Sharp v. Salyer (In re SK Foods)

499 B.R. 809

In re SK FOODS, LP, a California Limited Partnership, et al., Debtors.Bradley D. Sharp, Chapter 11 Trustee, Plaintiff,

v.Scott Salyer, as Trustee of the Scott Salyer Revocable Trust, et al., Defendants.

Bankruptcy No. 09–29162–D–11.

Adversary No. 10–02014.

DC No. SH–16.¹

United States Bankruptcy Court,

E.D. California,

Sacramento Division.

Oct. 2, 2013.

Gregory C. Nuti, Kevin W. Coleman, Michael M. Carlson, Todd Holvick, Schnader Harrison Segal & Lewis LLP, San Francisco, CA, for Plaintiff Bradley D. Sharp, Chapter 11 Trustee.

FINDINGS OF FACT AND CONCLUSIONS OF LAW RE MOTION FOR DEFAULT JUDGMENT, OR ALTERNATIVELY, SUMMARY JUDGMENT

ROBERT S. BARDWIL, Bankruptcy Judge.

On the 2nd day of October 2013, the Court considered the motion of Bradley D. Sharp (the “Trustee”), the duly appointed and acting Chapter 11 trustee for SK Foods, L.P., a California limited partnership (“SK Foods”), and RHM Industrial/Specialty Foods, Inc., a California corporation, d/b/a Colusa County Canning Co. (“RHM”) for default judgment, or alternatively, summary judgment on the Trustee's fourth claim for relief (Substantive Consolidation) set forth in his Complaint filed January 11, 2010 (the “Motion”). The Court considered the submissions and declarations in support of the Motion, and all declarations, evidence and memoranda previously filed in this action, the underlying Chapter 11 case, and related adversary proceedings that are referenced therein, and the oppositions and submissions of the Defendants and other parties in interest in response to the Motion. After affording the parties the foregoing hearing, and good cause having been shown, the Court granted the Trustee's motion and entered an order granting judgment on the Trustee's fourth claim for relief, which is entered contemporaneously herewith. The Court makes the following findings of fact and conclusion of law in connection with its decision to enter an order granting the motion seeking default judgment, or alternatively, summary judgment on the Trustee's fourth claim for relief, substantive consolidation as to the following defendants in this action: SK PM Corp. (“SKPM”), SK Foods, LLC (“SKF”), SKF Canning, LLC (“SKF Canning”), Blackstone Ranch Corporation (“Blackstone”), Monterey Peninsula Farming, LLC (“Monterey”), Salyer Management Company, LLC (“SMC”), SK Farms Services, LLC (“SK Farms Services”), SS Farms, LLC (“SS Farms”), SSC Farming, LLC (“SSC”), SSC Farms I, LLC (“SSC I”), SSC Farms II, LLC (“SSC II”), and SSC Farms III, LLC (“SSC III”) (collectively, “Defendants”). Scott Salyer (“Salyer”) as the Trustee of the Scott Salyer Revocable Trust (the “SSR Trust”) and SK Frozen Foods, LLC (“SK Frozen Foods”) are also defendants in this action, but the Trustee is not seeking substantive consolidation as to them and they are not included within the defined term “Defendants” hereinafter.

FINDINGS OF FACT

A. Facts Regarding the Procedural History of this Proceeding

1. The Trustee is the duly appointed and acting Chapter 11 trustee for SK Foods and RHM (collectively, the “Debtors”).

2. On May 5, 2009 (the “Petition Date”), involuntary bankruptcy petitions were filed against SK Foods and RHM. Thereafter, on May 7, 2009, the Debtors filed a voluntary petition for relief (the “Bankruptcy Case”) under chapter 11 of Title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the “Bankruptcy Code”). The Plaintiff was appointed the Chapter 11 trustee in the Bankruptcy Case and presently serves in that capacity.

3. On January 11, 2010, the Trustee initiated his complaint (the “Complaint”) against Defendants and against Salyer, as trustee of the SSR Trust and SK Frozen Foods, seeking, among other relief, substantive consolidation of the defendants in this action with the Debtors' estate (Docket Number (“DN”) 1).

4. On March 9, 2010, the Trustee moved for entry of a temporary restraining order and order to show cause re: preliminary injunction (DN 11). On March 11, 2010, the Court entered a Temporary Restraining Order, restraining and enjoining the Defendants from selling, assigning, transferring, or otherwise dissipating assets or moving the assets outside of California, except upon application to this Court and for good cause shown (DN 24). On March 20, 2010, the Court entered a preliminary injunction against Defendants (DN 50) (the “March 20, 2010 Preliminary Injunction”). The injunction constituted the continuation, without interruption, of the restraints and injunction imposed upon the Defendants by the Court's Temporary Restraining Order, until such time as modified by the Court. Id. at 3:17–19. At the time the Court granted the March 20, 2010 Preliminary Injunction, the Court made Finding of Fact and Conclusions of Law that the Trustee was likely to succeed on the merits of his claim that the Defendants assets should be included in the Debtors' Estate and that a preliminary injunction was required to preserve the value of the those assets pending trial (DN 63). The March 20, 2010 Preliminary Injunction was modified six times, on October 13, 2010, January 20, 2011, February 16, 2011, May 1, 2011, May 10, 2011, and September 2, 2011 (collectively the “Preliminary Injunction Orders”).

5. On March 24, 2010, the Defendants filed their answer (the “Answer”) to the Complaint (DN 55).

6. On June 28, 2011, the Court entered an order staying this adversary proceeding until further Court order due to the pending criminal proceedings against Salyer and its potential impact on the Defendants' ability to mount a defense (DN 233).

7. Having found that some of the Defendants and their agents had violated the Preliminary Injunction Orders, see Civil Minutes, filed November 30, 2011 (DN 346), the Court, on December 1, 2011, modified the Preliminary Injunction Ordersand entered an order appointing a receiver over some of Defendants' assets. See Order Modifying Preliminary Injunction and Appointing Receiver (the “December 1, 2011 Receivership Order”).² The December 1, 2011 Receivership Order was modified three times, on December 27, 2011 (DN 372), January 18, 2012 (DN 389), and May 10, 2012 (DN 559) (the “Receivership Orders”), The modifications to the Receivership Orders gave the receiver power over substantially all of Defendants' assets.

8. On June 24, 2012, the Court entered an order vacating the June 28, 2011 stay in this adversary proceeding (DN 586).

9. On August 23, 2012, the Court entered a scheduling order authorizing the parties to seek discovery from any source and setting a fact discovery cutoff of April 30, 2013 (DN 597).

10. On November 16, 2012, the Trustee served initial discovery requests, including, Plaintiff's Interrogatories to Defendants, Set No. One and Plaintiff's Request for Production of Documents to Defendants, Set No. One (the “Discovery Requests”), on Attorney Holly Hostrop, Defendants' counsel at the time. February 13, 2013 Declaration of Gregory C. Nuti in Support of Motion to Strike Pleadings, For Entry of Default, and For Leave to Seek Entry of Default Judgment (DN 633 in No. 10–2014) (“February 13, 2012 Nuti Decl.”), ¶ 4, Exhibit A.

11. The deadline for the Defendants to respond to the Discovery Requests passed; however, the Defendants failed to respond or otherwise object to the Discovery Requests. February 13, 2013 Nuti Dec., ¶ 5.

12. On January 2, 2013, Ms. Hostrop filed a motion to withdraw as counsel of record for the Defendants (DN 619). On January 17, 2013, the Court granted Ms. Hostrop's motion to withdraw as counsel for the Defendants (DN 629).

13. On February 13, 2013, the Trustee filed a Motion to Strike Pleadings, For Entry of Default, and Leave to Seek Entry of Default Judgment against the Defendants (“Motion for Entry of Default”) (DN 631).

14. The Defendants were served with written notice of the Trustee's Motion for Entry of Default. DN 635.

15. Defendants did not file any opposition to the Motion for Entry of Default.

16. On March 14, 2013, the Court entered its Order Granting the Trustee's Motion to Strike Pleadings, For Entry of Default, and Leave to Seek Entry of Default Judgment (DN 642). The Order struck Defendants' Answer and entered a default. The Court set forth its reasons for granting the Trustee's Motion for Entry of Default in its Civil Minutes, dated March 13, 2013 (DN 644), which are incorporated herein by this reference. In sum, the Court found (1) “that the defendants are entities that are not permitted to participate in this adversary proceeding without an attorney. LBR 1001–1(c), incorporating Local District Court Rule 183(a) ... see D–Beam, Ltd. P'ship v. Roller Derby Skates, Inc., 366 F.3d 972, 973–74 (9th Cir.2004) (citation omitted) (“It is a longstanding rule that ‘corporations and other unincorporated associations must appear in court through an attorney.’ ”), (2) that “[t]he defendants have ... been unrepresented by counsel for seven weeks, a state of affairs that renders them unable to take steps to put on a defense,” and (3) “[c]ase law makes clear that entry of default is an appropriate remedy for an entity defendant's failure to be represented by counsel, where local rules so require.” See Employee Painters' Trust v. Ethan Enters., 480 F.3d 993, 998 (9th Cir.2007); United States v. High Country Broadcasting Co., 3 F.3d 1244, 1245 (9th Cir.1993). Id.

17. On April 10, 2013, the Trustee filled his motion for entry of default judgment, or alternatively, summary judgment (the “Motion”) on his fourth claim for relief (Substantive Consolidation) set forth in his Complaint (DN 647) and set a hearing date of May 8, 2013.

18. Following several unsuccessful attempts by Kimberly A. Wright, an attorney purporting to represent Defendants ( see Order dated April 17, 2013 (DN 666) and Order dated April 22, 2013 (DN 672), to appear as counsel of record for Defendants, on April 29, 2013, the Court issued an order continuing the hearing on the Motion from May 8, 2013 to May 22, 2013 at 10:00 a.m. to allow...