In re Reading Broadcasting, Inc., Bankruptcy No. 05-26563bif (Bankr. E.D. Pa. 7/8/2008)

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In re READING BROADCASTING, INC., Chapter 11, Debtor.

Bankruptcy No. 05-26563bif.

United States Bankruptcy Court, E. D. Pennsylvania.

July 8, 2008.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

Presently before me is an objection by the chapter 11 trustee, George L. Miller, to the general, unsecured claim filed by Philadelphia Television Network, Inc. (PTN). PTN's proof of claim, dated November 29, 2005 and docketed as claim #4, exhibit C-2, asserts that the debtor, Reading Broadcasting, Inc. (RBI), owes it $20,217,889.85. After an evidentiary hearing on the trustee's objection, PTN maintains that the correct amount of its claim is $16,267,750. See PTN's Memorandum, at 12. The trustee contends in his post-hearing memorandum that PTN's unsecured claim should be allowed in the amount of $8,314,863.41. Trustee's Memorandum, at 1.¹

As identified in PTN's proof of claim, the claim consists of three components. Ex. C-2. PTN and the trustee agree as to the first component, since that portion had been fixed prepetition by an interlocutory state court order. The trustee contends, however, that the other two components asserted by PTN should be disallowed in toto. PTN disagrees. Only one of the disputed components was the primary focus of evidence in this court.

I.

Upon consideration of the testimony and documents offered into evidence, I make the following findings of fact.²

Prior to its bankruptcy filing in October 2005, RBI operated a full power television station based in Reading, Pennsylvania. Ex. T-6, at 1-2. PTN operated a low-power television station in the Philadelphia area. Id., at 1. In November 1999, these two parties entered into a Time Brokerage Agreement as well as a Stock Option Agreement. Id., at 5, 7. Under the latter agreement, PTN agreed to option 40% of RBI's shares of stock, which option could be exercised after an FCC challenge to RBI's license was resolved. Id., at 7. PTN's proof of claim asserts, and the trustee does not dispute, that if PTN exercised its option it was to pay $5.24 per share for 512,043 shares. Ex. C-2.

In August 2001, PTN sued RBI for breach of contract (as well as other claims) in the Court of Common Pleas of Philadelphia County, Pennsylvania, docketed at August Term 2001, No. 1663. This civil action, assigned to the Honorable Albert W. Sheppard, Jr., was tried over a period of many days in 2004, and an interlocutory order was entered by the state trial court on July 14, 2005. The order was accompanied by 81 pages of findings of fact, conclusions of law and an explanatory discussion of the issues. See Exs. T-5, T-6.³

This July 14, 2005 ordered stated:

AND NOW, this 14th day of July 2005, upon consideration of the evidence presented at a bench trial, the respective proposed findings of fact and conclusions of law and responses of the parties, the respective briefs and memoranda, all matters of record, and in accord with the Findings of Fact, Discussion and Conclusions of Law being filed contemporaneously with this Order, it is ORDERED that:

1. Judgment is entered in favor of plaintiff, Philadelphia Television Network, Inc. ("PTN"), and against defendant, Reading Broadcasting, Inc. ("RBI"), on plaintiff's claim of breach of the Time Brokerage Agreement ("TBA").

2. The breach of the TBA constituted a breach of the Option Agreement. Therefore, judgment is entered in favor of plaintiff, PTN, and against defendant, RBI, on PTN's claim of breach of the Option Agreement.

3. The court awards PTN damages resulting from the breach of the TBA as follows:

a) $25,000.00 for payments made to RBI employees from a $500,000.00 advance, in violation of the TBA,

b) $1,418,687.00, representing a pro rata credit for the periods of time that the court finds RBI broadcast at below 50 percent ERP, and c) $6,938,224.00 in lost profits.

4. On PTN's claim for breach of the Option Agreement, the court Orders that each party choose an appraiser, and the two appraisers choose a neutral appraiser and that, among the three, a value of Station WTVE must be determined. Once the station has been assigned a value, PTN is awarded the value of their options minus the second anniversary payment of $296,984.94.

5. The court declines to order specific performance — that is, reinstatement of the TBA — in that monetary damages can compensate PTN.

6. With regard to alleged overpayments made by PTN, the court awards PTN:

a) $1,171.00 for the reimbursement of professional association dues, which amount was improperly billed to, and paid by PTN,

b) $80,238.36 for payments made by PTN for the legal services of the Holland & Knight law firm rendered prior to the TBA,

7. The court denies: (a) PTN's claim for alleged payroll overstatements and health insurance charges, (b) PTN's claim for "non-reimbursable" expenses of Michael Parker, Frank McCracken, George Mattmiller and Tom Root, (c) PTN's claim for charges related to a "non-reimbursable" car, (d) PTN's claim for reimbursement of a $10,000.00 retainer for legal services, (e) PTN's claim for $60,000.00 owed to Verizon, and (f) PTN's claim for reimbursement of the $500,000 advance.

8. Judgment is entered in favor of RBI, and against PTN, on PTN's claim for fraud and deceit.

9. A hearing will be scheduled to permit the parties to present evidence related to the issue of the propriety of pre-judgment interest.

Thus, PTN was awarded damages by an interlocutory order of the state court on July 14, 2005 totaling $8,463,320.36⁴ for breach of the Time Brokerage Agreement, with a further determination to follow regarding pre-judgment interest and assessment of damages for the debtor's breach of the Stock Option Agreement. Prior to any further state court rulings, however, the debtor filed a voluntary petition in bankruptcy thereby triggering the bankruptcy stay under 11 U.S.C. § 362(a).⁵

Before I consider the two damage issues left open by the state court adjudication, I note (and the parties do not disagree) that in this circuit the Rooker-Feldman doctrine, which precludes federal court review of prior state court orders, applies to interlocutory as well as final orders. See Port Authority Police Benevolent Association v. Port Authority Police Department, 973 F.2d 169, 177-78 (3d Cir. 1992); In re 421 Willow Corp., 2003 WL 22318022, at *6 n.6 (E.D. Pa. 2003); In re Freehand H.J., Inc., 2007 WL 2071877, at *3 (Bankr. E.D. Pa. 2007); see also Campbell v. Greisberger, 80 F.3d 703, 707 (2d Cir. 1996) ("It cannot be the meaning of Rooker-Feldman that, while the inferior federal courts are barred from reviewing final decisions of state courts, they are free to review interlocutory orders."); cf. In re Brown, 951 F.2d 564, 569 (3d Cir. 1991) ("[T]he order of the state court granting summary judgment on liability was not final for purposes of appeal, but that does not deny it preclusive effect in the bankruptcy court.").

Accordingly, the interlocutory state court determination of liability of the debtor for its prepetition breach of the Time Brokerage Agreement and its assessment of damages in the amount of $8,314,863.41⁶ will be treated as binding and represents at least a portion of PTN's allowed unsecured claim.⁷

II.

Before addressing the two disputed components of PTN's unsecured claim, one should recognize the parties' respective evidentiary burdens of production and persuasion.

Allowance of a proof of claim is governed by 11 U.S.C. § 502(a), which provides in relevant part: "A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects." See generally In re Harrison, 987 F.2d 677, 680 (10th Cir. 1993). Moreover, pursuant to Fed. R. Bankr. P. 3001(f), "[a] proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." See generally In re Innovative Software Designs, Inc., 253 B.R. 40, 44 (B.A.P. 8th Cir. 2000); In re Brinson, 153 B.R. 952, 954 (Bankr. M.D. Fla. 1993).

The Third Circuit Court of Appeals has instructed that a shifting evidentiary burden arises when an objection has been filed to a proof of claim. In re Allegheny International, Inc., 954 F.2d 167, 173 (3d Cir. 1992); In re Graboyes, 371 B.R. 113 (Bankr. E.D. Pa. 2007). That shifting burden was explained recently in In re Kincaid, 2008 WL 2278895, at *2 (Bankr. E.D. Pa. 2008):

Bankruptcy Rule of Procedure 3001(f) provides that a proof of claim executed and filed in accordance with the rules of procedure constitutes prima facie evidence of the validity and amount of the claim. . . . Even if there is an objection filed to the claim, the evidentiary effect of Rule 3001(f) remains in force. . . . The objecting party carries the burden of going forward with evidence in support of its objection which must be of probative force equal to that of the allegations of the creditor's proof of claim. . . . "[T]he objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." In re Allegheny International, Inc., 954 F.2d 167, 173-74 (3d Cir. 1992). If the objecting party succeeds in overcoming the prima facie effect of the proof of claim, the ultimate burden of persuasion then rests on the Claimant. Id. at 174.

(citations omitted).

Here, PTN filed a proof of claim, docketed on the claim register as #4, which meets the requirements of Fed. R. Bankr. P. 3001. Thus, the proof of claim itself constitutes "prima facie evidence of the validity and amount of the claim." The burden of production shifts to the trustee, as objector, to negate the validity of PTN's proof of claim. If the trustee meets this burden, then PTN has the ultimate burden of persuasion to demonstrate the validity of its claim by the preponderance standard. In re Allegheny International, Inc., 954 F.2d at 174.

III.

The principal focus of the trustee's evidence at the claim objection hearing, and...