Fernstrom Storage and Van Co., Matter of
| Decision Date | 23 August 1991 |
| Docket Number | No. 90-1213,90-1213 |
| Citation | 938 F.2d 731 |
| Parties | , 21 Bankr.Ct.Dec. 1565, Bankr. L. Rep. P 74,126 In the Matter of FERNSTROM STORAGE AND VAN COMPANY, an Illinois Corporation, Fernstrom Storage and Van Company of Virginia, a Virginia Corporation, Fernstrom Storage and Van Company of Minnesota, a Minnesota Corporation, and Bradley Moving and Storage Company, a Michigan Corporation, Debtors. INTERNATIONAL BUSINESS MACHINES, Plaintiff-Appellee, v. FERNSTROM STORAGE AND VAN COMPANY, and Bradley Moving and Storage Company, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Edward M. Kay (argued), James T. Ferrini, Robert E. Gilmartin, Lisa Marco Kouba, Clausen, Miller, Gorman, Caffrey & Witous, M. Scott Michel, Dept. of Justice, U.S. Trustee, Chicago, Ill., for plaintiff-appellee.
John F. Horvath (argued), Horvath, Lieber & Quilici, Stephen P. Eisenberg, Leahy, Eisenberg & Fraenkel, Chicago, Ill., for defendants-appellants.
Before POSNER, FLAUM and KANNE, Circuit Judges.
On June 30, 1979, fire damaged a Birmingham, Michigan, warehouse owned by debtor Bradley Moving and Storage Company, a subsidiary of debtor Fernstrom Storage and Van. The blaze destroyed $800,000 worth of computer equipment owned by International Business Machines (IBM) that was stored in the warehouse at the time. IBM presented a claim for damages to Fernstrom on March 12, 1980. When Fernstrom refused to pay, IBM filed a claim with its insurer, which reimbursed the computer maker for the lost equipment.
Fernstrom, too, was insured, under two policies which, taken together, provided for coverage up to a maximum of $750,000 per policy year. IBM's insurer asserted a subrogation claim against Fernstrom in the amount of the insurer's payment to IBM, and entered into negotiations with Fernstrom's insurers, Home Insurance and St. Paul Fire & Marine. One of these insurers agreed to pay IBM's insurer $75,000, but refused to pay more. Subsequent negotiations between IBM's insurer and Fernstrom's insurers concerning the balance of IBM's claim proved fruitless, and on June 30, 1982, IBM filed suit against Fernstrom in district court. The case was assigned to Judge Hart; jurisdiction was founded on diversity of citizenship.
Unknown to IBM at the time it filed suit, and for six years thereafter, in October 1980 Fernstrom and its subsidiary Bradley had filed for protection from their creditors pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 1101 et seq. IBM was named as a creditor in the schedules Fernstrom filed with the bankruptcy court, but the amount Fernstrom indicated it owed IBM related not to the fire loss but rather to computer equipment Fernstrom had leased from IBM. IBM filed proofs of claim for the amounts Fernstrom owed for the leased equipment, but did not file a proof of claim for the equipment destroyed in the fire.
In the six years after it was filed, the civil action brought by IBM--in truth, by IBM's insurer--against Fernstrom--in truth, against Fernstrom's insurers--spawned extensive discovery and numerous motions. In March 1988 counsel for IBM and Fernstrom appeared before Judge Hart to discuss the scheduling of the trial. At that meeting, Fernstrom's counsel for the first time informed IBM and the district court that his client had filed for bankruptcy in 1980. Fernstrom filed a motion to dismiss on the ground that the suit was stayed by the pending bankruptcy. Judge Hart granted this request, dismissing the action with leave to reinstate if the bankruptcy judge consented to modify the stay to the extent necessary to allow IBM's action to proceed.
In the bankruptcy court IBM moved to modify the stay and return the action to Judge Hart. In an erudite and comprehensive opinion, In re Fernstrom Storage and Van, 100 B.R. 1017 (Bankr.N.D.Ill.1989), Judge Sonderby granted IBM's motion. Judge Sonderby noted that IBM had stipulated that it would only seek to recover up to the $750,000 limit provided in Fernstrom's insurance policies, meaning that if the dismissed district court action were reinstated and IBM won, its claim would be satisfied solely from the proceeds of Fernstrom's insurance. She reasoned that allowing IBM to collect from these insurers would not deplete the assets contained in Fernstrom's bankruptcy estate. Not allowing IBM to proceed with its civil action, by contrast, would work considerable hardship on the computer firm, which had spent six years prosecuting its district court action against Fernstrom only to have its suit dismissed shortly before trial. Fernstrom appealed Judge Sonderby's decision to the district court, which agreed with the bankruptcy court that the automatic stay should be lifted to allow IBM's civil action against Fernstrom to proceed. We affirm the decision of the district court.
Fernstrom's first argument on appeal is that IBM's failure to file a timely proof of claim against Fernstrom for the amount at issue in the subrogation action bars the computer maker from pursuing its claim against Fernstrom. IBM responds that since it only seeks to recover from Fernstrom's insurers, it was not required to file a proof of claim in Fernstrom's bankruptcy proceeding.
Section 501(a) of the bankruptcy code allows, but does not require, creditors of the bankruptcy estate to file proofs of claim. 11 U.S.C. Sec. 501(a). Under Code Sec. 502, however, only a "claim or interest, proof of which is filed under section 501," may be deemed an allowed claim that entitles the party asserting the claim to share in the distribution of assets from the bankruptcy estate. 11 U.S.C. Sec. 502(a). See, e.g., In re Thomson McKinnon Securities, 125 B.R. 88, 92 (Bankr.S.D.N.Y.1991); In re Nutri*Bevco, 117 B.R. 771, 778 (Bankr.S.D.N.Y.1990); In re Stamford Color Photo, 105 B.R. 204, 206 (Bankr.D.Conn.1989); In re Butterworth, 50 B.R. 320, 322 (Bankr.W.D.Mich.1984). In this case, it is undisputed that IBM failed to file a proof of claim within the time limits set by the bankruptcy court. See R.Bankr.Pro. 3002(c).
We agree with the bankruptcy and district courts that IBM's failure to file a claim should not bar it from recovering against Fernstrom's insurers. We find support for this conclusion in the Eleventh Circuit's decision in In re Jet Florida Systems, 883 F.2d 970 (11th Cir.1989). In Jet Florida, the debtor was sued by a former employee, Owaski, who had been fired because of his alleged involvement in the sabotage of a Jet Florida airplane. Owaski sued in state court, claiming that Jet Florida had defamed him. When Jet Florida subsequently sought protection from its creditors under Chapter 11, Owaski "filed a proof of claim with respect to unpaid wages and benefits [but] he filed no proof of claim pertaining to his defamation action." 883 F.2d at 972. Owaski agreed to limit his recovery to what he could obtain from Jet Florida's liability insurer. Id. The district court held that Owaski could proceed with his defamation action against Jet Florida "to establish the debtor's liability in order to recover from the debtor's insurer," id. at 973, reasoning that allowing the suit to proceed would in no way hamper the debtor. Id. The Eleventh Circuit agreed, and adopted the district court's opinion as its own.
Another case that supports the conclusion that the failure to file a proof of claim does not preclude an action against the debtor to establish liability that will be satisfied by a third party is In re Turner, 55 B.R. 498 (Bankr.N.D.Ohio 1985). In Turner the debtor was a loan officer who had been fired from his job with a bank after he approved several loans that went bad under suspicious circumstances. The bank filed a civil RICO action against Turner and others, seeking to recover the amounts it lost on the bad loans. Turner had previously filed a petition in bankruptcy, but the bank failed to "file[ ] any proofs of claim for the alleged RICO violations of the debtor...." 55 B.R. at 500. The Bank stipulated that it would not seek to collect damages from Turner, but argued that it needed to obtain a finding of liability against Turner before it could be compensated by a surety which had sold the bank a fidelity bond to cover losses caused by embezzling employees. 55 B.R. at 502. The bankruptcy court was persuaded that allowing the case to go forward despite the bank's failure to file a proof of claim would not harm the estate or prejudice other participants in Turner's bankruptcy proceeding.
The precise legal issue in Jet Florida was whether further proceedings in Owaski's defamation suit violated the post-discharge injunction against the continuation of pre-petition legal proceedings provided for in Bankruptcy Code Sec. 524(a)(3). In Turner the issue was whether the suit against the debtor could go forward despite the automatic stay of proceedings provided in Code Sec. 362(a) (). We believe, however, that the reasoning in both cases defeats Fernstrom's argument that a creditor's failure to file a proof of claim bars a subsequent action against the debtor in which all the plaintiff seeks is a declaration of liability.
"The purpose of the proof of claim is to alert the court, trustee, and other creditors, as well as the debtor, to claims against the estate." In re Daystar of California, 122 B.R. 406, 408 (Bankr.C.D.Cal.1990); In re Stern, 70 B.R. 472, 476 (Bankr.E.D.Pa.1987). By providing creditors with a limited time period in which to assert their claims, the Bankruptcy Code and Rules enable the various participants in a bankruptcy proceeding to determine the amount and nature of claims against the estate, information essential to the distribution of the estate's assets or the formulation of an equitable plan of reorganization. As in Turner and Jet Florida, in this case the creditor holding the claim for...
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