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Cousins International Food, Corp. v. Aquino Vidal

United States Bankruptcy Appellate Panel of the First Circuit

March 21, 2017

COUSINS INTERNATIONAL FOOD, CORP., a/k/a IHOP Caguas, and CIF BARCELONETA CORP., a/k/a IHOP Barceloneta, Debtors.
v.
LUIS S. AQUINO VIDAL, OLGA M. VIDAL, HÉCTOR A. CORTÉS BABILONIA, and GUILLERMO D. RODRÍGUEZ SERRANO, Defendants-Appellees. ENCANTO RESTAURANTS, INC., Plaintiff-Appellant, Adversary Proceeding No. 14-00030-MCF

         Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Mildred Cabán Flores, U.S. Bankruptcy Judge)

          Hermann D. Bauer Alvarez, Esq., Nayuan Zouairabani Trinidad, Esq., and Gabriel L. Olivera Dubón, Esq., on brief for Plaintiff-Appellant.

          Jacqueline E. Hernandez Santiago, Esq., on brief for Defendants-Appellees.

          Before Bailey, Harwood, and Fagone, United States Bankruptcy Appellate Panel Judges.

          FAGONE, U.S. BANKRUPTCY APPELLATE PANEL JUDGE

         Encanto Restaurants, Inc. ("Encanto"), the purchaser of substantially all of the assets of the chapter 11 debtor, Cousins International Food, Corp., a/k/a IHOP Caguas (the "Debtor"), appeals from the bankruptcy court's June 14, 2016 Opinion and Order (the "June 2016 Order").[1]Encanto also appeals from the bankruptcy court's June 15, 2016 Judgment (the "Judgment"). By its appeal, Encanto attempts to challenge two refusals by the bankruptcy court: one relating to Encanto's requests for relief under § 362, and a second relating to its requests for relief under a certain sale order (the "Sale Order").[2]

         Encanto lacks standing to pursue an appeal from the June 2016 Order and the Judgment to the extent that those rulings denied Encanto's requests for relief for alleged violations of § 362's automatic stay. Further, the bankruptcy court committed no error when it declined to grant Encanto relief for alleged violations of the Sale Order. Thus, we DISMISS a portion of this appeal for lack of standing and, as to the remainder of the appeal, we AFFIRM the bankruptcy court's orders.

         BACKGROUND

         I. The Local Court Action

         The Debtor, an International House of Pancakes ("IHOP") franchise operator, employed Luis S. Aquino ("Luis") for several months in 2011. In September 2011, the Aquinos, represented by the Attorneys, filed a complaint against the Debtor (the "Local Court Action") in the Commonwealth of Puerto Rico, Court of First Instance in Arecibo (the "Local Court"), alleging that the Debtor unlawfully terminated Luis' employment. In its answer to the Aquinos' complaint, the Debtor denied any wrongdoing and asserted a number of affirmative defenses.

         II. The Chapter 11 Filing

         In October 2012, the Debtor filed a voluntary petition for chapter 11 relief in the United States Bankruptcy Court for the District of Puerto Rico.[3] The Debtor did not disclose the pendency of the Local Court Action in its Statement of Financial Affairs or list the Aquinos as creditors in its Schedules. Therefore, the Aquinos did not receive notices regarding the proceedings and deadlines in the Debtor's bankruptcy case.

         On November 15, 2012, counsel for the Debtor filed an "informative motion" in the Local Court Action (the "Informative Motion"), indicating that she had learned "through the press" that the Debtor had filed a chapter 11 petition. In an order entered on December 5, 2012 (the "December 2012 Order"), the Local Court directed the Debtor to submit evidence of its bankruptcy filing and to prove that it listed Luis as a creditor in its bankruptcy case. The Debtor did not comply with that order.

         III. The Sale Motion

         On December 28, 2012, the Debtor, CIF, and Encanto filed an "urgent joint motion" with the bankruptcy court seeking judicial approval of the sale to Encanto of substantially all of the Debtor's assets, including two IHOP restaurants (the "Restaurants"), free and clear of all liens, claims, interests, and encumbrances, pursuant to § 363 and § 365 (the "Sale Motion"). Additionally, they requested a determination that Encanto was a good faith purchaser. The Asset Purchase Agreement accompanying the Sale Motion provided that Encanto would not assume or be liable for any obligations of the Debtor, including any employee liabilities or causes of action resulting from the Debtor's operation of the Restaurants. After a hearing, on February 26, 2013, the bankruptcy court entered an order approving the Asset Purchase Agreement (as amended) and the Sale Order, thereby approving the proposed sale. The Sale Order provided, inter alia, that Encanto would not be "liable, either directly or indirectly, as successor, transferee or otherwise, for any liabilities or interests of the Debtor[ ] . . . as a result of the sale or purchase of the Assets or employment of any former employee of the Debtor . . . ." Pursuant to Encanto's subsequent motion, the bankruptcy court extended the original sale date to March 13, 2013. The docket reflects that the Aquinos never received notice of the bankruptcy proceedings and orders.

         IV. The Local Court Judgment

         Meanwhile, as the bankruptcy proceedings advanced, so, too, did the Local Court Action. On January 18, 2013, the Defendants requested the entry of a default judgment against the Debtor in the Local Court Action due to the Debtor's various omissions, including its failure to comply with the December 2012 Order. Thereafter, the Local Court scheduled a pretrial conference, at which the Debtor failed to appear. Accordingly, the Local Court entered a judgment against the Debtor in May 2013 (the "Local Court Judgment"); the following month, the Local Court assessed damages against the Debtor in the amount of $60, 000.00 and awarded Luis additional remedies, including the reinstatement of his job. The Aquinos attempted to enforce the Local Court Judgment against Encanto by filing a motion for contempt and execution of judgment in the Local Court Action on October 23, 2013. They asserted that Encanto was liable for the entire amount of the Local Court Judgment pursuant to "the doctrine of successor employer [liability]."

         One week later, the Local Court entered an amended judgment (the "Amended Local Court Judgment"). Although it is unclear whether Encanto was named as a party defendant in the Amended Local Court Judgment, Encanto maintains that the purpose of the amendment was to enable the Defendants to enforce the original Local Court Judgment against it.

         In December 2013, Encanto filed a "notification" in the Local Court Action, in which it asked the Local Court to take notice of the Sale Order and of the "nullity" of any procedural events in the Local Court Action that post-dated the petition date, including, but not limited to, the Local Court Judgment. Additionally, Encanto requested the dismissal of the Local Court Action pursuant to § 362(a)(1). Together with the Debtor, Encanto also filed an Urgent Joint Motion for an Order to Show Cause in the bankruptcy court, asking that court to compel the Aquinos and Attorney Cortés Babilonia to demonstrate why they should not be found in contempt for violating the automatic stay and the Sale Order. The bankruptcy court denied the motion due to the movants' failure to commence an adversary proceeding against the Aquinos.

         V. Encanto's Adversary Proceeding

         Thus, in February 2014, Encanto-acting alone-commenced an adversary proceeding against the Defendants by filing a Complaint for Injunctive and Other Relief (the "Complaint"), setting forth three separate counts. In the first count, Encanto requested an order "enjoining [the] Defendants from any further litigation of the" Local Court Action and from enforcing the Local Court Judgment and the Amended Local Court Judgment (collectively, the "Judgments") pursuant to § 362(a). In the second count, Encanto sought, also pursuant to § 362(a), a declaratory judgment that the Judgments were "null, void and unenforceable" because they were entered in violation of the automatic stay. And in the third count, Encanto requested "an order finding the Defendants in contempt" and imposing sanctions against them for their willful violation of the automatic stay and the Sale Order.

         In their answer to the Complaint, the Defendants asserted, among other things, that: (1) Encanto was not entitled to injunctive relief, as it was not a debtor and, moreover, the Defendants did not levy on any property of the Debtor's bankruptcy estate; (2) Encanto was not entitled to declaratory relief because the Defendants were never included as creditors in the Debtor's bankruptcy schedules; (3) the automatic stay did not apply to the Defendants; and (4) the Defendants' claims were not subject to discharge, as they were known creditors without actual notice of the Debtor's bankruptcy petition.

         In July 2014-seven months after Encanto filed the Complaint-Encanto, the Debtor, and CIF filed an Amended Complaint, without seeking the bankruptcy court's leave or the Defendants' consent to add the Debtor and CIF as co-plaintiffs.[4] The Amended Complaint added a fourth count, seeking actual damages in the approximate amount of $222, 000.00, as well as punitive damages for the Defendants' alleged violations of the automatic stay and of various court orders, including the order approving the Asset Purchase Agreement and the Sale Order.

         VI. The Motion for Partial Summary Judgment

         Several months later, the Debtor, Encanto, and CIF filed the Partial Summary Judgment Motion on all counts of the Amended Complaint (except with regard to the imposition of the requested sanctions and attorneys' fees), arguing that the Defendants had either constructive or actual knowledge of the ...


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