In re Chi-Chi's, Inc.

• Decision Date: 18 January 2006
• Docket Number: Bankruptcy No. 03-13063.,Adversary No. 05-52726.
• Citation: 338 B.R. 618
• Parties: In re CHI-CHI'S, INC., et al., Debtors. Sysco Corporation and The SYGMA Network, Inc., Plaintiffs, v. Chi-Chi's, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

338 B.R. 618

In re CHI-CHI'S, INC., et al., Debtors Sysco Corporation and The SYGMA Network, Inc., Plaintiffs, v. Chi-Chi's, Inc., Defendant.

Bankruptcy No. 03-13063.

Adversary No. 05-52726.

United States Bankruptcy Court, D. Delaware.

January 18, 2006.

Bruce Grohsgal, Laura Davis Jones, Sandra G. McLamb, Rachel Lowy Werkheiser, Pachulski, Stang, Ziehl, Young,

Jones, Frederick B. Rosner, Jaspen Schlesinger Hoffman, Wilmington, DE, for Debtors.

MEMORANDUM OF OPINION AND ORDER

RANDOLPH BAXTER, Bankruptcy Judge.

Before the Court is the complaint of Sysco Corporation and the SYGMA Network (collectively, "Sysco") seeking to enjoin the Debtor Chi-Chi's Inc. ("Chi-Chi's") from initiating, continuing, and/or participating in any additional actions, including arbitration, against them in connection with certain hepatitis claims.

The Court acquires core matter jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(a), (b) and 1334(b). Upon an examination of the parties' respective briefs and supporting documentation, and after conducting a trial on the matter, the following findings of fact and conclusions of law are hereby rendered:

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1. Factual History

The present action arises out of a November 2003 outbreak of Hepatitis A illnesses attributed to the consumption of certain contaminated green onions at a Chi-Chi's restaurant in Monaca, Pennsylvania. The outbreak caused at least four deaths, and at least 650 illnesses. Chi-Chi's alleges that Sysco was the supplier of the contaminated onions. Sysco, in turn, allegedly obtained the onions from Castellini Company, LLC ("Castellini").

Bodily injury claimants have filed several hundred claims and/or complaints against Chi-Chi's (collectively, the "Hepatitis Claims"). To date, Chi-Chi's, through its own funds and those of its liability insurers, has paid approximately $31,000,000 in damages. Empire Indemnity Insurance Company ("Empire"), one of Chi-Chi's liability insurers, has paid, or will pay out, some $10,000,000 ("Empire costs").¹ Chi-Chi's also alleges that it has suffered its own damages of more than $30,000,000, including lost profits, property damage, self-insurance costs, indemnification, and other outbreak related costs (collectively, "lost profits damages").

2. Procedural History

a. Chi-Chi's Action

In July 2004, Chi-Chi's filed an adversary proceeding in this Court against Sysco and Castellini (the "Chi-Chi's Action"). Castellini informed Chi-Chi's of its intention to demand a jury trial and to seek withdrawal of the District Court's reference. Chi-Chi's also asserts that Sysco indicated a desire to submit the matter to arbitration, pursuant to the Distribution Service Agreement executed by the parties. For these reasons, on November 12, 2004, Chi-Chi's filed 1) a stipulation of dismissal as to defendant Castellini, so that Chi-Chi's could initiate an action against Castellini in the United States District Court for the Central District of California ("California District Court"), and 2) a notice of dismissal as to defendants Sysco and SYGMA, allegedly upon Sysco's suggestion that they would pursue resolution of the dispute through arbitration.

On November 22, 2004, Chi-Chi's filed a complaint in the Central District of California against Castellini. On June 1, 2005, the California District Court abstained from hearing the matter pursuant to 28 U.S.C. § 1334(c)(1). On June 6, 2005, Chi-Chi's reified its complaint against Castellini in the United States District Court for the Western District of Pennsylvania ("Pennsylvania District Court") as a third-party complaint in a bodily injury case filed against Chi-Chi's.² On October 7, 2005, the Pennsylvania District Court, citing the first filed rule, granted Castellini's motion to dismiss Chi-Chi's third party complaint in favor of the action currently pending in this Court prosecuted by Empire against Castellini (see below).

On September 8, 2005, Chi-Chi's filed an arbitration claim against Sysco with ADR Options in Philadelphia, Pennsylvania.

b. Empire Action

On November 16, 2004, Empire filed, as a real party in interest, its own adversary action in this Court (the "Empire Action"). Empire, naming Chi-Chi's as the plaintiff in the adversary action, noted that the complaint was filed by Empire, as subrogee of Chi-Chi's.³ The complaint was brought by Empire's own litigation counsel. The complaint in the Empire Action is nearly word-for-word identical to the complaint in the Chi-Chi's Action.

Similar to the Chi-Chi's Action, Sysco also allegedly indicated to Empire that it would seek to invoke the mandatory arbitration provision contained in the Distribution Service Agreement. Accordingly, on December 7, 2004, Empire filed a notice of dismissal of its complaint, without prejudice, as to Sysco and SYGMA. Empire's complaint alleging claims against Castellini remains pending at this time.

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The Court must determine whether 41(a)(1) bars Chi-Chi's from bringing an arbitration claim and/or other proceedings against Sysco. Under the two dismissal rule, "if the plaintiff invokes Rule 41(a)(1) a second time for an `action based on or including the same claim,' the action must be dismissed with prejudice." Radogna v. Ashland, Inc., 2005 WL 736599, *1 n. 2 (E.D.Pa.2005) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 394, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990)). The Court must determine whether Chi-Chi's is barred by Federal Rule of Civil Procedure 41(a)(1) from pursuing arbitration, as well as all other actions. Rule 41 states, in relevant part:

(a) Voluntary Dismissal: Effect Thereof.

(1) By Plaintiff; by Stipulation.... Unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim.

FED.R.CIV.P. 41(a)(1).

Because it operates as an adjudication on the merits, the two dismissal rule has been strictly construed. E.g., Manze v. State Farm Ins. Co., 817 F.2d 1062, 1066 (3d Cir.1987) ("several other courts of appeals have strictly interpreted Rule 41(a)(1)"); Janssen v. Harris, 321 F.3d 998, 1001 (10th Cir.2003); Sutton Place Development Co. v. Abacus Mortg. Inv. Co., 826 F.2d 637, 640 (7th Cir.1987) ("We should be especially careful not to extend the scope of such a narrow exception when the purpose for the exception would not be served."); Seippel v. Jenkens & Gilchrist, P.C., 2004 WL 2809205, *1 (S.D.N.Y.2004); Muzikowski v. Parmount Pictures Corp., 2003 WL 22872117, *3 (N.D.Ill.2003); Kuhn v. Williamson, 122 F.R.D. 192, 195 (E.D.N.C.1988) ("Since the two dismissal rule is in derogation of previously existing right and thus is to be strictly construed ...").

Sysco argues that arbitration, as well as all other actions against Sysco, should be enjoined because the two dismissal rule prohibits Chi-Chi's from bringing a third action in connection with the Hepatitis Claims. Sysco argues that two dismissals have already occurred: 1) the Chi-Chi's Action, which was dismissed by notice as to Sysco and SYGMA on November 12, 2004, and 2) the Empire Action, which was also dismissed by notice as to Sysco and SYGMA on December 7, 2004. Therefore, pursuant to Rule 41(a)(1), the Empire Action would serve as an adjudication on the merits, and Chi-Chi's should be enjoined from pursuing arbitration at this stage.

As the party seeking to invoke Rule 41(a)(1), Sysco bears the burden of proving the applicability of the two dismissal rule by a preponderance of the evidence. Marques v. Federal Reserve Bank of Chicago, 286 F.3d 1014, 1017 (7th Cir. 2002) (placing the burden under Rule 41(a)(1) on the defendant, "since it is the defendant that is asserting the right to prevent the plaintiff from dismissing the suit.").

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Initially, Sysco asserts that if applicable, this Court has the authority to enjoin arbitration proceedings in order to enforce Rule 41(a)(1). This assertion is not' disputed by Chi-Chi's, since Chi-Chi's believes that Rule 41(a)(1) is inapplicable. Sysco argues that pursuant to Rule 41(a)(1), the dismissal of the Empire Action in this Court would operate as an adjudication on the merits of Chi-Chi's complaint. In the event that this Court determines that Rule 41(a)(1) would apply in this manner, this Court would have the power to enjoin arbitration in order to protect its prior judgment. See John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 138 (3d Cir.1998) ("[A] realistic concern for the finality and integrity of judgments would arise if parties were free to ignore federal court decisions that have conclusively settled claims or issues now sought to be arbitrated.... When a federal court is presented with the contention that a prior federal judgment determined issues now sought to be relitigated in an arbitral forum it must first determine the effect of the judgment."); In re American Honda Motor Co., Inc., Dealerships Relations Litigation, 315 F.3d 417, 443 (4th Cir.2003).

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The express language of Rule 41(a)(1) requires that the second action be filed by a "plaintiff who has once dismissed." The Court must determine whether the Chi-Chi's Action and the Empire Action were filed by the same real party in interest.

The complaints in both actions are captioned with Chi-Chi's as the named plaintiff. The fact that the same plaintiff is named in the case caption, however, is not sufficient, alone, to invoke the two dismissal rule. The Empire complaint states that it was filed by Empire, as subrogee of the Debtor.⁴ At oral argument the Court noted, and counsel for Sysco acknowledged, that it is not uncommon for a subrogated action by an insurer to be captioned in the name of the insured.⁵ Michigan Alkali Co. v. Bankers Indemnity Ins. Co., 103 F.2d 345, 348 (2d Cir.1939) ("Even when a suit is for the benefit of an...