In re Vylene Enterprises, Inc., CV 90-4090 SVW

• Citation: 122 BR 747
• Decision Date: 29 October 1990
• Docket Number: No. CV 90-4090 SVW,Bankruptcy No. LA 84-14659 SB,Adv. No. LA 85-4983 SB.,CV 90-4090 SVW
• Court: U.S. District Court — Central District of California
• Parties: In re VYLENE ENTERPRISES, INC., Debtor. VYLENE ENTERPRISES, INC., Plaintiff-Appellee, v. NAUGLES, INC., Defendant-Appellant.

122 B.R. 747 (1990)

In re VYLENE ENTERPRISES, INC., Debtor.

VYLENE ENTERPRISES, INC., Plaintiff-Appellee, v. NAUGLES, INC., Defendant-Appellant.

No. CV 90-4090 SVW, Bankruptcy No. LA 84-14659 SB, Adv. No. LA 85-4983 SB.

United States District Court, C.D. California.

October 29, 1990.

COPYRIGHT MATERIAL OMITTED

William T. Rintala, Diane B. Sherman, Suzanne Criley, Rintala, Smoot, Jaenicke & Brunswick, Michael A. Morris, Stutman, Treister & Glatt, Los Angeles, Cal., for defendant and appellant Kentucky Fried Chicken of So. Calif., Inc. formerly known as Naugles, Inc.

Howard Mark Becker, Becker & Soosman, Westlake Village, Cal., Philip K. Fife, Universal City, Cal., for debtor and plaintiff Vylene Enterprises, Inc.

ORDER VACATING JUDGMENT OF THE BANKRUPTCY COURT

WILSON, District Judge.

INTRODUCTION

This case is before this court on appeal from the judgment of the bankruptcy court pursuant to 28 U.S.C. sec. 158(a). Appellant Kentucky Fried Chicken of Southern California, Inc. formerly known as Naugles, Inc. ("Naugles") has moved in this court for an order vacating the judgment of the bankruptcy court on two grounds. First, appellants claim that the bankruptcy court exceeded its jurisdiction in entering judgment in this proceeding because it is not a core proceeding under 28 U.S.C. sec. 157(b). Second, appellants assert that even if the bankruptcy court had jurisdiction to enter judgment, its purported final judgment is defective because it disposes of less than all the claims in the adversary proceeding and fails to comply with Rule 54(b) of the Federal Rules of Civil Procedure made applicable to the bankruptcy court by Bankruptcy Rule 7054.

The debtor, Vylene Enterprises, Inc. ("Vylene"), was a franchisee of defendant-appellant Naugles, operating a fast-food restaurant pursuant to a ten year franchise agreement entered into in December, 1975. On July 17, 1984, Vylene filed a Chapter 11 Bankruptcy petition. On December 30, 1985, the expiration date of the franchise agreement, Vylene filed an adversary proceeding against Naugles in the bankruptcy court. Vylene's First Amended Complaint, which was filed on April 15, 1986, asserted nineteen claims for relief based on Naugles' alleged refusal to negotiate for an extension of the franchise agreement and other alleged misconduct concerning the performance of the agreement.

Naugles' Answer to the First Amended Complaint alleged that the proceeding was a non-core proceeding and stated that it did not consent to the jurisdiction of the bankruptcy court. Naugles also filed counterclaims for trademark violations, unfair competition, misappropriation of trade secrets, and for possession of the real property held by Vylene under sublease from Naugles. Naugles then moved for a preliminary injunction to prevent Vylene from continuing to use Naugles' federally registered trademarks. While that motion was under submission, Naugles moved for relief from the automatic stay so that it could pursue repossession of the franchise.¹ In ruling on the merits of Naugles' motions for relief from the stay and for preliminary injunction, the bankruptcy judge held that the Naugles' counterclaims and motion for preliminary injunction concerned the continued use of property by the debtor, and thus, the case was a core proceeding within the literal language of 28 U.S.C. sec. 157(b)(2)(M). In re Vylene Enterprises, Inc., 63 B.R. 900, 905 (Bankr.C. D.Cal.1986), rev'd, No. CV 86-7281 JSL (C.D.Cal. June 25, 1987), appeal dismissed sub nom., Naugles Inc. v. Vylene Enterprises, Inc., 891 F.2d 295 (9th Cir.1989) (unpublished disposition).

The bankruptcy judge rejected Vylene's argument that the preliminary injunction motion violated the automatic stay, finding that the stay does not apply to motions for injunctive relief brought in the court in which the bankruptcy case is pending. Id. at 907. However, the bankruptcy judge denied the motion for preliminary injunction on its merits, permitting Vylene to continue operating the Naugles' franchise and using the Naugles' trademarks on a provisional basis pending a final determination on the merits of the adversary proceeding. Id. at 912. The bankruptcy court conditioned its denial of the preliminary injunction on Vylene's payment of interim franchise and rental fees of $2,000 per month. Id. Essentially, the bankruptcy court found that the failure of the parties to negotiate in good faith for a renewal of the franchise agreement resulted in the failure of a condition precedent to the expiration of the agreement. Id. at 909. Thus, the agreement not having expired, Naugles would not likely succeed on the merits of its counterclaims for trademark infringement and repossession of the franchise. Further, the bankruptcy judge's provisional order permitting Vylene to continue operating the franchise left Naugles' with no forum other than the bankruptcy court in which it could pursue repossession of the franchise.²

Naugles appealed the bankruptcy court's denial of its motions for preliminary injunction and for relief from the stay to the district court. The district court reversed, holding that the bankruptcy judge had misinterpreted the right of first refusal clause in the franchise agreement and that there was no right to renew. In re Vylene Enterprises, Inc., CV 86-7281 JSL, Order Reversing And Remanding To Bankruptcy Court, at 3 (C.D.Cal. June 25, 1987), appeal dismissed sub nom., Naugles Inc. v. Vylene Enterprises, Inc., 891 F.2d 295 (9th Cir.1989) (unpublished disposition). Thus, the occurrence of good faith negotiations for renewal was not a condition precedent to the expiration of the franchise agreement, and to the extent the bankruptcy court denied relief on the basis that the franchise agreement had not expired, the bankruptcy court had erred. Id. Essentially, the district court found that while Vylene could enforce an obligation upon Naugles' to comply with the terms of the agreement and to act in good faith with regard to the franchise agreement, it did not have a right to renew the franchise if Naugles declined to do so. Id. (noting that Naugles' remedy for breach of any such obligation would be an action for money damages).

The district court's order was appealed by Vylene to the Ninth Circuit, which subsequently dismissed the appeal as moot and vacated the Bankruptcy Court Order denying preliminary injunction of September 10, 1986, and the subsequent District Court Order reversing and remanding of June 25, 1987. In re Vylene Enterprises, Inc., 891 F.2d 297 (9th Cir.1989) (text available on Westlaw), reported at Naugles Inc. v. Vylene Enterprises, Inc., 891 F.2d 295 (9th Cir.1989) (table of unpublished dispositions). The appeal had become moot as the bankruptcy court had granted Naugles' renewed motion for relief from the automatic stay and allowed Naugles to take possession of the premises due to Vylene's failure to pay franchise fees and rent pursuant to the court's provisional order. Id.; See In re Vylene Enterprises, Inc., 105 B.R. 42, 45 (Bankr.C.D.Cal.1989) (Memorandum of Opinion Re Liability of Naugles, Inc.).

Meanwhile, as neither of the appellate decisions had addressed the bankruptcy court's finding that the adversary proceeding was a core proceeding,³ the bankruptcy court held a trial in three phases over a period of nearly three years concerning Vylene's claims for breach of the franchise agreement and for breach of the implied covenant of good faith and fair dealing. The court found that Naugles breached the franchise agreement and the covenant of good faith and fair dealing by, inter alia, opening a competing franchise within the immediate vicinity of the Vylene franchise and by refusing to negotiate in good faith for a renewal. Id. at 49. Subsequently, the bankruptcy judge ruled that Vylene had suffered damages in the amount of $2,219,468 and awarded attorneys' fees and costs of $550,000 to Vylene. In re Vylene Enterprises, Inc., Bk. No. LA 84-14659 SB, Adv. No. LA 85-4983 SB, Ruling On Damages (Bankr.C.D.Cal. July 5, 1990). On July 12, 1990, the bankruptcy court entered the judgment from which Naugles appeals.

DISCUSSION

Appellant Naugles' main contention is that the bankruptcy judge erred in characterizing the adversary proceeding filed by Vylene as a "core" proceeding under 28 U.S.C. sec. 157(b). That section provides, in subdivision (b)(1), that bankruptcy courts, as established by the Bankruptcy Amendments And Federal Judgeship Act of 1984 ("1984 Act"), Pub.L. 98-353, 98 Stat. 340, "may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, . . . and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. sec. 157(b)(1). Section 157(b)(2) provides a non-exclusive list of proceedings Congress deemed to be core proceedings. Section 157 further provides that where a proceeding is not a core proceeding, but is related to a case under title 11, the bankruptcy judge may hear the case as an adjunct of the district court and submit proposed findings of fact and conclusions of law to the district court, with any final order or judgment to be entered by the district court after a de novo review of any matters to which a party has properly objected. 28 U.S.C. sec. 157(c)(1). Additionally, however, under section 157(c)(2), the parties may consent to the bankruptcy court's jurisdiction and authority to enter judgments in such "related" proceedings. In re Daniels-Head & Associates, 819 F.2d 914, 918-19 (9th Cir.1987) ("Daniels-Head"); 28 U.S.C. sec. 157(c)(2).

The issue before this court on Naugles' motion is whether the adversary proceeding filed by Vylene in the bankruptcy court was a "core" proceeding subject to entry of judgment by the bankruptcy judge or rather a related proceeding in which the bankruptcy court could only act as an adjunct. As a question of jurisdiction, the bankruptcy judge's...