Kipp Flores Architects, L.L.C. v. Mid-Continent Cas. Co.

• Decision Date: 24 March 2017
• Docket Number: No. 16-20255,16-20255
• Citation: 852 F.3d 405
• Parties: KIPP FLORES ARCHITECTS, L.L.C., Plaintiff–Appellant v. MID–CONTINENT CASUALTY COMPANY, Defendant–Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

852 F.3d 405

KIPP FLORES ARCHITECTS, L.L.C., Plaintiff–Appellant

v.MID–CONTINENT CASUALTY COMPANY, Defendant–Appellee

No. 16-20255

United States Court of Appeals, Fifth Circuit.

FILED March 24, 2017

Louis Karl Bonham, Osha Liang, L.L.P., Patrick Zummo, Law Offices of Patrick Zummo, Houston, TX, Louis Karl Bonham, Osha Liang, L.L.P., Austin, TX, for Plaintiff–Appellant.

Robert Sullivan Gebhard, Sedgwick, Detert, Moran & Arnold, San Francisco, CA, Douglas J. Collodel, Esq., Sedgwick, L.L.P., Los Angeles, CA, Timothy Brian Poteet, Chamberlain McHaney, Austin, TX, Sherman Vance Wittie, Esq., Counsel, Sedgwick LLP, Dallas, TX, for Defendant–Appellee.

Before JONES, BARKSDALE, and COSTA, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This is the third appeal arising out of an architectural copyright infringement action and subsequent Chapter 7 bankruptcies of two related companies in the homebuilding business. After Kipp Flores Architects ("KFA") sued Hallmark Collection of Homes, L.L.C., for copyright infringement, Hallmark Collection commenced a "no asset" bankruptcy case. KFA filed a bankruptcy proof of claim for copyright infringement damages. Relying on its "deemed allowed" claim, 11 U.S.C. § 502(a), as a final judgment, KFA sued appellee Mid–Continent Casualty Company, the debtor's liability insurer. KFA argues that the unobjected-to claim constitutes a final judgment and is res judicata as to Mid–Continent. The question on appeal is what "deemed allowed" means when a proof of claim is filed in a no-asset bankruptcy case, no deadline is set for objections to claims, and no "party in interest" objects? We conclude that the text and structure of the Bankruptcy Code, Rules and Official Forms, and relevant case law all support affirming the district court's summary judgment against KFA.

BACKGROUND

Appellant KFA creates and markets proprietary home designs and plans. In a series of licensing agreements, KFA prepared twenty-one different architectural designs for Texas-based Hallmark Collection of Homes, L.L.C. ("Hallmark Collection"). Hallmark Collection obtained a license to build one, and only one, house per plan—unless Hallmark Collection compensated KFA for each additional house built from that plan. Hallmark Collection, however, built several hundred houses from the licensed plans without paying KFA.

KFA filed suit in March 2009 for violations of federal copyright law and actual or statutory damages under 17 U.S.C. § 504. The defendants included Hallmark Collection, the limited partnership Hallmark Design Homes, L.P. ("Hallmark Design"), and Joe Partain, an owner of Hallmark Collection. In the midst of the copyright lawsuit, Hallmark Collection and Hallmark Design filed separately for Chapter 7 bankruptcy protection in November 2009. Both bankruptcy filings stated on Form B1 that, "after any exempt property is excluded and administrative expenses paid, there will be no funds available for distribution to unsecured creditors." KFA's copyright suit was stayed pending the bankruptcy cases on November 23, 2009. 11 U.S.C. § 362(a).

Hallmark Collection's schedules disclosed liabilities in excess of $2.5 million but listed no assets available for distribution to creditors. KFA was listed as a creditor with an unsecured nonpriority claim for an unknown amount based on the copyright suit. In early January 2010, the Chapter 7 Trustee distributed the following notice to creditors:

It having appeared from the schedules of [Hallmark Collection] at the time of filing that there was no estate from which any dividend could be paid to creditors, the notice to creditors advised that it was unnecessary for any creditor to file his claim at that time.

It appearing subsequently that there is an estate from which a dividend to creditors may be paid, creditors must now file claims in this case in order to share in any distribution from the estate. CLAIMS MUST BE FILED ON OR BEFORE NINETY (90) DAYS FROM THE ISSUANCE OF THIS NOTICE.

Claims which are not filed timely as set forth above will not be allowed, except as otherwise provided by law.

Responding to this notice, KFA timely filed a proof of claim for $63,471,000 against Hallmark Collection. (This amount was based on the debtor's gross receipts from sales of the infringing homes.) No deadline was set by the court for objecting to claims. Unsurprisingly, neither the trustee nor any other party in interest objected to KFA's proof of claim. The bankruptcy court entered no order allowing or disallowing the claim. But in August 2010, the Chapter 7 Trustee submitted a No Asset Report, stating that there were no proceeds from the Hallmark Collection estate for distribution to creditors. The bankruptcy court closed the case five weeks later.

While Hallmark Collection's case was pending, KFA amended its complaint in the copyright lawsuit and added individual defendants Laura Partain and William Graper, each of whom filed Chapter 7 bankruptcy cases. KFA persuaded the district court in August 2011 to withdraw the reference to the bankruptcy court of claims against Hallmark Design, Joe Partain, and Laura Partain in the underlying copyright suit. See 28 U.S.C. § 157(d). KFA never made a similar request with respect to the claim against Hallmark Collection.

In November 2011, KFA amended its proof of claim in the Hallmark Design bankruptcy case, seeking over $83 million, and filed an identical claim in the Partain case. The respective Chapter 7 Trustees' objections to KFA's claims were consolidated with the underlying copyright action. After the district court lifted the automatic stay, KFA prevailed in a jury trial of the copyright suit that yielded a finding of $3,231,084.00 damages against Hallmark Design but imposed no liability on the individual defendants. KFA was granted an "allowed unsecured claim" for $3,239,688.40 in the Hallmark Design bankruptcy. Hallmark Design appealed, and the Fifth Circuit affirmed.¹

Appellee Mid–Continent, Hallmark Design's insurer, had been approved to represent the trustee in KFA's litigation. The insurer next filed a declaratory judgment action in January 2013 to challenge its policy coverage of the judgment against Hallmark Design. KFA counter-claimed and prevailed in the district court.² The Fifth Circuit affirmed that judgment³ , and Mid–Continent paid KFA $3,031,563.12.

While litigation over the Hallmark Design judgment was pending, KFA made demand on Mid–Continent to pay off KFA's "final judgment" obtained for its proof of claim in the Hallmark Collection bankruptcy. KFA sought payment of the Mid–Continent policies' $6 million face value.

When Mid–Continent refused to pay, KFA filed this action in September 2014 for breach of contract as a judgment creditor of Hallmark Collection and third-party beneficiary under Mid–Continent's policies. The district court referred the matter for pretrial management, pursuant to 28 U.S.C. § 636(b)(1)(A) and (B), to a magistrate judge. Following protracted proceedings, the parties filed cross-motions for summary judgment.

Citing precedent from multiple bankruptcy courts around the country, the magistrate judge concluded that "KFA's proof of claim was not ‘deemed allowed,’ as a matter of law." In part, the magistrate judge reasoned that in cases where there are no assets available for distribution to creditors, the bankruptcy claims allowance process "was never ‘triggered’ at all." After reviewing KFA's objections to the magistrate judge's recommendation, the district court adopted it with one modification that is irrelevant here. KFA appealed.

STANDARD OF REVIEW

The standard of review for a district court's grant of summary judgment is de novo, Sossamon v. Lone Star State of Tex. , 560 F.3d 316, 326 (5th Cir. 2009), applying the usual standards under Federal Rule of Civil Procedure 56. RSR Corp. v. Int'l Ins. Co. , 612 F.3d 851, 857 (5th Cir. 2010).

DISCUSSION

KFA contends that the district court judgment created a "no asset case" exception to 11 U.S.C. § 502(a) contrary to the provision's plain language. According to KFA, the Bankruptcy Code is unambiguous: any proof of claim is deemed allowed if no party in interest objects. Because no party objected to KFA's proof of claim in the Hallmark Collection bankruptcy case, the claim was "deemed allowed," became a final judgment against Hallmark Collection, and under principles of res judicata, suffices to trigger Mid–Continent's duty to indemnify its insured, Hallmark Collection.

Mid–Continent responds that KFA's proof of claim did not result in a final judgment in Hallmark Collection's no asset Chapter 7 case. The allowance of KFA's claim for copyright infringement damages served no bankruptcy purpose because there were no assets to be marshalled and distributed among creditors. According to Mid–Continent, the Bankruptcy Code, read as a whole, provides that proofs of claim may be filed and become subject to bankruptcy court adjudication in the claims process only when assets are available or are thought to be forthcoming for distribution.

This appeal raises an intriguing question of statutory interpretation. We conclude that Mid–Continent has the better of the argument when Section 502 is read in tandem with other provisions of the Bankruptcy Code. Further light is shed on the question by the relevant Bankruptcy Rules and Official Forms, which are promulgated under the auspices of the U.S. Supreme Court and approved by Congress. See 28 U.S.C. § 2075 ("Bankruptcy Rules").

The core of KFA's case is Section 502(a), which states:

A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.

11 U.S.C § 502(a). Standing alone, the provision appears to say that any bankruptcy proof of claim not objected to by a "party in interest" is "deemed allowed." KFA would have the analysis stop here. But interpretations of the ...