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In re Gorilla Companies, Inc.

United States District Court, D. Arizona

March 26, 2014

In the Matter of Gorilla Companies, Inc., Debtor.
v.
Gorilla Companies, LLC, Appellees. 13 Holdings, LLC, Robb M. Corwin and Jillian C. Corwin, Appellants,

MEMORANDUM OF DECISION AND ORDER

STEPHEN M. McNAMEE, Senior District Judge.

Pending before the Court is Appellants Robb and Jillian Corwin and 13 Holdings, LLC (collectively "13 Holdings", unless otherwise specified) who appeal from the final judgment entered by the Bankruptcy Court. (Doc. 1.) The Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1). The Court will find that the Bankruptcy Court had authority to enter its final judgment. The final judgment entered will be affirmed in part and denied in part, and remanded for further proceedings consistent with this Order.

BACKGROUND

13 Holdings LLC is owned by Robb and Jillian Corwin. (No. CV 10-1029, Doc. 75.) In June 2007, pursuant to an Asset Purchase Agreement ("APA"), 13 Holdings sold the assets of several event management companies to Gorilla Companies LLC ("Gorilla") in exchange for an immediate $14 million payment, Gorilla stock worth $1 million, a $1.5 million deferred note, and a "seller note" that could result in an earn out payment of up to $6 million depending on Gorilla's performance from March 2007 through February 2008. (Id.) Robb Corwin served as CEO of Gorilla after the asset purchase until his termination in mid-November 2008. (Id.) On April 2, 2008, Gorilla paid the $1.5 million deferred note and made a $1.4 million prepayment on the seller note. (Id.)

Subsequently, a dispute arose regarding the amount 13 Holdings should receive under the seller note. (Id.) Gorilla filed suit against 13 Holdings in state court, Gorilla Cos. LLC v. Corwin, No. CV2008-032847 (Ariz. Super. Ct. Dec. 23, 2008). (Id.) 13 Holdings responded and filed counterclaims. (Id., Doc. 30.) The case was removed to the Bankruptcy Court after Gorilla filed chapter 11 bankruptcy, Gorilla Cos. LLC v. Corwin, No. AP-09-266 (Bankr. Ariz. Mar. 10, 2009). (Id., Doc. 75.) 13 Holdings subsequently filed proofs of claim in the bankruptcy proceedings, including two claims by Robb Corwin and a claim by 13 Holdings, which claims mirrored their state-court counterclaims. (Id., Doc. 30.) Robb Corwin's proofs of claim related to a non-competition clause and consulting agreement (Id., Doc. 100.) 13 Holdings LLC's proof of claim related to additional payments allegedly due under the seller note. (Id., Doc. 30.) Gorilla responded with counterclaims that mirrored its state-court claims, including breach of contract related to the seller note, breach of the covenant of good faith and fair dealing, negligent misrepresentation, fraud and unjust enrichment. (Id.) 13 Holdings' claims were heard by the Bankruptcy Court on July 16 and 21, 2009; Gorilla's claims were heard on November 23 and 30, 2009. (Id., Doc. 75.) On March 22, 2010, the Bankruptcy Court entered final judgment in favor of Gorilla on the claims against it and on its own claims for breach of contract, breach of the covenant of good faith and fair dealing, negligent misrepresentation, fraud, and unjust enrichment. (Id.) The Bankruptcy Court awarded Gorilla more than $4.7 million in damages (including prejudgment interest) and nearly $1.8 million in attorney's fees. (Id.) The Bankruptcy Court framed the March 22 adjudication as a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (C), and treated Gorilla's claims as "compulsory counterclaims to [13 Holdings'] Proof of Claims." (Id., Doc. 30.)

First Appeal

13 Holdings appealed the Bankruptcy Court's final judgment. Judge David Campbell bifurcated the first appeal, to resolve separately: (1) the constitutional authority of the Bankruptcy Court to enter final judgment against 13 Holdings on Gorilla's counterclaims; and (2) the substantive findings of fact and conclusions of law of the Bankruptcy Court with regard to Gorilla's counterclaims of fraud, lost profits, breach of contract, and the seller note. (Doc. 14-1 at 6.) Judge Campbell concluded this case was a core proceeding and that the Bankruptcy Court had jurisdiction to adjudicate these claims and enter judgment on the issues in the case. (Doc. 10-2 at 52-53.) Regarding Gorilla's counterclaims, Judge Campbell entered an Order affirming in part and reversing in part. (Doc. 10-2 at 66.) Judge Campbell reversed the Bankruptcy Court's judgment regarding Gorilla's counterclaims of fraud, lost profits and breach of contract, but affirmed Gorilla's unjust enrichment claim. (Id.) Judge Campbell did not provide a specific dollar amount that Gorilla was entitled to for its unjust enrichment judgment; rather he remanded for the Bankruptcy Court to determine a new EBITDA[1] calculation consistent with the Court's order. (Id. at 65.) On remand, in order to arrive at the new EBITDA calculation, the Court found that the $297, 328 depreciation expense error was not material to the EBITDA calculation (Id. at 62-63), the decision to exclude the $177, 000 NFL invoice from the EBITDA calculation was proper (Id. at 64-65), and allowing a reclassification employee deduction of $57, 986 for the pre-closing period. (Id. at 66.) In addition, Judge Campbell vacated the Bankruptcy Court's attorney's fee award and remanded for a determination whether attorney's fees should be awarded to either side. (Id. at 65-66.)

On rehearing, Judge Campbell granted rehearing in part and denied allowing a reclassification employee deduction from EBITDA of $57, 986 for the pre-closing period. (Id. at 70.)

13 Holdings again sought rehearing following the Supreme Court's opinion in Stern v. Marshall , 131 S.Ct. 2594 (2011). (Id. at 71-76.) 13 Holdings argued that Stern applied a new test when determining the reach of a Bankruptcy Court's jurisdiction to issue final judgment over counterclaims to proofs of claim. (Id.) 13 Holdings argued that Stern employed a "necessarily resolves" test, where the relevant inquiry is whether the ruling on a proof of claim necessarily resolves the counterclaim. (Id. at 73.) 13 Holdings further contended that the Bankruptcy Court's entry of final judgment on Gorilla's counterclaims failed the Stern test and was therefore unconstitutionally entered. (Id.)

Judge Campbell reiterated his finding that Gorilla's counterclaims were core after determining that the counterclaims were necessary to resolve 13 Holdings' proof of claim, which related to additional payments allegedly due under the seller note. (Id. at 74, citing id. at 48.) The Court went on state that 13 Holdings can raise the jurisdictional issue on remand and the Bankruptcy Court can address its jurisdiction. (Id. at 75.)

Subsequently, both parties filed applications for attorney's fees under the APA claiming that they were the prevailing party on appeal. (Id. at 77-83.) 13 Holdings argued that the Court had reversed the Bankruptcy Court's findings on breach of contract, breach of the implied covenant of good faith and fair dealing, fraud and negligent misrepresentation. Gorilla argued that the Court affirmed its unjust enrichment claim. (Id.)

Judge Campbell found that Gorilla's success was independent of the APA and denied fees both under the APA and A.R.S. § 12-341.01; however, the Court further found that 13 Holdings' success on appeal was related to the APA and awarded 13 Holdings' attorney's fees of $127, 058.35. (Id. at 83.)

Bankruptcy Remand

On remand, 13 Holdings, pursuant to Fed.R.Civ.P. 60(b)(4) and (b)(6), requested that the Bankruptcy Court set aside its judgment on the basis of Stern, arguing that the judgment was void under Stern or because Stern constituted an extraordinary circumstance. (Doc. 10 at 11-12.)

The Bankruptcy Court found that any redetermination regarding its jurisdiction was res judicata because this claim had already been raised and decided on appeal that it had jurisdiction to enter final judgment. (Doc. 10-2 at 114.) The Bankruptcy Court further found that this Court had not reversed its previous ruling on jurisdiction or the Bankruptcy Court's ruling on jurisdiction, and additionally had discussed Stern in the context of the facts of this case. (Doc. 10-2 at 114-26.) Even if the issue of jurisdiction was not res judicata, the Bankruptcy Court stated that Gorilla's counterclaim was exactly the kind of claim the Supreme Court held to be within its power. The Bankruptcy Court stated:

To put it very simply, to determine whether [13 Holdings was]... owed more under the seller notes or under any other terms of the APA on which Proofs of Claim were filed, the Bankruptcy Court would necessarily have to resolve if they've ...

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