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In re Polaroid Corporation

United States District Court, D. Minnesota

March 29, 2017


          David J. Adler, MCCARTER & ENGLISH LLP, Four Gateway Center, and Robert T. Kugler, STINSON LEONARD STREET LLP, for appellant.

          John R. Stoebner and Ralph V. Mitchell, Jr., LAPP LIBRA THOMSON STOEBNER & PUSCH, CHARTERED, for appellee.


          JOHN R. TUNHEIM Chief Judge United States District Court

         This matter arises out of the bankruptcy proceedings of Debtor Polaroid Corporation (“Polaroid”). Appellant PNY Technologies, Inc. (“PNY”) submitted a proof of claim in the amount of $686, 837.57 seeking payments related to its prior business relationship with Polaroid. Polaroid's trustee (“Trustee”) objected to a portion of PNY's proof of claim in 2011, and the Bankruptcy Court sustained the Trustee's objection in 2013. PNY appealed, arguing that it should have been given an opportunity to conduct discovery, and in 2015, this Court vacated the Bankruptcy Court's 2013 order and remanded for further proceedings. Subsequently, PNY conducted discovery and the Trustee expanded its objection to cover all but a small portion of PNY's proof of claim. The Bankruptcy Court held a joint trial and evidentiary hearing on the Trustee's objection in October 2015. In May 2016, the Bankruptcy Court sustained the Trustee's objection, allowing only $41, 923.57 of PNY's original claim for $686, 837.57.

         PNY now appeals the order of United States Bankruptcy Judge Gregory F. Kishel dated May 5, 2016, arguing that the Bankruptcy Court (1) should have considered certain internal documents to be “admissions” binding on the Trustee; (2) should have drawn an adverse inference against the Trustee for failure to produce certain documents during discovery; (3) strayed from the mandate of the Court's 2015 decision; and (4) erred in its determination of PNY's claim amount. For the reasons set forth below, the Court affirms the order of the Bankruptcy Court.


         I. FACTS & PROCEEDINGS BEFORE 2015[1]

         On April 6, 2007, PNY and Polaroid executed a Support Services Agreement (“SSA”) under which Polaroid would act as an intermediary in the sale of PNY's goods to the retailer Target Corporation (“Target”). (Appellant's Br. (“PNY Br.”), Exs. 1-3 (“App.”) at 11-20, July 25, 2016, Docket No. 18.)[2] The process contemplated by the SSA is as follows: Target would submit a purchase order for PNY-manufactured goods to Polaroid, Polaroid would then submit a purchase order reflecting Target's order to PNY, PNY would ship the products to Target, PNY would invoice Polaroid for the order, Polaroid would then invoice Target for the order, Target would send payment to Polaroid, and Polaroid would pass on the payment to PNY less a 1% service fee as described in the SSA (the “Service Fee”). (Id. at 11-12, 34.) Under the SSA, Polaroid was never obligated to pay PNY for its fulfillment of a purchase order unless and until Target first paid Polaroid.[3] (Id. at 12.)

         Occasionally, Target would deduct various costs associated with the sale of PNY's goods (for example, charge backs, price protections, discounts, and advertising costs) from the overall amount it paid to Polaroid; these costs are referred to for purposes of this Order as “deductions.” The SSA further provides that “PNY will be solely responsible for any [deductions, including ]situations, risks, liabilities, and claims relating to charge backs, price protections and discounts, marketing fees, late or incomplete shipments, returns, recalls, consolidation fees and charges, and similar risks relating to or arising from the sale of the Products to [Target].” (Id. at 13.)

         The parties conducted business under the SSA until June 30, 2008. (Id. at 20.) Polaroid filed for bankruptcy on December 18, 2008; on August 31, 2009, the proceedings were converted from Chapter 11 to Chapter 7. (Id. at 124.) On February 20, 2009, PNY filed a Proof of Claim (referred to as “Claim 34”) against Polaroid in the bankruptcy proceeding; PNY sought a total of $686, 837.57 from Polaroid composed of $111, 713.60 in “Invoices” (the “Invoices Claim”) and $575, 123.97 in “Deductions” (the “Deductions Claim”).[4] (Id. at 21-27.)

         On June 21, 2011, the Trustee filed a motion seeking to disallow the Deductions Claim. (Id. at 28-32.) The Trustee argued that based on the SSA, PNY bore all risk for Target's deductions of various sorts, and therefore, Polaroid could only possibly owe PNY $111, 713.60 based on the Invoices Claim. (Id. at 30). PNY responded that it would be premature for the Court to disallow the Deductions Claim without first giving PNY leave to obtain “narrow” discovery from the Trustee[5] related to “the relationship between Polaroid and Target, ” “[t]he payments from Target to Polaroid and the invoices sent from Polaroid to Target, ” including whether Target withheld any portion of payment based on a “deduction” and also whether any payments from Target were based on Target's reversal of previous deductions or chargebacks. (Id. at 180-81, 194-95.) On December 30, 2013, the Bankruptcy Court denied PNY's request for discovery and disallowed the Deductions Claim as a matter of law based on its interpretation of the SSA (the Bankruptcy Court's decision is referred to as the “2013 Claims Order”). (Id. at 133-55.) The Bankruptcy Court, however, allowed the Invoices Claim because “the Trustee had not met his burden[, ] as objector, to rebut the prima facie validity assigned to that component of the claim under Fed.R.Bankr.P. 3001(f).” (Id. at 923.)

         In February 2014, the Bankruptcy Court denied PNY's motion to reconsider the 2013 Claims Order, and PNY subsequently appealed the 2013 Claims Order and the denial of the motion to reconsider to the District Court. (Id. at 343-44, 339-40.)


         On appeal, the Court vacated the 2013 Claims Order. PNY Techs., Inc. v. Polaroid Corp. (In re Polaroid Corp.), 527 B.R. 335 (D. Minn. 2015). In In re Polaroid Corp. (also referred to as the “Remand Order”), the Court reasoned that the Bankruptcy Court had abused its discretion in not permitting discovery before the entry of judgment under Rule 56(d) of the Federal Rules of Civil Procedure.[6] Id. at 347-48. The Court explained:

[The Court] will remand to allow PNY to conduct discovery with respect to its entitlement to the $575, 123.97 sought in its proof of claim. The Court notes, however, that such discovery will be limited to the document production requests that PNY has cited in its brief before this Court, [7] as these are the materials that PNY indicated would be probative on its proof of claim.

Id. at 350-51 (footnotes omitted). As for the Invoices Claim, the Court explained:

PNY has not, . . . provided a basis for allowing additional discovery with respect to the $111, 713.69 sought in invoices, and therefore may not conduct discovery to ascertain if any additional invoices would entitle PNY to more than the $111, 713.69 relief it claims.

Id. at 351 n.8. The Court remanded the matter to the Bankruptcy Court for “further proceedings consistent with this Order.” Id. at 351.


         After remand, at a status conference on May 26, 2015, the Trustee's counsel announced, for the first time, his position that the Invoices Claim should be disallowed, stating that Polaroid's “obligation to [pay the invoices PNY sent to Polaroid] arose only if and when [Polaroid] received payments from Target, so [Polaroid] had no liability for invoices at all.” (App. at 534.) The Trustee's counsel did not formally object to the Invoices Claim at that time, but stated that the Trustee was “looking into whether he wants to amend his objection since the whole order came back and was reversed and remanded, including the allowance of [the Invoices Claim].”[8] (Id.)

         Subsequently, the Bankruptcy Court directed PNY to serve discovery requests “within the subject-matter limits imposed by the district court on remand, ” cautioning that the requests must be “directed toward the specific factual question of whether Target Corporation ever rectified the account chargebacks in dispute by making payment to the Debtors that the Debtors then did not pay over to PNY.” (App. at 555-56 (citing In re Polaroid Corp. at 351 & n.8).)

         On June 9, 2015, PNY served Polaroid with a formal request for documents which included a modified, rather than verbatim, version of its 2011 discovery request.[9] A dispute ensued over whether PNY's discovery requests were proper, and PNY filed a motion to compel.[10] (Id. at 558-98). On August 24, 2015, PNY withdrew its motion to compel, stating that “on August 19-20, 2015 Plaintiff, through its counsel, provided PNY with answers to the relief requested in the Motion.” (Id. at 603.)

         The Bankruptcy Court held a joint evidentiary hearing and trial on October 28 and 29, 2015. The parties submitted exhibit lists in advance of the hearing, and they jointly stipulated to the admission of certain exhibits.[11] In the Trustee's pre-hearing brief filed September 11, 2015, the Trustee formally objected to the Invoices Claim for the first time, echoing the arguments the Trustee made in the status conference on May 26, 2015. (Id. at 644.) PNY's pre-hearing brief, filed on October 3, 2015, did not directly address the Trustee's new objection to the Invoices Claim, nor did it request additional discovery, though it did state that “it is troubling that many responsive documents were not produced” and “[a]s a result of this, these issues will need to be explored with the witnesses at the evidentiary hearing.” (Id. at 652.)

         At the evidentiary hearing, PNY relied on Polaroid's internal reports summarizing all SSA-related transactions with Target and PNY on a monthly basis (the “Monthly Reconciliations”). The reports, which the Trustee provided to PNY in February 2015, showed that overall, Target paid $5, 511, 844 to Polaroid in connection with the SSA and that Polaroid remitted $5, 079, 316 to PNY over the life of the SSA. (See, e.g., id. at 990.) A PNY employee testified that she could not verify the accuracy of the $5, 511, 844 figure because the exhibit “[was not her] document, ” and it came from Polaroid. (Id. at 681.) The Monthly Reconciliations did not provide an accounting of each and every transaction that took place each month; rather, they were contemporaneously-created summaries created monthly, and the data on them was pulled from Polaroid's more-detailed ledger books.

         The Trustee's witness, James Dolan, testified that the Monthly Reconciliations showing Target had paid Polaroid $5, 511, 844 were not accurate.[12] (See generally Id. at 931-32.) According to Dolan, in the course of responding to PNY's discovery request, he discovered that the underlying source documents (the ledger books) were correct, but that when Polaroid personnel created the Monthly Reconciliation for March 2008, they had pulled data from the wrong part of the ledger books, thus resulting in an inflated sum on the Monthly Reconciliations. (Id. at 695-98, 701-04, 766-67, 777, 780-81.) Dolan testified that based on his review of the ledger books, to his knowledge Target had actually only paid Polaroid $5, 172, 970, rather than $5, 511, 844. (Id. at 704.) Dolan also testified that the error was discovered “about two weeks after [he] prepared the reconciliation schedule.” (Id. at 781.)

         Based on the evidence produced at the evidentiary hearing as well as the parties' post-hearing briefing, on May 5, 2016, the Bankruptcy Court issued an order (the “2016 Claims Order”) sustaining the Trustee's objection to PNY's proof of claim to the extent of all but $41, 923.57 (the difference between $5, 172, 970 and $5, 079, 316, less the Service Fee). (Id. at 920-41.) On May 19, 2016, PNY filed a Notice of Appeal regarding the 2016 Claims Order. (Id. at 942-45.) PNY now appeals pursuant to 28 U.S.C. § 158(a).


         In bankruptcy proceedings the District Court sits as an appellate court and reviews the Bankruptcy Court's conclusions of law de novo and its findings of fact for clear error. Reynolds v. Pa. Higher Educ. Assistance Agency, 425 F.3d 526, 531 (8th Cir. 2005). “A finding is ‘clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948); see DeBold v. Case, 452 F.3d 756, 761 (8th Cir. 2006). A trial court's decisions regarding discovery sanctions are subject to abuse-of-discretion review. Smith v. AS Am., Inc., 829 F.3d 616, 624 (8th Cir. 2016); Sentis Grp., Inc. v. Shell Oil Co., 559 F.3d 888, 898 (8th Cir. 2009). “To the extent a discovery sanction depends upon an interpretation of law, our review of the underlying legal determination is de novo.” Sentis Grp., 559 F.3d at 899 (citing United States v. Gonzalez-Lopez, 403 F.3d 558, 564 (8th Cir. 2005)). To the extent a discovery sanction depends on a ruling under Fed.R.Civ.P. 26(e), the 26(e) ruling is reviewed “for gross abuse of discretion and [should be] reverse[d] only if it resulted in fundamental unfairness.” United States v. STABL, Inc., 800 F.3d 476, 487 (8th Cir. 2015).

         An appellate court's prior opinion binds the trial court on remand regarding “all matters within the compass of [the] prior opinion.” Houghton v. McDonnell Douglas Corp., 627 F.2d 858, 865 (8th Cir. 1980). “[O]n remand the trial court is free to pass upon any issue which was not expressly or impliedly disposed of on appeal.” Thornton v. Carter, 109 F.2d 316, 320 (8th Cir. 1940). However, later decisions must “not [be] inconsistent with either the spirit or express terms of [the appellate court's] decision.” Quern v. Jordan, 440 U.S. 332, 347 n.18 (1979); Houghton, 627 F.2d at 865. A reviewing court “may construe its own [prior] mandate, ” which “is ‘to be interpreted reasonably and not in a manner to do injustice.'” Bailey v. Henslee, 309 F.2d 840, 843-44 (8th Cir. 1962) (quoting Wilkinson v. Mass. Bonding & Ins. Co., 16 F.2d 66, 67 (5th Cir. 1926)). “The question of whether the bankruptcy court exceeded [a reviewing court's prior] mandate is a question of law and is thus subject to de novo review.” In re Tri-State Fin., LLC, 519 B.R. 759, 765 (B.A.P. 8th Cir. 2014).

         Rule 8014(a) of the Federal Rules of Bankruptcy Procedure - like Rule 28(a) of the Federal Rules of Appellate Procedure - requires an appellant's brief to include “a statement of the issues presented” and an “argument, which must contain the appellant's contentions and the reasons for them, with citations to the authorities and parts of the record on which the appellant relies.” Fed.R.Bankr.P. 8014(a)(5), (a)(8); see Fed. R. App. P. 28(a)(5), (a)(8). “To be reviewable, an issue must be presented in the brief with some specificity. Failure to do so can result in waiver.” Meyers v. Starke, 420 F.3d 738, 743 (8th Cir. 2005) (interpreting Fed. R. App. P. 28(a)(5)).


         First, the Court provides a brief discussion of the Bankruptcy Court's application of the burden-shifting framework set out in the Federal Rules of Bankruptcy Procedure.

A properly filed proof of claim constitutes prima facie evidence of the validity and amount of the claim. Fed.R.Bankr.P. 3001(f); Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004). If a proof of claim is not objected to, it “is deemed allowed.” 11 U.S.C. § 502(a). To rebut the “presumptive validity” of a claim an objector bears the burden of producing “substantial evidence.” Brown v. IRS (In re Brown), 82 F.3d 801, 805 (8th ...

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