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In re Le-Nature's Inc.

June 23, 2010

IN RE: LE-NATURE'S INC., ET AL. DEBTORS.
CHESTNUT RIDGE GROUP, L.P., SUCCESSOR BY MERGER TO C.S. ACQUISITION, L.P., MOVANT,
v.
INTERNATIONAL FIDELITY INSURANCE COMPANY, RESPONDENT.



The opinion of the court was delivered by: Nora Barry Fischer United States District Judge

Bankruptcy Case No. 06-25454(MBM)

MEMORANDUM OPINION

I. INTRODUCTION

Pending before the Court is an appeal from a January 20, 2010 Order entered by the Bankruptcy Court in Bankruptcy Case No. 06-25454. (Docket No. 1). Appellant Chestnut Ridge Group, L.P ("Appellant") appeals the Bankruptcy Court's Order (Bk. Docket No. 3173*fn1 ) denying its Motion to Enforce ("Motion to Enforce," Bk. Docket No. 2529) a previous order of the Bankruptcy Court. In the previous order, the Bankruptcy Court had approved the sale of the debtors' property to Appellant's predecessor, free and clear of all liens, claims interests and encumbrances. (Bk. Docket No. 1526). In the Order now on appeal, the Bankruptcy Court denied Appellant's Motion to Enforce and ruled that: a mortgage held by Gregory J. Podlucky was not divested from and remains against the property; Appellant's predecessor assumed the risk of the existence of said Mortgage by taking the property through a quitclaim deed; and Appellant was barred by the terms of the agreements among the parties from asserting certain claims against the bankruptcy liquidation Trustee, the trust's assets, or the debtors' estates. (Bk. Docket No. 3173).

Based on the following, the decision of the Bankruptcy Court is AFFIRMED, as the record demonstrates that the Bankruptcy Court did not err in making said determinations.

II. BACKGROUND

In 1997, Gregory Podlucky, CEO of Le-Nature's, Inc., received a mortgage and a note (the "Mortgage") on Le-Nature's Latrobe bottling facility from Le-Nature's, Inc. (f/k/a Global Beverage Systems, Inc.). In 2006, Le-Nature's, Inc. entered Chapter 11 bankruptcy.

On July 13, 2007, counsel for the bankruptcy Liquidation Trustee filed a Motion to Sell the Property "Free and Clear of Liens, Claims, Interests and Encumbrances" to Giant Eagle, Inc., subject to higher and better offers at a bankruptcy auction, pursuant to an Asset Purchase Agreement ("GE APA," (Bk. Docket No. 1459, Exh. B). (Bk. Docket No. 1459). Mr. Podlucky was not named as a respondent to the Motion, although it was served upon his attorney (Bk. Docket No. 1469), and the Mortgage was not listed in the motion, the GE APA, or the title insurance commitment accompanying the GE APA. (Bk. Docket No. 2913, Exh. G).

At the bankruptcy auction, Giant Eagle's bid was the highest and, on August 9, 2007, the Bankruptcy Court entered an Order approving the sale pursuant to the GE APA. (Bk. Docket No. 1526).

Before the closing, however, the Bankruptcy Court found that Giant Eagle had acted in bad faith and, therefore, entered an Amended Sale Order (Bk. Docket No. 1576) setting aside the bankruptcy sale, forbidding Giant Eagle from purchasing the property, and requiring the second highest bidder, Cadbury Schweppes Bottling Group, Inc. ("Cadbury"), to purchase it at its bid price.

Thereafter, on September 10, 2007, before the closing of the sale, the Bankruptcy Trustee, Giant Eagle, and Cadbury entered into a Settlement Agreement (Bk Docket No. 1595, Exh. A) which had the following effect. First, the court-ordered sale to Cadbury would go through, but Cadbury would immediately resell the property to a wholly-owned acquisition subsidiary of Cadbury, C.S. Acquisition, Inc., pursuant to an Amended Asset Purchase Agreement ("Cadbury APA")(Bk. Docket No. 3077, Exh. A). (Id.) Then, the subsidiary would be acquired by Chestnut Ridge, a subsidiary of Giant Eagle. (Id.) The settlement agreement specified that Giant Eagle and its affiliates would waive "any right to assert any claims under or in connection with the Cadbury APA, the Sale Order or the Amended Sale order after the closing of the sale of the [property] to Cadbury . . . , with only Cadbury or its successors (excluding Giant Eagle and other GE entities) having the right to assert or seek to enforce any such claims or rights against the Trustee and/or the Debtors' estates." (Bk. Docket No. 1595, Exh. A, ¶3(a)).

The Cadbury APA consists of an original Asset Purchase Agreement dated September 10, 2007 and a First Amendment to Asset Purchase Agreement dated October 9, 2007. (Bk. Docket No. 3077, Exh. A). The original Cadbury APA largely mirrored the GE APA, but as amended it eliminated the indemnification obligations on the part of the Trustee and a $2 million indemnification holdback in favor of the buyer. (Bk. Docket No. 1595, Exh. A). The Bankruptcy Court approved the Settlement Agreement on September 25, 2007. (Bk. Docket No. 1623).

On October 9, 2007, the sale of the property to CS Acquisition was completed, the settlement agreement became effective, and appellant Chestnut Ridge acquired and merged with CS Acquisition, thus becoming owner of the property. (Bk. Docket No. 1665).

On March 27, 2009, almost one and a half years later, Gregory Podlucky assigned the Mortgage to Appellee, International Fidelity Insurance Co. in satisfaction of another obligation. (Bk. Docket No. 2529 at 27-34). Appellee International Fidelity contacted Giant Eagle in April 2009, explaining that it did not believe that the mortgage had been divested by the bankruptcy sale because of lack of notice to Podlucky. (Bk. Docket No. 2529 at 116-18). On May 21, 2009, Appellee filed a foreclosure action in the Court of Common Pleas of Westmoreland County, initially naming Giant Eagle as the defendant and then naming C.S. Acquisition. (Bk. Docket No. 2529 Exh A, at 14-19).

On July 9, 2009, Appellant Chestnut Ridge filed the Motion to Enforce (Bk. Docket No. 2529), asking the Bankruptcy Court to determine whether the Podlucky Mortgage had been divested through the bankruptcy-court-approved sale of the property.

The Bankruptcy Court entertained extensive responses, replies, and briefs (Bk. Docket Nos.2682, 2684, 2690, 2981, 2982, 2994, 3077, 3106), heard argument in three separate hearings (Bk. Docket Nos. 2858, 3045, 3185), and accepted affidavits from counsel for the Appellee Trustee (Bk. Docket No. 2913), and counsel for Podlucky (Bk. Docket No. 2795).

On January 20, 2010 the Bankruptcy Court entered an Order denying the Motion to Enforce (Bk. Docket No. 3173), now on appeal before this Court. In the Order, the Bankruptcy Court made the following factual findings and legal conclusions:

1. The parties to the Cadbury APA relied upon a title company chosen by the buyer to conduct a search of liens and encumbrances on the Real Estate and to issue a Title Commitment and policy of title insurance in favor of buyer.

2. The title search and Title Commitment did not reveal the existence of the Mortgage.

3. As a result thereof, Gregory J. Podlucky, record holder of the Mortgage at the time of the Sale, was not named as a respondent in either the caption of the July 13, 2007 Motion to approve the Sale ([Bk.] docket no. 1459) (the "Sale Motion") or the caption of the July 13, 2007 Notice of Sale ([Bk.] docket no. 1461).

4. As a result thereof, the Mortgage was not identified in either the body of the Sale Motion or the body of the Notice of ...


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