In Re Local Union 722 International Brotherhood of Teamsters
MEMORANDUM OPINION
In this mаtter, a creditor, Mark Serafinn (“Serafinn”), moves to dismiss the bankruptcy case of the debtor, Local Union 722 International Brotherhood of Teamsters (“Debtor”), pursuant to 11 U.S.C. § 1112(b). After briefing and a hearing on the matter, the motion is granted for the following reasons.
I. JURISDICTION
The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1384 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A),(B), and (0).
II. BACKGROUND
The dispute between the Debtor and Serafinn has an acrimonious history. The Debtor is a local unit of the International Brotherhood of Teamsters union with approximately 1,340 members who contributed approximately $880,000.00 in dues and fees to the Debtor in 2008. The Debtor owns a parcel of real property in LaSalle, Illinois; its estimated value is approximately $350,000.00. Hometown National Bank (“Bank”) holds a security interest in this property pursuant to a promissory note in the amount of $200,000.00. The note is secured by a mortgage and assignment of rents in the property. Acсording to the Debtor’s schedules, it owes roughly $130,000.00-$140,000.00 on this obligation to the Bank.
Serafinn is the former president of the Debtor. On December 30, 2003, Serafinn initiated suit against the Debtor for alleged violations of the Labor Management Reporting and Disclosure Act of 1959 (“Labor Action”) in the District Court for the Northern District of Illinois. Following a trial, a jury awarded Serafinn $286,000.30 on November 14, 2006. On January 12, 2007, after receiving the adverse verdict, the Debtor entered into a $200,000.00 line of credit with the Bank. The stated purpose of the line of crеdit was to “PROVIDE AN OPERATING LINE OF CREDIT TO COVER LEGAL EXPENSES.” (Mem. of Law in Support of Mot. to Dismiss, Case No l:09-bk-20825, Dkt. No. 48, Ex. D)(emphasis in original). In January 2008, the Debtor borrowed an additional $200,000.00 from the Bank with the purpose “TO TERM OUT EXISTING LOC.” (Reply Mem. of Law in Support of Mot. to Dismiss, Case No. l:09-bk-20825, Dkt. No. 71, Ex. C) (emphasis in original). A final judgment was entered on April 17, 2009 in Serafinn’s favor. The Debtor has appealed that judgment to the Seventh Circuit Court of Appeals.
In order to collect on the judgment, Serafinn recorded a
lis pendens
with the LaSalle County Recorder’s Office in April 2007 against the Debtor’s real property. In response to the
lis pendens
against its real property, the Debtor filed a lawsuit in state court in LaSalle County, Illinois against Serafinn and his counsel alleging
On June 3, 2009, Serafinn served a citation to discover assets upon the Bank. At the time, the Debtor had approximately $69,000.00 in its two accounts at the Bank which the Debtor states represents its operating funds. The Bank then exercised its set-off rights pursuant to its promissory note with the Debtor and froze $67,000.00 of the Debtor’s assets in the accounts. The Debtor states that the Bank agreed to refrain from exercising its rights until June 8, 2009 to provide the Debtor with an opportunity to quash the citation. On June 5, 2009, the Debtor filed an emergency motion to quash the citation. This motion was granted in part to pay certain payroll and vendor checks. On June 8, 2009, the Debtor’s motion to quash the citation was denied. The Debtor filed the underlying chapter 11 petition for bankruptcy relief immediately after the motion was denied on June 8, 2009.
Thе Debtor listed $1,465,948.28, later amended to 1,596.948.28, in unsecured claims on its schedules. A large portion of these claims is the claim of Central States Health & Welfare (“Central States”), a multiemployer pension plan, which filed a contingent claim for $1,231,138.63. The next biggest claim is Serafinn’s judgement of $286,000.30; it is listed as disputed. The third largest claim is for $26,000.00 held by Cavanagh & O’Hara (“Cavanagh”), the Debtor’s counsel in the Labor Action. The remaining claims are related mostly to the Debtor’s day-to-day operations and unpaid accrued еmployee vacation time.
III. DISCUSSION
Serafinn seeks to dismiss the Debtor’s bankruptcy case for cause under 11 U.S.C. § 1112(b). He argues that the Debtor filed for bankruptcy in bad faith. The Debtor resists Serafinn’s efforts.
A bankruptcy court possesses broad discretion to dismiss a chapter 11 bankruptcy case for cause under § 1112(b).
Matter of Woodbrook Associates,
Although not specifically provided for under § 1112(b), good faith is recognized as a prerequisite to filing a bankruptcy case under chapter 11 of the Bankruptcy Code.
In re Dilling,
A. Is the Bankruptcy Case Really a Two-Party Dispute?
Serafinn first argues that the Debtor’s bankruptсy case is in essence a
Serafinn points to several facts to support his argument that the underlying bankruptcy case is a two-party dispute with no realistic chance of rehabilitation of the Debtor. First, he points to an email dated June 4, 2009, after Serafinn served the citation to discover assets upon the Bank, to his attorney in the Labor Action stating that serving the citation “has placed the [Debtor] in а very precarious financial position such that their only remedy may be to seek protections under the bankruptcy code[.]” (Mem. of Law in Support of Mot. to Dismiss, Case No 1:09— bk-20825, Dkt No. 48, Ex. A). Citation to this email has no bearing on whether this is really a two-party dispute. Large judgments are a common reason for filing for chapter 11 bankruptcy protection.
See Billing,
Additionally, the Debtor alleges that Serafinn acted with bad faith. The Debtor points out that Serafinn took the position that the automatic stay, when the Bebtor filed for bankruptcy, prevented it from prosecuting its appeal of the Labor Action and attempted to have the stay enforced against the Debtor. Additionally, the Debtor cites Serafinn’s filing of the Lis Pendens Action as another sign of bad faith. Finally, the Debtor points to Seraf-inn’s efforts in objecting to Debtor’s motion to retain Cavanagh as special counsel to proceed with the Lis Pendens Action. To support its last contention, the Debtor submits two emails that Serafinn’s counsel sent to Mr. O’Hara of Cavanagh indicating that Cavanagh should cease its representation of the Debtor in the Lis Pendens Action until this Court ruled on the motion to retain Cavanagh. The Debtor proffers that these emails were sent in an attempt to frighten Mr. O’Hara from representing the Debtor in the Lis Pendens Action. These actions do not clearly indicate bad faith. Instead, they appear to be litigation tactics, some that involve an action in a different court. Lawyers are specially trained to ascertain the veracity and validity of such claims. The Court makes no comment on these tactics and does not find these acts to be indicative of bad faith on Serafinn’s part.
Serafinn also points out that the claims listed on the Debtor’s bankruptcy schedules help prove that this is really a two-party dispute. According to Serafinn, his claim in proportion to the others indicates this. The Debtor’s schedules initially indicated $1,465,948.28 in unsecured claims. The Debtor later amended its schedules to include a total of over forty creditors with claims in the amount of $1,596,422.96. Most of the additional cred
The largest claim is held by Central States, a multiemployer pension plan. This claim, for a total of $1,231,138.63, is listed as contingent, and will not become an actual claim until the Debtor either withdrаws from the multiemployer pension plan or ceases operations, incurring withdrawal liability under the Employee Retirement Income Security Act of 1974 (ERISA).
See
29 U.S.C. § 1383(a);
GCIU-Employer Ret. Fund v. The Goldfarb Corp.,
Serafinn also argues that the next largest creditor, besides itself, is Cavanagh, the Debtor’s counsel in the Labor Actiоn and
Lis Penden
Action, for $26,000.00 and should be disregarded in the"'two-party analysis because it belongs to its attorney as part of a dispute between the two parties. To support his proposition, Serafinn cites this Court’s decision in
Liptak.
In
Liptak,
the Court made a determination that legal fees incurred during years of litigation between the debtor and the main creditor weighed in favor of a finding of a two-party dispute between the debtor and that creditor.
Liptak,
Even with the inclusion of the Cavanagh claim with the body of the other unsecured claims, Serafinn’s claim controls a high proportion in regard to the other claims. Out of the $365,284.33 absent Centrаl States’ claim, Serafinn’s $286,000.30 claim represents roughly 78% of the Debtor’s unsecured debt. This factor favors finding that the underlying chapter 11 bankruptcy case is really a two-party dispute.
B. Was the Underlying Bankruptcy Necessary?
Serafinn next argues that the bankruptcy case need not have been filed.
The most basic “good faith” ground for dismissal of a Chapter 11 case is that the filing is unnecessary. A truly unnecessary Chapter 11 casе imposes improper burdens both on creditors and on the bankruptcy system. The creditors are arbitrarily required to accept rights in bankruptcy in place of their property rights under non-bankruptcy law (at the very least, the automatic stay is imposed upon them), and the bankruptcy system is required to waste its resources, possibly interfering with the processes of other court systems.
Id.
An indication that a bankruptcy is not necessary is “if the debtor’s business could continue unimpaired, without a bankruptcy filing,” otherwise “a creditor whose rights are impacted by the filing has ‘cause’ for relief, independent of the other factors listed in the decisions on good faith in filing.”
Id.
at 278. Generally, a particular financial hardship is not necessary to support a voluntary filing.
Id.
Section 1112(b) does not require a debtor to “clearly articulate or convincingly prove its need for bankruptcy protection.”
Id.
It is presumed that debtors file cases under chapter 11 because their need for relief is genuine.
Id.
Insolvency is nоt a requirement for filing a bankruptcy case under any chapter.
In re Int’l Oriental Rug Ctr.,
Serafinn makes several arguments as to why the Debtor’s bankruptcy case was unnecessarily filed. He notes that the Debtor continues to collect dues from its members, which is its primary source of income, was current on its obligations to the Bank prior to the set-off of the Debt- or’s accounts, and has the ability to satisfy its dispute with Serafinn. Serafinn’s contention centers on the fact that the Debtor took out a $200,000.00 line of credit from the Bank in order to continue its litigation against Serafinn in January 2007. Instead, Serafinn argues that the Debtor could have used these funds to negotiate a settlement and resolve his dispute. Moreover, Serafinn also argues that the Debtor could use equity in its real property to obtain a loan to satisfy the judgment. Serafinn argues that thе only purpose of the bankruptcy filing was to thwart its nonbankruptcy collection rights.
In response, the Debtor states that it took out the line of credit for a multitude of reasons. It concedes that it did use the line of credit to pay legal expenses, but the loan proceeds were also used to pay general operating expenses. The Debtor also stated that it was involved with numerous settlement negotiations with Serafinn but found Serafinn’s terms to be unacceptable. The Debtor allеges that Serafinn would only accept that the Debtor forgo its appeal rights, drop the Lis Pendens Action, and satisfy 100% of Serafinn’s judgment. Additionally, the Debtor believes that it will prevail in its appeal of the Labor Action and in the Lis Pendens Action. The Debtor also disputes that it could utilize equity in its real property to satisfy a judgment because its title is clouded by the lis pendens filed by Serafinn. Lastly, the Debtor argues its bankruptcy was necessary because its operating funds were set-off after the citation to discover assets was served upon the Bank.
Once again, Serafinn relies upon this Court’s decision in
Liptak
to bolster his
[A] Chapter 11 filing is in good faith and may be used to replace an appeal bond if the judgment against the debtor is so large that the debtor faces severe disruption of his business if enforcement of the judgment is not stayed. However, if the debtor has the ability to satisfy the judgment from non-business assets, then it is bad faith to attempt to use the bankruptcy laws to appeal without posting a bond ... The timing of any bankruptcy filing may be relevant to determining whether the debtor acted to delay creditors unneсessarily ..., but there is nothing improper in a debt- or’s thwarting state court collection proceedings by filing a Chapter 11 petition, as long as reorganization is both needed and feasible.
Liptak,
The test is whether the debtor has a business justification for thwarting a judgment creditor’s collection activity and forcing them to accept other (possibly reduced) future payment rights under a reorganization plan in lieu of assets crucial to oрerating the business. This justification does not exist if the debtor could have satisfied a judgment with funds and savings that were not being used to operate a business.
Id.
It is Serafinn’s position that the Debtor failed the test stated above since it took out a line of credit to continue in its efforts to litigate with Serafinn.
Liptak
presents facts different from those in this case. In
Liptak,
the Court specifically found that the debtor had funds aside from those he used to run his business.
Id.
at 833. The Court stated,
“No evidence
suggests that the $2 million Thornhill seeks to collect is absolutely necessary for Liptak to provide business turnaround advice to potential clients or that he uses his own funds to rehabilitate companies.”
Id.
(emphasis added). In the instant case, the Debtor states that the bankruptcy filing became necessary when its operating funds were frozen by the Bank after Serafinn issued the citation to discover assets. Serafinn does not produce any evidence that the Debtor currently has funds other than those held with the Bank that it may use for its day-to-day operations. The fact that the Debt- or incurred debt two years prepetition to continuе its litigation instead of satisfying Serafinn’s judgment may not have been in the Debtor’s best interests looking backward. Hindsight and the Court’s judgment cannot be substituted for the Debt- or’s business judgment at that time. As stated in
N.R. Guaranteed, “...
there is nothing improper in a debtor’s thwarting state court collection proceedings by filing a Chapter 11 petition, as long as reorganization is both needed and feasible.”
N.R. Guaranteed,
C. Is it Possible for the Debtor to Formulate a Confirmable Plan of Reorganization?
Serafinn also argues that the Debtor cannot propose a confirmable plan over Serafinn’s objection because Seraf-inn’s claim dominates the class of unsecured nonpriority claims, likely the only
The Debtor argues that it can confirm a plan despite an objection by Serafinn. It claims that Serafinn’s claim would be placed into a separate clаss of impaired claims because it is a contingent claim. This is a so-called “cramdown” of chapter 11 plan whereby a plan is confirmed over the objection of creditors so long as “at least one class of impaired creditors approve the plan and that the plan satisfy the absolute priority rule, which precludes the payment of junior claims as long as senior claims remain unsatisfied.”
Matter of Wabash Valley Power Ass’n, Inc.,
An inherent issue in classifying unsecured claims into different classes is the danger of gerrymandering, an almost certain objection should the Debtor’s plan place Serafinn’s claim in a separate class of claims than those of the other unsecured creditors. “Every plan proponent creates its classification scheme with the goal of maximizing the probability thаt its plan will be confirmed.”
In re Sentinel Mgmt. Group, Inc.,
Section 1122(a) provides little guidance as to how claims should be classified. The Seventh Circuit Court of Appeals has weighed in on the issue:
A debtor in bankruptcy has considerable discretion to classify claims and interests in a chapter 11 reorganization plan. While a debtor may not separately classify claims solely in order to “gerrymander an affirmative vote on reorganization,” claims may be classified separately if “significant disparities exist between the legal rights of the holder[s of the different claims] which render the two claims not substantially similar.” Claims may also be separately classified if there are “good business reasons” to do so or if the claimants have sufficiently different interests in the plan.
Wabash Valley Power,
The Seventh Circuit noted that a danger of gerrymandering exists when classifying similar claims differently to ensure that a proper vote is secured to obtain confirmation of a plan. The Circuit stated “[s]ome limits are necessary to offset a debtor’s incentive to manipulate a classification
Whether a claim should be included within the same class is dependent on whether the claims are “substantially similar.”
Sentinel,
The Debtor argues that Seraf-inn’s claim must be separately classified from the other unsecured claims since it is a contingent claim and that it is contingent because it is based on a judgment that is currently being appealed. According to the Debtоr, the plan could be confirmed as long as the class of unsecured claims not including Serafinn’s claim votes to accept the plan. The Seventh Circuit Court of Appeals rejected essentially the same argument the Debtor tries to raise here. In
Knight,
a chapter 13 debtor argued that “a debt becomes noncontingent only when a triggering event (such as the entry of final judgment) occurs to make the claim immediately due.”
In re Knight,
IV. CONCLUSION
Based on the foregoing, Serafinn’s motion to dismiss the Debtor’s chapter 11
Notes
. The Court notes that the movant seeks dismissal under 11 U.S.C. § 1 112(b) and does not ask to convert the case to a case under chapter 7 of the Bankruptcy Code.
. Moreover, the fact this claim is disputed would not constitute a valid reason for segregating it from other unsecured claims.
See In re Orla Enterprises,