In re Chicago Midwest Donut, Inc.
| Decision Date | 08 January 1988 |
| Docket Number | Bankruptcy No. 87 B 9691. |
| Citation | 82 BR 943 |
| Parties | In re CHICAGO MIDWEST DONUT, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Leroy G. Inskeep, Philip V. Martino, Rudnick & Wolf, Chicago, Ill., for Mister Donut of America, Inc.
Gary G. Tucker, Chicago, Ill., for debtor.
This cause comes before the Court on the motion of Mister Donut of America, Inc. ("Mister Donut") to impose sanctions, including attorneys' fees and costs, pursuant to Rule 11, F.R.Civ.P., Bankr.Rule 9011, and 28 U.S.C. § 1927. The Motion lies against Chicago Midwest Donut, Inc. ("Debtor") and against its attorney. For reasons stated below, the Motion is allowed against Debtor and its counsel, in the amount of $1,755.
On July 1, 1987, Debtor filed this bankruptcy proceeding under Chapter 11 of the Bankruptcy Code. Following events related herein, the proceeding was converted to one under Chapter 7.
On July 28, 1987, Mister Donut filed a Motion to modify the automatic stay. It asserted that (1) two subleases (Bloomington, Pekin) and three franchise agreements (Bloomington, Pekin, Springfield) were not assignable to Debtor; (2) Debtor failed to make the payments required under those agreements; and (3) Debtor failed to offer Mister Donut adequate protection either for use of demised premises or for use of Mister Donut's franchise and trademarks. Mister Donut sought stay modification to allow four pending lawsuits involving the subleases and franchise agreements to continue with Debtor as a defendant in each.
Debtor was ordered by this Court to answer that motion. Debtor answered the Mister Donut motion with an argument, including the suggestion that Debtor would be unable to generate revenue if the stay were modified. Mister Donut replied to Debtor's Answer pointing out that Debtor had failed to deny any factual allegations and therefore was deemed to have admitted all factual allegations in the Motion under Rule 8(d) F.R.Civ.P., and Local District Court Rule 9(a) (adopted by the Bankruptcy Court).
On September 1, 1987, this Court held a preliminary hearing under Bankruptcy Code § 362 on the motion of Mister Donut to modify stay. Debtor's counsel acknowledged that his Answer had not responded to each allegation of the Motion, and in justification said that he prepared it without having the Motion available. Efforts by Debtor's counsel to assert unpleaded affirmative matters orally were not permitted by the Court. Rather, the Court ruled at the September 1st hearing that Mister Donut's well pleaded factual allegations were deemed admitted, Debtor having failed to answer as ordered. The stay was then modified to allow the Bloomington, Pekin I, and Pekin II lawsuits and any appeals therefrom to proceed with the Debtor added as a defendant in those suits.
Debtor filed a Motion the next day to Reconsider and Vacate this Court's Order modifying the automatic stay. On September 2, 1987, Debtor presented an Emergency Motion for leave to file his Amended Answer and Affirmative Defenses instanter. This was permitted by the Court and the same were filed on September 2, 1987.
The Amended Answer, in paragraph 14, admitted that Debtor did not satisfy certain assignment requirements contained in the franchise agreements between Debtor's assignor and Mister Donut. However, in paragraph 16, Debtor denied that it failed (a) to comply with those provisions, and (b) to make the post assignment and post petition royalty and advertising contributions required thereunder. Finally, in paragraph 17, Debtor denied that it failed to afford adequate protection to Mister Donut, inferring that adequte protection existed because Debtor was making post petition payments.
Debtor also pleaded affirmative defenses that (1) Mister Donut accepted post petition "rent" from Debtor, which constituted an acceptance of the assignment of the subleases to Debtor, and (2) the assignment to Debtor was proper.
At the September 2nd hearing on motion to reconsider and vacate, Mr. Tucker stated that he called his client immediately after the September 1st hearing and learned that Debtor's "rent" check had cleared. Based on the new pleadings and this representation, and over the objection of Mister Donut's counsel, the Court granted the motion to reconsider and vacate. Debtor was allowed to file its Amended Answer and affirmative defenses instanter.
A new preliminary hearing was then held on the motion to modify stay. It was held that very day because the 30-day period required for preliminary hearing under § 362 was about to expire. At the September 2nd hearing, Mister Donut advanced seven arguments in support of its position, namely: (1) the refusal to accept the proposed assignment was not unreasonable; (2) accepting a post petition payment for use of the premises is not a waiver; (3) the Bloomington and Pekin subleases terminated by operation of law on August 31, 1987; (4) Debtor must immediately surrender possession of the leased premises to Mister Donut; (5) the Bloomington and Pekin subleases were terminated on January 25, 1987, before the purported assignment to Debtor; (6) the franchise agreements and subleases for Bloomington and Pekin were so interwined that termination of the subleases terminated the franchise agreements; and (7) Debtor had failed to make any showing of adequate protection, or ability to promptly cure its defaults, or ability to perform in the future.
In response, Debtor argued inter alia that by accepting the post petition check, Mister Donut waived its objection to the purposed assignment of the subleases to Debtor.
During the course of the argument, Mr. Tucker admitted that Debtor had made no attempt to assume the subleases and that he did not know whether Debtor's post petition check to Mister Donut included royalties and advertising contributions required under the franchise agreements. Further, Mr. Tucker acknowledged the inconsistent positions Debtor had taken in the Amended Answer between paragraph 14 () and paragraph 16 ().
The Court then found under Bankruptcy Law that Mister Donut's acceptance of any post petition use and occupancy payments was not a waiver of its objection to the assignments; that the subleases terminated as a matter of Bankruptcy law on August 31, 1987, because Debtor had made no attempt before that date to assume the leases; and that termination of the Bloomington and Pekin subleases terminated the franchise agreements for those locations. The Court did not decide whether Mister Donut reasonably withheld its consent to the purported assignments. Based on findings made, the Court ordered the automatic stay modified to allow the pending Pekin and Bloomington lawsuits to proceed. The Court also found, however, that Debtor's Amended Answer denying a default and claiming that it was making post-petition royalty and advertising payments for the Springfield location raised a fact question that justified a final hearing and continued stay as to that location. Consequently, the court set a final hearing date on September 9th as to the Springfield location, and entered a Preliminary Pretrial Order.
It subsequently was reported that the Debtor's check that its counsel had referred to had been returned by the bank for insufficient funds.
On September 9, 1987, at the third hearing on this matter, Debtor sought and was granted leave to file a Second Amended Answer to the Motion to Modify the Automatic Stay. Debtor's counsel admitted therein that (1) franchise fees were not paid for under the Springfield franchise, just as Mister Donut had alleged; (2) when the original Answer was filed, neither Debtor nor its counsel knew the exact amount of payment tendered to Mister Donut for August 1987 payment; and (3) counsel learned that the Debtor's check had omitted franchise fees only after filing his Amended Answer. The Second Amended Answer admitted the allegations of paragraph 16 of the Motion that Debtor was in default of the agreement in several ways both prepetition and post petition. At the hearing on the motion for leave to file that Second Amended Answer, Mr. Tucker orally also admitted paragraph 17 of the Mister Donut motion which had alleged lack of adequate protection. He acknowledged that the automatic stay should be modified with respect to the Springfield location, and the Court entered such an order.
On September 18, 1987, counsel for Mister Donut wrote to Debtor's counsel requesting fees and expenses under Rule 11 F.R.Civ.P., Bankruptcy Rule 9011, and 28 U.S.C. § 1927. Neither Debtor nor its counsel responded thereto. Consequently, this motion followed.
Mister Donut first asks sanctions with respect to Debtor's initial Answer to the Motion to modify automatic stay. It contends that Debtor's counsel neglected to review the appropriate rules and law to ascertain that allegations of motions not denied are deemed admitted. That caused the first hearing to be held without proper answer being filed, and lead to a second and then a third hearing once answers and denials were filed.
Mister Donut also argues that sanctions are appropriate with respect to Debtor's Motion to Vacate and Reconsider because: (1) the truth as to all facts pleaded therein were available to counsel upon reasonable inquiry; (2) Debtor's counsel orally represented that Debtor's post-petition check "cleared" when it in fact was returned for insufficient funds; and (3) the subleases had terminated by law on August 31, 1987 thereby rendering Debtors continued opposition to the original Motion legally indefensible as to the Pekin and...
To continue reading
Request your trial