Komodo Cloud, LLC v. DB Holding Liquidation, Inc. (In re DB Holdings Liquidation, Inc.)

• Decision Date: 12 September 2018
• Docket Number: Civ. No. 17-605 (GMS),Bankr. Case No. 16-12435 (CSS), Civ. No. 17-606 (GMS)
• Citation: 592 B.R. 539
• Parties: IN RE: DB HOLDINGS LIQUIDATION, INC., et al., Debtors. Komodo Cloud, LLC, Appellant, v. DB Holding Liquidation, Inc. f/k/a DirectBuy Holdings, Inc. and CSC Generation Inc., Appellees.
• Court: U.S. District Court — District of Delaware

592 B.R. 539

IN RE: DB HOLDINGS LIQUIDATION, INC., et al., Debtors.

Komodo Cloud, LLC, Appellant,

v.DB Holding Liquidation, Inc. f/k/a DirectBuy Holdings, Inc. and CSC Generation Inc., Appellees.

Bankr. Case No. 16-12435 (CSS)

Civ. No. 17-605 (GMS)

Civ. No. 17-606 (GMS)

United States District Court, D. Delaware.

Signed September 12, 2018

Robert Karl Hill, Seitz, Van Ogtrop & Green, P.A., Wilmington, DE, for Appellant.

Marion Maxwell Quirk, Nicholas Jaison Brannick, Cole, Schotz, Meisel, Forman & Leonard, P.A., Christopher M. Samis, Leslie Katherine Good, Whiteford, Taylor & Preston, L.L.C., Wilmington, DE, Evan M. Lazerowitz, Robert B. Winning, Lawrence C. Gottlieb, Pro Hac Vice, for Appellees.

MEMORANDUM

GREGORY M. SLEET, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Presently before the court are the appeals of Komodo Cloud, LLC ("Appellant") from two decisions of the Bankruptcy Court, entered in the above-captioned debtors' ("Debtors") chapter 11 cases. The first decision on appeal (B.D.I. 587)¹ ("Withdrawal Order") granted Debtors' motion to voluntarily withdraw (B.D.I. 494) ("Motion to Withdraw") the Debtors' emergency motion for injunctive and declaratory relief (B.D.I. 406) ("Emergency Motion"),² which sought, inter alia , to compel Appellant's performance under a Master Services Agreement ("MSA"). Whereas the Bankruptcy Court permitted the Debtors to withdraw the Emergency Motion, that relief was "with prejudice," as requested by Appellant. However, the Bankruptcy Court denied Appellant's request for an award of its costs and fees under the MSA as the "prevailing party," and for this reason, Appellant has appealed the Withdrawal Order. (Civ. No. 17-605, D.I. 1). The second decision on appeal (B.D.I. 589) ("Compel Order") denied Appellant's Objection to Alteration of Assumption and Assignment Procedures Without Notice and Motion to Deem Komodo Cloud's Executory Contracts Assumed and Assigned or, Alternatively, to Compel Assumption and Assignment (B.D.I. 532) (the "Motion to Compel"). (Civ. No. 17-606, D.I. 1). For the reasons set forth below, the court will affirm both decisions. Accordingly, the motions for leave to withdraw as counsel to the Debtors in these appeals, filed by Cole Schotz P.C. (Civ. No. 17-605, D.I. 20; Civ. No. 17-606, D.I. 21) ("Motions to Withdraw as Counsel"), are each denied as moot.

II. APPEAL OF THE WITHDRAWAL ORDER

A. Background

DirectBuy was a members-only buying club that had 178,431 members on the petition date. Komodo was one of the Debtors' contract counterparties pursuant to the MSA that set forth the terms and conditions that would govern future agreements between Komodo and the Debtors, including, but not limited to, a so-called "5 Year FlexCompute Transition" agreement (the "FlexCompute Contract") entered into by and between DirectBuy and Komodo. (See Civ. No. 17-605, D.I. 14 (MSA, Exh. A to the sealed Emergency Motion) ). The MSA provides for a ten-day grace period for the Debtors to cure any alleged breach (id. at § 5.3(i) ); mandatory mediation if there is a dispute under the contract (id. at § 11.16(a) ); and requires Appellant to seek injunctive relief if it believes its intellectual property rights are being violated (id. at § 11.16(b) ). The MSA also provides that "[i]n the event of any proceeding or lawsuit brought by [Appellant] or Customer in connection with this Agreement, the prevailing party shall be entitled to receive its costs, expert witness fees, and reasonable attorneys' fees, including costs and fees on appeal, in addition to any relief granted by a court of law." (Id. at § 11.17).

On November 1, 2016, Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On February 14, 2017, the Bankruptcy Court entered an order approving the sale of substantially all of the Debtors' assets to appellee CSC Generation, Inc. ("CSC") (B.D.I. 377) (the "Sale Order"). (SA-14). The Sale Order provided for a designation rights period during which CSC could determine whether it wished for the Debtors to assume and assign certain contracts and leases to CSC.

On the evening of February 23, 2017, Appellant sent a cease and desist letter to CSC via email, alleging that the Debtors and/or CSC had breached their agreements by transporting "clones" of Appellant's software to other service providers. (See KA9, ¶ 27). The following day, CSC sent an email to Appellant explaining that neither CSC nor the Debtors had breached Appellant's contracts with the Debtors, but that CSC would take precautionary measures to ensure that Komodo's concerns would be resolved. (See id. ¶ 29). The parties appear to dispute what happened next. CSC says that Appellant engaged in "self help," in violation of the terms of the MSA and state law remedies. (KA258, 5/8/17 Hr'g Tr. at 43:5-9). Specifically, CSC alleges Appellant took actions to destroy a network connection between the Debtors' server environment and CSC's corporate headquarters, that "had a dramatic effect on the Debtors' and CSC's operations," and that "neither the Debtors nor CSC were able to effectively communicate with Appellant on February 24^th or during the following weekend." (KA9-11, ¶¶ 28, 34-36). Appellant concedes that it took steps to restrict [Debtors'] access to [Appellant's] systems" and "acknowledges that it may have caused some temporary disruptions." (See SA-76, B.D.I. 430). Specifically, Appellant acknowledged a brief disruption to Debtors'/CSC's Citrix access but contends that this disruption only impacted 25 minutes a single business day and was corrected within 2 minutes of receiving a help desk ticket. (See Civ. No. 17-605, D.I. 12 at 4; B.D.I. 416, Menon Decl. at ¶ 6).

The following Monday, February 27, 2017, Debtors filed the Emergency Motion (KA1-100), seeking a permanent mandatory injunction on the basis that Appellant was allegedly destroying Debtors' ongoing business operations both directly by interfering with the Debtors' ability to prepare monthly operating reports and indirectly by preventing Debtors from performing under a transition services agreement with CSC. (B.D.I. 406). Debtors filed four declarations in support of their argument that business operations were being disrupted and that Appellant was not helping to address those problems. (B.D.I. 407-410). The Bankruptcy Court scheduled a telephonic hearing on the Emergency Motion for February 28, 2017, and, at the completion of that hearing, the Bankruptcy Court set an evidentiary hearing for March 2, 2017. At the March 2 hearing, the Bankruptcy Court delayed the hearing to allow the parties to engage in settlement discussions, and, by the end of that day, the parties mutually agreed to a further adjournment of the evidentiary hearing to March 14. Due to inclement weather, which resulted in the closing of the Bankruptcy Court on March 14, and a scheduling conflict, the evidentiary hearing was adjourned again to April 5, 2017.

CSC argues that, during the pendency of the adjournments, circumstances changed, leading to the decision to withdraw the Emergency Motion. "Most notably, after the Emergency Motion was filed, CSC worked to make numerous specific workarounds and Komodo, by its own admission, began working with the Debtors to ameliorate certain disruptions." (Civ. No. 17-605, D.I. 15 at 9).³ Appellant conditioned its consent to withdrawal of the Emergency Motion on payment of its attorneys' fees under the MSA. Debtors/CSC sought withdraw the Emergency Motion without prejudice and with each party bearing its own costs. (B.D.I. 494-95). On May 8, 2017, the Bankruptcy Court held a hearing and ruled that the Emergency Motion could be withdrawn but only with prejudice. (KA274, 5/18/17 Hr'g Tr. at 59:2-7). With respect to Appellant's request for attorneys' fees under the MSA, the Bankruptcy Court stated:

With regard to whether Komodo was the prevailing party, I can't believe that it's appropriate to make that finding. I don't believe the facts and circumstances support them being deemed the prevailing party. If someone brings a motion and for whatever reason, circumstances, et cetera, change and they withdraw that motion, that doesn't mean that the other side was the prevailing party. I think some affirmative finding on the merits in favor of one of the parties is necessary for the court to find that party was the prevailing party under the contract.

(KA272-74, 5/8/17 Hr'g Tr. at 57:16-58:1 & 59:8-10).

B. Parties' Contentions

Appellant argues that the Bankruptcy Court correctly determined that permission to withdraw the Emergency Motion should be granted only with prejudice. (See Civ. No. 17-605, D.I. 12 at 7-9). Appellant argues on appeal that, having obtained such a ruling, Appellant was the "prevailing party" in the proceeding, and therefore, under the broad fee provision of the MSA, Appellant was entitled to reimbursement of its reasonable attorneys' fees incurred in defending the Emergency Motion. (See id. at 9-12). According to Appellant, "[c]ourts interpreting the phrase [‘prevailing party’] have repeatedly held that a dismissal with prejudice acts as an adjudication of the merits, which makes the other party a ‘prevailing party’ for purposes of recovering costs and/or attorneys' fees." (Id. at 10). Appellant argues that, while the Third Circuit does not appear to have addressed this issue, all other circuits considering the issue have reached the conclusion that a dismissal with prejudice is tantamount to a judgment on the merits, and a defendant obtaining such a dismissal must be considered a prevailing party. (See id. at 10-11).

CSC does not dispute that the Bankruptcy Court's grant of relief with prejudice was a proper exercise of its discretion. CSC argues that, under Federal Rule of Civil Procedure 41 (a)(2),⁴ the Bankruptcy Court had broad discretion to dismiss the action without ordering payment of Appellant's fees. (See Civ. No. 17-605, D.I. 15 at 13-14). CSC argues that the decision to deny an award of fees was a proper...