Vylene Enterprises, Inc., In re

• Decision Date: 12 September 1996
• Docket Number: No. 94-56470,94-56470
• Citation: 90 F.3d 1472
• Parties: , Bankr. L. Rep. P 77,124, 96 Cal. Daily Op. Serv. 5553, 96 Daily Journal D.A.R. 11,169, 96 Daily Journal D.A.R. 9087 In re VYLENE ENTERPRISES, INC., Debtor. VYLENE ENTERPRISES, INC., Plaintiff-Appellant, v. NAUGLES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1472

90 F.3d 1472

29 Bankr.Ct.Dec. 578, Bankr. L. Rep. P 77,124,

96 Cal. Daily Op. Serv. 5553,

96 Daily Journal D.A.R. 11,169,

96 Daily Journal D.A.R. 9087

In re VYLENE ENTERPRISES, INC., Debtor VYLENE ENTERPRISES, INC., Plaintiff-Appellant, v. NAUGLES, INC., Defendant-Appellee.

No. 94-56470.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 8, 1996.

Submission Vacated April 3, 1996.

Resubmitted May 1, 1996.

Decided July 29, 1996.

As Amended on Denial of Rehearing and

Rehearing En Banc Sept. 12, 1996. ^*

Phillip K. Fife, Seal Beach, California, for plaintiff-appellant.

William T. Rintala and Ann K. Penners, Rintala, Smoot, Jaenicke & Brunswick, Los Angeles, California, for defendant-appellee.

Appeal from the United States District Court for the Central District of California, Stephen V. Wilson, District Judge, Presiding. D.C. No. CV-90-04090-SVW.

Before: PREGERSON and T.G. NELSON, Circuit Judges, and EZRA, ^** District Judge.

T.G. NELSON, Circuit Judge:

OVERVIEW

Chapter 7 debtor Vylene Enterprise, Inc., the operator of a restaurant under a franchise granted by defendant Naugles, Inc., appeals the district court's order declining to adopt the bankruptcy court's proposed findings of fact and conclusions of law.

We have jurisdiction under 28 U.S.C. § 1291. For the reasons stated herein, we vacate the district court's order and reinstate the bankruptcy court's findings of fact, conclusions of law, and judgment.

FACTS AND PROCEDURAL HISTORY

In 1975, Vylene, the franchisee, and Naugles, the franchisor, entered into a ten-year franchise agreement which authorized Vylene to take over the operation of an existing Naugles restaurant located in Long Beach, California. Under the terms of the franchise agreement, Vylene was granted the option to extend the franchise upon the expiration of the initial ten-year term, for an additional eight years, "on terms and conditions to be negotiated."

In 1983, Vylene became increasingly delinquent in paying its franchise fees and rent. Shortly thereafter, Vylene filed a voluntary Chapter 11 proceeding in bankruptcy court. In July 1985, the bankruptcy court approved a stipulation which, among other things, authorized Vylene to assume the franchise agreement upon payment to Naugles of $38,121 representing unpaid pre-petition rent and royalties, less unpaid rebates. In August 1985, Naugles filed a creditor's claim against Vylene's estate.

Also in August 1985, Vylene paid the pre-petition arrearages under the Order and Stipulation, and assumed the remainder of the franchise through December 31, 1985, as a debtor in possession. With regard to Vylene's right to renew the franchise contract, paragraph three of the order provided that the "issue of the franchisee's right to extend the franchise for an additional eight (8) year period is reserved for decision if and when the Debtor gives the Creditor Naugles, Inc. the required notice as per the Franchise Agreement."

In October 1985, approximately two months prior to the end of the ten-year term of the franchise agreement, Vylene notified Naugles of its desire to extend the franchise. Naugles mailed to Vylene its offer to extend the franchise. Vylene's attorney rejected the offer arguing that Naugles' proposal was "so On November 23, 1985, Naugles opened a new company-owned restaurant approximately 1.4 miles from Vylene's location. The new restaurant offered a new menu which differed from the menu offered at Vylene's restaurant in that it offered smaller portions at a lower price. The new restaurant also gave out coupons which were redeemable at participating Naugles restaurants. Vylene did not participate in the coupon program. It is undisputed that the new restaurant had a negative impact on Vylene's sales.

obviously onerous that no one could operate the business except at a loss."

On December 30, 1985, one day prior to the expiration date of the franchise agreement, Vylene filed an adversary proceeding against Naugles in bankruptcy court asserting claims for relief based on Naugles' alleged refusal to negotiate for an extension of the franchise agreement and other alleged misconduct concerning the performance of the agreement. Naugles' answer to the complaint alleged that the proceeding was a non-core proceeding and stated that it did not consent to the jurisdiction of the bankruptcy court. Naugles also filed counterclaims for trademark violations, unfair competition, misappropriation of trade secrets, and for possession of the real property held by Vylene under sublease from Naugles. Naugles then moved for a preliminary injunction to prevent Vylene from continuing to use Naugles' federally registered trademarks. While the motion for injunction was under submission, Naugles moved for relief from the automatic stay in order to pursue repossession of the franchise.

The bankruptcy judge held that Naugles' counterclaims and motion for preliminary injunction concerned the continued use of property by the debtor, and thus the case was a core proceeding within the literal language of 28 U.S.C. § 157(b)(2)(M). In ruling on the merits of Naugles' motion for preliminary injunction, the bankruptcy judge found that the failure of the parties to negotiate in good faith for a renewal of the franchise agreement resulted in the failure of a condition precedent to the expiration of the agreement. Thus, the bankruptcy judge held that the franchise agreement was still in effect and Vylene's continued use of the trademark was proper.

Naugles appealed the bankruptcy court's denial of its motions for preliminary injunction and for relief from the stay. The district court reversed, holding that the bankruptcy judge had misinterpreted the right of first refusal clause in the franchise agreement and that Vylene had no right to renew under the agreement. In re Vylene Enterprises, Inc., CV 86-72881 JSL, Order Reversing and Remanding to Bankruptcy Court (C.D. Cal. June 25, 1987), appeal dismissed sub nom., Naugles Inc. v. Vylene Enterprises, Inc., 891 F.2d 295 (9th Cir.1989). Vylene appealed the district court's order to this court. The appeal, however, was dismissed as moot, and the bankruptcy court order denying a preliminary injunction and the district court order reversing and remanding were vacated. The appeal became moot because the bankruptcy court had granted Naugles' renewed motion for relief from the automatic stay and allowed Naugles to take possession of the franchise premises due to Vylene's failure to pay franchise fees and rent pursuant to the court's provisional order. Further, Vylene's Chapter 11 proceeding had been converted into a Chapter 7 case based on Vylene's failure to comply with the financial reporting requirements imposed upon a debtor in possession.

However, because neither appellate decision addressed the bankruptcy court's finding that the adversary proceeding was a core proceeding, the bankruptcy court held a trial in three phases over a period of nearly three years concerning Vylene's claims for breach of the franchise agreement and for breach of the implied covenant of good faith and fair dealing. The bankruptcy court found that Naugles breached the franchise agreement and the covenant of good faith and fair dealing by opening a competing franchise within the immediate vicinity of the Vylene franchise and by refusing to negotiate in good faith for a renewal. The bankruptcy judge held that Vylene had suffered damages in the amount of $2,219,468 and awarded attorneys' fees and costs of $550,000 to Vylene.

On appeal, the district court held that the bankruptcy court erred in determining that

the action was a core proceeding and vacated and remanded to the bankruptcy court for the preparation of proposed findings of fact and conclusions of law. On April 22, 1993, the bankruptcy court issued an order adopting its earlier Memoranda as proposed findings of fact and conclusions of law. Naugles filed objections to the proposed findings and conclusions. On August 25, 1994, the district court declined to adopt the proposed findings and conclusions and entered judgment in favor of Naugles. Vylene filed a timely notice of appeal.

DISCUSSION

Core v. Non-core Proceeding

Title 28 of the U.S.C., § 157(b)(1) states: "Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 ... and may enter appropriate orders and judgments, subject to review under section 158 of this title." Section 157(b)(2) sets forth a nonexclusive list of proceedings Congress deemed to be core proceedings:

(2) Core proceedings include, but are not limited to--

(A) matters concerning the administration of the estate;

(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11....

(C) counterclaims by the estate against persons filing claims against the estate;

(D) order in respect to obtaining credit;

(E) orders to turn over property of the estate;

(F) proceedings to determine, avoid, or recover preferences;

(G) motions to terminate, annul, or modify the automatic stay;

(H) proceedings to determine, avoid, or recover fraudulent conveyances;

(I) determinations as to the dischargeability of particular debts;

(J) objections to discharges;

(K) determinations of the validity, extent, or priority of liens;

(L) confirmations of plans;

(M) order approving the use or lease of property, including the use of cash collateral;

(N) order approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and

(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful...