United States District Court, D. Delaware
IN RE RENT-A-WRECK OF AMERICA, INC, et al., Debtors.
RENT-A-WRECK OF AMERICA, INC., BUNDY AMERICAN, LLC, AND QUARLES & BRADY LLP, et al., Appellees. RENT A WRECK, INC. AND DAVID S. SCHWARTZ, Appellants,
T. Earle, Esq., Zarwin Baum DeVito Kaplan Schaer Toddy, P.C.,
Wilmington, DE; Roger C. Simmons, Esq. (argued), Jacob I.
Weddle, Esq., Charles E. Remus II, Esq., Gordon &
Simmons, LLC, Frederick, MD, attorneys for Appellants David
Schwartz and Rent A Wreck, Inc.
Minuti, Esq., Saul Ewing Arnstein & Lehr LLP, Wilmington,
DE; Faye B. Feinstein, Esq. (argued) and Christopher Combest,
Esq., Quarles & Brady LLP, Chicago, IL, attorneys for
Appellees, Rent-A-Wreck of America, Inc., Bundy American,
LLC, and Quarles & Brady LLP.
ANDREWS, UNITED STATES DISTRICT JUDGE
before the Court is the appeal (D.I. 1) of Appellants Rent a
Wreck, Inc. and David S. Schwartz (together,
"Schwartz") from a Bankruptcy Court Order dated May
17, 2018 (B.D.I. 241) ("Order"), which denied
Schwartz's motion for sanctions (B.D.I. 237)
("Sanctions Motion") against Rent-A-Wreck of
America, Inc. ("RAWA") and Bundy American, LLC
("Bundy," and, together with RAWA,
"Debtors") and their counsel, Quarles & Brady,
LLP ("Q&B"). Following discovery and a two-day
evidentiary hearing, the Bankruptcy Court dismissed the
Debtors' Chapter 11 cases for failure to satisfy the good
faith filing doctrine, In re Rent-A-Wreck of America,
Inc., 580 B.R. 364 (Bankr. D. Del. 2018)
("Dismissal Opinion"). Based on the dismissal,
Schwartz filed the Sanctions Motion seeking an order imposing
sanctions against Debtors and Q&B pursuant to Federal
Rule of Bankruptcy Procedure 9011 ("Bankruptcy Rule
9011"). Following another evidentiary hearing, the
Bankruptcy Court issued a bench ruling exercising its
discretion to deny the Sanctions Motion, finding that the
Debtors' Chapter 11 filing was not patently unmeritorious
or frivolous or made for improper purposes of delay,
harassment, or to increase costs. (B.D.I. 243, 5/17/18
Hr'g Tr. at 36:2-43:7). For the reasons set forth below,
the Order is affirmed.
concedes that the Dismissal Opinion accurately recites the
extensive history between Schwartz, RA WA, and Q&B
throughout roughly ten years of litigation in the United
States District Court for the District of Maryland and the
United States Court of Appeals for the Fourth Circuit. (D.I.
12 at 4). A brief summary of the relevant background follows.
sells and administers franchises for the
"Rent-A-Wreck" vehicle rental businesses inside and
outside of the U.S. and is the operating subsidiary of RAWA.
RAWA is a holding company that also runs the reservation
system for Bundy and other non-debtor affiliated entities.
RAWA and Bundy are part of a larger group of private
companies owned by J.J.F. Management Services, Inc.
("JJFMS"), whose primary principal is John J.
Fitzgerald, Jr. Fitzgerald is an owner, president, CEO and
chairman of JJFMS's board and also director and chairman
of RAWA's board. RAWA's officers and directors are
associated with JJFMS.
began the business under the name "Bundy
Rent-A-Wreck" in 1973 in connection with his auto sales
business in Los Angeles. In 1977, Schwartz and another
investor created the predecessor to Bundy for the purpose of
offering Rent-A-Wreck franchises. The Rent-A-Wreck mark was
assigned to Bundy, and the Los Angeles County territory was
excepted from the assignment. Years later, Bundy, now a
wholly-owned subsidiary of then-publicly owned RAWA, ran the
Rent-A-Wreck franchise system and managed the mark in all
locations except Los Angeles. The relationship between
Rent-A-Wreck and Schwartz was unorthodox as there was never a
formal, executed franchise agreement, and, while RAWA imposed
certain requirements upon its franchisees, Schwartz did not
abide by those requirements at his Los Angeles location. In
2006, JJFMS completed the purchase of all outstanding RAWA
stock and took RAWA private. Before the sale closed, Schwartz
filed two lawsuits against RAWA challenging the sale. In
October 2006, RAWA (now owned by JJFMS) wrote Schwartz
demanding that he either provide evidence of a franchise
agreement or that he stop holding himself out as a RAWA
franchisee. RAWA removed the Los Angeles location from its
25, 2007, Schwartz sued RAWA, Bundy, and JJFMS, commencing
the Maryland District Court litigation presided over by the
Honorable Peter J. Messitte. After two jury trials and two
Fourth Circuit decisions, it has been determined that
Schwartz has an implied-in-fact royalty- and fee-free
franchise agreement to run a Rent-A-Wreck used car rental
business in West Los Angeles for his lifetime. The exact
terms of the implied franchise agreement are undetermined.
Schwartz does not have to comply with RAWA's fleet
requirements, and RAWA must keep the Los Angeles location on
its website. A 2011 order provides: "[RAWA's] Call
Center shall in no way attempt to dissuade prospective
customers from connecting with [Schwartz's] business or
in any way attempt to divert business from Plaintiffs'
exclusive business territory to other franchises." (D.I.
16 at 520-21). Otherwise, the obligations of the parties
remained unsettled, and further litigation followed. On June
29, 2017, Judge Messitte found that RAWA "deliberately
directed or permitted their call center operators to advise
prospective customers that Rent-A-Wreck had no
franchise" in West Los Angeles, and this conduct served
as the basis for finding RAWA in contempt of a 2011 Order
(id. 578-81) ("Contempt Order"). The
Contempt Order provided injunctive relief "in light of
RAWA's consistent efforts to undermine Schwartz's
business" and awarded Schwartz $83, 620.80 in fees,
costs, and damages. (Id. at 581).
Motion to Dismiss Chapter 11 Petitions
after the Contempt Order was issued, on July 24, 2017,
Debtors filed voluntary Chapter 11 petitions. Debtors were
granted postpetition financing on interim and final bases.
(See D.I. 15 at 164, 386). On September 1, 2017,
Debtors filed a motion to reject seven franchise agreements,
including Schwartz's agreement. (B.D.I. 91). Schwartz
opposed the rejection motion and filed separately the
Dismissal Motion, seeking to dismiss the Chapter 11 cases on
the basis that the petitions were filed for the improper
purpose of rejecting his franchise agreement and were not
filed in "good faith" within the meaning of case
law interpreting § 1112(b) of the Bankruptcy Code.
(B.D.I. 116). The Bankruptcy Court entered an order granting
the rejection motion as to six franchise agreements and
deferred a ruling on the motion as it related to
Schwartz's franchise agreement so that it could be heard
together with the Dismissal Motion. (B.D.I. 118).
Chapter 11 case may be dismissed for cause. 11 U.S.C. §
1112(b). The Third Circuit has held that § 1112(b)
imposes a good faith standard. In re SGL Carbon
Corp., 200 F.3d 154, 160-62 (3d Cir. 1999). However, it
is a non-statutory, judge-made doctrine, and the term
Though it suggests that the debtor's subjective intent is
determinative, this is not the case. Instead, the "good
faith" filing requirement encompasses several distinct,
equitable limitations that courts have placed on Chapter 11
filings. Courts have implied such limitations to deter
filings that seek to achieve objectives outside the
legitimate scope of the bankruptcy laws. Pursuant to §
1112(b), courts have dismissed cases filed for a variety of
tactical reasons unrelated to reorganization.
SGL Carbon, 200 F.3d at 165 (quoting In re
Marsch, 36 F.3d at 825, 828 (9th Cir. 1994)).
When a motion to dismiss a bankruptcy case is filed, the
burden is on the petitioner to establish by a preponderance
of the evidence that good faith exists. In re
Tamecki, 229 F.3d 205, 207 (3d Cir. 2000). "Whether
petitioner has met the burden is a 'fact intensive
inquiry' in which a court must examine 'the totality
of facts and circumstances' and determine where 'a
petition falls along the spectrum ranging from the clearly
acceptable to the patently abusive.'" In re
Integrated Telecom Express, Inc., 384 F.3d 108, 118 (3d
Cir. 2004) (quoting SGL Carbon, 200 F.3d at 162).
While there is no definitive list of factors, the Third
Circuit focuses on two inquiries "particularly relevant
to the question of good faith: (1) whether the petition
serves a valid bankruptcy purpose, e.g., by
preserving a going concern or maximizing the value of the
debtor's estate, and (2) whether the petition is filed
merely to obtain a tactical advantage." Id. at
119-21. The Third Circuit has also instructed that to be
filed in good faith, a petition must do more than merely
invoke some distributional mechanism in the Bankruptcy Code:
"[i]t must seek to create or preserve some value that
would otherwise be lost - not merely distributed to a
different stakeholder - outside of bankruptcy."
Id. at 129.
opposing the Dismissal Motion, the Debtors bore the burden of
establishing by a preponderance of the evidence that the
petitions had been filed in good faith. Relying primarily on
In re PPI Enterprises (U.S.), Inc., 228 B.R. 339
(Bankr. D. Del. 1998), aff'd 324 F.3d 197 (3d
Cir. 2003), Debtors argued their petitions were filed for
valid bankruptcy purposes of: maximizing the value of their
trademarks by rejecting underperforming or burdensome
agreements; eliminating the risk of further litigation with
Schwartz; and relieving their balance sheet of significant
debt. (B.D.I. 161). Schwartz challenged the Debtors' good
faith on the basis that the Debtors were not in financial
distress and filed their Chapter 11 petitions for the
improper purposes of harassment and delay. (B.D.I. 116). An
evidentiary hearing was held, at which three witnesses
testified. (B.D.I. 187, 188). The parties made post-trial
submissions. (B.D.I. 196, 197).
February 13, 2018, the Bankruptcy Court issued the Dismissal
Opinion. Reviewing controlling Third Circuit law, the
Bankruptcy Court noted that while a desire to invoke the
powers conferred by the Bankruptcy Code does not establish a
good faith, nor does it constitute a valid bankruptcy
purpose. Rent-A-Wreck, 580 B.R. at 374 (citing
Integrated Telecom, 384 F.3d at 127-28 ("Just
as a desire to take advantage of the protections of the Code
cannot establish bad faith as a matter of law, that
desire cannot establish good faith as a matter of
law. Given the truism that every bankruptcy petition seeks
some advantage under the Code, any other rule would
eviscerate any limitation that the good faith requirement
places on Chapter 11 filings") (emphasis in original)).
Otherwise, "any entity willing to bear the cost of a
bankruptcy filing could use the Bankruptcy Code's
redistributive mechanisms to its advantage, a concept
'antithetical to the structure and purposes of the
Bankruptcy Code.'" Id. at 375 (quoting
Integrated Telecom, 384 F.3d at 129). The Bankruptcy
Court further stated, "The ability to use the
redistributive provisions of the Bankruptcy Code assumes the
existence of a valid bankruptcy, 'which, in turn, assumes
a debtor in financial distress.'" Id.
(quoting Integrated Telecom, 384 F.3d at 128).
"Thus, good faith is a predicate to a debtor's
ability to use provisions of the Bankruptcy Code, and
financial distress is a part of- if not itself a predicate to
- a good faith analysis." Id.
a detailed and thorough analysis of the evidence offered by
Debtors, the Bankruptcy Court made several findings with
respect to the Debtors' financial
condition. Based on the record, the Bankruptcy Court
"[could] not conclude that Debtors were in financial
distress when they filed their petitions." Id.
at 382. The Bankruptcy Court found that the Debtors
"were solvent, they were not facing pressure from
unaffiliated creditors nor material litigation. It is unclear
whether Debtors were cash flow positive or not. The cursory
testimony offered by Debtors' witnesses on this point
only leaves questions, particularly after reviewing the
documentary information in the record." Id. at
382. The Bankruptcy Court concluded, "The lack of
credible facts demonstrating financial distress supports a
finding that these cases were not filed in good faith."
Bankruptcy Court reviewed the validity of the
reorganizational purposes asserted by the Debtors and
determined that the non-financial evidence also did not
support a finding of good faith. The Bankruptcy Court found
that the "primary purpose" of the bankruptcy filing
was to reject Schwartz's franchise agreement and
"open the Los Angeles territory to multiple
royalty-paying franchisees." Id. The Bankruptcy
Court found that the Debtors did not have to file the cases
to relieve their balance sheet of secured debt, which matured
six years earlier and was owed entirely to JJFMS, nor to
relieve unsecured debt, the vast majority of which was owed
to affiliates. The Bankruptcy Court also found that the
filing would not eliminate further litigation with Schwartz;
rather, the filing "has accelerated it."
Id. at 386. "Debtors are simply continuing
their prepetition litigation in another forum."
Id. The Bankruptcy Court found that the filing was
"nothing more than a straightforward attempt to take
value that belongs to Schwartz and give it to Bundy,"
and thus the filing did not create or preserve value for
creditors that would otherwise be lost outside of bankruptcy.
See Id. at 383. The Bankruptcy Court described the
case as "a prime example of the situation the Third
Circuit warned against: the use of the Bankruptcy Code - and,
in particular, its redistributive provisions - when a party
is willing to pay the freight of a bankruptcy case," and
concluded that the "bankruptcy petitions fall on the
dark side of the spectrum ranging from the clearly acceptable
to the patently abusive." Id. at 386-88. Based
on the totality of the circumstances, the Bankruptcy Court
ruled that Debtors had not carried the burden of proving that
the cases were filed in good faith, including that the
Debtors were in financial distress, and entered the Dismissal
Order. (B.D.I. 222).
April 17, 2018, Schwartz filed the Sanctions Motion against
Debtors and Q&B pursuant to Bankruptcy Rule 9011.
Appellants acknowledged that the Sanctions Motion was based
on the findings set forth in the Dismissal Opinion and
offered no new evidence in support of the Sanctions Motion.
(See D.I. 12 at 4; 5/17/18 Hr'g Tr.). Following
oral argument, the Bankruptcy Court exercised its discretion
not to impose sanctions. (5/17/18 Hr'g Tr. at 36:2-43:7).
After identifying the relevant legal standards for evaluating
the petitions under Bankruptcy Rule 9011, the Bankruptcy
Court could not conclude that "no attorney or client
would have found the bankruptcy filing justifiable."
(Id. at 40:9-22). Because Appellants did not
establish that the petitions were "patently
unmeritorious or frivolous," see Dura Sys., Inc. v.
Rothbury Inc., Ltd.,886 F.2d 551, 558 (3d Cir. 1989),
the Bankruptcy Court declined to find that the petitions had
been filed for an improper purpose. (Id. at
41:15-19). The Bankruptcy Court noted that the stringent
standard governing the imposition of sanctions under Rule 11
contrasts sharply with the wide discretion afforded to
bankruptcy courts to weigh ...