Fid. & Deposit Co. of Md., Zurich Am. Ins. Co. & Their Subsidiaries & Affiliates v. U.S. Bank Nat'Lass'N (In re Kimball Hill, Inc.)
| Decision Date | 04 November 2014 |
| Docket Number | No. 13 C 07146,13 C 07146 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | IN RE KIMBALL HILL, INC., Debtor. FIDELITY & DEPOSIT COMPANY OF MARYLAND, ZURICH AMERICAN INSURANCE COMPANY and their subsidiaries and affiliates, Appellants, v. U.S. BANK NATIONAL ASSOCIATION, as the PLAN ADMINISTRATOR for the KHI POST-CONSUMMATION TRUST and the LIQUIDATION TRUST ADMINISTRATOR for the KHI LIQUIDATION TRUST, Appellee. |
MEMORANDUM OPINION AND ORDER
The appellants in this bankruptcy appeal are creditors Fidelity & Deposit Company of Maryland (F&D) and Zurich American Insurance Company (along with its subsidiaries, collectively referred to as Zurich). The creditors appeal from an order of the bankruptcy court that in effect ratified the substantive consolidation of a number of their claims against Debtor Kimball Hill, Inc. and its affiliates(collectively Kimball Hill).1 For the reasons discussed below, the bankruptcy court's order is affirmed.
Founded in Illinois in 1969, Kimball Hill was a residential construction business with operations across the United States by the time that it filed for Chapter 11 bankruptcy protection on April 23, 2008. Dkt. No. 1, Voluntary Petition; Dkt. No. 926, Disclosure Stmt. at 16.2 F&D and Zurich, two of Kimball Hill's creditors, timely filed ten and thirty proofs of claim (respectively) against a number of Kimball Hill entities. See R. 17, Exh. A-6, Table of Proofs of Claim. On December 2, 2008, Kimball Hill submitted a Joint Plan for proceeding under Chapter 11. Dkt. No. 814.
The Plan, as further explained by an amended Disclosure Statement filed on January 21, 2009, outlined a settlement agreement whereby two trusts would be established to liquidate Kimball Hill's assets and distribute the proceeds to Kimball Hill's creditors at a fixed rate. Disclosure Stmt. at 36-39. The bankruptcy court approved the Disclosure Statement, along with the proposed solicitation procedures for obtaining approval of the Plan. See Dkt. No. 925, Order Granting Mot. to Approve. After being served with the Plan, Disclosure Statement, and court-approved solicitation packages, F&D voted to accept the Plan and Zurich abstained.See Dkt. No. 981, Aff. of Service; Dkt. No. 1091, Supp. Aff. of Romelia A. Edwards Re: Tabulation of Votes on Joint Plan.
On March 12, 2009, the bankruptcy court entered its findings of fact and conclusions of law confirming the Plan, which became effective later that month. Dkt. No. 1118, Confirmation Order. The Confirmation Order specified that the Plan Administrator, which is the appellee in this appeal, had the sole authority to file any objections to claims or interests and to settle any disputed claims. Id. ¶ 34. Using that authority, on April 10, 2013, the Administrator filed its 22nd Omnibus Objection, seeking to disallow all but one each of F&D and Zurich's claims as duplicative because the Plan provided for only a single recovery on a liability asserted against multiple Kimball Hill entities. Dkt. 3394, 22nd Omnibus Objection ¶¶ 24-25. F&D and Zurich opposed the Objection, contending that all of their claims should be preserved because each of the debtor-entities was jointly and severally liable. Dkt. No. 3421, F&D and Zurich's Resp. to Objection ¶¶ 6, 9.
The bankruptcy court held a hearing on July 10, 2013, at which it expressed skepticism for why it should allow the claims, explaining that F&D and Zurich's position appeared to be a "very, very late objection" to substantive consolidation that the "parties had an opportunity to raise" four years before, during the ratification of the Plan. R. 6, July 10, 2013 Hr'g Tr. at 8. On August 7, the bankruptcy court made its ruling orally, holding that "the plan does, in fact, call for a consolidation for distribution purposes." R. 12, Aug. 7, 2013 Hr'g Tr. at 20. The bankruptcy court entered an order sustaining the Objection on August 30, 2013,Dkt. No. 3537, and F&D and Zurich's timely appeal to this Court followed. R. 1, Appeal.
A federal district court has jurisdiction, under 28 U.S.C. § 158(a), to hear appeals from the rulings of a bankruptcy court. On appeal, the district court reviews the bankruptcy court's legal findings de novo and its factual findings for clear error. In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). "A bankruptcy court's interpretation of a plan it confirmed is subject to full deference as an interpretation of its own order and may be overturned only if the record shows an abuse of discretion in the interpretation." In re Airadigm Commc'ns, Inc., 547 F.3d 763, 768 (7th Cir. 2008) (citing In re Weber, 25 F.3d 413, 416 (7th Cir. 1994)).
Substantive consolidation typically involves "pooling the assets of, and claims against, [various debtor] entities; satisfying liabilities from the resultant common fund; eliminating inter-company claims; and combining the creditors of the two companies for purposes of voting on reorganization plans." In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d Cir. 1988). The purpose of substantive consolidation is "to [e]nsure the equitable treatment of all creditors." Eastgroup Properties v. S. Motel Ass'n, Ltd., 935 F.2d 245, 248 (11th Cir. 1991) (citation omitted). It also "avoid[s] the expense or difficulty of sorting out the debtor's recordsto determine the separate assets and liabilities of each affiliated entity." In re Auto-Train Corp., Inc., 810 F.2d 270, 276 (D.C. Cir. 1987).
There is no explicit basis for substantive consolidation in either the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure; rather, it springs from a bankruptcy court's equity powers as reflected in 11 U.S.C. § 105, a catch-all provision that grants the court all "necessary or appropriate" authority in carrying out the purposes of the Bankruptcy Code. See, e.g., F.D.I.C. v. Colonial Realty Co., 966 F.2d 57, 59 (2d Cir. 1992). As a result, the doctrine's development through case law has been marked by a variety of approaches, as "the bankruptcy court has the power to modify substantive consolidation to meet the specific needs of the case." In re Standard Brands Paint Co., 154 B.R. 563, 567-70 (Bankr. C.D. Cal. 1993) ().
In this appeal, F&D and Zurich contend that the bankruptcy court's order sustaining the Administrator's Objection, thereby confirming substantive consolidation of their claims, was a mistake because (1) the Plan did not expressly provide for substantive consolidation, and (2) the bankruptcy court did not provide for "clear notice to the adversely affected creditors."3 R. 10, Appellants' Br. at 9-10. The Court addresses these two separate points, neither of which is convincing, in turn.
The creditors' first contention presents a pure question of law, making it subject to de novo review. In re Miss. Valley Livestock, Inc., 745 F.3d at 302. According to F&D and Zurich, "substantive consolidation cannot be deemed effective from a cobbling together of words and phrases," and instead "must be clearly and unambiguously set forth in the Plan or ordered after a trial or hearing." Appellants' Br. at 12. In effect, they argue that substantive consolidation of their claims is invalid because no provision in the Plan explicitly stated that consolidation was part of the Plan.
The problem with this argument is that F&D and Zurich never identify any applicable law that actually sets forth such a requirement. Instead, F&D and Zurich fixate on the well-established presumption against the use of substantive consolidation in most cases. Id. at 12-15 (citing In re Raymond Prof'l Grp., Inc., 438 B.R. 130, 138 (Bankr. N.D. Ill. 2010); In re Doctors Hosp. of Hyde Park, Inc., 308 B.R. 311, 322 (Bankr. N.D. Ill. 2004); In re World Access, Inc., 301 B.R. 217 (Bankr. N.D. Ill. 2003)). That the doctrine should be applied only in narrow circumstances and with careful forethought is uncontested. As the Second Circuit has noted, "[b]ecause of the dangers in forcing creditors of one debtor to share on a parity with creditors of a less solvent debtor ... substantive consolidation is no mere instrument of procedural convenience ... but a measure vitally affecting substantive rights, to be used sparingly." In re Augie, 860 F.2d at 518 (internal quotation marks and citations omitted); see also In re Owens Corning, 419 F.3d 195, 208-09 (3d Cir. 2005).
But it does not necessarily follow that merely because substantive consolidation should be used cautiously, it therefore can only be applied where an express written provision in a proposed bankruptcy plan has provided for it. F&D and Zurich point to no legal authority holding that an otherwise properly reviewed and vetted reorganization plan must have the magic words "this is substantive consolidation" in order to be operative. Nor has the Court found any in its independent research. The bankruptcy court determined that this is a case where substantive consolidation, caution and caveats notwithstanding, is appropriate. Rather than address the merits of that determination, F&D and Zurich seek to escape its effects by asking for an unprecedented legal rule.
Nor does it make sense to establish a set-in-stone, explicit-statement requirement that one would expect if substantive consolidation were grounded in the Bankruptcy Code or Rules. Instead, the equitable origins of the doctrine have unsurprisingly resulted in its application in various contexts and via various procedural forms, including through motions for consolidation made directly to the court and court approval of privately negotiated settlements. See, e.g., In re Owens Corning, 419 F.3d at 195 (); In re Auto-Train Corp.,...
To continue reading
Request your trial