United States District Court, N.D. Illinois, Eastern Division
In Re John W. Fliss, Debtor.
John W. Fliss Appellee. Generation Capital I, LLC, Appellant,
MEMORANDUM OPINION AND ORDER
HONORABLE THOMAS M. DURKIN, UNITED STATES DISTRICT JUDGE
Generation Capital I, LLC (“Generation
Capital”) has appealed the bankruptcy court's
order (1) disallowing its claim in its entirety as a
discovery sanction, and (2) the subsequent confirmation of
debtor John W. Fliss's Chapter 13 Plan. This Court has
jurisdiction pursuant to 28 U.S.C § 158 because the case
involves the appeal of a final judgment entered in the
bankruptcy court. For the following reasons, the Court
vacates the bankruptcy court's judgment and remands the
case for further proceedings.
consolidated appeals stem from Generation Capital's
bankruptcy claim based on a state court judgment (the
“Claim”) against Fliss's bankruptcy estate.
During the bankruptcy proceedings, the bankruptcy court
disallowed the Claim because Generation Capital failed to
comply with discovery orders. As a result, the bankruptcy
court held there were no objections to Fliss's Chapter 13
Plan (the “Plan”) and confirmed the Plan without
hearing Generation Capital's Claim on its merits.
Generation Capital now argues that the bankruptcy court
committed an error of law or abused its discretion in
disallowing the Claim in its entirety as a discovery
sanction, and that the bankruptcy court committed an error of
law or abused its discretion when it confirmed the Plan.
The State Court Judgment
about April 2009, a promissory note was executed by Duraguard
Services, LLC and Polymeric Solutions, LLC in favor of
Barrington Bank and Trust Company, N.A. to borrow $200, 000
(the “loan”). The note was personally guaranteed
by Fliss, Mark E. Barr, Lawrence E. Wojciak, and The Sherry
R. Wojciak Revocable Trust dated February 16, 1999 (the
“Trust”). In September 2011, Barrington Bank
filed a complaint and confession of judgment against the
borrowers Duraguard and Polymeric and against all of the
individual guarantors (the “litigation”). A
judgment of confession was entered against all of the
defendants in that case-against Fliss, Barr, Wojciak, and the
Trust for $204, 797.70, against Duraguard for $208, 733.08,
and against Polymeric for $205, 950.55. In February 2012,
Barrington Bank and Generation Capital entered into a note
sale and assignment agreement (the “note
agreement”). The note agreement transferred all of
Barrington's rights under the loan and the litigation to
Generation Capital in exchange for payment of $240, 000.
Evidence of a wire transfer in that amount from Generation
Capital II, LLC (“Generation II”) on behalf of
Duraguard was introduced in the state court proceedings. R.
20-1 at A-22.
February 2012, Barrington Bank, Wojciak, and the Trust
entered into a settlement agreement (the “settlement
agreement”). The settlement agreement provided that in
exchange for payment of $240, 000 by Wojciak and/or the Trust
to Barrington Bank, Barrington Bank would transfer all of its
rights under the loan and the litigation to Generation
Capital, and Barrington Bank, Wojciak, and the Trust would
release each other from liability on any claims. Id.
at A-23. There was no evidence in the state court record that
Wojciak or the Trust ever made this payment to Barrington
Bank. Id. at A-24.
2012, pursuant to the note agreement, the state court
substituted Generation Capital for Barrington Bank.
Generation Capital subsequently filed a motion to turnover
assets against Fliss and Barr in the litigation. In November
2014, Fliss and Barr filed a motion to determine the amount
owed pursuant to the judgment. In that motion, Fliss and Barr
argued that the judgment in the litigation had been
extinguished by the payment of $240, 000 from Generation
Capital pursuant to the settlement agreement. But because no
evidence had been presented that the payment from Wojciak
and/or the Trust had been made to Barrington Bank, the state
court held that the settlement agreement was not satisfied,
the litigation was not settled, and the release of liability
between Barrington Bank, the Trust, and Wojciak was void.
Id. (opinion entered May 12, 2015). As a result, the
state court held that Barrington Bank could sell the rights
pursuant to the note agreement to Generation Capital, and
Generation Capital had a live cause of action against Fliss,
Barr, Wojciak, and the Trust for the outstanding judgment
amount of $204, 797.70. Id. at A-25.
The Bankruptcy Proceedings
August 28, 2015, Fliss filed a voluntary Chapter 13
bankruptcy petition. The Chapter 13 Plan stated that
Generation Capital had a claim against Fliss's estate
secured by the “memorandum of judgment recorded against
real property, ” but that the collateral “either
has no value or [ ] is fully encumbered by liens with higher
priority, ” causing the Claim to be treated as
unsecured. A-19 at 3. On November 1, 2015, Generation Capital
objected to the Plan on the grounds that: (1) the Plan did
not adequately provide for Generation Capital's secured
claim pursuant to 11 U.S.C § 1325(a)(5), et
seq.; and (2) pursuant to 11 U.S.C § 1322(b)(2).
Generation Capital filed a timely proof of claim on December
24, 2016, Fliss filed an objection to the Claim and made the
same arguments he made in the state court motion for
determination. Specifically, he argued that Generation
Capital's Claim had been released by the payment of the
settlement amount to Barrington Bank. A-25. He also argued
that Generation Capital did not own the Claim, and that the
Claim was overstated. Id. Like in the state court
motion, Fliss argued that the settlement agreement payoff was
made on behalf of Duraguard and Polymeric and thus
extinguished any claims Barrington Bank had against them, as
well as against their guarantors (i.e., Fliss, Barr,
Wojciak, and the Trust).
further argued that Generation Capital is an alter ego of
Wojciak and the Trust. He noted that although the note
agreement provided for the assignment of the loan and
litigation to Generation Capital, the note agreement was
executed by Wojciak, and the only evidence of payment was
from an account in the name of Generation II. Fliss thus
questioned who actually owned the Claim-Generation II,
Wojciak, or Generation Capital. Again, as in the state court
motion, Fliss argued that because the payment was made, the
payment released the obligation of all of the guarantors as
well. In response, Generation Capital argued that the
objection should be denied because the state court judgment
was not subject to challenge based on res judicata, the
Rooker-Feldman Doctrine,  and full faith and credit.
October 25, 2016, the parties appeared for a hearing on
Fliss's objection to the Claim. The bankruptcy court
indicated there was a question as to whether the Claim had
been paid and that it intended to conduct an evidentiary
hearing. A-136 at 10. The bankruptcy court ordered the
parties to exchange witness lists, exhibit lists, and
exhibits on or before November 21, 2016. Id. at 11.
The bankruptcy court also set a status for November 22, 2016
to determine whether discovery was needed. Id.
November 21, 2016 and November 22, 2016, Fliss issued
discovery requests to Generation Capital and indicated to the
bankruptcy court that there was a question as to whether the
Claim had been paid and that he thought the Generation
Capital entities were alter egos of Wojciak and the Trust.
A-149 at 3. Fliss's attorney represented that Generation
Capital and the related entities had not produced any
operating agreements, bank statements, or tax returns.
Id. at 4. The bankruptcy court told Generation
Capital's attorney that “if you don't produce
[the documents], [the court would] sustain the
objection.” Id. The bankruptcy court ordered
Generation Capital to produce the documents by December 9,
2016, over Generation Capital's representation to the
bankruptcy court that it had received the requests the day
before, that there were 16 requests, and that it had
consistently been Generation Capital's position that
Fliss's objection was barred by the state court judgment
under either res judicata or the Rooker-Feldman principle.
Id. at 5, 7.
Capital failed to produce the documents on December 9, 2016,
allegedly because its counsel were in a trial that ended up
taking several days longer than anticipated. A-158 at 4.
Fliss did not contact Generation Capital or file a motion to
compel. Instead, on December 12, 2016, Fliss filed a motion
to disallow the Claim as a sanction for Generation
Capital's failure to produce documents. A- 109.
Generation Capital responded to the requests by December 14,
2016. A-158 at 4. During argument on the motion to
disallow on December 19, 2016, Generation Capital argued that
the document requests asked for documents that did not belong
to Generation Capital, and that Generation Capital produced
hundreds of pages of documents in response to the requests.
Id. at 5-6.
bankruptcy court ordered Generation Capital to produce
information regarding the ownership of the Generation Capital
entities by December 21, 2016. Id. The bankruptcy
court also reminded Generation Capital's counsel, Mr.
Sheldon, that the information had to be disclosed. Mr.
Sheldon responded that the information the bankruptcy court
and Fliss were looking for had already been produced:
THE COURT: I just remembered, this isn't the first time
I've made it clear that this information has to be
disclosed. I remember being incredulous, and nobody knows
where what is this, $300, 000 payment?
MR. SCHECHTER: 240, 000.
THE COURT: 240, and nobody knows --
MR. SHELDON: Which we provided proof of.
THE COURT: -- who made it, and where it is.
MR. SHELDON: Which we provided proof of, Your Honor.
THE COURT: But you got to convince me you're making
MR. SHELDON: Judge, you haven't seen the documents,
THE COURT: He hasn't seen them because you won't give
them to him.
MR. SHELDON: No, you haven't seen them. Mr. Schechter has
documents. Respectfully, Your Honor, everything Mr. Schechter
argues seems to be taken as the gospel.
THE COURT: It doesn't, we just want the information. We
don't know what -
MR. SHELDON: He has information, Your Honor. He has hundreds