TSA Stores, Inc. v. M J Soffe, LLC (In re Tsawd Holdings, Inc.)

• Decision Date: 06 March 2017
• Docket Number: Adv. No. 16–50364(MFW),Case No. 16–10527 (MFW) Jointly Administered
• Citation: 565 B.R. 292
• Parties: IN RE: TSAWD HOLDINGS, INC., et al.,Debtors. TSA Stores, Inc., TSA Ponce, Inc., and TSA Caribe, Inc., Plaintiffs, and Wilmington Savings Fund Society, FSB, as Successor Administrative and Collateral Agent, Plaintiff–Intervenor/Counterclaim Defendant, v. M J Soffe, LLC a/k/a M.J. Soffe, LLC, Defendant/Counterclaim Plaintiff.
• Court: U.S. Bankruptcy Court — District of Delaware

565 B.R. 292

IN RE: TSAWD HOLDINGS, INC., et al.,¹ Debtors.TSA Stores, Inc., TSA Ponce, Inc., and TSA Caribe, Inc., Plaintiffs,andWilmington Savings Fund Society, FSB, as Successor Administrative and Collateral Agent, Plaintiff–Intervenor/Counterclaim Defendant,

v.M J Soffe, LLC a/k/a M.J. Soffe, LLC, Defendant/Counterclaim Plaintiff.

Case No. 16–10527 (MFW) Jointly Administered

Adv. No. 16–50364(MFW)

United States Bankruptcy Court, D. Delaware.

Signed March 6, 2017

Andrew L. Magaziner, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, Plaintiffs.

Daniel B. Butz, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, for Plaintiff–Intervenor/ Counterclaim Defendant.

R. Stephen McNeill, Etta Ren Wolfe, Potter Anderson & Corroon LLP, Wilmington, DE, Defendant/Counterclaim Defendant/Counterclaim Plaintiff.

MEMORANDUM OPINION²

Mary F. Walrath, United States Bankruptcy Judge

Before the Court is a Motion for Partial Judgment on the Pleadings filed by Intervening Plaintiff, Wilmington Savings Fund Society, FSB ("WSFS"), seeking a declaration that it has a perfected security interest in the Debtors' inventory and sale proceeds senior to that of M J Soffe, LLC ("Soffe") and seeking disgorgement of the sale proceeds of that inventory. For the reasons set forth below, the Motion for Partial Judgment on the Pleadings will be denied.

I. BACKGROUND

The Debtors marketed and sold sporting goods and active apparel from retail stores located across the United States and Puerto Rico under the name "Sports Authority." The Debtors obtained their inventory from vendors under various arrangements, including consignment. Soffe sold sporting goods and athletic apparel to the Debtors for resale. WSFS is a secured creditor of the Debtors pursuant to prepetition term loan credit and security agreements, under which WSFS was granted a security interest in, inter alia, the Debtors' inventory.

On March 2, 2016, the Debtors commenced their chapter 11 cases. On March 16, 2016, the Debtors commenced this adversary proceeding against Soffe, seeking,³ inter alia, declaratory relief in connection with competing claims to certain inventory in the Debtors' possession pursuant to a Pay by Scan Agreement and to the sale proceeds resulting therefrom (the "Disputed Proceeds"). (Adv. D.I. 1.) The inventory in dispute consists of approximately $5,421,528 of goods shipped and delivered prepetition by Soffe to the Debtors (the "Disputed Goods"). Id.

On May 3, 2016, the Court entered a final Order in the Debtors' main case authorizing the Debtors to sell consigned goods in the ordinary course of business so long as the Debtors complied with their prepetition agreements, including remitting part of the sale proceeds to consignment vendors (the "Final Consignment Order"). (D.I. 1704.) The Debtors agreed to this procedure when the Court refused to otherwise let the Debtors sell the Disputed Goods until the Court could determine the competing interests in the consigned goods and proceeds therefrom in the adversaries. (D.I. 175.) See In re Whitehall Jewelers Holdings, Inc., No. 08-11261 (KG), 2008 WL 2951974, at *6 (Bankr. D. Del. July 28, 2008) (holding that issues regarding ownership of prepetition consigned goods and interrelated issues regarding the existence, perfection, and/or priority of any security interest in those goods can only be resolved in an adversary proceeding, not a section 363 sale). The Final Consignment Order explicitly provides that the Disputed Proceeds, together with interest, are subject to disgorgement.⁴ (D.I. 1704.)

WSFS filed a motion to intervene in the adversary proceeding which was granted and filed a complaint against Soffe seeking a declaration that WSFS has a perfected security interest senior to Soffe's interest in the Disputed Goods and seeking disgorgement of the Disputed Proceeds. (Adv. D.I. 17.) WSFS's asserted claim is premised on its role as successor agent under a 2006 Term Loan Credit Agreement, as amended and restated on November 16, 2010, under which several of the Debtors are obligated as either borrower or guarantor.⁵ Id. WSFS asserts a security interest in the Debtors' inventory pursuant to a Term Loan Security Agreement (the "WSFS Security Agreement") and financing statement. WSFS's alleged secured debt totaled $276.7 million in principal as of the petition date. Id.

On June 30, 2016, Soffe filed an Answer to WSFS's Complaint and counterclaimed for a declaration that any security interest WSFS purports to have in the Debtors' inventory does not attach to the Disputed Goods and that, to the extent it is determined that WSFS has a lien on the Disputed Goods, such lien is subordinate to Soffe's interest. (Adv. D.I. 27 at ¶¶ 89, 96.)

On July 19, 2016, WSFS filed the instant Motion for Partial Judgment on the Pleadings. (Adv. D.I. 34.) A notice of completion of briefing on that motion was filed on August 17, 2016, and the matter is now ripe for decision. (Adv. D.I. 40.)

II. JURISDICTION

Soffe asserts that the Court does not have subject matter jurisdiction over WSFS's complaint and Soffe's counterclaims, contending that they are non-core claims raised by non-debtor parties. Soffe does not consent to entry of any final order or judgment by the Court.

WSFS, however, asserts that the Court has jurisdiction over the instant adversary proceeding, which is a core proceeding because it requires a determination of the validity, extent, and priority of liens on property of the estate. 28 U.S.C. § 157(b)(2)(K). WSFS additionally contends that the Court has jurisdiction because the adversary proceeding is premised on the enforcement and interpretation of the Final Consignment Order. See, e.g., Travelers Indem. v. Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009) (observing that a bankruptcy court has jurisdiction to interpret and enforce its own prior orders); In re Lazy Days' RV Ctr., Inc., 724 F.3d 418, 423 (3d Cir. 2013) (same).

In determining the scope of the Court's jurisdiction over this adversary proceeding, the Court must conduct a two-part inquiry: it must determine first whether the Court has subject matter jurisdiction and second, whether the Court has authority to enter a final judgment. See, e.g., Liquidating Tr. of the MPC Liquidating Trust v. Granite Fin. Solutions, Inc. (In re MPC Computers, LLC), 465 B.R. 384, 389 (Bankr. D. Del. 2012) ("The question pondered by the Supreme Court in Stern, whether the bankruptcy judge had the power to enter a final judgment in a state law counterclaim by the estate, is entirely separate from the question of whether a bankruptcy judge has jurisdiction to hear a matter without entering final judgment.").

The Court's subject matter jurisdiction is derived from section 1334 of title 28, which establishes the district court's bankruptcy jurisdiction, and the Amended Standing Order of Reference, which then refers "any or 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 ... to the bankruptcy judges for this district." See 28 U.S.C. § 157(a). Thus, to the extent that the adversary proceeding arises under or in a case under title 11, or is related to a case under title 11, the Court has subject matter jurisdiction to hear the same. See, e.g., Burtch v. Huston (In re USDigital, Inc.), 461 B.R. 276, 283 (Bankr. D. Del. 2011) ("Stern in no way limits the bounds of a bankruptcy court's subject matter jurisdiction. At the very least the bankruptcy court must have ‘related to’ jurisdiction.").

Proceedings arising under title 11 and arising in cases under title 11 are both generally referred to as "core" proceedings. 28 U.S.C. § 157(b) ; Stern v. Marshall, 564 U.S. 462, 476, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ("Under our reading of [28 U.S.C. § 157(b) ], core proceedings are those that arise in a bankruptcy case or under title 11. The detailed list of core proceedings in § 157(b)(2) provides courts with ready examples of such matters."); Stoe v. Flaherty, 436 F.3d 209, 216 (3d Cir. 2006) (citing In re Combustion Eng'g, Inc., 391 F.3d 190, 225 (3d Cir. 2004) ). Proceedings arising under title 11 involve express provisions of the Bankruptcy Code, while proceedings arising in a case under title 11 refer to proceedings that are not based on any right expressly created by the Bankruptcy Code, but nevertheless would have no existence outside the bankruptcy case. See Stoe, 436 F.3d at 218 ("[C]laims that ‘arise in’ a bankruptcy case are claims that, by their nature, not their particular factual circumstances, could only arise in the context of a bankruptcy case."); Seagate Tech. (US) Holdings, Inc. v. Global Kato HG, LLC (In re Solyndra, LLC), No. 11-12799 (MFW), 2015 WL 6125246, at *3 (Bankr. D. Del. Oct. 16, 2015) (same).

It is well-settled that proceedings "arising in" bankruptcy include those requiring determinations of the validity, extent or priority of liens on property of the estate. 28 U.S.C. § 157(b)(2)(K). See, e.g., Stoe, 436 F.3d at 216 ; Nelson v. Welch (In re Repository Techs., Inc.), 601 F.3d 710 (7th Cir. 2010). See also 1–3 COLLIER ON BANKRUPTCY ¶ 3.01[3][e][iv] (16th ed. rev. 2012). A plain reading of section 157(b) therefore provides the statutory authority for the Court to hear the instant adversary proceeding as a core proceeding because the parties seek a determination of the extent and priority of WSFS's lien on the Debtors' inventory.

Post–Stern, however, the Court must also determine whether Article III prohibits the Court from entering a final order in the adversary proceeding. See Stern, 564 U.S. at 468, 131 S.Ct. 2594 (finding that the bankruptcy court had statutory authority to enter judgment on the bankruptcy estate's state law counterclaim, but lacked constitutional authority to do so).

The bankruptcy court has constitutional authority to enter final judgment if "the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern, ...