621 B.R. 848
Bankr. N.D. Ill.2020Background
- Concepts America, Inc. guaranteed a commercial lease between Galleria Mall Investors LP (landlord) and Townhouse DG LLC (tenant); a Texas court entered a $925,341.87 judgment (plus fees) against both tenant and Concepts on October 29, 2013.
- Galleria domesticated the judgment in Cook County and served a Citation to Discover Assets; Concepts first personally appeared in the citation on March 19, 2014, triggering the Illinois six‑month rule for citation proceedings.
- Citation proceedings were delayed by Concepts’ objections and document resistance; Galleria filed a motion for rule to show cause and later was one of three creditors who filed an involuntary Chapter 7 petition against Concepts on September 19, 2014.
- The bankruptcy petition was followed by appointment and election activity; Galleria submitted a proxy to vote in the Chapter 7 trustee election and later filed Proof of Claim No. 6 (Dec. 11, 2015) asserting a secured claim of $1,050,309.60 based on the citation lien.
- Trustee objected seeking to (a) reclassify Galleria’s claim as unsecured (arguing the citation lien had expired or was waived) and (b) cap the claim under 11 U.S.C. § 502(b)(6).
- Court sustained Trustee’s objection: it held the citation lien had not expired (estoppel and § 108(c) preserved it), but Galleria waived secured status by (i) failing to disclose the lien when joining the involuntary petition and (ii) acting as an unsecured creditor in the trustee election; the claim was reclassified as general unsecured and capped at $362,022.15 under § 502(b)(6).
Issues
| Issue | Trustee's Argument | Galleria's Argument | Held |
|---|---|---|---|
| Whether an objection to the proof of claim seeking reclassification of secured status must be brought as an adversary proceeding | Objection to claim is a contested matter under Rule 3007; Trustee is not seeking affirmative lien avoidance so no adversary is required | A proceeding to determine validity/extent of a lien is an adversary under Rule 7001(2) | Objection proper as contested matter; trustee may challenge secured status via claim objection (no adversary needed) |
| Whether the citation lien expired before the involuntary petition (six‑month rule) | Lien expired before petition, making claim unsecured | Lien continued; even if six‑month rule began at first appearance, delays by debtor estop debtor from invoking the deadline | Citation did not terminate before petition; debtor’s delaying conduct estopped invocation of six‑month rule; § 108(c) preserved the lien after petition date |
| Whether Galleria waived secured status by filing the involuntary petition without disclosing the lien | Galleria’s omission does not automatically waive secured status | Failure to disclose security on involuntary petition demonstrates conduct inconsistent with enforcing the lien and constitutes waiver | Galleria waived secured status by failing to disclose the citation lien when acting as a petitioning creditor |
| Whether Galleria waived secured status by voting (via proxy) in the Chapter 7 trustee election | Voting as unsecured (appointing proxy and stating claim amount without security) is conduct inconsistent with preserving lien | Voting alone is insufficient to waive secured status | Galleria’s proxy vote plus other omissions and filings (including involuntary petition and Rule 2004 motion) amounted to an intentional waiver of secured status |
| Whether § 502(b)(6) caps landlord’s claim against a guarantor and whether cap applies | Cap applies to landlord’s claim against guarantor of lease; claim should be reduced | Argues equitable reasons to avoid or modify cap because guarantor (not lessee) and mitigation efforts | Court applied plain meaning: § 502(b)(6) caps the lessor’s claim against a guarantor; claim capped at $362,022.15 |
Key Cases Cited
- Cacok v. Covington, 111 F.3d 52 (7th Cir. 1997) (citation lien is perfected as of date of service)
- Resolution Trust Corp. v. Ruggiero, 994 F.2d 1221 (7th Cir. 1993) (debtor’s delays in citation proceedings estop debtor from invoking six‑month termination rule)
- In re Cent. Illinois Oil & Ref. Co., 133 F.2d 657 (7th Cir. 1943) (failure of a secured creditor to disclose security when filing an involuntary petition can constitute waiver of the lien)
- In re Arden, 176 F.3d 1226 (9th Cir. 1999) (§ 502(b)(6) cap applies to lessor’s claim against guarantor)
- Sunbeam Prods., Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012) (courts must apply Bankruptcy Code as written; equitable arguments cannot override plain statutory text)
- U.S. v. Ron Pair Enters., Inc., 489 U.S. 235 (1989) (statutory plain‑meaning rule governs interpretation absent demonstrable conflict with legislative intent)
- In re Porayko, 705 F.3d 703 (7th Cir. 2013) (discussing perfection of citation liens under Illinois law)