U.S. Bakery v. Svenhard's Swedish Bakery
| Decision Date | 25 October 2021 |
| Docket Number | No. 20-cv-02105-KJM,20-cv-02105-KJM |
| Citation | 632 B.R. 312 |
| Parties | UNITED STATES BAKERY, Appellant, v. SVENHARD'S SWEDISH BAKERY, Appellee. |
| Court | U.S. District Court — Eastern District of California |
Hagop Tatios Bedoyan, McCormick Barstow Sheppard Wayte & Carruth, LLP, Fresno, CA, Timothy J. Conway, PHV, Pro Hac Vice, Tonkon Torp, LLP, Portland, OR, for Appellant.
Derrick Matthew Talerico, Zolkin Talerico, LLP, Los Angeles, CA, for Appellee.
United States Bakery ("US Bakery") appeals the bankruptcy court's final order denying its motion to convert debtor appellee's Chapter 11 bankruptcy case to Chapter 7. Debtor appellee, Svenhard's Swedish Bakery ("Svenhard's"), opposes. This court has jurisdiction to review final bankruptcy court orders under 28 U.S.C. § 158(a). For the following reasons, the court finds it lacks jurisdiction to review this case and therefore the appeal is dismissed .
Svenhard's was a bakery that produced a variety of Swedish pastries such as "bear claws, raisin snails, cinnamon rolls" and other pastries sold in stores across the country. Chief Operating Officer David Kunkel Decl. in Support of Special Counsel ¶ 4, App-177 (Kunkel Special Counsel Decl.), ECF No. 5-1.1 US Bakery is one of Svenhard's largest creditors. See Bankr. Schedules at App-87; Hr'g Tr. (May 12, 2020) at App-606.
In 2014, Svenhard's entered into a business relationship with US Bakery in order to sell its business to USB. See Kunkel Special Counsel Decl. ¶ 5, App-177. The arrangement provided for Svenhard's taking on significant debt. Id. On December 19, 2019, after defaulting on a settlement agreement with "its former union on account of pension liability," id. ¶ 6, Svenhard's filed a voluntary bankruptcy petition seeking financial relief under Chapter 11 of the United States Code (the "Bankruptcy Code"), See Chapter 11 Voluntary Pet., ECF No. 1 in In re: Svenhard's Swedish Bakery , Bankr. No. 19-15277-C-l 1 (E.D. Cal filed Dec. 19, 2019) (hereafter Bankr. Case). Svenhard's is not currently operating. Appellant Opening Br. at 5, ECF No. 5 (Brief); Appellee Br. at 22, ECF No. 7 (Appellee Brief). Svenhard's bankruptcy schedules2 reflect no accounts receivable within the last 90 days of the schedules' filing, nor assets including pieces of inventory, raw materials, supplies, office furniture, equipment, collectibles, machinery, customer lists or an internet domain name. See December 2019 Monthly Report at App-179–194; January 2020 Monthly Report at App-219–235; February 2020 Monthly Report at App-236–251. Svenhard's most recent monthly report does not alter this conclusion. See September 2021 Monthly Report, ECF No. 354 in Bankr. Case (reflecting $0 dollars in cash sales and $0 in interest received).
Despite the fact the business is not operating, Svenhard's estate has incurred expenses since the bankruptcy filing. Brief at 6–7. This includes $23,500 in payments to Svenhard's sole employee, Mr. David Kunkel, disbursed in February 2020, and an additional $10,000 in March 2020. id. at 6–7 (citing February 29 Wells Fargo Statement at App-248; March 2020 Monthly Operating Report at App-431). Mr. Kunkel is the chief operating officer and one of the owners of the bakery. Id. at 5 (citing to Kunkel Special Counsel Decl. at App-174, App-177). Svenhard's paid a portion of these funds to Mr. Kunkel using US Bakery's cash collateral, which US Bakery did not authorize. id. at 7. From April 2020 to at least October 2020, the estate has also noted a $10,000 monthly salary is due to Mr. Kunkel though not yet paid. Brief at 6 (citing Feb. 2020 Monthly Operating Report at App-236, App-238–239, App-241, App-248; March 2020 Monthly Operating Report at App-431, App-433–434, App-436). In February 2020, the monthly report reflected a salary exceeding $20,000 to Mr. Kunkel. Feb. 2020 Monthly Operating Report at App-236. Appellees represent Mr. Kunkel has not drawn on USB's alleged cash collateral since February 2020. Appellee Br. At 16.
Svenhard's also continues to incur expenses by virtue of its representation by bankruptcy counsel and special counsel. As of August 2020, the attorney's fees incurred totaled $462,000. Brief at 15 (citing August 2020 Monthly Operating Report at App-726). Most recently, the fees have reached at least $836,379. See September 2021 Monthly Operating Report, ECF No. 354 in Bankr. Case.
Given its concerns about the administrative expenses accruing and the unauthorized use of its cash collateral, US Bakery filed a motion to convert Svenhard's Chapter 11 case to one under Chapter 7 on April 7, 2020. See Docket Text at App-11; see also Mot. to Convert at App-252– 253. US Bakery relied on 11 U.S.C. § 1112(b), which is a provision of the bankruptcy code that permits creditors to seek conversion of bankruptcy cases from Chapter 11 to Chapter 7 for cause. US Bakery argued the bankruptcy case must be converted because (1) there is a "substantial or continuing loss to or diminution of the estate" and an "absence of reasonable likelihood of rehabilitation," U.S.C. § 1112 (b)(4)(A), (2) Svenhard's use of unauthorized cash collateral substantially harms US Bakery, id. § (b)(4)(D), and (3) the unauthorized use of cash demonstrates "gross mismanagement of the estate," id. § (b)(4)(B). Mem. P.& A. Mot. to Convert at App-419– 420.
On May 12, 2020, Bankruptcy Judge Lastreto heard US Bakery's motion. See Hr'g Tr. (May 12, 2020) at App-590. Although the judge provided an opportunity for the parties to present witness testimony and conduct further discovery, all parties declined and the judge then submitted the matter, indicating the court would "issue its ruling shortly". Hr'g Tr. (May 12, 2020) at App-592–595, App-630. Within a short period of time, however, the judge recused himself from the case and the matter was reassigned to Bankruptcy Judge Klein. Order of Recusal, ECF No. 166 in Bankr. Case.
After a number of continuances, the court set the conversion motion for hearing on September 23, 2020. Civ. Min. (August 26, 2020) at App-718. At hearing, Judge Klein denied the conversion motion from the bench. Civ. Min. (Sept. 23, 2020) at App-740. On October 6, 2020, the court issued a short order confirming its denial of the motion: Order (October 6, 2020) at App-952.
On October 21, 2020, US Bakery timely filed a notice of this appeal from the October 6, 2020 Order. Notice of Appeal, ECF No. 1. It filed its opening brief on January 4, 2021 arguing this court has jurisdiction to hear the appeal under 28 U.S.C. § 158 and the bankruptcy court committed reversible error when it failed to convert the case to Chapter 7 without making the necessary findings on the record. See generally Brief. Svenhard's moves to dismiss the appeal or in the alternative to affirm the order of the bankruptcy court to deny the conversion motion. Appellee Brief at 18. Svenhard's argues the October 6, 2020 order is a non-appealable interlocutory order, and even if this court were to find jurisdiction to review the order, the conversion motion was properly denied when the bankruptcy court did not find cause to convert. id. at 17–18. Appellants responded, Reply, ECF No. 8, and the court held a hearing on the matter on May 28, 2021. Timothy Conway and Hagop Bedoyan appeared for US Bakery, Derrick Talerico appeared for Svenhard's Swedish Bakery, and Paul Jaspar appeared on behalf of the Official Committee of Unsecured Creditors. Hr'g Min. (May 28, 2021), ECF No. 12. After oral argument the court submitted the matter.
"[D]istrict courts have jurisdiction to hear appeals from the bankruptcy court of: (1) final judgments, orders, and decrees; (2) interlocutory orders and decrees issued under section 1121(d) of title 11; and (3) with leave of the court, from other interlocutory orders and decrees." In re Gabriel Techs. Corp. , No. 13-03061, 2013 WL 4672785, at *3 (N.D. Cal. Aug. 30, 2013) ( Gabriel ); see also Ritzen Grp., Inc. v. Jackson Masonry, LLC, ––– U.S. ––––, 140 S. Ct. 582, 587, 205 L.Ed.2d 419 (2020). In "ordinary civil litigation, a case in federal district court culminates in a final decision" where the district court "disassociates itself from [the] case" and a party can only appeal "as of right" from that final decision. Bullard v. Blue Hills Bank , 575 U.S. 496, 501, 135 S.Ct. 1686, 191 L.Ed.2d 621 (2015). However bankruptcy cases "involve[ ] ‘an aggregation of individual controversies,’ " and therefore a different standard applies. id. (internal citation omitted).
The Ninth Circuit approaches finality in bankruptcy cases with a "pragmatic or flexible" eye. See In re Liu , 611 B.R. 864, 870 (B.A.P. 9th Cir. 2020) ; see also In re Linton , 631 B.R. 882, 891 (B.A.P. 9th Cir. 2021) (). "This approach to finality is driven by the realization that ‘certain proceedings in a bankruptcy case are so distinct and conclusive either to the rights of individual parties or the ultimate outcome of the case that final decisions as to them should be [immediately] appealable as of right.’ " In re Liu , 611 B.R. at 870 ) (quoting United States v. Technical Knockout Graphics, Inc. , 833 F.2d 797, 800 (9th Cir. 1987) ). " Ocwen Loan Servicing LLC v. Marino (In re Marino) , 949 F.3d 483, 487 (9th Cir. 2020) (internal citation omitted). "Under the Ninth Circuit approach, a bankruptcy court...
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