Gladstone v. Travelers Prop. Cas. Co. of Am. (In re Garden Fresh Rests.)
| Decision Date | 20 September 2022 |
| Docket Number | 21-CV-1440 JLS (KSC) |
| Parties | In re GARDEN FRESH RESTAURANTS, LLC, Debtor. v. TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA; and THE TRAVELERS LLOYDS INSURANCE COMPANY, Defendants. LESLIE T. GLADSTONE, ESQ., as Chapter 7 Trustee of Garden Fresh Restaurants, LLC, Plaintiff, |
| Court | U.S. District Court — Southern District of California |
ORDER (1) OVERRULING PLAINTIFF'S OBJECTIONS; (2) ADOPTING IN PART PROPOSED ORDER; AND (3) GRANTING DEFENDANTS' MOTION TO DISMISS WITHOUT PREJUDICE
On August 30, 2021, Defendants Travelers Property Casualty Company of America and The Travelers Lloyds Insurance Company (collectively, “Defendants”) filed a Motion to Dismiss the First Amended Complaint of Plaintiff Leslie T Gladstone, Esq., as Chapter 7 Trustee of Garden Fresh Restaurants, LLC (“Plaintiff”) in Adversary Proceeding No. 21-90043, currently pending in the United States Bankruptcy Court for the Southern District of California. Gladstone v. Travelers Prop. Cas. Co. of Am., No. 21-90043-LT (Bankr. S.D. Cal. 2021), ECF No. 24. On January 28, 2022, the Bankruptcy Court issued a Proposed Order on Defendants' Motion to Dismiss, recommending that the District Court grant Defendants' Motion to Dismiss with prejudice. ECF No. 15-1 (the “Proposed Order”). The matter was submitted to this Court on March 24, 2022. See generally Docket.
Presently before the Court is the Bankruptcy Court's Proposed Order, Plaintiff's Objections (“Objs.,” ECF No. 15-3), and Defendants' Reply to Plaintiff's Objections (“Reply,” ECF No. 15-4). Pursuant to Civil Local Rule 7.1(d)(1), the Court finds the matters presented appropriate for resolution without oral argument. After a careful, de novo review of the relevant record, the Parties' submissions, and the Proposed Order, the Court OVERRULES Plaintiff's Objections, ADOPTS IN PART the Proposed Order, and GRANTS Defendants' Motion to Dismiss WITHOUT PREJUDICE.
On May 14, 2020, debtor Garden Fresh Restaurants, LLC (“Garden Fresh”) commenced voluntary Chapter 7 Bankruptcy Proceeding No. 20-02477 in the United States Bankruptcy Court for the Southern District of California. In re Garden Fresh Restaurants LLC, Case No. 20-02477-LT, ECF No. 1. On June 7, 2021, Garden Fresh initiated Adversary Proceeding No. 21-90043 against Defendants in Bankruptcy Court. Case No. 21-90043-LT, ECF No. 1.
On June 14, 2021, Plaintiff, as the Chapter 7 Trustee of debtor Garden Fresh, filed a First Amended Complaint against Defendants. Id., ECF No. 3. On August 30, 2021, Defendants filed a Motion to Dismiss Plaintiff's First Amended Complaint. Id., ECF No. 24. On October 4, 2021, the Bankruptcy Court determined the Adversary Proceeding was a non-core proceeding. Id., ECF No. 37. On January 28, 2022, the Bankruptcy Court issued the at-issue Proposed Order, prompting the filing of Plaintiff's Objections and Defendants' Reply.[1]
On March 24, 2022, the Bankruptcy Court transmitted its Proposed Order, Plaintiff's Objections, and Defendants' Reply to this Court for consideration. ECF No. 15. On April 28, 2022, Plaintiff filed a Notice of Supplemental Authority in the Adversary Proceeding. Case No. 21-90043-LT, ECF No. 58. On May 6 and May 11, 2022, Defendants filed a Response to Plaintiff's Notice with additional supplemental authority. Id., ECF Nos. 59 & 60.
The Bankruptcy Court's Proposed Order contains a thorough and accurate recitation of the factual allegations in Plaintiff's First Amended Complaint. Proposed Order at 2-7. The Court incorporates the Proposed Order's background discussion by reference. In short, Plaintiff's First Amended Complaint-styled as a declaratory judgment action-arises from Defendants' denial of Garden Fresh's claim for lost business income and other expenses under a commercial property insurance policy following government closure orders due to the COVID-19 pandemic. Case No. 21-90043-LT, ECF No. 3 ¶¶ 1-7.
Prior to its bankruptcy filing, Garden Fresh operated ninety-seven restaurants, two distribution centers, and four other locations throughout the United States (hereinafter, “Insured Properties.”). Id. ¶¶ 17-18. These locations were covered by a commercial insurance policy Garden Fresh purchased from Defendants for the period spanning April 1, 2019, through April 1, 2020 (hereinafter, the “Policy.”). Id. ¶ 2. Under the general “Coverage” provision, the Policy provided Defendants would pay for a “direct physical loss or damage” to the Insured Properties “causing by or resulting from a Covered Cause of Loss.” Case No. 21-90043-LT, ECF No. 3-2 at 14. The “Business Income,” “Extra Expense,” and “Civil Authority” provisions further defined the various benefits Garden Fresh could be entitled to if the general “Coverage” provision was triggered and also set forth other requirements for coverage. Id., ECF No. 3-2 at 33-49. Finally, the “Virus Exclusion” provision removed from coverage any “loss or damage caused directly or indirectly by . . . [a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Id. at 25, 27.
In March 2020, Garden Fresh made a claim pursuant to the Policy after state and local authorities issued orders limiting the public's access to restaurants in response to the COVID-19 pandemic. Case No. 21-90043-LT, ECF No. 3 ¶¶ 61-95, 179. This claim was denied by Defendants in a letter dated May 21, 2020. Id. ¶¶ 180-181. Plaintiff alleges Defendants' denial “compounded” the results of the government shutdown orders and forced Garden Fresh into bankruptcy. Id. ¶ 185.
In Plaintiff's First Amended Complaint, Plaintiff seeks an order declaring that: (1) Garden Fresh sustained a “direct physical loss of or damage” to property; (2) the Virus Exclusion provision of the Policy is not applicable to Garden Fresh's losses; and (3) Defendants must pay Garden Fresh “up to the limits of liability” in accordance with the Policy. Id. at 51.
In their Motion to Dismiss, Defendants argue Plaintiff failed to allege any facts plausibly supporting Garden Fresh's entitlement to coverage under the Policy. See Case No. 21-90043, ECF No. 24-2. In its Proposed Order, the Bankruptcy Court recommends Defendants' Motion to Dismiss be granted with prejudice for two reasons. Proposed Order at 9-15. First, the Bankruptcy Court concludes Plaintiff cannot allege Garden Fresh sustained a “direct physical loss or damage” to property because Plaintiff cannot plausibly allege that the physical presence of COVID-19 in only the Insured Properties “caused Garden Fresh to suspend its operations[.]” Id. at 12.
Instead, the Bankruptcy Court reasoned that:
Irrespective of what the Trustee argues or pleads, common sense dictates that it was: (i) the pandemic spread of the virus throughout the United States-as opposed to it spreading solely in Garden Fresh's restaurants-that triggered the Government Orders temporarily suspending on-site dining at its restaurants; and (ii) it was the Government Orders-not the presumed physical presence of the virus in the air and on the property surfaces in the Garden Fresh restaurants-that caused Garden Fresh's loss of use of its restaurant premises and all of its economic losses.
Id. (emphasis in original).
Second, the Bankruptcy Court found all of Plaintiff's claims for coverage were, as a matter of law, barred by the Policy's Virus Exclusion provision. Id. at 13. In so doing, the Bankruptcy Court rejected Plaintiff's argument Garden Fresh's losses were caused predominantly by the United States Government's negligence and not the COVID-19 virus. Id. at 13-15. The Bankruptcy Court concluded this allegation was “logically implausible” because “[e]ven assuming the U.S. Government was negligent (a legal conclusion), logically its negligence was not the predominant cause of Garden Fresh's operations without the virus (a point that is not debatable).” Id. at 14 (emphasis in original).
A bankruptcy court's authority to enter final orders or judgments is governed by 28 U.S.C. § 157. Section 157 “divid[es] all matters that may be referred to the bankruptcy court into two categories: ‘core' and ‘non-core' proceedings.” Exec. Bens. Ins Agency v. Arkison, 573 U.S. 25, 33 (2014).
A bankruptcy judge “may hear and determine all cases under title 11 and all core proceedings arising under title 11.” 28 U.S.C. § 157(b). A bankruptcy judge may also “hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.” 28 U.S.C. § 157(c)(1). “However, because bankruptcy judges are not Article III judges, the Constitution limits their ability to adjudicate-i.e., to render a final judgment-to issues that are at the ‘core' of the bankruptcy power.” Harris v. Wittman (In re Harris), 590 F.3d 730, 737 (9th Cir. 2009).[2]
In a noncore proceeding, such as this one, the bankruptcy judge “shall submit proposed findings of fact and conclusions of law to the district court[.]” 28 U.S.C. § 157(c)(1). “[A]ny 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.” Id.; see Fed. R. Bank. P. 9033(d) (“The district judge shall make a de novo review . . . of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made in accordance with this rule.”); see Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1436 (9th Cir. 1995) (“In noncore matters, ...
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