In Re Montgomery Ward, LLC
65 Collier Bankr. Cas. 2d 450
3rd Cir.2011Background
- Montgomery Ward operated a department store and entered into an RCOEA with Jolward and Wieboldt, sharing CAM and related expenses at Jefferson Square Mall.
- Jolward leased the Department Store and Land to Ward; Ward pledged its fee interest for financing, with a nonrecourse Mortgage stating Ward had no personal liability.
- State Farm financed the construction; Jolward’s note was secured by the Ground Lease, Lease, Sublease, and Mortgage, with Ward joining in the Mortgage to grant a security interest.
- Ward II and Dika-Ward filed proofs of claim in Ward II for the Mortgage balance and CAM-related lease damages, respectively; Ward I had a prior bankruptcy with a Stipulation settling Jolward I Claim.
- Ward I confirmed plan left State Farm with its security interest and did not require Ward to pay the mortgage; Ward II sought to challenge the Lease’s true nature and CAM liability.
- Bankruptcy Court granted partial summary judgment: res judicata barred Plan Administrator from challenging the Lease in Ward II; judgments on the Mortgage and CAM claims were entered in favor of Dika-Ward and Ward II Plan Administrator respectively; on appeal, the Third Circuit affirmed in part and vacated/remanded in part to allow the Plan Administrator to challenge the Lease’s nature.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Plan Administrator is barred by res judicata from challenging the Lease’s nature. | Plan Administrator is not in privity with Ward I Debtor; Ward II is a successor trustee enacting new estate. | Ward I Plan confirmation precludes such challenges via res judicata or waiver. | Res judicata does not bar the Plan Administrator from challenging the Lease. |
| Whether Dika-Ward can recover CAM expenses under the Lease. | CAM expenses are unpaid damages under Jolward II Claim. | No CAM liability if Lease is true lease or if Ward II Stipulation released CAM liabilities. | No CAM liability for Ward II Debtor; remand to determine Lease type. |
| Whether the Mortgage became recourse under section 1111(b) post-Ward I. | Section 1111(b) recourses claim should be allowed for distribution purposes. | Transformation is for distribution only; Mortgage remains nonrecourse. | Mortgage remained nonrecourse; Dika-Ward cannot claim against Ward II beyond secured property. |
Key Cases Cited
- In re Silver Mill Frozen Foods, Inc., 32 B.R. 783 (W.D. Mich. 1983) (trustee represents creditors, not simply debtor-in-possession)
- In re WorldCom, Inc., 401 B.R. 637 (S.D.N.Y. 2009) (trustee is successor to debtor's estate; privity considerations in res judicata)
- Taylor v. Sturgell, 553 U.S. 880 (2008) (nonparty preclusion exceptions; privity in bankruptcy context)
- 680 Fifth Ave. Assoc., 680 F.3d 95 (2d Cir. 1994) (1111(b) distribution purposes; nonrecourse treated as recourse for voting rights)
- In re DRW Property Co., 57 B.R. 987 (Bankr.N.D. Tex. 1986) (recourse transformation for distribution purposes only)
- In re Szostek, 886 F.2d 1405 (3d Cir. 1989) (final judgment on the merits for res judicata)