Gary T. Rafool, Not Individually But for Cent. Ill. Energy, L.L.C. v. Evans

• Decision Date: 11 September 2013
• Docket Number: No. 12–cv–1352.,12–cv–1352.
• Citation: 497 B.R. 312
• Parties: Gary T. RAFOOL, not individually but as Trustee for Central Illinois Energy, L.L.C., Plaintiff/Appellant, v. Michael E. EVANS and Froehling, Weber & Schell, LLP, formerly doing business as Froehling, Weber, Evans & Schell, LLP, Defendants/Appellees.
• Court: U.S. District Court — Central District of Illinois

497 B.R. 312

Gary T. RAFOOL, not individually but as Trustee for Central Illinois Energy, L.L.C., Plaintiff/Appellant,

v.Michael E. EVANS and Froehling, Weber & Schell, LLP, formerly doing business as Froehling, Weber, Evans & Schell, LLP, Defendants/Appellees.

No. 12–cv–1352.

United States District Court, C.D. Illinois.

Sept. 11, 2013.

Alan L. Fulkerson, Stephen Alan Fulkerson, Riordan Fulkerson Smith & Coleman, Chicago, IL, for Plaintiff/Appellant.

Kirk W. Laudeman, Drake Narup & Mead PC, Springfield, IL, for Defendants/Appellees.

ORDER & OPINION

JOE BILLY McDADE, Senior District Judge.

This matter is before the Court on Appellant's appeal from the Bankruptcy Court for the Central District of Illinois' determination that the right to draw on a letter of credit is property of a bankruptcy estate and that Appellees therefore did not proximately cause Appellant's damages by failing to cause the Debtor to draw upon the letters of credit prior to the bankruptcy filing. Both Appellant and Appellee have filed their briefs on appeal, and the matter is now ready for disposition. For the reasons stated below, the decision of the Bankruptcy Court is affirmed.

Legal Standards

This Court has jurisdiction to review the decision of the bankruptcy court pursuant to 28 U.S.C. § 158(a). On an appeal, a “district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr.P. 8013. District courts are to apply a dual standard of review when considering a bankruptcy appeal: the bankruptcy court's findings of fact are reviewed for clear error, while the conclusions of law are reviewed de novo. Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir.2004). The Court reviews mixed questions of fact and law de novo. Mungo, 355 F.3d at 974.

A legal malpractice claim is made up of four elements: “(1) the existence of an attorney-client relationship that establishes a duty owed by the attorney; (2) a negligent act or omission constituting a breach of that duty; (3) proximate cause; and (4) damages.” 4 Ill. Law and Prac. Attorneys and CounselorsS § 85 (citations omitted). Before the Bankruptcy Court, the parties each cited Illinois law as governing the legal malpractice claim, and the Bankruptcy Court agreed that Illinois law probably controlled the claim. In re Central Illinois Energy, L.L.C., 482 B.R. 772, 789 n. 3 (Bkrtcy.C.D.Ill.2012). On appeal, neither party disputes this assumption, and the Court agrees that the underlying contract for legal services appears to have been formed and performed in Illinois by Illinois-licensed attorneys with an Illinois-based client, and is thus likely governed by Illinois law under both Illinois and federal choice-of-law rules. Id.; see Auto–Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir.2009) (internal quotation omitted) (“Courts do not worry about conflict of laws unless the parties disagree on which state's law applies.”); In re Jafari, 569 F.3d 644, 648–51 (7th Cir.2009) (whether bankruptcy courts are to apply forum state's or federal choice-of-law rules unsettled in Seventh Circuit).

Finally, as relevant to this appeal, the Bankruptcy Code provides that a bankruptcy “trustee may not assume or assign any executory contract ... if ... such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor.” 11 U.S.C. § 365(c)(2). The Seventh Circuit has explained that “[§ ] 365(c)(2) prevents the assumption of a loan commitment or equivalent promise because the cost of future credit depends on the probability of repayment, and bankruptcy reveals that the risk of nonpayment is higher than the would-be creditor likely assumed.” In re United Airlines, Inc., 368 F.3d 720, 723 (7th Cir.2004). As recognized by the Bankruptcy Court, the letters of credit at issue here indicate that New York state law governs their interpretation. Central Illinois Energy, 482 B.R. at 789 n. 3. This Court will thus look to New York state law to define the relationships created by letters of credit, in order to determine whether the one at issue here falls within § 365(c)(2). See Auto–Owners Ins. Co., 580 F.3d at 547 (internal quotation omitted) (“Courts do not worry about conflict of laws unless the parties disagree on which state's law applies.”); Jafari, 569 F.3d at 648–51 (whether bankruptcy courts are to apply forum state's or federal choice-of-law rules unsettled in Seventh Circuit).

Background

Appellant does not challenge any of the Bankruptcy Court's factual findings, and the issues presented on appeal are ones of pure legal interpretation, so the Court will briefly summarize the facts from the Bankruptcy Court's opinion that are relevant to the issues raised before this Court. In re Central Illinois Energy, L.L.C., 482 B.R. 772 (Bkrtcy.C.D.Ill.2012).

The Debtor in the bankruptcy proceeding from which this appeal arises is Central Illinois Energy, L.L.C., which was formed in 2004 for the purpose of constructing, owning, and operating an ethanol production facility. The Debtor arranged with Lurgi PSI, Inc. to design and construct the facility, and Lurgi provided the Debtor with letters of credit as a retainage of the monthly progress payments. Appellee Michael Evans, an attorney, represented the Debtor in these negotiations. The Debtor began to encounter financial difficulties, and consulted with Barry Barash, a bankruptcy attorney, in late fall of 2007. In November 2007, Lurgi obtained two letters of credit from Calyon Credit Agricole CIB in the Debtor's favor, expiring on December 15, 2008.¹ The Debtor never drew upon the Calyon letters of credit.

On December 8, 2007, the Debtor hired Mr. Barash to represent it in a chapter 11 bankruptcy proceeding. On December 13, 2007, the Debtor filed a chapter 7 bankruptcy petition. The Trustee brought a complaint against Appellees for legal malpractice, alleging that they had unreasonably failed to advise or cause the Debtor to draw on the letters of credit prior to the bankruptcy filing, and seeking damages in the amount of the letters of credit.²

Bankruptcy Court's Decision

The Bankruptcy Court issued its Opinion on Appellees' Motion for Summary Judgment as to the malpractice claim on November 20, 2012. Central Illinois Energy, 482 B.R. 772. After reviewing the background facts summarized above and the applicable law, the Bankruptcy Court turned to the issues raised in Appellees' Motion for Summary Judgment. Appellees' Motion for Summary Judgment argued, in part, that they did not proximately cause Appellant's damages because the Debtor could have drawn upon the letters of credit after the bankruptcy filing.³ Appellant argued in opposition that § 365(c)(2) applied to the letters of credit, preventing the Debtor from drawing upon them after the date of the bankruptcy filing.

The Bankruptcy Court found that § 365(c)(2) was not applicable to the letters of credit because the letters of credit were not “contracts of the Debtor,” were not executory contracts, and were not “a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor.” Id. at 785–789. Because the letters of credit were not within the terms of § 365(c)(2), they could have been assumed by the Trustee even after the bankruptcy filing. Id. at 789–91. The Bankruptcy Court therefore concluded that the Appellees did not proximately cause the damages alleged because Mr. Barash, the Debtor's attorney, knew of the letters of credit by January 7, 2008, and could have drawn on them prior to their December 15, 2008 expiration.

Discussion

Appellant challenges the Bankruptcy Court's determination that § 365(c)(2) does not apply to the letters of credit, arguing that they were contracts between the Debtor and the issuing institution, that they were executory in nature, and that they were a financial accommodation. This finding was essential to the grant of summary judgment in Defendants' favor, so if it is reversed, summary judgment must be overturned and the case remanded to the Bankruptcy Court. Appellant concedes that if the Court affirms the Bankruptcy Court's analysis on this question, it should affirm the Bankruptcy Court's grant of summary judgment to Appellees.

Under 11 U.S.C. 365(c), “[t]he trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties” in certain circumstances. The circumstance relevant to this malpractice action is where “such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor.” 11 U.S.C. § 365(c)(2). Appellees argued for summary judgment based, in part, on the assertion that this subsection was not applicable to the letters of credit, such that the letters of credit could be assumed by or assigned to the bankruptcy estate. If the letters of credit could be assumed by or assigned to the bankruptcy estate, then their “failure” to advise the Debtor to draw on the letters of credit prior to the bankruptcy filing did not proximately cause the damages claimed in Appellants' malpractice action.

As agreed by the parties and Bankruptcy Court, in this case, § 365(c)(2) provides that the letters of credit were not assumable if they (1) were contracts of the Debtor, (2) were executory in nature, and (3) were “financial accommodations” to the Debtor or for the Debtor's benefit. If any one of these elements is missing, the estate could have drawn on the letters of credit, even after the date of the bankruptcy filing. The Bankruptcy Court found that none of these elements described the letters of credit in question, and so § 365(c)(2) did not apply...