In re Cmgt, Inc., Bankruptcy No. 04 B 31669.
| Decision Date | 12 March 2008 |
| Docket Number | Bankruptcy No. 04 B 31669.,Adversary No. 07 A 00838. |
| Citation | 384 B.R. 497 |
| Parties | In re CMGT, INC., Debtor. David E. Grochocinski, Trustee Plaintiff, v. Spehar Capital, LLC, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
David E. Grochocinski, Grochocinski & Grochocinski, Orland Park, IL, pro se.
Scott N. Schreiber, Stahl Cowen Crowley, Chicago, IL.
This matter comes before the Court on the motion of Spehar Capital, LLC ("Spehar") for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), made applicable by Federal Rule of Bankruptcy Procedure 7012(c). For the reasons set forth herein, the Court denies the motion because there are disputed issues of material fact and Spehar has not shown that it is entitled to judgment as a matter of law.
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O).
On March 18, 2004, Spehar obtained a judgment in the amount of $17,045,780 and a permanent injunction against CMGT, Inc. ("CMGT") in the Superior Court of the State of California, (Resp. to Mot. for J. on the Pleadings Ex. D.) On April 7, 2004, Spehar filed a citation notice in the Circuit Court of the Eighteenth Judicial Circuit, DuPage County, Illinois. (First. Am.Compl.Ex. No. 1.)1 The person named in the citation notice was "Louis J. Franco President and CEO, CMGT, Inc." (Id.) Exhibit A to the citation notice was a citation to discover assets issued to "Louis J. Franco, President/CEO, c/o CMGT, Inc." (Id.) The citation notice and citation to discover assets are collectively referred to herein as the "Citation to Discover Assets." At the heart of this dispute is whether the service of the Citation to Discover Assets on Louis J. Franco ("Franco") by Spehar resulted in the attachment of a statutory lien on CMGT's personal property as Spehar claims, or whether the service was ineffective to impose a lien on CMGT's personal property as the Trustee now asserts. See 735 ILL. COMP. STAT. 5/2-1402(a) & (m).
The timing of service on Franco is important because on September 19, 2003, Franco resigned as president and chief executive officer of CMGT via electronic mail. (First. Am. Compl. ¶ 11; First. Am. Answer ¶ 11.) On April 10, 2004, Franco referenced his resignation from CMGT in a letter to its investors. (First. Am.Compl.Ex. No. 2.) On May 7, 2004, Franco appeared pursuant to the Citation to Discover Assets. (First. Am. Compl. ¶ 14; First. Am. Answer ¶ 14.) Exhibit 11 at the Citation to Discover Assets hearing was the April 10, 2004 letter written by Franco that referenced his resignation. (First.Am.Compl.Ex. No. 2.) During his examination at the hearing, Franco told CMGT's counsel that he had resigned from CMGT in September 2003, and counsel so advised CMGT's shareholders.
On August 25, 2004, Spehar filed a involuntary Chapter 7 bankruptcy petition against CMGT. Thereafter, on September 15, 2004, the Court entered an order for relief under Chapter 7. David E. Grochocinski was appointed the Chapter 7 case trustee (the "Trustee") on September 21, 2004.
On June 14, 2005, the Trustee and Spehar entered into a letter agreement (the "Letter Agreement") whereby Spehar agreed to loan money to CMGT's bankruptcy estate. The Letter Agreement contained a provision that stated that the Trustee would "take all necessary or appropriate actions to void the UCC-1 financing statements or other liens that CMGT's shareholders or persons otherwise affiliated filed with the 1L Secretary of State Illinois [sic] on or about 12/18/2003." (Id. ¶ 2b.) The Letter Agreement does not address the priority of Spehar's lien claim.
On July 15, 2005, the Trustee filed an application to enter into post-petition secured financing and other relief (the "Financing Motion"). The Financing Motion informed the Court that Spehar was providing postpetition financing for a potential malpractice action (the "Malpractice Action") against Mayer, Brown, Rowe & Maw ("Mayer, Brown"), professionals who had rendered services to CMGT. As part of the agreement, Spehar was to share with CMGT's estate in any recovery made in the Malpractice Action. The Financing Motion stated in pertinent part as follows:
Spehar ... is the holder of a judgment against ... [CMGT] in the sum of $17,045,780.00 plus interest and costs. ... The judgment was duly registered in the Circuit Court of the 18th Judicial Circuit, DuPage County.... A citation to discover assets was issued [by Spehar] and served upon the former president of ... [CMGT], Louis Franco.... To the extent that assets are available in the matter, Spehar ... by virtue of the citation to discover assets which was served upon ... [CMGT] more than 90 days prior to the filing of the petition has a valid perfected lien.
(Id. ¶¶ 2 & 3.)
After a hearing on the Financing Motion, the Court entered an order on September 2, 2005 (the "Financing Order"). (First. Am. Answer Ex. B.) The Financing Order provided that Spehar's advances to fund the Malpractice Action would be collateralized and repaid from the estate's recovery in that litigation and specifically recited and ordered that "[b]y virtue of its Citation to Discover Assets, Spehar has a valid and perfected lien on the proceeds of any such recovery [from the Malpractice Action]." (Id. ¶ 6.) Further, the Financing Order stated that "[t]he Trustee shall take all reasonable and appropriate actions to void all liens that are asserted to be superior to Spehar's valid and perfected lien in CMGT's assets ..." (Id. ¶ 8.).
On March 22, 2006, Spehar filed a proof of claim in CMGT's bankruptcy case for a secured amount of $17,045,780 based on the Citation to Discover Assets. (First. Am.Compl.Ex. No. 4.) Thereafter, on April 10, 2006, Spehar filed an amended proof of claim alleging a secured clairri in the sum of $ 13,427,560 based on the Citation to Discover Assets, and an unsecured nonpriority claim in the amount of $3,618,220. (First.Am.Compl.Ex. No. 5.)
On August 28, 2006, CMGT's estate filed the Malpractice Action against Mayer, Brown. (First. Am. Compl. ¶ 46; First Am. Answer ¶ 46.) That litigation is currently pending in the United States District Court for the Northern District of Illinois (06 C 5486).
On August 30, 2007, the Trustee filed the instant adversary proceeding. Thereafter, on October 5, 2007, the Trustee filed a first amended complaint (the "amended complaint"). Count 1 of the four-count amended complaint asserts that the Citation to Discover Assets was invalid under Illinois law because Franco had resigned from CMGT and did not have actual or apparent authority to act on behalf of or bind CMGT. As a result, the Trustee contends that Spehar does not have a valid lien against any assets of CMGT pursuant to the Citation to Discover Assets.
Under Count II of the amended complaint, the Trustee alleges that on May 7, 2004, the Malpractice Action had not been commenced by CMGT, and thus, even if the Citation to Discover Assets was valid, any claim of CMGT against Mayer, Brown was beyond the scope of, not covered by, and not subject to the Citation to Discover Assets. The Trustee maintains that if the Citation to Discover Assets is determined to be valid, the scope of the Citation is limited, pursuant to 11 U.S.C. § 362, to the assets of CMGT that were within the scope of the Citation as of August 25, 2004, the date the involuntary Chapter 7 bankruptcy petition was filed by Spehar.
Count III of the amended complaint objects under 11 U.S.C. §§ 502(a) and 704(a)(5) to the proof of claim filed by Spehar. According to the Trustee, the basis for Spehar's secured component of its claim is the lien created by the Citation to Discover Assets. The Trustee argues that if the Citation to Discover Assets is determined to be valid, Spehar does not have a secured claim with respect to any of the proceeds from the Malpractice Action because as of August 25, 2004, any claim of CMGT against Mayer, Brown was a potential chose in action beyond the scope of, not covered by, and not subject to the Citation to Discover Assets.
Count TV of the amended complaint asserts that pursuant to Illinois law and 11 U.S.C. § 362, Spehar docs not have any interest in the proceeds from the Malpractice Action pursuant to the Financing Order beyond Spehar's post-petition capital advances. Specifically, the Trustee alleges that the Financing Order provides for Spehar's lien on the proceeds of the Malpractice Action. According to the Trustee, the lien claim of Spehar was never valid. The Trustee further contends that even if the lien was valid, on August 25, 2004, when the involuntary petition was filed, and on September 2, 2005, when the Court entered the Financing Order, the Malpractice Action was a potential chose in action beyond the scope of, not covered by, and not subject to the Citation to Discover Assets. The Trustee argues that pursuant to paragraphs 6 and 7 of the Financing Order, Spehar does not have any interest in the proceeds of the Malpractice Action beyond Spehar's post-petition monetary advances to CMGT's estate.
Spehar filed an amended answer to the amended complaint as well as a counterclaim alleging breach of contract by the Trustee, Spehar denies that the Citation to Discover Assets was invalid and asserts that Franco had authority to act on behalf of CMGT. Specifically, Spehar admits that...
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