In re H. King & Associates

Decision Date23 June 2003
Docket NumberAdversary No. 01 A 00521.,Bankruptcy No. 99 B 17717.
Citation295 B.R. 246
CourtU.S. Bankruptcy Court — Northern District of Illinois
PartiesIn re H. KING & ASSOCIATES, Debtor. Gina B. Krol, Trustee, Plaintiff, v. Joseph Wilcek, Earl Wilcek and HKA Display, Inc., Defendants.

Barry Chatz, Esq., Richard K. Hellerman, Esq., Dawn C. Wrona Eby, Esq., Arnstein & Lehr, Chicago, IL, for Plaintiff/Trustee.

James M. DeZelar, Esq., Robbins, Salomon & Patt, Ltd., Chicago, IL, for Defendants.

Gina B. Krol, Esq., Cohen & Krol, Chicago, IL, trustee.

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW ON COUNTS I, II AND III AND MEMORANDUM OPINION ON COUNTS IV, V, XV AND XVI

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the complaint filed by Gina B. Krol, the Chapter 7 case trustee (the "Trustee") for the Debtor, H. King & Associates (the "Debtor") against Joseph Wilcek ("Joe"), Earl Wilcek ("Earl") and HKA Display, Inc. ("HKA"). For the reasons set forth herein, the Court enters its proposed findings of fact and conclusions of law and recommends that the District Court grant judgment against Joe and Earl jointly and severally and in favor of the Trustee under Count I of the complaint. The Court recommends that the District Court order an accounting from Joe and Earl to specifically identify all revenue realized by them, either directly or through HKA, from, in connection with, or as a result of the relationship with R.J. Reynolds Co. that was diverted from the Debtor and utilized by Earl and Joe through HKA. Moreover, the Court recommends that the District Court impose a constructive trust on all assets presently being held by Earl and Joe, either directly or through HKA, so that it may be determined whether assets of the Debtor are being held in furtherance of, or as a consequence of, the usurpation of the R.J. Reynolds Co. corporate opportunity. Further, the Court recommends that the District Court deny the Trustee's request for her attorneys' fees under 805 ILCS 5/12.60(j).

In addition, the Court recommends that the District Court grant judgment against Joe and Earl jointly and severally and in favor of the Trustee in the amount of $500,000.00 for actual damages under Count II of the complaint. The Court recommends that the District Court award the Trustee punitive damages in the sum of $500,000.00, which shall be assessed against Joe and Earl jointly and severally. The Court further recommends that the District Court assess the Trustee's taxable costs against Joe and Earl jointly and severally pursuant to 28 U.S.C. § 1920. The Trustee shall submit a bill therefor pursuant to Local Bankruptcy Rule 7054-1 within thirty days hereof.

Finally, the Court recommends that the District Court grant judgment in favor of HKA pursuant to Count III of the complaint.

Pursuant to Count IV of the complaint, the Court finds that the Trustee has demonstrated that the transfers to Joe in the aggregate amount of $33,244.81 constitute fraudulent conveyances under to 11 U.S.C. § 548(a)(1)(A) and 11 U.S.C. § 548(a)(1)(B). The Court enters partial judgment in favor of the Trustee and against Joe in the sum of $33,244.81 under Count IV of the complaint. Under 11 U.S.C. § 550(a)(1), the Trustee may recover those transfers from Joe for the benefit of the Debtor's estate, plus prejudgment interest from the date of the filing of the adversary proceeding, June 1, 2001, pursuant to 28 U.S.C. § 1961. In addition, the Court finds that the transfers from the Debtor to Joe were fraudulent under 740 ILCS § 160/5(a)(1) and 740 ILCS § 160/5(a)(2). Pursuant to 11 U.S.C. § 544(b)(1), the Trustee may recover those transfers in the sum of $33,244.81 from Joe for the benefit of the Debtor's estate, plus prejudgment interest from the date of the filing of the adversary proceeding, June 1, 2001, pursuant to 28 U.S.C. § 1961.

Moreover, the Court grants judgment in favor of the Trustee and against Joe under Count V of the complaint. Pursuant to Count V, the Court finds that the post-petition transfers by the Debtor to Joe in the sum of $1,788.44 violated 11 U.S.C. § 549(a). Pursuant to 11 U.S.C. § 550(a), the Trustee may recover those transfers from Joe for the benefit of the Debtor's estate, plus pre-judgment interest from the date of the transfers pursuant to 28 U.S.C. § 1961.

The Court assesses the Trustee's taxable costs incurred under Counts IV and V of the complaint and allowable under 28 U.S.C. § 1920 against Joe. The Trustee shall submit a bill therefor within thirty days hereof pursuant to Local Bankruptcy Rule 7054-1.

The Court enters judgment against the Trustee and in favor of Joe under Counts XV and XVI of the complaint.

On July 15, 2002, in her exhibit list filed with the Court, the Trustee indicated that she would not be pursuing Counts VI, VII, VIII, IX, X, XI, XII, and XIII of the complaint. Moreover, on November 4, 2002, the Trustee voluntarily dismissed Count XIV of the complaint. Accordingly, the Court will not further address these counts.

I. JURISDICTION AND PROCEDURE

Bankruptcy jurisdiction is determined under 28 U.S.C. § 1334(b), which provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). While § 1334 sets forth jurisdiction of the district courts, 28 U.S.C. § 157(a) enables district courts to refer all such cases and proceedings to the bankruptcy judges for the district. See 28 U.S.C. § 157(a). The District Court for the Northern District of Illinois has referred all bankruptcy cases under its jurisdiction to the bankruptcy judges pursuant to Internal Operating Procedure 15(a). Through that reference from the District Court, jurisdiction lies here over matters arising under, arising in, or related to bankruptcy cases under 28 U.S.C. § 1334.

Section 157 divides bankruptcy jurisdiction into two categories: core and noncore. Under 28 U.S.C. § 157(b)(1), "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). Core matters are those "arising under" title 11 or "arising in" a case under title 11.

Jurisdiction over matters "arising under" the Bankruptcy Code or "arising in" bankruptcy proceedings "is limited to questions that arise during the bankruptcy proceeding and concern the administration of the bankruptcy estate, such as whether to discharge a debtor." Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 162 (7th Cir.1994) (citations omitted). These matters are termed "core proceedings" and, for the most part, are enumerated by statute in 28 U.S.C. § 157(b)(2). Barnett v. Stern, 909 F.2d 973, 979 (7th Cir.1990). "Arising under" jurisdiction involves causes of action created or determined by a statutory provision of title 11. Id. at 981. "Arising in" jurisdiction encompasses administrative matters that arise only in bankruptcy cases — matters not based on any right expressly created by title 11, but without existence outside of bankruptcy. Diamond Mtg. Corp. of Ill. v. Sugar, 913 F.2d 1233, 1239 (7th Cir.1990).

The question whether a matter falls within the bankruptcy court's core or non-core "related to" jurisdiction relates to how jurisdiction is exercised-whether the bankruptcy court is limited to making findings and conclusions for the district court, or whether it may issue a ruling outright. In re Piper Aircraft Corp., 244 F.3d 1289, 1303 n. 9 (11th Cir.2001).

Under 28 U.S.C. § 157(c)(1), a bankruptcy judge "may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11." However, in such non-core proceedings, proposed findings of fact and conclusions of law must be submitted to the District Court, which has authority to enter the final order or judgment. 28 U.S.C. § 157(c). Non-core matters over which bankruptcy courts have limited jurisdiction are those "related to" a bankruptcy case. The Seventh Circuit has articulated a somewhat limited definition of "related to" jurisdiction, holding that "`[a] case is "related to" a bankruptcy when the dispute affects the amount of property for distribution [i.e., the debtor's estate] or the allocation of property among creditors.'" In re FedPak Sys., Inc., 80 F.3d 207, 213-14 (7th Cir.1996) (quoting In re Memorial Estates, Inc., 950 F.2d 1364, 1368 (7th Cir.1991), cert. denied, 504 U.S. 986, 112 S.Ct. 2969, 119 L.Ed.2d 589 (1992)); see also In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987). The Seventh Circuit has explained that it reads § 157(c) narrowly "not only out of respect for Article III but also to preserve the jurisdiction of state courts over questions of state law involving persons not party to the bankruptcy." Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir.1989). Overlap between the debtor's affairs and another dispute is insufficient unless its resolution also affects the debtor's estate or the allocation of its assets among creditors. Id.

Having reviewed the Trustee's first three causes of action: (1) CountI — deprivation of corporate opportunity against Earl and Joe; (2) Count II — breach of fiduciary duty against Earl and Joe; and (3) Count III — corporate successor liability against HKA, the Court concludes that none of these causes of action "arise under the Bankruptcy Code in the strong sense that the Code itself is the source of the claimant's right or remedy, rather than just the procedural vehicle...

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