550 B.R. 391
Bankr. N.D. Ill.2016Background
- Shelbourne North Water Street, L.P. (debtor) ran a Chicago Spire project; Garrett Kelleher was its principal and personally guaranteed the Shelbourne loans and separately borrowed a $6.1M personal loan (the “Kelleher Loan”) secured by his non-debtor assets.
- Anglo Irish/IBRC → NALM acquired loans; NALM later transferred the Shelbourne loans to RMW but retained the Kelleher Loan. NALM was not a creditor of Shelbourne at confirmation.
- A settlement among debtor, RMW, Kelleher, and others formed the basis of a joint chapter 11 plan confirmed in October 2014; the plan contains release and injunction provisions. NALM was not a party to the settlement or a recipient of plan distributions.
- Kelleher sued NALM and Capita seeking a declaratory judgment that the plan’s releases and injunction barred collection of the Kelleher Loan and alleging willful violations; he later voluntarily dismissed the adversary.
- NALM/Capita moved for Rule 9011 and § 1927 sanctions arguing the complaint lacked any legal or factual basis; the court examined plan definitions and language and found Kelleher’s claim frivolous.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plan releases/injunction cover the Kelleher Loan (a non-debtor debt to non-creditor) | Kelleher: plan’s release/injunction include him as a Released Party and therefore bar NALM from collecting the Kelleher Loan | NALM: plan language and definitions limit releases/injunctions to claims against the debtor or debtor’s property; NALM received no rights/distribution and was not identified or given notice | Court: Release and injunction do not cover the Kelleher Loan; claim was frivolous |
| Whether NALM can be bound by the plan because it “participated” in the bankruptcy | Kelleher: NALM intervened and participated, so could be bound | NALM: limited intervention (to protect sealed info) does not convert it into a creditor or bind it to plan | Court: Limited intervention did not bind NALM; participation alone insufficient |
| Whether sanctions under Rule 9011 are warranted for the complaint | Kelleher: asserted some legal theories and disputed facts; argued sanctions untimely | NALM: complaint lacked any reasonable legal or factual basis; timely moved after safe-harbor and dismissal | Court: Rule 9011 sanctions warranted; complaint frivolous and objectively unreasonable |
| Whether § 1927 sanctions apply for multiplying proceedings | NALM: sought alternative sanction under § 1927 | Kelleher: dispute; argued Rule 9011 only | Court: § 1927 not warranted—no pattern of vexatious multiplicative conduct; denied § 1927 relief |
Key Cases Cited
- Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073 (7th Cir. 1987) (serious sanctions motions must be treated seriously)
- Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (U.S. 1990) (voluntary dismissal does not eliminate a prior Rule 11 violation)
- Matrix TV, Inc. v. Am. Nat’l Bank & Trust Co., 649 F.3d 539 (7th Cir. 2011) (Rule 11 safe-harbor timing is a floor, not a ceiling)
- In re Airadigm Commc’ns, Inc., 519 F.3d 640 (7th Cir. 2008) (limits on plan releases of creditor claims against non-debtors)
- In re Ingersoll, Inc., 562 F.3d 856 (7th Cir. 2009) (non-debtor releases may be valid only in unusual circumstances with fair notice to affected parties)
- Divane v. Krull Elec. Co., 200 F.3d 1020 (7th Cir. 1999) (Rule 11 may authorize attorney’s fees as a sanction for deterrence)