Judge Jacqueline P. Cox - Opinions

Judge Jacqueline P. Cox

In re Teknek, LLC
March 13, 2009

05 B 27545

Chapter 7 trustee sought approval of a settlement agreement resolving all litigation between the defendants in an adversary proceeding for recovery of pre-petition transfers. The settlement agreement was opposed by one of the administrative creditors who argued that the settlement amount was too low. The objecting creditor argued that little of the estate’s resources would be needed to realize a potentially $4 million dollar judgment. The Court approved the settlement agreement, finding the agreement to be in the best interests of the estate.

07 B 19360, 08 A 00300

Prior to filing his chapter 7 bankruptcy petition, the debtor sought to rescind two mortgage loans from the defendants. After the bankruptcy case commenced, the chapter 7 trustee filed an adversary complaint requesting enforcement of the debtor's right to rescind the loans. The trustee alleged that the debtor did not receive two copies of the Notice of Right to Cancel in connection with each loan as was required by the Truth in Lending Act (“TILA”). The trustee asserted that the debtor properly exercised his right to rescission through written notice to the defendants within the three-year time limit provided in 15 U.S.C. § 1635(f) of TILA. The defendants filed a motion to dismiss the trustee's rescission claims as time-barred because he did not file those claims in court within three years after seeking rescission of the loans. At issue was whether a consumer who provides timely notice to a creditor is also required to file a lawsuit seeking to enforce rescission within the time limit set forth in § 1635(f). The Court found that TILA does not preclude the trustee’s suit to enforce the debtor’s right of rescission after the passing of the three-year period because the debtor timely exercised his right to rescind the loans within the three-year period. Therefore, the defendants’ motion to dismiss was denied.

08 B 01187,08 A 00237

In this chapter 11 matter, the shares of the Debtor were held in a trust. Wayne and Terry Cohen were beneficiaries of the trust and two co-trustees were named as trustees of the trust. Wayne was the President of the Debtor and Terry was its CEO. Both were the sole directors of the Debtor. Beginning in 2000, Wayne suspected Terry of looting the Debtor’s assets and notified the co-trustees on several occasions. Pursuant to the trust agreement, the co-trustees had the ability to appoint or remove directors and officers. Despite numerous assurance that they would investigate, the co-trustees did not act. Wayne eventually filed a shareholder’s derivative suit in the Chancery Court of Cook County, Illinois against Terry and the co-trustees for breach of fiduciary duty and civil conspiracy. Eventually, the Debtor was placed into bankruptcy and a creditors’ committee was formed. The committee removed the derivative action to this Court and filed its own adversary proceeding against, inter alai, Terry, Wayne, and the co-trustees. The committee’s complaint also sought relief for breach of fiduciary duty, recovery of fraudulent transfers, and other relief. Wayne eventually amended his complaint to include a RICO cause of action against Terry. The co-trustees moved to dismiss Wayne’s complaint on standing, causation, damages, and mitigation grounds. The co-trustees similarly moved against the committee. Terry moved to dismiss Wayne’s complaint on standing grounds. Wayne moved for judgment on the pleadings regarding the committee’s complaint against him alleging fraudulent transfers. The Court granted the motions to dismiss in part and denied them in part. Wayne’s motion for judgment on the pleadings was denied.

In re Orla Enterprises
January 8, 2009

08 B 27287

In this chapter 11 matter, the debtor-lessor sought to reject a non-residential lease to the extent that the lease remained unexpired. The issue focused on an option to purchase allegedly contained in the lease. The lessee alleged that an option to purchase the property existed in the lease and that it properly exercised the option. The debtor denied that the option ever existed and refused to sell the property to the lessee. The lessee then abandoned the property when the option term ended but before the end of the lease term. The issue on the option’s existence was being litigated in DuPage County Circuit Court before the filing of the bankruptcy petition and is now stayed. The Court denied the motion and held that option contract was not an executory contract since it did not meet that definition on the date of filing the bankruptcy petition. The option would have been breached at the expiration of the option term by the debtor if the option did exist. Conversely, the lease would have been terminated by the lessee when it abandoned the property before the lease term ended if no option existed. Further proceedings are needed to determine if the option existed.

08 B 01187

The movant, the Official Committee of Unsecured Creditors of Hearthside Baking Co., Inc. (the “Committee”), sought entry of an order directing the Debtor to surrender an insurance policy indemnifying the life of one of the Debtor’s principals. After hearing, the Court held that the policy belonged to a third-party and not the Debtor, precluding the Committee’s requested relief. Further, it was noted that under Federal Rule of Bankruptcy Procedure 7001(2), such relief could not be granted via a motion. The Committee’s motion was denied.

In re Teknek, LLC
October 20, 2008

05 B 27545

In this chapter 7 case, the chapter 7 trustee sought to employ Neal Levin of Freeborn Peters LLP as special counsel to pursue causes of action against certain parties affiliated with the debtor (“Teknek Parties”). Levin previously represented the chapter 7 trustee in this capacity and also represented the estate’s main creditor, Systems Division, Inc. (“SDI”) at a point during the bankruptcy case. Levin previously withdrew representation of both parties when the trustee initiated an adversary proceeding against SDI. Now, the trustee seeks to re-employ Levin for the limited purpose of pursuing causes of action against the Teknek Parties. Both the Teknek Parties and SDI object. SDI objected on the grounds that it previously withdrew its as of right and that alleged misconduct by Levin precluded his employment with the estate. The Court held that the Teknek Parties lacked standing to object to Levin’s re-employment and overruled SDI’s objection as it related to its assertion that it withdrew its claim and Levin’s alleged misconduct. However, the Court found that 11 U.S.C. 327(a) precluded Levin’s re-employment to the chapter 7 trustee in this case. Therefore, the objection was ultimately sustained.

In re Marks
September 25, 2008

08 B 06743

A secured creditor objected to the plan of a chapter 13 debtor. The creditor’s claim was for a retail installment contract on a motor vehicle. The plan initially provided for adequate protection payments of approximately 1% of the collateral until payment to the creditor would begin April 2009 when the creditor would begin to receive payment on its claim at 6.25% annum. The creditor objected, arguing that the amount of adequate protection was incorrect, that the plan violated the equal monthly payment provision of § 1325 of the Bankruptcy Code, that it was entitled to attorney’s fees as provided by the original contract between the parties, and the interest rate under the plan was insufficient. The plan was later amended using a calculation for adequate protection that uses the difference between the value of the motor vehicle from the month the petition was filed and the value of the motor vehicle in the month immediately after filing. The Court sustained the creditor’s adequate protection argument but noted that the plan was amended to provide the correct amount. Next, the Court overruled the creditor’s § 1325 argument since it is adequately protected under the plan and that § 1325 does not specifically require the equal monthly payments to a creditor to begin with the first payment to the chapter 13 trustee made under the plan. The creditor’s attorney’s fees were sustained since they were provided for by the original contract. Lastly, the Court held that the creditor did not meet its burden of proving that it was entitled to a higher interest rate than the one provided by the plan.

In re Dugar
August 19, 2008

06 B 11328

Claimant filed a claim against the Debtors’ estate for a breach of contract relating to a contract for home repair work. Each party claimed the other breached the contract. A two-day hearing was held. The Debtors testified that the claimant made work difficult for the Debtors while performing under the contract. She constantly complained about the work, insulted and made vulgar comments consistently to one of the co-debtors while he was trying to work. Events culminated when claimant told the Debtors that she refused to pay any more than the initial deposit for any work the Debtors had done or would do under the contract. The Debtors also brought in a subsequent contractor to testify whom the claimant had also hired to do work on her home. His testimony echoed the Debtors’ testimony. The Debtors met their burden of rebutting the claimant’s claim and the claim was denied.

08 B 01187, 08 A 00237, 08 A 00279

Debtor corporation manufactured and sold cookies as the Maurice Lenell Cooky Company. Two brothers, Terry and Wayne Cohen, served as CEO and President and were sole directors of the company. The company was held in a trust with Wayne and Terry as beneficiaries. Defendants Blum and Gordon were co-trustees of the trust. A dispute formed between the brothers and Wayne filed suit in Cook County Chancery Court in March 2005 against Terry, Blum, and Gordon for Terry’s alleged looting of company assets and Blum and Gordon’s failure to properly investigate Wayne’s allegations. In January 2008, four creditors filed an involuntary petition against the Debtor. Except for a valuation proceeding that eventually became moot or abandoned, little progress was made in the Chancery Case. A committee of unsecured creditors was formed and was given authorization to prosecute causes of action and to intervene in the Chancery Court on behalf of the Debtor. Under this authority, the committee removed the Chancery Court case to this Court. Defendants Blum, Gordon, and Terry opposed removal of the case and filed motions before this Court disputing proper subject matter jurisdiction and for this Court to abstain from hearing the matter and remanding it back to the Chancery Court. The Court found proper “related to” jurisdiction and also denied the defendants’ motion for mandatory abstention, permissive abstention, and equitable remand pursuant to 28 U.S.C. § 1452(b). Further, the committee also filed its own adversary proceeding before this Court and sought to consolidate the removed Chancery Case with their adversary proceeding. This unopposed motion was joined by Wayne and was granted.

07 B 03856

Chapter 11 debtor LLCs objected to the claim of one of its former managing member and agent. The claimant still maintains a membership interest in debtor LLC after being removed as managing member and agent in a state court proceeding prior to the bankruptcy case. Two other members were appointed by the state court as managers of the debtor LLCs. The debtor LLCs filed a counterclaim along with their objection for breach of contract, breach of fiduciary duty, and equitable subordination. In response, the claimant filed a third-party complaint for equitable subordination against the current managing members alleging commingling of assets, undercapitalization, and mismanagement. The debtor LLCs and managing partners each filed motions to dismiss arguing that the claimant lacked standing to bring the suit, violated the automatic stay by bringing the suit, violated the Barton doctrine that precludes bringing a suit against a trustee (or DIP) or its current management without leave of the Court, that the issue was barred by res judicata and collateral estoppel since undercapitalization issues were raised during a prior objection to a motion to sell property in a separate proceeding, and that the third-party action was improper and should have been filed as an adversary proceeding. The Court held that the claimant had standing to bring claim for equitable subordination and did not violate the automatic stay in doing so. Also, the Court held the Barton doctrine was not violated since the suit was for alleged acts occurring pre-petition. Further, Res judicata and collateral estoppel were inapplicable because the facts alleged at the sale motion objection differed from those alleged in the current third-party complaint. Finally, the Court dismissed the third-party complaint as improper under rule 7014 and directed the claimant to re-file his suit as an adversary proceeding as required by Fed.R.Bank.P. 7001(8), and Fed.R.Bankr.P. 3007(b), which was amended December 10, 2007 requiring that all actions for relief as provided by Rule 7001(8) must be brought via an adversary proceeding. The debtor LLCs were directed by separate order to re-file their counterclaim as an adversary proceeding as required by Rules 7001(8) and 3007(b).