In re Concepts Am., Inc.

• Decision Date: 22 October 2020
• Docket Number: Case No. 14 B 34232
• Citation: 621 B.R. 848
• Parties: IN RE: CONCEPTS AMERICA, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

621 B.R. 848

IN RE: CONCEPTS AMERICA, INC., Debtor.

Case No. 14 B 34232

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

Signed October 22, 2020

Karen L. Hart, Bell, Nunnally & Martin LLP, 2323 Ross Avenue, Suite 1900, Dallas, Texas; Douglas C. Giese, Markoff Law, LLC, 29 N. Wacker Drive, Suite 1100, Chicago, Illinois, Attorney for Galleria Mall Investors LP.

Brian L. Shaw, Richard M. Fogel, Christina M. Sanfelippo, Cozen O'Connor, 123 North Wacker Drive, Suite 1800, Chicago, Illinois, Attorney for Trustee, Brian Audette.

MEMORANDUM OPINION

DAVID D. CLEARY, United States Bankruptcy Judge

This matter comes before the court on the Trustee's Objection to Claim No. 6 Asserted by Galleria Mall Investors LP ("the Galleria"). Brian Audette, not individually but as the chapter 7 trustee ("Trustee") for the bankruptcy estate ("Estate") of Concepts America, Inc. ("Debtor") seeks to reclassify proof of claim no. 6 as well as reduce the amount. For all of the reasons stated below, the court will sustain the Trustee's objection.

JURISDICTION

The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). Venue is proper under 28 U.S.C. § 1409(a).

BACKGROUND

The Trustee and the Galleria agreed that many of the facts underlying this claim objection were undisputed. In order to avoid the need for an evidentiary hearing, they prepared and filed a Joint Stipulation of Facts.

1. In or around May 2011, the Galleria, as landlord, and Townhouse DG LLC d/b/a Townhouse Kitchen & Bar, as tenant ("Tenant"), entered into a lease ("Lease") pursuant to which Tenant leased a restaurant space from the Galleria. (Joint Stipulation of Facts ¶ 1 ("Joint Stip.").

2. At approximately the same time, Debtor executed a guaranty pursuant to which it guaranteed Tenant's obligations under the Lease ("Guaranty"). (Joint Stip. ¶ 5).

3. The Lease was amended by the First Amendment, dated April 5, 2013. (Joint Stip. ¶ 3, Ex. A-1).

4. On October 29, 2013, the District Court of Dallas County, Texas entered a Final Default Judgment Order in favor of the Galleria and against the Tenant and the Debtor, jointly and severally in the amount of $925,341.87, plus applicable pre-judgment interest, plus reasonable attorneys' fees in the amount of $27,616.75, plus applicable post-judgment interest and costs of court in connection with Tenant's breach of the Lease and Debtor's breach of the Guaranty ("Judgment"). (Joint Stip. ¶ 7).

5. About three months later, the Galleria domesticated the Judgment with the Circuit Court of Cook County. Around the same time, it caused a Citation to Discover Assets ("Citation") to be issued against the Debtor. (Joint Stip. ¶¶ 9, 11).

6. In connection with the Citation, the Galleria served discovery requests on the Debtor. (Joint Stip. ¶ 13).

7. On March 19, 2014, the Debtor, through one of its attorneys, made its first personal appearance in the Citation proceedings pending in the Circuit Court of Cook County, Illinois ("Citation Proceedings"). (Joint Stip. ¶ 14).

8. Orders were entered in the Citation Proceedings on March 19, July 8 and July 9, 2014. (Joint Stip. ¶¶ 15-17).

9. The July 9 order recorded certain rulings made on the record the day before regarding objections filed by Debtor to the Citation and document riders. The court reserved ruling and continued the hearing on certain remaining objections, requiring the Tenant and Debtor and third-party citation respondents to file amended or revised objections with factual and legal support. The matter was set for continued hearing on August 20, 2014. (Joint Stip. Ex. H).

10. On or about August 15, 2014, the Galleria filed a motion for rule to show cause for failure to comply with court orders ("Contempt Motion") in the Citation Proceeding. (Joint Stip. ¶ 18).

11. At the August 20 hearing, the court did not expressly continue the citation lien. The August 20 order states in substance: "This cause coming to be heard pursuant to this court's prior order for status of compliance with all pending citations and Plaintiff's motion for rule to show cause against Defendants and third parties; due and proper notice to all parties, counsel for all parties present, and this court being fully advised of the premises, IT IS HEREBY ORDERED THAT (1) Over Plaintiff's objections, all Defendants/third party respondents shall have until 9-10-2014 to provide complete responses to all citation riders which specifically address each request and specifically identifies each document produced in response; and (2) Plaintiff's motion for rule is entered/continued to 9-22-2014 at 11:00 a.m. in Room 2503." (Joint Stip. Ex. J).

12. On September 19, 2014, three creditors filed an involuntary chapter 7 petition ("Involuntary Petition") against the Debtor. The Galleria was one of those three petitioning creditors. (Joint Stip. ¶¶ 21, 23).

13. On the Involuntary Petition, the Galleria's claim is listed as $925,341.76. No information is provided on the petition as to whether the Galleria's claim is secured, undersecured or unsecured. The nature of the Galleria's claim is described as "Judgment." (Joint Stip. ¶ 24, Ex. K).

14. Orders were entered in the Citation Proceedings on September 22 and October 14, 2014. (Joint Stip. ¶¶ 25-26).

15. On November 18, 2014, the Debtor consented to the entry of an order for relief under Chapter 7 of the Bankruptcy Code. (Joint Stip. ¶ 27).

16. On January 16, 2015, the Galleria filed the Proxy ("Proxy"), pursuant to which it appointed the law firm of Querrey & Harrow, Ltd. as its proxy in the election of the Chapter 7 trustee and to cast its vote for a trustee pursuant to 11 U.S.C. § 702. (Joint Stip. ¶ 29, Ex. O).

17. In the Proxy, the Galleria states that, as of the petition date, it held a claim in the amount of at least $925,341.87. (Joint Stip. ¶ 31, Ex. O).

18. On January 20, 2015, the United States Trustee filed a Report of Undisputed Election. (Joint Stip. ¶ 32, Ex. P).

19. On December 11, 2015, the Galleria filed Proof of Claim No. 6 in the amount of $1,050,309.60 ("Claim") in this bankruptcy case. The stated basis for the Claim is the Judgment. The Galleria asserted that the Claim is fully secured by virtue of a lien created by the Citation. (Joint Stip. ¶¶ 34, 36-37, Ex. Q).

20. The last day for the filing of claims by creditors, including governmental units, was February 5, 2016. (Joint Stip. ¶ 38).

21. If 11 U.S.C. § 502(b)(6) applies to limit the Galleria's Claim, then the Claim is capped at $362,022.15, regardless of its secured status. If § 502(b)(6) does not apply, then the Claim is $1,050,309.60 (plus any additional accrued post-judgment interest as allowed by law), regardless of its secured states. (Joint Stip. ¶¶ 39-40).

DISCUSSION

A. The Claim Objection is Procedurally Proper

The first issue in dispute is whether this matter is in the proper procedural posture for the court to rule.

"A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." Fed. R. Bankr. P. 3001(f). Since a properly filed proof of claim is valid on its face, the objecting party has the burden to introduce evidence or legal authority rebutting this presumption. See In re Pierport Development & Realty, Inc. , 491 B.R. 544, 547 (Bankr. N.D. Ill. 2013). Once it does so, the burden shifts to the claimant. See In re The Budd Company, Inc. , 540 B.R. 353, 362 (Bankr. N.D. Ill. 2015). The ultimate burden always remains with the claimant to establish by a preponderance of the evidence that its claim is valid. See In re McCoy , 355 B.R. 69, 72 (Bankr. N.D. Ill. 2006).

Objections to claims are governed by Fed. R. Bankr. P. 3007. Parties in interest who file an objection to claim "shall not include a demand for relief of a kind specified in Rule 7001" in that objection. Fed. R. Bankr. P. 3007(b). Fed. R. Bankr. P. 7001(2) states that "a proceeding to determine the validity, priority, or extent of a lien or other interest in property" is an adversary proceeding. Consequently, the Galleria argues that the Trustee must file an adversary proceeding in order to "reclassify" its claim from secured to unsecured.

The Trustee disagrees with the Galleria's characterization of his request. "The Trustee is not challenging the creation of the Citation Lien, seeking to avoid the Citation Lien, or otherwise seeking the kind of affirmative relief specified in Rule 7001." (Reply, p. 9). Instead, he asks the court to sustain his objection to the Claim as secured on the basis that either: (1) the Citation Proceedings terminated prior to the commencement of this case; or (2) Galleria waived its secured status.

In support of its argument that the Trustee can dispute the secured status of its claim only through an adversary proceeding, the Galleria cites In re Grand View Fin. LLC , 2018 WL 3025273 (Bankr. C.D. Cal. Jun. 19, 2018) and Matter of Haber Oil Co., Inc. , 12 F.3d 426, 437-40 (5th Cir. 1994).

The Galleria's cited cases are not on point and are not persuasive authority. In neither case did the movant seek to reclassify the status of a claim from secured to unsecured. In Grand View , the movant sought recovery of property under 11 U.S.C. § 542. The parties disputed whether the matter could proceed by motion because Fed. R. Bankr. P. 7001(1) provides that "a proceeding to recover money or property" is an adversary proceeding. Although the Grand View court decided that the motion was procedurally defective, the holding that an adversary proceeding was required to pursue a request for turnover of property is not helpful authority in deciding the issue before the court today.

Neither is Haber Oil useful in determining whether the Trustee's objection to claim should proceed as an adversary proceeding. The movant in Haber Oil "agree[d] that he made a demand for relief that necessitated an adversary proceeding under Bankruptcy Rule...