In Re: Stone Resources, Inc. v. , 482 F. App'x 719 ( 2012 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 11-2888
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IN RE STONE RESOURCES, INC.,
Appellant
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civ. Action No. 11-02526)
District Judge: Honorable Petrese B. Tucker
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Submitted Under Third Circuit LAR 34.1(a)
April 26, 2012
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Before: GREENAWAY, JR., ROTH, and TASHIMA*, Circuit Judges.
(Opinion Filed: May 29, 2012)
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OPINION
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TASHIMA, Circuit Judge.
* Honorable A. Wallace Tashima, Circuit Judge, United States Court of Appeals for
the Ninth Circuit, sitting by designation.
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This case arises from a franchisor=s attempt to enforce various termination
provisions of its franchise agreement against its bankrupt former franchisee. After the
agreement expired by its own terms, the franchisee, Stone Resources, Inc. (AStone@),
initiated arbitration proceedings against the franchisor, MarbleLife, Inc. (AMarbleLife@),
seeking to void the agreement. MarbleLife obtained a preliminary injunction to enjoin
compliance with the termination provisions pending an arbitration decision, and Stone
promptly filed for Chapter 11 bankruptcy. MarbleLife then moved to dismiss the
bankruptcy petition or, in the alternative, for relief from the automatic stay to permit it to
enforce the preliminary injunction. The Bankruptcy Court denied both requests. The
District Court reversed the Bankruptcy Court=s denial of relief from the automatic stay; it
assumed that relief followed automatically from the fact that the preliminary injunction
was not a Aclaim@ dischargeable in bankruptcy. Stone now appeals. For the reasons that
follow, we will vacate and remand the District Court=s order. We will also vacate the
District Court=s order modifying the terms of the injunction in another case.
I. Background
As its name suggests, MarbleLife is in the business of maintaining and restoring
marble, granite, and other surfaces. In April 2000, Stone contracted with MarbleLife to
operate a franchise of the business in Pennsylvania. The agreement had a ten-year term,
and it expired by its terms in April 2010.
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Among the terms of the franchise agreement was a requirement that Stone not
compete with MarbleLife or MarbleLife franchises Afor a period of two (2) years after the
expiration or termination@ of the agreement. The agreement also contained a section
entitled AConsequences of Termination,@ which, upon expiration of the agreement,
required Stone, among other things, to: transfer Athe business, its customers, facilities,
services, employees, and telephone numbers, including all business listings in the Yellow
Pages and all similar business directories, to MarbleLife or its designee@; Acease to use the
Mark and the System in any way@ or to Arefer[] to or identify[] itself as a MarbleLife
franchisee@; and give MarbleLife all printed materials identifying the business as a
MarbleLife franchise and Aall sales or marketing data or market research information
relating to MarbleLife or any of its affiliates.@ Finally, the agreement provided that any
disputes between the parties would be resolved by arbitration in Texas, where MarbleLife
was headquartered, A[e]xcept for any temporary, interim or provisional equitable
remedies.@
Upon the expiration of the franchise agreement, Stone initiated an arbitration
against MarbleLife in Texas seeking to void the agreement and asserting claims for,
among other things, negligent misrepresentations and fraud. MarbleLife filed a complaint
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in the Eastern District of Pennsylvania seeking injunctive relief to enforce the non-
compete clause and turnover provisions of the agreement during the pendency of the
arbitration. MarbleLife, Inc. v. Stone Res., Inc., Civ. No. 10-2480 (E.D. Pa.), ECF No. 1.
After discovery and a hearing, the District Court granted MarbleLife=s request and issued
a preliminary injunction. The Court concluded that MarbleLife had demonstrated a
likelihood of success on the merits of its breach-of-contract and trademark claims;
irreparable injury in the event its injunction request was denied; greater hardship in the
absence of an injunction than Stone would suffer with one; and a public interest in
precluding Stone from confusing customers and requiring it to live up to the terms of its
agreement.
Stone moved for reconsideration, and on February 11, 2011, the District Court
denied the motion, calling it Asimply an expression of disagreement with the Court=s
previous ruling.@ The Court noted that its decision was not a Afinal enforceable ruling
with regards to the parties[=] rights or obligations under the contract@ B the pending
arbitration proceeding would accomplish that B but that it had jurisdiction to grant a
preliminary injunction Ato maintain the status quo pending the outcome of arbitration.@
4
Five days after the District Court=s denial of Stone=s motion for reconsideration,
Stone filed a petition in bankruptcy under Chapter 11. Stone Res., Inc., Bankr. No. 11-
11124 (Bankr. E.D. Pa.). The filing of the petition invoked the automatic stay of judicial
proceedings, the enforcement of judgments, and attempts to obtain possession of property
or recover claims against Stone. See 11 U.S.C. ' 362(a). MarbleLife moved to dismiss
the bankruptcy petition or, in the alternative, to obtain relief from the automatic stay with
respect to the injunction against Stone. Stone Res., Inc., Bankr. No. 11-11124, ECF No.
13. On March 2, 2011, the Bankruptcy Court denied MarbleLife=s motion to dismiss and
its request for relief from the stay. Id., ECF No. 41.
MarbleLife appealed to the District Court. The appeal received its own civil case
number but was assigned to the same judge who had previously issued a preliminary
injunction against Stone. In re Stone Res., Inc., Civ. No. 11-2526 (E.D. Pa.). On June 24,
2011, the District Court affirmed the Bankruptcy Court=s denial of MarbleLife=s motion to
dismiss, but reversed the denial of relief from the automatic stay. The order reinstated the
preliminary injunction; set new deadlines for Stone to comply; and reset the start-date for
the 15 months= non-compete term with MarbleLife. Id., ECF No. 11.
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Stone filed a timely notice of appeal. Two months later, the District Court issued
an opinion that further explained the reasoning behind its June 2011 order.1 Id., ECF No.
27.
II. Jurisdiction and Standards of Review
The District Court had jurisdiction to hear an appeal from the Bankruptcy Court=s
order pursuant to 28 U.S.C. ' 158(a)(1). See In re Graves, 33 F.3d 242, 246 n.9 (3d Cir.
1994) (denial of relief from the automatic stay was Aa final, appealable order in
bankruptcy@). We have jurisdiction under 28 U.S.C. ' 158(d)(1). Although contempt
proceedings in this case continued even after the notice of appeal had been filed, such
ancillary proceedings do not defeat ' 158(d) finality. See In re Marcal Paper Mills, Inc.,
650 F.3d 311, 314 (3d Cir. 2011) (discussing this circuit=s relaxed, Apragmatic,@ and Aless
technical@ approach to finality under ' 158(d) (citation and internal quotation marks
1 AAs a general rule, the timely filing of a notice of appeal . . . divest[s] a district
court of its control over those aspects of the case involved in the appeal.@ Venen v. Sweet,
758 F.2d 117, 120 (3d Cir. 1985). A District Court, however, retains the Alimited
authority to take any steps that will assist the Court of Appeals in its determination.@
United States v. Pelullo, 14 F.3d 881, 907 (3d Cir. 1994) (internal quotation marks and
citation omitted); see United States v. Scarfo, 263 F.3d 80, 89 (3d Cir. 2001); Third Cir.
L. App. R. 3.1 (2011). The District Court=s explanatory opinion, although issued two
months after Stone filed its notice of appeal, was in aid of our resolution of this appeal;
therefore, we may consider it.
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omitted)); see also Univ. Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101 (3d Cir.
1981) (finding appellate jurisdiction despite the district court=s remand to the bankruptcy
court for an accounting, because Athe district court conclusively determined the question
presented by this appeal and awarded possession of the property to [the appellee]@).
This Court exercises plenary review over the District Court=s decision, using the
same standard of review as the District Court in reviewing the Bankruptcy Court=s
determinations. In re Winstar Commcn=s, Inc., 554 F.3d 382, 389 n.3 (3d Cir. 2009). The
Bankruptcy Court=s legal determinations receive plenary review and its factual
determinations are reviewed for clear error. Fellheimer, Eichen & Braverman, P.C. v.
Charter Tech., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995). The Bankruptcy Court=s decision
whether to grant relief from the automatic stay is reviewed for abuse of discretion. In re
Myers, 491 F.3d 120, 128 (3d Cir. 2007).
III. Analysis
In this appeal, Stone argues that: (1) the District Court erred in reversing the
Bankruptcy Court=s denial of relief from the stay; and (2) the District Court exceeded its
jurisdiction by modifying the terms of an injunction it had entered in a different (though
closely related) case.
A. The District Court=s Grant of Relief from the Stay
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Stone first contends that the Bankruptcy Court properly weighed the evidence
when it declined to grant MarbleLife relief from the automatic stay in order to enforce the
preliminary injunction it had obtained against Stone. It further contends that the District
Court failed to give the Bankruptcy Court=s findings due deference or to limit itself to the
record before it. MarbleLife argues, and the District Court at least implicitly concluded,
that because the injunction is not a Aclaim@ within the meaning of 11 U.S.C. ' 362(a), it is
not and should not be subject to the automatic stay.
Assuming without deciding that the preliminary injunction is not a Aclaim@
dischargeable in bankruptcy, we disagree that this is dispositive. The question presented
to the Bankruptcy Court was not whether the injunction was dischargeable in bankruptcy;
rather, it was whether MarbleLife was entitled to relief from the stay in order to enforce
the injunction. Even if the injunction is not a claim, any action to enforce it is subject to
the stay and cannot proceed without relief from the stay under one of the circumstances
laid out in ' 362(d). See 11 U.S.C. ' 362(a)(1) (providing that a bankruptcy petition stays
Athe commencement or continuation . . . of a judicial, administrative, or other action or
proceeding against the debtor that was or could have been commenced before the
commencement of the case under this title, or to recover a claim against the debtor@
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(emphasis added)); see also Matter of Udell, 18 F.3d 403, 410 (7th Cir. 1994) (reversing
the district court=s finding that an injunction was a claim, but explaining that A[i]t does not
necessarily follow that [the company] is entitled to relief from the stay@).
Under ' 362(d)(1), relief from a stay Ashall@ be granted Afor cause, including the
lack of adequate protection of an interest in property of such party in interest.@ 11 U.S.C.
' 362(d)(1). ASection 362(d)(1) does not define >cause,= leaving courts to consider what
constitutes cause based on the totality of the circumstances in each particular case.@
Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d Cir. 1997) (citation omitted). The
Bankruptcy Court, examining the totality of the circumstances, concluded that MarbleLife
was not entitled to relief from the stay. The District Court erred by failing to review this
decision according to the proper standard B whether the Bankruptcy Court abused its
discretion in denying relief, irrespective of whether the injunction is a Aclaim@
dischargeable in bankruptcy.
The District Court also erred by failing to confine its review of this decision to the
proper record. The District Court=s jurisdiction in this case flows from 28 U.S.C. '
158(a). That statute limits the court=s jurisdiction Ato final decisions, judgments, orders,
and decrees of the bankruptcy court.@ S=holders v. Sound Radio, Inc., 109 F.3d 873, 880
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(3d Cir. 1997) (citing 28 U.S.C. ' 158(a)). When reviewing such decisions, the District
Court Asits as an appellate court@; it engages in no Aindependent fact finding.@ Nantucket
Investors II v. Cal. Fed. Bank (In re Indian Palms Assocs., Ltd.), 61 F.3d 197, 210 n.19
(3d Cir. 1995). Its jurisdiction is circumscribed in the same way that an appellate court=s
ordinarily is. Accordingly, the District Court should not have decided the appeal on the
basis of the record in another case.
For these reasons, we will vacate the District Court=s June 24 order and remand for
a determination based solely on the record before the Bankruptcy Court, of whether the
Bankruptcy Court abused its discretion in denying relief.
B. The District Court=s Power To Modify the Terms of Its Injunction
The District Court also erred by modifying the terms of the injunction it had
entered in a different case. MarbleLife argues that the District Court has primary
jurisdiction of all bankruptcy proceedings and is free to assert that jurisdiction over a
bankruptcy proceeding sua sponte. That is true enough, see Cooper-Jarrett, Inc. v. Ctrl.
Transp., Inc., 726 F.2d 93, 95-96 (3d Cir. 1984), but it does not answer the question
whether a District Court sitting in appellate review of a Bankruptcy Court=s decision has
the power to venture beyond the bounds of the record on appellate review. Cooper-
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Jarrett concerned a different issue: a District Court=s power to grant a motion in a civil
case B a forum in which it had original, not appellate, jurisdiction B that had the effect of
resolving a complaint filed in Bankruptcy Court. Id. at 94-95. Here, the question is
whether the District Court, when conducting ' 158(a) review of a Bankruptcy Court=s
decision, has the power to modify an injunction entered in another action. MarbleLife
cites no precedent for such an act. Although the District Court would have jurisdiction to
modify the injunction if it were sitting as the court that had issued the injunction, given
the limited scope of the District Court=s ' 158(a) review, it lacked jurisdiction to modify
the injunction during the course of the appeal from the Bankruptcy Court. We must
therefore vacate its order modifying the injunction.
IV. Conclusion
For the foregoing reasons, we will vacate the District Court=s order reversing the
Bankruptcy Court=s denial of relief, and remand for further proceedings consistent with
this opinion. We will also vacate the District Court=s modification of the terms of the
injunction it had entered in another case.
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