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In re Dvorkin Holdings, LLC

United States District Court, N.D. Illinois, Eastern Division

March 29, 2016

DVORKIN HOLDINGS, LLC, Debtor.
v.
GUS A. PALOIAN, not individually or personally but solely in his capacity as the Chapter 11 Trustee of Debtor's Estate, AARON DVORKIN, BEVERLY DVORKIN, and FRANCINE DVORKIN, Appellees COLFIN BULLS FUNDINGS A, LLC, Appellant,

          On appeal from the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division. Bankr. Case No. 12-31336 (JPC). Judge Jacqueline P. Cox.

         For Colfin Bulls Funding A, LLC, Appellant: Jerry Lewis Switzer, Jr., LEAD ATTORNEY, Jean Soh, Polsinelli PC, Chicago, IL.

         For Gus A Paloian, Not individually or personally but solely in his capacity as the Chapter 11 Trustee of Debtor's Estate, Appellee: Bret M Harper, Seyfarth Shaw LLC, Chicago, IL; Gus Anthony Paloian, James B. Sowka, Seyfarth Shaw LLP, Chicago, IL.

         For Francine Dvorkin, Beverly Dvorkin, Aaron Dvorkin, Appellees: Gina B. Krol, Cohen & Krol, Chicago, IL.

         MEMORANDUM OPINION AND ORDER

         Robert M. Dow, Jr., United States District Judge.

         This case is on appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 12-31336 (JPC). On July 10, 2015, the Bankruptcy Court entered an order (" Order" ) confirming the amended joint Chapter 11 plan of reorganization for Dvorkin Holdings, LLC (" Debtor" ), which was proposed by Gus A. Paloian, not individually or personally but solely in his capacity as the Chapter 11 Trustee (the " Trustee" ) and Aaron Dvorkin, Beverly Dvorkin, and Francine Dvorkin (collectively, the " Equity Interest Holders" ). Before the Court is the appeal of Colfin Bulls Fundings A, LLC (" Creditor" ) from the Bankruptcy Court's Order.[1] For the reasons set forth below, the Bankruptcy Court's decision is reversed in part. This matter is remanded to the Bankruptcy Court to: (1) determine the appropriate rate of postpetition interest to award Creditor in light of this opinion, Creditor's contracts, and any relevant equitable considerations; (2) determine whether Creditor's amended proof of claim is timely under Section 6.4 of the Plan and, if it is not, address and resolve Creditor's arguments concerning why its amended proof of claim should nonetheless be accepted; and (3) make a distribution of funds in the appropriate amount to Creditor.

         I. Background

         On August 7, 2012, Debtor filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § § 101 et seq. Debtor was and is involved in real estate investment and management through its affiliates and related entities. The Equity Interest Holders indirectly own the membership interests in Debtor.

         The United States Trustee filed a motion requesting that the Bankruptcy Court appoint a Chapter 11 Trustee. See N.D.Ill. Bankr. Case No. 12-31336, Docket Entry 29. The United States Trustee explained that Debtor's management was unable to fulfill the fiduciary duties owed to Debtor's creditors following the indictment of Daniel Dvorkin--who played an important role in Debtor's management--in a plot to solicit the murder of one of its creditors. See id. at 5-6. See also United States v. Dvorkin, 799 F.3d 867 (7th Cir. 2015) (affirming Daniel Dvorkin's conviction for using or causing another person to use a facility of interstate commerce with intent to commit murder for hire and soliciting another to commit a crime of violence). On October 16, 2012, the Bankruptcy Court granted the United States Trustee's Motion and appointed Mr. Paloian the Chapter 11 Trustee. See N.D.Ill. Bankr. Case No. 12-31336, Docket Entry 96.

         On November 15, 2012, Creditor filed a proof of claim (the " Original Proof of Claim" ) with the Bankruptcy Court in the total amount of $3,504,767.25, exclusive of costs, expenses, and attorneys' fees. Creditor's claim evidences debt acquired by Creditor from MB Financial Bank, N.A. (" MB Financial" ) for one or more loans that MB Financial made to Debtor or its affiliates. Creditor reserved its right to amend and supplement its Original Proof of Claim to add any additional claims it may have against Debtor. On December 20, 2012, the Bankruptcy Court sent a notice to all creditors informing them that February 27, 2013 was the deadline to file proofs of claim against the Estate (the " Bar Date" ). Overall, creditors filed nearly $65,000,000 in claims against Debtor's bankruptcy estate. On February 25, 2015, the Trustee filed a limited objection to Creditor's Proof of Claim, to which Creditor responded on March 26, 2015.

         On March 31, 2015, the Trustee and the Equity Interest Holders (collectively, the " Plan Proponents" ) filed a Joint Chapter 11 Plan of Reorganization (the " Plan," [14-1] at 1-26) and a disclosure statement concerning the Plan (" Disclosure Statement," [14-4] at 78-106). The Plan proposed to pay general unsecured claims (Class Two) in full, plus interest accruing after the Petition Date at the " Legal Rate." [14-1] at 13. In the Disclosure Statement, " Plan Proponents assert [that the Legal Rate] is the federal judgment rate, or 0.17%." [14-4] at 93. The Plan further provided that the Equity Interest Holders (Class 3) would retain their interests in Debtor. [14-1] at 13. Finally, the Plan provided for the disallowance of improperly filed claims. Specifically, Section 6.4 of the Plan provided: " Subject to Bankruptcy Code section 502(j) and Bankruptcy Rules 3008 and 9006, any Claim for which the filing of a Proof of Claim, application or motion with the Bankruptcy Court is required under the terms of the Bankruptcy Code, the Bankruptcy Rules, any order of the Bankruptcy Court (including one providing for a Bar Date) or the Amended Joint Plan will be disallowed for distribution purposes if and to the extent that such Proof of Claim (or other filing) is not timely and properly made." ' [14-1] at 17.

         Creditor objected to the Plan's proposed payment of postpetition interest to holders of general unsecured claims at the Legal Rate. Creditor proposed that, instead of the Legal Rate, the Plan should pay postpetition interest at the postpetition regular and default interest rates set forth in its applicable promissory notes (the " Contract Rate" ).

         On May 7, 2015, the Bankruptcy Court granted the Trustee's motion for an order approving the adequacy of the Plan Proponents' Disclosure Statement. [14-3] at 14-18. The court recognized that the Trustee had recovered many millions of dollars for the Estate and its creditors, resulting in a surplus estate with more liquidated assets than scheduled claims. Id. at 15. The court explained that " [n]o voting will occur under" the Plan because " each class is unimpaired by the plan." Id. (citing In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 203 (3d Cir. 2003)). The court recognized that the Plan " proposes to pay claim holders 100% with interest at the rate of 0.17%, the federal judgment rate and to permit Interest Holders to retain their Interests in the Debtor." Id.

         The court rejected the competing plan offered by creditors--which " propose[d] to pay claim holders interest at the contracts' default rate" --on the basis that it " ignores the 11 U.S.C. § 502(b)(2) prohibition on the payment of unmatured postpetition interest." [14-3] at 15. According to the court, " [s]ection 502(b)(2) provides that a claim is disallowed to the extent that 'such claim is for unmatured interest,'" and therefore " 'prohibits payment of postpetition interest on prepetition unsecured claims, including claims for prepetition taxes.'" [14-3] at 15-16 (quoting 4 Collier on Bankruptcy ¶ 502.03[3][a] (16th ed.)). The Bankruptcy Court also determined that In re Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 791 F.2d 524, 530 (7th Cir. 1986)--which observed that " when the debtor is solvent the judicial task is to give each creditor the measure of his contractual claim, no more and no less" --was not applicable because " that case was decided almost 30 years ago under the Bankruptcy Act," not the Bankruptcy Code. [14-3] at 16.[2] Instead, the court concluded that section 726(a)(5) of the Code applied, requiring the payment of postpetition interest at " the legal rate." Id. Citing the Ninth Circuit's decision in In re Cardelucci, 285 F.3d 1231, 1234 (9th Cir. 2002), the court explained that " the legal rate" meant the Federal Judgment Rate set forth in 28 U.S.C. § 1961(a). [14-3] at 17. Finally, the court found that the " absolute priority rule" codified in section 1129(b) of the Code did not require it to award postpetition interest at the Contract Rate, because " [t]he absolute priority rule is not implicated herein where all claims will be paid in full." Id. at 18 (citing 11 U.S.C. § 1129(b)).

         On May 29, 2015, Creditor filed an amended proof of claim (the " Amended Proof of Claim" ). The Amended Proof of Claim added " a claim for post-petition regular and default interest" at the Contract Rate. [13] at 15. Neither the Trustee nor any other party objected to the Amended Proof of Claim on the ground that it was filed after the Bar Date or was otherwise improperly filed under Section 6.4 of the Plan.

         On June 12, 2015, Creditor filed an objection to confirmation of the Plan. Specifically, Creditor: (1) restated its objection to confirmation of the Plan because it proposed to pay postpetition interest on Creditor's claims at the Legal Rate rather than the Contract Rate; and (2) objected to the Plan's proposed disallowance of late-filed claims for distribution purposes. The Plan Proponents responded to Creditor's objection on June 23, 2015. On June 26, 2015, the Plan Proponents filed an amendment to the Plan.

         On June 30, 2015, the Bankruptcy Court held a plan confirmation hearing. Creditor restated its two objections. The Bankruptcy Court overruled them and confirmed the Plan. See [1-3]. The Bankruptcy Court overruled Creditor's objection to the postpetition interest rate " for the reasons stated on the record." Id. at 3. It overruled Creditor's objection to Section 6.4 of the plan: (1) " for the reasons set forth in In re Xpedior, Inc., 354 B.R. 210, 225-27 (Bankr. N.D.Ill. 2006)" ; (2) because " disallowance of a claim is not a form of impairment for plan confirmation purposes" ; and (3) because " such objection is premature in that the Trustee has not, to date, relied on [Section] 6.4 as a basis for the Estate's objections to [Creditor's] proof of claim (Claim 14-1) or amended proof of claim (Claim No. 14-2)." [1-3] at 3.

         On July 9, 2015, Creditor filed a Notice of Appeal challenging the Confirmation Order. Following confirmation, the Trustee made a distribution to creditors of 100% of all allowed claims, plus postpetition interest at the Federal Judgment Rate. Creditor's claim is the only claim not fully paid under the Plan, due to Creditor's objections.

         Creditor raises the following issues on appeal (see [13] at 12-14):

         1. Whether the Bankruptcy Court erred in entering the Confirmation Order confirming the Plan on the ground that, because the Debtor's Estate is solvent, the Plan fails to provide Lender post-petition interest on its claims at the rates set forth in its contracts with the Debtor.

         2. Whether the Bankruptcy Court erred in entering the Confirmation Order, on the ground that, because the Debtor's Estate is solvent, the rate of post-petition interest provided in the Confirmation Order and in the Plan is improperly low and violates the " best interests of creditors" test of 11 U.S.C. § 1129(a)(7).

         3. Whether the Bankruptcy Court erred in entering the Confirmation Order, and finding that the " legal rate" as provided for in 11 U.S.C. § 726 is the federal interest rate on money judgments in civil cases as provided in 28 U.S.C. § 1961, which as of the Petition Date (defined below) in the Bankruptcy Case provides post-judgment interest at the de minimis rate of only approximately 0.17% per annum.

         4. Whether the Bankruptcy Court erred in entering the Confirmation Order, on the ground that, the rate of post-petition interest provided in the Confirmation Order and in the Plan is improperly low and provides an unfair and inequitable windfall to the Equity Interest Holders at the expense of creditors.

         5. Whether the Bankruptcy Court erred in entering the Confirmation Order, on the ground that, the rate of post-petition interest provided in the Confirmation Order and in the Plan is improperly low and violates 11 U.S.C. § 1129(b) to the extent that it is not " fair and equitable" and improperly discriminates against creditors to the benefit of the Equity Interest Holders.

         6. Whether the Bankruptcy Court erred in entering the Confirmation Order, on the ground that, the disallowance of late-filed claims for distribution purposes under Section 6.4 of the Plan violates the " best interests of creditors" test of 11 U.S.C. § 1129(a)(7) and 11 U.S.C. § 726(a)(3).

         7. Whether the Bankruptcy Court erred in entering the Confirmation Order, on the ground that, the disallowance of late-filed claims for distribution purposes under Section 6.4 of the Plan violates 11 U.S.C. § § 1122(a), 1124 and 1129(a)(1).

         8. Whether the Bankruptcy Court erred in entering the Confirmation Order, on the ground that, the disallowance of late-filed claims for distribution purposes under Section 6.4 of the Plan violates 11 U.S.C. § 1129(b) to the extent it is not " fair and equitable" and improperly discriminates against creditors to the benefit of Equity Interest Holders.

         II. Standard of Review

         " District courts sit as appellate courts when hearing appeals from bankruptcy courts." Hijjawi v. Five N. Wabash Condo. Ass'n, 491 B.R. 876, 880 (N.D. Ill. 2013). The Bankruptcy Court's factual findings are scrutinized for clear error, while its legal conclusions are reviewed do novo. Kovacs v. United States, 739 F.3d 1020, 1023 (7th Cir. 2014). To the extent that the Bankruptcy Code commits a decision to the discretion of the Bankruptcy Court, that decision is reviewed for an abuse of discretion. Belson v. Olson Rug Co., 483 B.R. 660, 664 (N.D. Ill. 2012) (citing Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009)). " 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).

         III. ...


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