Fogel, Trustee v. Zell et al

• Decision Date: 19 July 2000
• Docket Number: No. 00-1743,00-1743
• Citation: 221 F.3d 955
• Parties: (7th Cir. 2000) Richard M. Fogel, as Trustee for the Estate of Madison Management Group, Inc., Plaintiff-Appellee, v. Samuel Zell, et al., Defendants-Appellees. Appeal of City and County of Denver
• Court: U.S. Court of Appeals — Seventh Circuit

Page 955

221 F.3d 955 (7th Cir. 2000)

Richard M. Fogel, as Trustee for the Estate of Madison Management Group, Inc., Plaintiff-Appellee, v. Samuel Zell, et al., Defendants-Appellees.

Appeal of City and County of Denver.

No. 00-1743

In the United States Court of Appeals For the Seventh Circuit

Argued June 9, 2000

Decided July 19, 2000

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Posner, Chief Judge, and Bauer and Rovner, Circuit Judges.

Posner, Chief Judge.

A trustee in bankruptcy settled an adversary proceeding that he had brought against Samuel Zell and various individuals and corporations associated with him, claiming that they had looted the debtor's estate. As a condition of the settlement, the district court, having taken over the adversary proceeding from the bankruptcy court because the defendants had requested a jury trial, see 28 U.S.C. sec.sec. 157(d), (e), enjoined Denver from suing Zell and the other adversary defendants. Denver's appeal asks us to consider whether the potential legal claim of a potential tort victim is a "claim" within the meaning of the Bankruptcy Code; if it is, what kind of notice such a "claimant" is entitled to from the trustee; and the extent to which a bankruptcy court can enjoin the prosecution of claims against the defendants in an adversary proceeding in order to facilitate the settlement of the proceeding.

The story begins with Interpace Corporation, a manufacturer, now defunct, of prestressed concrete pipe used in sewer and sanitation systems. During the 1970s, the pipe that Interpace sold to some 10,000 purchasers was defective, though this was not realized at first. Meanwhile, in the mid-1980s, through a complex system of transactions unnecessary to describe, Interpace was acquired by Madison Management. Then the pipes began to burst, and Madison's owners--Zell and the other adversary defendants-- removed Madison's assets, lest Madison be held liable for its predecessor's torts. The removal left Madison a shell that declared bankruptcy under Chapter 11 of the Bankruptcy Code in 1991. Later, as so often happens, the Chapter 11 proceeding (reorganization) was converted to a Chapter 7 proceeding (liquidation).

By the time Madison declared bankruptcy, eight purchasers of Interpace pipe, not including Denver however, had sued Madison, seeking damages in excess of $300 million, for harms caused by the bursting of the defective pipe. Madison's trustee in bankruptcy, seeking to obtain assets for distribution to the creditors, brought this adversary proceeding, charging that Zell and others had fraudulently conveyed Madison's assets to themselves in order to avoid having to make good on the tort claims arising from the burst pipes.

The bankruptcy court set a deadline of April 5, 1993, for the filing of proofs of claim with the trustee. A brief notice to that effect was published in USA Today and Waterworld Review. The deadline came and went without Denver filing a claim. But its pipes hadn't burst yet. That didn't happen until May 23, 1997. On the following January 9, having confirmed that the pipe had been manufactured by Interpace, Madison's predecessor, Denver filed a proof of claim with the trustee. The claim was for more than $17 million in damages for the harm caused by the burst pipes and for the expense of replacing the rest of the Interpace pipe that Denver had bought, before it burst too. It appears that Denver and the eight pipe claimants that filed timely proofs of claim in the bankruptcy proceeding are the only purchasers of Interpace pipe who have as yet sustained damages because of the defective pipe.

The fraudulent-conveyance action brought by the trustee against Zell and his fellow alleged looters was settled a few months after Denver filed its claim. In exchange for the trustee's agreeing to release his claim against them, the adversary defendants agreed to pay him whatever amount, estimated to be between $35 and $45 million, would enable creditors of Madison whose claims had been filed by the April 5, 1993, deadline to receive 70 cents on the dollar. Claims such as Denver's, however, that had been filed later would receive nothing. The eight timely pipe claimants are not among the creditors benefited by the settlement either, but that is because one of the adversary defendants in effect bought their claims, paying $24 million, which was less than 10 percent of what those claimants had originally sought.

The settlement between the adversary defendants and the trustee was made expressly contingent on the district court's enjoining all of Madison's creditors, including pipe claimants, from suing the adversary defendants. Denver had already filed suit against those defendants in a state court in Colorado. Its suit was closely modeled on the trustee's fraudulent-conveyance suit. Because Zell and the other adversary defendants were not the manufacturer of the defective pipe or even the successor of the manufacturer (Interpace), but rather the alleged looters of the successor's assets, Denver's claim against them, as distinct from the claim that it had filed against Madison in the bankruptcy proceeding, could not be, and was not, a products-liability claim.

The district judge found that Denver knew by October of 1990 that the pipe it had bought from Interpace might be defective, and so should have filed a proof of claim with Madison's trustee in bankruptcy before the bar date two and a half years later. Other Interpace pipe, bought at the same time, had already burst; and Denver had even played host to a conference at which representatives of a number of municipalities that had bought such pipe discussed the likelihood that it would burst. The judge's finding that Denver knew about the defect in its pipe before Madison went into bankruptcy is contested, but for purposes of this appeal we can assume that it's correct. The judge ruled that by failing to file a proof of claim by the bar date, Denver had forfeited any right it might have had to object to a settlement that gave it nothing. And so the judge proceeded to consider whether the settlement was in the best interests of the debtor's estate, Denver's interest notwithstanding. She concluded that it was, because it would avoid costly and protracted litigation and add sufficient assets to the estate to enable a handsome recovery, by normal bankruptcy standards, by those creditors (other than the timely pipe claimants, who had settled separately) that had filed timely proofs of claim. Since the settlement was contingent on enjoining suits by all pipe claimants against the adversary defendants, the judge, to make sure that the settlement would go through, granted the injunction sought by the trustee and the adversary defendants against Denver's state court suit against the latter. The consequence of the judge's rulings was to block Denver from recovering any of the losses that it has sustained as a result of the bursting of the defective pipe, since Interpace no longer exists, the Madison bankruptcy yielded nothing for Denver, and Denver's state-court suit against the alleged looters is enjoined.

Judges naturally prefer to settle complex litigation than to see it litigated to the hilt, especially when it is litigation in a bankruptcy proceeding--the expenses of administering the bankruptcy often consume most or even all of the bankrupt's assets. The trustee's adversary proceeding against Zell and the other alleged looters promised to be hard-fought; the parties had already been at each other's throats for six years. Much of the property of the debtor's estate might be eaten up in that litigation, which in the end might fail to recover a penny for the estate. It was natural for the judge to prefer a $45 million bird in the hand to birds of unknown number and value in dense thickets. But this is on the assumption that Denver, whose claim exceeds $17 million, and any other purchaser from Interpace whose pipes burst after April 5, 1993, deserved to receive zero cents on the dollar because they should have filed claims before that deadline. If the judge was wrong to fault Denver for filing later, an essential premise of her decision to approve the settlement and issue the injunction collapses.

On whether Denver filed its proof of claim too late, it is uncertain, to begin with, whether it could have filed a claim before its pipes burst, which didn't happen until 1997, long after the bar date for filing proofs of claim. A "creditor" in bankruptcy is anyone who has a "claim" against the bankrupt estate that arose (so far as bears on this case) no later than the filing of the voluntary petition in bankruptcy. 11 U.S.C. sec.sec. 101(10), 301; In re Chicago Pacific Corp., 773 F.2d 909, 916 (7th Cir. 1985); In re Gucci, 126 F.3d 380, 388-89 (2d Cir. 1997). "Claim" is broadly defined to include equitable as well as legal rights to payment, and even "contingent" such rights. 11 U.S.C. sec. 101(5)(A); McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir.2000). A claim implies a legal right, however, and before a tort occurs the potential victim has no legal right, "contingent" or otherwise, with an exception, irrelevant to this case, noted in the next paragraph, for the case in which the potential tort victim incurs reasonable costs to prevent the tort from occurring or to mitigate its severity. A right that can be made the basis of a claim in bankruptcy may be contingent on something happening, such as the signing of a contract, e.g., In re Remington Rand Corp., 836 F.2d 825, 827 (3d Cir. 1988); In re M. Frenville Co., 744 F.2d 332, 336-37 (3d Cir. 1984), but if the contingency can be the tort itself, this spells trouble, both practical and conceptual. Suppose a manufacturer goes bankrupt after a rash of products-liability suits. And suppose that ten million people own automobiles manufactured by it that may have the same defect that gave rise to those suits but, so far, only a thousand...