UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION







IN RE:



RUSSELL CAVE COMPANY, INC. f/k/a

The J. Peterman Company



DEBTOR CASE NO. 99-50142

CHAPTER 11







THE OFFICIAL COMMITTEE OF

UNSECURED CREDITORS PLAINTIFF





VS. ADV. NO. 01-5034





APPAREL DESIGNERS ZONE, INC. DEFENDANT





REPORT AND RECOMMENDATION ON

DEFENDANT'S RENEWED MOTION FOR JURY TRIAL



This matter is before the Court on the defendant's Renewed Motion for Jury Trial filed on August 23, 2002, the plaintiff's response and the defendant's reply. The plaintiff alleged in its First Amended Complaint filed herein on March 2, 2001, that this Court has jurisdiction of this matter pursuant to 28 U.S.C.  1334(b), that it is a core proceeding pursuant to 28 U.S.C.  157(b)(2)(O), and that venue is proper in this Court pursuant to 28 U.S.C.  1409(a). The defendant denied these allegations of jurisdiction and venue in its answer and requested trial by jury. The court ruled that venue was proper in the Eastern District of Kentucky in its Memorandum Opinion and Order entered herein on September 10, 2001, and declined to rule on the jury trial issue at that time. On January 2, 2002, the defendant filed a motion to withdraw the reference of this matter from this court to the district court. The district court, in its Memorandum Opinion and Order of June 24, 2002, declined to rule on the defendant's motion to withdraw the reference until such time as this court ruled on the jury trial question. That issue is now before the court.

The record before the Court shows that the debtor and the defendant entered into an agreement on December 29, 1998 ("the original agreement"), which provided that the defendant would conduct a liquidation or clearance sale of excess merchandise of the debtor. The agreement was to be governed by California law. Before any sales were conducted the debtor filed its Chapter 11 petition in this Court on January 25, 1999. On January 29, 1999, this Court entered its Order (A) Approving Clearance Sale to be Conducted by Apparel Designers Zone, Inc. ("ADZ"), and (B) Approving Agreement Between Debtor and ADZ. Pursuant to the terms of the order ADZ guaranteed a recovery of at least 45% of the debtor's cost of clearance inventory whether sold or unsold, thus amending the original agreement (hereinafter referred to as "the amended agreement"). There is no evidence in the record that the defendant objected to the entry of this order, or that it ever attempted to have it set aside.

The plaintiff's amended complaint alleges that the defendant breached the amended agreement in that it paid the debtor only a fraction of the money owed from the sale. According to the allegations of the complaint, the cost of inventory provided to the defendant by the debtor was $2,289,687.20, and pursuant to the terms of the Order the debtor was owed $1,030,359.24. The amount actually paid was $160,000.00. The plaintiff claims damages for breach of contract in the amount of $870,359.24 and further alleges unjust enrichment in the same amount. The defendant's answer denied the allegations of the complaint.

The defendant filed a counterclaim with its answer, alleging that the debtor had breached the original agreement by failing to disclose its precarious financial condition and implicitly representing that it was solvent. The defendant further alleged that after the filing of its bankruptcy case, the debtor inaccurately represented that a party only identified as "Gordon Brothers" had agreed to buy the inventory to be sold at liquidation for at least 55% of the debtor's costs. The defendant alleged that by this representation the debtor and its lender induced it to agree to the "revision" of the agreement, i.e, the guaranteed recovery of 45% of the debtor's cost of inventory.

The defendant contends that because the cause of action herein is legal in nature (i.e., for breach of contract), it is entitled to a jury trial pursuant to the holding in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). The plaintiff has alleged that this is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(O), which provides that "core proceedings include ... other proceedings affecting the liquidation of the assets of the estate." The Court agrees with this characterization. A matter is not non-core simply because the contacts between the parties arose prior to the filing of the bankruptcy petition. See Nutri/System, Inc. v. Carma, Inc. (In re Nutri/System, Inc.), 159 B.R. 725, 727 (E.D. Pa. 1993).

A bankruptcy court may conduct a jury trial in a core proceeding pursuant to 28 U.S.C.  157(e), if it has been so designated by the district court and if all parties agree. As the defendant points out, it has not agreed to a jury trial in this court, nor has it filed a claim in this case. It is therefore up to the court to decide if it requires a jury trial, and if so, to recommend that the reference of this adversary proceeding be withdrawn by the United States District Court for the Eastern District of Kentucky so that it may conduct such a trial or other proceedings in the adversary proceeding.

The plaintiff argues that the defendant is not entitled to a jury trial because its complaint seeks specific performance of the contract between the debtor and the defendant. Unfortunately for the plaintiff, the language of the complaint does not support such an argument. Count I seeks damages for breach of contract, contending that the defendant owed the debtor a certain amount of money under the agreement and that it did not pay it. Count II alleges unjust enrichment in the same amount. The complaint seeks payment of that sum under both theories.

In regard to Count I, as stated by the court in Hedback v. American Family Mut. Ins. Co.(In re Matthews), 203 B.R. 152, 157-58 (Bankr. D. Minn. 1996), a case cited by the plaintiff but which does not support its position,

The Defendant unquestionably has the right of trial by jury on the Plaintiff's first count. Fundamentally, this is an action for breach of contract, as classical a civil common-law cause of action as exists. .... [T]he Plaintiff seeks to recover money damages for the alleged breach. This is the signal legal remedy under our system.



As to Count II, unjust enrichment is an action in equity, the remedy for which may be the placing of funds in dispute in a constructive trust. Assuming California law must be applied in resolution of this question, courts in that state have held in such cases that absent a demonstration that the remedy provided by law is inadequate, "equity will not intervene." Gama v. County of Kern, 179 Cal. App.2d 1, 4 (1960). The plaintiff here seeks the same relief under Count II as under Count I, i.e., the payment of a sum certain. This is the legal remedy, and apparently the plaintiff considers it adequate. In any event, it has not sought the establishment of a constructive trust.

The nature of the action is not the only determination to be made, however, but whether there are disputed facts at issue. "[W]here little or no disputed facts are at issue and the dispute is largely a question of law, a demand for a jury trial must be denied." Baskin v. Wade (In re Brenner), 119 B.R. 495, 497 (Bankr. E.D. Pa. 1990). The defendant contends that there are several disputed facts including the allegation that it was induced to amend the original agreement, and its allegations that the debtor shipped inadequate amounts of merchandise to be sold, that shipments were late, and that some merchandise consisted of "otherwise unsellable inventory."

In his deposition taken on January 7, 2002, Behnam Badiee, president of the defendant, testified that as to disputed facts. Then in joint stipulations filed herein on February 15, 2002, the parties identified the following as "Disputed Facts:"

17. The Committee claims the Debtor shipped 45,489 units of inventory on four trucks on January 29, 1999. ADZ claims the Debtor shipped 40,308 units of the inventory and that it received the merchandise on the following dates, times, and amounts: (there follows a table setting out this information)

The Committee claims the cost of inventory shipped was $2,289,687.20, as indicated on a computer printout. ADZ disputes this contention because it disputes the total amount of inventory delivered. ADZ claims that the Debtor delivered substantially less inventory than it had promised. The Committee claims that ADZ received sufficient inventory to conduct its liquidation sales profitably.



18. ADZ claims that the Agreement specifies a February 1, 1999 delivery date and that the Debtor delivered the inventory late, damaging its ability to conduct liquidation sales. The Committee claims that ADZ knew of and agreed to the shipment date of January 29, 1999, and ADZ received sufficient inventory in advance of the first liquidation sale held February 4-7, 1999, to conduct that sale profitably.



19. The Committee claims that ADZ was never given the exclusive right to sell the Debtor's inventory at discounted prices. Furthermore, the Committee claim that the inventory shipped to ADZ remained property of the Debtor pursuant to the Agreement. ADZ claims that the Debtor discounted prices including without limitation prices in its catalogues and San Francisco stores, making the inventory delivered "not otherwise marketable." ADZ claims that by discounting its prices, the Debtor breached the Agreement and any implied covenant of good faith and fair dealing. The Committee claims that the Agreement allowed the Debtor to discount its catalog prices or otherwise conduct other liquidation sales.



20. ADZ claims that it could not mitigate its damages because the Debtor flooded the market with cheap merchandise and did not protect ADZ from trademark infringement claims by the purchaser of Peterman's assets. The Committee claims that the Agreement did not prevent the Debtor from selling off its other inventory through other means. The Committee claims ADZ was never given the exclusive right to sell the Debtor's inventory. The Committee also claims that the Debtor had no duty to protect ADZ from trademark infringement by third parties.



21. ADZ claims that the make-up of the inventory made it difficult to sell. The Committee disputes this claim, as the Agreement did not specify the make-up of the inventory.



22. ADZ claims that it notified the Debtor on multiple occasions over the course of more than a year to pick up its remaining inventory. ADZ claims that the Debtor never responded and, ADZ claims, that the Debtor consequently abandoned its right, if any, to the inventory. The Committee denies this claim.



23. ADZ claims that it was told that Gordon Brothers had agreed to pay 55% of the Debtor's cost when in fact Gordon Brothers had not. The Committee denies this claim.



24. ADZ claims that it has been damaged in the amount of $328,744.90 and is entitled to a claim in such amount. In the alternative, ADZ claims it has been damaged in the amount of $98,76d3.91 and is entitled to a claim in such amount. The Committee disputes these claims.



It appears clear that all the elements that support a finding that the defendant is entitled to a jury trial are present.

In summary, therefore, this court recommends that the reference of this adversary proceeding be withdrawn by the United States District Court for the Eastern District of Kentucky for a jury trial, or such other proceeding as that court should deem appropriate, on the plaintiff's amended complaint and the defendant's answer and counterclaim thereto.



By the court -







Judge William S. Howard









Copies to:



Daniel R. Warncke, Esq.

Ali M.M. Mojdehi, Esq.

Kevin G. Henry, Esq.