In re Kids Creek Partners, LP, 98 C 3852
| Decision Date | 17 March 1999 |
| Docket Number | 94 B 23947.,No. 98 C 3852,98 C 3852 |
| Parties | In re KIDS CREEK PARTNERS, L.P., Debtor. David R. Herzog, Trustee in Bankruptcy, and David A. Belofsky & Associates, P.C., Special Counsel for the Trustee, Appellants, v. Leighton Holdings, Ltd., Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
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Neil Wolf and Janet Baer of Schwartz, Cooper, Greenberger & Krauss, Chicago, IL, for Movant.
David A. Belofsky, Douglas Belofsky, and Steven Shamash, Chicago, IL, for Respondent.
David R. Herzog of Layfer Cohen & Handelsman, Chicago, IL, trustee.
This matter comes before the court on appeal from a series of decisions of the United States Bankruptcy Court for the Northern District of Illinois. The Appellants assert that the Bankruptcy Court (1) erred in allowing the Appellee a superpriority administration claim for fees and expenses incurred in connection with an adversary proceeding brought against the Appellee by the Trustee in Bankruptcy and (2) erred in denying a motion by the Trustee in Bankruptcy and his Special Counsel to vacate and set aside the Bankruptcy Court's previous Order and Memorandum Opinion on the application of the Bankruptcy Court's official court reporter for payment of an administrative claim and erred in denying the Trustee in Bankruptcy's motion to stay enforcement of such order and opinion pending appeal. For the reasons set forth below, we affirm the Bankruptcy Court's decisions.
The majority of the following facts come from our previous decision in this case, In re Kids Creek Partners, L.P., 1997 WL 627652 (N.D.Ill.1997), addressing an earlier appeal in this matter. Any additional facts come from the briefs filed by the Appellants and the Appellee in the present appeal.
This appeal arises from a bankruptcy proceeding involving Kids Creek Partners, L.P. ("Kids Creek") and a related Adversary Proceeding instituted by David R. Herzog ("Herzog" or "Trustee"), the Trustee in Bankruptcy, and David A. Belofsky & Associates, P.C., Special Counsel to the Trustee ("Special Counsel") against Leighton Holdings, Ltd. ("Leighton") and others.
Beginning in January 1993, Leighton and Kids Creek entered into various loan and security agreements. Pursuant to these agreements, Leighton advanced Kids Creek an aggregate amount of $1,692,740. In January 1994, Leighton ceased funding under these loans, alleging Kids Creek defaulted under the loan documents.
Kids Creek was in the business of attempting to develop or redevelop an approximately 450-acre parcel of real estate in Traverse City, Michigan that had once been the site of the Traverse City Regional Psychiatric Hospital ("the Commons Property"). On December 14, 1993, pursuant to an agreement between the parties, Kids Creek provided Leighton with a mortgage ("the Leighton Mortgage") on Kids Creek's interest in the Commons Property. The Leighton Mortgage, which the parties recorded on December 14, 1993, was secured by the Commons Property real estate, leasehold interests, rents, profits and revenues derived either directly or indirectly from the real estate, and certain personal property and equipment. The Leighton Mortgage provided that it would be released only upon payment of the entire indebtedness and strict performance of the other terms and conditions of the mortgage.
In November 1994, Kids Creek entered into an agreement to sell a 43-acre portion of the Commons Property ("the Munson Parcel") to Munson Healthcare Corporation ("Munson Healthcare") and Grand Traverse County, Michigan ("the County") (collectively "the Purchasers") for approximately $2,874,000. The purchase money for this transaction had been placed in escrow. The escrow money was to be returned to the Purchasers if the parties did not consummate the sale by December 31, 1994, the date upon which the County's authority to complete the purchase would expire.
On December 5, 1994, an involuntary bankruptcy petition was filed on Kids Creek's behalf in the United States Bankruptcy Court for the Northern District of Illinois. At the time of the filing of the bankruptcy petition, the only significant assets in Kids Creek's estate were (1) pursuant to a Redevelopment Agreement with Grand Traverse Commons Redevelopment Corporation ("Grand Traverse Redevelopment Corp."), certain options to purchase the Commons Property from Grand Traverse Redevelopment Corp. for nominal consideration and (2) pursuant to a master lease with Grand Traverse Redevelopment Corp., a leasehold interest in the Commons Property.
On December 14, 1994, the County and Munson presented an emergency motion for the appointment of a trustee to the Bankruptcy Court. The purpose of this emergency motion was to have an interim trustee appointed to complete the sale of the Munson Parcel. On December 15, 1994, the Bankruptcy Court granted the emergency motion and ordered the United States Trustee to appoint an interim trustee. On December 15, 1994, the United States Trustee appointed Herzog as interim trustee.
On or about December 19, 1994, the Trustee presented an emergency motion to employ counsel for trustee, in order to enable him to administer Kids Creek's assets and to close the sale of the Munson Parcel to Munson Healthcare and the County. The Bankruptcy Court authorized the Trustee to employ James W. Boyd of Traverse City, Michigan to close the sale of the Munson Parcel. The Bankruptcy Court also authorized the Trustee to employ the law firm of Layfer, Cohen & Handelsman, Ltd., and its individual attorneys David Herzog, Steven Shamash and David J. Wolf as "regular counsel."
Because the completion of the sale of the Munson Parcel would result in a significant infusion of cash into Kids Creek's estate, the Trustee sought to complete the sale on behalf of Kids Creek. Thus, on December 23, 1994, the Trustee filed a motion to authorize him to acquire the Munson Parcel from the Grand Traverse Redevelopment Corp. and for authority to sell the Munson Property to Munson Healthcare and the County ("the Trustee's Motion to Authorize Sale"). Several obstacles remained to the completion of this sale, however. Leighton held both a security interest in all of Kids Creek's property, including the options and the Redevelopment Agreement between Kids Creek and Grand Traverse Redevelopment Corp., and a leasehold mortgage on all of Kids Creek's leased real estate. Grand Traverse Redevelopment Corp., the then-owner of the 450-acre Commons Property, had subordinated its fee interest to Leighton's leasehold mortgage.
Kids Creek was also in default under the Redevelopment Agreement and the Trustee was unable to cure the defaults. Grand Traverse Redevelopment Corp. was unwilling to waive the defaults and permit the Trustee to exercise the option and acquire the Munson Parcel, which Kids Creek would then sell to Munson Healthcare and the County as per their November 1994 agreement, unless the Trustee (1) agreed to terminate the Redevelopment Agreement and Master Lease and (2) obtained the release of Leighton's leasehold mortgage on the entirety of remaining acreage of the Commons Property, not simply the Munson Parcel.
In order to secure a release of Leighton's leasehold mortgage, the Trustee had to pay off in full Kids Creek's obligations to Leighton. There was a further complication, however, namely the Trustee did not want to pay Leighton. The Trustee suspected that Kids Creek's estate might have a cause of action against Leighton to invalidate Leighton's security interest and leasehold mortgage in the Commons Property. The Trustee was apparently concerned about whether Leighton would move off-shore any funds Kids Creek paid Leighton and that such funds would thereafter be beyond the jurisdiction of the Trustee and the Bankruptcy Court. As noted by the Bankruptcy Court, the Trustee was "in a box" from which he could escape only by making a deal with Leighton.
On December 30, 1994, one day before the County's authority to purchase the Munson Property was set to expire, the Bankruptcy Court held a hearing on the Trustee's Motion to Authorize Sale. At this hearing, the parties presented to the court the respective positions of all involved, including the Trustee, Leighton, Munson Healthcare, the County and the Grand Traverse Redevelopment Corp. At this time, Leighton was not willing to release its lien on the entire Commons Property without some assurances that its interests would be protected. As noted above, the Trustee did not want to consent to the repayment of Leighton's loans in full for fear that any money he paid Leighton would be moved off-shore.
At the start of the hearing on the Trustee's Motion to Authorize Sale, the parties requested a recess so they could attempt to negotiate and draft an agreed order satisfactory to all sides. The Trustee and Leighton thereafter entered into a handwritten agreement that authorized the Trustee to exercise Kids Creek's option to acquire the Munson Parcel from Grand Traverse Redevelopment Corp. and to sell that parcel to Munson and the County free and clear of any liens or encumbrances, including Leighton's lien. In exchange for Leighton's acquiescence to the sale, the Trustee agreed to pay Leighton the full amount of its claims. The handwritten agreement between the Trustee and Leighton, which the Bankruptcy Court explicitly incorporated into its December 30, 1994 Agreed Order, stated as follows:
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In re Anthony M. Mortellite, Jr. & Colleen Mortellite, , LLC, Case No.: 17-21818-ABA
...To allow such a result would be offensive to this court. The court is further persuaded by the reasoning in In re Kids Creek Partners, L.P., 233 B.R. 409 (N.D. Ill. 1999). In that case, the district court affirmed the bankruptcy court's finding that the chapter 7 trustee was barred from sub......
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