Ill. Dep't of Revenue v. Elk Grove Vill. Petroleum, LLC

• Decision Date: 30 September 2015
• Docket Number: Case No. 14 C 5072
• Citation: 541 B.R. 673
• Parties: Illinois Department of Revenue, Appellant, v. Elk Grove Village Petroleum, LLC, et al., Appellees.
• Court: U.S. District Court — Northern District of Illinois

541 B.R. 673

Illinois Department of Revenue, Appellant,

v.Elk Grove Village Petroleum, LLC, et al., Appellees.

Case No. 14 C 5072

United States District Court, N.D. Illinois, Eastern Division.

Signed September 30, 2015

James Douglas Newbold, Illinois Attorney General's Office, Chicago, IL, for Appellant.

Timothy C. Culbertson, Fox River Grove, IL, Devon Joseph Eggert, Shelly A. DeRousse, Freeborn & Peters LLP, Jeffrey Chad Dan, Crane, Heyman, Simon, Welch & Clar, William J. McKenna, Jr., Foley & Lardner, U.S. Bankruptcy Clerk (Chicago), United States Trustee, Office of the United States Trustee, Timothy A. Barnes, U.S. Bankruptcy Court, Chicago, IL, for Appellees.

MEMORANDUM OPINION AND ORDER

John Robert Blakey, United States District Judge

In this bankruptcy appeal, this Court must decide whether the Bankruptcy Court erred when it decided that Appellant Illinois Department of Revenue's (“IDOR”) “interest” in the Debtors' property was without value and thus not entitled to “adequate protection” under Section 363(e) of the Bankruptcy Code. The IDOR's “interest” was extinguished pursuant to Section 363(f) of the Bankruptcy Code, as part of the sale of the Debtors' property during the underlying bankruptcy case. Appellee United Central Bank (“UCB”)—who, along with the IDOR, are the two creditors present in this appeal—and the Chapter 11 trustee of the Debtors' estates argue that there is no reversible error. For the reasons set forth below, this Court finds that the Bankruptcy Court's decision is well-reasoned, but this Court differs in one material respect that warrants reversal.

I. Standard of Review

Pursuant to 28 U.S.C. § 158(a), this Court has jurisdiction to hear appeals from the rulings of the Bankruptcy Court. On appeal, this Court reviews the Bankruptcy Court's legal findings de novoand its factual findings for clear error. In re Mississippi Valley Livestock, Inc.,745 F.3d 299, 302 (7th Cir.2014). Because this appeal only challenges the Bankruptcy Court's legal decisions, this Court's review is de novo.

II. Facts and Procedural History

This bankruptcy appeal arises out of the post-petition sale of substantially all the assets of jointly administered Chapter 11 bankruptcy estates for four debtors who operated five BP branded gas stations in the Chicagoland area: Elk Grove Village Petroleum, Joliet Petroleum, Oswego Petroleum and Orland Park Petroleum (each a “Debtor,” and collectively, the “Debtors”). In the course of their business, the Debtors entered into loan agreements with UCB, a bank, as lender, which were secured by mortgages on the real properties upon which the gas stations operate, as well as security interests in the Debtors' personal property. The Debtors subsequently defaulted on their obligations to UCB. As a result, between December 2012 and January 2013, each Debtor filed a separate voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The Debtors' separate cases have been jointly administered since January 23, 2013, in the case captioned: In re Elk Grove Village Petroleum, LLC,Case No. 12 B 49658 (N.D.Ill.). Bankruptcy Dkt. 25. On April 12, 2013, in light of the Debtors' financial performance not having improved, the Bankruptcy Court appointed Eugene Crane as the Chapter 11 Trustee (“Trustee”) of the Debtors' estates. Bankruptcy Dkt. 69.

On October 10, 2013, the Trustee, pursuant to Sections 363(b) and (f) of the Bankruptcy Code, filed a Motion to Approve Sale of Gas Stations (“Sale Approval Motion”). Bankruptcy Dkt. 158. On October 22, 2013, the IDOR filed a Limited Objection to the Sale Approval Motion (“Limited Objection”). Bankruptcy Dkt. 173. Beyond defaulting on their obligations to UCB, the Debtors also owed $1,881,648.60 in outstanding pre-petition tax liabilities to the State of Illinois. In its Limited Objection, the IDOR explained that, but for the application of Section 363(f) of the Bankruptcy Code, which permits the Trustee to extinguish “any interest” in sold property, the IDOR would have had the right to pursue any purchaser of the Debtors' gas stations personally for the Debtors' outstanding tax liabilities pursuant to 35 ILCS 5/902(d)( “Illinois Income Tax Act”) and 35 ILCS 120/5j(“Retailers' Occupation Tax Act”) (herein collectively referred to as the “Bulk Sales Acts”).

The Bulk Sales Acts authorize the IDOR to issue a “stop order,” a mechanism whereby the IDOR can instruct a purchaser to withhold a portion of the sales to cover the seller's outstanding tax liabilities and, if the purchaser does not remit the appropriate amount of withheld money to the IDOR upon demand, then the purchaser becomes personally liable to the IDOR for the seller's outstanding tax liabilities. 35 ILCS 5/902(d); 35 ILCS 120/5j. Because the sale of the Debtors' gas stations under Section 363(f)would have the effect of extinguishing the IDOR's rights under the Bulk Sales Acts to pursue the purchaser, the IDOR sought “adequate protection” from the Bankruptcy Court under Section 363(e) of the Bankruptcy Code.

On November 13, 2013, after conducting a hearing, the Bankruptcy Court entered an Order Approving Sale of Gas Stations (“Sale Order”) and told the IDOR that no additional language was required in the Sale Order to preserve its interests. Bankruptcy Dkt. 191. The sale of the Debtors' gas stations was made to purchaser PAV2, LLC. In accordance with Section 363(f), the Sale Order authorized the sale “free and clear of all liens, claims, encumbrances and interests, with all liens, claims, encumbrances and interests to attach to the proceeds.” The Sale Order further provided that the Trustee would hold the proceeds of the sale until further Court Order. The Trustee closed the sale of the gas stations over the next two months, and received net sales proceeds totaling $5,229,475.27.

On January 29, 2014, UCB filed a Motion for Allowance of Secured Claim and Turnover of Collateral Proceeds (“Allowance Motion”). Bankruptcy Dkt. 205. The Allowance Motion asserted claims against Debtors in the collective amount of $14,077,157.67. The Allowance Motion sought the allowance of UCB's claims against each of the Debtors, secured to the full extent of the value of the gas stations, and also requested turnover of the sales proceeds.

On March 5, 2014, the IDOR filed an Objection to UCB's Allowance Motion and an accompanying Cross–Motion for Partial Turnover of Proceeds of Sales (“Cross–Motion”). Bankruptcy Dkt. 232–33. The IDOR requested that the Bankruptcy Court order the Trustee (as “adequate protection” for the IDOR's “interest” under the Bulk Sales Acts that was extinguished by the Sale Order) to turnover sufficient funds from the sales proceeds to satisfy the Debtors' outstanding tax liabilities. Bankruptcy Dkt. 233, IDOR's Cross Motion ¶¶ 17, 23–26, Prayer for Relief. In April 2014, the parties completed briefing on IDOR's Cross–Motion. SeeBankruptcy Dkt. 237, 239, 244.

On May 21, 2014, the Bankruptcy Court issued a Memorandum Decision resolving UCB's Allowance Motion and the IDOR's Cross–Motion. Bankruptcy Dkt. 267. That decision has been published as In re Elk Grove Village Petroleum,510 B.R. 594 (Bankr.N.D.Ill.2014). The next day, May 22, 2014, the Bankruptcy Court entered a corresponding Order granting UCB's Allowance Motion. Bankruptcy Dkt. 271.

In its Memorandum Decision, the Bankruptcy Court found that UCB's secured claims were deemed allowed under Section 502(a) of the Bankruptcy Codein the total amount of $14,077,157.67. In re Elk Grove Village Petroleum,510 B.R. at 600, 602. The Court, applying Section 506 of the Bankruptcy Code, found that UCB's claims consisted of a secured claim in the amount of $5,229,475.27 that was secured in the sale proceeds and a general unsecured claim in the amount of $8,847,682.40. Id.at 602. The Bankruptcy Court further found that the IDOR's claims were allowed in the amount of $1,881,648.60, consisting of priority and general unsecured claims. Id.at 601–02.

The Bankruptcy Court next determined that the IDOR's right under the Bulk Sales Acts to pursue the purchaser for the Debtors' outstanding tax liabilities was an “interest” extinguished by the Sale Order. Id.at 602–04. Despite the IDOR having lost that “interest,” the Court found that the loss was without value and thus was not entitled to “adequate protection” under Section 363(e) of the Bankruptcy Code. Id.at 604–05. Whether or not the IDOR could have pursued the purchaser for the Debtors' outstanding tax liabilities, the IDOR's claims were subordinate to UCB's claims in either event. Id.The IDOR was thus “out of the money.” Id.at 605.

On appeal, the IDOR challenges only that portion of the Bankruptcy Court's decision concluding that its extinguished “interest” was without value and not entitled to “adequate protection” under Section 363(e). The parties do not contest the other aspects of the Bankruptcy Court's decision, such as that the IDOR's claim against the purchaser was, in fact, an “interest” as that term is used by Sections 363(e) and (f). SeeIn re Vista Marketing Group Ltd.,No. 12 B 83168, 2014 WL 1330112, at *8 (Bankr.N.D.Ill. March 28, 2014)(an analogous case where the Court emphasized that it could not “readily conceive” how the purchaser of property from a Section 363bankruptcy sale would become liable to the IDOR under the Bulk Sales Acts for the debtor's outstanding tax liabilities after that “interest” had been extinguished by Section 363(f)). Accordingly, this Court limits its discussion today to valuing the IDOR's extinguished “interest.”

III. Analysis

The issue of first impression in this bankruptcy appeal is whether, under Section 363 of the Bankruptcy Code, the IDOR requires “adequate protection,” namely, compensation, for having its statutory right under the Bulk Sales Acts extinguished. That right is the IDOR's ability to pursue the purchaser of the Debtors' gas stations personally for the Debtors' outstanding tax liabilities. The Bankruptcy Court found that the IDOR did not require ...