Ralls v. Docktor Pet Centers, Inc.
| Decision Date | 26 January 1995 |
| Docket Number | Civ. A. No. 92-12371-JLT. |
| Citation | 177 BR 420 |
| Parties | Randy RALLS, et al., Appellants, v. DOCKTOR PET CENTERS, INC., Appellee. |
| Court | U.S. District Court — District of Massachusetts |
Bruce G. McNeill, Tarlow, Breed, Hart, Murphy & Rodgers, Boston, MA, Aaron Keiter, Keiter & Associates, P.C., Michael L. Holland, Holland & McHale, Houston, TX, for appellants.
Paul P. Daley, Erik P. Kimball, Hale & Dorr, Boston, MA, for appellee.
This case comes to the district court on appeal from a final judgment and order of the bankruptcy court. Below, Debtor/Appellee moved to reject certain franchise agreements and for money damages and equitable relief. The bankruptcy judge granted Appellee's Motion to Reject Certain Franchise Agreements. After a hearing, the bankruptcy judge awarded money damages and equitable relief.
Appellee, Docktor Pet Centers, Inc. ("Docktor"), was a national franchisor of retail pet stores with over 200 stores and 184 franchise agreements. Appellants, Randy Ralls, Kim Ralls, Traveling Circus, Inc.,1 and David Yaksic ("Appellants") were franchisees of Docktor. Traveling Circus had one store. Yaksic had two stores. Other than their involvement in this case, the two parties are not connected.
On September 24, 1991, Docktor filed a voluntary petition under chapter 11 of the Bankruptcy Code (the "Code"). The bankruptcy court refused Docktor's request for post-petition borrowing or use of cash collateral, and subsequently Docktor was forced to sell its assets. On December 10, 1991, Docktor sold all of its assets to a newly formed corporation, which was given the option, pursuant to 11 U.S.C. § 365, to assume any of Docktor's executory contracts and unexpired leases. The purchaser declined to assume 75 of the franchise agreements, including those at issue here.
On December 31, 1991, Docktor filed a motion to reject the 75 remaining franchise agreements pursuant to 11 U.S.C. § 365. In addition, Docktor asked the bankruptcy court to issue an injunction ordering the Appellants to "de-identify" their stores according to the termination provisions in the franchise agreement. Docktor also asked for money damages. Specifically, Docktor claimed that the 75 franchisees, including the Traveling Circus and Yaksic, had a history of nonpayment of royalties and accounts receivable, both before and after the filing of the petition, and failed to meet Docktor's requirements for store cleanliness, humane treatment of animals and other franchise guidelines.
Below, Appellants objected to various aspects of the rejection proceedings. They did not object to the bankruptcy court ruling on the rejection of the franchise agreement. Instead, they argued that Docktor had sold its rights in the relevant contracts and thus did not have standing to request the injunctive relief.2 Appellants also attacked the court's subject matter jurisdiction and its power to enter a final judgment on allegedly past due accounts receivable and royalties. Finally, Appellants argued that they were entitled to a full adversarial proceeding, including trial by jury.
The bankruptcy court held a hearing on January 30, 1992 and these demands were rejected. On February 6, 1992, the court issued its Memorandum Regarding Rejection of Certain Franchise Agreements. The bankruptcy court found that the termination provisions of the franchise agreements, including those calling for the de-identification of stores, remained binding on the Appellants. Further, it held that Docktor retained sufficient interest in the franchise agreements to support the court's jurisdiction.
The bankruptcy court then proceeded to hold a "contested matter" hearing on the issue of damages. Bank.R. 9014. The hearing lasted three days and parties were allowed all the benefits of discovery provided by Article VII of the Federal Rules of Bankruptcy Procedure which governs adversarial proceedings. Although they had the option, Appellants did not file any discovery motions, request depositions or propound interrogatories.
On July 22, 1992, the bankruptcy court issued its Decision on Rejection of Certain Franchise Agreements (the "Decision"). As a preliminary matter, it granted the motion to reject the agreements. The court also awarded monetary damages to Docktor in the amounts of $146,622.71 from Traveling Circus and $49,856.84 from Yaksic. These amounts were for past due accounts receivable, unpaid royalties, and remaining balances on notes. The bankruptcy judge also issued an injunction requiring Appellants to de-identify their stores. Finally, the bankruptcy court denied the Appellants' request to offset the cost of de-identifying their stores from the damage award.
Appellants allege the following five errors of law in the proceedings below: 1) that the bankruptcy court was without subject matter jurisdiction to issue the injunction or hear the claims for monetary damages; 2) that the bankruptcy court was without jurisdiction to issue a final order on the money damages; 3) that the bankruptcy court erred by not proceeding with an adversarial hearing; 4) that the bankruptcy court erred by not allowing a trial by jury; and 5) that the bankruptcy court erred by not allowing the Appellants to set-off the costs of de-identifying their stores from the award.
This court has direct appellate jurisdiction of final bankruptcy judgments. 28 U.S.C. § 158(a). The factual findings of a bankruptcy judge are reviewed under a "clearly erroneous" standard. In re The Bible Speaks, 869 F.2d 628, 630 (1st Cir.1989); In re Roco Corp., 701 F.2d 978, 981 (1st Cir.1983). Conclusions of law are reviewed de novo. Arnold Print Works, Inc. v. Apkin, 61 B.R. 520, 521 (D.Mass.1986), vacated on other grounds, 815 F.2d 165 (1st Cir.1987); Liebowitz v. Columbia Packing Co., 56 B.R. 222, 224 (D.Mass.1985), aff'd, 802 F.2d 439 (1st Cir.1986). The five contested issues herein are all issues of law.
Bankruptcy courts are given a broad grant of subject matter jurisdiction under 28 U.S.C. § 157(a). The Code states that bankruptcy courts may hear "any and all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11...." Id. Generally, where the outcome of a proceeding "could conceivably have any affect on the estate being administered," the bankruptcy court has subject matter jurisdiction to hear the proceeding. Videocart, Inc. v. Hambrecht & Quist, Inc., 165 B.R. 740, 743 (Bankr.D.Mass.1994); Matter of Wood, 825 F.2d 90, 93 (5th Cir.1987). The Motion to Reject Certain Franchise Agreements pursuant to § 365 is undeniably a matter over which the bankruptcy court has subject matter jurisdiction. The breach of contract claims asserted by Docktor may have an affect on the bankrupt's estate in that their outcome may increase the size of the estate. The bankruptcy court, therefore, has subject matter jurisdiction to hear those claims.
As the Appellants point out, the power to hear a claim and the power to issue final orders are not necessarily co-extensive. See In re Reed, 94 B.R. 48 (Bankr.E.D.Pa. 1988) (). Thus, there are two separate jurisdictional issues: the preliminary question of subject matter jurisdiction to simply hear the matters; and the second question of whether the bankruptcy court has the power to issue final judgment and orders. This court has already found that the bankruptcy court properly heard the matters involved. It now turns to the second question.
In Northern Pipeline Const. Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Supreme Court found unconstitutional the Code's grant of jurisdiction, which allowed non-Article III bankruptcy judges to issue final judgement and orders for state or federal common law claims. Congress responded by amending the Code and creating a distinction between "core" and "non-core" bankruptcy proceedings. 28 U.S.C. § 157(b), (c). Bankruptcy judges are empowered to enter final orders and judgments in core proceedings. 28 U.S.C. § 157(b). Bankruptcy judges may hear a non-core issue in connection with a bankruptcy proceeding. On these causes of action, however, their power is limited to submitting proposed findings of fact and conclusions of law to the district court for de novo review. 28 U.S.C. § 157(c)(1). Only a district court may enter a final judgment or order in a non-core proceeding. Id.3
Docktor contends its Motion to Reject and the relief requested therein are core proceedings over which the bankruptcy court properly issued final judgment and orders. In the alternative, they argue that the contract claims were related non-core issues, properly before the bankruptcy judge for proposed findings of fact and conclusions of law. Appellants do not contest the bankruptcy court's power to issue a final judgment on the Motion to Reject the Franchise Agreements. Appellants argue that the claims of breach of contract and warranty, and recovery of accounts receivable are garden variety state contract claims and thus are non-core proceedings. At most, therefore, the issues are related matters, and the bankruptcy court's jurisdiction is limited to offering proposed findings of fact and conclusions of law. The court assumes that the bankruptcy judge found all the matters to be core proceedings.4
Generally, the determination between core and non-core can be made by reference to the source of authority for the challenged action.5 Clearly, if the source is the Code itself, the action is a core proceeding. See 1 Daniel R. Cowans, Bankruptcy Law and Practice § 1.2 at 31 (1989); In re MEC Steel Bldgs, Inc., 136 B.R. 606,...
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