In re Hicks

Docket Number14bk36072
Decision Date31 August 2023
PartiesIn re: James Hicks, Jr., Debtor.
CourtU.S. Bankruptcy Court — Northern District of Illinois

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In re: James Hicks, Jr., Debtor.

No. 14bk36072

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

August 31, 2023


Chapter 7

MEMORANDUM DECISION

TIMOTHY A. BARNES, JUDGE.

The matter before the court comes on for consideration on the Objection to Trustee's Final Report [Dkt. No. 46][1] (the "Objection")[2] filed by the City of Chicago (the "City") in the above-captioned case. In the Objection, the City contests the final report on the grounds that the chapter 7 trustee, Phillip D. Levey (the "Chapter 7 Trustee"), has used the wrong legal rate for interest. The City requests that the Court define "the legal rate" in 11 U.S.C. § 726(a)(5) as the state statutory rate, instead of the Chapter 7 Trustee's use of the federal judgment rate under 28 U.S.C. § 1961(a).

For the reasons more fully stated herein, the Objection is well taken. The appropriate postpetition interest rate the Chapter 7 Trustee should provide to the City in this case is the state statutory rate under Illinois law. As a result, the Objection will be and is, by order entered concurrent with this Memorandum Decision, GRANTED.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may refer these cases to the bankruptcy courts for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D.Ill. Internal Operating Procedure 15(a).

A bankruptcy court judge to whom a case has been referred has statutory authority to enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy court judges must therefore determine, on motion or sua sponte, whether a proceeding is a core proceeding or is otherwise related to a case

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under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the bankruptcy court judge may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court judge may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1) & (c). Absent consent, the bankruptcy court judge must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, a bankruptcy court judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in noncore matters, where the matter is either one that falls within the public rights exception, id., or where the parties have consented, either expressly or impliedly, to the bankruptcy court judge hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 669 (2015) (parties may consent to a bankruptcy court judge's jurisdiction); Richer v. Morehead, 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

A trustee's final report and any objections to a trustee's final report (and thus the treatment of a secured creditors' claims thereunder) are matters concerning the administration of the estate and are thus core proceedings under the Bankruptcy Code. 28 U.S.C. § 157(b)(2)(A) & (B); In re Pearson Bros. Constr., Inc., Case No. 15-90458, 2016 WL 3004534, at *2 (Bankr. C.D. Ill. May 17, 2016). An objection to a trustee's final report in a chapter 7 bankruptcy case thus "stems from the bankruptcy itself," and thus may constitutionally be decided by a bankruptcy court judge. Stern, 564 U.S. at 499.

It follows that the court has the jurisdiction, statutory authority and constitutional authority to hear and determine the Objection.

PROCEDURAL HISTORY

Prior to the commencement of the matter before the court, James Hicks Jr. (the "Debtor") had been a debtor in the above-captioned chapter 7 case (the "Chapter 7 Case"). The Chapter 7 Case was commenced on October 3, 2014. Voluntary Petition [Dkt. No. 1]. On November 22, 2014, the Chapter 7 Trustee filed his report of no distribution, [Dkt. No. 12], and, as a result, the Clerk of the United States Bankruptcy Court for the Northern District of Illinois entered a discharge order on January 21, 2015. [Dkt. No. 16].

More than seven years later, on May 26, 2022, the Debtor filed a motion to reopen the Chapter 7 Case so he could amend his schedules to disclose a personal injury claim in the reopened case. [Dkt. No. 19]. The case was reopened on June 8, 2022. [Dkt. No. 22]. The Chapter 7 Trustee was reappointed and, as a result of the Debtor's amended disclosures, all creditors were noticed of a bar date for submitting claims. Notice Fixing Time for Filing Claims [Dkt. No. 27]. As a result, the City timely filed a proof of claim on October 3, 2022, in the reopened case and later amended the claim on January 11, 2023. [Claim Nos. 1-1, 1-2]. The claims stated therein (the "City's Claim") contained a calculation of interest, nominally as the "legal rate of interest." Id.

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On February 21, 2023, the Chapter 7 Trustee filed his final report in the reopened Chapter 7 Case. Trustee's Final Report (TFR) [Dkt. No. 40] (the "Final Report").[3] In the Final Report, the Chapter 7 Trustee provided a treatment of the City's Claim with postpetition interest at a rate of 0.1% under section 1961(a) of title 28 (the "Federal Judgment Rate"), valued at $43.54. Final Report, at 8.[4]

The City objected. In the Objection, the City argues that the amount of postpetition interest provided it under the Final Report is incorrect. The City argues that it is owed $2,807.64 in postpetition interest, using the 9% interest rate under Illinois law. 735 ILCS 5/2-1303(a).

On March 22, 2023, the court conducted a preliminary hearing on the Final Report and the Objection. At that hearing, counsel to the Chapter 7 Trustee, counsel to the City and counsel to Patrick S. Layng, the United States Trustee to the Northern District of Illinois (the "United States Trustee") appeared. Both the Chapter 7 Trustee and the United States Trustee voiced their objections to the City's position. As a result, the court ordered briefing on the Objection. See [Scheduling] Order [Dkt. No. 52].[5]

On April 14, 2023, the United States Trustee filed the United States Trustee's Response to the City of Chicago's Objection to the Trustee's Final Report [Dkt. No. 53] (the "U.S. Trustee's Response"), stating that the proper interest for this case was the Federal Judgment Rate. On April 15, 2023, the Chapter 7 Trustee filed his Trustee's Response to Objection of the City of Chicago to Trustee's Final Report [Dkt. No. 54] (the "Chapter 7 Trustee's Response", and together with the United States Trustee's Response, the "Responses"). The Chapter 7 Trustee's Response and the U.S. Trustee's Response are, for all intents and purposes, the same. On May 10, 2023, the City filed its Reply in Support of the City's Objection to Trustee's Final Report [Dkt. No. 55] (the "Reply"). The court conducted a hearing on the fully briefed Objection, Responses and Reply on May 31, 2023, and as a request by the parties to argue the matter orally, heard those arguments on June 14, 2023. Thereafter the court took the matter under advisement.

This Memorandum Decision constitutes the court's ruling on the matter before it. In considering the matter, the court has considered the Objection, the Responses and the Reply as well as the arguments made by counsel at the hearing on June 14, 2023. Though these items do not constitute an exhaustive list of the filings in the Chapter 7 Case, the court has also taken judicial notice of the contents of the dockets and claims register in this matter. See Levine v. Egidi, Case No. 93C188, 1993 WL 69146, at *2 (N.D. Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent, 458 B.R. 444, 455 n.5 (Bankr. N.D.Ill. 2011) (Goldgar, J.) (recognizing same).

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SUMMARY OF ISSUES PRESENTED

This issue is very narrow. The sole question before the court is what legal rate of interest should be afforded the City's Claim.

The Bankruptcy Code states that "the property of the estate shall be distributed . . . in payment of interest at the legal rate from the date of filing the petition . . . ." 11 U.S.C. § 726(a)(5) (emphasis added). The City argues that the legal rate of interest is governed by the solvent debtor exception,[6] and that, as a result, "the legal rate" for postpetition interest under section 726(a)(5) is 9% under Illinois's statutes. 735 ILCS 5/2-1303(a). To be clear, the Debtor is solvent in this Chapter 7 Case because regardless of the rate paid to the City on its Claim, all creditors will be paid in full and there is a surplus that will be returned to the Debtor. Final Report, at 8.

The United States Trustee and the Chapter 7 Trustee would have the court adopt recent out-of-circuit case law, ignore Seventh Circuit precedent and find that the solvent debtor exception did not survive the implementation of the Bankruptcy Code. As a result, they argue that "the legal rate" under section 726(a)(5) on postpetition interest is the Federal...

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