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Wells Fargo Financial Leasing, Inc. v. Comdisco

May 30, 2006

WELLS FARGO FINANCIAL LEASING, INC., APPELLANT,
v.
COMDISCO, INC., APPELLEE.



The opinion of the court was delivered by: Honorable David H. Coar

MEMORANDUM OPINION AND ORDER

Before this court is Appellant Wells Fargo Financial Leasing, Inc.'s ("WFFL's") appeal from the Bankruptcy Court decision in United States Bankruptcy Case No. 01 B 24795. That decision denied WFFL's Motion to Reconsider Disallowance of Claim No. 2022 and entered judgment in favor of Appellee, Comdisco, Inc. ("Comdisco"). This Court has jurisdiction to determine this appeal pursuant to Title 28, Section 158(a)(1) of the United States Code. For the following reasons, this Court reverses the judgment below and remands the case to the Bankruptcy Court for proceedings consistent with this opinion.

I. STATEMENT OF THE ISSUES PRESENTED

The two issues on appeal are (1) whether the Bankruptcy Court erred in refusing to consider evidence in support of WFFL's motion to reconsider the disallowance of its claim on the basis of newly discovered evidence, and (2) whether the Bankruptcy Court erred by applying an improper legal standard when ruling on WFFL's motion to reconsider on the basis fraud, misrepresentation, or other misconduct. Both issues arise under Section 502(j) of the Bankruptcy Code, which governs the reconsideration of claims that have been disallowed, and Rule 60(b) of the Federal Rules of Civil Procedure, which governs relief from final judgment.

II. APPLICABLE STANDARD OF REVIEW

The District Court reviews a Bankruptcy Court's grant or denial of relief under Bankruptcy Code § 502(j) and Federal Rule of Civil Procedure 60(b) for abuse of discretion. See In re Williams, 276 B.R. 899, 906 (C.D. Ill. 1999); see also In re Childress, 851 F.2d 926, 927 (7th Cir. 1988). Under this standard of review, "the relevant inquiry is . . . whether any reasonable person could agree with the [bankruptcy] court." In re Morris, 223 F.3d 548, 554 (7th Cir. 2000) (citation omitted) (alteration in original). "In general terms, a court abuses its discretion when its decision is premised on an incorrect legal principle or a clearly erroneous factual finding, or when the record contains no evidence on which the court rationally could have relied." In re KMart Corp., 381 F.3d 709, 713 (7th Cir. 2004). Accord Salgado by Salgado v. General Motors Corp., 150 F.3d 735, 739 & n.4 (7th Cir. 1998) (explaining that the reviewing court must "scrutinize the [lower] court's determination to ensure that it invoked the correct legal standards and that its findings of fact are not clearly erroneous."). The standard is extremely deferential, but not "toothless." Land v. Chicago Truck Drivers, Helpers and Warehouse Workers Union, 25 F.3d 509, 515 (7th Cir. 1994); see also Castro v. Board of Education, 214 F.3d 932, 934 (7th Cir. 2000). In reviewing the evidence, the court must accept as true the movant's undenied allegations. Tobel v. City of Hammond, 94 F.3d 360, 362 (7th Cir. 1996).

III. FACTUAL AND PROCEDURAL BACKGROUND

The Sale-Leaseback Transaction between WFFL and Comdisco In November and December 1994, WFFL and Comdisco entered into a commercial transaction-a sale-leaseback of computer equipment. WFFL purchased the equipment from Comdisco through a third party, and Comdisco leased the equipment back from WFFL.

The transaction was structured so that WFFL would receive tax depreciation benefits. The transaction also included an Indemnity Agreement in which Comdisco promised to indemnify WFFL if WFFL did not receive the expected tax benefits because Comdisco breached any of the representations it made in the various transaction documents. Finally, the transaction included a Consent and Agreement, in which Comdisco promised to indemnify WFFL if its representations were not correct.

The Double Sales

Two of the computers involved in the sale-leaseback are at issue in this appeal: the "ADP Computer" and the "Southwestern Bell Computer." Unbeknownst to WFFL, Comdisco "double sold" these two computers.*fn1 This Court will forgo the details in favor of a generalized description of the event: Although WFFL was supposed to receive good title to the ADP and Southwestern Bell computers, Comdisco actually sold the computers to WFFL and to other companies. This clouded WFFL's title, and breached Comdisco's representations of good title and duty to defend WFFL's title.

Once Comdisco discovered the double sales, it worked, largely unsuccessfully, to rectify the problem and learn of its source. Yet Comdisco never told WFFL about the double sales. Instead, it continued to send WFFL reports indicating that WFFL had good title to the computers.

Comdisco's Bankruptcy

Comdisco entered Chapter 11 bankruptcy in 2001. As a protective measure, WFFL filed a proof of claim, Claim No. 2202, based upon the Indemnity Agreement, even though at that time WFFL did not know that Comdisco breached any of the representations it made as a part of the sale-leaseback transaction. Comdisco objected to the proof of claim, and WFFL did not contest the objection. Based upon Comdisco's uncontested objection, the Bankruptcy Court disallowed Claim No. 2202 in July 2002.

IRS Litigation Against WFFL

Between 1999 and 2002, the IRS audited WFFL and challenged deductions related to WFFL's purchase of computer equipment from Comdisco. During the process, the IRS issued Revenue Agent's Reports questioning the deductions. The reports, however, did not indicate that the deductions were improper because Comdisco double-sold or committed any other conduct regarding computer equipment. WFFL, believing that it had good title to the equipment and that the deductions were proper, protested. This led to several proceedings within the IRS and the United States Tax Court.

In June 2003, the IRS offered to settle the dispute if WFFL agreed to pay substantial additional taxes. WFFL, again believing it had good title and had made proper ...


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