Encanto Rests., Inc. v. Vidal (In re Cousins Int'l Food Corp.)

• Decision Date: 14 June 2016
• Docket Number: CASE NO. 12–08567–MCF,ADV. NO. 14–00030
• Citation: 553 B.R. 197
• Parties: In re: Cousins International Food Corp., Debtor Encanto Restaurants, Inc.; Cousins International Food Corp.; CIF Barceloneta Corp., Plaintiffs, v. Luis S. Aquino Vidal; Olga M. Vidal; Héctor A. Cortés Babilonia; and Guillermo D. Rodríguez Serrano, Defendants
• Court: U.S. Bankruptcy Court — District of Puerto Rico

553 B.R. 197

In re: Cousins International Food Corp., DebtorEncanto Restaurants, Inc.; Cousins International Food Corp.; CIF Barceloneta Corp., Plaintiffs

v.Luis S. Aquino Vidal; Olga M. Vidal; Héctor A. Cortés Babilonia; and Guillermo D. Rodríguez Serrano, Defendants

CASE NO. 12–08567–MCF

ADV. NO. 14–00030

United States Bankruptcy Court, D. Puerto Rico.

Signed June 14, 2016.

Hermann D. Bauer Alvarez, Nayuan Zouairabani Trinidad, O'Neill & Borges, Nicolas A. Wong, Wong Law Offices, San Juan, PR, for Plaintiffs.

Jacqueline Hernandez Santiago, San Juan, PR, for Defendants.

OPINION AND ORDER

MILDRED CABAN FLORES, U.S. Bankruptcy Judge

The purchaser of two restaurants sold in a chapter 11 bankruptcy proceeding seeks declaratory relief to enforce the provisions of the sale order and to enjoin judgment creditors from executing judgment on it in a local court proceeding. The court addresses whether the debtor and the purchaser provided adequate notice to these judgment creditors of the debtor's bankruptcy filing and of the sale motion to bar them from prosecuting their claims against the purchaser in local court. We hold that since no notice was given of debtor's bankruptcy filing or of the sale motion to the judgment creditors, the declaratory relief requested is not within the purchaser's reach.

I. Background

Cousins International Food Corp. (“Debtor”), an IHOP-franchise restaurant operator, filed for bankruptcy under chapter 11 on October 26, 2012.¹ Debtor subsequently filed a motion for the substantial sale of the IHOP franchises to Encanto Restaurants, Inc.'s (“Encanto”), which was approved by the court on February 26, 2013.² As the purchasing party, Encanto explicitly disclaimed all liability arising from Debtor's previous employees.

Prior to Debtor's bankruptcy, Luis S. Aquino Vidal, an ex-employee, and his mother, Olga M. Vidal, through their legal counsel, Héctor A. Cortés Babilonia & Guillermo D. Rodríguez Serrano (collectively, the “Aquinos”), filed a damages action for labor claims against Debtor in the Commonwealth of Puerto Rico, Court of First Instance in Arecibo (the “Local Proceeding”) on September 20, 2011. Debtor appeared through legal counsel in the Local Proceedings. Debtor's counsel later requested leave to resign from Debtor's representation stating in her motion the following:

Last week I became aware that my client, the Cousins International Food company [sic], filed for bankruptcy, such decision taking us by surprise. I obtained this information through the press. To date, I have not received any call or formal communication from my client informing its notification to file for bankruptcy.³

The local court ordered Debtor to present proof of its bankruptcy filing and of the Aquinos' inclusion in Debtor's bankruptcy proceeding. Debtor did not answer the court order nor file any proof to that effect. The Local Proceeding continued against Debtor and the court issued a final judgment on May 9, 2013, holding Debtor liable on various grounds of the complaint.

On October 31, 2013, months after Debtor's sale of assets to Encanto, the Aquinos who had obtained a favorable judgment against the Debtor, moved to enforce that judgment against Encanto on the theory of successor liability. On December 17, 2013, Debtor and Encanto requested this court to compel the Aquinos to answer why they should not be found in contempt for violating the provisions of the automatic stay under section 362(a) of the Bankruptcy Code and the order approving the sale motion.⁴ The court denied the contempt motion for failure to bring an adversary proceeding against the Aquinos.⁵

Subsequently, Encanto commenced the present adversary proceeding requesting declaratory and injunctive relief against the Aquinos from executing the local court judgment against it.⁶ Debtor later joined as a co-plaintiff to the adversary action. Both Debtor and Encanto moved for partial summary judgment on all counts of the adversary complaint,⁷ except with regard to the imposition of requested sanctions and attorney's fees. The Aquinos opposed. The court scheduled a hearing on the motion for summary judgment.

Based on the written motions and the arguments presented in open court on September 23, 2015, the court declined to find the Aquinos in violation of the automatic stay because adequate notice of Debtor's bankruptcy filing and of the sale motion was not given to them by Encanto or the Debtor.⁸ As known creditors, the Aquinos were entitled to notice of Debtor's bankruptcy filing and the sale of substantially all of Debtor's assets in order to assert their interest in the bankruptcy proceedings. This court also declined to exercise its jurisdiction to enjoin the Local Proceeding or declare the judgment unenforceable because the Aquinos' lack of notice prevented them from participating in the sale proceedings and deprived them of an opportunity to object to the sale motion.

Plaintiffs argued in their summary judgment motion that Debtor had provided the Aquinos with actual or constructive notice of the bankruptcy filing through the informative motion filed by its local counsel.⁹ The court disagreed. The court held that, as known creditors, the Aquinos were entitled to adequate notice of the bankruptcy proceedings in order to participate in and be privy to any matters affecting their interests as claimants, such as the bankruptcy sale. Since the Debtor's informative motion was insufficient notice, the Aquinos did not receive proper notice of the Debtor's bankruptcy filing and the sale motion.

Encanto filed a motion for reconsideration solely with regard to the request for declaratory relief.¹⁰ Both parties filed cross motions for summary judgment. On June 8, 2016, the parties argued the pending motions and the court took the matters under advisement.

II. Encanto's request for reconsideration

A request for reconsideration under Rule 59(e) can only be sought in order to “correct manifest errors of law or fact, present newly discovered evidence, or when there is an intervening change in the law.” Jorge Rivera Surillo & Co. v. Falconer Glass Indus., Inc., 37 F.3d 25, 29 (1st Cir.1994). Hence, this vehicle may not be used by the losing party to repeat old arguments previously considered and rejected, or to raise new legal theories that should have been raised earlier. Id. Rule 59(e) motions should be granted sparingly because parties should not be free to relitigate issues a court has already decided. A party moving for Rule 59(e) relief may not repeat arguments previously made during summary judgment, Prescott v. Higgins, 538 F.3d 32, 45 (1st Cir.2008), nor may it present new arguments on a Rule 59(e) motion if such arguments could, and should, have been made before judgment issued. ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 55 (1st Cir.2008).

In its Rule 59(e) motion, Encanto argues that the court failed to address its count on declaratory relief, pursuant to 11 U.S.C. § 105(a) and 28 U.S.C. § 2201(a).¹¹ Encanto claims that the court only resolved the issues regarding a violation of the automatic stay but did not address its request for declaratory relief.¹² Encanto asserts that it is entitled to a judgment declaring that the prosecution against it in the Local Proceeding is unenforceable based on the court order approving the sale and the asset purchase agreement.¹³ The court will address Encanto's contentions below.

Encanto's reliance on the approved sale order and asset purchase agreement is not convincing for the court to reconsider—let alone grant—the declaratory-relief requested, pursuant to 11 U.S.C. § 105(a) and 28 U.S.C. § 2201(a). The court's authority to grant declaratory relief requested under 11 U.S.C. § 105(a) or 28 U.S.C. § 2201(a) is discretionary. Allstate Ins. Co. v. Charneski, 286 F.2d 238 (7th Cir.1960). See also Sears, Roebuck & Co. v. American Mut. Liability Ins. Co., 372 F.2d 435 (7th Cir.1967) ; Washington v. Ga r mire, 317 F.Supp. 1384 (S.D.Fla.1970) ; Nichols v. Vance, 293 F.Supp. 680 (S.D.Tex.1968). The law in the First Circuit is clear in regard to a bankruptcy court's lack of authority to declare the bounds of another court's judgment.

In re Savage Indus., Inc., 43 F.3d 714 (1st Cir.1994).

Encanto contends that successor liability is a type of interest that may be eliminated in a bankruptcy sale, pursuant to 11 U.S.C. §§ 363(b)(1) and 363(f).¹⁴ However, the court was not called upon to make a determination of which interests may or may not be cut off in a bankruptcy sale. The court is not prompted to resolve the state law issue of successor liability because its threshold inquiry in the matter is with regard to the Aquinos' due-process rights to receive notice of the sale in the first place. Encanto misses the point in addressing why the court should declare the rights of parties that did not participate in the bankruptcy proceedings and whose due process rights were overlooked throughout the bankruptcy sale in Debtor's case. Failure to provide proper notice caused the Aquinos' claims to “ride through” the bankruptcy.

Next, Encanto argues that “The [Aquinos] are [ ] violating the [ ] terms of [the Asset Purchase Agreement approved by this Court] and collaterally attacking the validity of the Court's Sale order before a different tribunal.”¹⁵ It is uncontested in Encanto's reconsideration motion that the Aquinos did not receive proper notice of Debtor's bankruptcy filing nor of the bankruptcy sale. Encanto did not elaborate on the issue of what would have constituted sufficient notice nor argue why the Aquinos have a duty to seek redress from this court after the sale order's approval, even when the Aquinos were deprived of their rights to proper notice as known creditors of the estate. Encanto litigates once more its assertion that the Aquinos had a duty to come before the court even when the Aquinos had no adequate notice of Debtor's bankruptcy filing.¹⁶ The issue was adjudicated by this court in its oral ruling. The court held...