Case LSS Doc 58 Filed 03/04/15 Page 1 of 11 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case LSS Doc 58 Filed 03/04/15 Page 1 of 11 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE : Chapter 11 In re: : : Case No LSS SALADWORKS, LLC, : : RE: Docket No. 13 Debtor. : Obj. Deadline: 3/4/15, 4:00 p.m. : Hearing Date: 3/11/15, 2:00 p.m. OBJECTION BY JVSW LLC AND WS FINANCE LLC TO DEBTOR S MOTION FOR ENTRY OF AN ORDER EXTENDING THE AUTOMATIC STAY PROVISIONS OF BANKRUPTCY CODE SECTION 362 JVSW LLC and WS Finance LLC (collectively the Objectors ) hereby object to Debtor s Motion for Entry of An Order Extending the Automatic Stay Provisions of Bankruptcy Code Section 362 (the Extension Motion ) and, in connection therewith, respectfully state as follows: Introduction 1. Pursuant to the Extension Motion, the Debtor seeks to extend the automatic stay provisions of section 362 of title 11 of the United States Code, 11 U.S.C. 101 et seq. to the Debtor s Chief Executive Officer, John Scardapane ( Scardapane ), and J Scar Holdings, Inc. ( J. Scar ) 1, which is the majority member of the Debtor and a party to the Amended and Restated Limited Liability Company Agreement of Saladworks, LLC dated as of March 9, 2008 ( Operating Agreement ). 2. JVSW LLC ( JVSW ) is a minority member of the Debtor holding 300 Class C membership interests. 3. On October 20, 2014, JVSW filed an Amended Complaint against the Debtor, Scardapane and J. Scar in the Court of Chancery of the State of Delaware ( Delaware 1 J Scar Holdings, Inc. is wholly owned by Scardapane.

2 Case LSS Doc 58 Filed 03/04/15 Page 2 of 11 Litigation ). JVSW has asserted breach of contract claims against the Debtor and J. Scar and claims of fraud, waste of company assets, breach of fiduciary duty and unjust enrichment against Scardapane. 4. While it is clear that the automatic stay applies to the Debtor, the stay does not apply to Scardapane or J. Scar. The automatic stay should not be extended to apply to Scardapane or J. Scar and the Delaware Litigation should be permitted to continue as to these non-debtor parties. 5. WS Finance LLC ( WS ) is a creditor of the Debtor. 6. WS is the assignee of the following three loans and one line of credit that were extended to the Debtor: a. Term Loan # was made to the Debtor on or about March 8, 2011, and evidenced by a promissory note, dated March 8, 2011 and guaranteed by Scardapane, Saladworks Holdings NJ LLC and Vernon W. Hill; b. Term Loans # and # were made to the Debtor on or about March 30, 2010 and September 9, 2011, respectively, and evidenced by promissory notes, dated March 30, 2010 and September 9, 2011, respectively, both guaranteed by Scardapane and Vernon W. Hill; and c. Line of Credit # was extended to Debtor on or about July 16, 2008, and evidenced by a promissory note, dated July 16, 2008, guaranteed by both Scardapane and Vernon W. Hill. 7. WS is also the holder, by assignment, of the following confessed judgments against the Debtor and has the rights, title and interest to a civil action initiated against the Debtor in Pennsylvania for breach of two promissory notes (the Pennsylvania Litigation ): 2

3 Case LSS Doc 58 Filed 03/04/15 Page 3 of 11 a. Metro Bank v. Saladworks, LLC, Complaint in Confession of Judgment (regarding Term Loan # ), Civil Action No , Montgomery County Court of Common Pleas, Pennsylvania; b. Metro Bank v. Saladworks, LLC, Compliant in Complaint in Confession of Judgment (regarding Term Loan # ), Civil Action No , Montgomery County Court of Common Pleas, Pennsylvania; and c. Metro Bank v. Saladworks, LLC, Civil Action No , Montgomery County Court of Common Pleas, Pennsylvania. 8. While it is clear that the automatic stay applies to the Debtor, the stay does not and shoud not apply to Scardapane. WS should not be precluded from initiating litigation against Scardapane in his individual capacity based on his guaranties of Term Loans # , # and # and Line of Credit # More importantly, the Debtor should not hamper itself in taking actions against Scardapane for his violations of his fiduciary dutyies and his use of the Debtor as his personal purse. Objection A. The Extension Motion should be denied as Debtor failed to seek the extension through an adversary proceeding as required by the Bankruptcy Code and Rules. 9. Although the scope of the automatic stay under 362 of the Bankruptcy Code is broad, the language of the statute stays actions only against a debtor. McCartney v. Integra National Bank North, 106 F.3d 506, 509 (3d Cir. 1997). However, courts are permitted to extend the automatic stay to non-debtor third parties if unusual circumstances exist. In re Uni-Marts, LLC, 405 B.R. at 126; see also McCartney, 106 F.3d at

4 Case LSS Doc 58 Filed 03/04/15 Page 4 of Because the Bankruptcy Code does not explicitly authorize the release and permanent injunction of claims against non-debtors, 105(a) has been utilized to supplement a court s bankruptcy powers by authorizing orders necessary or appropriate to carry out the provisions of the Bankruptcy Code. In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000). However, section 105(a) is limited in scope as it does not create substantive rights that would otherwise be unavailable under the Bankruptcy Code. Id. 11. A debtor seeking an injunction to extend the automatic stay to a non-debtor must do so by the initiation of an adversary proceeding. In re The Fairchild Corporation, 2009 WL , at *7 (Civ. A. No CSS) (D. Del. Dec. 1, 2009); Fed.R.Bankr.P. 7001(7). 12. The Debtor filed the Extension Motion instead of initiating an adversary proceeding as required by case law and the Federal Rules of Bankruptcy Procedure to circumvent the procedural due process guaranteed to the Objectors. 13. Because the Debtor has not properly sought an extension of the automatic stay, the Extension Motion should be denied. See In re The Fairchild Corporation, 2009 WL , at 7. B. The Debtor has not met the elements of the unusual circumstances test to extend the automatic stay to non-debtor third parties. 14. The automatic stay provides a debtor with a breathing spell from creditors by stopping all collection efforts and all foreclosure actions and permits the debtor to attempt a repayment or reorganization plan, or it simply relieves the debtor of the financial pressures that drove him into bankruptcy. McCartney, 106 F.3d at Although the scope of the stay is broad, the language of 362(a) stays actions only against a debtor. McCartney, 106 F.3d at 509. Therefore, it is acknowledged that the stay accorded by 362 may not be invoked by entities such as sureties, guarantors, co-obligors or 4

5 Case LSS Doc 58 Filed 03/04/15 Page 5 of 11 others with a similar legal or factual nexus to the debtor. Id. at The main rationale for refusing to extend the stay to non-debtor third parties is to ensure that creditors obtain the protection they sought and received prior to the bankruptcy case, such as when they required a non-debtor third party to guaranty a debt. Id. at However, courts have extended the automatic stay to non-debtor third parties when unusual circumstances exist. In re Uni-Marts, LLC, 405 B.R. at 126; see also McCartney, 106 F.3d at 510. Courts have found unusual circumstances where there is such identity between the debtor and the third party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor. McCartney, 106 F.3d at 510; see also In re W.R. Grace & Co., 386 B.R. 17, 30 (D. Del. 2008). 17. Courts applying the unusual circumstances test recognize that it is intensely fact driven and dependent on the debtor s ability or inability to present facts which demonstrate the pending non-bankruptcy proceedings against non-debtors pose a serious risk to its reorganization and the court s evaluation of the relative harms each side may suffer from the grant or denial of the injunction request. In re Union Trust Philadelphia, LLC, 465 B.R. 765, 772 (E.D. Pa. 2011). 18. The automatic stay has also been extended to non-debtor third parties where stay protection is essential to the debtor s efforts of reorganization. McCartney, 106 F.3d at 510. But to extend the stay to non-debtor parties, something more than the mere fact that one of the parties to a lawsuit has filed a Chapter 11 bankruptcy must be shown. A.H. Robbins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986). 19. Unusual circumstances have been found where a lawsuit is filed against a third party who is entitled to absolute indemnity by the debtor on account of any judgment that may result 5

6 Case LSS Doc 58 Filed 03/04/15 Page 6 of 11 from the case. A.H. Robbins Co., Inc., 788 F.2d at 999. However, the purpose served by extending the automatic stay to officers and directors entitled to indemnification from the debtor must be consistent with the purpose of the stay itself to suspend actions that present a serious threat to a corporate debtor s reorganization. In re Uni-Marts, LLC, 405 B.R. at The Debtor s request to stay its own claims against Scardapane for the recovery of liquidated debts owing by Scardapane to the Debtor suggests a significant conflict of interest between the interests of the Debtor and the interests of Scardapane 20. Prior to the Petition Date, Scardapane improperly used the credit card of the Debtor to pay certain personal and other non business related expenses in the amount of not less than $500, Upon information and belief, when these unauthorized and improper expenditures were discovered by JVSW, LLC and the board of directors, Scardapane agreed to repay the amounts due and owing and to memorialize the terms of his repayment in the form of a promissory note. 22. Pursuant to the terms of the promissory note, Scardapane was required to make payments of the amounts due to Debtor over a period of time. 23. Scardapane failed and refused to make the payments as and when due, thereby defaulting under the terms of the promissory note and his obligations to the Debtor. 24. The Debtor failed and refused to bring suit against Scardapane to recover the amounts due to the Debtor by Scardapane and, as a result, JVSW, LLC determined it was in the best interest of the Debtor to commence suit against Scardapane, derivatively, on behalf of the Debtor in the Court of Chancery of the State of Delaware to recover on behalf of the Debtor the amounts due and owing by Scardapane to the Debtor. 6

7 Case LSS Doc 58 Filed 03/04/15 Page 7 of By its Motion, however, the Debtor, controlled entirely by Scardapane, is seeking a stay of its own claims against Scardapane and, in doing so, is impermissibly doing Scardapane s bidding with utter disregard for the best interests of the Debtor and its creditors, which is to enforce payment by Scardapane through prosecution of the pending claim. 26. The Debtor s motion seeking to extend the stay to claims by or owned by the Debtor against Scardapane must be denied. 2. JVSW should be able to proceed with the Delaware Litigation against Scardapane and J. Scar. 27. The Debtor asserts that the automatic stay should be extended to Scardapane and J. Scar because the Debtor must indemnify them under the terms of the Operating Agreement. However, the indemnification provision of the Operating Agreement is not an absolute indemnification. Section 11.2(A) of the Operating Agreement states: To the fullest extent permitted by applicable law, the Company shall indemnify, defend and hold each Covered Person 2 harmless from and against any loss, liability, damages, cost or expense, including reasonable attorneys fees, incurred by or asserted against the Covered Person and arising in connection with any of such Covered Person s acts or omissions (i) performed or omitted in good faith on behalf of the Company, and (ii) in a manner reasonably believed to be in, or at least not opposed to the Company s best interests, except that no Covered Person shall entitled to be indemnified in respect of any loss, claim or monetary damage incurred by reason of any act or omission of such Covered Person that is adjudged in any proceeding to constitute fraud, gross negligence, willful misconduct, or a breach of this Agreement or his Employment Agreement, if any, to which he is a party. (emphasis added). 2 Covered Person is defined in the Operating Agreement as a Member, any Affiliate of a Member, any director on the Company s Board of Directors, any officer, director, shareholder, partner, employee, member, manager, representative or agent of a Member or any of its Affiliates, or any officer or employee of the Company. Section 2.1 of the Amended and Restated Limited Liability Company Agreement of Saladworks, LLC dated as of March 9,

8 Case LSS Doc 58 Filed 03/04/15 Page 8 of The claims asserted against Scardapane in the Delaware Litigation include fraud, waste of company assets, breach of fiduciary duty and unjust enrichment. This type of conduct and wrongdoing by an Officer precludes indemnification. 29. The claim against J. Scar is for breach of the Operating Agreement. Breach of the Operating Agreement by a Member precludes indemnification. 30. Moreover, there are no allegations or evidence that the Debtor was indemnifying J. Scar and/or Scardapane for the Delaware Litigation prior to the filing of its bankruptcy petition. J. Scar and Scardapane cannot now seek to use the indemnification provisions of the Operating Agreement and bankruptcy protections afforded to the Debtor in order to avoid the Delaware Litigation. 31. Even if the Debtor were required to indemnify J. Scar and/or Scardapane for the Delaware Litigation, J. Scar and Scardapane s claims for indemnification would be subordinate to all of the Debtor s unsecured creditors claims. Although this may increase the Debtor s total amount of debt, it would not constitute a significant impediment to the Debtor s efforts to conduct the sale. 32. The Debtor also argues the automatic stay should be extended to Scardapane because as the CEO, his time, energy and resources are essential to the success of the Debtor s chapter 11 case and ultimate recoveries of unsecured creditors. 33. Although Scardapane may be the CEO, the Debtor is managed by a Board of Directors who manage the business and affairs of the Company, and such Board of Directors shall have exclusive and complete authority to manage the operations and affairs of the Company and to make all decisions regarding the business of the Company. Section 5.1(a) of the Debtor s Operating Agreement. 8

9 Case LSS Doc 58 Filed 03/04/15 Page 9 of The Board of Directors clearly has the responsibility and authority to manage the operations and affairs of the Debtor and to make all decisions. Therefore, other parties are available to assist the Debtor through its bankruptcy in addition to Scardapane. 35. JVSW should not be prevented from litigating its claims against the non-debtor third parties. Extension of the automatic stay should not occur unless unusual circumstances exist. Here, no such unusual circumstances exist and continuation of litigation against Scardapane and J. Scar does not cause any serious threat to the Debtor s bankruptcy. 36. Therefore, the Extension Motion should be denied. 3. WS should not be prevented from initiating litigation against Scardapane in his individual capacity. 37. WS should not be prevented from initiating litigation against Scardapane based on his guaranties of the Term Loans and Line of Credit. Scardapane is a guarantor in his individual capacity and the stay cannot be invoked by guarantors. 38. The Debtor has failed to present facts that demonstrate any such action against Scardapane in his individual capacity poses a serious risk to its reorganization. 39. Therefore, the Extension Motion should be denied. C. The relief sought by the Extension Motion is overbroad and beyond the scope of the Bankruptcy Court s jurisdiction. 40. The Extension Motion seeks to have the protections afforded by the automatic stay provided in Bankruptcy Code Section 362 extended to the Non-Debtor Defendants through and including the substantial consummation of a plan of reorganization 41. This relief is overbroad as it seeks to extend the automatic stay to any and all litigation now existing or that may be commenced in the future against J. Scar and Scardapane even litigation not connected to the Debtor in any manner. 9

10 Case LSS Doc 58 Filed 03/04/15 Page 10 of The generally accepted test for determining whether a bankruptcy court has subject matter jurisdiction over litigation between non-debtor third parties is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. In re W.R. Grace & Co., 386 B.R. 17, 25 (D. Del. 2008). 43. The Debtor provides no limiting scope whatsoever on the extension of the automatic stay it seeks and fails to present evidence that any possible future litigation against J. Scar or Scardapane would affect the administration of its bankruptcy estate. The Bankruptcy Court s jurisdiction cannot be extended to encompass every single piece of litigation that has been or may be filed against these non-debtor third parties. 44. Therefore, the automatic stay should not be extended to Scardapane or J. Scar and the Extension Motion should be denied. Conclusion 45. The Extension Motion should be denied as the Debtor has improperly sought an extension of the automatic stay by motion instead of by initiation of an adversary proceeding. Additionally, the Debtor has failed to meet the elements of the unusual circumstances test for extending the automatic stay to non-debtor third parties and the relief sought is overbroad as it seeks to extend the stay to any and all litigation against the non-debtor third parties J. Scar and Scardapane whether related to the bankruptcy or not. 10

11 Case LSS Doc 58 Filed 03/04/15 Page 11 of 11 WHEREFORE, JVSW LLC and WS Finance LLC respectfully request this Court deny the Extension Motion and grant such other and further relief as is just and proper. Dated: March 4, 2015 Respectfully submitted, WEIR & PARTNERS, LLP By: /s/ Jeffrey S. Cianciulli Jeffrey S. Cianciulli, Esquire. (DE Bar No. 4369) Kenneth E. Aaron, Esquire (DE Bar No. 4043) Walter Weir Jr., Esquire (pro hac vice) 824 Market Street, Suite 800 Wilmington, Delaware Telephone: (302) Facsimile: (302) Counsel to WS Finance, LLC and JVSW, LLC 11

12 Case LSS Doc 58-1 Filed 03/04/15 Page 1 of 1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) ) Chapter 11 SALADWORKS, LLC, ) Case No (LSS) ) Debtors. ) Related to Docket No. 13 ) ) ORDER AND NOW this day of, 2015, upon consideration of Debtor s Motion for Entry of An Order Extending the Automatic Stay Provisions of Bankruptcy Code Section 362 (the Extension Motion ) and the Objection of JVSW LLC and WS Finance LLC, it is hereby ORDERED that the Debtor s Extension Motion is DENIED. Laurie Selber Silverstein, U.S.B.J.

13 Case LSS Doc 58-2 Filed 03/04/15 Page 1 of 3 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) ) Chapter 11 SALADWORKS, LLC, ) Case No (LSS) ) Debtors. ) Related to Docket No. 13 ) ) CERTIFICATE OF SERVICE I, Jeffrey S. Cianciulli, Esquire, hereby certify that on the 4 th Day of March, 2015, I caused a copy of the Objection of WS Finance, LLC and JVSW, LLC to Debtor s Motion for Entry of An Order Extending the Automatic Stay Provisions of Bankruptcy Code Section 362 to be served on the individuals on the attached service list and in the manner indicated: WEIR & PARTNERS, LLP Date: March 4, 2015 By: /s/ Jeffrey S. Cianciulli Jeffrey S. Cianciulli, Esquire. (DE Bar No. 4369) Kenneth E. Aaron, Esquire (DE Bar No. 4043) Walter Weir Jr., Esquire (pro hac vice) 824 Market Street, Suite 800 Wilmington, Delaware Telephone: (302) Facsimile: (302) jcianciulli@weirpartners.com kaaron@weirpartners.com wweir@weirpartners.com Counsel to WS Finance, LLC and JVSW, LLC

14 Case LSS Doc 58-2 Filed 03/04/15 Page 2 of 3 VIA ECF AND FIRST CLASS MAIL Kimberly A. Brown, Esquire Landis Rath & Cobb LLP 919 N. Market Street Suite 1800 PO Box 2087 Wilmington, DE (Proposed Counsel to the Debtor) Adam G. Landis, Esquire Landis Rath & Cobb LLP 919 Market Street Suite 1800 Wilmington, DE (Proposed Counsel to the Debtor) Kerri K. Mumford, Esquire Landis Rath & Cobb LLP 919 Market Street Suite 1800 Wilmington, DE (Proposed Counsel to the Debtor) Jane M. Leamy, Esquire Office of the U.S. Trustee 844 King St. Suite 2207 Wilmington, DE Sovran LLC Attn: Ramin Katirai 5003 Overlea Ct. Bethesda, MD Eight Tower Bridge Development Associates Attn: Helen Ignas Two Tower Bridge #450 One Fayette, St. Conshohocken, PA Michael Bartell 2867 Mill Rd. Doylestown, PA SERVICE LIST

15 Case LSS Doc 58-2 Filed 03/04/15 Page 3 of 3 Richard Michael Beck, Esquire Klehr Harrison Harvey Branzburg LLP 919 Market Street, Suite 1000 Wilmington, DE (Proposed Counsel to Official Committee of Unsecured Creditors) Sally E. Veghte, Esquire Klehr Harrison Harvey Branzburg LLP 919 North Market Street Suite 1000 Wilmington, DE (Proposed Counsel to Official Committee of Unsecured Creditors)

Case hdh11 Doc 223 Filed 12/26/17 Entered 12/26/17 15:19:42 Page 1 of 163

Case hdh11 Doc 223 Filed 12/26/17 Entered 12/26/17 15:19:42 Page 1 of 163 Case 17-33964-hdh11 Doc 223 Filed 12/26/17 Entered 12/26/17 15:19:42 Page 1 of 163 Gregory G. Hesse (Texas Bar No. 09549419) HUNTON & WILLIAMS LLP 1445 Ross Avenue Suite 3700 Dallas, Texas 75209 Telephone: