Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-02938/USCOURTS-caed-2_09-cv-02938-1/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy Appeal

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An identical Memorandum and Order was previously filed in 1

Appellants’ related Appeal, No. 2:09-cv-02942-MCE at Docket No.

32. That Order is being refiled here, without change, only so

that the docket in both cases is clear.

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

In re: No. 2:09-cv-02938-MCE

SK FOODS, L.P., a California

limited partnership, and RHM

INDUSTRIAL /SPECIALTY FOODS, 

INC., a California Corporation,

d/b/a Colusa County Canning Co., MEMORANDUM AND ORDER1

Debtors.

________________________________

SS FARMS, LLC., SSC FARMING, LLC,

SSC FARMING 1, LLC, SSC FARMING 2

LLC and SCOTT SALYER,

Appellants,

v.

BRADLEY D. SHARP, Chapter 11

Trustee,

Appellee.

----oo0oo----

Case 2:09-cv-02938-MCE Document 35 Filed 05/12/10 Page 1 of 10
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 Because oral argument will not be of material assistance, 2

the Court ordered this matter submitted on the briefs. E.D. Cal.

Local Rule 230(g).

2

Through the present Motion, Appellants SSC Farms, LLC, SSC

Farming LLC, SSC Farming 1, LLC, SSC Farming 2, LLC, and Scott

Salyer (collectively referred to as “Appellants” or “Moving

Parties” unless otherwise noted) request a stay of the Bankruptcy

Court’s Order which gave Bankruptcy Trustee Bradley D. Sharp

(“Trustee”) the authorization to continue to possess and review

information in his possession relating to the moving party

farming entities. The farming entities are not debtors in the

underlying bankruptcy proceedings involving SK Foods, L.P. (“SK

Foods”). Moving Parties seek a stay pending their appeal of the

Bankruptcy Court’s Order to this Court. For the reasons set

forth below, Moving Parties’ stay request will be granted.2

BACKGROUND

On May 5, 2009, creditors filed involuntary bankruptcy

proceedings against SK Foods and RHM Industrial/Specialty Foods

(“Debtors”), both of which are engaged in the processing of

tomato products. The Debtors subsequently filed voluntary

Chapter 11 petitions, and Bradley Sharp was appointed Trustee of

the bankruptcy estate on May 18, 2009.

Scott Salyer founded SK Foods and owns the company both

through a separate corporate entity and his trust. The farming

entities, SS Farms, LLC, SSC Farming, LLC, SSC Farms I, LLC, and

Case 2:09-cv-02938-MCE Document 35 Filed 05/12/10 Page 2 of 10
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SSC Farms II, are owned by Salyer’s children.

Those entities grow tomato and vegetable products processed by

the Debtors.

Following his appointment, the Trustee and his counsel took

possession and control of all records located at SK Foods,

including electronic records stored on the company’s computer

servers. Although the farming entities maintain their own

records on SK Foods’ premises, they claim that this arrangement

was under a joint cost sharing arrangement aimed at maximizing

operational efficiency. The Trustee, on the other hand, contends

that SK Foods had custody and control over the electronic and

hard-copy records of the farming entities because debtors and

those entities essentially functioned as a single operational and

economic enterprise. The Trustee alleges the records were

intermingled, that SK Foods employees had ready access to the

farming entity records, and that all the affiliated entities

shared servers and an email system owned by SK Foods. The

farming entities dispute those factual assertions and take the

Trustee and his counsel to task for accessing their private

records along with the SK Foods records, then refusing to return

the farming entity records. 

Ultimately, after Appellants moved to disqualify both the

Trustee and his counsel for improperly converting their property

in violation of the Fourth Amendment, the Trustee filed his own

counter-motion seeking an order from the Bankruptcy Court that he

could continue to review information and documents pertaining to

the farming entities on grounds that, under the circumstances,

they had waived any separate rights and privileges to the

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documents.

On October 9, 2009, the Bankruptcy Court issued a single

Memorandum decision denying the disqualification motion and

granting the Trustee’s counter-motion. The Bankruptcy Court

found, as a matter of law, that the farming entities had waived

any privacy rights associated with their records by failing to

remove them from SK’s premises before involuntary bankruptcy

proceedings were commenced.

On October 19, 2009, the farming entities, along with Scott

Salyer, filed a timely notice of appeal from the Bankruptcy

Court’s Order. Appellants then moved for an emergency stay of

the Order from the Bankruptcy Court on October 28, 2009, pending

completion of the instant appeal, but the Bankruptcy Court

granted only a temporary stay until November 16, 2009 to permit

Appellants to seek the necessary relief from this Court.

Appellants filed an emergency stay request here on

November 6, 2009. Although they requested a hearing date of

November 12, 2009 so as to obtain a decision before expiration of

the temporary stay on November 16, by Order filed November 10,

2009, this Court extended the temporary stay until the matter

could be normally heard on December 10, 2009 and decided

thereafter.

STANDARD

Federal Rule of Bankruptcy 8005 permits a bankruptcy court

to stay its orders pending appeal, and states that stay

applications must ordinarily be made before the bankruptcy court

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before relief is requested from the district court:

A motion for stay of the judgment, order, or decree of

a bankruptcy judge...pending appeal must ordinarily be

presented to the bankruptcy judge in the first

instance....A motion for such relief, or for

modification or termination of relief granted by a

bankruptcy judge, may be made to the district court...

but the motion shall show why the relief,

modification, or termination was not obtained from the

bankruptcy judge...

In evaluating a motion for stay pending appeal, the Ninth

Circuit has directed that equitable criteria be utilized similar

to the criteria applicable for evaluating a motion for

preliminary injunction. See Los Angeles Mem’l Coliseum Comm’n v.

Nat’l Football League, 634 F.2d 1197, 1200 (9th Cir. 1980). The

balancing test in that regard requires consideration of four

intersecting factors: (1) whether the appellant is likely to

succeed on the merits on appeal; 2) whether appellant is likely

to suffer irreparable harm in the absence of a stay; 3) whether

the appellant’s threatened injury outweighs potential damage from

a stay to the appellee; and 4) whether the stay is in the public

interest. American Trucking Ass’n, Inc. v. City of Los Angeles,

559 F.3d 1046, 1052 (9th Cir. 2009)). Courts apply these same

factors in considering a stay under Rule 8005. See In re Irwin,

338 B.R. 839, 843 (E.D. Cal. 2006).

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ANALYSIS

In granting the Trustee’s counter-motion for authorization

to possess and utilize data and documents belonging to the

farming entities and being stored on SK Foods’ business premises,

the Bankruptcy Court found that the farming entities, even though

they were not bankruptcy debtors, had no expectation of privacy

under the Fourth Amendment with regard to such records. The

Bankruptcy Court made that determination as a matter of law on

grounds that the relevant facts were undisputed. In the absence

of undisputed facts, however, the Bankruptcy Court itself noted

that whether a reasonable expectation of privacy exists

ordinarily presents a mixed question of law and fact. See Hill

v. Nat’l Collegiate Athletic Ass’n., 7 Cal. 4th 1, 39-40 (1994). 

Any determination of the reasonableness of a search or seizure in

that regard requires an assessment of all surrounding

circumstances. Skinner v. Ry. Labor Executives’ Ass’n, 489 U.S.

602, 619 (1989). Because Appellants contend that the facts

surrounding the maintenance and use of the farming entity records

are anything but undisputed, they maintain that the Bankruptcy

Court erred in finding no right of privacy as a matter of law,

instead of conducting an evidentiary hearing in order to weigh

the conflicting evidence before reaching any conclusion.

A bankruptcy court abuses its discretion if it bases its

decision on an incorrect view of the law or on clearly erroneous

factual findings. See Warrick v. Birdsell (In re Warrick), B.R.

182, 184 (9th Cir. B.A.P. 2002). 

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 While the Trustee also argues that the appeal itself is an 3

unappealable interlocutory order, that argument appears to be

largely premised on the Trustee’s characterization of the dispute

as concerning a discovery order. See Trustee’s Opp’n, 15:26-

16:8. Access to the farming entities’ data and records, however,

does not relate to any discovery request by the Trustee. 

Instead, the issue here relates to constitutional privacy

concerns of a non-party to the bankruptcy proceedings. That

issue would appear susceptible to interlocutory review.

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Application of the wrong legal standard also constitutes an abuse

of discretion. See Simantob v. Claims Prosecutor, LLC (In re

Lihijani), 325 B.R. 282, 287 (9th Cir. B.A.P. 2005).

Whether or not a stay is appropriate here depends, in large

part, on whether Appellants have demonstrated a “fair chance of

success on the merits.” Gilder v. PGA Tour, Inc., 936 F.2d 417,

422 (1991). A stay may also be warranted if sufficiently 3

serious questions going to the merits of Appellants’ claims

exist. Artukovic v. Rison, 784 F.2d 1354, 1356 (9th Cir. 1986).

The Bankruptcy Court’s decision granting the Trustee’s

counter-motion, as delineated above, hinged on a determination

that because the nature of Appellants’ allegedly intertwined

business dealings with the farming entities was undisputed, the

Court could determine that there was no cognizable privacy

interest as a matter of law and grant the motion on that ground

alone.

In this Court’s estimation, that approach may well be

flawed. Appellants have raised a host of disputed factual

questions which were not addressed by the Bankruptcy Court simply

upon its determination that, as a preliminary matter, Appellants

waived any privacy interest in their data and records because

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they failed to retrieve them before SK’s bankruptcy. 

As Appellants point out, however, a reasonable expectation of

privacy in their financial, personal and other related documents

remains even if such documents are stored or left at the premises

of a third party. See U.S. v. Fultz, 146 F.3d 1102, 1105 (9th

Cir. 1998). Intermingling of documents, alone, does not waive

Appellants’ constitutional rights. See U.S. v. Comprehensive

Drug Testing, 579 F.3d 989, 1004-05 (9th Cir. 2009). The Trustee

has cited no authority for the proposition that such privacy

interests are waived simply because the companies may have shared

storage and access capabilities, and may not have immediately

segregated and taken their own materials once the debtors’

bankruptcy filing occurred. Appellants correctly point out that

any waiver of the constitutional right of privacy must be

narrowly rather than expansively construed. Fortunato v.

Superior Court, 114 Cal. App. 4th 475, 482 (2003).

Significantly, Appellants have identified evidence

suggesting that electronic data for each non-debtor entity was

maintained in separate folders and was not intermingled with data

belonging to other entities. See Decl. of John Matthew Gallegly

in Opp’n to Counter-Motion, ¶ 11. Appellants have further

identified evidence that the servers used to store the data in

question was not owned by the debtor, that SK Foods’ access to

documents and information pertaining to the non-debtor entities

required authorization, and that Appellants immediately demanded

the return of their own private and confidential information once

the Trustee intervened. See generally Appellants’ Reply herein,

pp. 7-11. 

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Particularly given the Trustee’s argument to the contrary that

all of the concerned entities operated as a singular whole, all

of this creates disputed facts that arguably should have been

resolved through an evidentiary hearing rather than as a matter

of law.

This Court therefore concludes that a sufficient showing of

success on the merits has been raised to justify issuance of a

stay of the Bankruptcy Court’s Order pending the appeal presently

before the Court. The other equitable factors that must also be

addressed in determining whether to permit a stay fall readily

into place once that assessment has been made. First, with

respect to the requisite irreparable harm, it appears axiomatic

that such harm is met if Appellants’ confidential business

materials are improperly taken and used against their interests

during the bankruptcy proceeding. Second, turning to the balance

of potential harms, although the Court appreciates the Trustee’s

argument that his inability to access and identify assets of the

debtor could potentially be compromised by a stay, in fact a stay

simply preserves the status quo as it has existed for many

months, first on a voluntary basis prior to the Bankruptcy

Court’s Order, and now in anticipation of this Court’s ruling on

Appellants’ appeal.

Importantly, too, the briefing on the appeal itself should

be completed within the coming two weeks, which means that a

decision as to the matter in its entirety should be forthcoming

shortly. If the Court declines to issue a stay at this time, the

Trustee’s access to Appellant’s data and materials may for all

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practical purposes make adjudication of the appeal itself moot.

Similarly, the public interest is served in preserving the

integrity of the right to appellate review since that right may

be undermined if a stay is not forthcoming.

CONCLUSION

For all the foregoing reasons, Appellants’ Motion to Stay

the Bankruptcy Court’s Order granting the Trustee Counter Motion

Pending Appeal (Docket No. 7) is GRANTED.

IT IS SO ORDERED.

Dated: May 11, 2010

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

Case 2:09-cv-02938-MCE Document 35 Filed 05/12/10 Page 10 of 10