In re Argon Credit, LLC
| Decision Date | 10 January 2019 |
| Docket Number | Case No. 16-39654 (Jointly Administered) |
| Citation | 596 B.R. 882 |
| Parties | IN RE ARGON CREDIT, LLC, et al., Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Dale & Gensburg P.C., Matthew T. Gensburg, E. Philip Groben, Gensburg Calandriello & Kanter, P.C., Chicago, IL, for Debtor.
Jeffrey C. Dan, Crane, Simon, Clar & Dan, for Debtor/Trustee.
Eugene Crane, Crane Heyman Simon Welch & Clar, Shelly A. DeRousse, Elizabeth L. Janczak, Freeborn & Peters LLP, Arthur G. Simon, Crane, Simon, Clar & Dan, Brian P. Welch, Burke, Warren, MacKay & Serritella, P.C., Chicago, IL, for Trustee.
Deborah L. Thorne, United States Bankruptcy JudgeThis case poses the question of the meaning and enforceability of a subordination agreement against a presumably subordinate creditor who is seeking to enforce a subpoena for a Rule 2004 Examination. Fund Recovery Services, LLC ("FRS") filed a motion to quash the subpoena originally served upon it by Eugene Crane, chapter 7 trustee of Argon Credit, LLC and Argon X, LLC (together, the "Debtors" or "Argon"). The Trustee is no longer actively pursuing the subpoena, but it is being pursued by Margon, LLC, the Mark Triffler Trust and the Cardinal Trust (jointly referred to as "Margon" unless otherwise indicated).1 Although the subpoena was served well over a year ago, the parties attempted to resolve disputes until the fall of 2018 when the cooperation disappeared and Margon filed an Opposition to the FRS Motion to Quash. The court has reviewed the pleadings filed by both parties and the matter is now ripe for decision.
Pre-petition, Argon operated an online lending platform providing near-prime consumer installment loans. On May 1, 2015, Fintech Financial, LLC (Fintech) lent Argon $ 20 million under the terms of a revolving credit facility (the revolver). Argon also granted Fintech liens in all of its then-existing or after-acquired property, both real and personal, to secure repayment. The facility closed on May 5.
The next day Fintech assigned all of its interests in and rights arising out of the revolver, including its liens, to Princeton Alternative Income Fund, LP (Princeton). At some point prior to February of 2016, Fintech and/or Princeton increased Argon's loan under the revolver to $ 37,500,000. Certain insiders3 of Argon, namely Margon, had also made loans to Argon prior to February of 2016.
Margon lent money to Argon prior to the Fintech closing in May of 2015. According to FRS, Margon and Fintech entered into a subordination agreement as part of the original May 2015 deal, an agreement in which Margon agreed to subordinate its claim against Argon to that of Fintech. That subordination agreement between Margon and Fintech was then amended in February of 2016, which was also when the trusts initially entered into their subordination agreements with Fintech. Both trusts had also previously lent money to Argon.
Argon filed a voluntary petition under chapter 11 of the Bankruptcy Code in December of 2016. In January 2017, the case was converted to a chapter 7. Several months later, a stipulated order was entered into between Deborah Ebner, the original chapter 7 trustee,4 and FRS that provided, among other things, for parties in interest and the trustee to coordinate regarding discovery surrounding FRS's claim (Docket No. 129). All requests were to be served by the trustee, but if a party in interest had conferred in good faith with the trustee and if the trustee were not going to proceed with a discovery request, then that party could serve and enforce its own discovery on a separate track without filing a separate Rule 2004 motion in the bankruptcy court.
In 2017, the trustee served a subpoena on FRS demanding a wide range of documents. FRS moved to quash the subpoena. FRS's motion was continued for a long while until late 2018, when Margon responded to the motion to quash and attempted to enforce the trustee's subpoena directly after having conferred in good faith with the trustee and after having received his approval.
FRS is now attempting to interpose the subordination agreements entered into between it and Margon. FRS argues that Margon's efforts to directly obtain discovery from it run afoul of those agreements. Margon counters that (1) the court lacks subject matter jurisdiction to adjudicate this contested matter, (2) the subordination agreements were never validly assigned to FRS, (3) the agreements do not bar it from obtaining discovery on behalf of the trustee and/or the estate, and (4) in any event, the agreements do not bar discovery regarding FRS's own fraud.
For the following reasons, the Motion to Quash will be granted as to Margon but not as to the trustee.5
FRS's argument is simple and well-taken. The Bankruptcy Code provides, in a plain and straightforward provision, that "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 510(a) (emphasis added). And as the Supreme Court has often reminded, "Congress says in a statute what it means and means in a statute what it says there." Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (internal quotations omitted).
The subordination agreements at issue provide in relevant part that:
See Margon's Response, Docket No. 340–1, Ex. 3, at 25, Ex. 4, at 39, Ex. 5, at 53 (emphasis added).
In the court's opinion, this standby limitation constitutes an explicit and express "silent seconds" provision aimed at preventing "obstructionist behavior"; it goes above and beyond the mere maintenance of the "hierarchy of lien priorities." In re MPM Silicones, L.L.C., No. 15-CV-2280(NSR), 596 B.R. 416, 431–32, 2019 WL 121003, at *11 (S.D.N.Y. Jan. 4, 2019). It prevents Margon (the subordinated lender) from using the bankruptcy process to affirmatively obtain discovery from FRS (the senior lender) respecting FRS's claim against Argon.
Delaware law bears this out. The agreements provide that Delaware law governs their interpretation, and the parties do not dispute this point. Under Delaware law, a subordination agreement is a contract, and contracts are interpreted according to their plain meaning where they are clear and unambiguous. Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010).6
Again, the plain text of the agreements prevents Margon from "proceed[ing] in any way to enforce any claims" against Argon. See Margon's Response, Docket No. 340–1, Ex. 3, at 25, Ex. 4, at 39, Ex. 5, at 53. Margon and the trusts only have standing under the order and under Rule 2004 because of their status as "parties in interest." See Fed. R. Bankr. P. 2004(a) ; Stipulation and Agreed Order, Docket No. 129, at 4, ¶ 4. And they are only "parties in interest" because they have claims against Argon (claims that may be affected by this bankruptcy proceeding) for the money they have lent to Argon, proofs of which have been duly filed. See Matter of FBN Food Servs., Inc. , 82 F.3d 1387, 1391 (7th Cir. 1996) ; Proofs of Claim, 16bk39654, 16–1, 17–1, 18–1.7
The plain meaning of the standby limitation prevents them from affirmatively obtaining Rule 2004 discovery, because any act to obtain Rule 2004 discovery in this bankruptcy case is a calculated, if intermediate, act to enforce the claims they have against Argon.8 It simply cannot be assumed by the court that Margon is asking for discovery for no reason; they cannot be presumed to be irrational.
Margon offers a number of arguments as to why it should not be barred from seeking Rule 2004 discovery directly from FRS despite the plain meaning of the subordination agreements and section 510(a) of the Bankruptcy Code. The court considers each in turn.
Margon contends that this court does not have subject matter jurisdiction over this matter. This is unfounded as the district court has original jurisdiction over all cases under title 11 and over all proceedings arising under title 11 or arising in or related to cases under title 11. 28 U.S.C. § 1334(a) – (b). "Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." 28 U.S.C. § 157(a). The District Court for the Northern District of Illinois has exercised its power to refer all such matters to this court. N.D. Ill. L.R. 40.3.1(a).
The present dispute stems from a stipulated order entered by this court on March 28, 2017, wherein the court stated that:
FRS shall provide the Trustee and other parties in interest, upon request, all available information reasonably requested by the Trustee or such parties in interest to permit an analysis of the FRS claims within the Examination Period. In order to minimize duplicative discovery, the Trustee and all parties in interest seeking discovery relating to FRS's claims shall coordinate for the issuance of joint discovery requests to FRS, with all initial joint discovery requests to FRS being issued through the Trustee's counsel. If a party in interest has made a good faith effort to coordinate its discovery requests with the Trustee's counsel in the first instance, then such party may serve discovery on FRS in...
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