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Big Shoulders Capital LLC v. San Luis & Rio Grande Railroad, Inc.

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

November 18, 2019

Big Shoulders Capital LLC, Plaintiff,
v.
San Luis & Rio Grande Railroad, Inc. and Mt. Hood Railroad Company, Defendants.

          MEMORANDUM OPINION AND ORDER

          Honorable Thomas M. Durkin United States District Judge

         On September 12, 2019, the Court entered an Order Appointing Receiver over the Defendants and their assets. That order contained an anti-litigation injunction barring all persons and entities from commencing any action that would affect the receivership estate. On October 16, 2019, creditors Ralco, LLC, South Middle Creek Road Association, and San Luis Central Railroad Co. filed an involuntary bankruptcy petition against Defendant San Luis & Rio Grande Railroad in the United States Bankruptcy Court for the District of Colorado, despite knowing of the Order Appointing Receiver and its contents. Upon the Receiver's emergency motion to determine the effect of that petition on this Court's jurisdiction to proceed, the Court held that the creditors violated the anti-litigation injunction and declared the petition void ab initio and of no force and effect. The petitioning creditors subsequently filed a motion for reconsideration or, in the alternative, for an order granting leave to file an involuntary bankruptcy petition [R. 101]. That motion is granted in part and denied in part.

         Background

         Defendant San Luis & Rio Grande Railroad (“SLRG”) operates a 150-mile long railway in Colorado that primarily transports grain, minerals, rock products, and produce. Mt. Hood Railroad Company provides freight services and offers excursion and dinner trains along a 22-mile long track in Oregon (SLRG and Mt. Hood will collectively be referred to as the “Defendants”). SLRG wholly owns Mt. Hood, and Permian Basin Railways, Inc. wholly owns SLRG. Iowa Pacific Holdings, LLC, in turn, wholly owns Permian Basin. Iowa Pacific provides management services to all of its subsidiaries (including the Defendants), such as insurance, payroll, human resources and benefits.

         In 2017, Plaintiff Big Shoulders Capital entered into a Loan and Security Agreement with Iowa Pacific and its material subsidiaries, including SLRG and Mt. Hood (the “Borrowers”). The Loan Agreement granted Big Shoulders a security interest in all of the Borrowers' personal property assets (the “Collateral”), and further imposed joint and several liability on the Borrowers. The Borrowers defaulted, and Big Shoulders sued SLRG and Mt. Hood to recover the money owed. In addition, Big Shoulders moved for the appointment of a receiver, due to the Defendants' alleged inability to operate their business and maintain and preserve the Collateral. The Defendants did not oppose Big Shoulders' motion, and the Court entered an order appointing Novo Advisors (the “Receiver”) as receiver over the Defendants on September 12, 2019 (“Order Appointing Receiver”). R. 19.[1]

         Paragraph 5 of the Order Appointing Receiver provides in relevant part:

On the Effective Date, Defendants (and, where applicable, Defendants' officers, shareholders, directors, partners, assigns, agents, servants, employees, accountants, and attorneys), all persons and entities claiming by or through Defendants, and all other person and entities . . . except by leave of the Court, shall be enjoined, restrained, stayed, and prohibited from (a) commencing, prosecuting, continuing or enforcing any suit or proceeding against or affecting Defendants or any part of the Receivership Assets, except that such actions may be filed to toll any statutes of limitations[.]

R. 19 ¶ 5(ii). On October 16, 2019, unsecured creditors Ralco, LLC, South Middle Creek Road Association, and San Luis Central Railroad Co. (the “Petitioning Creditors”) filed an involuntary chapter 11 petition against SLRG in the United States Bankruptcy Court for the District of Colorado (the “Petition”). Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition “operates as a stay, applicable to all entities, of the continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before” the bankruptcy petition. 11 U.S.C. § 362(a).

         On October 17, the Receiver filed an emergency motion to determine the effect, if any, of the automatic stay on this Court's jurisdiction to proceed. R. 77. The following day, the Court held a status hearing so that the attorneys responsible for filing the Petition could explain why it did not violate paragraph 5(ii) of the Order Appointing Receiver. The attorneys explained that while they were aware of the Order Appointing Receiver, they did not believe Paragraph 5(ii) covered creditor petitions for involuntary bankruptcy. The Court subsequently held that the Petition violated paragraph 5(ii) of the Order Appointing Receiver and declared the Petition void ab initio and of no force and effect. As such, the Court determined that the automatic stay did not apply. R. 87.

         The Petitioning Creditors and the Board of Commissioners of Rio Grande County, Colorado thereafter filed a motion for reconsideration, arguing that the Order Appointing Receiver's injunctive provisions should not apply to creditors filing involuntary bankruptcy petitions. In the alternative, the Petitioning Creditors sought leave to pursue an involuntary bankruptcy petition.

         Legal Standard

         While styled a motion for reconsideration, the Court invited the Petitioning Creditors to submit written briefing so that it could further review the issues raised in the Receiver's emergency motion. The Court will thus consider the Petitioning Creditors' arguments de novo rather than under the standard for motions to reconsider.

         Analysis

         The Court must answer three questions to resolve the Petitioning Creditors' motion. First, did the filing of the Petition violate paragraph 5(ii) of the Order Appointing Receiver? Second, on the facts of this case, does this Court have the authority to enjoin non-parties from filing involuntary bankruptcy petitions with respect to property in the receivership? And ...


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