In re Inc.

• Decision Date: 11 April 2011
• Docket Number: No. 01 B 24742.,01 B 24742.
• Citation: 54 Bankr.Ct.Dec. 151,448 B.R. 499
• Parties: In re MARCHFIRST, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

448 B.R. 499

54 Bankr.Ct.Dec. 151

In re MARCHFIRST, INC., et al., Debtors.

No. 01 B 24742.

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

April 11, 2011.

Richard J. Mason, Patricia K. Smoots, Paul J. Catanese, McGuireWoods LLP, Chicago, IL, Attorneys for Andrew J. Maxwell, Trustee.Stephen J. Rosenfeld, Keith E. Allen, Mandell Menkes LLC, Chicago, IL, Attorneys for CIT Communications Finance Corp.

AMENDED MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Three matters are before the court for ruling in the long-running bankruptcy case of marchFirst, Inc. and its affiliates. They are (1) the motion for summary judgment of chapter 7 trustee Andrew J. Maxwell (“Maxwell”) on his supplemental objections to two amended requests for payment of administrative expenses filed by CIT Communications Finance Corporation (“CIT”), (2) CIT's cross-motion for summary judgment on its amended requests, and (3) CIT's motion to compel payment of both its original and amended requests. In its amended requests, CIT asks to be compensated for millions of dollars in telecommunications equipment it leased to some of the debtors, equipment it says Maxwell never returned. Maxwell objects to the amended requests on two grounds: (1) the amended requests are untimely; and (2) the amended requests are barred under the doctrine of claim preclusion.

Maxwell is right on both grounds. His supplemental objections will therefore be sustained, and his motion for summary judgment will be granted. CIT's cross-motion for summary judgment on the amended requests will be denied, and the motion to compel payment will be denied to the extent it relates to the amended requests.¹

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B).

2. Facts

The following facts are undisputed.² CIT is in the business of leasing telecommunications equipment (Maxwell L.R. 7056–1 Stmt. ¶ 8; CIT L.R. 7056–2 Resp. ¶ 8) and leased telecommunications equipment pre-petition to marchFirst and several affiliated entities ( id. ¶¶ 12–15).³ In April 2001, marchFirst and certain of the affiliates filed chapter 11 bankruptcy petitions in Delaware. ( Id. ¶ 1). The cases were converted to chapter 7 ( id. ¶ 2), ordered jointly administered ( id. ¶ 4), and transferred to this district ( id. ¶ 5), where Maxwell was appointed chapter 7 trustee ( id. ¶ 7).

Maxwell's Delaware predecessor as trustee, Michael B. Joseph, did not assume or reject the CIT leases, and accordingly they were deemed rejected under section 365(d)(1) of the Bankruptcy Code, 11 U.S.C. § 365(d)(1), on June 27, 2001. (Maxwell L.R. 7056–1 Stmt. ¶ 16; CIT L.R. 7056–2 Resp. ¶ 16). In August 2001, the court set October 11, 2001, as the deadline for holders of claims arising from the rejection of unexpired leases or executory contracts to file proofs of claim. ( Id. ¶ 19). The court set the same date as the deadline for lessors under rejected leases who sought payment of administrative expenses to file requests for payment. ( Id. ¶ 18).

a. CIT's Claims and Administrative Expense Requests

On October 10, 2001, CIT filed two proofs of claim for damages arising from the rejection of the leases, one for $1,437,024, the other for $4,853,333. ( Id. ¶ 20 & Exs. I, J). Both claims sought amounts due under the leases pre-petition as well as remaining contract balances and something called “equipment residual.” ( Id. ¶ 21 & Exs. I, J).

The next day, CIT filed two requests for allowance and payment of administrative expenses. (Maxwell L.R. 7056–1 Stmt. ¶ 23; CIT L.R. 7056–2 Resp. ¶ 23). In the requests, CIT asserted that the estate had continued to use the leased equipment post-petition and sought rent and other costs and charges ($81,546 in one request, 380,411 in the other) from the petition date through October 1, 2001. ( Id. ¶¶ 24–25 & Exs. K, L).

On November 30, 2001, Maxwell filed an omnibus objection to administrative claims. ( Id. ¶ 26; see Btcy. Dkt. No. 497). Among the claims to which Maxwell objected were CIT's two requests for allowance and payment of administrative expenses. (Maxwell L.R. 7056–1 Stmt. ¶ 26; CIT L.R. 7056–2 Resp. ¶ 26).

On December 10, 2002, more than a year after the bar date, CIT filed an “Amendment to Request for Allowance and Payment of Administrative Expenses.” ( Id. ¶ 27). The “Amendment” document asserted that Maxwell had “breached his fiduciary duty to gather, administer and turnover some of the [e]quipment” subject to certain leases. ( Id. Ex. M). CIT sought $1,181,989 in administrative expenses for the value of what CIT called “the converted equipment.” ( Id. ¶ 27 & Ex. M). The same day, CIT also filed an “Amended Request for Allowance and Payment of Administrative Expenses.” ( Id. ¶ 28 & Ex. N). In the “Amended Request,” CIT made the same allegations about Maxwell's breach of fiduciary duty in connection with other leases ( id. ¶ 29 & Ex. N.) and sought $1,293,767, again consisting of the value of the “converted equipment” ( id. ¶¶ 28–29).⁴ In both amended requests, CIT asserted that it had not learned of Maxwell's alleged breach of fiduciary duty and the conversion of its equipment until after the October 11, 2001 bar date. ( Id. ¶ 30). However, CIT neither sought nor received leave of court to amend its initial administrative expense requests. ( Id. ¶ 29).

On February 18, 2003, Maxwell objected to CIT's amended administrative expense requests. ( Id. ¶ 31 & Ex. O; see Btcy. Dkt. No. 1154). Among other things, Maxwell asserted that the requests were untimely. (Maxwell L.R. 7056–1 Stmt. ¶ 31 & Ex. O, ¶ 1).

There things sat for the next four years. For reasons the record does not reveal, the court held no hearings and made no rulings on the pending requests and objections.⁵ Neither CIT nor Maxwell saw fit to bring matters to a head.

b. CIT's Adversary Proceeding

CIT broke the four-year silence on May 7, 2007, when it suddenly filed an adversary proceeding against Maxwell, both personally and in his capacity as trustee. (Maxwell L.R. 7056–1 Stmt. ¶ 32 & Ex. P; CIT L.R. 7056–2 Resp. ¶ 32).

In its complaint, CIT alleged that it had leased more than $4.7 million in telephone equipment to marchFirst and the other debtors, equipment placed in offices across the country. (Maxwell L.R. 7056–1 Stmt. Ex. P, ¶¶ 6–8). CIT further alleged that Maxwell as trustee had an obligation to insure and safeguard property that came into his hands. ( Id. Ex. P, ¶ 11). Despite this obligation, CIT said, Maxwell failed to inventory or secure CIT's equipment, failed to investigate the estate's interest in the leased property, filed a false Statement of Financial Affairs that said the debtors held no property owned by another person (although he knew the opposite was true), ignored CIT's requests for the return of the equipment, and even affirmatively resisted CIT's efforts to recover it. ( Id. Ex. P, ¶¶ 11–13, 17–21, 28).

CIT's complaint had four counts. Counts I and II were claims for breach of fiduciary duty against Maxwell in his personal and official capacities, respectively. Count III was a claim against Maxwell in his personal capacity for “ultra vires activities.” Count IV was a claim against Maxwell in his official capacity for “constructive bailment.” ( Id. Ex. P at 5–9). In each count, CIT sought damages of $3,655,713 (the value of the lost equipment, almost $1.2 million more than the amount sought in the amended administrative expense requests), as well as costs CIT allegedly incurred in attempting to recover the equipment and lost profits resulting from its inability to re-lease the equipment. ( Id.).

Maxwell moved to dismiss the complaint (Maxwell L.R. 7056–1 Stmt. ¶ 35; CIT L.R. 7056–2 Resp. ¶ 35), and in November 2007, the bankruptcy court granted the motion ( id. ¶ 36). In its memorandum opinion, the court declined to decide whether CIT had a prima facie case against Maxwell under the Barton doctrine, see Barton v. Barbour, 104 U.S. 126, 127, 26 L.Ed. 672 (1881) (holding that permission of the court must be obtained before a receiver can be sued), concluding instead that the action was barred by the applicable statute of limitations. (Maxwell L.R. 7056–1 Stmt. Ex. Q at 6). The applicable limitations period, the court said, was the five-year period under Illinois law governing actions for damages arising out of an injury to personal property. ( Id. Ex. Q at 7). CIT knew of its claim no later than November 2, 2001, when Maxwell filed the Statement of Financial Affairs disclosing that the debtors held no leased equipment, and perhaps as early as July 20, 2001, when Maxwell allegedly failed to return the equipment. Either way, the court held, the limitations period ran well before the May 2007 filing date, and the action was barred. ( Id. Ex. Q at 8–9).

CIT appealed the dismissal to the district court, but the district court affirmed the bankruptcy court's decision. (Maxwell L.R. 7056–1 Stmt. ¶¶ 38, 40; CIT L.R. 7056–2 Resp. ¶¶ 38, 40). In its opinion, the district court did the bankruptcy court one better, holding that CIT not only should have known of its injury no later than the filing of the Statement of Financial Affairs but should have known of it as early as June 26, 2001, when the leases were rejected but the equipment not returned. (Maxwell L.R. 7056–1 Stmt. Ex. T at 7).

Again CIT appealed, but the court of appeals affirmed the judgment of the district court. See In re marchFIRST Inc., 589 F.3d 901, 904 (7th Cir.2009) (holding that “CIT's claims ... are barred by the statute of limitations”). The court noted that “all activity” alleged in the adversary complaint “relating to CIT's efforts to recover its equipment and Maxwell's lack of response” took place in the summer and fall of 2001. Id. at 904. “[A]t the very least,” the court said, CIT should have known of its injury when...