In Re Gorilla Companies LLC, Bankruptcy No. 2:09-bk-02898-RJH

429 B.R. 308

In re GORILLA COMPANIES LLC, et al., Debtors.Gorilla Companies LLC, Plaintiff,v.Robb M. Corwin, et al., Defendants.

Bankruptcy Nos. 2:09-bk-02898-RJH, 2:09-bk-02901-CGC, 2:09-bk-02903-GBN, 2:09-bk-02905-CGC.

Adversary No. 2:09-ap-00266-RJH.

United States Bankruptcy Court D. Arizona.

May 6, 2010.

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Daniel B. Pasternak, Esq., Greenberg Traurig LLP, Phoenix, AZ, for Plaintiff.

John R. Clemency, Esq., Craig Solomon Ganz, Esq., Janel M. Glynn, Esq., Gallagher & Kennedy, Phoenix, AZ, for Gorilla Companies LLC.

Geoffrey S. Kercsmar, Esq., Todd Feltus, Esq., Eric B. Hull, Esq., Kercsmar & Feltus PLLC, Daniel P. Collins, Esq., Collins, May, Potenza, Baran & Gillespie, P.C., Phoenix, AZ, for Robb M. Corwin, Jillian C. Corwin, 13 Holdings, LLC and Great Days, LLC.

OPINION DENYING MOTION TO ALTER OR AMEND JUDGMENT RE CORE NATURE

RANDOLPH J. HAINES, Judge.

Defendants Robb Corwin and 13 Holdings LLC (collectively, “Corwin”) have moved the Court to alter or amend its judgment to find that all of the claims asserted by Debtor Gorilla Companies, Inc. (“Gorilla”) are non-core. Although this has previously been briefed, argued and decided, Corwin's motion to alter or amend argues that the Ninth Circuit's recent decision in In re Marshall, 600 F.3d 1037 (9th Cir.2010), changed the law.

Corwin is correct that Marshall changed the law, but the question remains whether this case fits within the narrow category of cases affected by Marshall's change. The Court concludes it does not.

FACTUAL BACKGROUND

Robb and Jillian Corwin are the sole owners of 13 Holdings LLC, which was an event-management company. In June of 2007, 13 Holdings entered into an asset purchase agreement to sell all of its assets to Gorilla. Under the asset purchase agreement, 13 Holdings was to receive, along with some other consideration, an immediate cash payment and a deferred payment memorialized by a Seller Note, under which 13 Holdings could be paid up to $6 million depending upon Gorilla's performance. In early 2008, Corwin demanded and Gorilla made a large payment to 13 Holdings as a prepayment on the Seller Note. Later that year, however, a dispute arose as to the amount actually due on that Seller Note: Corwin contended Gorilla owed substantial additional amounts under the Seller Note, while Gorilla contended that it not only owed nothing further under the Seller Note but had actually substantially overpaid on the Seller Note.

When Gorilla did not pay the additional amounts that Corwin claimed it owed, Corwin exercised various self-help remedies to collect it in early 2009, including but not limited to taking hundreds of thousands of dollars from ATM machines owned by Gorilla and notifying several substantial Gorilla clients, including the National Football League, the Arizona Cardinals and Arizona State University, that they should make their payments to Corwin rather than to Gorilla. Gorilla filed suit in state court not only for the amounts it claimed had been overpaid on the Seller Note, but also seeking to enjoin Corwin from attempting to collect from Gorilla's clients. The state court granted the preliminary injunction, conditioned upon Gorilla filing a bond. A few days later, on February 20, Gorilla filed this Chapter 11 case,¹ and then on March 10 removed its state court suit to the bankruptcy court as an adversary proceeding.

Corwin sought a remand of the removed state court litigation, and before its remand motion was ruled upon filed proofs of claim in the bankruptcy case on May 20.² On June 13, the bankruptcy court denied the motion to remand.

In October, Jillian Corwin moved in the Arizona District Court to withdraw the reference of claims Gorilla had asserted against her arguing, among other grounds, that Gorilla's claims were non-core because they arose in November 2008, months before Gorilla filed for bankruptcy. In November, the District Court denied the motion for withdrawal of the reference, primarily on the basis that the claims asserted against her were not asserted against her individually, but only as against her marital community, and that the marital community had waived its right to a jury trial by filing proofs of claim in the bankruptcy court.

Corwin's proofs of claim also sought amounts due under other aspects of the asset purchase agreement in addition to the Seller Note. In particular, Corwin claimed he was due additional consulting fees under a transitional employment agreement entered into as part of the asset purchase agreement, and that he was owed damages for Gorilla's breach of an exception to the non-compete agreement Corwin entered into as part of the asset purchase agreement, which he claimed permitted him to continue providing consulting services for event management. Ultimately both of those additional Corwin claims were settled rather than litigated and decided by the bankruptcy court.

So that Gorilla could file a plan of reorganization, Gorilla moved for estimation ³ of the amount due on the proofs of claim. After trial, the Court estimated that Gorilla owed nothing additional under the Seller Note. The Court also held that the evidence received in the estimation trial would also be deemed admitted in the adversary proceeding.

Trial in the adversary proceeding was held on November 23 and 30. Following trial, the Court granted judgment in favor of Gorilla and against the Corwins and 13 Holdings, jointly and severally, for almost $3 million. This included approximately $1.4 million constituting overpayment on the Seller Note, prejudgment interest on that amount, some $268,000 for conversion of the ATM cash together with prejudgment interest on that amount, and $1 million in actual compensatory damages for lost profits caused by Corwins' conduct that necessitated the bankruptcy. Among other things, the judgment for lost profits was based upon the fraud perpetrated by Robb Corwin individually in manipulating the Gorilla books and records and misrepresenting Gorilla's earnings, which were the basis for calculating the amount due on the Seller Note. That same judgment disallowed all claims asserted by the Corwins in their proofs of claim.

Following entry of judgment, Corwin moved to alter or amend that judgment to include a finding that all of Gorilla's claims were non-core, based on the Ninth Circuit's new definition of “core” in Marshall.

ANALYSIS

Prior to Marshall, the statute was clear that all counterclaims asserted by a debtor against a persons filing claims in the bankruptcy case were defined as core.⁴ Marshall held, however, that notwithstanding that plain language of the statute, it could not be read so broadly. Although there is no language in the statute to suggest that the word “counterclaim” must be limited to only a certain kind of counterclaim, the Marshall court held that it must be construed more narrowly “to avoid potential constitutional problems arising from having Article I judges issue final orders in cases requiring an Article III judge.” ⁵ To avoid those constitutional issues, therefore, the Ninth Circuit construed 28 U.S.C. § 157(b)(2)(C) to be limited not only to compulsory counterclaims, but even further to those kinds of compulsory counterclaims that are “part and parcel of the [claim] allowance process,” as the Ninth Circuit concluded was the preference counterclaim in Katchen v. Landy.⁶ The Marshall opinion went on to find that in that case the debtor's counterclaim for tortious interference with a gift expectancy was not “part and parcel” of the allowance of the creditor's claim for defamation, and therefore was non-core.

The Ninth Circuit's Marshall opinion also suggests that the construction of § 157(b)(2)(C) must be “much narrower” than its plain language “because it is designed to comply with the constitutional limitations on the bankruptcy court's jurisdiction as set forth in Marathon.” ⁷ Unfortunately, however, the Ninth Circuit did not then proceed to identify what those constitutional limits were when adjudicating a debtor's claim against a party that filed a claim against the bankruptcy estate. That circumstance did not exist in Marathon, so it can provide no answer to that question. The Marshall opinion did indicate that the narrower construction of § 157(b)(2)(C) is also required by Katchen v. Landy, where that factual circumstance did exist. Yet Katchen v. Landy expressly held there was no constitutional problem for the bankruptcy court to adjudicate a preference action against a creditor who had filed a proof of claim, even though the creditor's proof of claim was unrelated to the transaction in which the creditor had received a preference.⁸ It is difficult therefore, to utilize the facts of Katchen to help define what kinds of counterclaims will satisfy the Ninth Circuit's narrower interpretation of § 157(b)(2)(C).

The Marshall opinion does not address the Ninth Circuit's own precedent in Peters v. Lines holding that “the filing of a proof of claim ... constitute [s] a consent to the bankruptcy court's [summary] jurisdiction so as to enable the bankruptcy court to render an affirmative judgment against the creditor on the trustee's counterclaim arising out of the same contract.” ⁹ Perhaps it was not addressed because the facts of Marshall did not involve claims and counterclaims arising out of contract, much less out of the same contract. Presumably, that precedent therefore remains good law in the Ninth Circuit.

Marshall's reliance on Katchen does imply that what constituted summary jurisdiction under the former Bankruptcy Act also qualifies as “core” under the post- Marathon bankruptcy jurisdictional statutes. And nothing in Marathon itself or the language of the post- Marathon statutes suggests that “core” should be any narrower than was summary jurisdiction under the Bankruptcy Act, or that there would be any constitutional concern in having Article I judges hear and determine all cases that were previously regarded as being...