In re Inc.

• Decision Date: 16 September 2011
• Docket Number: Adversary Nos. 10–50818 (CSS),10–52913 (CSS).,Bankruptcy No. 09–10990 (CSS).
• Citation: 457 B.R. 372
• Parties: In re SPORTSMAN'S WAREHOUSE, INC., et al., Reorganized Debtors.Sportsman's Warehouse, Inc., Plaintiff,v.McGillis/Eckman Investments–Billings, LLC, Defendant.McGillis/Eckman Investments–Billings, LLC, Plaintiff,v.Sportsman's Warehouse, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

457 B.R. 372

In re SPORTSMAN'S WAREHOUSE, INC., et al., Reorganized Debtors.Sportsman's Warehouse, Inc., Plaintiff,

v.McGillis/Eckman Investments–Billings, LLC, Defendant.McGillis/Eckman Investments–Billings, LLC, Plaintiff,

v.Sportsman's Warehouse, Inc., Defendant.

Bankruptcy No. 09–10990 (CSS).Adversary Nos. 10–50818 (CSS)

10–52913 (CSS).

United States Bankruptcy Court, D. Delaware.

Sept. 16, 2011.

Richards Layton & Finger, P.A., Russell C. Silberglied, Katisha D. Fortune, Julie A. Finocchiaro, Wilmington, DE, O'Melveny & Myers LLP, Stephen H. Warren, Matthew W. Close, Los Angeles, CA, for Sportman's Warehouse, Inc.Morris, Nichols, Arsht & Tunnell LLP, Gregory W. Werkheiser, Wilmington, DE, and Blackburn & Stoll, LC, Bryce D. Panzer, Salt Lake City, UT, for McGillis/Eckman Investments–Billings, LLC.

OPINION ¹

CHRISTOPHER S. SONTCHI, Bankruptcy Judge.

INTRODUCTION

Before the Court is a motion filed by defendant McGillis/Eckman Investments–Billings, LLC (“McGillis”) to dismiss the adversary proceeding (the “SWI Adversary”) filed by plaintiff Sportsman's Warehouse, Inc. (“SWI”). McGillis asserts that the Court lacks subject matter jurisdiction over two of the six counts in the complaint (“SWI Complaint”). In the alternative, McGillis requests that the Court abstain from hearing those counts. McGillis also argues that five of the six counts should be dismissed because they fail to state claims upon which relief can be granted.

The Court finds that it has, at minimum, related-to jurisdiction over the disputed counts and that abstention is not appropriate in this case. The Court also finds that while Count V and a portion of Count VI of the SWI Complaint warrant dismissal, the remaining counts do not. Accordingly, the Court will grant the motion in part and deny it in part.

BACKGROUND

I. Factual Background²

On March 21, 2009 (the “Petition Date”), SWI filed a voluntary petition for relief under chapter 11 in the United States Bankruptcy Court for the District of Delaware. SWI is a Utah corporation that owns and operates various retails stores selling sporting goods.

A. The Lease Agreement

In March, 2008 (prior to the bankruptcy filing in 2009), SWI and McGillis entered into a lease agreement (the “Lease Agreement”). McGillis is a limited liability company that owns the real property subject to this dispute (the “Property”). Under the Lease Agreement, McGillis agreed to construct a building on the Property, which SWI would thereafter lease and use as a retail store. The Lease Agreement included a provision (the “Purchase Provision”) that granted SWI “the exclusive option and right to purchase the [Property],” which “may be exercised at any time during the [Lease] Term.” The Purchase Provision also provided that “[n]otwithstanding any other provision of [the Lease Agreement], [SWI] shall exercise its option to purchase the [Property] and will acquire the [Property] during the [Lease] Term.” McGillis thereafter-but prior to the bankruptcy-constructed the building and SWI occupied the Property.

B. The Lease Memorandum

Six months after the execution of the Lease Agreement but still before the bankruptcy, in September 2008, SWI and McGillis executed a lease confirmation memorandum (the “Lease Memorandum”), which provided that SWI would lease the Property until December 25, 2008, and that “[SWI] will purchase the property on or before the Initial Term Expiration Date of December 25, 2008.” SWI did not purchase the Property on or before December 25, 2008 but remained in possession of the Property after that date.

C. The Lease Amendment

SWI filed bankruptcy in March, 2009. Shortly thereafter, SWI and McGillis executed an amendment to the Lease Agreement (the “Lease Amendment”) without seeking approval of the Court. The Lease Amendment extended the Lease Term for one year to March 1, 2010 and reduced the monthly rent. The Lease Amendment further provided that the Lease Agreement “shall remain in full force and effect and shall remain [otherwise] unaltered,” but made no specific reference to the Purchase Provision or its contents. Finally, the Lease Amendment provided that “[n]othing in [it] constitutes an assumption or rejection of the Lease [Agreement] under Bankruptcy Code Section 365, and [SWI] retains all rights under the Bankruptcy Code to either assume or reject the Lease [Agreement].”

D. The Assumption of the Lease and Plan Confirmation

In July, 2009, three months after the signing of the Lease Agreement, SWI filed a motion seeking the authority to assume the Lease Agreement (the “Assumption Motion”). SWI listed a cure amount of $0.00 in the Assumption Motion. McGillis did not object to the Assumption Motion.

Two weeks later, the Court entered an order (the “Confirmation Order”) confirming SWI's second amended joint plan of reorganization (the “Plan”). On the same day, the Court also entered an order granting the Assumption Motion (the “Assumption Order”) in which SWI was authorized to assume the Lease Agreement, as amended by the Lease Amendment. The assumption became effective shortly thereafter.

SWI continued to lease and occupy the Property until March 1, 2010, when it vacated the Property on demand by McGillis. SWI never purchased the Property.

II. Procedural BackgroundA. The Montana Litigation

In February, 2010, six months after the entry of the Assumption Order and confirmation of SWI's plan, McGillis filed a complaint against SWI in Montana state court (the “Montana Litigation”). McGillis alleged in the Montana Litigation that SWI was obligated to buy the Property by the end of the Lease, i.e. March 1, 2010, but SWI had breached the Lease Agreement by not purchasing the Property. By its complaint, McGillis requested that the Montana court compel SWI to purchase the Property for $3 million plus 10% interest as well as unpaid rent, and real estate taxes, for a total purchase price of approximately $7.5 million. Alternatively, McGillis requested damages on account of SWI's breach.

B. The SWI Adversary

Shortly after the filing of the Montana Litigation, SWI commenced the SWI Adversary in Delaware, in which SWI asserts six counts against McGillis.

C. Motion to Dismiss the SWI Adversary

By the Motion, McGillis seeks dismissal of the SWI Complaint in its entirety. McGillis asserts that Count I and portions of Count VI should be dismissed for lack of subject matter jurisdiction. Alternatively, McGillis requests the Court to abstain from hearing these counts. McGillis also asserts that the Counts II–VI should be dismissed for failure to state claims upon which relief can be granted.

D. The Consolidation of the SWI Adversary and the Montana Litigation

Immediately prior to the filing of the SWI Adversary, at SWI's request the Montana Litigation was removed to the United States District Court for the District of Montana (the “Montana Court”). Thereafter, McGillis filed a motion for remand, or alternatively, abstention. Meanwhile, SWI moved to transfer the Montana Litigation to the Delaware District Court for referral to this Court, or, alternatively, to stay the Montana Litigation in favor of the SWI Adversary.

In August, 2010, the Montana Court adopted the findings and recommendations of the United States Magistrate Judge who had been assigned to resolve the motions filed by McGillis and SWI. With respect to McGillis's motion for remand, the Montana Court held it has jurisdiction over the Montana Litigation because it is related to SWI's bankruptcy case. In support, the Montana Court explained that there is a “close nexus” between the issues raised in the Montana Litigation and SWI's bankruptcy case as their resolution will require a court to interpret the Assumption Order and, if warranted, affect the implementation, consummation, and administration of the Plan by significantly depleting SWI's assets and affecting the distribution scheme approved under the Plan. With respect to SWI's motion to transfer venue to the District of Delaware for referral to this Court, the Montana Court concluded that transfer was warranted based on its finding of related-to jurisdiction. The Montana Litigation was therefore transferred to the District of Delaware for referral to this Court.

The Delaware District Court immediately referred the Montana Litigation to this Court. SWI and McGillis subsequently “agreed to consolidate the adversary proceedings for all pre-trial matters and for trial; provided, however, that the consolidation shall not effect [sic] or alter which party has the burden of proof of any claim, counterclaim or affirmative defense or this Court's jurisdiction over any claim, counterclaim or affirmative defense,” which the Court approved.

LEGAL DISCUSSION

I. Subject Matter JurisdictionA. The Standard for Evaluating a Motion to Dismiss for Lack of Subject Matter Jurisdiction Under Federal Rule of Civil Procedure 12(b)(1)

Rule 12(b)(1) of the Federal Rules of Civil Procedure allows a party to bring a motion to dismiss for lack of subject matter jurisdiction.³ As a rule, the party invoking the federal court's jurisdiction bears the burden of establishing that the Court has the requisite jurisdiction.⁴ A motion to dismiss under Rule 12(b)(1) challenges the power of the federal court to hear a claim or case. ⁵ “If a court lacks subject matter jurisdiction, it is generally barred from taking any action that goes to the merits of the case.” ⁶ A defendant may challenge the plaintiff's invocation of federal jurisdiction in one of two ways: (1) to challenge the sufficiency, but not the accuracy, of the facts alleged in the complaint; or (2) to challenge the accuracy of the complaint's factual allegations.⁷ Here, McGillis does not challenge the factual allegations in the SWI Complaint. Accordingly, for the purpose of considering the Motion, the Court will presume the veracity of all factual allegations contained in the SWI Complaint. SWI nonetheless retains the burden of proving that the Court has subject matter...