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Fidelity and Deposit Company of Maryland v. TRG Venture Two LLC

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

October 16, 2019

Fidelity and Deposit Company of Maryland, Appellant,
TRG Venture Two, LLC, Appellee.



         For the reasons stated below, the Bankruptcy Court's order on TRG's motion to enforce is vacated, and the case is remanded for further proceedings consistent with this opinion.


         I. Background

         The instant bankruptcy appeal comes after years of litigation, dozens of filings, and hundreds of hours of state and federal-court consideration. A simplified version of the facts is as follows. Kimball Hill, Inc. (“KHI”), a residential construction company, owned the five undeveloped properties at issue (the “Properties”), which are located in five different municipalities in Illinois. Anticipating development of subdivisions on the Properties, KHI entered into Annexation Agreements with the municipalities to construct improvements on the land, such as sidewalks, curbs, and sewers. Pursuant to the Annexation Agreements, KHI obtained surety bonds from Fidelity and Deposit Company of Maryland (“F&D”), the appellant in this case, to secure KHI's performance.

         KHI filed for liquidation under Chapter 11 of the Bankruptcy Code in April 2008. F&D filed proofs of claim in the bankruptcy proceeding and, on March 12, 2009, the Bankruptcy Court entered a Confirmation Order confirming KHI's liquidation plan. F&D accepted the terms of the Plan. The Plan Release provided that claimholders voting to accept the Plan “shall be deemed to have conclusively, absolutely, unconditionally, irrevocably, and forever, released the Debtors . . . and the Released Parties from any and all Claims.” The Plan also includes a section entitled “Miscellaneous, ” which provides that “[t]he right, benefits, and obligations of any Entity named or referred to in the Plan shall be binding on, and shall inure to the benefit of any . . . successor or assign . . . . of each Entity.” The Confirmation Order and Plan enjoined all parties subject to the Plan Release from pursuing a released claim against a party covered by the Plan Release.

         TRG Venture Two, LLC (“TRG ”) acquired the Properties from a third-party entity that had purchased them from the bankruptcy trust; TRG thus became responsible for the obligations under the Annexation Agreements that KHI had previously entered into with the Municipalities. Certain of the Municipalities filed suit in state court, seeking performance under the Annexation Agreements from TRG directly and F&D as the surety. In the state-court lawsuits, F&D filed counterclaims or third-party claims against TRG, alleging that, in the event F&D was found liable as a secondary obligor, TRG was liable to F&D under theories of indemnity and/or unjust enrichment. While TRG initially obtained dismissal of F&D's claims against it, these dismissals were reversed on appeal. See, e.g., Vill. of Montgomery v. Fid. & Deposit Co. of Md., No. 2-15-0571, 16 WL 1621971, at *7 (Ill.App.Ct. Apr. 21, 2016) (concluding that “where TRG assumed KHI's obligations under the annexation agreement . . . and those obligations were the basis for the surety bonds, a suretyship relation arose as a matter of law, and TRG owes [F&D] a common-law duty to perform its obligations and to hold [F&D] harmless from its failure to do so.”).

         Subsequently, after six years of state-court litigation, TRG filed in Bankruptcy Court a Motion for Entry of an Order Enforcing Confirmation Order, asserting for the first time that the Plan Injunction barred F&D's state-law claims for indemnity and unjust enrichment. The Bankruptcy Court granted the motion, finding that in consenting to the Confirmation Plan, F&D had released its state-law claims against TRG, and awarded $9, 539, 768.54 in damages to TRG. F&D now appeals the Bankruptcy's Court's ruling, asserting several bases of error.

         II. Analysis

         A. Jurisdiction

         The Confirmation Order includes a provision stating that “the Bankruptcy Court shall retain exclusive jurisdiction over all matters arising out of, or related to, the Chapter 11 Cases and the Plan . . ., including jurisdiction to: . . . [e]nter and implement such orders as may be necessary or appropriate to execute, implement, or consummate the provisions of the Plan and all contracts, instruments, releases, indentures, and other agreements or documents created in connection with the Plan . . . .” (Appellant's Ex. 6, Dkt. # 30-1, ¶ 58, FD0104-05.) The Plan includes the same provision, and F&D voted in favor of the Plan. In re Kimball Hill, Inc., No. 13 C 07146, 2014 WL 5615650, at *4 (N.D. Ill. Nov. 4, 2014).

         F&D first contends that the Bankruptcy Court lacked subject-matter jurisdiction over the motion under 28 U.S.C. § 1334(b), which confers on a bankruptcy court, after a referral by the district court under § 157, “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” According to F&D, the Court lacks related-to jurisdiction. As the Seventh Circuit has recently stated, “the related-to jurisdiction must be assessed at the outset of the dispute, and it is satisfied when the resolution has a potential effect on other creditors.” Bush v. United States, No. 16-3244, 2019 WL 4565106, at *5 (7th Cir. Sept. 20, 2019).

         However, as noted by TRG, the Bankruptcy Court also concluded that it had jurisdiction to enforce its own orders. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009) (“[T]he Bankruptcy Court plainly had jurisdiction to interpret and enforce its own prior orders.”). See also In re Bateman, No. 8:14-BK-5369-RCT, 2019 WL 4644385, at *1 (M.D. Fla. Sept. 24, 2019) (“[A] bankruptcy court, like any court, retains the inherent power to enforce an order. Although begun by a party, a contempt proceeding is ‘at all times an action of the court.'”) (citation omitted). Thus, the Court finds that the Bankruptcy Court had subject-matter jurisdiction over TRG's motion to enforce.

         F&D next contends that even if the Bankruptcy Court has subject-matter jurisdiction, it should have permissively abstained. “Permissive abstention, which is governed by 28 U.S.C. § 1334(c)(1), allows bankruptcy courts to abstain from hearing a particular proceeding in the interest of justice, in the interest in comity with state courts, or due to concerns regarding respect for state law.” In re Heotis, No. 17 C 00886, 2018 WL 1534970, at *4 (N.D. Ill. Mar. 29, 2018). “The party seeking permissive abstention has the burden of proving by a preponderance of the evidence that abstention is appropriate.” Id. “[F]ederal courts generally should exercise their jurisdiction if properly conferred and . . . abstention is the ...

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