In re Commercial Loan Corp.

• Decision Date: 14 March 2007
• Docket Number: Adversary No. 06 A 1530.,Bankruptcy No. 04 B 18946.
• Citation: 363 B.R. 559
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re COMMERCIAL LOAN CORP., Debtor. CLC Creditors' Grantor Trust, Plaintiff, v. Sonnenschein Nath & Rosenthal LLP; Kenneth G. Kolmin; Gordon P. Paulson; and Thomas McQueen, Defendants.

363 B.R. 559

In re COMMERCIAL LOAN CORP., Debtor CLC Creditors' Grantor Trust, Plaintiff, v. Sonnenschein Nath & Rosenthal LLP; Kenneth G. Kolmin; Gordon P. Paulson; and Thomas McQueen, Defendants.

Bankruptcy No. 04 B 18946.

Adversary No. 06 A 1530.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

March 14, 2007.

Warren Lupel, Michael Weininger, Lupel Weininger LLP, Chicago, IL, Attorneys for plaintiff CLC Creditors' Grantor Trust.

Barry S. Alberts, Eugene J. Geekie, Jr., David C. Scott, Schiff Hardin LLP, Chicago, IL, Attorneys for defendants Sonnenschein Nath & Rosenthal LLP, Kenneth G. Kolmin, Gordon P. Paulson, and Thomas McQueen.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This adversary proceeding is before the court on the defendants' motion to dismiss the plaintiffs complaint under Rule 12(b)(6), Fed.R.Civ.P. 12(b)(6) (made applicable by Fed. R. Bankr.P. 7012(b)). The plaintiff is CLC Creditors' Grantor Trust (the "Trust"), a trust created by the confirmed plan of debtor Commercial Loan Corporation ("CLC"). The defendants are Sonnenschein Nath & Rosenthal LLP ("SNR"), a Chicago law firm, and Kenneth G. Kolmin, Gordon P. Paulson, and Thomas McQueen, partners in the firm. SNR served as outside general counsel to CLC before it sought bankruptcy protection in 2004.

The complaint alleges that CLC was ostensibly in business as an originator and servicer of commercial real estate and personal property loans and sold participations in the loans to local banks. In fact, the Trust says, CLC was engaged in a scheme under which it sold participations in loans that were already 100% sold, used loan proceeds for unauthorized and improper purposes, and failed to remit loan proceeds to the participant banks. SNR, Kolmin, Paulson, and McQueen allegedly assisted CLC in its scheme. In Count I, the Trust seeks damages for the defendants' actions in aiding and abetting CLC's breaches of fiduciary duty. Count II requests turnover of a retainer CLC paid SNR for work in connection with CLC's bankruptcy, a retainer the Trust says SNR did not earn. Count III is a fraudulent transfer claim seeking fees that CLC paid SNR to perform legal services, not for CLC, but for CLC's president, Peter Hueser.

For the reasons that follow, the defendants' motion will granted in part and denied in part. The motion will be granted as to Count I, and Count I will be dismissed — but on grounds other than those the defendants raise. The motion to dismiss Counts II and III will be denied.

1. Jurisdiction

The court has subject matter jurisdiction over Counts II and III of the complaint pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). The claims in those founts are core proceedings. 28 U.S.C. §§ 157(b)(2)(E), (H). As for Count I, a court always has jurisdiction to determine its jurisdiction. Gladney v. Pendleton Corr. Facility, 302 F.3d 773, 775 (7th Cir. 2002).

2. Facts

The following abbreviated version of the facts is drawn from the complaint and from materials in the record of the CLC bankruptcy. See Palay v. United States, 349 F.3d 418, 425 n. 5 (7th Cir.2003) (stating that in resolving a Rule 12(b)(6) motion, a court "is entitled to take judicial notice of matters in the public record"). For purposes of the motion to dismiss, all facts alleged in the complaint are taken as true. Savory v. Lyons, 469 F.3d 667, 670 (7th Cir.2006).

a. CLC and SNR

CLC was primarily in the business of originating and servicing commercial real estate and personal property loans. In the vast majority of cases, CLC sold participation interests in the loans to banks, entering into Loan Participation Sale and Trust Agreements with those banks. Under the Participation Agreements, the banks obtained an equitable interest in the loans. CLC retained legal title to the loans, acted as servicer, and was obligated to remit the proceeds to the banks. As of December 1, 2004, some thirteen banks owned participation interests in CLC loans with balances of more than $70 million.

SNR began representing CLC at least as early as December 2001 and became CLC's outside general counsel in March 2003. In 2002, SNR represented CLC in connection with several large loans to Ingenium Packaging Corp. and Continental Container LLC (collectively "Ingenium"). All told, CLC loaned Ingenium more than $15 million. By March 2004, Ingenium owed CLC roughly $20 million.

CLC and its president, Peter Hueser, came up with the funds to lend Ingenium through a simple diversion scheme. When loans in which the banks had participations were paid, Hueser lent the proceeds to Ingenium instead of paying them to the participant banks. Because CLC was the record owner of the loans, the banks were unaware that the loans had been paid and so were unaware of the diversion. As of May 2003, Hueser had diverted more than $15 million in proceeds belonging to the participant banks and loaned those proceeds to Ingenium. The alleged point of the scheme was "to earn additional fees for CLC by making ever increasing loans to Ingenium."

But Ingenium was unable to repay the loans, and CLC found itself in serious financial trouble as a result. The complaint details two diversionary transactions CLC used to keep itself afloat and its scheme alive. In the first, CLC obtained a short term, $1.3 million loan from Lakeside Bank, pledging as collateral the proceeds of a loan CLC had made to 7410 Winchester LLC. But the proceeds were not CLC's to pledge: participations constituting a 60% interest in the loan had already been sold. When Winchester paid off the loan in April 2004, all of the proceeds nevertheless went to Lakeside.

The second transaction involved CLC's sale of seven mortgage loans totaling approximately $3.6 million to an entity called JDI Loans. At least five of the loans were subject to participations CLC had previously sold, and CLC's agreement with JDI required CLC to use all of the purchase price to "pay amounts owed to any of its participants." When the sale of the seven mortgage loans closed, however, CLC paid the entire $3.2 million purchase price to a single participant, Umbrella Bank, although that bank's interest was only $243,000.¹

Eventually, the entire scheme collapsed. The participant banks began to express dissatisfaction with CLC's handling of the loans, complaining in late 2003 and early 2004 that CLC was not honoring its obligations under the Participation Agreements. (One participant bank threatened legal action after CLC extended the maturity date of a loan in violation of the Participation Agreement.) In early 2004, the FDIC and OTS began investigating CLC and Hueser. Federal authorities undertook a criminal investigation of Hueser, as well.

According to the complaint, SNR, Kolmin, Paulson, and McQueen were heavily involved in the unsavory activities of CLC and Hueser. SNR advised CLC in connection with the Participation Agreements and represented CLC in the Ingenium loan transactions. Kolmin knew that Ingenium was unable to repay the loans it received from CLC and that CLC was in serious financial trouble. Kolmin repeatedly assured complaining participant banks that CLC was complying with the Participation Agreements although it was not. McQueen advised CLC to pay the proceeds of the Winchester loan to Lakeside although he knew about Hueser's diversion scheme and knew the loans were subject to participations. SNR represented CLC in the JDI transaction, held the $3.2 million in escrow, and disbursed the $3.2 million to Umbrella Bank although the firm knew that the loans sold to JDI were subject to participations.

SNR's representation of CLC and Hueser continued as the scheme unraveled. McQueen and Kolmin represented Hueser in connection with the FDIC and OTS investigations, and McQueen discussed Hueser with members of the U.S. Attorney's Office in Chicago. Although these legal services were personal to Hueser, SNR billed CLC $127,451 for them, and CLC paid the bills.²

b. The CLC Bankruptcy and Plan

In May 2004, CLC sought bankruptcy protection under chapter 11. SNR filed the petition and received a total of $300,000 as a retainer for its expected work in the bankruptcy case.³ Within a week of the petition's filing, four of the participant banks moved for appointment of a chapter 11 trustee, as did the U.S. Trustee with the agreement of CLC. The U.S. Trustee's motion was granted, and a chapter 11 trustee was appointed.

Although SNR prepared the petition and filed some initial papers for CLC postpetition, SNR was never retained as CLC's counsel in the bankruptcy. Indeed, no retention application was even filed. SNR subsequently disgorged to the chapter 11 trustee $126,315 of the $300,000 prepetition retainer it had received.

In October 2004, seven of the participant banks filed a proposed plan and a disclosure statement in the bankruptcy. On December 1, 2004, the court approved the banks' proposed Third Amended Disclosure Statement (the "Disclosure Statement"). Two weeks later, over the objection of the chapter 11 trustee, the court confirmed the banks' proposed Second Amended Plan of Liquidation (the "Plan").

The Plan provides that upon confirmation, all property of the CLC bankruptcy estate vests in a Creditors' Trust — the plaintiff Trust in this adversary proceeding — created pursuant to a separate Creditors' Grantor Trust Agreement. (Not surprisingly, the trustees of the Trust are participant banks.) The Trust Agreement confers on the trustees the power, among other things, to sell assets of the estate and pay allowed claims in accordance with the Plan. The Plan contemplates distributions to the holders of "allowed claims" (a defined term) from property that the Trust holds or obtains.

The Plan also addresses claims and causes of action of the CLC bankruptcy estate. Article VI, section 6.2 includes in the estate, and vests in the Trust, "all claims, causes of action and Debtor's Insurance Rights."...