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In re DB Holdings Liquidation, Inc.

United States District Court, D. Delaware

September 12, 2018

IN RE DB HOLDINGS LIQUIDATION, INC., et al, Debtors.
v.
DB HOLDING LIQUIDATION, INC. f/k/a DIRECTBUY HOLDINGS, INC. and CSC GENERATION INC., Appellees. KOMODO CLOUD, LLC, Appellant,

          MEMORANDUM

         I. INTRODUCTION

         Presently before the court are the appeals of Komodo Cloud, LLC ("Appellant") from two decisions of the Bankruptcy Court, entered in the above-captioned debtors' ("Debtors") chapter 11 cases. The first decision on appeal (B.D.I. 587)[1] ("Withdrawal Order") granted Debtors' motion to voluntarily withdraw (B.D.I. 494) ("Motion to Withdraw") the Debtors' emergency motion for injunctive and declaratory relief (B.D.I. 406) ("Emergency Motion"), [2] which sought, inter alia, to compel Appellant's performance under a Master Services Agreement ("MSA"). Whereas the Bankruptcy Court permitted the Debtors to withdraw the Emergency Motion, that relief was "with prejudice," as requested by Appellant. However, the Bankruptcy Court denied Appellant's request for an award of its costs and fees under the MSA as the "prevailing party," and for this reason, Appellant has appealed the Withdrawal Order. (Civ. No. 17-605, D.I. 1). The second decision on appeal (B.D.I. 589) ("Compel Order") denied Appellant's Objection to Alteration of Assumption and Assignment Procedures Without Notice and Motion to Deem Komodo Cloud's Executory Contracts Assumed and Assigned or, Alternatively, to Compel Assumption and Assignment (B.D.I. 532) (the "Motion to Compel"). (Civ. No. 17-606, D.I. 1). For the reasons set forth below, the court will affirm both decisions. Accordingly, the motions for leave to withdraw as counsel to the Debtors in these appeals, filed by Cole Schotz P.C. (Civ. No. 17-605, D.I. 20; Civ. No. 17-606, D.I. 21) ("Motions to Withdraw as Counsel"), are each denied as moot.

         II. APPEAL OF THE WITHDRAWAL ORDER

         A. Background

         DirectBuy was a members-only buying club that had 178, 431 members on the petition date. Komodo was one of the Debtors' contract counterparties pursuant to the MSA that set forth the terms and conditions that would govern future agreements between Komodo and the Debtors, including, but not limited to, a so-called "5 Year FlexCompute Transition" agreement (the "FlexCompute Contract") entered into by and between DirectBuy and Komodo. (See Civ. No. 17-605, D.I. 14 (MSA, Exh. A to the sealed Emergency Motion)). The MSA provides for a ten-day grace period for the Debtors to cure any alleged breach (id. at § 5.3(i)); mandatory mediation if there is a dispute under the contract (id. at § 11.16(a)); and requires Appellant to seek injunctive relief if it believes its intellectual property rights are being violated (id. at § 11.16(b)). The MSA also provides that "[i]n the event of any proceeding or lawsuit brought by [Appellant] or Customer in connection with this Agreement, the prevailing party shall be entitled to receive its costs, expert witness fees, and reasonable attorneys' fees, including costs and fees on appeal, in addition to any relief granted by a court of law." (Id. at § 11.17).

         On November 1, 2016, Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On February 14, 2017, the Bankruptcy Court entered an order approving the sale of substantially all of the Debtors' assets to appellee CSC Generation, Inc. ("CSC") (B.D.I. 377) (the "Sale Order"). (SA-14). The Sale Order provided for a designation rights period during which CSC could determine whether it wished for the Debtors to assume and assign certain contracts and leases to CSC.

         On the evening of February 23, 2017, Appellant sent a cease and desist letter to CSC via email, alleging that the Debtors and/or CSC had breached their agreements by transporting "clones" of Appellant's software to other service providers. (See KA9, ¶ 27). The following day, CSC sent an email to Appellant explaining that neither CSC nor the Debtors had breached Appellant's contracts with the Debtors, but that CSC would take precautionary measures to ensure that Komodo's concerns would be resolved. (See Id. ¶ 29). The parties appear to dispute what happened next. CSC says that Appellant engaged in "self help," in violation of the terms of the MSA and state law remedies. (KA258, 5/8/17 Hr'g Tr. at 43:5-9). Specifically, CSC alleges Appellant took actions to destroy a network connection between the Debtors' server environment and CSC's corporate headquarters, that "had a dramatic effect on the Debtors' and CSC's operations," and that "neither the Debtors nor CSC were able to effectively communicate with Appellant on February 24th or during the following weekend." (KA9-11, ¶¶ 28, 34-36). Appellant concedes that it took steps to restrict [Debtors'] access to [Appellant's] systems" and "acknowledges that it may have caused some temporary disruptions." (See SA-76, B.D.I. 430). Specifically, Appellant acknowledged a brief disruption to Debtors /CSC's Citrix access but contends that this disruption only impacted 25 minutes a single business day and was corrected within 2 minutes of receiving a help desk ticket. (See Civ. No. 17-605, D.I. 12 at 4; B.D.I. 416, Menon Decl. at ¶ 6).

         The following Monday, February 27, 2017, Debtors filed the Emergency Motion (KA1-100), seeking a permanent mandatory injunction on the basis that Appellant was allegedly destroying Debtors' ongoing business operations both directly by interfering with the Debtors' ability to prepare monthly operating reports and indirectly by preventing Debtors from performing under a transition services agreement with CSC. (B.D.I. 406). Debtors filed four declarations in support of their argument that business operations were being disrupted and that Appellant was not helping to address those problems. (B.D.I. 407-410). The Bankruptcy Court scheduled a telephonic hearing on the Emergency Motion for February 28, 2017, and, at the completion of that hearing, the Bankruptcy Court set an evidentiary hearing for March 2, 2017. At the March 2 hearing, the Bankruptcy Court delayed the hearing to allow the parties to engage in settlement discussions, and, by the end of that day, the parties mutually agreed to a further adjournment of the evidentiary hearing to March 14. Due to inclement weather, which resulted in the closing of the Bankruptcy Court on March 14, and a scheduling conflict, the evidentiary hearing was adjourned again to April 5, 2017.

         CSC argues that, during the pendency of the adjournments, circumstances changed, leading to the decision to withdraw the Emergency Motion. "Most notably, after the Emergency Motion was filed, CSC worked to make numerous specific workarounds and Komodo, by its own admission, began working with the Debtors to ameliorate certain disruptions." (Civ. No. 17-605, D.I. 15 at 9).[3] Appellant conditioned its consent to withdrawal of the Emergency Motion on payment of its attorneys' fees under the MSA. Debtors/CSC sought withdraw the Emergency Motion without prejudice and with each party bearing its own costs. (B.D.I. 494-95). On May 8, 2017, the Bankruptcy Court held a hearing and ruled that the Emergency Motion could be withdrawn but only with prejudice. (KA274, 5/18/17 Hr'g Tr. at 59:2-7). With respect to Appellant's request for attorneys' fees under the MSA, the Bankruptcy Court stated:

With regard to whether Komodo was the prevailing party, I can't believe that it's appropriate to make that finding. I don't believe the facts and circumstances support them being deemed the prevailing party. If someone brings a motion and for whatever reason, circumstances, et cetera, change and they withdraw that motion, that doesn't mean that the other side was the prevailing party. I think some affirmative finding on the merits in favor of one of the parties is necessary for the court to find that party was the prevailing party under the contract.

(KA272-74, 5/8/17 Hr'g Tr. at 57:16-58:1 & 59:8-10).

         B. Parties' Contentions

         Appellant argues that the Bankruptcy Court correctly determined that permission to withdraw the Emergency Motion should be granted only with prejudice. (See Civ. No. 17-605, D.I. 12 at 7-9). Appellant argues on appeal that, having obtained such a ruling, Appellant was the "prevailing party" in the proceeding, and therefore, under the broad fee provision of the MSA, Appellant was entitled to reimbursement of its reasonable attorneys' fees incurred in defending the Emergency Motion. (See Id. at 9-12). According to Appellant, "[c]ourts interpreting the phrase ['prevailing party'] have repeatedly held that a dismissal with prejudice acts as an adjudication of the merits, which makes the other party a 'prevailing party' for purposes of recovering costs and/or attorneys' fees." (Id. at 10). Appellant argues that, while the Third Circuit does not appear to have addressed this issue, all other circuits considering the issue have reached the conclusion that a dismissal with prejudice is tantamount to a judgment on the merits, and a defendant obtaining such a dismissal must be considered a prevailing party. (See Id. at 10-11).

         CSC does not dispute that the Bankruptcy Court's grant of relief with prejudice was a proper exercise of its discretion. CSC argues that, under Federal Rule of Civil Procedure 41 (a)(2), [4]the Bankruptcy Court had broad discretion to dismiss the action without ordering payment of Appellant's fees. (See Civ. No. 17-605, D.I. 15 at 13-14). CSC argues that the decision to deny an award of fees was a proper exercise of the Bankruptcy Court's discretion under the facts in this case, where Appellant admitted to causing a disruption in service, including subsequently to working with Debtors/CSC to resolve service issues, and where changed circumstances, including this change in Appellant's conduct, obviated the need for emergency relief and lead to withdrawal of the Emergency Motion. (Id. at 17). CSC further argues that Appellant "cites no case where a party was deemed the 'prevailing party' under a contract due to a dismissal with prejudice" or in circumstances analogous to the Emergency Motion. (Id. at 18). "[Appellant] does not cite any decision that addresses a situation like the one here, where (i) an emergency motion (filed the next business day after a business disruption) was withdrawn due to changed circumstances, and (ii) the trial court never made an affirmative ruling." (Id.)[5]

         C. Jurisdiction and Standard of Review

         Pursuant to 28 U.S.C. § 158(a), district courts have mandatory jurisdiction to hear appeals "from final judgments, orders and decrees" and discretionary jurisdiction over appeals "from other interlocutory orders and decrees." 28 U.S.C. § 158(a)(1), (3). In reviewing the Bankruptcy Court's determinations, this court "review[s] the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof." See In re Trans World Airlines, Inc., 145 F.3d 124, 130-31 (3d Cir. 1998) (noting that both the Third Circuit and the district court "exercise the same standard of review") (internal quotations and citations omitted).

         The parties dispute the issue on appeal and, therefore, dispute the applicable standard of review. According to Appellant, the issue on appeal is whether the Bankruptcy Court erred when it found that Appellant was not a "prevailing party" and, therefore, not entitled to attorneys' fees, because the dismissal with prejudice was not an "affirmative finding on the merits." (See Civ. No. 17-605, D.I. 12 at 1). Appellant argues that "the legal effect of a dismissal with prejudice is an issue of law to be reviewed de novo'" but cites no authority. (Id.). According to CSC, the only issue on appeal is whether the Bankruptcy Court abused its discretion when it granted the motion to voluntarily withdraw the Emergency Motion and denied Appellants' attorneys' fees and costs. (Civ. No. 17-605, D.I. 15 at 3 (citing Ockert v. Union Barge Line Corp., 190 F.2d 303, 304-05 (3d Cir. 1951)). As framed by CSC, the decision on attorneys' fees is not a governed by whether Appellant was the "prevailing party" in this proceeding under the MSA; rather, the Bankruptcy Court's decision on attorneys' fees is a matter of discretion somehow subsumed in the Bankruptcy Court's discretionary authority to permit withdrawal of the contested matter with prejudice. CSC cites no authority in support of its position either. "Whether a litigant is a 'prevailing party'" under a fee-shifting provision "constitutes a question of law warranting de novo review." Carter v. Inc. Vill. of Ocean Beach, 759 F.3d 159, 164 (2d Cir. 2014) (quoting Dattner v. Conagra Foods, Inc., 458 F.3d 98, 100 (2d Cir. 2006) (per curiam)).

         D. Discussion

         Courts have "broad equitable discretion" in evaluating Rule 41. In re Appleseed's Intermediate Holdings LLC, 2012 WL 6629624, at *3 (Bankr. D. Del. Dec. 20, 2012) (citations omitted). The text of the rule leaves no question that a court has discretion to fashion appropriate relief under the facts and circumstances of its case: "an action may be dismissed at the plaintiffs request only by court order, on terms that the court considers proper." Fed. R. Civ. P. 41(a)(2) (emphasis added). As CSC points out, the Bankruptcy Court's discretion to grant or deny fees in this contested matter may be even broader than the discretion recognized under Rule 41 because (i) the Bankruptcy Court was not required to apply Rule 41, see, e.g., Fed. R. Bankr. P. 9014(c) (stating that certain rules apply to contested matters "unless the court directs otherwise"), and (ii) § 105(a) of the Bankruptcy Code affords the Bankruptcy Court flexibility to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions" of the Bankruptcy Code, including with respect to the terms on which it grants a motion to withdraw or dismiss, see 11 U.S.C. § 105(a). Even if the Bankruptcy Court were required to apply Rule 41(a)(2), its decision is well supported. This matter did not involve a complaint, but rather an emergency motion to compel performance. During the course of this contested matter, the parties exchanged no documents, took no depositions, and obtained no expert witnesses. Appellant has admitted to taking some action to disrupt service under the MSA, which is the basis of the Emergency Motion. When circumstances changed, including a change in Appellant's conduct that obviated the need for emergency relief, Debtors did not delay in moving to withdraw the Emergency Motion. Any prior delay appears attributable to the parties' engagement in settlement negotiations, attempts to work through the service disruption issues, or were otherwise largely out of the parties' control (i.e., weather-related delays). Based on this record, the court would find no abuse of discretion in the Bankruptcy Court's decision not to award Appellant attorneys' fees. Absent the MSA's fee-shifting provision, the court's review would be limited to a review of the Bankruptcy Court's denial of fees for abuse of discretion, and there is no abuse of discretion on this record.

         Contrary to CSC's arguments, however, Appellant's rights to recover its attorneys' fees under the MSA in this case is not solely a matter of Bankruptcy Court discretion. The MSA is an enforceable contract, [6] with a provision expressly governing disputes thereunder. CSC cites no authority that would support the view that enforcing the MSA's fee-shifting provision is also somehow discretionary in the context of a Rule 41(a)(2) dismissal, or that such a fee-shifting provision is somehow unenforceable in the context of these bankruptcy proceedings. The Bankruptcy Court recognized that the MSA governed. Construing the fee-shifting provision, the Bankruptcy Court based its denial on its determination that "some affirmative finding on the merits in favor of one of the parties is necessary for the court to find that party was the prevailing party under the contract." (KA272, 5/8/17 Hr'g Tr. at 57:16-58:1). Appellant disputes that an affirmative finding on the merits in favor of one of the parties was required, yet the central issue of this appeal - whether Appellant is a "prevailing party" under the terms of the MSA - receives little attention in either party's briefing.

         Appellant argues that "prevailing party" is a term of art frequently used in both contracts and fee-shifting statutes," and that, while the Third Circuit has not addressed this issue, "[c]ourts interpreting the phrase 'prevailing party' have repeatedly held that a dismissal with prejudice acts as an adjudication on the merits, which makes the other party a 'prevailing party' for purposes of recovering costs and/or attorneys' fees." (Id. at 10).[7] Appellant cites a Second Circuit decision, Chase Manhattan Bank, N.A. v. Celotex Corp., 56 F.3d 343, 345 (2d Cir. 1995), in support of this argument. However, Chase held that "[a] voluntary dismissal with prejudice is an adjudication on the merits for purposes of res judicata." Id. (emphasis added). The Second Circuit has clarified that Chase does not support the assertion that simply "a dismissal with prejudice constitutes a decision on the merits." EMI Blackwood Music Inc. v. KTS Karaoke, Inc., 655 Fed.Appx. 37, 40 (2d Cir. 2016). Other non-binding cases cited by Appellant on appeal were all decided in the context of various statutory fee-shifting provisions, which give courts discretionary authority to award attorneys' fees, as opposed to contractual fee-shifting provisions. Appellant does not cite a single case where a party was deemed a prevailing party under a contractual fee-shifting provision due to a dismissal with prejudice.[8] Appellant cites only one case (in its reply) that even involves a contractual fee-shifting provision, and that case sheds no light on whether the "prevailing party" definition is met in the context of a dismissal with prejudice.[9] For its part, CSC is content to ignore the MSA altogether and pretend that the Bankruptcy Court's decision to deny fees was entirely discretionary under Rule 41(a)(2). CSC offers no argument with respect to the legal standard for "prevailing party" and merely distinguishes the cases cited by Appellant under statutory fee-shifting provisions on their facts.[10]

         The MSA clearly states that it is governed by Indiana law. (See MSA at 10, § 11.1; see also 5/8/17 Hr'g Tr. at 43:7-9 (Debtors' counsel conceding that Indiana law governs the contract)). "Indiana adheres to the American rule that[, ] in general, a party must pay his own attorneys' fees absent an agreement between the parties, a statute, or other rule to the contrary." R.L. Turner Corp. v. Town of Brownsburg, 963 N.E.2d 453, 458 (Ind. 2012). However, when parties have executed a contractual provision agreeing to pay attorney fees, such agreement is enforceable according to its terms unless the contract is contrary to law or public policy. See Carter-McMahon v. McMahon, 815 N.E.2d 170, 178 (Ind.Ct.App. 2004). Under Indiana law, like that of many states, the goal of contract interpretation is to is to ascertain and give effect to the parties' intent as reasonably manifested by the language of the agreement. See First Fed. Sav. Bank of Ind. v. Key Mkts., Inc., 559 N.E.2d 600, 603-04 (Ind. 1990). "[I]f the language is clear and unambiguous, it must be given its plain and ordinary meaning." Cabanaw v. Cabanaw, 648 N.E.2d 694, 697 (Ind.Ct.App. 1995).

         Looking to the plain and ordinary meaning of this fee-shifting provision, the language is very broad, encompassing "any proceeding" brought by either party ("Komodo or Customer") "hi connection with'" the MSA.[11] The provision is also mandatory: "the prevailing party shall be entitled to receive its costs, expert witness fees, and reasonable attorneys' fees ...". (MSA § 11.17). However, the agreement does not define "prevailing party." Rather than apply the rules of contract interpretation, Appellant relies entirely on Schwarz, where, according to Appellant, "the court held a defendant obtaining a dismissal with prejudice must be considered a prevailing party to be consistent with the doctrine that allows such dismissals over the objection of the defendant in the first place." (See Civ. No. 17-605, D.I. 12 at 10-11). In Schwarz, the Fifth Circuit remanded a denial of costs and fees to the trial court to give its reasons for such denial. There, the Fifth Circuit said:

Having already held that a dismissal with prejudice may be granted at any time in a lawsuit because it does not prejudice the defendant, we would be inconsistent to deny the defendant "prevailing party" status, since such a denial would be precisely the type of prejudice to the defendant that we claimed would not occur. Because a dismissal with prejudice is tantamount to a judgment on the merits, the defendant in this case ... is clearly the prevailing party and should ordinarily be entitled to costs.

767 F.2d at 130. Importantly, Schwarz did not involve a contractual fee-shifting provision. Rather, Schwarz reviewed the court's denial of costs and fees under various statutory fee-shifting provisions, including denial of costs under Rule 54(d)[12] and denial of attorney's fees under Rule 41(a)(2). Schwarz is nonbinding and otherwise factually distinguishable from this proceeding.[13]

         In Reuille v. Brandenberger Construction, Inc., 888 N.E.2d 770 (Ind. 2008), the Supreme Court of Indiana interpreted a contractual fee-shifting provision in favor of the "prevailing party" - the precise issue on appeal here. The parties in that case had entered into an agreement for the construction of a new home. Id. at 771. The agreement provided that, in the event of a legal dispute, the "prevailing party" would be entitled to reasonable costs and expenses, including attorneys' fees. Id. Plaintiff Reuille filed a complaint against construction company alleging breach of contract, breach of warranty, and negligence. See Id. Following mediation, the parties reached a settlement on all issues with the exception of fees, which issue was explicitly reserved for judicial resolution. See Id. Like the MSA, the term "prevailing party" was not defined in the construction contract, so the Supreme Court of Indiana "turn[ed] to sources that reflect the ordinary meaning of the term at the time the contract was executed." Id. The court noted that, at the time the contract in Reuille was executed in 1997, Black's Law Dictionary defined "prevailing party" as:

The party to a suit who successfully prosecutes the action or successfully defends against it, prevailing on the main issue, even though not necessarily to the extent of his original contention. The one in whose favor the decision or verdict is rendered and judgment entered.

Id. at 771 (citing Black's Law Dictionary 1188 (6th ed. 1990)). The Reuille court found "[t]his definition appears to contemplate a trial on the merits and entry of a favorable judgment in order to obtain prevailing party status" which approach was corroborated "by several Indiana court decisions issued shortly before the parties executed their contract." Id. at 771-72 (citing Heritage v. House of Salem, Inc. v. Bailey,652 N.E.2d 69, 79-80 (Ind.Ct.App. 1995) (plaintiff is not a prevailing party where it obtained a preliminary injunction but where judgment ultimately was rendered for the defendant); State Wide Aluminum, Inc. v. Postle Distribs., Inc.,626 N.E.2d 511, 516-17 (Ind.Ct.App. 1993) (State Wide is not a prevailing party under § 34-1-32-l(b) (now § 34-52-1-1) because it did not receive a judgment); State ex rel. Prosser v. Ind. Waste Sys., Inc.,603 N.E.2d 181, 189 (Ind.Ct.App. 1992) (a favorable ruling on a motion is not a judgment allowing the recovery of costs as a prevailing party)). Advising that "contracting parties can readily agree to fee-shifting arrangements that are more prescriptive," the Reuille court found the contract before it to be nonetheless "straightforward and unadorned." I ...


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