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In re Spectrum Alliance, LP

United States District Court, E.D. Pennsylvania

October 31, 2019

IN RE: SPECTRUM ALLIANCE, LP, Debtor
v.
SPECTRUM ALLIANCE, LP, Appellee. THE NORTHEAST CARPENTERS ANNUITY FUND, Appellant

          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. ...


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