Siegal v. Everett (In re Siegal)

• Citation: 591 B.R. 609
• Decision Date: 08 August 2018
• Docket Number: Case No. 17-15088-MMH,Adversary No. 17-00348-MMH
• Parties: IN RE: Robert S. SIEGAL, Debtor. Robert S. Siegal, Plaintiff, v. Lawrence R. Everett, et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

591 B.R. 609

IN RE: Robert S. SIEGAL, Debtor.

Robert S. Siegal, Plaintiff,

v.Lawrence R. Everett, et al., Defendants.

Case No. 17-15088-MMH

Adversary No. 17-00348-MMH

United States Bankruptcy Court, D. Maryland, at Baltimore.

Signed August 8, 2018

Joseph Michael Selba, Tydings & Rosenberg LLP, Baltimore, MD, for Plaintiff.

Marios John Monopolis, Simms Showers LLP, Hunt Valley, MD, for Defendants.

MEMORANDUM OPINION

MICHELLE M. HARNER, U.S BANKRUPTCY JUDGE

This adversary proceeding involves a failed business relationship. Robert Siegal and Lawrence Everett formed a business entity known as Farm Fresh Direct by A Cut Above, LLC ("Farm Fresh" and collectively with Mr. Everett, the "Defendants"). At some point subsequent to the filing of Mr. Siegal's chapter 13 case, the Defendants sought to sever their business relationship with Mr. Siegal by, among other things, attempting to buy out Mr. Siegal's membership interest in, and terminating his employment with, Farm Fresh. The Defendants assert that the Farm Fresh Operating Agreement and applicable state law authorized these and other actions. Mr. Siegal counters that the Defendants' conduct violated sections 362 and 525 of the U.S. Bankruptcy Code.¹ 11 U.S.C. §§ 362, 525. Indeed, the parties' dispute raises issues at the intersection of federal bankruptcy law and state entity law, and the important public policies underlying each.

A party's nonbankruptcy law rights, including those under state law, generally are respected to the greatest extent possible in a bankruptcy case. Where a party's state law rights conflict with a provision or policy underlying the Code, courts are guided by the provisions of the Code, the Bankruptcy and Supremacy Clauses of the U.S. Constitution, and relevant case law. For example, the U.S. Supreme Court has instructed that "[p]roperty interests are created and defined by state law. Unless some federal interest requires a different result , there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (emphasis added). As such, the statement that a party's conduct was permissible under state law may, but does not necessarily, end the inquiry. The consequences of that statement depend on the particular facts and circumstances of the case at hand.

As further explained below, many of the Defendants' actions appear grounded in the terms of the Farm Fresh Operating Agreement and applicable state law. The Defendants cannot, however, use the Operating Agreement as a shield with respect to conduct that otherwise would violate the automatic stay of section 362 of the Code—one of the hallmark protections provided to debtors under the Code. 11 U.S.C. § 362(a). Rather, the Court must analyze the alleged conduct and its consequences under the Code. The Court does, however, agree with the Defendants that certain of the alleged conduct implicates the automatic stay only if Mr. Siegal is a member of Farm Fresh and that membership interest is protected by the Code. Although the Court does not, by this Memorandum Opinion, determine the validity or extent of Mr. Siegal's membership interest in Farm Fresh, the Court rejects the Defendants' position that Mr. Siegal's failure to contribute $100.00 to the entity forecloses any argument that Mr. Siegal is a member. Accordingly, for the reasons set forth below, the Court will grant the Defendants' motions for summary judgment solely with respect to the Defendants' response to Mr. Siegal's demand to inspect records and the Defendants' alleged use of Mr. Siegal's proprietary information without compensation. The Court will deny the Defendants' summary judgment motions on all other claims and will likewise deny Mr. Siegal's motion for summary judgment.

I. Relevant Background²

On April 17, 2017, Mr. Siegal filed a petition for relief under chapter 13 of the Code. Prior to the petition date, Mr. Siegal and Mr. Everett entered into a business venture to operate Farm Fresh, a home food delivery business. The general terms of that business venture are set forth in the Farm Fresh Operating Agreement, dated December 23, 2016 (the "Operating Agreement"). Under the Operating Agreement, Mr. Siegal and Mr. Everett were to become 50-50 members of Farm Fresh. In addition, in anticipation of forming Farm Fresh, Mr. Siegal and Mr. Everett executed a Non-Disclosure Agreement, dated October 3, 2016, with respect to certain proprietary information of Mr. Siegal (the "Non-Disclosure Agreement").

After the petition date, Mr. Everett and Farm Fresh attempted to buy out Mr. Siegal's membership interest in Farm Fresh for $100.00, by delivering a Buyout Notice.³ Mr. Siegal and Mr. Everett also entered into an Employment Agreement, dated May 5, 2017 (the "Employment Agreement"). The Employment Agreement contemplated Mr. Siegal's continued employment as an at-will employee, but introduced a covenant not to compete into the employment relationship. The Defendants terminated Mr. Siegal's employment on June 14, 2017.

The parties have filed a variety of pleadings against one another in both this adversary proceeding and the main chapter 13 case. For example, the Defendants have objected to Mr. Siegal's proposed chapter 13 plan, and that objection and plan confirmation remain pending. The Defendants also filed a motion to dismiss the Amended Complaint in this adversary proceeding [ECF 94] and a motion to dismiss Mr. Siegal's chapter 13 case [ECF 63 in Case No. 17-15088]. The Court held separate hearings on each motion to dismiss on April 10, 2018, and July 10, 2018, respectively. The Court analyzed the motion to dismiss in this adversary proceeding as a motion for judgment on the pleadings and entered an Order granting in part, and denying in part, that motion (the "Rule 12(c) Order"). ECF 119. The Court also entered an Order denying the motion to dismiss Mr. Siegal's chapter 13 case without prejudice. ECF 78, Case No. 17-15088.

The matters now before the Court involve four separate motions for partial summary judgment—three filed by the Defendants and one filed by Mr. Siegal (collectively, the "Dispositive Motions"). ECF 78, 87, 115, 127. The parties have opposed each other's motions and filed supplemental briefing in support of their respective positions. The Court held hearings on the Dispositive Motions on June 5, 2018 (the "June Hearing") and July 19, 2018. The matters are now fully briefed and ripe for resolution. Notably, in addition to the pending Dispositive Motions, Mr. Siegal previously filed a motion for partial summary judgment in this adversary proceeding, which Judge Rice granted by an Order entered on December 4, 2017 (the "December Stay Order").⁴ ECF 33.

II. Jurisdiction and Legal Standards

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Local Rule 402 of the United States District Court for the District of Maryland. This proceeding is a "core proceeding" under 28 U.S.C. § 157(b)(2).

Rule 56 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Bankruptcy Rule 7056, governs the Dispositive Motions. A moving party may be entitled to judgment as a matter of law under Civil Rule 56 in the absence of any genuine issue of material fact. Fed. R. Civ. P. 56. See Emmett v. Johnson , 532 F.3d 291, 297 (4th Cir. 2008) (citing Celotex Corp. v. Catrett , 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). See also Guessous v. Fairview Prop. Inv., LLC , 828 F.3d 208, 216 (4th Cir. 2016) (discussing standards for summary judgment). "When a party has submitted sufficient evidence to support its request for summary judgment, the burden shifts to the nonmoving party to show that there are genuine issues of material fact." Emmett , 532 F.3d at 297. Courts generally will grant summary judgment "unless a reasonable jury could return a verdict for the nonmoving party on the evidence presented." Stanley Martin Cos. v. Universal Forest Prods. Shoffner LLC , 396 F.Supp.2d 606, 614 (D. Md. 2005) (citations omitted).

A court must view the evidence on summary judgment in the light most favorable to the nonmoving party and "draw all justifiable inferences" in its favor, "including questions of credibility and of the weight to be accorded to particular evidence." Masson v. New Yorker Magazine , 501 U.S. 496, 520, 111 S.Ct. 2419, 115 L.Ed.2d 447 (1991) (citations omitted). Under Civil Rule 56, a party may support assertions made in a motion for summary judgment by citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations, admissions, interrogatory answers or other materials. Fed. R. Civ. P. 56(c). A court has some flexibility in the kinds of evidence that it can consider in resolving a motion for summary judgment. See, e.g., Humphreys & Partners Architects , 790 F.3d 532, 538–539 (4th Cir. 2015).

In these matters, the Defendants rely on, among other things, the Operating Agreement, the Employment Agreement, the Non-Disclosure Agreement, and the Declarations of the Defendants' counsel and Mr. Everett. Mr. Siegal points to the facts stated in the pleadings, as well as his Declaration (the "Siegal Declaration") [ECF 133], which the Court permitted Mr. Siegal to file after the June Hearing under Civil Rule 56(e). June Hearing Tr. 24. See also, e.g., Fed. R. Civ. P. 56(e) ; Martin v. Int'l Longshoremen's Ass'n, Local 1248 , No. 2:17CV175, 2017 WL 5146018, at *7 (E.D. Va. Aug. 16, 2017) ("Whether to afford a party who fails to properly support an assertion of fact or fails to properly address another party's assertion of fact an opportunity to properly support or address the fact lies within the sound discretion of the Court."). The Defendants, in turn, filed a motion to strike Mr. Siegal's Declaration.⁵ ECF 137. The Court...