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In Re: Union Trust Philadelphia, LLC v. Singer Equipment Company

November 3, 2011

IN RE: UNION TRUST PHILADELPHIA, LLC
DEBTOR.
UNION TRUST PHILADELPHIA, LLC, PLAINTIFF/APPELLEE,
v.
SINGER EQUIPMENT COMPANY, INC., DEFENDANT/APPELLANT, SUNLIGHT ELECTRICAL CONTRACTING COMPANY, INC. AND THOMAS MACKIN, OTHER DEFENDANTS.



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

MEMORANDUM RE: APPEAL FROM BANKRUPTCY COURT

ORDER

Presently before this Court is an appeal from an Order of the United States Bankruptcy Court for the Eastern District of Pennsylvania (Coleman, J.) granting a motion for a preliminary injunction filed by Plaintiff-Appellee Union Trust Philadelphia, LLC ("Union Trust"), enjoining state court proceedings brought by Defendant-Appellant Singer Equipment Company, Inc. ("Singer") against third-party non-debtors Joseph Grasso ("Grasso") and Garrett Miller ("Miller"). For the reasons that follow, the Bankruptcy Court is affirmed.

I. Background

On March 31, 2011, Union Trust, the operator of a restaurant named Union Trust Steakhouse in Center City, Philadelphia, filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. However, Grasso and Miller, the sole members of Union Trust, did not. In April 2009, Singer commenced proceedings in Pennsylvania state court by filing suit against Grasso, Miller, and Chestnut Restaurant Ventures, LLC ("CRV"), among others, in an attempt to collect nearly $500,000 in payments that CRV allegedly owed Singer for purchases of restaurant equipment. Grasso and Miller, along with two other individuals not relevant to the instant dispute, are also members of CRV. On August 9, 2010, while the state court proceedings were pending, CRV transferred all of its assets, including its interest in the equipment, to Union Trust for one dollar. Union Trust continues to benefit from the use of the equipment. On or about April 4, 2011, the Court of Common Pleas of Philadelphia County entered a judgment enforcing a settlement among the parties to the state court proceedings. The judgment requires Grasso and Miller each to personally contribute $350,000. Grasso and Miller have appealed from the judgment.

On May 23, 2011, after Grasso and Miller filed their appeal in state court, Union Trust commenced the instant adversary proceeding against Singer,*fn1 seeking an injunction pursuant to 11 U.S.C. § 105(a) that would extend the protections of the automatic stay under 11 U.S.C. § 362(a) to enjoin the state court proceedings. On June 7, 2011, after a hearing on the matter, including testimony by both Grasso and Miller, the Bankruptcy Court granted Union Trust's request for preliminary injunctive relief over Singer's objections. The Bankruptcy Court determined that the preliminary injunction would expire on August 31, 2011. The court believed this would provide Union Trust sufficient amount of time to prepare and submit a reorganization plan. Singer then appealed the Bankruptcy Court's order to this Court. Shortly thereafter, pursuant to Rule 8001-1(b) of the Local Bankruptcy Rules of the United States Bankruptcy Court for the Eastern District of Pennsylvania, the Bankruptcy Court issued a memorandum opinion in support of the order. In re Union Trust Philadelphia, LLC, No. 11-00429-MDC, 2011 WL 2604784 (Bankr. E.D. Pa. June 30, 2011).

On July 7, 2011, Singer filed a motion to stay the effect of the order pending appeal with this Court. After holding an expedited hearing on the motion, this Court denied the relief sought on procedural grounds. In re Union Trust Philadelphia LLC, No. 11-mc-141, 2011 WL 3330797 (E.D. Pa. Aug. 2, 2011).

Even though the terms of the preliminary injunction expired on August 31, 2011, Singer made a request by letter, dated September 1, 2011, that this Court rule on the appeal. In the letter, Singer argued that the expiration of the preliminary injunction did not render the appeal moot because Union Trust could seek to renew the injunction for a limited duration at any time. This Court subsequently held a teleconference on the matter. Union Trust did not object to Singer's contention. Therefore, resolution of the appeal by this Court is appropriate.

II. The Bankruptcy Court's Opinion

In granting Union Trust's motion for a preliminary injunction, the Bankruptcy Court relied on the testimony of both Grasso and Miller at the hearing. In re Union Trust, 2011 WL 2604784, at *2. The court explained that the testimony by Grasso and Miller concerning their day-to-day involvement in Union Trust's operations, their involvement in the state court proceedings, and their efforts to secure a loan commitment on Union Trust's behalf to assist in its reorganization were of particular relevance to the issues raised by the motion. Id. The court also noted that Singer did not present any of its own witnesses in opposition to the motion, but did cross-examine Grasso and Miller. Id.

As an initial matter, the Bankruptcy Court first concluded that it had jurisdiction to consider the requested relief on the ground that an action for an injunction under § 105(a) is a "core" proceeding under the Bankruptcy Code. Id. at *3 n.3. Moreover, the court determined that the Anti-Injunction Act, 28 U.S.C. § 2283, did not limit its jurisdiction and authority to enter such an injunction because § 105(a) is an "expressly authorized" exception to the Act. Id. at *3-*4.

Next, the Bankruptcy Court concluded that "unusual circumstances" existed to support extending the automatic stay under § 362(a) to Grasso and Miller. Specifically, the court determined that Union Trust's ability to reorganize would be substantially diminished if the state court proceedings were allowed to continue because Grasso and Miller devote a substantial amount of their time to the daily operations of Union Trust and are actively involved in its reorganization. Id. at *6. According to the court, Grasso has funded tax payments to the Internal Revenue Service on behalf of Union Trust and both Grasso and Miller are helping arrange financing to fund Union Trust's plan of reorganization. Id. Additionally, the court determined that there was a reasonable likelihood of successful reorganization because it had negotiated cash collateral agreements and was making adequate protection payments to its lenders, all while continuing to operate its steakhouse.Id. Further, the court determined that the risk of harm to Union Trust's ability to reorganize outweighed any delay that would result from enjoining the state court proceedings because the preliminary injunction would not deprive Singer of the ability to collect on its state court judgment, but would only temporarily delay its ability to do so. Id. at *7. And finally, the court determined that the public interest supported issuance of the injunction because it would foster Union Trust's reorganization process and protect the integrity of the claims resolution process. Id. Therefore, according to the court, issuance of a § 105(a) preliminary injunction was proper to extend the effect of the automatic stay to Grasso and Miller.Id.

Notably, in order to protect Singer's interests, the Bankruptcy Court required Grasso and Miller to provide Singer with sworn personal financial statements so that it could monitor their assets and protect against dissipation. Id. The court also made clear that it would revisit whether continuation of the injunction is warranted if it found that Union Trust had not acted expeditiously in formulating its plan of reorganization at the time of the injunction's expiration date.Id.

III. Jurisdiction and Standard of Review

This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158. Singer appeals a final order of the United States Bankruptcy Court for the Eastern District of Pennsylvania.

In an appeal from an order by a bankruptcy court, a district court sits as an appellate court. 28 U.S.C. § 158(a)(1). As a general matter, a district court reviews a bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Global Indus. Techs., Inc., 645 F.3d 201, 209 (3d Cir. 2011).

A factual finding is clearly erroneous when "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). In particular, "due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr. P. 8013.

IV. Parties' Contentions

Singer contends that the Bankruptcy Court should be reversed for several reasons. First, Singer argues the Anti--Injunction Act prohibits the Bankruptcy Court from enjoining the state court proceedings against Grasso and Miller. In addition, Singer argues that the Bankruptcy Court lacked jurisdiction over the state court proceedings. Further, Singer argues that the Bankruptcy Court improperly extended the automatic stay to Grasso and Miller. Finally, Singer argues the Bankruptcy Court abused its discretion in issuing the injunction.

In response, Union Trust contends that the Bankruptcy Court should be affirmed for substantially the same reasons outlined by the court in its opinion. Union Trust argues that the Anti-Injunction Act does not bar the Bankruptcy Court from enjoining the state court proceedings because ยง 105(a) creates an exception to the Act and the court had jurisdiction to grant such relief. Moreover, Union Trust contends that the record demonstrates that the Bankruptcy Court's extension of the automatic ...


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