In re Llc
| Decision Date | 09 March 2011 |
| Docket Number | Nos. 09–1735,09–1746.,09–1736,09–1745,s. 09–1735 |
| Citation | 634 F.3d 732 |
| Parties | In re MONTGOMERY WARD, LLC, et al., Debtors,Dika–Ward LLC, Appellant.In re Montgomery Ward, LLC, et al., Debtors,Plan Administrator of Montgomery Ward, LLC; PA Comm. of Montgomery Ward, LLC, Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
OPINION TEXT STARTS HERE
Theodore J. Tacconelli, Esquire, Ferry, Joseph & Pearce, Wilmington, DE, David K. Welch, Esquire (Argued), Crane, Heyman, Simon, Welch & Clar, Chicago, IL, for Appellant.Daniel B. Butz, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, Richard S. Kanowitz, Esquire, Brent I. Weisenberg, Esquire (Argued), Cooley, New York, NY, for Appellee.Before: JORDAN, ROTH and TASHIMA *, Circuit Judges.
Dika–Ward filed a proof of claim in Montgomery Ward's second bankruptcy proceeding for amounts allegedly due under a mortgage and a lease. The Bankruptcy Court, ruling on the parties' motion and cross motion for summary judgment, held that (1) Montgomery Ward was not personally liable under the mortgage, (2) Montgomery Ward had no liability for common area maintenance expenses under the lease, and (3) Montgomery Ward's Plan Administrator was precluded from challenging whether the lease was a true lease, as this was res judicata from Montgomery Ward's first bankruptcy proceeding. Both parties appealed this order, and the District Court affirmed the judgment of the Bankruptcy Court. We will affirm the summary judgment order as to the claims for the mortgage note and for common area maintenance. However, we will vacate the Bankruptcy Court's order, ruling that res judicata precluded the Plan Administrator's cause of action, and remand this case to the District Court for remand to the Bankruptcy Court so that the Plan Administrator may challenge the nature of the lease.
I. BACKGROUND
Prior to its bankruptcy petitions, Montgomery Ward operated one of the largest retail merchandising organizations in the United States. Montgomery Ward's plans in the 1970s to develop the Jefferson Square Mall in Joliet, Illinois, and a new department store there gave rise to the disputed claims in this appeal. Montgomery Ward, Joliet Mall Associates, and Wieboldt Stores entered into a Reciprocal Construction, Operation and Easement Agreement (RCOEA) in which the parties agreed to develop the mall and share certain expenses, including common area maintenance and repair expenses (collectively referred to as Common Area Maintenance, or CAM, expenses).
Montgomery Ward contracted with Jolward Associates Limited Partnership (Jolward) to construct a department store (the Department Store) on a parcel of land that Montgomery Ward owned at the planned site of the Jefferson Square Mall (the Land). The parties entered into a Ground Lease whereby Montgomery Ward leased the Land to Jolward and Jolward agreed to construct the Department Store. Montgomery Ward consented to pledge its fee interest in the Land to secure financing for the Department Store's construction, with “it being expressly understood and agreed that Lessor [Montgomery Ward] assumes no personal liability for the payment of any principal, interest or premium on the Notes by so doing.”
State Farm Life Insurance Co. financed the Department Store's construction, with Jolward executing a note (the Note) secured by Jolward's rights in the Ground Lease, the Lease and Sublease Agreement (as described below), and the Department Store (the Mortgage). Montgomery Ward joined in the execution of the Mortgage to grant State Farm a security interest in its rights in and to the Land, the Department Store, and the RCOEA. The Mortgage agreement reiterated that Montgomery Ward “assumes no personal liability for the payment of any principal, interest or premium, if any, on the Note”; that is, the Mortgage was without recourse to Montgomery Ward.
Jolward leased the Department Store and the Land back to Montgomery Ward under a Lease and Sublease Agreement. Montgomery Ward received an option to purchase the Department Store at the end of the lease, and it agreed to indemnify Jolward for any expenses or liabilities incurred as a result of Jolward's interest in the estate.
Over twenty years later, in 1997 and again in 2000, Montgomery Ward filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code. Creditors filed proofs of claim in each of these bankruptcies on account of the Mortgage and the Lease and Sublease Agreement, as described below.
In Montgomery Ward's first bankruptcy proceeding ( Ward I ), State Farm filed a proof of claim for the outstanding balance of the Mortgage. The Confirmed Plan of Reorganization (the Ward I Plan) provided for no distributions to State Farm on account of the Mortgage; State Farm simply retained its security interest.
The Ward I debtor-in-possession (the Ward I Debtor) assumed the Lease and Sublease Agreement, meaning that it agreed to continue to be bound by the agreement and to pay any past-due amounts to Jolward. State Farm, as assignee of Jolward's interest in the Lease and Sublease Agreement, filed a proof of claim for these past due amounts, including unpaid real estate taxes and CAM expenses (the Jolward I Claim).
The Ward I Debtor disputed the amount of the Jolward I Claim, including the allegedly unpaid CAM expenses. The parties settled this dispute, with State Farm receiving the full amount of its claim and acknowledging that its claim was fully satisfied (the Ward I Stipulation).1
Montgomery Ward filed its second Chapter 11 petition ( Ward II ) less than eighteen months after emerging from its first bankruptcy proceeding, this time with the goal of winding down operations and liquidating assets. As part of this plan, the Ward II debtor-in-possession (the Ward II Debtor) rejected the Lease and Sublease Agreement.
Dika–Ward, an Illinois limited liability company, acquired State Farm's interests in both the Mortgage and the Lease and Sublease Agreement and filed two proofs of claim. First, it filed a proof of claim for the full amount of the Note and argued that, as a consequence of the Ward I bankruptcy, Montgomery Ward was personally liable for the full amount of that loan. Dika–Ward contended that the Mortgage, although initially nonrecourse, had become recourse in Ward I under Section 1111(b) of the Bankruptcy Code.
Second, Dika–Ward filed a proof of claim for lease rejection damages from the Lease and Sublease Agreement, which included allegedly unpaid CAM expenses (the Jolward II Claim). Dika–Jefferson—an affiliate of Dika–Ward that acquired the Jefferson Square Mall—also filed a proof of claim for unpaid CAM expenses (the Jefferson II Claim).
The Ward II Debtor entered into a settlement agreement with Dika–Jefferson as to the Jefferson II Claim, conveying its interest in the Land to Dika–Jefferson in satisfaction of the claim (the Ward II Stipulation). But the Ward II Debtor objected to the Jolward II Claim, and the Ward II Plan Administrator, who was appointed to represent the interests of the Ward II estate, filed a supplemental objection.2 The supplemental objection asserted that the Lease and Sublease Agreement was actually a structured financing, not a true lease. As such, the Plan Administrator argued that Dika–Ward's only remedy would be against the collateral securing that financing. The Plan Administrator contended alternatively that, even if the Lease and Sublease Agreement were a true lease, all CAM obligations were discharged and released in the Ward II Stipulation.
Dika–Ward responded by arguing that the Ward I Plan confirmation precluded the Plan Administrator from challenging the Lease and Sublease Agreement on principles of res judicata, equitable estoppel, and waiver.
Dika–Ward and the Plan Administrator moved and cross-moved for summary judgment. The Bankruptcy Court granted summary judgment for Dika–Ward on the res judicata issue, concluding that confirmation of the Ward I Plan barred the Plan Administrator from challenging the nature of the Lease and Sublease Agreement. The court held that the confirmation order in Ward I was a final adjudication on the merits, that the Ward I Debtor could have challenged the nature of the Lease and Sublease Agreement in its dispute concerning the amount of the Jolward I Claim, and that the Ward II Debtor (and Plan Administrator) were successors in interest to the Ward I Debtor. In dictum, the Bankruptcy Court noted that, even if res judicata did not apply, equitable estoppel and waiver would bar the Plan Administrator from challenging the nature of the lease.
On the Dika–Ward Mortgage and the CAM expense claims, the Bankruptcy Court granted summary judgment for the Plan Administrator. The court held that section 1111(b) did not make the Mortgage recourse but merely, during the Ward I reorganization, granted the holder of the Mortgage a claim as if it were recourse. In addition, the court concluded that Dika–Ward had not established that Montgomery Ward was liable for any CAM expenses to Jolward. The parties appealed and cross-appealed this order, and the District Court affirmed, adopting the reasoning and analysis of the Bankruptcy Court. Both Dika–Ward and the Plan Administrator appealed to this Court.3
II. DISCUSSIONA. Res Judicata
Res judicata bars re-litigation of a claim if “there has been (1) a final judgment on the merits in a prior suit involving (2) the same claim and (3) the same parties or their privies.” E.E.O.C. v. U.S. Steel Corp., 921 F.2d 489, 493 (3d Cir.1990). The issue before us is whether the Ward II Plan Administrator, as successor in interest to the Ward II Estate, was the same party as, or privy of, the Ward I Debtor.4
The Ward I Debtor was a party to the Ward I Plan confirmation proceeding. Upon confirmation of that plan, the Ward I Debtor ceased to exist, and the reorganized Montgomery Ward succeeded to the Ward I estate. As Elizabeth Warren has explained,
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