Aire Serv LLC v. Roberts (In re Roberts)

• Decision Date: 10 October 2019
• Docket Number: Adv. No. 19ap00587,Case No. 19bk06272
• Parties: IN RE: Joseph F. ROBERTS and Dorothy L. Roberts, Debtors. Aire Serv LLC, Plaintiff, v. Joseph F. Roberts, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

607 B.R. 635

IN RE: Joseph F. ROBERTS and Dorothy L. Roberts, Debtors.Aire Serv LLC, Plaintiff,

v.Joseph F. Roberts, Defendant.

Case No. 19bk06272

Adv. No. 19ap00587

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Dated: October 10, 2019

Attorney for Plaintiff: Patrick F. Moran, Gordon & Rees LLP, Chicago, IL

Attorney for Debtor/Defendant: Richard G. Fonfrias, Fonfrias Law Group, LLC, Chicago, IL

MEMORANDUM DECISION

Timothy A. Barnes, United States Bankruptcy Judge

This matter comes before the court on the Amended Adversary Complaint Seeking Injunctive Relief [Adv. Dkt. No. 3] (the "Amended Complaint") and the Motion for Preliminary Injunction [Adv. Dkt. No. 6] (the "Motion") brought by the plaintiff Aire Serv LCC ("Aire Serv") against the defendant-debtor Joseph F. Roberts ("Joseph").

For the reasons set forth more fully below, upon review of the respective filings, the court concludes that Aire Serv's rights under the covenant not to compete in the Franchise Agreement (as defined below), including to injunctive relief, constitute a "claim" within the meaning of 11 U.S.C. § 101(5), which claim will be treated in accordance with bankruptcy law. The court further concludes that Aire Serv has no cause or right of action against Joseph under the covenant not to compete in the Confidentiality Agreement (as defined below). Aire Serv is therefore unlikely to succeed on the merits of its claims for a permanent injunction, the only relief sought in the Amended Complaint, and the Motion is therefore not well taken and will be denied.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code, or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the bankruptcy judge may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy judge may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1), (c). Instead, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, the bankruptcy court must also have constitutional authority to hear and determine a matter. See Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in noncore matters, where the matter is either one that falls within the public rights exception, id. , or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S. Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) (parties may consent expressly or impliedly to a bankruptcy court's jurisdiction); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

In the Response to Plaintiff's Motion for a Preliminary Injunction [Adv. Dkt. No. 13] (the "Response"), Joseph appears to challenge the court's authority to enter final orders in this adversary proceeding. See Resp., at p. 4.¹ This appears to be a so-called Stern challenge.

KHI Liquidation Tr., Inc. v. Wisenbaker Builder Servs., Inc. (In re Kimball Hill, Inc. ), 480 B.R. 894, 898 (Bankr. N.D. Ill. 2012) (Barnes, J.)

As noted by this court in Wisenbaker shortly after the Stern decision was issued, Stern objections have become a form over substantive devise used by "strategic-minded defendants who have sought to use Stern to prolong and/or obfuscate litigation." Id. (full internal citation omitted). Like most Stern challenges of this nature, Joseph cites no statute, case or rule that supports his position, nor does he clarify whether his is a challenge to this court's jurisdiction, statutory authority or constitutional authority.

The court finds Joseph's Stern challenge to be disingenuous at best and legally deficient at worst. Joseph commenced this bankruptcy case, putting all of his affairs—including contractual disputes—before the court. Joseph scheduled Aire Serv as a creditor and noted the nature of the debt as a lawsuit. Official Form 106E/F, Creditors Who Have Unsecured Claims at 4.1 (contained in Official Form 101, Voluntary Petition for Individuals Filing for Bankruptcy [Case No. 19bk06272, Dkt. No. 1] (the "Petition")); Official Form 107 at p. 9 (also contained in the Petition). For Joseph to challenge the ability of this court to determine a creditor's request to enforce the terms of a contract in Joseph's own, voluntary bankruptcy case is disingenuous.

It is also legally deficient. Recent amendments to the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") have added a specific mechanism for bringing Stern challenges in adversary proceedings. Bankruptcy Rule 7012 provides that "[a] responsive pleading shall include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy court." Fed. R. Bankr. P. 7012(b). This is an addendum to the requirements of Rule 12 of the Federal Rules of Civil Procedure (the "Civil Rules"), made applicable in adversary proceedings by Bankruptcy Rule 7012, which requires defenses to be set forth in responsive pleadings or a motion under that Rule. See Fed. R. Civ. P. 12(b). Failure to assert defenses in accordance with the rules constitutes waiver of those defenses. See Fed. R. Civ. P. 12(h).

Joseph's Response is neither a responsive pleading nor a motion under Civil Rule 12(b). As such, his defense is waived, Fed. R. Civ. P. 12(h) ; Trs. of Cent. Laborers' Welfare Fund v. Lowery , 924 F.2d 731, 732 (7th Cir. 1991), and he has impliedly consented to the entry of final orders by the court in this adversary proceeding. Wellness , 135 S. Ct. at 1944–47 (2015) (implied consent constitutionally sufficient for entry of final orders by bankruptcy court), remanded to 617 F. App'x 589, 590 (7th Cir. 2015) (failure by a party to properly raise its lack of consent according to applicable rules forfeited the point); Richer , 798 F.3d at 490. Aire Serv has, of course, by invoking this court's jurisdiction by filing the Amended Complaint, also consented to the entry of final orders.

The court has original but not exclusive jurisdiction over this matter under 28 U.S.C. § 1334(b) as a matter arising in or related to a case under the Bankruptcy Code. Further, the court has statutory authority to hear the matter under 28 U.S.C. § 157(b)(1) as a matter that affects the administration of Joseph's bankruptcy estate and claim against the bankruptcy estate. 28 U.S.C. §§ 157(b)(2)(A), (B). Finally, as noted above, the parties have waived objections to or impliedly or explicitly consented to this court's constitutional authority over the matter.

The court therefore concludes that resolution of the matters presented herein is within the scope of the court's jurisdiction, statutory authority and constitutional authority.

PROCEDURAL HISTORY

In addition to reviewing the Amended Complaint, the Motion and the Response, and any and all exhibits submitted in conjunction therewith, the court has considered the arguments of the parties at the hearing held on July 18, 2019 (the "Hearing") and has reviewed and considered the following documents:

(1) Adversary Complaint Seeking Injunctive Relief [Adv. Dkt. No. 1] (the "Complaint");

(2) Affidavit of Peter J. Dotson [Adv. Dkt. No. 16] (the "Dotson Affidavit");

(3) Plaintiff's Reply in Support of Its Motion for Preliminary Injunction [Adv. Dkt. No. 17] (the "Reply");

(4) Plaintiff's Supplement Argument in Support of Its Motion for Preliminary Injunction [Adv. Dkt. No. 26] (the "Supplemental Reply"); and

(5) Response to Plaintiff's Supplemental Argument in Support of Plaintiff's Motion for a Preliminary Injunction [Adv. Dkt. No. 27] (the "Supplemental Response").

The court has taken into consideration any and all exhibits submitted in conjunction with the foregoing. Though these items do not constitute an exhaustive list of the filings in this adversary proceeding, the court has taken judicial notice of the contents of the docket in this case. See Levine v. Egidi , Case No. 93C188, 1993 WL 69146, at *2 (N.D. Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent , 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 1989) (Goldgar, J.) (recognizing same).

Having conducted such review, this Memorandum Decision constitutes the court's determination of the Motion.

BACKGROUND

The matter before the court arises from a failed franchise relationship, the resulting litigation and certain related prepetition and postpetition events described in Parts A and B ...