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OPS3 LLC v. American Chartered Bank

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

August 1, 2017

OPS3 LLC, LEE M. FACKLIS, JEFFREY DEAN FACKLIS, and 2201 W. FULTON, LLC, Plaintiffs-Appellants,
v.
AMERICAN CHARTERED BANK, Defendant-Appellee.

         On Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Case No. 12-ap-01667

          MEMORANDUM OPINION AND ORDER

          Andrea R. Wood United States District Judge

         OPS3 LLC, Lee Facklis, Jeffrey Facklis, and 2201 W. Fulton, LLC ("Appellants") have brought this appeal from the decision of the bankruptcy court dismissing their adversary complaint. The adversary complaint sought, as relevant here, a declaratory judgment that personal guaranties by Lee Facklis and Jeffrey Facklis (collectively, the "Facklises") had been discharged in bankruptcy, and an injunction preventing American Chartered Bank ("ACB") from enforcing a mortgage executed by the Facklises in favor of ACB to secure loans made to the debtors as it too had been discharged in the bankruptcy. The bankruptcy court dismissed both of those claims in an oral ruling, reasoning that the bankruptcy plan language did not specifically discharge either the personal guaranties or the mortgage. Appellants now contend that the bankruptcy court erred, as the plain meaning of the plan language discharged both the guaranties and the mortgage. For the reasons set forth below, the Court affirms the decision of the bankruptcy court dismissing the adversary complaint.

         BACKGROUND

         The debtors in the underlying bankruptcy case were four separate business entities: Show Department, Inc.; Resolution Digital Studios (“Resolution”); Boreray, LLC; and 2201 West Fulton, LLC (“Fulton, ” and collectively with Show Department, Resolution, and Boreray, the “Debtors”). (Adversary Compl. ¶¶ 4-5, Dkt. No. 13-1.) Sometime prior to the bankruptcy, the Facklises-who were two insiders of the Debtors-executed personal guaranties (the “Facklis Guaranties”) for each of seven business loans made to the Debtors by ACB. (Id. ¶ 20.) Separately, in March 2010, the Facklises executed a second mortgage on certain Wisconsin real estate that they owned personally (the “Wisconsin Mortgage”) to secure a loan in the amount of $340, 000 made by ACB to Show Department, Boreray, and Resolution. (Id. ¶¶ 23-24.)

         After each of the Debtors filed voluntary petitions for bankruptcy, the bankruptcy court entered an order allowing the joint administration of the Debtors with In re Show Department, Inc., Case No. 10-bk-42055 (Bankr. N.D. Ill.), as the lead case. (Id. ¶ 14.) Each of the Debtors filed a separate Plan of Reorganization, all of which were confirmed on December 15, 2011. (Id. ¶¶ 15, 17.) OPS3 LLC was created pursuant to the Plans of Reorganization of Show Department, Resolution, and Boreray, and assumed all assets and liabilities of those three Debtors. (Id. ¶¶ 4, 16.) Meanwhile, under its Plan of Reorganization, Fulton continued in existence and retained ownership of the real estate located at 2201 West Fulton in Chicago Illinois, and also provided for the repayment of the mortgage debt on that property owed to ACB. (Id. ¶ 18.)

         Each of the Plans of Reorganization contained the following provision labeled Section 9.13:

On the latest Effective Date of the four Plans, (a) all guaranties of any of the Debtors (Show Department, Inc.; Resolution Digital Studios, LLC; Boreray, LLC; 2201 W. Fulton, LLC) of the payment, performance or collection of any other of the Debtors shall be deemed eliminated and cancelled; (b) any obligation of any of Debtors and all guaranties by or on behalf of any of the Debtors shall be merged into the obligation of the Debtor as stated in the Plan; and (c) intercompany Claims between the Debtor entities shall be eliminated.

(Id. ¶ 19 (emphasis added).) Each of the confirmed Plans of Show Department, Boreray, and Resolution also contained the following provision at Section 2.01:

ACB is secured to the extent of the value of its collateral, including accounts receivable, equipment, furniture, general intangibles and chattel papers (all assets), as of the Effective Date of the Plan.

(Id. ¶ 38.)

         On October 31, 2012, OPS3 and the Facklises filed an adversary complaint against ACB. The action included three counts; however, only Counts I and III are relevant to the appeal. Count I sought a declaratory judgment that the Facklis Guaranties had been “merged” into the obligations of the Debtors, per Section 9.13, and then discharged in bankruptcy. (Id. ¶ 27.) Count III sought an injunction preventing ACB from enforcing the Wisconsin Mortgage on the ground that Section 2.01 fails to state specifically that ACB is secured in the Wisconsin Mortgage and therefore that secured debt was discharged in bankruptcy. (Id. ¶¶ 38-45.)

         ACB filed a motion to dismiss the adversary complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012. After briefing concluded, the bankruptcy court dismissed the action in an oral ruling. (Apr. 25, 2013 Tr. at 7:6-13:12, Dkt. No. 13-2.) With respect to Count I, the bankruptcy court found Appellants' interpretation of Section 9.13 to be overly broad in light of Seventh Circuit precedent indicating that releases of third parties in bankruptcy actions must be narrowly tailored and supported by express findings by the bankruptcy court that such releases are absolutely essential to the reorganization. (Id. at 7:6-8:25.) The bankruptcy court also found that the plain language of Section 9.13 did not support the proposition that the Facklis Guaranties had been discharged. The bankruptcy court commented that the relevant language stated that guaranties on behalf of the debtor were “merged” into the debtor and further noted:

I don't even know what merged means. If you look it up in the dictionary, it says unite. . . . [I]n your next phrase, you say and intercompany claims between the debtor entity shall be eliminated. You really wouldn't have had to use that last sentence. It would be surplusage if your term of merger was ...

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