In re Freeway Foods of Greensboro Inc.

449 B.R. 860

In re FREEWAY FOODS OF GREENSBORO, INC., Debtor.Jane H. Walter, Plaintiff,

v.Freeway Foods, Inc., Freeway Foods of Greensboro, Inc., Gary M. Fly, individually, Lynne R. Fly, individually, Yellow Sign, Inc., and Waffle House, Inc., Defendants.

Bankruptcy No. 10–11282.

Adversary No. 10–02057.

United States Bankruptcy Court, M.D. North Carolina,Greensboro Division.

May 24, 2011.

John Patrick Haywood, Rachel Scott Decker, Carruthers & Roth P.A., Greensboro, NC, for Plaintiff.William B. Sullivan, Ronald R. Davis, Brent F. Powell, Womble Carlyle Sandridge & Rice PLLC, James C. Adams, II, Brooks Pierce McLendon, et al., LLP, Greensboro, NC, for Defendants.

MEMORANDUM OPINION

THOMAS W. WALDREP, JR., Bankruptcy Judge.

This matter came before the Court on January 20, 2011, upon the Plaintiff's Motion for (I) Remand of the Claims Involving the Plaintiff the Non–Debtors (sic), or, in the Alternative, (II) Mandatory Abstention of the Claims Involving the Non–Debtors and Remand to State Court, or, in the Further Alternative, (III) Permissive Abstention of All Claims and Remand to State Court (the “Motion to Remand”) filed by the above-captioned plaintiff, Jane H. Walter (“Walter”), on December 7, 2010. J. Patrick Haywood and Rachel Scott Decker appeared on behalf of Walter, William B. Sullivan appeared on behalf of Waffle House, Inc. (“Waffle House”) and Yellow Sign, Inc. (“YSI”), and James C. Lanik appeared on behalf of the Trustee. The parties were given an opportunity to file post-hearing briefs, which Walter, Waffle House, and YSI did. After consideration of the pleadings, the evidence presented, and the arguments of counsel, the Motion for Remand will be denied. For the reasons set forth below, the Court finds that mandatory abstention does not apply, and declines to exercise its discretion to permissively abstain from hearing the Adversary Proceeding or to remand it to state court.

I. JURISDICTION

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and Local Rule 83.11 of the United States District Court for the Middle District of North Carolina. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), which this Court has the jurisdiction to hear and determine.

II. FACTS

A. Procedural Background

Freeway Foods of Greensboro, Inc. (the “Debtor”) was in the business of operating 36 Waffle House franchises in North Carolina until an involuntary bankruptcy was filed against it on July 13, 2010. On July 30, 2010, Walter, the owner of certain real property on which was located a Waffle House franchise operated by the Debtor, filed suit in the Superior Court of Guilford County, North Carolina, against the Debtor, Gary and Lynne Fly (the principals of the Debtor and, collectively, the “Flys”), Waffle House (the franchisor of the Debtor's Waffle House locations), and YSI (an affiliate of Waffle House), seeking damages as a result of an alleged scheme between and among the Defendants to defraud her. The Walter complaint set forth eleven causes of action: (1) breach of lease agreement against the Debtor; (2) fraud against the Debtor and the Flys; (3) unfair and deceptive trade practices against the Debtor; (4) piercing the corporate veil against the Flys; (5) breach of lease agreement against Waffle House and YSI; (6) successor liability against Waffle House and YSI; (7) lender liability against Waffle House and YSI; (8) interference with contract against Waffle House and YSI; (9) fraud against Waffle House and YSI; (10) unfair and deceptive trade practices against Waffle House and YSI; and (11) conspiracy against the Debtor, Waffle House, YSI, and the Flys.

Prior to both the bankruptcy and the commencement of Walter's suit, on February 18, 2010, YSI filed an action for declaratory judgment against the Debtor and the Flys in Fulton County, Georgia (the “Georgia Action”), seeking a determination that the Debtor was in default under a note and credit agreement owned by YSI. On March 24, 2010, the Debtor and the Flys filed an Answer and Counterclaim (the “Georgia Counterclaim”) against YSI. That same day, the Debtor and the Flys filed suit in North Carolina state court (the “North Carolina Action”) seeking to enjoin a foreclosure sale of its assets. The complaint filed in the North Carolina Action (the “Debtor Complaint”) contains identical allegations and causes of action to those found in the Georgia Counterclaim. The North Carolina Action was ultimately unsuccessful—no injunction was obtained, and the action was voluntarily dismissed.

On October 26, 2010, the Debtor filed a notice of removal of the Georgia Action to the United States District Court for the Northern District of Georgia, and then, on November 12, 2010, the Debtor and the Flys filed a motion to transfer the case to the Middle District of North Carolina. The case was transferred on December 6, 2010, and referred to the Bankruptcy Court as an adversary proceeding (Adv. No. 11–2008) on April 7, 2011. Walter takes many of the factual allegations in her Complaint directly from the Debtor Complaint—which, as discussed above, contains allegations identical to those found in the Georgia Counterclaim in the Georgia Action that is now before this Court—often citing to the Debtor Complaint or quoting it, word for word, as a basis for her claims against the Defendants.

On October 4, 2010, Waffle House and YSI filed a Motion to Dismiss Walter's claims against them as well as a motion to stay Walter's state court action for six months pending the resolution of the claims in the Georgia Action and the Trustee's decision on whether to assume or reject the Debtor's lease with Walter. On October 5, 2010, the Flys filed an Answer to the Complaint. On November 5, 2010, the Debtor filed a Notice of Removal to the United States District Court for the Middle District of North Carolina. On November 19, 2010, Walter filed a Notice of Dismissal, voluntarily dismissing her claims in this Adversary Proceeding against the Debtors without prejudice, a Response to the Notice of Removal, and a Brief in Support of Motion for Remand.

On November 22, 2010, Walter filed the Motion to Remand, seeking remand to state court of her remaining nine claims, as follows: (1) fraud against Mr. Fly, (2) piercing the corporate veil against the Flys; (3) breach of lease agreement against Waffle House and YSI; (4) successor liability against Waffle House and YSI; (5) lender liability against Waffle House and YSI; (6) interference with contract against Waffle House and YSI; (7) fraud against Waffle House and YSI; (8) unfair and deceptive trade practices against Waffle House and YSI; and (9) conspiracy against Waffle House, YSI, and the Flys. The case was referred to the Bankruptcy Court on December 2, 2010, and this Adversary Proceeding was opened on December 7, 2010. On January 3, 2010, the Trustee, as well as Waffle House and YSI, filed objections to the Motion to Remand.

B. Factual Allegations

The claims in both the Georgia Action and this Adversary Proceeding stem from a series of events involving the takeover of the Debtor's franchises by Waffle House and YSI and the eventual involuntary bankruptcy of the Debtor.

Prior to its bankruptcy, the Debtor had been a franchisee of Waffle House since 1972, and it owned and operated 36 Waffle House restaurants in North Carolina. On January 30, 2006, Walter sold some real property in Raleigh. In order to defer taxes, Walter elected to acquire replacement property for a Section 1031 like-kind exchange. I.R.C. § 1031(a)(1). Walter began to investigate the property at 3929 Battleground Avenue, Greensboro, NC—a location where the Debtor was operating a Waffle House franchise—as potential replacement property. In the course of due diligence for the transaction, Walter discovered that the Debtor was in a “technical default” under a loan with SunTrust Bank, N.A. (“SunTrust”), but she alleges that Mr. Fly assured her that the “technical default” was being dealt with pursuant to an agreement with SunTrust, and that it had not affected his status as a Waffle House franchisee. In addition, Walter claims that a representative of Waffle House further assured her that the Debtor was a franchisee in good standing. Walter alleges that she closed on the property in reliance on these representations, intending to continue to lease the property to the Debtor for use as a Waffle House franchise.

On April 19, 2006, the Debtor entered into a commercial lease (the “Lease”) with Walter effective until August 6, 2015, with the option to extend the term for additional five year periods. The Lease provided that the Debtor was in good standing as a franchisee of Waffle House and that the property would be used solely and exclusively as a Waffle House restaurant in accordance with the terms of the franchise agreement between the Debtor and Waffle House. Furthermore, the Lease contained a provision allowing the Debtor to assign the Lease to Waffle House, in which case Waffle House would take full responsibility under the Lease. Walter contends that Waffle House required that the above assignment provisions be included in the Lease.

Walter alleges that Waffle House then devised a scheme with YSI whereby they used misrepresentations and duress to obtain rent concessions from certain landlords of franchise property, including Walter, and then gained control of the franchises at a discount as a result. These same allegations are made in the Debtor Complaint from the North Carolina Action, as well as the Georgia Counterclaim in the Georgia Action, which has been removed to this Court. Walter cites to, or quotes from, the Debtor Complaint for each factual statement that she makes regarding the alleged scheme.

Specifically, by reference to the Debtor Complaint, Walter alleges that sometime in 2000, the Debtor borrowed funds from SunTrust (the “SunTrust Loan”) to finance the acquisition of the...