In re Alwan Bros. Co., Inc., 88-82572 to 88-82574

• Decision Date: 13 October 1989
• Docket Number: Adv. No. 89A-8046,89A-8047.,No. 88-82572 to 88-82574,88-82572 to 88-82574
• Citation: 105 BR 886
• Parties: In re ALWAN BROTHERS CO., INC., Debtor. In re William N. ALWAN, Debtor. In re Joseph M. ALWAN, Debtor. Jane GNIDOVEC, David Towell and Robert Dawson, Plaintiffs, v. Joseph M. ALWAN, Defendant, William N. Alwan, Defendant.
• Court: U.S. Bankruptcy Court — Central District of Illinois

105 B.R. 886 (1989)

In re ALWAN BROTHERS CO., INC., Debtor In re William N. ALWAN, Debtor In re Joseph M. ALWAN, Debtor Jane GNIDOVEC, David Towell and Robert Dawson, Plaintiffs, v. Joseph M. ALWAN, Defendant William N. Alwan, Defendant.

Nos. 88-82572 to 88-82574, Adv. Nos. 89A-8046, 89A-8047.

United States Bankruptcy Court, C.D. Illinois.

October 13, 1989.

Barry M. Barash, Galesburg, Ill., for debtor.

Andrew W. Covey, Baymiller, Christison & Radley, Peoria, Ill., for movants.

OPINION

WILLIAM V. ALTENBERGER, Bankruptcy Judge.

On September 20, 1985, Jane Gnidovec, David Towell and Robert Dawson (MOVANTS) obtained a judgment in the Kentucky Trial Court against Alwan Brothers Co., Inc., Joseph M. Alwan (JOSEPH), William N. Alwan (WILLIAM), and Joseph M. Alwan and William N. Alwan, d/b/a Alwan Brothers Partnership (jointly as ALWANS) for $110,059.00 compensatory damages and $750,000.00 punitive damages plus interest and costs. The ALWANS appealed the judgment to the Court of Appeals of the Commonwealth of Kentucky. On November 12, 1985, the Kentucky trial court set a Supersedeas Bond in the amount of $1,000,000.00. On February 12, 1986, the MOVANTS and the ALWANS entered into a Supersedeas Bond Trust Agreement (AGREEMENT), which was approved by the Kentucky trial court on that same date.¹

The AGREEMENT provided that the ALWANS were to transfer nine pieces of real estate to a trustee, who was to hold the real estate during the pendency of the appeal. During the pendency of the appeal, the ALWANS were to maintain the property, keep it insured, pay any real estate taxes, and not permit any further liens or encumbrances to attach to it. Upon the judgment becoming final, the ALWANS had thirty days within which to satisfy the judgment. If not satisfied, the real estate was to be sold, with the proceeds applied to the judgment. In the event the proceeds exceeded the amount of the judgment, the excess was to be returned to the ALWANS. If the proceeds did not satisfy the judgment, the MOVANTS had the right to further execute on the judgment. The real estate consisted of two farms in Kentucky, which were subsequently sold to satisfy the judgment; one farm in Woodford County, Illinois, in which the ALWANS have no equity over and above the mortgage against it; two homes in Peoria, Illinois, one belonging to WILLIAM and his wife, the other belonging to JOSEPH and his wife. WILLIAM and JOSEPH own only a one-half interest in the respective homes. These homes are valued at approximately $150,000.00 each, and the AGREEMENT provides that they cannot be sold until the other parcels are first liquidated. Finally, there are four pieces of real estate upon which Kentucky Fried Chicken franchises are being operated. Both WILLIAM and JOSEPH own a part, but not all, of each of these four pieces of real estate. All four pieces of real estate are encumbered, with their liquidation value being approximately $45,000.00 to $60,000.00 each. They are being leased to third parties who actually operate the franchises. The value of these four pieces of real estate to the ALWANS is in the cash flow they generate, and not just their liquidation value.

On July 14, 1987, the Court of Appeals of Kentucky affirmed the Kentucky trial court, and the ALWANS subsequently appealed to the Supreme Court of Kentucky. On September 8, 1988, the Supreme Court of Kentucky affirmed the judgments of the Court of Appeals and the trial court. On October 27, 1988, the Supreme Court of Kentucky denied the ALWANS' petition for a rehearing. On November 10, 1988, the ALWANS moved the Supreme Court of Kentucky to stay the enforcement of its opinion for a period of ninety days. On December 22, 1988, the ALWANS filed their Chapter 11 proceedings in this Court, and on January 9, 1989, the ALWANS filed a petition for Writ of Certiorari to the United States Supreme Court.²

The MOVANTS filed two adversary complaints, one against WILLIAM and one against JOSEPH. Both adversaries seek to have the Kentucky state court judgment declared nondischargeable pursuant to Section 523(a)(2), (4), and (6). 11 U.S.C. Section 523(a)(2), (4), and (6). WILLIAM and JOSEPH each filed a motion to (1) consolidate the adversaries, and (2) strike the allegations relating to punitive damages. The motion was heard. The MOVANTS agreed to a consolidation, and also agreed that Section 523(a)(2) cannot be the basis of having the punitive damages declared nondischargeable. The Court took under advisement the issue of whether punitive damages are nondischargeable under Section 523(a)(4) and (6).

The MOVANTS also filed a Motion for Relief from the stay. Their position is that the real estate is not property of the estate. In the alternative they contend that pursuant to Section 362, 11 U.S.C. Section 362, the ALWANS have failed to provide adequate protection for the MOVANTS' interest in the real estate and the ALWANS have no equity in the real estate which is not necessary for an effective reorganization.

Subsequent to the hearings on those motions, the ALWANS filed a motion to require application of the proceeds of the sale of the 188 acre Kentucky farm to the compensatory damage component of the MOVANTS' claims. A hearing on that motion and the response thereto was held on July 10, 1989, and the matter was taken under advisement.

The ALWANS then filed a supplemental objection to the claims of two of the MOVANTS, David Towell and Robert Dawson, claiming that they had received restitution payments from Larry Janssen, who had pled guilty to related state criminal charges.³

Finally the MOVANTS filed a motion to sequester the rents from the tracts of real estate which are leased to Kentucky Fried Chicken of Kewanee, Inc. The MOVANTS also filed motions for summary judgment in the adversary proceedings.

The ALWANS' supplemental objection and the motions filed by the MOVANTS were heard on October 2, 1989. The Court determined that the ALWANS' supplemental objection to claims raised a factual question and set the matter for hearing. Subject to a ruling on their supplemental objection to the claims of Towell and Dawson, the ALWANS stated that they do not contest the MOVANTS' motion for summary judgment as to the compensatory damage component of the MOVANTS' claims and interest accrued thereon. The remaining matters were taken under advisement.

This case presents both unusual and difficult questions of law. Given the particular posture in which it reaches this Court, the issues of whether the real estate which is the subject of the AGREEMENT is property of the estate and whether punitive damages are dischargeable cannot be separately resolved and singly applied to the facts of this case.

The ALWANS candidly admit that the key to a successful reorganization is a ruling that their liability for the punitive damages can be dealt with in the Chapter 11 plan. A determination by this Court that either the punitive damages are nondischargeable or that the real estate is not property of the bankruptcy estate and that consequently this Court is without jurisdiction to alter the terms of the AGREEMENT, would be the coup de grace to the ALWANS' reorganization.

The first issue to be addressed is whether punitive damages are dischargeable under the Bankruptcy Code. Given the persisting controversy regarding the propriety and constitutionality of the skyrocketing awards of punitive damages, it is not unexpected that the issue of the dischargeability of such awards has divided the courts as well. See In re Austin, 93 B.R. 723 (Bkrtcy.D.Colo.1988).

This Court, following the decision of Judge Gerald Fines in In re Rubitschung, 101 B.R. 28 (Bkrtcy.C.D.Ill.1988), in In re Hulvey, 102 B.R. 703 (Bkrtcy.C.D.Ill.1988), held that an award of punitive damages is dischargeable. See also In re Hallahan, 99 B.R. 897 (Bkrtcy.C.D.Ill.1989). In Rubitschung, the complaint was brought under Section 523(a)(6), seeking to have a judgment for $65,150.00 for compensatory and $25,000.00 for punitive damages arising out of a barroom fracas declared nondischargeable. In deciding that the punitive damages were dischargeable, Judge Fines relied on Matter of Suter, 59 B.R. 944 (Bkrtcy.N.D.Ill.1986), wherein Judge Ginsberg held that an award of treble damages under RICO were punitive in nature and therefore dischargeable as not being obtained by actual fraud as required by Section 523(a)(2)(A). The court in Suter continued:

The result reached by this Court also accords with other provisions of the Bankruptcy Code, particularly Section 523(a)(7). Section 523(a)(7) provides for the nondischargeability of a debt owed to a governmental unit for a fine, penalty, or forfeiture that is not compensation for any actual damages. In Section 523(a)(7), Congress created a specific exception to discharge for noncompensatory damages. However, Congress clearly determined to not allow nongovernmental entities to seek the nondischargeability of punitive damages under Section 523(a)(7). The language of Sections 523(a)(2)(A) and 523(a)(7) when read in harmony compel the conclusion that Congress intended noncompensatory damages to be excepted from discharge only where they are owed to a governmental entity pursuant to Section 523(a)(7). No other result can be gleaned from interpreting the plain language of those sections.

Finally it must be remembered that Section 523(a)(2)(A) is a provision conflicting with the fresh start philosophy of the Bankruptcy Code. Therefore, it should be read no more broadly than required to implement the policy underlying Section 523(a)(2)(A), i.e. the policy against debtors avoiding fraud-based debts in bankruptcy. If McCullough collects $14,045.51 plus interest and attorneys\' fees from the debtor, he will be made whole. If he collects $56,935.62, he will, in effect, receive a windfall in the amount of $35,748.97. The Bankruptcy Code intends the former result. It does not intend the latter. Section 523(a)(7) recognizes that

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