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In Re: Stone Resources

September 9, 2011

IN RE: STONE RESOURCES, INC.,
DEBTOR



The opinion of the court was delivered by: Tucker, J.

MEMORANDUM OPINION

September ___, 2011

Presently before the Court is Appellant, MarbleLife Inc.'s Appeal of the Bankruptcy Decision rendered by Honorable Magdeline D. Coleman of the United States Bankruptcy Court for the Eastern District of Pennsylvania in In re Stone Resources, Inc., Bankr. No. 11-11124 (MDC) (Doc.3 ) and Appellee, Stone Resources Inc.'s Response in Opposition thereto (Doc. 5). After careful consideration of the parties' submissions and exhibits thereto and after oral argument held before the Court on June 21, 2011, the Court will reverse the Bankruptcy Decision rendered by Honorable Magdeline D. Coleman of the United States Bankruptcy Court for the Eastern District of Pennsylvania in In re Stone Resources, Inc.,Bankr. No. 11-11124 (MDC) in part.

Appellant, MarbleLife Inc. ("Appellant" or "MarbleLife") appeals from an order of the Bankruptcy Court denying Appellant's motion to dismiss pursuant to 28 U.S.C. § 1112(b) and denying Appellant's motion for relief from the automatic stay provision of the bankruptcy code pursuant to 28 U.S.C. § 362(d)(1). The issue on appeal is whether, on the facts of this case, a preliminary injunction entered prior to the filing of a petition for bankruptcy is a claim within the meaning of the bankruptcy code and thus subject to the provisions of the automatic stay, and whether the Bankruptcy Court issued an advisory opinion or decided an issue that was not properly before it.

The Court concludes that the preliminary injunction is not subject to the automatic stay and will therefore reverse the Bankruptcy Decision to the extent that it denied Appellant's motion for relief from the automatic stay.

II. FACTUAL BACKGROUND

The facts relevant to the instant motion are as follows.

A. MarbleLife Action

The instant action stems from MarbleLife v. Stone Resources, Inc., Civ. No. 10-2480, (hereinafter the "MarbleLife Action") a civil action which has been pending before this Court since May 21, 2010. Appellant initiated the MarbleLife Action against Appellee, Stone Resources Inc. "Appellee" "Stone Resources") in the United States District Court for the Eastern District of Pennsylvania with the filing of a Complaint for injunctive relief pursuant to Federal Rule of Civil Procedure 65.*fn1 The MarbleLife Action concerned allegations of breach of contract, trademark infringement, false designation of origin, and trademark dilution. The underlying dispute between the parties concerns the termination of a Franchise Agreement entered into by the parties on April 3, 2000. Appellant, a Texas corporation with its principal place of business in Sanford, Florida, is engaged in the business of restoring and repairing granite and other types of inorganic and organic surfaces. Appellant sells franchises of its business system under which it grants to franchisees across the United States the rights to use its methods, trademarks, and related services and products. Appellee, a former franchisee of Appellant is a Pennsylvania corporation with its principal place of business in Media, Pennsylvania. The Franchise Agreement entered into by the parties granted Appellee certain rights including, inter alia, the right and license to operate a franchise in a specified territory. Additionally, Appellee was granted the right and license to use MarbleLife's registered trademark. Pursuant to the Franchise Agreement, Appellant adopted the trade name, "MarbleLife of Delaware Valley." In exchange for the rights granted to Stone Resources under the Franchise Agreement, Appellee agreed to pay Appellant royalties from its gross income, franchise fees and advertising assessments which accrued during the term of the Franchise Agreement.

The Franchise Agreement had an initial term of ten (10) years (which was not extended), and imposed certain requirements upon Appellee following its expiration, including the following: (1) an agreement not to compete during the term of the Franchise Agreement and for a period of two years following expiration of the Franchise Agreement; (2) a requirement to cease using the trademark and/or any System Rights; and (3) a limitation on the use of Appellant's confidential information only for the purposes of fulfilling Franchisee's obligations under this Agreement.

In the event of termination, the Franchise Agreement also included additional consequences of expiration, including the following: (1) the immediate termination of all rights granted to Appellee; (2) the transfer of business, customers, facilities, services, employees, and telephone numbers to Appellant; and (3) the return or disposal of certain specified information (i.e., all advertising and promotional materials containing the MarbleLife trademark; all information relating to MarbleLife; all manuals and supplements; and all sales or marketing data relating to MarbleLife). In entering into the Franchise Agreement, Appellee further agreed that any violation of the non-compete provision and the confidentiality provisions would cause Appellant to suffer irreparable harm and thus Appellant could seek damages or injunctive relief against Franchisee in a court of competent jurisdiction to address said harm.

On or around April 13, 2010, the Franchise Agreement between the parties expired. Appellee declined to renew its franchise and as a result, Appellant ceased receiving royalty payments, franchise fees and advertising assessments. Shortly thereafter, pursuant to the terms of the Franchise Agreement, Appellee commenced an arbitration proceeding in Dallas Texas alleging, inter alia, breach of contract and fraud. The gravamen of Appellee's arbitration complaint concerned Appellant's ownership interest in certain patents. Specifically, Appellee avers that it entered into the Franchise Agreement based on representations it alleges MarbleLife made that it owned certain patents and trademarks and that MarbleLife possessed unique business formats which could be used in the operation of a MarbleLife franchise. At the time the Arbitration Demand was made Appellant continued to operate its franchise despite the expiration of the Franchise Agreement and the covenant not to compete. Consequently, Appellant initiated the MarbleLife Action seeking to enforce the covenant not to compete and seeking injunctive relief.

On December 23, 2010, after a three-day evidentiary hearing, the Court granted Appellant's motion for a preliminary injunction. Despite the Court's Order directing Appellee to inter alia cease and desist in the operation of the MarbleLife Franchise in specified territories pending resolution of the arbitration proceeding, Stone Resources continued to operate in direct contravention of the Court's directives. On January 3, 2011, Appellee filed a motion for reconsideration. (Doc. 40) In support of said motion, Paul Winterhalter, lead counsel for Appellee argued that he mistakenly believed the filing of the motion for reconsideration stayed the effectiveness of the Court's Order but could provide no legal authority for this belief.

On February 3, 2011, the Court heard argument on several pending motions, including Appellee's motion for reconsideration.*fn2 Thereafter, on February 11, 2011, the Court entered an Order denying Appellee's motion for reconsideration. (Doc. 56) The Court's Order also amended certain portions of the preliminary injunction.Specifically, the Order revised the deadlines set for compliance with certain provisions of the December 23 Preliminary Injunction Order.

On February 16, 2011, still not having complied with the Court's December 23, 2010 Preliminary Injunction Order or the revised Order entered just five days earlier, Appellee filed a voluntary petition for relief in the United States Bankruptcy Court for the Eastern District of Pennsylvania pursuant to Chapter 11 of the United States Bankruptcy Code. (Case number 11-11124) See (Doc. 58). At the time of the filing of Appellee's petition there was a motion for attorneys' fees, statutory fees and costs pending before the Court. Said motion, filed by Appellant, requested an award of $378,919.67 in attorney's fees, $21,903.01 in statutory costs and $11,872.45 in other expenses pursuant to the parties' contract, for a total of $412,695.13. 10-cv-2480 (Doc. 44.) As a result of Appellee's petition for bankruptcy relief, the MarbleLife Action was placed in civil suspense and the Court reserved judgment of the motion.

B. Bankruptcy Court Proceedings

On February 23, 2011 Appellant filed a motion for an order dismissing Appellee's bankruptcy action, or in the alternative, an order granting MarbleLife relief from the automatic stay provision of Chapter 11 of the United States Code to enforce the Preliminary Injunction granted by this Court. Appellant argued that Appellee's Chapter 11 petition was filed in bad faith and was merely a litigation tactic to avoid complying with this Court's Orders and should therefore be dismissed pursuant to section 1112(b) of the bankruptcy code. In opposition, Appellee argued that (1) the voluntary petition for relief was not filed in bad faith but was filed for the legitimate purpose of business reorganization; (2) the petition is not a single creditor bankruptcy action; (3) Appellant's claim can be addressed in the bankruptcy proceedings; and (4) there is no cause to enforce the preliminary injunction.

On March 2, 2011, the Bankruptcy Court held a hearing on the Appellant's motion. During the hearing the Bankruptcy Court heard testimony from Joseph Smith, Stone Resource's sole shareholder. In re Stone Res., Inc., 448 B.R. 361, 365 (Bankr. E.D. Pa. 2011). Smith testified that the petition for bankruptcy was filed because Stone Resources was in financial distress as a result of this Court's grant of a Preliminary Injunction and was unable to fund an appeal of this Court's Preliminary Injunction Orders. Id. Also important to the Bankruptcy Court's decision was Smith's testimony that Stone Resources had a Sovereign Bank Loan of approximately $87,500.00 dollars which Smith averred that Stone Resources was unable to pay. In fact. Smith testified that Appellee was unable to make payments to any of its creditors. Id. at 366. According to Smith's testimony Appellee had ceased doing business. Id. at 365.

Richard Ritaco, publisher of Distinctive Living Magazine, also testified on behalf of Appellee and stated that his company would be negatively impacted if the Preliminary Injunction was not subject to the automatic stay because Stone Resources would no longer purchase advertising from his company. Id. at 366.

Additionally, the parties stipulated to the admission of testimony from two other witnesses, Don Haas, the property manager of a building located at Three Logan Square and Pat Keavney, the property manager of a building located at One Logan Square. Id. Both Haas and Keavney averred that Appellee contracted to provide maintenance to their respective buildings and both ...


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