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In re SK Foods

May 11, 2010

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

Non-debtor Appellants SS Farms, SSC Farming, SSC Farms I, SSC Farms II and SK Foods CEO Scott Salyer (collectively "Appellants") appeal the bankruptcy court's order in favor of Chapter 11 Trustee Bradley D. Sharp ("Appellee").*fn1

On October 9, 2009, the bankruptcy court denied Appellants' motion to remove the Trustee and disqualify counsel, and granted Trustee's counter-motion to retain possession of Appellants' documents. For the reasons set forth below, the bankruptcy court's decision is affirmed.

BACKGROUND

Debtor S.K. Foods L.P. ("Debtor"), managed by Appellant Scott Salyer ("Salyer") permitted Appellants and other non-debtors to store financial, business, estate planning, and other personal documents on Debtor's premises in a combined computer system as part of a joint administration arrangement. Debtor employees would perform accounting and recordkeeping services for Appellants.

On May 8, 2009, Debtor filed for Chapter 11 bankruptcy. On May 18, 2009, Appellee Bradley Sharp was appointed as Trustee for Debtor and he selected the firm of Schander Harrison Segal & Lewis LLP as his counsel. Following appointment, Appellee took possession of all records located on the premises of Debtor, including documents and electronic files belonging to Appellants.

Upon discovering the confiscation of their documents, Appellants wrote to Appellee demanding return of the original documents without further review. Appellee refused.

Appellee contends that continued possession and review of Appellants' documents is attendant to the discharge of his duties. According to Appellee, Appellants' documents were controlled by Debtor and intermingled with Debtor's files making his review of Appellant's documents necessary as trustee. Furthermore, Appellee states that in his efforts to close sale of Debtor's assets, he was prevented from doing so by Appellants seeking to terminate Wastewater Discharge Agreements made with Debtor. Believing that Appellants did not have the right to terminate those agreements, Appellee asked Debtor's CFO to provide information about the payment practices between Debtor and Appellants in order to determine whether the parties' course of dealing waived any right Appellants had to terminate the agreements. Debtor's CFO turned over Appellants' records located on Debtor premises. Based on the information acquired, Appellee thereafter filed an adversary complaint in bankruptcy court seeking to consolidate the Appellant entities, and their assets, into Debtor's bankruptcy estate.

On August 7, 2009, Appellants filed a motion to remove the Trustee and disqualify counsel on the grounds that the documents in Appellee's possession are confidential, and in many instances protected by attorney-client privilege or work product doctrine.

Appellants further allege that Trustee's possession constitutes conversion, and that the Trustee's "seizure" of their documents violates their privacy rights under the California and U.S. Constitutions. In response, Appellee filed a counter-motion requesting an order confirming his authority to continue to possess and review the documents in question.

The bankruptcy court held oral argument on September 29, 2009, and subsequently denied Appellants' motion and granted Appellee's counter-motion on the grounds that Appellants could not have had a reasonable expectation of privacy in their documents and had additionally waived their right to any privilege. As such, the trustee and his counsel could not be held liable for violation of privacy or conversion.

STANDARD

The bankruptcy court's conclusions of law are reviewed by the District Court de novo. State Bar of California v. Findley (In re Findley), 593 F.3d 1048, 1050 (9th Cir. 2010). The standard of review for factual questions is "clearly erroneous." Harris v. Wittman (In re Harris), 590 F.3d 730, 736 (9th Cir. 2009).

Findings of fact are "clearly erroneous" only if the "reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed." Anderson v. Bessemer City, 470 U.S. 564, 573 (1985) (quoting United ...


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