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In re SK Foods

December 23, 2009

IN RE: SK FOODS, L.P., A CALIFORNIA LIMITED PARTNERSHIP, AND RHM INDUSTRIAL /SPECIALTY FOODS, INC., A CALIFORNIA CORPORATION, D/B/A COLUSA COUNTY CANNING CO., 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.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

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.*fn1

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 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 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 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 ...


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