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Jefferson-Pilot Investments, Inc v. Capital First Realty

May 29, 2012

JEFFERSON-PILOT INVESTMENTS, INC., PLAINTIFF,
v.
CAPITAL FIRST REALTY, INC., SUNSET VILLAGE LIMITED PARTNERSHIP, TCF NATIONAL BANK, L H BLOCK ELECTRIC COMPANY, INC., DOHERTY, GIANNINI, REITZ CONSTRUCTION, INC., EAGLE HEATING & COOLING INC., LAYNE CHRISTENSEN COMPANY, AND LAYNE-WESTERN, DEFENDANTS. JEFFERSON-PILOT INVESTMENTS, INC., THIRD-PARTY PLAINTIFF,
v.
CAPITAL FIRST REALTY, INC., THE KLARCHEK FAMILY TRUST, JOHN COSTELLO AS TRUSTEE OF THE KLARCHEK FAMILY TRUST, JOHN LOGIUDICE AS TRUSTEE OF THE KLARCHEK FAMILY TRUST, WOLIN KELTER & ROSEN, LTD., BAUCH & MICHAELS, LLC, CAPITAL HOME SERVICES CORP., GILSON LABUS & SILVERMAN, LLC, JAY KLARCHEK, MICHAEL PASHAWITZ, AND SUNSET VILLAGE LIMITED PARTNERSHIP, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:

MEMORANDUM OPINION AND ORDER

Jefferson-Pilot Investments, Inc. has sued Capital First Realty for breach of its obligations under guaranties executed in connection with certain mortgage loans. Jefferson-Pilot has also filed a third-party complaint in which it seeks damages from several individuals and businesses based on the allegedly wrongful distribution of its cash collateral. The third-party defendants ("defendants") have moved to dismiss Jefferson-Pilot's third-party complaint. For the reasons stated below, the Court grants their motions in part and denies them in part.

Background

The Court takes the following facts from the third-party complaint and accepts them as true for purposes of the motions to dismiss. Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). The Court assumes familiarity with its prior rulings in this case. See Jefferson-Pilot Invs., Inc. v. Capital First Realty, Inc., No. 10 C 7633, 2012 WL 137881 (N.D. Ill. Jan. 18, 2012); Jefferson-Pilot Invs., Inc. v. Capital First Realty, Inc., No. 10 C 7633, 2011 WL 2888608 (N.D. Ill. July 18, 2011).

In 2001 and 2006, Sunset Village Limited Partnership borrowed large amounts of money to start a residential development. Capital First guarantied Sunset Village's loans. In June 2010, the initial lenders assigned their rights in the notes, mortgages, and security interests to Jefferson-Pilot. Shortly thereafter, Sunset Village missed a payment. Jefferson-Pilot delivered a notice of default, but Sunset Village did not pay. Jefferson-Pilot then delivered a notice of acceleration, requesting immediate payment of all amounts due. Sunset Village again failed to cure the default, and Jefferson-Pilot filed a mortgage foreclosure suit against Sunset Village in state court in late September 2010.

On October 13, 2010, Sunset Village filed a voluntary petition for Chapter 11 bankruptcy, which automatically stayed Jefferson-Pilot's foreclosure action. This petition was filed the day before a scheduled hearing on Jefferson-Pilot's motion to appoint a receiver. After initial proceedings in the bankruptcy case, Jefferson-Pilot agreed that Sunset Village could use the rents and other proceeds generated from the properties for property maintenance and related expenses, pursuant to periodic "cash collateral orders" entered by the bankruptcy court. The bankruptcy court entered several such orders, the last of which covered the period from May 1, 2011 through May 31, 2011.

Jefferson-Pilot moved the bankruptcy court to dismiss the bankruptcy case or modify the automatic stay to allow for the continuation of the foreclosure action. The bankruptcy court scheduled a hearing on this motion for May 18, 2011. Prior to the hearing, however, Sunset Village's counsel obtained leave to withdraw its appearance in the bankruptcy case. At the May 18, 2011 hearing, the bankruptcy court ruled that Sunset Village could not proceed without counsel and dismissed the case.

After the dismissal, on May 18 and 19, 2011, Capital First, in its role as Sunset Village's manager, disbursed a total of $317,625 from the funds that had been designated as cash collateral to some or all of the third-party defendants. In addition, more than $50,000 was disbursed from Sunset Village's bank accounts later in May. On May 31, 2011, this Court entered a temporary restraining order (TRO) enjoining Sunset Village from disbursing funds contained in two of its bank accounts. At the beginning of the May 31 TRO hearing, Jefferson-Pilot was not yet aware of the funds that had been disbursed, and it argued that it needed the TRO to protect its interests after the expiration of the cash collateral order.

Discussion

On a motion to dismiss under Rule 12(b)(6), the Court accepts the facts stated in the complaint as true and draws reasonable inferences in favor of the plaintiff. Hallinan, 570 F.3d at 820. To survive the motion, the complaint must include enough facts to state a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009). A claim is plausible on its face "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 1949.

Jefferson-Pilot has sued eleven third-party defendants, asserting a total of seven claims against those defendants. Each defendant has filed or joined one of five motions to dismiss, each of which incorporates the relevant arguments from the others. Several arguments appear in multiple briefs. The Court need not reference each iteration of each argument, but it has considered the material in each defendant's submissions and will specifically identify particular briefs when appropriate.

1. Effect of the cash collateral order

As a threshold matter, the parties dispute the effect of the bankruptcy court's May 2011 cash collateral order after that court dismissed the bankruptcy case. Jefferson-Pilot maintains that the order remained in effect and that Sunset Village's violation of its terms provides the element of fraud or bad faith that is required for many of the other claims in the third-party complaint. Defendants argue that dismissal of the bankruptcy case voided the order and freed Sunset Village from any other restraints the bankruptcy had placed on it.

The parties agree that section 349(b) of the Bankruptcy Code establishes the effect of dismissal:

(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title . . .

(2) vacates any order, judgment, or transfer ordered, under section 522(i)(1), 542, 550, or 553 of this title; and

(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title. 11 U.S.C. § 349(b). A bankruptcy court is authorized to enter cash collateral orders under section 363.

Jefferson-Pilot cites several cases to support its contention that a bankruptcy court order can remain in effect after the dismissal of a bankruptcy case. The most closely analogous case is In re TNT Farms, 226 B.R. 436 (Bankr. D. Idaho 1998), in which a bankruptcy court, in a cash collateral order, had granted a first-priority lien over certain crop proceeds to one of the debtor's secured creditors. After the case was dismissed, the creditor commenced an adversary proceeding in the bankruptcy court seeking to establish the continuing priority of its lien over the liens of other creditors. The court determined that the plaintiff creditor had first priority in the crop proceeds "by virtue of its adequate protection liens provided in the cash collateral orders issued by this Court in connection with TNT's first bankruptcy case." Id. at 441. In reaching this holding, the court observed that "the omission of Section 363 from the language of Section 349 manifests the intent of Congress to leave orders entered under Section 363 unaffected unless otherwise provided by the Court." Id. at 442. The court also noted that the words "[u]nless the Court, for cause, orders otherwise" in section 349(b) "allow[] the Court, under these appropriate circumstances, to adjust the strict results of dismissal here." Id.

It is not entirely clear whether the court in TNT Farms was invoking its power to "adjust the strict results of dismissal" as a necessary prerequisite to finding that the cash collateral order continued to establish priority. If so, the case does not support Jefferson-Pilot's argument that a cash collateral automatically survives dismissal. Even if the court in TNT Farms based its holding solely on the statutory text, however, the Court respectfully disagrees with its conclusion.

The Bankruptcy Code's definition of cash collateral and the restrictions that the Code imposes on its use are inextricably intertwined with the pendency of a bankruptcy case. "Cash collateral" is defined as "cash, negotiable instruments, . . . or other cash equivalence whenever acquired in which the estate and an entity other than the estate have an interest." 11 U.S.C. §363(a) (emphasis added). The statutory restrictions on cash collateral establish that "[t]he trustee may not use, sell, or lease cash collateral . . . unless (A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section." 11 U.S.C. § 363(c)(2) (emphasis added). This text indicates that such restrictions do not survive the dismissal of a bankruptcy case, when there is no longer an estate -- and thus no "cash . . . in which the estate . . . ha[s] an interest" -- or a trustee. See Matter of Statistical Tabulating Corp., 60 F.3d 1286, 1290 (7th Cir. 1995) ("Because the [automatic] stay is dependent on the existence of the bankruptcy, the dismissal of the case disposed of any dispute about the stay.").

In addition, a bankruptcy court's authorization of a debtor's use of cash collateral is neither a final order disposing of a case nor an order that has the attributes of finality. Instead, as an order designed to govern the behavior of the parties while the case is pending, a cash collateral order is similar to a preliminary injunction, which "cannot survive the dismissal of a complaint." Venezia v. Robinson, 16 F.3d 209, 211 (7th Cir. 1994). This is particularly true in this case because, unlike the creditor in TNT Farms, Jefferson-Pilot is arguing that the cash collateral order governed Sunset Village's actions even after the bankruptcy case in which it was entered was no longer pending, not merely that it established a legal relationship between the parties that affects a subsequent case. As defendants argue, if dismissal of a bankruptcy case did not vacate orders controlling a debtor's behavior, such an order could remain in effect indefinitely, and the (former) bankruptcy debtor that was subject of the order would have no way to ...


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