In re Morris Senior Living, LLC, 12–05364.

• Decision Date: 24 January 2014
• Docket Number: No. 12–05364.,12–05364.
• Citation: 504 B.R. 490
• Parties: In re MORRIS SENIOR LIVING, LLC, Morris Real Estate Holdings II, LLC, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

504 B.R. 490

In re MORRIS SENIOR LIVING, LLC, Morris Real Estate Holdings II, LLC, Debtors.

No. 12–05364.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Jan. 24, 2014.

Brad Berish, Alexander F. Brougham, Nathan Q. Rugg, Adelman & Gettleman, Ltd., Chicago, IL, for Trustee.

Stephen G. Wolfe, Chicago, IL, for U.S. Trustee.

Maurice J. Salem, Salem Law Office, Palos Heights, IL, for Debtor.

AMENDED ORDER ON AMENDED MOTION FOR LEAVE TO FILE CLAIMS (Dkt. No. 339)

JACQUELINE P. COX, Bankruptcy Judge.

Non-debtor Morris Healthcare & Rehabilitation Center, LLC (“Morris Healthcare”) and Lewis Borsellino (“Borsellino” and together with Morris Healthcare “Movants”) seek leave of court in their Motion for Leave to File Claim Against Trustee's Counsel For Fraudulent Inducement (“Motion”) to sue the trustee's counsel for statements he made or should have made in connection with litigation in this bankruptcy case. The Movants make the remarkable statement that if during discovery it is discovered that the trustee had knowledge of fraudulent inducement and allowed such, the claim will also be against the trustee. Oddly, the Movants do not seek leave herein to sue the trustee or present grounds in support of a claim against the trustee. Even more remarkable is the Movants' request for leave to sue counsel to Northbrook Bank & Trust Company (the “Bank”) and the Illinois Department of Healthcare and Family Services (“IDHFS”).

For the reasons noted herein, the Motion is DENIED.

I. FACTS AND BACKGROUND

Prior to a 2013 bankruptcy sale of its assets, the Debtors owned and operated Morris Senior Living Facility, a supportive living facility at 1221 South Edgewater Drive in Morris, Illinois. See Motion for Entry of an Order Pursuant to Sections 105(a) and 362 of the Bankruptcy Code Extending the Automatic Stay to Membership Interests in Morris Senior Living, LLC, Bankruptcy Case 12–005364, dkt. no. 6, p. 2. The Debtors had been owned by the same parties who own Movant Morris Healthcare, which operated a nursing home next door to the Debtors' facility. Response of Chapter 11 Trustee and His Counsel in Opposition to the Amended Motion For Leave to File a Claim Against Trustee's Counsel and Others for Fraudulent Inducement, dkt. no. 351, p. 3.

II. LEGAL ISSUES

A trustee in bankruptcy works for the bankruptcy court that appointed or approved his or her appointment, administering property that has come under the court's control by virtue of 11 U.S.C. § 541(a) of the Bankruptcy Code (“Code”) which provides that at the commencement of a bankruptcy case, a debtor's property becomes property of the bankruptcy estate.

A trustee in bankruptcy may not be sued unless the court that appointed him or her allows the claimant to proceed. Barton v. Barbour, 104 U.S. 126, 136, 26 L.Ed. 672 (1881); In re Linton, 136 F.3d 544, 545 (7th Cir.1998). A party seeking leave to sue a trustee “must make a prima facie case against the trustee, showing that its claim is not without foundation.” In re National Molding Co., 230 F.2d 69, 71 (3rd Cir.1956) (citing Dunscombe v. Loftin, 154 F.2d 963, 966 (5th Cir.1946) and Driver–Harris Co. v. Industrial Furnace Corp., 12 F.Supp. 918, 919 (W.D.N.Y.1935)).

A bankruptcy trustee owes fiduciary duties to the debtor's estate and its creditors. In re Chicago Art Glass, Inc. 155 B.R. 180, 187 (Bankr.N.D.Ill.1993) citing In re Melenyzer, 140 B.R. 143 (Bankr.W.D.Tex.1992). As the court noted in In re Kids Creek Partners, L.P., it is not as clear “as to the extent these duties are owed by Special Counsel for the Trustee, but for purposes of this discussion it will be assumed that fiduciary duties of any counsel for Trustee to the estate and its creditors are the same as those due from the Trustee.” In re Kids Creek Partners, L.P., 248 B.R. 554, 560 (Bankr.N.D.Ill.2000). This court also assumes that a trustee's counsel owes fiduciary duties to the bankruptcy estate and to its creditors.

Morris Healthcare claims that it once owned a Skilled Living Facility Certificate (“SLF Certificate”) allowing it to operate a skilled living facility. SLF Certificates are issued by the State of Illinois through its Department of Healthcare and Family Services.

According to Morris Healthcare, owners of SLF Certificates enroll medical providers to operate skilled living facilities pursuant to 89 Illinois Administrative Code 140.11. Morris Healthcare appointed Debtor Morris Senior Living, LLC (“Morris Senior Living”) as the medical provider for the Morris Senior Living Facility. Morris Healthcare alleges that Debtor Morris Senior Living was not licensed to operate the Skilled Living Facility (“SLF”), but was the SLF's medical provider based on Morris Healthcare's state-issued SLF Certificate. Morris Healthcare alleges that as an SLF Certificate owner it can change providers at any time. See Motion, at ¶ 9.

Morris Senior Living, LLC and Morris Real Estate Holdings II, LLC (“Morris Real Estate”) filed for bankruptcy relief on February 14, 2012 under chapter 11 of the Code. Morris Real Estate owned the real estate where Morris Senior Living, LLC operated the SLF. On February 14, 2012, the Bank, a secured creditor herein, conducted a sale pursuant to the Uniform Commercial Code at which it purchased the membership interests of Debtor Morris Senior Living.

On March 21, 2013, this court approved the sale of substantially all of the Debtors' assets. See dkt. no. 248. The Movants may be under the impression that the trustee sold its SLF Certificate in this effort. It did not. The court order authorizing the sale was entered on March 21, 2013 (“Sale Order”). See dkt. no. 248. The Movants (along with Morris Real Estate) appealed the Sale Order. See dkt. no. 255. An Amended Notice of Appeal of the Sale Order was filed on April 1, 2013. Seedkt. no. 267.

On May 9, 2013, District Judge Matthew Kennelly ruled that the SLF Certificate was not sold as part of the court-approved sale. See Case 1:13–cv–02457, dkt. no. 21, May 9, 2013, ¶ 3. The District Court dismissed the appeal. The Movants' efforts herein are an effort to relitigate the issues resolved by the Sale Order and District Judge Kennelly's order: the SLF Certificate was not sold.

A. Res Judicata

The Movants are precluded from relitigating this issue by the principle of res judicata. Res judicata, or claim preclusion, bars the same parties or their privies from relitigating any issue that was raised in a prior judgment or could have been raised in a prior action. Res judicata is a judicial doctrine whose purpose is to ensure the finality of judicial decisions. Application of this doctrine requires: (1) identity of the parties or their privies; (2) identity of the causes of action and (3) a final judgment on the merits in an earlier action. Tartt v. Northwest Community Hosp., 453 F.3d 817, 822 (7th Cir.2006). The Movants are the same parties who challenged the Sale Order. The Movants are challenging whether Morris Healthcare's SLF Certificate was sold, the same issue resolved by two final judgments. The May 9, 2013 dismissal of their appeal is the second final judgment in an earlier action on the sale (the first final judgment was the March 21, 2013 Sale Order). Judge Kennelly's order has not been appealed.

Movants allege that the Bank's counsel asked IDHFS to determine who owned the SLF Certificate and that the state responded that Morris Healthcare was the SLF Certificate owner. See April 26, 2012 letter to Kim Westerkamp, Exhibit A to Motion Exhibit M at Docket No. 337.

The Movants allege that pursuant to Illinois law, once Debtor Morris Senior Living had new owners, the Bank, it could no longer operate the SLF because its participation approval was not transferable. 89 Ill. Admin. Code § 146.215(e) states: “SLF certification is not transferable or applicable to any location, provider, management agent or ownership other than that indicated on the provider agreement.”

Citing an April 2, 2012 transcript (“Transcript”), the Movants allege that the Bank's counsel fraudulently induced a judge to believe that Debtor Morris Senior Living owned the license to operate the facility, knowing that the Debtor did not own the license, and for that reason a trustee could be appointed under Code Section 1104 to run the operation. See Motion, ¶¶ 17–18.

This court reviewed the twenty-four page Transcript of the hearing, which was presided over by a another judge, but did not find proof of the Bank's counsel making such a statement. The Movants have not directed the court's attention to a specific page or line of the Transcript showing that the Bank's counsel made fraudulent inducements. The Transcript shows that at one point the judge stated that Morris Senior Living was licensed and certified by the State of Illinois to operate the facility. However, she also noted confusion regarding the ownership of the license. See Transcript, pp. 5, 10. It is unlikely that the Bank's attorney fraudulently induced or convinced the judge that Debtor Morris Senior Living held the license/SLF Certificate.

The Bank's attorney mentioned preventing Morris Healthcare from taking adverse action with respect to the SLF Certificate. This may mean that the Bank's attorney thought that Morris Healthcare owned or exercised authority over the SLF Certificate, in contrast to the Movants' position that the Bank's attorney fraudulently told the court that Morris Healthcare did not own the SLF Certificate. This refutes the Movants' allegation that he fraudulently induced the court to believe that Debtor Morris Senior Living owned the SLF Certificate. See Transcript, p. 19. The court has seen no evidence that the judge who heard this matter that day was fraudulently induced by the Bank's attorney regarding the facts.

In contrast to the Movants' assertion that the judge hearing the matter was misled about ownership of the SLF Certificate on April 2, 2012, an Assistant U.S. Trustee stated at the hearing that he was aware of...