In re Aztec Supply Corp.
| Decision Date | 09 January 2009 |
| Docket Number | No. 07 B 15189.,07 B 15189. |
| Citation | 399 B.R. 480 |
| Parties | In re AZTEC SUPPLY CORP., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Harvey J. Waller, Michael I. White Chicago, IL, for Debtor.
William T. Neary, Office of the U.S. Trustee, Chicago, IL.
Lawrence M. Karlin, Lupel Weininger LLP, Chicago, IL, for YMIR, Inc.
David R. Shannon, Tenney & Bentley, Chicago, IL, for Inlander Brothers, Inc.
David A. Kallick, Natalia K. Rzepka, Tishler & Wald Ltd., Chicago, IL, for Aztec America Bank.
Dennis E. Quaid, Thompson Coburn Fagel Haber, Chicago, IL, for Bio Star Films, LLC and Plastic Financial LLC.
On August 21, 2007, Aztec Supply Corporation ("Debtor") filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code. AztecAmerica Bank (the "Bank") was the only secured creditor of Debtor and asserted a first priority security interest on all of Debtor's assets. During pendency of the bankruptcy, an order granting relief in the nature of a declaratory judgment was entered in favor of the Bank authorizing it to stop payment of a certain cashier's check issued by the Bank with Debtor as the remitter. That order was entered without notice to the holder of the check, and without filing an Adversary proceeding and serving summons on that holder. Debtor's bankruptcy case was subsequently dismissed on motion of the United States Trustee.
The cashier's check in question was payable to National Packing Services, Corp. ("NPS"). After the bankruptcy was dismissed, NPS assigned the check to Inlander Brothers, Inc. ("Inlander") which moved to reopen the bankruptcy case and vacate that portion of the prior order blocking its rights as holder of the cashier's check. Those motions were granted on September 11, 2008. Pending is the Bank's Motion under Rule 59 Fed.R.Civ.P. [Rule 9023 Fed. R. Bank. P.] to vacate the Orders of September 11, 2008, which reopened the bankruptcy case and vacated the applicable portion of the order at issue.
For the following reasons, the Bank's Motion will be granted in part, and the September 11th Orders will be vacated, but only so that more precisely focused orders can be entered. This Memorandum Opinion clarifies the legal authority upon which the relief in Inlander's motions should be granted. A new order will be entered vacating the dismissal of Debtor's bankruptcy case so that Inlander's Motions may be dealt with and the case will be reopened so that the Clerk can administer the docketing requirements. A new order will then be entered vacating that portion of the earlier order affecting the cashier's check. This relief is granted since the order in question was void because it was obtained without initiating an Adversary proceeding and serving summons or otherwise providing notice to the affected party as required by Bankruptcy Rules and Fifth Amendment due process.
The relevant history of pending matters is derived from the filings and docket entries in this case, and undisputed matters pleaded. It is a sad history of failure to comply with rules dealing with electronic filings, sloppiness in filing the bankruptcy petition and inadequate scheduling of claims, lack of notice to parties to be affected by orders requested, and disregard of due process. Thankfully, it is not a history often seen in this court.
On or about September 6, 2007, after Debtor's bankruptcy case had been filed, Debtor received a check drawn on an Inlander corporate checking account payable to Debtor in the amount of $15,803.48 (the "Inlander Check"). Debtor used that Inlander Check to purchase a cashier's check from the Bank in the amount of $15,496.25 (the "Cashier's Check"). The Cashier's Check was drawn to the order of "NPS" as payee, NPS being then a supplier of Debtor and Inlander. The balance of the Inlander check or $307.23, represented a two-percent commission to Debtor, and was deposited into Debtor's account at the Bank. The Bank contends that the Inlander Check was cash collateral securing its loan to Debtor, and that use of it as described violated its rights without permission or court authority.
When this bankruptcy case was filed, the Bank was initially kept in the dark despite rules that provided for notice to creditors. Pursuant to Rule 1007(a)(1) Fed. R. Bankr.P., "In a voluntary case, the debtor shall file with the petition a list containing the name and address of each entity included or to be included on Schedules D, E, F, G, and H as prescribed by the Official Forms." (Emphasis added). See also Local Bankruptcy Rule 1007-1 (requiring "Computer Readable Lists of Creditors"). In this case, the Bank was not listed on Debtor's "Creditor Matrix", which is the list of creditors referred to in Rule 1007(a)(1) and Local Rule 1007-1 that is used by the Clerk of Court to send notices. (Docket No. 1.) Therefore, the Bank was not sent notice of the Meeting of Creditors held under 11 U.S.C. § 341 when the Clerk mailed that notice to creditors on August 25, 2007. (Docket No. 5.) Debtor later filed its Schedule D listing the Bank as a secured creditor on September 6, 2007, sixteen days after Debtor's bankruptcy petition was filed. See Rule 1007(c) Fed. R. Bankr.P. (). However, due to its failure to follow the correct procedures for electronic filing, Debtor's counsel was notified by the Clerk to re-file its Schedule D, which they did on September 14, 2007. (Docket No. 15.) Consequently, the Bank did not receive notice of bankruptcy proceedings in this case on a regular basis until its counsel filed an appearance on October 2, 2007. (Docket Nos. 23-24.) It appears, therefore, that the Bank did not have notice of Debtor's bankruptcy filing when it issued the Cashier's Check on September 6th.
National Packing Services presented the Cashier's Check for deposit on September 11, 2007. It appears that the Bank had actual notice of Debtor's bankruptcy as of September 17, 2007, when it dishonored and stopped payment on the Check that day. The Bank took the position that use of the $15,803.48 from Inlander to purchase the Cashier's Check was an unauthorized use of its cash collateral in contravention of 11 U.S.C. § 363(c)(2).
On October 2, 2007, the Bank filed a Motion for Order Granting Relief From Automatic Stay to Set Off Accounts and to Stop Payment of Cashier's Check or in the Alternative to Dismiss Case (the "Motion for Relief from Automatic Stay") in which it requested permission from the court to stop payment of the Cashier's Check. (Docket No. 25.) However, due to failure of its counsel to follow the correct procedures for electronic filing, the Bank was notified to re-file that Motion, which was done on October 4, 2007. (Docket No. 31.) No Service List was attached to the Certificate of Service when the Motion was re-filed on October 4th. In addition, NPS, which was payee on the Cashier's Check and the party whose rights the Bank sought to affect by its request for authorization to stop payment on the Check, was not listed on the Certificate of Service and Service List attached to the Motion when it was originally filed on October 2nd. The Bank concedes that it never provided NPS with notice of the relief sought against it in that Motion or any subsequent motion filed in the bankruptcy concerning the Cashier's Check. (See Hr'g Tr. 15-16, Sept. 9, 2008.) Judge Squires, before whom this case was assigned, continued the hearing on that Motion until October 16, 2007.
Also noticed for October 16th was the Bank's Motion for Authorization for Use of Cash Collateral and Granting Post-Petition Replacement Liens. On October 16th, Debtor and the Bank jointly presented a Stipulation and First Interim Order Authorizing Use of Cash Collateral and Granting Post-Petition Replacement Liens which authorized use of cash collateral through November 1, 2007. (Docket No. 52.) As earlier noted, the Bank had previously dishonored the Cashier's Check when NPS presented it for payment on September 17, 2007. As part of the Stipulation and First Interim Order, Debtor agreed to "use its best efforts to cause the holder of cashier's check number 1199 in the amount of $15,496.25 issued by Lender to be returned to Lender without being presented for payment." No objections were interposed to the proposed Order, and Judge Squires entered the Stipulation and First Interim Order at the October 16th hearing. (Docket No. 52.) Hearing on the Motion for Relief from Automatic Stay was continued until October 30, 2007.
On October 30th, the Bank presented a new Motion for Authorization for Continued Use of Cash Collateral, and a Stipulation and proposed draft Order Authorizing Continued Use of Cash Collateral. The Order requested therein was entered by Judge Squires on November 6, 2007 (the "November 6th Order"). (Docket No. 79.) Paragraph 7 of the Order proposed with the purported "Stipulation" authorized the Bank "to issue a stop payment order on cashier's check number 1199 in the amount of $15,496.25 previously issued by Lender at the request of Debtor." Paragraph 7 thereby sought to ratify the Bank's unilateral decision to dishonor the Cashier's Check on September 17th. Although the interest of NPS as payee of the Check was clearly known and directly affected by that Order, NPS was not provided any notice of the October 30th hearing or of the request for entry of the Order entered on November 6th. In addition, the Motion requested the relief provided for in Paragraph 7 which comprised a form of declaratory judgment adjudging the validity of a party's interest in the check. That is certainly not the type of relief normally contained in a motion for use of cash collateral under 11 U.S.C. § 363(c)(2). In other words, Paragraph 7 was...
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