United States District Court, E.D. Pennsylvania
MEMORANDUM
C.
Darnell Jones, II J.
I.
Introduction
Presently
before this Court is an appeal by Northeast Carpenters
Annuity Fund (“Fund”) from an Order of the United
States Bankruptcy Court for the Eastern District of
Pennsylvania recategorizing the Fund's proof of claim
against debtor Spectrum Alliance, LP (“Spectrum”)
as a proof of interest and, accordingly, subordinating the
Fund's interest pursuant to 11 U.S.C. § 510(b). Upon
referral from this Court, the Honorable Lynne A. Sitarski,
United States Magistrate Judge, prepared a Report and
Recommendation, recommending affirmance of the Bankruptcy
Court's Order and denial of the Fund's appeal. (ECF
No. 12.) The Fund objected to Judge Sitarksi's Report and
Recommendation. (ECF No. 13.) Spectrum responded. (ECF No.
15.) For the reasons set forth herein, Judge Sitarksi's
Report and Recommendation is adopted by this Court over the
Fund's objections and the Order of the Bankruptcy Court
is affirmed.
II.
Background [1]
The
Northeast Carpenter's Annuity Fund (“Fund”)
is a benefit fund providing retirement benefits to union
members. Spectrum Alliance, LP (“Spectrum”) is a
limited partnership incorporated under the laws of
Pennsylvania. Spectrum Alliance Services, GP, LLC is a
general partner of Spectrum. Trefoil Properties, L.P., a
Delaware limited partnership, is the sole member of general
partner Spectrum Alliance Services, GP, LLC.
In
October 2012, the Fund purchased five million dollars'
worth of Class A shares in Spectrum, thereby becoming a
limited partner. As a partner, the Fund was bound by
Spectrum's Partnership Agreement, which states that
partners are not entitled to redeem their partnership
interests but that they may request redemption of their
interest and “the General Partner shall endeavor in
good faith to effect such redemption.” However, prior
to investing, and to induce the Fund to invest,
Trefoil-Spectrum's General Partner's sole
member-entered into a Guaranty and Suretyship Agreement with
the Fund. Said Agreement worked around the Partnership
Agreement's redemption terms by making Trefoil
“surety for the payment to [the Fund] of the
[redemption amount], ” and making the redemption amount
“due and payable in full” by six months from the
date of a written redemption request by the Fund. On October
18, 2012, the Fund and Spectrum also entered into a letter
agreement (dubbed “Side Letter”) pursuant to
which the Fund had “the right to demand and obtain the
immediate redemption of the Fund's entire interest in
Spectrum” if, at certain evaluation times, the
Fund's investments in Spectrum appraised “greater
than 5% below the original value.” Due to a low
September 2013 valuation, the Fund submitted a redemption
request on October 1, 2013. Spectrum did not honor the
Fund's request for redemption before, in June 2017,
Spectrum filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the Eastern District of
Pennsylvania.[2]
After
Spectrum filed for bankruptcy, the Fund filed a proof of
claim, seeking redemption of its $5, 000, 000 investment in
Spectrum plus interest. The Bankruptcy Court found the Fund
was an equity security holder and, accordingly, recategorized
the Fund's proof of claim as a proof of interest and
subordinated its interest pursuant to 11 U.S.C. §
510(b). The Fund appealed the Bankruptcy Court's
recategorization and subordination to the United States
District Court for the Eastern District of Pennsylvania
pursuant to 28 U.S.C. § 158(a).[3] Upon referral from this
Court, the Honorable Lynne A. Sitarski, United States
Magistrate Judge, prepared a Report and Recommendation,
recommending affirmance of the Bankruptcy Court's Order
and denial of the Fund's appeal. (ECF No. 12.) The Fund
filed objections to Judge Sitarksi's Report and
Recommendation. (ECF No. 13.) Spectrum responded to the
Fund's objections. (ECF No. 15.)
III.
Standard of Review
When
objections are filed to the Report and Recommendation
(“R&R) of a Magistrate Judge, the district court
must conduct a de novo review of those portions of
the R&R to which objections are made. 28 U.S.C. §
636(b)(1). If there are no objections to the R&R, or when
reviewing those portions of the R&R to which no
objections are directed, the court, as a matter of good
practice, should “satisfy itself that there is no clear
error on the face of the record in order to accept the
recommendation.” Fed.R.Civ.P. 72(b), advisory committee
notes; see also Oldrati v. Apfel, 33 F.Supp.2d 397,
399 (E.D. Pa. 1998) (“In the absence of a timely
objection … this Court will review [the
Magistrate's] Report and Recommendation for ‘clear
error.'”) (citations omitted).
“Objections
which merely rehash an argument presented to and considered
by a magistrate judge are not entitled to de novo
review.” Gray v. Delbiaso, CIVIL ACTION NO.
14-4902, 2017 U.S. Dist. LEXIS 101835, at *11 (E.D. Pa. Jun.
30, 2017). “Where objections do not respond to the
Magistrate's recommendation, but rather restate
conclusory statements from the original petition, the
objections should be overruled.” Prout v.
Giroux, CIVIL ACTION NO. 14-3816, 2016 U.S. Dist. LEXIS
57085, at *30 (E.D. Pa. Apr. 29, 2016). “[F]ederal
district courts are not required to engage in de novo review
of objections to a Magistrate's R&R that lack
specificity.” Guzman v. Rozum, CIVIL ACTION
NO. 13-7083, 2017 U.S. Dist. LEXIS 55661, at *22 (E.D. Pa.
Apr. 12, 2017).
IV.
Discussion
Generally
speaking, the Fund's objections essentially repackage
arguments presented in its appeal, which was referred to and
considered by Judge Sitarksi. Therefore, the Fund's
objections are not entitled to comprehensive de novo review.
However, because the Fund's objections endeavor to
respond particularly to the content of Judge Sitarksi's
R&R and for thoroughness' sake, this Court shall
conduct de novo review limited to the Fund's specific
objections.
A.
Appellant's Objections[4]
The
Fund objects to the Magistrate's conclusion that the
Fund's proof should be characterized as a proof of
interest, not a proof of claim.[5] (Objs. 1.) It argues the
Magistrate arrived at the wrong characterization because she
disregarded the applicable legal standard for
characterization of claims. (Objs. 1.) The Fund also objects
to the finding that its interests are subject to
subordination pursuant to 11 U.S.C. § 510(b). (Objs. 1.)
This Court shall address the Fund's objections ad
seriatim.
B.
Security Interest vs. ...