09 B 49094, 11 A 2395
This matter involves the former principals of Brown’s Chicken & Pasta (“Debtor”), the franchisor of Brown’s Chicken restaurants in the Chicago area. Following the dissolution of the principals’ business relationship, litigation ensued and a judgment was entered against the Debtor in the amount of $882,000,which led to the Debtor’s bankruptcy filing in 2009.
At issue in this adversary proceeding is what property was sold in a section 363 sale of Debtor’s assets. In Count I, the Plaintiff accuses the Defendants of conversion of equipment purchased in the sale, valued at $25,582.25. The Defendants claims that although the equipment was mistakenly included in Debtor’s schedules, it had previously been sold, and therefore, was not property of the bankruptcy estate. In Count II, Plaintiff requests declaratory relief, arguing that it properly assumed and accepted a 15-year franchise agreement between the Debtor and franchisee, Joli Inc. The Defendants counter that a subsequent 15-month franchise agreement is the operative document which was been terminated in accordance with its terms.
As to Count I, the Court ruled that Plaintiff justifiably relied on the representation in Schedule B that the equipment listed therein belonged to the Debtor. The Court noted that Schedule B was never amended to reflect the purported change in ownership, and concluded that the equipment was sold to Plaintiff in the section 363 sale.
As to Count II, the Court expressed doubts as to the authenticity of the shorter, 15-month franchise agreement, and concluded that the 15-year term franchise agreement had been properly assumed and assigned by the Plaintiff in accordance with the requirements of the Bankruptcy Code.
Judge Jacqueline P. Cox - Opinions
Judge Jacqueline P. Cox
December 16, 2013
09 B 49094, 11 A 2395
November 19, 2013
12 B 49219 (jointly administered)
The Sierra Club filed a motion seeking entry of an order confirming that the automatic stay was not in effect due to the police power exception of Bankruptcy Code section 362(b)(4), or, in the alternative, granting relief from the automatic stay to continue a regulatory action pending against Debtor, Midwest Generation, LLC before the Illinois Pollution Control Board. The Court held that the police power exception was not applicable, noting that the Sierra Club is not a “governmental unit” as defined by Section 101(27) of the Bankruptcy Code. The Court also noted that neither the Illinois Attorney General, nor the Illinois EPA intervened in the proceeding initiated by the Sierra Club. The Court determined that cause existed to lift the stay, after employing a balancing test as instructed by the Seventh Circuit in In re Fernstrom,938 F.2d 731, 735 (7th Cir. 1991). The court also considered the impact of the alleged environmental violations on the residents of Illinois.
June 19, 2013
11 B 51502
Evans Construction Company (“Evans”) filed a secured Mechanics Lien claim in the amount of $398,937.00 which represented amounts that were owed directly to Evans’ subcontractors. The Lender, Debtor's successor, objected to the claim, asserting a setoff for amounts paid directly to subcontractors and for amounts paid to correct construction work alleged to be defective. The Court reduced Evans claim to reflect amounts proven to be paid directly to subcontractors. However, after hearing the testimony of several witnesses, the Court determined that the Lender’s assertion that Evans produced faulty work was not supported by the evidence, as the defects complained of were explicitly contracted for by the parties.
April 26, 2013
09 B 42237
In this Chapter 13 proceeding, the Court granted the Debtor’s motion for sanctions, after a Mortgagee continued to collect the mortgage payments from both the Debtor and the Trustee despite the Court’s approval of a loan modification agreement. The Court’s opinion highlights the importance of parties examining whether loan modifications necessitate a subsequent chapter 13 plan amendment to accurately provide for treatment of mortgage arrears.
March 19, 2013
11 B 40944 (jointly administered)
In this memorandum opinion, the Court denied confirmation of the Debtor’s Third Amended Plan of Reorganization. The Court noted that to satisfy the Bankruptcy Code’s requirement that the Debtor’s Plan be fair and equitable, a plan must propose an interest rate adequate to assure the realization of the Bank’s claim. In this case, the Court determined that the interest rate advanced by the Debtor did not sufficiently capture the risk that the Debtor would not satisfy the Bank’s claim. The Court also determined that the Plan was not feasible because the Debtor failed to prove that the property would increase in value enough to give the Debtor sufficient equity to facilitate refinancing at the end of 7 years to fund a balloon payment to the Bank. Also, relying on the Seventh Circuit’s decision in In re Castleton Plaza, LP, No. 12-2639, 2013 WL 537269, and Bankruptcy Code Section 101(31)(B), the Court held that the nature of the plan warrants application of the absolute priority rule as the plan gave the Debtor’s insider preferential access to an investment opportunity in the Reorganized Debtor without allowing others to compete for that opportunity. The Court also granted the Bank’s request for relief from the automatic stay because the Debtor failed to show that there is a reasonable possibility of a successful reorganization.
January 10, 2013
11 B 40944 (jointly administered)
In this memorandum opinion, the Court denied confirmation of the Debtor’s Amended Plan of Reorganization. The Court noted that to satisfy the Bankruptcy Code’s requirement that the Debtor’s Plan be fair and equitable, a plan must propose an interest rate adequate to assure the realization of the Bank’s claim. In this case, the Court determined that the interest rate advanced by the Debtor did not sufficiently capture the risk that the Debtor would not satisfy the Bank’s claim. The Court also determined that the Plan was not feasible because the Debtor failed to prove that the property would increase in value enough to give the Debtor sufficient equity to facilitate refinancing at the end of 7 years to fund a balloon payment to the Bank. The Court also granted the Bank’s request for relief from the automatic stay because the Debtor failed to show that there is a reasonable possibility of a successful reorganization.
October 19, 2012
12 B 08807
In this Chapter 13 proceeding, the Court sustained Creditors’ objection to confirmation of Debtors’ Plan, holding that the Debtors’ obligations under a Settlement Agreement with a former employer (including a non-compete clause) were non-monetary in nature, and therefore were not a "claim" for bankruptcy purposes. Only claims for money can be discharged. The Settlement Agreement included language that the non-monetary provisions of Articles 3 and 4 were the essence of the agreement and that should the Debtors fail to perform the duties prescribed in those provisions, injunctive relief would be appropriate to require the Debtors to perform the duties. The Court also noted that the provision governing attorney’s fees was not a compensation remedy, but was designed to make the prevailing party whole after the resolution of disputes.
October 16, 2012
11 B 42873, 11 A 02278
4100 West Grand LLC, debtor in possession, filed this adversary proceeding against defendant, TY Grand LLC, to avoid and recover a transfer alleged to be fraudulent pursuant to 11 U.S.C. §§ 544, 548 and 740 ILL. COMP. STAT. §§ 160/5 and 160/6. As a threshold matter, the Court relied on the Stern v. Marshalldecision and its progeny in determining that the Court had authority to enter a final judgment in the adversary, as the proofs of claim filed by the defendant made clear that their resolution depended on the outcome of the debtor’s fraudulent conveyance claims. Proof of claim no. 3-5 provided that if TY Grand did not prevail in the litigation, its secured claim would be $2,722,170.34. If TY Grand prevailed, it would have no claim against the Debtor. Because the fraudulent conveyance cause of action was resolved in the process of ruling on the proofs of claim, the bankruptcy court has authority to enter a final order herein. Stern v. Marshall, —U.S.—, 131 S.Ct. 2594, 2620 (2011). In the alternative, should a reviewing court find that this court lacked authority to enter a final order, the Court held that its memorandum opinion may serve as its proposed findings of fact and conclusions of law under section 157(c)1. This adversary proceeding was initiated after TY Grand LLC recorded a deed in lieu of foreclosure for Property valued at $1.115 million after 4100 West Grand LLC defaulted under the terms of the parties’ Forbearance Agreement. During the forbearance period, TY Grand also received cash payments in the amount $485,000. Pursuant to the terms of the agreement, after the recording of the deed, TY Grand LLC waived its right to sue for non-monetary defaults under the agreement, as well as the deficiency amount of $2,510,123.90. The Court entered judgment in favor of TY Grand, holding that 4100 West Grand LLC received reasonably equivalent value in exchange for the transfer. The Court determined that TY Grand LLC received value in the amount of $2,310,000, which amount represents the value of the Property transferred ($1.115 million); $485,000 in cash payments; and a claim under the Forbearance Agreement worth approximately $710,000; whereas the Debtor received a release of a $2.5 million debt
August 24, 2012
Attorney Daniel A. Zazove and the Perkins Coie law firm filed a Motion and Application for Allowance of Compensation as Debtor's Attorney. Chapter 7 Trustee Steven Radtke and Robert Stein, a defendant in a related adversary, objected to Counsel’s Application for Compensation, arguing that subsequent to the entry of the retention order, Zazove and Perkins Coie received other compensation from an Assignee or Fifth Third Bank without leave of court as required by 11 U.S.C. § 330(a)(1). Mr. Zazove argued that those funds were for services rendered to the Assignee for the Benefit of Creditors, not the bankruptcy estate. Over Stein’s objection, the Court granted Counsel’s application for compensation. In the spirit of abstention, the Court declined to require the Assignee to submit to bankruptcy court jurisdiction after he was excused from the Section 543 delivery requirement. Bankruptcy Code Section 330(a)(1) governs compensation to professionals retained by a bankruptcy estate; it has no application to the payment of an assignee’s attorney for legal services rendered in the operation of an assignment for the benefit of creditors.
March 7, 2012
Defendants in eleven Lancelot-related (08-B-28225) adversary proceedings brought 17 motions for summary judgment arguing that each matter involved the straightforward application of Bankruptcy Code Sections 546(e) and (g) “safe harbor” limitations on a trustee’s avoidance powers and for that reason they were entitled to summary judgment as a matter of law regarding payments and transfers made to them. The Trustee resisted the imposition of summary judgment on two major grounds: that the safe harbor provisions do not shield payments and transfers tainted by Ponzi Scheme fraud and that avoiding the payments and transfers would not materially impact the financial markets. The Defendants suggested that the Trustee’s arguments look beyond the plain statutory text of the safe harbor provisions by reading exceptions into the Code. The Court granted summary judgment as to the Counts alleging preferential transfers and constructive fraudulent transfers under Bankruptcy Code Sections 548(a)(1)(B), 550 and 544 as well as under Illinois law, but denied summary judgment as to the actual fraudulent transfer claims asserted under Section 548(a)(1)(A). The safe harbor provisions specifically prohibit the recovery of preferential transfers, constructively fraudulent transfers and claims based on state law. The provisions do not protect actual fraudulent transfer claims. The Court declined to expand the plain meaning of the statute, and noted that Congress did not exempt all fraudulent transfers from safe harbor protection, only those involving actual fraud, claims that allege that a debtor acted “with actual intent to hinder, delay or defraud any entity” to which the debtor was indebted. Before submitting Orders on these matters, the Court invited the parties to submit supplemental briefs on whether the Orders resolve core matters on which this court may enter final orders in light of the Supreme Court’s ruling in Stern v. Marshall, 131 S.Ct. 2594 (2011) and the recent Seventh Circuit Court of Appeals ruling in Ortiz v. Aurora, 665 F.3d 906 (7th Cir. 2011).