In re C.P. Hall Co.

• Decision Date: 15 July 2014
• Docket Number: No. 11 B 26443.,11 B 26443.
• Citation: 513 B.R. 540
• Parties: In re The C.P. HALL COMPANY, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

513 B.R. 540

In re The C.P. HALL COMPANY, Debtor.

No. 11 B 26443.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Signed July 15, 2014.

Ronald Barliant, Prisca Kim, Goldberg Kohn, Ltd., Chicago, IL, for James Shipley.

Steven B. Towbin, Allen J. Guon, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, for chapter 7 trustee Joseph A. Baldi.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Currently pending is the motion of chapter 7 trustee Joseph A. Baldi under Rule 9019, Fed. R. Bankr.P. 9019, to approve a settlement with two groups of creditors. Under the settlement, the claims of those creditors would be allowed. Another creditor, however, has objected to the claims and contends the settlement cannot be approved until his objection is addressed. At a recent status hearing, the court disagreed and set Baldi's motion for an evidentiary hearing.

On reconsideration, however, the court agrees with the objecting creditor. The creditor has statutory rights to object to the claims and obtain a ruling on his objection. The settlement cannot be approved if approval would deprive the creditor of those rights. The hearing will therefore be stricken, and Baldi's motion will be continued until the objection is resolved.

1. Jurisdiction

The court has subject matter over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (B).

2. Background

The C.P. Hall Company is a defunct distributor of raw asbestos products. In 2011, C.P. Hall filed a chapter 11 bankruptcy case that was later converted to a case under chapter 7, and Baldi was appointed interim trustee. Like other asbestos companies, C.P. Hall has been the subject of many personal injury actions from people claiming harm from its products. Most if not all of these people hold judgments against C.P. Hall and are creditors in the bankruptcy case. Like other asbestos companies, C.P. Hall also had insurance policies that may provide coverage for the claims. Except for a bank account with a trivial balance, the policies and their proceeds are C.P. Hall's only assets.

Since before the bankruptcy case was filed, various personal injury creditors have been fighting over the relative priority of their rights to C.P. Hall's assets. On one side is James Shipley, as representative of his late wife's estate. Shipley filed a proof of claim in the bankruptcy case for $3,362,465. On the other side are two groups of creditors. One group, represented by the Chicago law firm Cooney & Conway, filed a proof of claim asserting claims totaling $121,610,107. The other group, represented by the O'Brien Law Firm in St. Louis, filed a proof of claim asserting claims totaling $30,900,000.

Although personal injury creditors typically hold unsecured claims, both Shipley and the Cooney & Conway and O'Brien creditors insist their claims are secured at least in part, and objections have been asserted to the secured status of all of the claims. Shipley has filed adversary complaints against the Cooney & Conway and O'Brien creditors seeking a determination that he has a lien on certain insurance proceeds, that any lien the Cooney & Conway and O'Brien creditors have is invalid, and that to the extent both he and these creditors have liens, his is superior to theirs. In the complaints, Shipley also objects to the claims. Baldi has objected to Shipley's claim, contending the claim is not secured. Shipley's adversary proceedings and Baldi's claim objection are pending.

In February 2014, meanwhile, Baldi reached a settlement with the Cooney & Conway and O'Brien creditors. Under the settlement agreement, these creditors would relinquish their position that their claims were secured. The claims would be paid instead as “general unsecured claims” without any sort of administrative or priority status. (Dkt. 220, Ex. A at 3). In return, the claims would be “allowed in full.” ( Id.).

In March 2014, Baldi moved under Rule 9019 for approval of the settlement. Shipley opposed the motion, arguing not only that the settlement was not in the best interests of the estate but also that the court had no authority to allow the Cooney & Conway and O'Brien claims without first ruling on his objection to them. (Dkt. No. 236 at 1). Baldi responded that Shipley's claim objection posed no barrier to approval of the settlement because he had no standing to pursue it. (Dkt. No. 240 at 6–7). Even if he had standing, Baldi added, the court had the power to approve the settlement regardless of its effect on Shipley's objection. ( Id. at 7–8). In support of this second point, Baldi cited In re Kaiser Aluminum Corp., 339 B.R. 91 (D.Del.2006), and In re The Heritage Org., 375 B.R. 230 (Bankr.N.D.Tex.2007).

After several rounds of briefing, a status hearing was held. At the hearing, the court agreed that under Kaiser and Heritage, a hearing on the Rule 9019 motion could be held despite the pending claim objection. A date for the hearing was set.

On reflection, however, and after further review of the parties' memoranda and the Kaiser and Heritage decisions, the court concludes that Shipley is correct.

3. Discussion

Shipley is correct that he has standing to object to the Cooney & Conway and O'Brien claims. He is correct, as well, that he is entitled to a ruling on his objection. Baldi cannot enter into a settlement of the claims that would strip him of these rights, effectively settling Shipley's objection out from under him. On both points, Shipley has the Bankruptcy Code on his side. Baldi's position is based on judicial concepts of bankruptcy policy with no support in the Code.

The Code grants Shipley standing to object to the claims. Section 502 governs the allowance of claims and interests and permits any “party in interest” to object. See11 U.S.C. § 502(a). The Code does not define “party in interest” (except in section 1109(b), which is irrelevant here). In re Lewis, 459 B.R. 281, 288 (N.D.Ill.2011). The Seventh Circuit, however, has said that a “party in interest” is “anyone who has a legally protected interest that could be affected by a bankruptcy proceeding.” Adair v. Sherman, 230 F.3d 890, 894 n. 3 (7th Cir.2000); see also In re FBN Food Servs., Inc., 82 F.3d 1387, 1391 (7th Cir.1996). The interest must be a pecuniary one. In re Cult Awareness Network, Inc., 151 F.3d 605, 607–08 (7th Cir.1998).

A creditor's interest in a bankruptcy case is pecuniary, and so a creditor is a “party in interest” with standing to object to the claims of other creditors. Adair, 230 F.3d at 894 n. 3; see also In re C.P. Hall Co., 750 F.3d 659, 661 (7th Cir.2014) (noting that “everyone with a claim to the res [the debtor's assets] has a right to be heard before the res is disposed of....” (quoting In re James Wilson Assocs., 965 F.2d 160, 169 (7th Cir.1992))). Indeed, a debtor's creditors “are the primary parties in interest” in the debtor's case. 4 Collier on Bankruptcy ¶ 502.02[2][d] at 502–13 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014). The right of one creditor to object to the claims of another therefore “should be undisputed on principle.” Id.

Baldi does not contest these basic principles. He asserts, however, that in a chapter 7 case, the trustee has a duty to object to claims, see11 U.S.C. § 704(a)(5), and the trustee alone has standing to object unless he fails or refuses to do so unreasonably. This position has support in the case law, see, e.g., Kowal v. Malkemus (In re Thompson), 965 F.2d 1136, 1147 (1st Cir.1992); Pascazi v. Fiber Consultants, Inc., 445 B.R. 124, 129 (S.D.N.Y.2011) (calling it “the majority rule”); In re Trusted Net Media Holdings, LLC, 334 B.R. 470, 475–76 (Bankr.N.D.Ga.2005), and in a leading treatise, see Collier, supra, ¶ 502.02[2][d] at 502–13 to –14.¹Collier explains that although creditors have a right to object to claims, “the needs of orderly and expeditious administration do not permit the full and unfettered exercise of such right.” Id. at 502–13. The right of creditors to object, then, “is restricted.” Id. at 502–14.

The problem is that this restriction on creditors' rights is a “judicial” one that does not appear in the Code itself. Ulz, 401 B.R. at 327 n. 5. The right to object to claims that section 502(a) grants creditors like Shipley is unqualified. Nowhere is it made subject to “the needs of orderly and expeditious administration.” It may be that sound bankruptcy policy warrants limiting creditors' rights this way, and when it comes to objecting to claims a chapter 7 trustee should be given first crack. But Congress, not the courts, decides what makes for sound bankruptcy policy. When Congress expresses its views in the Code, courts have no business rewriting the Code to suit themselves, “turning it into something they consider more logical, sensible, or conducive to human enlightenment.” In re Miller, 493 B.R. 55, 59 (Bankr.N.D.Ill.2013) (internal quotation omitted). The Seventh Circuit has repeatedly warned against this sort of departure from clear Code provisions. See, e.g., Sunbeam Prods., Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372, 375–76 (7th Cir.2012); In re Kmart Corp., 359 F.3d 866, 869 (7th Cir.2004).

Just as Shipley has a right to object to the Cooney & Conway and O'Brien claims, he has a right to receive a ruling from the court on his objection notwithstanding Baldi's proposed settlement. Section 502(b)(1) declares that when a party in interest objects to a claim, “the court shall determine the amount of such claim ... and shall allow [the] claim” in that amount unless the claim is objectionable under sections 502(b)(1)-(9). 11 U.S.C. § 502(b)(1) (emphasis added). The court's obligation to rule on a claim objection is mandatory, and the creditor's right to a ruling is also unqualified. Nothing in the Code subordinates that right to the trustee's duty to administer the estate, let alone his agreement with a creditor that the...