In re Jii Liquidating, Inc.
Decision Date | 27 April 2006 |
Docket Number | Bankruptcy No. 05 B 25909.,Adversary No. 05 A 1874. |
Citation | 341 B.R. 256 |
Parties | In re JII LIQUIDATING, INC. f/k/a Jernberg Industries, Inc.; JSI Liquidating, Inc. f/k/a Jernberg Sales, Inc.; and IM Liquidating, LLC, f/k/a Iron Mountain Industries, LLC, Debtors. Richard J. Mason, Chapter 7 Trustee, Plaintiff, v. Heller Financial Leasing, Inc., Defendant. |
Court | U.S. Bankruptcy Court — Northern District of Illinois |
Paula K. Jacobi, Andrew J. Abrams, Chicago, IL, for Plaintiff.
Ann E. Pille and Alexander Terras, Chicago, IL, for Defendant.
These matters come before the Court on the cross-motions of plaintiff Richard J. Mason (the "Trustee") and defendant Heller Financial Leasing, Inc. ("Heller") for summary judgment pursuant to Federal Rule of Bankruptcy Procedure 7056 and Federal Rule of Civil Procedure 56 on the Trustee's complaint1 seeking a declaration as to the nature of three contractual documents executed by the Debtors and Heller, avoidance of all liens asserted by Heller on certain equipment, and turnover of all post-petition payments made to Heller related to that equipment.2 For the reasons stated herein, the Court finds as a matter of law that the contractual documents constitute a disguised security agreement rather than a "true lease" pursuant to 810 ILCS 5/1-201(37). The Court further finds that the Trustee's interest in the equipment at issue is superior to the portion of Heller's interest that remained unperfected as of the petition date. Thus, the Trustee may avoid that portion of Heller's lien on the equipment under 11 U.S.C. § 544(a). Finally, the Court finds that the Trustee may recover, pursuant to 11 U.S.C. §§ 550 and 551, all payments received post-petition by Heller in connection with the unperfected lien on the equipment, as well as all future payments due and owing with respect to the equipment. A separate order will be entered granting the Trustee's motion on Counts I, II, and III of the amended complaint and denying Heller's cross-motion on those counts. A status hearing on Count IV is set for May 30, 2006 at 10:00 a.m.
The Court has jurisdiction to entertain these matters 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. They are core proceedings under 28 U.S.C. § 157(b)(2)(A), (E), (K), and (O).
The Debtors were collectively one of the country's largest independent providers of high-volume machined and forged parts for the transportation industry. (Debtors' Mot. for Order Authorizing & Approving Sale of Assets & Authorizing Assumption & Assignment of Leases & Contracts ¶ 4.) On December 31, 1998, the Debtors and Heller entered into a "Master Lease Agreement" (the "Agreement"), wherein Heller agreed to "lease" to the Debtors various pieces of equipment, which were to be itemized and described in subsequently executed "Master Lease Schedules." ( Paragraph 21(g) of the Agreement expressly provided that it was "non-cancelable" and that the Debtors' obligations under the Agreement were "absolute and unconditional." The Agreement also enumerated various "events" that would constitute default under the contract, including the filing of a voluntary petition in bankruptcy. (Am. Compl. Ex. A ¶ 16(d).) According to the Agreement, upon the occurrence of such a default, Heller had the right to terminate or cancel the Agreement and "declare all [r]ent ... immediately due and payable," whereupon the Debtors would be obligated to "promptly pay the same[.]" (Id. ¶ 17(iii).)
Subsequent to signing the Agreement, the Debtors and Heller executed twelve Master Lease Schedules numbered 1 through 5 and 7 through 13.3 (Heller 7056-1 supp. statement ¶¶ 3-14 & Exs. B-M; Tr. 7056-2 statement ¶¶ 3-14.) Under each, the Debtors received and accepted the equipment described in the schedules. (Id.) On March 23, 2001, the parties entered into Master Lease Schedule 14 ("Schedule 14"), which covered the equipment listed in Schedule A attached thereto (the "Equipment"). ( Pursuant to the terms of Schedule 14, the Debtors were required to make quarterly payments of $363,683.21, plus applicable taxes, beginning on April 1, 2001, for a term of twenty quarters, or five years. ( According to Schedule 14, the cost of the Equipment was $5,830,996.14. ( The parties do not dispute that the Equipment under Schedule 14 consists precisely of those items listed in Schedules 1 through 5 and in Schedules 7 through 13, "no more and no less." (Heller 7056-1 supp. statement ¶ 15; Tr. 7056-2 statement ¶ 15.)
Executed simultaneously with Schedule 14, a "Purchase Option Rider" (the "Purchase Option") provided that at the end of the five-year term, the Debtors could purchase the Equipment for $1.00 plus any applicable taxes, assuming no breach of the Agreement had occurred and the Debtors provided Heller with timely notice of their intention to exercise the option. (Am.Compl. Ex. C.) In the event that the Debtors did not exercise the Purchase Option, "all of the terms and provisions of the Schedule(s) [would] continue in full force and effect...." (Id.)
On December 15, 2001, Heller filed a Uniform Commercial Code ("UCC") financing statement against the Debtors with the Illinois Secretary of State identifying only the equipment under Master Lease Schedule 13 ("Schedule 13"). (Tr. 7056-1 statement ¶ 11 & Ex. E; Heller 7056-2 statement ¶ 11.) A financing statement listing all of the Equipment under Schedule 14 was never filed. (Tr. 7056-1 statement ¶ 13; Heller 7056-2 statement ¶ 13.)
On June 29, 2005, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.4 (Tr. 7056-1 statement ¶ 2; Heller 7056-2 statement ¶ 2.) The following day, they filed a motion for an order authorizing and approving the sale of certain assets free and clear of liens, claims, interests, charges, and encumbrances and authorizing the assumption and assignment of various leases and contracts in connection with the sale (the "Sale Motion"). (Tr. 7056-1 statement ¶ 15; Heller 7056-2 statement ¶ 15.) Attached to the Sale Motion was an Asset Purchase Agreement (the "APA"), executed by the Debtors and Hephaestus Holdings, Inc. ("HHI") on June 29, 2005. (Tr. 7056-1 statement ¶ 16; Heller 7056-2 statement ¶ 16.) Pursuant to the APA, HHI agreed to buy the Debtors' "Purchased Assets," as defined by the contract, including "all machinery, equipment, spare parts, tools, dies, test equipment, furniture, fixtures, ... and other tangible personal property ... [.]" In addition, the APA provided that HHI would take over certain "Assumed Liabilities" of the Debtors, including the Agreement at issue. In particular, HHI agreed to pay all amounts owed to Heller under Schedule 14 as of the petition date, as well as those amounts due thereafter under the Schedule. (Am. Compl. ¶ 16; Answer ¶ 16.)
On August 22, 2005, the Official Committee of Unsecured Creditors (the "Committee") filed an objection to the Sale Motion. (Am. Compl. ¶ 17; Answer ¶ 17.) Specifically, the Committee objected to, inter alia, HHI paying Heller under Schedule 14, arguing that neither the Schedule nor the Agreement is a "true lease" and that Heller had not perfected its security interest in the Equipment as of the petition date. (Id.)
On August 24, 2005, the Court granted the Sale Motion. (Tr. 7056-1 statement ¶ 17; Heller 7056-2 statement ¶ 17.) However, the Court declined to characterize the Agreement as either a "true lease" or a security agreement. Rather, the Court included in the order a reservation provision that reads in part as follows:
The Buyer [(HHI)] is authorized, pending further Court order, to pay the Assumed Liabilities with respect to the Unsecured Capital Leases to the lessors [(including Heller)]; provided, however, that the Debtors' estates reserve all rights to pursue Avoidance Actions against the lessors under the Unsecured Capital Leases, to seek to recharacterize the Unsecured Capital Leases as they existed as of the Petition Date, to avoid any alleged liens of the lessors of the Unsecured Capital Leases arising in connection with the Unsecured Capital Leases, and to preserve all rights under Bankruptcy Code section 551 in connection with the Unsecured Capital Leases and any litigation in connection therewith....
(Order Granting Sale Motion ¶ 15.)
On September 6, 2005, the Debtors filed a three-count complaint against Heller seeking a determination as to the nature of the Agreement, Schedule 14, and the Purchase Option; avoidance of any liens on the Equipment asserted by Heller; and turnover of all post-petition payments made to Heller related to the Equipment. Subsequently, on December 8, 2005, the Trustee filed the instant motion seeking summary judgment in his favor on Counts I, II, and III of the complaint. Specifically, the Trustee argues that the Agreement — along with Schedule 14 and the Purchase Option — is nothing more than a secured transaction. According to the Trustee, because Heller failed to perfect its security interest in the Equipment as of the petition date, he is entitled to avoid any and all of Heller's unperfected liens on the Equipment pursuant to 11 U.S.C. § 544(a)(1) and to...
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