IN RE ALL AMERICAN SEMICONDUCTOR, INC. (Bankr.S.D.Fla. 7-20-2010)

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ref245 B.R. 585, 590 (Bankr. N.D. Iowa 1998). "Upon confirmation of the plan, all prior obligations and rights of the parties are extinguished and replaced by the plan." Id. Courts have described the plan as a novation of prepetition obligations. See In re Jankins, 184 B.R. 488, 494 (Bankr. E.D. Va. 1995). The Plaintiff argues that the arbitration provisions of the contract with Sirius, and the forum selection provisions of the contracts with PeopleSoft and Sirius, have been superseded by the jurisdiction and venue provisions of the Third Amended Plan. Plaintiff also argues that PeopleSoft and Sirius waived the venue and arbitration provisions of their contracts when they filed proofs of claim.

The Plaintiff originally included GSI and DSI in this category but for the reasons discussed infra the Plaintiff receded from that position in oral argument.

The Bankruptcy Code clearly delineates the parties bound by a confirmed Chapter 11 Plan. 11 U.S.C. § 1141(a) provides:

(a) Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and any creditor, equity security holder, or general partner in the debtor, whether or not the claim or interest of such creditor, equity security holder, or general partner is impaired under the plan and whether or not such creditor, equity security holder, or general partner has accepted the plan.

"[The] Bankruptcy Court has the authority to modify the contractual relationships of the bankruptcy debtor and his creditors. However, a bankruptcy debtor may not use the Bankruptcy Court to modify contractual relationships with his debtor or other parties not included within 11 U.S.C. § 1141." English v. Valero Hydrocarbons Co. ( In re Northwest Exploration Co.), 71 B.R. 873, 877 (Bankr. N.D. Okla. 1987) (emphasis in original). A chapter 11 plan that purports to modify the contractual relationships of parties outside the scope of section 1141 of the Bankruptcy Code is "fatally flawed for the purposes of confirmation." In re Real Pro Financial Servs., Inc., 120 B.R. 216, 218 (Bankr. M.D. Fla. 1990).

In general, forum selection provisions in contracts are given great deference, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), even in bankruptcy adversary proceedings, Manchester, Inc. v. Lyle (In re Manchester, Inc.), 417 B.R. 377 (Bankr. N.D. Tex. 2009). However, venue provisions can be waived. See American Freight Sys., Inc. v. Blymyer Engineers, Inc. ( In re American Freight Sys., Inc.), 236 B.R. 47 (Bankr. D. Kan. 1999); accord, Nat'l Bank of North America v. Assocs. of Obstetrics and Female Surgery, Inc., 425 U.S. 460 (1976).

Similarly, courts, including bankruptcy courts, give tremendous deference to arbitration provisions. Indeed, a bankruptcy court must enforce an arbitration agreement relating to a noncore proceeding. The Whiting-Turner Contracting Co., United States Fid. and Guar. Co. v. Elec. Machinery Enters., Inc., (In re Elec. Machinery Enters., Inc.), 479 F.3d 791, 796 (11th Cir. 2007); accord Astropower Liquidating Trust, 335 B.R. at 326 ; Charter Behavioral Health Sys., LLC v. Managed Health Network, Inc. ( In re Charter Behavioral Health Care Sys., LLC), 277 B.R. 54 (Bankr. Del. 2002). Even for a core proceeding, a bankruptcy court must determine "whether enforcing a valid arbitration agreement would inherently conflict with the underlying purposes of the Bankruptcy Code." Electric Machinery Enters., 479 F.3d at 796.

However, venue provisions, like arbitration provisions, can be waived. Ivax Corp. v. B. Braun of America, Inc., 286 F.3d 1309 (11th Cir. 2002); S H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507 (11th Cir. 1990). To determine

whether a party has waived its right to arbitrate, we have established a two-part test. First, we decide if `under the totality of the circumstances,' the party `has acted inconsistently with the arbitration right,' and, second, we look to see whether, by doing so, that party `has in some way prejudiced the other party.'

Ivax Corp., 286 F.3d at 1315-1316 ( quoting S H Contractors, 906 F.2d at 1511).

Both Sirius and PeopleSoft dispute that their filing of a proof of claim constituted a waiver of the venue or arbitration provisions of their respective contracts. While PeopleSoft did cite to a case, Martin v. CitiFinancial, Inc. ( In re Martin), 387 B.R. 307 (Bankr. S.D. Ga. 2007), that held the filing of a proof of claim was not in itself a waiver of a lender's forum selection rights, this case seems anomalous in light of the undisputed rule that filing a proof of claim constitutes a voluntary submission to the equity jurisdiction of the bankruptcy court. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 57-58 ( citing Katchen v. Landy, 382 U.S. 323, 336 (1966)). However, I do agree that the filing of a proof of claim would not necessarily submit a creditor to the jurisdiction of the bankruptcy court for matters unrelated to the proof of claim. In this instance, PeopleSoft's proof of claim arises solely from the contract that is the subject of this adversary proceeding.

A creditor might also argue that the creditor may have submitted itself to the jurisdiction of the bankruptcy court by filing a proof of claim but not to venue in the district where the debtor's bankruptcy case is pending. This point was not directly argued by PeopleSoft; moreover, I do not need to reach a decision on this issue as I find PeopleSoft waived any objection to the venue provision by failing to object to the Third Amended Plan.

Interestingly, notwithstanding the clear law that filing a proof of claim constitutes a submission to the jurisdiction of the bankruptcy court (including waiver of any jury trial right), the majority of courts have held that the mere filing of a proof of claim does not constitute waiver of any contractual arbitration provision. See generally Michael D. Fielding , Elevating Business Above the Constitution: Arbitration and Bankruptcy Proofs of Claim, 16 Am. Bankr. Inst. L. Rev. 563 (2008). I do not need to resolve here whether and to what extent the choice by Sirius and PeopleSoft to file proofs of claim constituted a waiver of their contractual venue and arbitration provisions because I find their failure to contest the venue and exclusive jurisdiction provisions of the Third Amended Plan did constitute a waiver of those provisions.

Schedule I.A. 65 (the "First Schedule") was first filed on January 16, 2009 (DE #1052-2) as an exhibit to the Second Amended Plan of Liquidation filed January 16, 2009 (DE #1052). The First Schedule I.A.65 was subsequently amended on March 6, 2009 (DE #1104). The Second Amended Plan of Liquidation is the plan that was circulated to all creditors for balloting and objection. The venue and jurisdiction provisions of the Second Amended Plan and Third Amended Plan are identical, as is the definition of Litigation Claims. The First Schedule I.A.65 describes the ERP litigation (although not in the same detail as the Revised Schedule) but does not list IBM or Sirius as potential defendants. However, both the First Schedule and the Revised Schedule contain a sentence "[a]ny other parties that may be identified upon further investigation." Ballots were mailed on or about February 6, 2009 to all creditors and the deadline to object to confirmation was March 9, 2009.

There is no question that PeopleSoft had notice that the liquidating trustee would likely pursue claims against it with respect to the ERP System fiasco. There is also no question that, although PeopleSoft received the solicitation package, including the order setting deadline to file objections to confirmation, PeopleSoft did not file an objection to the Second Amended Plan.

Sirius argues that it should not be deemed to have consented to modification of, or waived, its contractual venue and arbitration rights because it was not listed in the First Schedule I.A. 65, a copy of which it did receive, but, rather, was only named in the Revised Schedule I.A. 65 which Sirius claims it did not receive. However, whether or not Sirius was named as a known target in the First Schedule I.A. 65 does not change the fact that a) the Second Amended Plan stated ALL litigation to be brought by the Liquidating Trustee would be subject to the exclusive jurisdiction of the bankruptcy court; b) the ERP litigation claims were generally described in the First Schedule with a provision stating additional defendants were being identified, and that a Revised Schedule I.A. 65 would be filed not later than 10 days before the Confirmation Hearing, and c) the ERP failure was described in the Disclosure Statement as the primary cause of the Debtors' demise. Thus, the fact that Sirius was not initially named in the First Schedule I.A. 65 does not mean it was not on notice that the Liquidating Trust was going to be filing litigation against everyone involved in the design, installation and implementation of the ERP System, and that a Revised Schedule would be filed before the confirmation hearing. Sirius has not attempted to argue it was not involved in some aspect of the ERP System design, installation and implementation. Accordingly, I find that, to the extent the Mullane criteria applies to these circumstances, Sirius received notice "reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 314 (1950).

Sirius correctly states that the certificate of service does not show it was served with the Revised Schedule I.A. 65. However, Sirius did receive the initial package, knew a final schedule would be released, and if Sirius chose not to review the final schedule, whether or not served on Sirius, it did so at its own peril.

Sirius, according to the Amended Complaint, was responsible for the service, consulting and maintenance of the ERP System.

In support of its position that Sirius waived its right to arbitration by failing to object to the Second Amended Plan, the Plaintiff relies on Ernst Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753 (7th Cir. 2002). In the Ernst Young case, the court held that Ernst Young waived its right to arbitration of a dispute when it failed to object to a plan that provided for adjudication of all pending adversary proceedings before the bankruptcy court. At the time of plan confirmation Ernst Young was a named defendant in an adversary proceeding. In holding that the bankruptcy court properly found that Ernst Young waived its right to arbitrate, the circuit court noted that Ernst Young had participated in the plan confirmation process by objecting to plan language that sought to limit Ernst Young's right to bring an action or assert a defense against the debtor's principal shareholder and his wife. The circuit court held that Ernst Young's objection to one plan provision regarding its litigation rights and not another constituted a waiver of its contractual arbitration rights.

Courts must examine the totality of the circumstances and `determine whether based on all the circumstances, the [party against whom the waiver is to be enforced] has acted inconsistently with the right to arbitrate' . . . Although several factors may be considered in determining waiver, diligence or the lack thereof should weigh heavily in the decision — `did that party do all it could reasonably have been expected to do to make the earliest feasible determination of whether to proceed judicially or by arbitration?'

Id. at 756 (internal citations and emphasis omitted).

Sirius seeks to distinguish Ernst Young arguing that in Ernst Young the adversary proceeding was pending at the time of confirmation and that Ernst Young had actual knowledge that the debtor intended to continue the lawsuit post confirmation. However, as I have already noted, Sirius knew the Liquidating Trust was going to be filing several lawsuits relating to the ERP System, Sirius knew the plan proponent intended to name additional potential defendants before confirmation, and, due to its involvement in the ERP System project, Sirius had to know it was a potential target. That Sirius, apparently, chose not to review those preconfirmation schedules was not reasonable under the circumstances.

Thus, in general, the venue and jurisdiction provisions of a confirmed plan will be binding on a creditor and supersede or modify the provisions of any contract between the creditor and the debtor, including arbitration and venue provisions. Conversely, those defendants who are not creditors and did not have an opportunity to object to confirmation are not bound by the terms of a confirmed plan.

Although Peoplesoft and Sirius are both creditors, they each argue the venue provisions of their respective contracts, and in the case of Sirius, the arbitration provision, cannot be modified because their contracts were rejected, and once rejected, the contract cannot then be modified. 11 U.S.C. § 365 authorizes the trustee to assume or reject executory contracts and unexpired leases. A debtor must either assume an executory contract in its entirety or completely reject it. See Byrd v. Gardinier ( In re Gardinier, Inc.), 831 F.2d 974, 975 n. 1 (11th Cir. 1987). 11 U.S.C. § 365(g) provides that rejection of a contract or lease that has not previously been assumed constitutes a breach immediately before the filing of the bankruptcy petition. Because the rejection of a contract constitutes a breach, rejection does not terminate the contract in its entirety, but rather, "frees the estate from the obligation to perform" its duties under the contract. Thompkins v. Lil' Joe Records, Inc., 476 F.3d 1294, 1306 (11th Cir. 2007).

[R]ejection `does not embody the contract-vaporizing properties so commonly ascribed to it . . . Rejection merely frees the estate from the obligation to perform; it does not make the contract disappear' . . . `[r]ejection has absolutely no effect upon the contract's continued existence; the contract is not cancelled, repudiated, rescinded, or in any other fashion terminated.'

Id. at 1306 ( quoting Cohen v. Drexel Burnham Lambert Group, Inc. ( In re Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 703 (Bankr. S.D.N.Y. 1992) (citations omitted)).

Consequently, a "debtor's liabilities under a contract or lease remain `intact to form the basis of a claim' against the bankruptcy estate." In re Old Carco LLC, 424 B.R. 633, 639 (Bankr. S.D.N.Y. 2010) ( quoting Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding `Rejection,' 59 U. Colo. L. Rev. 845, 888 (1988)), and conversely, provides a framework for any claim the bankruptcy estate may have against the other contract parties.

While it is true that a specific provision in an executory contract cannot be held enforceable if the contract as a whole has been rejected, see, e.g., In re Transamerican Natural Gas Corp., 79 B.R. 663, 667 (Bankr. S.D. Tex. 1987) (concluding that enforcing a liquidated damages provision in a rejected contract would essentially be the same as enforcing the executory contract), forum selection clauses and arbitration provisions address the procedural framework pursuant to which a contract dispute will be processed, rather than the substantive provisions that create and define the legal relationships between the parties. To argue that a party cannot modify or waive a forum selection provision for a contract that has been breached would render absurd any venue waiver case since presumably, litigation over a contract, whether terminated, completed, rejected or ongoing, only occurs when there has been a breach.

Indeed Sirius recognizes this distinction in its own pleadings citing to cases that hold that even when a contract is rejected or breached the parties may be compelled to arbitrate. See, e.g., Madison Foods, Inc. v. Fleming Companies, Inc. (In re Fleming Companies Inc.), 325 B.R. 687 (Bankr. D. Del. 2005).

As already noted, PeopleSoft and Sirius each had the opportunity to object to confirmation and raise the issue of the exclusive jurisdiction and venue provisions of the Second Amended Plan. Since they failed to object and the Third Amended Plan was confirmed, the venue and jurisdiction provisions of the Third Amended Plan superseded the venue provisions in the PeopleSoft and Sirius contracts and the Sirius arbitration provisions, as each has waived its rights by failing to object. Accord Ernst Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753.

Accordingly, I find that, while a rejected contract cannot be modified, the venue and arbitration provisions for litigation arising with respect to that contract may be waived, including by virtue of being superseded by the provisions of a confirmed plan to which no objection is raised.

Impact on DSI and GSI

DSI and GSI argue, and the Plaintiff agrees, that because neither DSI nor GSI was a creditor, the litigation with them must be arbitrated in accordance with their respective contract provisions. The Plaintiff has requested that the adversary proceeding with respect to these two defendants be stayed rather than dismissed pending arbitration. DSI and GSI have agreed to stay as an alternative to dismissal; accordingly, by separate orders all matters in this adversary proceeding subject to the DSI and GSI arbitration provisions are stayed and abated, pending further order of this Court.

THE MOTIONS TO DISMISS

Defendants Global Group Technologies, Redding by joinder, and PeopleSoft each argue that the Amended Complaint must be dismissed for failing to meet the pleading standards of Fed.R.Civ.P. 8 and 9 and of Rule 12 as outlined by the United States Supreme Court in Twombley and Ashcroft.

Federal Rule of Civil Procedure 12(b)(6), as made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7012(b), provides a mechanism by which a party may seek to dismiss a complaint for "failure to state a claim upon which relief may be granted." Fed.R.Civ.P. 12(b)(6). In order to survive a motion to dismiss, a plaintiff must allege more than "labels and conclusions," or simply recite the elements of a cause of action. Twombly, 550 U.S. at 555. The complaint must contain sufficient factual matter to state a claim to relief that is plausible on its face. Iqbal, 129 S.Ct. at 1949. A claim is considered factually plausible when "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. Failure to state a claim for relief is a purely legal question. Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1270 n. 19 (11th Cir. 2009).

Rule 8 of the Federal Rules of Civil Procedure requires the plaintiff to set forth a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). The Rule reflects a liberal notice pleading structure, "which is intended to `focus litigation on the merits of a claim' rather than on technicalities that might keep plaintiffs out of court." Brooks v. Ross, 578 F.3d 574, 580 (7th Cir. 2009) ( quoting Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002)). Despite the pleading modifications articulated in Twombly and Iqbal, the courts have not abandoned the notice pleading standard. Id. at 581 ("We understand the Court in Iqbal to be admonishing those plaintiffs who merely parrot the statutory language of the claims that they are pleading . . . rather than providing some specific facts to ground those legal claims, that they must do more.").

The parties complain primarily of undifferentiated allegations that lump all the defendants together. The provisions of the Amended Complaint common to each of the defendants relate to group references to liability and breach. An example of this group pleading is paragraph 95 contained in Count I of the Amended Complaint which states "[i]ndividually and collectively, Defendants breached their contracts and agreements by failing to deliver either the service or the products agreed upon among the parties." However, there is no description of how each defendant allegedly breached their respective contract. Something more precise than "the system utterly failed" is needed to meet the notice requirements of Fed.R.Civ.P. 8.

There are some more precise allegations for some of the defendants (e.g., paragraph 51 where the Plaintiff alleges one CSS employee acknowledged being "in over [his] head"), but even those sparse, albeit more precise, allegations are not adequately tied to the contract to which the alleged breach relates.

Another common complaint is that the Plaintiff is not entitled to a count for unjust enrichment because in each case the defendant had an express contract; I agree. While I understand the Plaintiff has the right to plead in the alternative, see Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1277 (11th Cir. 2006) , that is not the case when the facts do not support the alternative relief. Accord McCloud v. Fortune, 2005 WL 3274648, at *6 (N.D. Fla. Dec. 2, 2005). Nowhere in the Amended Complaint does the Plaintiff suggest that none of the parties had an express contract. At a minimum, when the Plaintiff files its second amended complaint, more precise grounds outlining the basis for a potential claim for unjust enrichment, something more than "just in case," will be required. Of course, should any defendant raise a defense that there is no valid contract, I will allow the Plaintiff to add a count for unjust enrichment.

The Wagner Court referred to Federal Rule of Civil Procedure 8(e), which has since been amended. The relevant language relating to alternative pleading is now set forth in Rule 8(d)(2).

The other 12(b)(6) issues raised by PeopleSoft, including the issues relating to notice and warranty claims, I will address, if necessary, after the Plaintiff has filed its second amended complaint. I will remind the Plaintiff, however, that the PeopleSoft contract is governed by California law and other contracts are governed by other states' laws, and therefore the substance and adequacy of its allegations in the second amended complaint with respect to contract issues will be judged under the law applicable to that particular contract.

Redding Improper Joinder Claim

Redding's Motion to Dismiss and Abstain raises improper joinder as one ground for dismissal. However, Redding acknowledges in his motion that the misjoinder issues may be resolved if the pleading deficiencies are corrected in an amended complaint. Because, as I previously stated, I will be directing and authorizing the Plaintiff to file a second amended complaint, I will deny Redding's Motion to Dismiss without prejudice and a separate order will be entered.

CONCLUSION

Accordingly, the Plaintiff will file its second amended complaint no later than July 28, 2010. The Defendants shall have twenty-eight days from the filing of the second amended complaint to file any response pleadings. Separate orders will be entered on each pleading.

ORDERED in the Southern District of Florida.