In the Matter of JAMES WILSON ASSOCIATES, Debtor. Appeals of METROPOLITAN LIFE INSURANCE COMPANY.
Nos. 91-1443, 91-3039, 91-3040, 91-3565 and 91-3726.
United States Court of Appeals, Seventh Circuit.
Decided May 22, 1992.
Argued (Nos. 91-1443, 91-3039 and 91-3040) Nov. 5, 1991. Submitted (Nos. 91-3565, 91-3726) March 13, 1992.
The appellant additionally argues that the district court erred in excluding the testimony of the authors of the Illinois Commerce Commission letter and report. As the district court noted in excluding the witnesses’ testimony, Section
“409 is, in effect, a congressional direction that if a project conceivably could be financed by federal funds as this one could have been, that in the interest of getting the job done, they don‘t want official reports being something that railroads have to be concerned about in personal injury cases, or that the investigator has to have that in mind when he is making a report. . . . If [the report is] not admissible, then having somebody get on the stand and testify to it, I don‘t think I can duck the statute that way.”
“Other courts have recognized that the underlying intent of the statute is to ‘facilitate candor in administrative evaluations of highway safety hazards,’ and to prohibit federally required record-keeping from being used as a ‘tool . . . in private litigation.‘” Robertson v. Union Pac. R.R., 954 F.2d 1433, 1435 (8th Cir. 1992) (citations omitted). We agree with the trial judge that allowing the witnesses to testify as to the content of the letter and report would have circumvented the purposes of the statute. Thus, the district court properly excluded the testimony of the Illinois Commerce Commission witnesses.9
V. CONCLUSION
We hold that the appellant waived her argument that the district court erred in rejecting her jury instructions regarding a statutory violation because she failed to argue to the trial court that there was evidence tending to establish that the train was not ringing its bell as it traversed the one-quarter mile before the crossing. We further hold that the district court properly excluded evidence relating to the Illinois Commerce Commission‘s investigation of the Harmony Road crossing, since it is a “railway-highway crossing” within the provision of
AFFIRMED.
Julie Plotkin, Murphy & Desmond, Madison, Wis., for JWP Investors.
Denis Vogel, Wheeler, Van Sickle & Anderson, Madison, Wis., for Fiaz Choudri.
Rachel A. Brickner, Kay & Eckblad, Madison, Wis., for Bruce G. Felland.
Francis J. Eustice, Eustice, Albert, Laffey & Fumelle, Sun Prairie, Wis., for Bank of Sun Prairie.
Daniel W. Hildebrand, James I. Statz, Denis Bartell (argued), Ross & Stevens, Madison, Wis., for James Wilson Associates, a Wisconsin Ltd. Partnership.
Before CUDAHY, POSNER, and COFFEY, Circuit Judges.
POSNER, Circuit Judge.
We have consolidated five (!) appeals by Metropolitan Life Insurance Company from adverse orders in a bankruptcy proceeding in which Metropolitan is the principal creditor. The debtor, James Wilson Associates (JWA), is a limited partnership that built and operates an office building in Madison, Wisconsin, and that in 1973 had borrowed $3.9 million from Metropolitan, secured by a first mortgage, with an assignment of rents as additional collateral. Later it borrowed more money, against a second mortgage (and assignment of rents) now held by First Nationwide Bank. The balance outstanding on the two mortgages is roughly $4.6 million. In 1976 JWA sold the building for $7 million under a land contract to JWP Investors, another and (despite the similar initials) unrelated limited partnership, which leased the building back to JWA. Although the purpose of the sale and lease back was to finance JWA‘s operation of the building rather than to transfer control, the transaction created a genuine lease under Wisconsin law because it did not vest title in JWA at the lease‘s termination. In re Spring Valley Meats, Inc., 94 Wis.2d 600, 609-10, 288 N.W.2d 852, 856 (1980); American Industrial Leasing Co. v. Moderow, 147 Wis.2d 64, 70-71, 432 N.W.2d 617, 620 (Ct.App.1988). JWP Investors did not assume the mortgages; JWA remained liable under them, and eventually defaulted. In 1990 the two mortgagees brought foreclosure suits in a Wisconsin state court, which at the request of both appointed a receiver to collect the rents from the building‘s tenants and enjoined the tenants from paying rent to anyone else. Three weeks later JWA filed for bankruptcy under Chapter 11 of the Bankruptcy Code, and in its new status as debtor in possession resumed collecting the tenants’ rents because the bankruptcy filing automatically stayed all judicial proceedings against the debtor, including the receivership.
A lease is, with regard to its unexpired portion, an executory contract; and a trustee in bankruptcy (or debtor in possession, as here) is free to repudiate without liability the debtor‘s executory contracts, expressly including any unexpired leases.
One appeal is from this order; the next two appeals challenge three other orders affirmed by the district judge. One turned down Metropolitan‘s request, premised on the argument that JWA had acted in bad faith in filing for bankruptcy, to lift the automatic stay with regard to the foreclosure proceeding. Another order allowed JWA to pay attorney‘s fees incurred in administering the bankrupt estate (an estate consisting be it noted solely of the debtor‘s interest in the office building) out of the tenants’ rents. The third order allowed a portion of those rents to be diverted to the account of First Nationwide, the second mortgagee, to protect its lien. The bankruptcy judge had determined that Metropolitan had adequate protection even after these diversions. The office building alone (that is, ignoring the past rentals, deposited in the debtor‘s account, out of which the diversions have been made) has a market value of $6 million, while Metropolitan, the senior lienor, is owed only about $3.2 million on its mortgage, including interest.
The final two appeals concern the plan of reorganization that JWA submitted and that the bankruptcy judge, affirmed by the district judge, approved after the other appeals had been filed. One appeal attacks the plan itself, as unfair to Metropolitan. The other allows additional attorneys’ fees to be paid out of the tenants’ rent; Metropolitan concedes that this appeal must be decided the same way as the appeal from the previous such order.
The plan of reorganization envisages that all creditors will be paid in full over a period of years, with interest. And all the creditors voted for the plan except Metropolitan, which under the plan is to receive, for seven years, payments based upon a 25-year amortization of its loan at an interest rate of 2.5 percent above the yield on current seven-year U.S. Treasury notes and, at the end of the seven years, a balloon payment for the balance; but JWA is to have two years to raise the money for the balloon payment.
Five appeals are a lot in one case and three of them were filed before the case ended with the approval of the plan of reorganization. This proliferation of interlocutory appeals may seem to do extraordinary violence to the principle of finality, which governs appeals to the courts of appeals in (most) bankruptcy cases, as it does in other cases. Compare
The automatic stay is an injunction. Here it not only stopped the foreclosure proceedings in their tracks; it wrested control over the building and the building rentals from the hands of the receiver. All four orders challenged by the first three appeals rebuffed Metropolitan‘s efforts to dissolve or modify this injunction by revesting the receiver with control over the rentals or, at the very least, blocking access to the rentals by the debtor in possession. Section 1292 of the Judicial Code makes orders granting or denying motions to grant, deny, modify, or dissolve preliminary injunctions appealable without regard to finality,
As a corollary, orders refusing to lift or modify the automatic stay are held to be final. In re Boomgarden, 780 F.2d 657, 660 (7th Cir.1985); In re Sonnax Industries, Inc., 907 F.2d 1280, 1283-85 (2d Cir.1990); Edith H. Jones, Bankruptcy Appeals, 16 Thurgood Marshall L.Rev. 245, 256-57 & n. 48 (1991). At first glance this conclusion seems strained, because no one supposes that a preliminary injunction winds up a case—that is why we have section 1292(a)(1). But at second glance we see that it is the analogy of the automatic stay to a preliminary injunction that is strained. (Analogy is a potent source of confusion in law.) The automatic stay, unless lifted, remains in effect until the entire bankruptcy proceeding is wound up—at which point, ordinarily, the debtor is discharged and whatever proceedings were stayed become moot. An injunction that continues in effect until mootness supervenes could be thought, if not permanent, at least closer to the permanent than to the preliminary end of the injunctive spectrum. So at least the courts have held without dissent and we are not minded to disturb the consensus. Of course, now that section 1292(a)(1) has been held applicable to bankruptcy appeals, it hardly matters whether the automatic stay is a preliminary or a permanent injunction. If the former, challenges to it are appealable to this court under that statute, and if the latter they are appealable under section 158(d). (“Permanent” doesn‘t quite mean “final,” but it‘s close enough. University Life Ins. Co. v. Unimarc, Ltd., 699 F.2d 846, 849 (7th Cir.1983).)
Another jurisdictional question, though, is whether the approval of the plan of reorganization has made the challenge to the automatic stay moot. The stay is automatically lifted when the plan is approved and the bankrupt discharged.
So let us turn to the merits (though we shall quickly encounter there another jurisdictional issue). Metropolitan‘s position is founded on the adage that liens pass through bankruptcy unaffected. Long v. Bullard, 117 U.S. 617, 620-21, 6 S.Ct. 917, 918, 29 L.Ed. 1004 (1886); Dewsnup v. Timm, — U.S. —, 112 S.Ct. 773, 778, 116 L.Ed.2d 903 (1992); In re Official Committee of Unsecured Creditors, 943 F.2d 752, 754 (7th Cir.1991); In re Lindsey, 823 F.2d 189, 190 (7th Cir.1987). Bankruptcy, when viewed from the standpoint of creditors, is intended for the protection of unsecured creditors from the bankrupt and from each other (the unseemly creditors’ scramble that may diminish the aggregate value of the bankrupt‘s assets). When viewed from the debtor‘s standpoint, it is intended for his protection against the unsecured creditors. The secured creditor is supposed to be able to waive his claims in bankruptcy and proceed directly to the liquidation of his security—that is what it means to say that liens pass through bankruptcy unaffected. In re Excello Press, Inc., 890 F.2d 896, 898 (7th Cir.1989); J. Catton Farms, Inc. v. First National Bank, 779 F.2d 1242, 1247 (7th Cir.1985). Metropolitan had a security interest in the rents as well as in the building itself, and the orders complained of, culminating in the plan of reorganization, have frustrated its efforts to use the state court receivership to take control of the rents. Not only has the receivership been enjoined but portions of the rents have been siphoned off to protect a junior creditor and to pay expenses of administering the bankrupt estate. An order by a bankruptcy
All this is very powerful but if accepted would have the peculiar consequence that Metropolitan could use its assignment of rents to pay itself, out of those rents and over as many years as it took, the principal and interest that is due it on its mortgage, and during this entire period there would be nothing for other creditors, or for the expense of administering the bankrupt estate, because the rents are the debtor‘s only income. Metropolitan would be entitled to do this under the view of the law that it is advancing even though its mortgage is comfortably oversecured—the building being worth almost twice as much as the unpaid balance of its mortgage, including interest, to which, as an oversecured creditor, Metropolitan is entitled.
Of course if the debtor in possession did not assume the lease, the rents are not an asset of the bankrupt estate and there is no longer any anomaly in denying the debtor‘s creditors any share of the rents. This is the issue in the first appeal. Metropolitan argues that since there was no formal assumption the lease is to be deemed rejected, the debtor is out, and not only must the stay of the receivership be lifted because it is intended to protect property of the debtor, not of other people, but the plan of reorganization must be disapproved because it attempts to regulate the use of property that is not part of the bankrupt estate.
A secured creditor dragged into a bankruptcy proceeding against his will by the automatic stay provision of the Bankruptcy Code has a tangible financial interest in getting his security out from under the jurisdiction of the bankruptcy court so that he can foreclose it (the receivership in effect foreclosed the rent assignment). That is interest enough to confer standing in an Article III sense. But this is not the only sense of standing that can bar a litigant from a federal court. To have standing to invoke a statute you must be one of the persons whom the statute is intended to protect. Tucker v. Department of Commerce, 958 F.2d 1411, 1416 (7th Cir.1992), and cases cited there. So unless the provision of the Bankruptcy Code relating to the assumption of leases was intended for the protection of other persons as well as lessors, Metropolitan cannot use it to challenge the stay of the receivership or the plan of reorganization.
Before section 365(d)(4) was added to the Bankruptcy Code in 1984, a Chapter 11 bankrupt who was a lessee had until the approval of the plan of reorganization to decide whether to assume the lease even if he had vacated the leased premises and stopped paying rent, so that until that approval the landlord might have to allow the premises to remain vacant lest the lessee decide to exercise his right. In re American Healthcare Management, Inc., supra, 900 F.2d at 830.
Although the only two appellate cases that we have found on the question divide over creditor standing to enforce the 60-day rule, compare International Trade Administration v. Rensselaer Polytechnic Institute, 936 F.2d 744, 747 (2d Cir.1991) (yes, standing), with In re Dein Host, Inc., 835 F.2d 402 (1st Cir.1987) (no standing), we find it very difficult to see who might be an intended beneficiary of this provision other than the lessor, and we therefore side with the First Circuit. The Second Circuit considered standing only in its Article III sense: did the creditor have a tangible stake in enforcing the rule? And of course it did, as Metropolitan does here. But there is more to standing. If as here the lessor is content to allow the lease to continue, no other creditors suffer a harm of the kind that the provision was intended to head off. A rule that allows other creditors to complain that the lease was not assumed will simply provoke arid controversies over what formalities should be considered adequate for the assumption of a lease—a matter between lessor and lessee. Metropolitan does not argue that there was collusion between lessee and lessor—that JWP Investors is a cat‘s paw of JWA. And it has abandoned its request for the appointment of a trustee to take control of the building away from JWA. Its position thus is hypertechnical; it is caviling about formalities intended for the protection of other people. This is inevitable if a creditor is allowed to challenge the assumption of a lease. The issue of the creditor‘s standing matters only when the lessor is content with the lessee‘s continuing under the lease; otherwise the lessor, whose standing is unquestionable, would be challenging the alleged assumption. The formalities of assumption are really no one else‘s business, so that here the concept of standing rather than blocking access to the merits screens out a set of inherently meritless claims.
We must consider, however, the bearing of section 1109(b) of the Bankruptcy Code, which provides that a “party in interest [in a bankruptcy proceeding], including . . . a creditor . . . may raise and may appear and be heard on any issue in a case under this chapter.” Provided that the creditor has a stake in the issue, as Metropolitan does, there could be no objection founded on Article III to such a grant of standing. But we do not think that this section was intended to waive other limitations on standing, such as that the claimant be within the class of intended beneficiaries of the statute that he is relying on for his claim, although a literal reading of section 1109(b) would support such an interpretation. We think all the section means is that anyone who has a legally protected interest that could be affected by a bankruptcy proceeding is entitled to assert that interest with respect to any issue to which it pertains, thus making explicit what is implicit in an in rem proceeding—that everyone with a claim to the res has a right to be heard before the res is disposed of since that disposition will extinguish all such claims. Cf. 5 Collier on Bankruptcy ¶ 1109.02, at pp. 1109-16 to 1109-32 (Lawrence P. King ed., 15th ed. 1991); United States v. Tit‘s Cocktail Lounge, 873 F.2d 141, 143 (7th Cir.1989) (per curiam). Section 365(b)(4) confers no legally protected interest on Metropolitan in the lease between JWP Investors and the bankrupt, and section 1109(b) therefore does not entitle Metropolitan to make an issue of the assumption of the lease.
Obviously this is a richly complex issue, and it was Metropolitan‘s burden to develop it in adequate depth to enable its opponent and this court to evaluate it. A very large corporation, Metropolitan is well able to afford the best counsel. It has filed five appeals in this case and hundreds of pages of briefs. We won‘t rewrite its appeal briefs for it.
Our resolution of the question of standing brings to the fore Metropolitan‘s argument that the entire bankruptcy proceeding is an abuse of the Bankruptcy Code because the sole purpose is to squirrel away the rents where the receiver can‘t get at them. In so arguing Metropolitan is appealing to section 1112(b) of the Code, which authorizes the bankruptcy judge to dismiss a bankruptcy proceeding for want of good faith. What should count as bad faith in this setting is unclear. It is not bad faith to seek to gain an advantage from declaring bankruptcy—why else would one declare it? One might have supposed that the clearest case of bad faith would be filing for bankruptcy knowing that one was not bankrupt, but the Bankruptcy Code permits an individual or firm that has debts to declare bankruptcy even though he (or it) is not insolvent. In re Johns-Manville Corp., 36 B.R. 727, 732 (Bankr.S.D.N.Y.1984); Baird & Jackson, supra, at 86-129. (These are usually cases of impending insolvency.) The clearest case of bad faith is where the debtor enters Chapter 11 knowing that there is no chance to reorganize his business and hoping merely to stave off the evil day when the creditors take control of his property.
And if this is a proper bankruptcy proceeding (and if the rents are the property of JWA, because, at least between it and JWP Investors, the lease was validly assumed) it illustrates that the adage that liens pass through bankruptcy unaffected cannot be taken at face value. In re Lindsey, supra, 823 F.2d at 190-91. Being subject to the automatic stay, Metropolitan cannot, without leave of the bankruptcy court, enforce its security interests either in the building itself or in the rentals that the building‘s tenants pay. In re Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir.1990); In re Excello Press, Inc., supra, 890 F.2d at 898; In re Met-L-Wood Corp., 861 F.2d 1012, 1015 (7th Cir.1988); Boston & Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562, 565 (7th Cir.1986). So its liens are affected by bankruptcy. But is it permissible to bite into them in order to pay attorney‘s fees and to protect the interest of another, but junior, secured creditor? We think so, given the oversecured character of Metropolitan‘s claim. A security interest is a security interest. It is not a fee simple. United States v. Security Industrial Bank, supra, 459 U.S. at 76, 103 S.Ct. at 411. Metropolitan does not own a $6 million building or the rents that that building throws off month after month, year after year. It is just a creditor with a claim currently worth about $3.2 million that it has secured with liens against the building, and against the rents, to assure repayment. It has no right to fence off the entire collateral in which it has an interest so that no other creditor can get at it. Its only entitlement is to the adequate protection of its interest.
As an original matter one might think that a senior lienor should be allowed to do whatever he wants with his lien, and the junior lienors be damned. They can always buy out his interest at its face amount. But the conceded applicability of the automatic stay to suits by creditors, such as Metropolitan‘s receivership action, as well as the fundamental principle that a creditor obtains only a security interest and not a fee simple no matter how the parties denominate his interest, shows that neither the Constitution nor the Bankruptcy Code requires so brutally simple an approach. The first lienor is entitled to the preservation of so much of his security interest as is necessary generously to secure his claim, but to no more. He may not paralyze the debtor and gratuitously thwart the other creditors by demanding superfluous security. We note the strategizing flavor of Metropolitan‘s demand to be allowed to col
What we have said disposes very largely of Metropolitan‘s challenge to the plan of reorganization itself. Like the automatic stay to which the previous appeals object, the plan prevents Metropolitan from either foreclosing a mortgage conceded to be valid or enjoying the mortgagor‘s rents under an assignment also conceded to be valid. It does make rather a mockery of the principle that liens pass through bankruptcy unaffected to force Metropolitan to extend its loan for seven years at an interest rate fixed by a court, when, the loan having been defaulted on, the unpaid balance became immediately due and owing. It is two years since Metropolitan sued to foreclose, and obtained a receivership; it will be seven years, at best, before the loan is repaid; it could well be longer because the plan of reorganization gives JWA two years after the loan comes due to find the money to make the balloon payment.
But the principle that liens pass through bankruptcy unaffected cannot be taken literally, as we have seen; and it is the law that, provided the plan of reorganization gives the secured creditor the “indubitable equivalent” of his secured interest, the bankruptcy judge can force the creditor to accept the exchange.
Metropolitan objects bitterly, however, to the exclusion of evidence that the building is in far worse state of repair than JWA acknowledges and is therefore worth much less than the plan assumes. The evidence had been obtained by a consulting engineer retained by Metropolitan‘s expert witness, an architect who planned to testify about the physical condition of the building as reported to him by the consulting engineer. The bankruptcy judge was entitled to exclude the architect‘s evidence as hearsay. An expert is of course permitted to testify to an opinion formed on the basis of information that is handed to rather than developed by him—information of which he lacks first-hand knowledge and which might not be admissible in evidence no matter by whom presented.
Metropolitan has raised some other issues but we need not discuss them. Its objections to the confirmation of the plan of reorganization are encompassed by our discussion. We find no errors in the challenged rulings.
AFFIRMED.
CUDAHY, Circuit Judge, concurring.
I can accept the majority‘s view that Metropolitan waived its best argument. Ante at 170. Had it not done so, this case would have been significantly more difficult.
Metropolitan sued both JWA and JWP Investors in Wisconsin state court and secured the appointment of a receiver. Under Ottman v. Tilbury, 204 Wis. 56, 234 N.W. 325 (1931) (a case cited to us by JWA!), this development ousted JWP Investors from its role as lessor and JWA from its role as sub-lessor and replaced them both with Metropolitan‘s receiver. In Ottman, the Wisconsin Supreme Court held that a receiver stood in the shoes of the landlord, “with all of the powers usually possessed by landlords in such cases.” Id. at 59, 234 N.W. 325. The landlord, however, was not the mortgagor of the property, but was rather a land contract vendee from the mortgagor. Here, of course, the land contract vendee (and landlord) is JWP Investors and the mortgagor is JWA. In Ottman, as here, both the land contract vendee and the mortgagor were joined in the action. Accordingly, the receiver stands in JWP Investors‘, the landlord‘s, shoes. Further, a receiver in this position may cancel a lease if the landlord could. See, for example, Evans v. Orgel, 221 Wis. 152, 156, 266 N.W. 176 (1936) (receiver may evict tenant who has violated local ordinances). In sum, although Metropolitan has no standing as a creditor to complain about JWA‘s failure to assume its lease under section 365(d)(4), it surely has standing as a landlord.
Of course, the automatic stay might put JWP Investors back into its own shoes; in which case, this state law analysis would not matter. But, as the majority notes, the potential effect of the stay on a proceeding between a creditor and a debtor‘s co-defendant raises difficult issues on which we have not been briefed.
The requirements of section 365(d)(4) are unequivocal and important. JWA tried to finesse them. In my view, JWA got off lightly here.