Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.)

466 B.R. 750

In re FREEWAY FOODS OF GREENSBORO, INC., Debtor.Yellow Sign, Inc., a Delaware Corporation, and Waffle House, Inc., a Georgia Corporation, Plaintiffs,

v.Freeway Foods, Inc., Freeway, Foods of Greensboro, Inc., Gary M. Fly, individually, Lynne R. Fly, individually, Gary M. Fly, as Trustee of the GMF Family Trust U/A/D December 17, 1999, and Lynne R. Fly, as Trustee of the LRF Family Trust U/A/D January 18, 2000, Defendants.Freeway Foods of Greensboro, Inc., Third–Party Plaintiff,

v.Joe W. Rogers, Jr. and Kimberly S. Kraft, Third–Party Defendants.

Bankruptcy No. 10–11282.

Adversary No. 11–02008.

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

Jan. 13, 2012.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Brent F. Powell, Jennifer Barker Lyday, Julie B. Pape, Ronald R. Davis, William B. Sullivan, Womble, Carlyle Sandridge & Rice, PLLC, Winston–Salem, NC, for Plaintiffs.

Benjamin R. Norman, James C. Adams, II, Brooks Pierce McLendon Humphrey & Leonar, Greensboro, NC, Ryan Lance Isenberg, Isenberg & Hewitt, Atlanta, GA, James C. Lanik, Roberson Haworth & Reese, PLLC, High Point, NC, Katherine J. Clayton, Raleigh, NC, for Defendants.

MEMORANDUM OPINION

THOMAS W. WALDREP, JR., Bankruptcy Judge.

The above-captioned plaintiffs (the “Plaintiffs”) filed a Third Amended Complaint in this Adversary Proceeding on July 6, 2011. On July 25, 2011, the Chapter 7 trustee (the “Trustee”) for the above-captioned debtor (“Freeway Foods”) filed a Motion to Dismiss Plaintiffs' Claims against the Freeway Foods (the “Motion to Dismiss”), and Yellow Sign, Inc. (“YSI”), Waffle House, Inc. (“Waffle House”), and Kimberly S. Kraft (“Kraft”) filed a Motion for Judgment on the Pleadings (the “Motion for Judgment on the Pleadings” and, together with the Motion to Dismiss, the “Dispositive Motions”). Given the complexity of these matters and the Supreme Court's recent decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (U.S. June 23, 2011), the Court held a hearing on September 20, 2011, to address issues regarding the Court's authority to render final judgments on the claims and counterclaims in this Adversary Proceeding.¹ Because the parties need to know whether the Court will be entering final orders on such claims, the Court will consider these issues before considering the merits of the Dispositive Motions. The Court has considered the briefs and the oral argument presented by all parties at the hearing on September 20, 2011, and makes the following findings of fact and conclusions of law.

I. FACTUAL ALLEGATIONS

The claims at issue in this case stem from a series of events involving the takeover of various Freeway Foods franchises by Waffle House and YSI and the eventual involuntary bankruptcy of Freeway Foods. Freeway Foods alleges that, starting sometime in 2008, Waffle House and its management, including Kraft and Joe W. Rogers, Jr. (“Rogers”), the CEO of Waffle House, devised a plan to take control of the franchised Waffle House restaurants throughout the United States. Freeway Foods alleges that Waffle House, YSI, Kraft, and Rogers induced franchisees to negotiate better lease terms by creating financial duress, then terminated their franchises, took control of the restaurants, and converted the better lease terms to their own benefit.

Freeway Foods, Inc., owned by Gary and Lynne Fly (the “Flys”), had been a franchisee of Waffle House since 1972, and owned and operated 36 Waffle House restaurants in North Carolina. In 2000, the Flys incorporated Freeway Foods of Greensboro, Inc. to acquire all the stock and assets of Freeway Foods, Inc. To finance this acquisition, the Freeway Foods entities collectively borrowed more than $12 million from SunTrust Bank (the “SunTrust Loan”), pledging the assets of Freeway Foods, Inc. as collateral. The Flys and the Fly Trusts guaranteed the loan obligation. In December 2001, Freeway Foods missed a payment on the SunTrust Loan. Freeway Foods contends that it negotiated with SunTrust to adjust the maturity date of the loan and pay all of the accrued interest as well as certain principal payments on a quarterly basis. Freeway Foods also entered into forbearance agreements with SunTrust regarding the maturity date of the loan. After December, 2001, Freeway Foods contends that it remained current on its modified lending terms, and sometime in 2006 or 2007, SunTrust and Freeway Foods stopped executing forbearance agreements in favor of adopting an informal process whereby Freeway Foods would pay accrued interest and as much principal as it could based on monthly cash flow. Freeway Foods claims that pursuant to this informal agreement, as long as Freeway Foods paid the interest and principal as requested, SunTrust would not exercise any remedies. By the middle of 2009, Freeway Foods had reduced the outstanding principal to approximately $6.2 million.

Freeway Foods alleges that sometime in 2004, Rogers began insisting that all franchisees do their accounting through Waffle House, and eventually required Freeway Foods to execute an Accounting Services Agreement (“ASA”) with Waffle House on January 11, 2007. Under the ASA, Waffle House became responsible for paying all of Freeway Foods' bills, including payroll. To do this, Waffle House obtained electronic access to Freeway Foods' bank account with BB & T as well as a limited power of attorney to write checks on the account. Freeway Foods claims that because Waffle House has company-owned restaurants in the areas east and west of the territory in which its franchises are located, Waffle House began targeting the Freeway Foods franchises for takeover to increase its revenue stream in the area at little additional expense. Freeway Foods alleges that to this end, in February, March, and April 2009, Rogers intentionally discouraged two potential purchasers from buying Freeway Foods franchises by fraudulently announcing that Waffle House planned to build a Waffle House owned restaurant in the middle of Freeway Foods' territory, which would impact any purchaser's profitability at the Freeway Foods location, and even went so far as to tell one potential buyer to “stand down from any interest.”

In addition, Freeway Foods contends that Waffle House and YSI fraudulently took control of the SunTrust Loan in order to create financial duress. In 2009, Freeway Foods was able to convince SunTrust to accept a discount on the SunTrust Loan from $6.2 million to $4.5 million. Then, in April 2009, Freeway Foods received a letter of interest from NewBridge Bank for a $4.5 million loan to take out the SunTrust Loan. Freeway Foods contends that it informed Waffle House of these negotiations because, pursuant to the Franchise Agreement, Waffle House would have to consent to any assignment of collateral rights to NewBridge Bank. In May 2009, Kraft allegedly contacted SunTrust and expressed concern about the ability of Freeway Foods to move forward with the loan, and expressed concerns regarding a heavy remodeling schedule that Waffle House was imposing. Waffle House then notified Freeway Foods that it was seeking to purchase the SunTrust Loan itself. Freeway Foods alleges that on May 12, 2009, Rogers contacted Mr. Fly and stated that Freeway Foods would be better off if Waffle House owned the debt because he “was interested in putting money in Mr. Fly's pocket, not the bank's,” and that the collateral had greater value to Waffle House than a third-party lender. Freeway Foods contends that as a result of these representations, it ceased its efforts to obtain financing from NewBridge Bank in August 2009.

Freeway Foods alleges that on August 8, 2009, Rogers and Kraft told Mr. Fly that they believed SunTrust would foreclose on the SunTrust Loan if Waffle House did not purchase the debt. Furthermore, Freeway Foods claims that throughout August of 2009, various representatives of Waffle House threatened Freeway Foods' financing. As a result, the Flys assisted Waffle House in negotiating the sale of the SunTrust Loan to Waffle House's affiliate, YSI, and the sale closed on October 2, 2009 for $4.4 million.

On September 2, 2009, as the Waffle House/YSI and SunTrust negotiations were wrapping up, Waffle House sent a Notice of Termination to Freeway Foods claiming that Freeway Foods was insolvent and that Waffle House intended to terminate the Freeway Foods franchises effective November 4, 2009. Freeway Foods maintains that it was solvent at this time. In addition, after acquiring the SunTrust Loan, Waffle House informed Freeway Foods that it expected Freeway Foods to repay the entire $6.2 million of the SunTrust loan to YSI, despite allegedly making promises to Freeway Foods that it would only be responsible for paying the discounted $4.4 million amount.

In order to avoid liability on the personal guaranties made by the Flys and the Fly Trusts, the parties began discussing a “friendly foreclosure” scenario whereby the Flys would turn over the assets of Freeway Foods to YSI and wind-down of the operations as franchises. Under this agreement, Waffle House would hold all of the cash of the Freeway Foods restaurants as of the closing date in escrow to be applied to the Freeway Foods debts as the bills came in. The Flys would be expected to make up any deficiencies, and the Flys would be released from their personal guaranties. The parties reached a final agreement on November 3, 2009, and on November 5, 2009, Kraft indicated that General Counsel for Waffle House and YSI would prepare and deliver the documents by November 12 or 13, 2009. In exchange, Freeway Foods was to obtain an aggregate of $120,000 in rent reductions from its various landlords by November 15, 2009. Freeway Foods alleges that this amount was set in bad faith, based on Waffle House's belief that Freeway Foods would not be able to obtain the required reductions by the deadline. Freeway Foods was able to obtain reductions with respect to...