In re Gluth Bros. Const., Inc.

• Decision Date: 25 November 2009
• Docket Number: Bankruptcy No. 07-B-71375.,Adversary No. 09-A-96132.
• Citation: In re Gluth Bros. Const., Inc., 424 B.R. 379 (Bankr. N.D. Ill. 2009)
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re GLUTH BROS. CONSTRUCTION, INC., Debtor. Charles Dixon and Charles Graeber, Jr., not in their individual capacities but solely as Trustees of the Gluth Bros. Construction, Inc. Creditor Trust, Plaintiff, v. American Community Bank & Trust, Defendant.

424 B.R. 379

In re GLUTH BROS. CONSTRUCTION, INC., Debtor Charles Dixon and Charles Graeber, Jr., not in their individual capacities but solely as Trustees of the Gluth Bros. Construction, Inc. Creditor Trust, Plaintiff, v. American Community Bank & Trust, Defendant.

Bankruptcy No. 07-B-71375.

Adversary No. 09-A-96132.

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

November 25, 2009.

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Aaron L. Hammer, Shira R. Isenberg, Freeborn & Peters LLP, Chicago, IL, for Plaintiff.

Thomas P. Sandquist, Scott C. Sullivan, Williams McCarthy LLP, Rockford, IL, for Defendant.

MEMORANDUM OPINION

MANUEL BARBOSA, Bankruptcy Judge.

This matter comes before the Court on the Defendant's combined Motion to Dismiss Adversary Complaint and Motion to Strike. For the reasons set forth herein, the Court will grant the Defendants' motion in part and deny in part.

JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide 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 pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), (E), (F), (K), and (O).

FACTS AND BACKGROUND

A. Background on the Parties

The following facts and procedural history are taken from Plaintiff's adversary complaint and opposition to Defendant's motion to dismiss and strike, as well as Defendant's combined motion to dismiss and strike, memorandum in support of motion to dismiss and strike, and reply to Plaintiff's opposition (collectively, the "pleadings"), and from all attachments to the pleadings referred to and incorporated therein. Because the matter is before the Court on a motion to dismiss, the Court accepts as true all of the factual allegations contained in the adversary complaint. See, e.g., Erickson v. Pardus, 551 U.S. 89, 93-94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

The Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with this Court on June 5, 2007. On March 4, 2009, the Court entered an order confirming the Plan of Liquidation Dated January 27, 2009 (the "Plan"). Pursuant to the Plan, and the Gluth Bros. Construction, Inc. Creditor Trust Agreement, entered into among the Debtor, the Official Committee of Unsecured Creditors and the Creditor Trustees, all remaining property of the Debtor's estate, including causes of action, were vested in the Creditor Trust, and the Creditor Trustees were granted the authority to commence actions.

The Defendant is a banking association, organized under the laws of the State of Illinois, with its principal place of business in Woodstock, Illinois. The Debtor is a Delaware corporation, with its principal place of business in Woodstock, Illinois. It appears that all of the relevant facts occurred in the State of Illinois.

B. The Loan from Defendant to Debtor and Related Collateral

On March 14, 2000, the Defendant lent a principal amount of $2,000,000 to the Debtor. In connection with the loan, the parties signed a promissory note, which provided for interest and fees and had an initial maturity date of July 1, 2001. On July 1, 2002, the Debtor and Defendant entered into a change-in-terms agreement, reducing the principal amount of the promissory note to $ 1,000,000 and extending the maturity date of the promissory note through July 1, 2003.¹ On July 1, 2003, the Debtor and the Defendant entered into a change-in-terms agreement, extending the maturity date of the promissory note through January 1, 2004. On January 1, 2004, the Debtor and the Defendant entered into a change-in-terms agreement, extending the maturity date of the promissory note through September 1, 2004, and requiring the Debtor to obtain a personal guarantee from the Debtor's sole shareholder and president, Frank Gluth ("Mr. Gluth"). On September 1, 2004, the Debtor and the Defendant entered into a change-in-terms agreement, extending the maturity date of the promissory note through September 1, 2005, and reaffirming the Debtor's obligation to obtain a personal guarantee from Mr. Gluth. On April 6, 2005, the Debtor and the Defendant entered into a change-in-terms agreement, which extended the maturity date of the promissory note through April 1, 2006, and pursuant to which the Defendant advanced an additional $1,000,000 in principal under the amended promissory note, thereby increasing the outstanding principal amount to $2,000,000. In connection with the April 2005 change-in-terms agreement, Mr. Gluth granted the Defendant a mortgage in his personal residence in Woodstock, Illinois. On April 6, 2006, the Debtor, the Defendant and Mr. Gluth entered into a change-in-terms agreement, extending the maturity date of the promissory note through April 1, 2007, and making Mr. Gluth a joint and several co-obligor on the promissory note. In connection with the April 6, 2006 change-in-terms agreement, Mr. Gluth, the Debtor and the Defendant entered into a Commercial Pledge Agreement, pursuant to which Mr. Gluth granted the Defendant a security interest in his personal wealth management account at the Defendant to secure the obligations under the promissory note. On April 1, 2007, the Debtor, Mr. Gluth and the Defendant entered into a change-in-terms agreement, extending the maturity date of the promissory note through December 1, 2007. As of the petition date, the principal amount outstanding on the promissory note was $1,991,000.

The Plaintiff alleges that the Debtor became insolvent at some point prior to filing its bankruptcy petition. The Plaintiff points to "(1) the precipitous thirty-percent (30%) decline in the Debtor's revenues from the year ending March 31, 2006 through the year ending March 31, 2007; (2) the Debtor's history of late interest payments on the Promissory Note; (3) the substantial decline in the Debtor's new projects in the several years prior to the Petition Date; (4) the Debtor's inability to collect on its accounts receivable; (5) the Defendant's requirement that Gluth become a joint and several co-obligor on the Promissory Note obligations; and (6) the Debtor's reliance on Gluth to support the Debtor's operations, and to satisfy its obligations under the Promissory Note, as evidenced by the substantial advances by Gluth to the Debtor prior to the Petition Date." (Compl. ¶ 81). The Debtor made monthly interest payments to the Defendant on the loan, including payments of $12,775.57 on March 9, 2007, $14,144.39 on April 2, 2007, and $13,688.12 on May 10, 2007. (Compl. ¶ 102).

In connection with the promissory note, the Debtor granted the Defendant a security interest in substantially all its business assets, which were composed of cash holdings, accounts receivable, trucks and trailers, office equipment, and other machinery and equipment (including loaders, bulldozers, hydraulic excavators, graders, elevated scrapers, trenchers, rollers, backhoes, dump trucks, motor graders, hydraulic compactors, and mobile office units) used in the Debtor's business. On April 19, 2002, the Defendant filed a UCC-1 financing statement with the Delaware Division of Corporations, listing the collateral as all inventory, chattel paper, accounts, equipment, investment property, deposit accounts and general intangibles, whether owned now or acquired after and all additions, replacements, substitutions, records or proceeds thereof. On November 30, 2006, the Defendant filed a continuation statement with the Delaware Division of Corporations. However, with respect to the collateral consisting of titled vehicles, the Defendant never delivered the existing certificate of titles or applications for certificate of title and application fees to record its liens with the Illinois Secretary of State.

On September 12, 2007, the Court entered an order authorizing the Debtor to sell by auction certain of its non-core assets, including construction equipment such as excavators, loaders, dozers, trenchers, graders and rollers, and various motor vehicles such as trucks. The order provided that any liens on the auctioned equipment would attach to the proceeds of the sale, and that no proceeds would be distributed pending further order of the Court. On September 29, 2007, the Debtor conducted an auction which yielded $1,053,933.50 in proceeds. On November 5, 2007, the Court entered an agreed order authorizing the turnover of the auction proceeds to the Defendant, but further providing that the turnover was without prejudice to any claims or causes of action that may be brought against the Defendant by the Debtor or the Committee of Unsecured Creditors (or their successors). Some time prior to January 23, 2008, Mr. Gluth paid the Defendant $1,051,754.20 out of his personal funds on account of his joint and several obligations on the promissory note. Together with the proceeds from the auction, the amounts outstanding to the Defendant on the promissory note were thereby paid in full.

C. Requests for Documents

After confirmation of the Plan on March 4, 2009, the Plaintiff made repeated demands in writing that the Defendant turn over all property of the Debtor in its possession or control, including bank account statements and other records regarding the Debtor's accounts at the Defendant that the Debtor failed to list in its bankruptcy schedules. On May 29, 2009, the Defendant turned over certain of these requested records, but did not produce cancelled checks or statements for the undisclosed accounts.

D. Relations between the Principals of the Defendant and the Debtor

The Plaintiff alleges that the Debtor's sole shareholder, Mr. Gluth, has had a close relationship with several of the principals of the Defendant. Mr. Gluth served on the board of directors of the...