In re Hardej

• Citation: 563 B.R. 855
• Decision Date: 15 February 2017
• Docket Number: Bankruptcy Case No. 13–00627
• Parties: IN RE: Pawel HARDEJ, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

563 B.R. 855

IN RE: Pawel HARDEJ, Debtor.

Bankruptcy Case No. 13–00627

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

Signed February 15, 2017

Mia B. Wery, Rozovics & Crawford L.L.P., Crystal Lake, IL, Todd M. Wincek, Burns & Wincek, Ltd., Chicago, IL, for Debtor.

Thomas Craig, Joel H. Shapiro, Kamenear Kadison Shapiro & Craig, Chicago, IL, for Trustee.

MEMORANDUM OPINION

JANET S. BAER, United States Bankruptcy Judge

This matter is before the Court on the motion for a rule to show cause filed by former chapter 7 debtor Pawel Hardej (the "Debtor"). The Debtor alleges that Metropolitan Development Enterprises, Inc. ("MDE") and its counsel, John P. Konvalinka and Kevin P. McJessy (collectively, the "Respondents"), have violated the discharge injunction under 11 U.S.C. § 524(a)(2) by pursuing an action against the Debtor in the Circuit Court of Cook County (the "state court") to collect a debt that was discharged pursuant to 11 U.S.C. § 727.¹ The Debtor seeks an order enjoining all proceedings in the state court, a finding that the Respondents are in contempt of court, and an award of damages, as well as attorneys' fees and costs, against the Respondents arising from their alleged violation of the discharge injunction. For the reasons stated herein, the pursuit of the action against the Debtor in the state court constitutes a violation of the discharge injunction, and the Respondents are ordered to cease any further pursuit of the Debtor. As for an award of damages and fees, however, the Debtor's request is denied.

JURISDICTION

The Court has jurisdiction to determine 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. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (I), and (O).

BACKGROUND

The facts in this matter are somewhat unusual, and, therefore, they are outlined here in great detail.² Those facts are as follows.

Prior to the filing of his chapter 7 bankruptcy case, the Debtor was the president and sole director and shareholder of MDE, an Illinois corporation in the business of real estate development. (Bankr. No. 13–00627, Docket No. 79, Ex. B, at 1–2, ¶¶ 6 & 7.)³ On April 16, 2004, MDE, as agent for 1910 N. Clark LLC, entered into a contract with Robert C. Austin and Kathryn C. Gamble for the sale of certain real estate. (Id. , Ex. B, attached Ex. A.) That contract required purchasers Austin and Gamble to pay earnest money in the amount of $250,000 (the "Earnest Money") to MDE's attorney. (Id. , Ex. B, attached Ex. A, at 1–2, ¶ 3.) Although the real estate sale was not completed, the Earnest Money was allegedly never returned to Austin and Gamble. (Id. , Ex. B, at 3–4, ¶¶ 17–21.) As a result, on September 28, 2004, Austin and Gamble, through counsel John P. Konvalinka, filed suit against MDE in the state court, entitled Robert C. Austin and Kathryn C. Gamble v. Metropolitan Development Enterprises, Inc. , No. 04 CH 15936, seeking, among other things, return of the $250,000 in Earnest Money (the "Austin Litigation"). (Id. at 2, ¶ 8 & Ex. A, at 3.) The Austin Litigation was lengthy and complex, involving multiple counterclaims and an appeal, and was consolidated with other actions between the parties and third parties claiming an interest in the suit, including Metropolitan Bank and Trust (the "Bank"), predecessor in interest to North Community Bank. (Id. at 2, ¶ 10; see also Docket No. 50, at 2–3, ¶ 9.)

On June 30, 2007, MDE executed an assignment of its interest in the Earnest Money to the Bank (the "Assignment"). (Docket No. 50, Ex. A.) The Assignment was made by MDE as security for a promissory note executed by 1910 N. Clark LLC and the Debtor to the Bank. (Id. ) The intent of the Assignment was to transfer to the Bank all of MDE's title to and interest in the funds and to confer on the Bank the right to prosecute, settle, and compromise the claims in the Austin Litigation. (Id. at 2–3, ¶ 9 & Ex. A.) The Bank alleges that, at one time prior to the Assignment, MDE's only remaining asset was the Earnest Money deposit but that, since the Assignment, that deposit belongs to the Bank and, thus, MDE has no remaining assets. (Id. at 3, ¶ 10).

In early 2009, while the Austin Litigation was pending, MDE ceased operations. (Docket No. 79, at 2, ¶ 11.) At that time, the Debtor alleges, MDE was insolvent and facing multiple suits by creditors. (Id. ) Because the company was no longer operating, the Debtor did not renew its business license with the Illinois Secretary of State. (Id. ) Thus, in early 2010, MDE was administratively dissolved by the State. (Id. )

On January 8, 2013, the Debtor filed a voluntary chapter 7 bankruptcy petition. (Docket No. 1.) In the petition, he listed twenty "other names used by the Debtor in the last [eight] years." (Id. at 4.) Among those names were MDE and nineteen limited liability companies, including 1910 N. Clark LLC. (Id. ) The Debtor's schedules list liabilities of over $44 million to creditors holding secured claims and almost $9 million to creditors holding unsecured nonpriority claims.⁴ (Id. at 14–17 & 20–28.)

The Debtor did not list in his schedules an ownership interest in MDE or any of the nineteen limited liability companies. (See id. at 7–32.) Nor did the Debtor list an ownership interest in any real estate or the ownership of any stock or interests in incorporated or unincorporated businesses. (See id. ) Additionally, the Debtor did not schedule MDE or Austin and Gamble as creditors. (See id. at 14–28.) In his statement of financial affairs, the Debtor listed MDE as a real estate development business in which he had an interest from November 22, 1999 to April 12, 2012, as well as the nineteen limited liability companies identified as "other names used by the Debtor" in his petition. (Id. at 4 & 40–42.) The Debtor scheduled the Bank as a creditor holding an undisputed general unsecured claim in the amount of $200,000 described as a "Note Loan." (Id. at 26.) The schedules do not state the date of the "Note Loan" or whether the note was executed by the Debtor individually or as an officer of an entity in which he held an interest. Nor is there any indication that the "Note Loan" scheduled is the same obligation at issue in the Austin Litigation. The record identifies that the Bank as a creditor of MDE but is silent as to whether the Bank was a creditor of the Debtor. (See Docket No. 50, at 2, ¶¶ 8 & 9; Docket No. 60, Transcript of Record, Sept. 22, 2014 ("Tr."), at 3:19–4:4.) Nevertheless, the Bank acknowledges the listing of the $200,000 obligation in the Debtor's schedules. (See Docket No. 50, at 2, ¶ 5.)

The Debtor's 341 meeting of creditors was scheduled for March 4, 2013. (Docket No. 5.) The Bank received notice of the meeting because the Debtor scheduled the Bank as a creditor in his case, but Austin, Gamble, and MDE were not given such notice. (See Docket No. 9, at 3–5.)

On March 5, 2013, the day after the 341 meeting was held, chapter 7 trustee Gregg Szilagyi (the "Trustee") filed a no-asset report. (Docket No. 15.) A discharge order was entered in the Debtor's case on July 29, 2014 (the "Discharge Order") (Docket No. 34), and the case was closed on August 1, 2014 (Docket No. 36).⁵

On August 20, 2014, the Trustee filed a motion to reopen the Debtor's bankruptcy case. (Docket No. 37.) In the motion, the Trustee indicated that he wanted the case reopened "to facilitate the administration of a valuable asset ... which first came to his attention subsequent to the date" that the case was closed. (Id. at 2, ¶ 8.) The Trustee explained that, although the Debtor listed MDE as one of the names he used and as an entity of which he had been an officer and director, "the Debtor failed to disclose the nature of his interest in [MDE] or the value thereof [either] in [his] [s]chedule B ... or when testifying at the meeting of creditors held on March 4, 2013." (Id. at 2, ¶ 9.) The Trustee noted that he filed a no-asset report because of the Debtor's "ambiguous reference" to MDE. (Id. at 2–3, ¶ 10.) As a result of the Debtor's failure to disclose the nature of his interest in MDE or the value thereof, the Trustee alleged that the estate's interest in the corporation was not abandoned upon the closing of the case. (Id. at 3, ¶ 11.) Accordingly, the Trustee contended, MDE remained, at that time, property of the estate pursuant to § 554(b). (Id. )

On August 27, 2014, the Debtor's bankruptcy case was reopened, and the Trustee was subsequently reappointed. (See Docket Nos. 38 & 39.) On September 15, 2014, counsel for the Trustee filed a motion pursuant to § 363(f), requesting permission to sell the stock of MDE to an entity identified as RJE II, LLC (the "Buyer") for $25,000, subject to higher and better offers. (See Docket No. 42.)

On September 22, 2014, the Court held a hearing on the Trustee's motion to set bidding procedures regarding the potential sale of the MDE stock. (See Docket Nos. 46 & 60.) At that hearing, counsel for the Debtor stated that the MDE stock was stock in a company owned by the Debtor but no longer operating and that the Debtor had "absolutely no objection to [the] sale." (Docket No. 60, Tr. at 3:14–18.)

Counsel for the Bank explained that there had been an Assignment of the Austin Litigation by MDE to the Bank and that the Bank believed that MDE, the defendant in that Litigation, was "the backer or owner of the [B]uyer ... and [was] attempting to purchase [MDE] in order to gain control of the [L]itigation."⁶ (Id. at 3:19–4:4.) Noting that MDE had no value, since its "only potential asset" was the Litigation which had been transferred to the Bank, counsel for the Bank questioned whether the Buyer might want to reconsider the sale. (Id. at 4:5–15.)

For his part, the Trustee stated that it was important to distinguish between the Debtor and MDE. (Id. at 5:1–4.) He argued that the sale consisted of whatever right, title, and interest to and in the MDE...