In re Vylene Enterprises, Inc.

Decision Date13 August 1986
Docket NumberAdv. No. LA 85-4983-SB.,Bankruptcy No. LA 84-14659-SB
Citation63 BR 900
PartiesIn re VYLENE ENTERPRISES, INC., Debtor. VYLENE ENTERPRISES, INC., v. NAUGLES, INC.
CourtU.S. Bankruptcy Court — Central District of California

Marc Smith, Universal City, Cal. and Howard Mark Becker of Knapp, Petersen & Clarke, Universal City, Cal., for debtor.

William T. Rintala, Peter C. Smoot and Marjorie Lakin Erickson of Rintala, Smoot, Jaenicke & Brunswick, Los Angeles, Cal., for creditors.

MEMORANDUM DENYING PRELIMINARY INJUNCTION

SAMUEL L. BUFFORD, Bankruptcy Judge.

I. INTRODUCTION

This motion for a preliminary injunction is brought by Naugles, Inc. ("Naugles") to prohibit the debtor Vylene Enterprises, Inc. ("Vylene") from infringing its federally registered trademarks and from otherwise unfairly competing with it. The grounds for the motion are that Vylene's ten-year franchise agreement with Naugles has expired according to its terms, and has not been renewed. Vylene opposes the motion on the merits, and argues in addition that in bringing the motion Naugles has violated the automatic stay of Bankruptcy Code § 362(a). For the reasons stated hereafter, the Court denies the motion for a preliminary injunction, on condition that Vylene pay interim franchise and rental fees to Naugles in the amount of $2,000 per month, beginning September 1, 1986.

The Court further holds that this litigation concerning the assumption of a franchise agreement belonging to the estate is a core proceeding, and that the motion is not in violation of the automatic stay.

II. FACTS

Vylene filed the underlying first amended complaint on April 15, 1986 pursuant to authorization of the Court. Vylene asserts nineteen claims for relief, all arising out of the expiration and non-renewal of the franchise agreement. Naugles has filed a counterclaim for trademark violations, unfair competition, misappropriation of trade secrets and for possession of the real property under the sublease from Naugles. Naugles moves for a preliminary injunction on this counterclaim.

Vylene paid $25,000 to Naugles for a ten year franchise beginning on December 30, 1975 for a Mexican-type fast food restaurant in Long Beach, California. The franchise included a sublease of the property from Naugles. Vylene claims that its restaurant was the most successful Naugles franchise, and one of the most successful Naugles restaurants.

Naugles began business in 1971, and in 1975 it owned 12 restaurants, including the Long Beach restaurant franchised to Vylene. It subsequently expanded to 219 company-owned restaurants by late 1985. The Vylene franchise was the sole Naugles franchise until October, 1983, when Naugles franchised five more units. As of late 1985 all of its restaurants were company operated, apart from these six franchises and one unit under an area franchise.

Relations between the parties were apparently good until 1983, when Vylene fell behind in payments due under the franchise agreement. In February, in June and again in July, 1984 Naugles gave Vylene notices of termination of the franchise agreement. In response to the last of these notices, Vylene filed this Chapter 11 bankruptcy case on July 17, 1984. At the time, Vylene was four months behind in its payments under the franchise agreement. On August 24, 1984 Naugles gave notice that it intended not to renew the franchise upon its expiration on December 30, 1985.

Through various proceedings before this Court Vylene paid its delinquent franchise fees and was permitted to assume the franchise agreement through its expiration date of December 31, 1975. The issue of the renewal of the franchise was reserved for later determination.

On October 30, 1985 Vylene gave timely notice of its intent to exercise its renewal rights. On November 14, 1985 Deborah Greene, the owner and president of Vylene, met with Michael Mooslin, the president of Naugles, to discuss the terms and conditions of a renewal agreement. On November 20, 1985 Naugles responded with an offer to renew, and demanded a renewal fee of $104,522 and other terms that Vylene found unacceptable. The franchise renewal fee was based on the fee that Naugles was charging in 1983 for new franchises, which was the last time that it had offered any franchises. Although in 1983 Naugles was offering to finance a portion of the franchise fee, it declined to offer any financing arrangements to Vylene, "due to its uncreditworthy history."

On November 23, 1985 Naugles opened a new company-owned restaurant at a distance of approximately 1.4 miles from the Vylene location, which offered a new menu with prices substantially below those of Vylene.

Deborah Greene sent letters to Naugles on December 8, 1985 and December 27, 1985 to protest the unfairness of the Naugles offer and to request a more reasonable renewal offer. After several further letters, on January 9, 1986 Naugles offered to reduce the franchise renewal fee to $80,000, and to reduce slightly the rent demanded. Alternatively, it offered to purchase the franchise for $80,000 in cash.

There have been no further negotiations, and no renewal agreement has been reached. In consequence, Naugles has refused to accept rent and franchise payments from Vylene, and seeks to terminate the operation of the franchise. Vylene claims that it still has a right to renew the franchise.

III. CORE VS. NONCORE

Neither party has made a formal motion for a determination as to whether this is a core proceeding, as defined in 28 U.S.C. § 157(b). However, the parties have argued this issue in their memoranda, and the Court treats the argument of the parties as a timely motion for determination of this issue under 28 U.S.C. § 157(b)(3), which provides:

The bankruptcy judge shall determine, on the judge\'s own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.

Naugles argues that this is not a core proceeding, as defined in 28 U.S.C. § 157(b)(2).1 Vylene, in contrast, argues that this is a core proceeding.

The consequence of the determination of whether a proceeding is a core proceeding is specified in sections 157(b)(1)2 and (c)(1):3 A bankruptcy judge may hear and make a final determination in a core proceeding; in a noncore proceeding,4 however, a bankruptcy judge must submit proposed findings of fact and conclusions of law to a district judge for a final order or judgment. The role of the bankruptcy court is succinctly described in Production Steel, Inc. v. Bethlehem Steel Corp. (In re Production Steel, Inc.), 48 B.R. 841 (M.D.Tenn.1985):

In noncore matters, the bankruptcy court acts as an adjunct to the district court, in a fashion similar to that of a magistrate or special master. In noncore matters, the bankruptcy court may not enter final judgments without the consent of the parties and its findings of fact and conclusions of law in noncore matters are subject to de novo review by the district court. . . . In contrast to the bankruptcy court\'s authority in noncore cases, the bankruptcy court may enter final judgments in so-called core cases, which are appealable to the district court. The standard for appeal of core matters of the district court is the same as in other civil matters appealed from the district court to the circuit courts of appeal. 28 U.S.C. § 158(c).

Id. at 844.

The division of responsibility by section 157(c)(1) between district courts and bankruptcy courts is based upon constitutional considerations (although perhaps not compelled thereby), pursuant to Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). Northern Pipeline invalidated the statutory jurisdictional grant to bankruptcy courts, on grounds obscured because there were four opinions, none of which commanded a majority of the Supreme Court. Section 157 was enacted in 1984 in response to the jurisdictional crisis of the bankruptcy courts resulting from the Northern Pipeline decision.

The United States Supreme Court has subsequently clarified its Northern Pipeline decision in Thomas v. Union Carbide Agricultural Products, Inc., 473 U.S. ___, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985) where it characterized its Northern Pipeline holding as follows:

The Court\'s holding in that case establishes only that Congress may not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review (emphasis added).5

Thomas involved a challenge to a statutory arbitration procedure to fix the compensation for the Environmental Protection Agency's use of a pesticide manufacturer's data on the health, safety and environmental effects of a registered pesticide in reviewing a subsequent registration application for a similar product. The arbitrator's "findings and determination" were subject to judicial review only for "fraud, misrepresentation or other misconduct." Id., 105 S.Ct. at 3339. The Supreme Court in Thomas found that this scope of review by an Article III court satisfied constitutional requirements.6

The Ninth Circuit, following Northern Pipeline, has held that a bankruptcy court lacks jurisdiction "to make final determinations in matters that could have been brought in a district court or a state court." Lucas v. Thomas (In re Thomas), 765 F.2d 926, 929 (9th Cir.1985) (validating the interim rule referring bankruptcy cases from the district court to the bankruptcy court); see, also, Piombo Corp. v. Castlerock Properties (In re Castlerock Properties), 781 F.2d 159, 162 (9th Cir.1986) (traditional state law contract claim is not a core proceeding).

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