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CPC Acquisitions, Inc. v. Helms

December 12, 2007

CPC ACQUISITIONS, INC., APPELLANT,
v.
BRENDA HELMS, APPELLEE.



The opinion of the court was delivered by: George W. Lindberg Senior U. S. District Court Judge

MEMORANDUM AND ORDER

Appellant CPC Acquisition, Inc. (CPCA) appeals from the United States Bankruptcy Court, Northern District of Illinois, Eastern Division's judgment that appellee Trustee Brenda P. Helms (Trustee) has exclusive right, title and interest to an $88,000 settlement arising from Certified Packaging Corp.'s (Certified) insurance company's negligent procurement of an insurance policy (Rothschild settlement), and also to any proceeds from the pending case between Certified and Commonwealth Edison (ComEd) except proceeds recovered for damage to CPCA's collateral. For the reasons set forth below, the Bankruptcy Court's judgment is affirmed in part and reversed in part.

In March 2000, Certified took out a loan from CIT Group/Business Credit, Inc. (CIT). This loan was secured by a lien granted to CIT over Certified's assets. CIT assigned its interest to LaSalle Bank, N.A. (LaSalle) in June 2001.

In late 2000, Certified's North Chicago plant caught fire. Certified's insurance company denied coverage due to the insurance broker's failure to include the North Chicago plant in the insurance policy. Certified sued the insurance company and settled, recovering $88,000 (the Rothschild settlement) for the company's negligent failure to insure Certified's North Chicago plant. Additionally, Certified filed a complaint against ComEd alleging that ComEd's negligent maintenance of utility and power lines caused the fire in Certified's plant. Certified is seeking recovery from ComEd for damage to its personal property as well as for business interruption losses in the total amount of two million dollars. This ComEd case is currently pending in the Circuit Court of Cook County.

This appeal arose out of the bankruptcy case of Sarah Michaels, Inc., Sarah Michaels, LLC, and Fasma, LLC (Debtors). Brenda P. Helms (Trustee) was appointed Chapter 7 trustee of the debtors' bankruptcy estate in February 2004. LaSalle sold its security interest to CPCA, the intervenor in this proceeding, in January 2006. Trustee initiated this adversary proceeding against Certified, and Certified consented to a Citation lien in favor of the Trustee and agreed not to challenge the validity of the Citation. CPCA intervened, alleging a security interest over Certified's assets listed in CPCA's security agreement with Certified. Both Trustee and CPCA claim the amounts recovered in the Rothschild and ComEd actions as assets subject to their own liens.

The Bankruptcy Court determined that CPCA did not have a lien over the $88,000 Rothschild settlement and proceeds recovered from the ComEd action other than any proceeds recovered for damage to CPCA's collateral.

In its amended designation of the record on appeal, CPCA appealed the following three issues: whether the Bankruptcy Court erred as to its ruling (1) on proceeds; (2) regarding the Composite Documents Rule; and (3) on "payment intangibles."

In its brief, CPCA raises four issues on appeal arguing that: (1) the $88,000 Rothschild settlement arising out of the insurance company's alleged negligent failure to insure damaged collateral covered by LaSalle's Security Agreement constitutes "proceeds" under 810 Ill. Comp. Stat. 5/9-102(a)(64); (2) amounts recovered on account of business interruption losses constitute "proceeds" of collateral under 810 Ill. Comp. Stat. 5/9-102(a)(64); (3) in the alternative, that Certified's notice to LaSalle of the Rothschild settlement and ComEd action was sufficient for LaSalle's security interest to attach to these commercial tort claims; and (4) even if Certified's notice was insufficient, the Bankruptcy Court should have applied the Composite Documents Rule and examined documents outside the Security Agreement to ultimately hold that the bank's security interest attached to these commercial tort claims. CPCA did not raise the issue of "payment intangibles" in its brief.

In this appeal, this Court will review the Bankruptcy Court's factual findings for clear error, Fed.R.Bankr.P. 8013, and its conclusions of law de novo, Matter of UNR Industries, Inc., 986 F.2d 207, 208 (7th Cir. 1993).

CPCA first argues that the $88,000 Rothschild settlement constitutes "proceeds" of damaged collateral under 810 Ill. Comp. Stat 5/9-102(a)(64). Trustee argues that CPCA waived the issue by not raising it in the Bankruptcy Court in these exact words or, in the alternative, that this court should affirm the Bankruptcy Court's ruling on the merits.

As to waiver, Trustee states that CPCA argued to the Bankruptcy Court only that the Rothschild settlement constitutes insurance proceeds or proceeds of the collateral damaged in the fire, but not that the Rothschild settlement is proceeds of the insurance policy, which is itself original collateral. While arguments not presented to the trial court are waived if raised for the 07 C 702 first time on appeal, In re Kroner, 953 F.2d 317, 319 (7th Cir. 1992), the difference between these two arguments is not one of substance, but rather of form. Regardless of how CPCA frames the issue, CPCA is arguing that the Rothschild settlement constitutes "proceeds" from damaged collateral under 810 Ill. Comp. Stat. 5/9-102(a)(64). CPCA did not waive this issue.

As to the merits, this Court reverses the Bankruptcy Court's judgment that the Rothschild settlement does not constitute proceeds under 810 Ill. Comp. Stat 5/9-102(a)(64). According to the statute, "proceeds" are:

(A) whatever is acquired upon the sale, lease, license, exchange, or other ...


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