In re Kjk Const. Co., Inc.

Decision Date10 September 2009
Docket NumberAdversary No. 09 A 00105.,Bankruptcy No. 07 B 21749.,Adversary No. 09 A 00106.
PartiesIn re KJK CONSTRUCTION CO., INC., Debtor. David E. Grochocinski, Trustee, Plaintiff, v. Kyle Rieger, Melissa Rieger, Kent Rieger, Diane Rieger, Stephanie Chan, and Kent D. Rieger as Trustee of the Galena Family Trust Dated November 11, 2005, Defendants. David E. Grochocinski, Chapter 7 trustee of the bankruptcy estate of KJK Construction Co., Inc., Plaintiff, v. Kent Rieger, Defendant.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

Kathleen M. McGuire, Esq., for Plaintiff.

Richard L. Hirsh, Hinsdale, IL, for Defendants.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

These matters come before the Court on the motions for summary judgment pursuant to Federal Rule of Bankruptcy Procedure 7056, which incorporates by reference Federal Rule of Civil Procedure 56, filed by Kyle Rieger, Melissa Rieger, Kent Rieger, Diane Rieger, Stephanie Chan, and Kent D. Rieger, as trustee of the Galena Family Trust dated November 11, 2005 (collectively the "Defendants") and on the motions of David E. Grochocinski, the Chapter 7 case trustee (the "Trustee") for the estate of KJK Construction Co., Inc. to strike the Defendants' motions for summary judgment. For the reasons set forth herein, the Court denies the Defendants' motions for summary judgment. In addition, the Court denies the Trustee's motions to strike the Defendants' motions for summary judgment. The Defendants shall file answers to the complaints by or before September 30, 2009. A status hearing in these adversary proceedings is set for October 9, 2009 at 10:00 a.m.

I. JURISDICTION AND PROCEDURE

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), (H), (I), and (O), except for Count VI of the complaint filed in adversary proceeding 09 A 00105. That count is a claim for an alleged breach of fiduciary duty and does not "arise under" or "arise in" this case for purposes of 28 U.S.C. § 1334. Count VI is a non-core related matter under 28 U.S.C. § 157(b)(3), and any recovery thereunder may result in a recovery for the bankruptcy estate.

II. FACTS AND BACKGROUND

The following facts are not in dispute. Kent Rieger is an individual who at all relevant times was an officer and director of KJK Construction Co., Inc. ("KJK"). (Tr. 7056-2 statement ¶ b.)1 Kent Rieger, Jevon Chan ("Chan"), and Kyle Rieger were each one-third shareholders (collectively "KJK Shareholders") in KJK. (Tr. 7056-2 statement ¶¶ c & d.) Kyle Rieger is the son of Kent Rieger, and Chan is the son-in-law of Kent Rieger. (Tr. 7056-2 statement ¶ e.) On or about September 29, 2000, the KJK Shareholders entered into an agreement with Suburban Bank & Trust Company to create a land trust known as Trust No. 74-2911 (the "Land Trust"). (Tr. 7056-2 statement ¶ f; Defendants' Ex. A (the "Land Trust Agreement").) A copy of the Land Trust Agreement was submitted as Exhibit A to the statement/affidavit of Kent Rieger ("Rieger Affidavit") and is found in Defendants' Group Exhibit A. (Tr. 7056-2 statement ¶ i; Defendants' Ex. A.) According to the Agreement, the Land Trust held title to property commonly known as 548 S. Arlington, Elmhurst, Illinois and 435 Berkeley, Elmhurst, Illinois. (Tr. 7056-2 statement ¶ f; Defendants' Ex. A.) Each of the KJK Shareholders owned a one-third beneficial interest in the Land Trust. (Tr. 7056-2 statement ¶ g; Defendants' Ex. A.) KJK was not named as a beneficiary in the Land Trust Agreement. (Defendants' Ex. A.)

The Defendants allege that prior to December 4, 2000, Chan executed an agreement on behalf of the KJK Shareholders to purchase real property, commonly known as 15 Beacon Trail, Galena, Illinois (the "Galena Property"). (Defendants' 7056-1 statement ¶ j; Defendants' Ex. B (the "Purchase Agreement").) A copy of the Purchase Agreement is attached as Exhibit B to the Rieger Affidavit and is found in Defendants' Group Exhibit A (Defendants' Ex. B.) On or about December 4, 2000, the Galena Property was conveyed to the Land Trust by the seller, Galena State Bank & Trust Company, as trustee. (Tr. 7056-2 statement ¶ k; Defendants' Ex. C.) A copy of a deed conveying the Galena Property to the Land Trust is attached as Exhibit C to the Rieger Affidavit and is found in Defendants' Group Exhibit A. (Defendants' Ex. C.)

On May 29, 2003, the Land Trust executed a deed conveying the Galena Property to the KJK Shareholders. (Compl. ¶ 34;2 Defendants' 7056-1 statement ¶ o; Defendants' Ex. E.) A copy of that deed, recorded with the Recorder of Jo Daviess County on February 18, 2005, as document number 318044, was submitted as Exhibit E to the Rieger Affidavit and is found in Defendants' Group Exhibit A. The deed to the KJK Shareholders was not recorded until February 18, 2005. (Compl. ¶ 39; Defendants' 7056-1 statement ¶ o; Defendants' Ex. E.) In June or July of 2003, the Galena Property was refinanced. (Compl. ¶ 35; Defendants' 7056-1 statement ¶ m.) A second refinancing of the Galena Property took place in February of 2005. (Compl. ¶ 40; Defendants' 7056-1 statement ¶ p.) The deed conveying the Galena Property was recorded at the time of the 2005 refinancing. (Tr. 7056-2 statement ¶ o.)

On or about September 7, 2005, the KJK Shareholders transferred the Galena Property by quit claim deed to their wives, Diane L. Rieger (Kent), Stephanie Chan (Jevon) and Melissa Rieger (Kyle) (collectively the "KJK Shareholder Wives"). (Tr. 7056-2 statement ¶ s; Defendants' Ex. I.) A copy of the deed is attached as Exhibit I to the Rieger Affidavit and is found in Defendants' Group Exhibit A. (Defendants' Ex. I.) On November 28, 2005, the KJK Shareholder Wives transferred the Galena Property to Kent Rieger as trustee of the Galena Family Trust. (Tr. 7056-2 statement ¶ t; Defendants' Ex. J.) A copy of the deed to the Galena Family Trust is attached as Exhibit J to the Rieger Affidavit and found in Defendants' Group Exhibit A. (Defendants' Ex. J.)

On June 25, 2007, Kent and Diane Rieger filed a petition for relief under Chapter 7 of the Bankruptcy Code (Bankr. No. 07-11298) (the "Rieger Bankruptcy Case"). An order of discharge was entered in the Rieger Bankruptcy Case on October 15, 2007. (Docket No. 49.) The Trustee was not named as a creditor in the Rieger Bankruptcy Case. On November 19, 2007, KJK filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code (Bankr.No. 07-21749) (the "KJK Bankruptcy Case"). (Docket No. 1.) On its petition, KJK stated that there were no pending bankruptcy cases filed by any affiliate of KJK. (Id.) On November 20, 2007, the Trustee was appointed the Chapter 7 trustee in the KJK Bankruptcy Case.

On December 5, 2007, Chan filed a petition for relief under Chapter 7 of the Bankruptcy Code in the Bankruptcy Court for the District of Rhode Island (the "Chan Bankruptcy Case"). (Compl.¶ 19.) An order of discharge was entered in the Chan Bankruptcy Case on March 4, 2008. (Id.) The Trustee alleges that he was not listed as a creditor in the Chan Bankruptcy Case, and that Chan stated on his bankruptcy petition that there were no pending bankruptcy cases filed by any of his affiliates. (Compl. ¶¶ 20 & 21.) According to the Trustee, Chan is not named as a defendant in the 09 A 00105 adversary proceeding due to concerns regarding the discharge injunction in the bankruptcy case filed in Rhode Island. (Compl. ¶¶ 21 & 22.) The Trustee is investigating these issues and may move to name Chan as an additional defendant in this adversary proceeding and/or file an objection to the dischargeability of the debts alleged in this adversary proceeding in the Chan Bankruptcy Case under 11 U.S.C. § 523(a)(2), (4), and (6). (Id.)

On February 6, 2009, the Trustee filed a six-count complaint (the "KJK Complaint") against the Defendants seeking to avoid transfers of the Galena Property and for damages for breach of fiduciary duties by the KJK Shareholders. The Trustee alleges that KJK was the equitable owner of the Galena Property. Specifically, the Trustee alleges in the KJK Complaint that KJK included the Galena Property as an asset on its corporate tax returns and claimed depreciation deductions on the Property (Compl.¶ 27); KJK included the Galena Property as an asset in its balance sheet (Compl.¶ 28); KJK made mortgage payments on the Galena Property (Compl.¶ 32); and KJK paid expenditures relating to the maintenance and upkeep of the Galena Property (Compl.¶ 33). The Trustee alleges that the Galena Property was fraudulently transferred from KJK to the KJK Shareholders. The Trustee further alleges that the KJK Shareholders refinanced the Galena Property on two occasions and embezzled or converted the proceeds of the refinancing for their own use.

In Counts I and III of the KJK Complaint, the Trustee seeks to avoid the alleged fraudulent transfers of the Galena Property pursuant to 11 U.S.C. § 544 and 740 ILL. COMP. STAT.160/1 et seq. Counts II, IV, and V of the KJK Complaint request a turnover of the value of the alleged transfers pursuant to 11 U.S.C. § 550. Count VI alleges that the KJK Shareholders breached fiduciary duties to KJK and its creditors in connection with the alleged transfers of the Galena Property. Contemporaneous with the filing of the KJK Complaint, the Trustee filed a complaint in the Rieger Bankruptcy Case (the "Rieger Complaint") objecting to the dischargeability of the debts alleged in the KJK Complaint under 11 U.S.C. § 523(a)(4) and (a)(6). The Defendants have not filed an answer to the KJK Complaint or the Rieger Complaint.3

On May 1, 2009, the Defendants filed a motion for summary judgment on Counts I-VI of the KJK Complaint. The Defendants argue that KJK never...

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