In re Octagon Roofing, Bankruptcy No. 90 B 08656
| Decision Date | 22 February 1991 |
| Docket Number | Bankruptcy No. 90 B 08656,Adv. No. 90 A 0873. |
| Parties | In re OCTAGON ROOFING d/b/a Western Modified Roofing, Debtor. Donald JOHNSON, Trustee for the Estate of Octagon Roofing d/b/a Western Modified Roofing, Plaintiff, v. NBD PARK RIDGE BANK, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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Donald E. Johnson, Hollis and Johnson, Chicago, Ill., for plaintiff.
Bruce Dopke, Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., for NBD Park Ridge Bank.
Donald E. Johnson ("Trustee"), Chapter 7 trustee in bankruptcy for the estate of Octagon Roofing ("Debtor"), filed this Adversary Complaint seeking in three alternate Counts to avoid a second mortgage lien and guaranty granted by Debtor to the Defendant NBD Park Ridge Bank ("Bank"). The Adversary Complaint also sought an order allowing sale of Debtor's real property pursuant to Sections 363(f)(3) and 363(f)(4) of the U.S. Bankruptcy Code ("Code"), Title 11 U.S.C. In the related bankruptcy proceeding, the Trustee also moved the Court to approve sale of the property on the same grounds. Following hearing held November 19, 1990, this Court allowed a sale to proceed under Section 363(f)(4). The Bank had earlier filed the instant motion to dismiss all four counts of the Adversary Complaint (Motion"). The Court announced from the bench at the November 19, 1990 hearing that the Motion would be denied for reasons to be explained by later opinion. For reasons stated below the Bank's Motion to Dismiss Count II is granted with leave to Plaintiff to file an Amended Count II. However, the Motion to Dismiss Counts I, III and IV is denied.
The following facts appear from the Complaint or otherwise in the record (but do not rely on evidence taken at the November hearing):
Hexagon Management Company ("Hexagon"), a Delaware corporation, was the sole general partner of the Debtor, owning 62.5% of partnership interests in Debtor. Eugene Scott, Mike Alcock, Ned Kimbral, Bud Jansen, and Rick Rosenow each owned 12.5% of the stock of Hexagon. Eugene Scott was President of Hexagon.
American Roofing Systems ("ARS") was an Illinois limited partnership whose general partner was ARC Management. Ned Kimbral owned 100% of the stock of ARC Management, while Eugene Scott, Mike Alcock, Bud Jansen, and Rick Rosenow each owned 16% of ARS, either directly or through wholly owned Subchapter "S" corporations.
Debtor owns real estate located at 150 Lyon Drive in Fernley, Nevada, consisting of a building and ten acres of land (the "Realty"). As of August 1, 1989, the Realty was subject only to a recorded first mortgage interest in the approximate amount of $525,000 in favor of WMR Partners. However, by the end of August, 1989, ARS owed NBD Park Ridge Bank ("Bank") an amount exceeding $4,000,000. The Bank is a banking corporation organized and doing business in the State of Illinois. Debtor also owed ARS approximately $78,206.74.
In August, 1989, the Bank suggested that Debtor give a Second Mortgage on its real estate to secure a new guaranty of loans to ARS from the Bank. Consequently, Eugene Scott, as President of Hexagon and on its behalf as general partner of Debtor, executed a second mortgage on the Realty in favor of the Bank ("Second Mortgage"). Counsel for the Bank prepared the mortgage document.
The first page of the mortgage instrument is entitled "Junior Mortgage To Secure Guaranty," and provides that the Second Mortgage was executed to secure Debtor's guaranty of ARS' debt of $4,079,99.96 to the Bank. The figure of $4,079,99.96 is handwritten on the document. The guaranty was in the amount of $1,000,000.
It is alleged that the Bank would have shut down the operations of ARS had Debtor not executed the Second Mortgage and guaranty.
In August, 1989, Eugene Scott as President of Hexagon, the general partner of Debtor, executed the aforesaid guaranty of ARS' debt to the Bank. The Second Mortgage was recorded on or about August 31, 1989. As of that date, Debtor owed the Bank at least $2,000,000 for loans made by the Bank to Debtor in 1988. In addition, Debtor's liabilities exceeded the value of its assets. Debtor did not receive any new funds from the Bank as a result of the Second Mortgage, and was unable to obtain alternative financing of its obligations to the Bank in 1989. Debtor then owed an unsecured debt to ARS in the amount of $83,006.74.
On or about July 9, 1990, Donald Johnson ("Trustee") was appointed Chapter 7 Trustee of Debtor. On November 1, 1990, Trustee filed this Adversary Complaint against the Bank. Count I of the Complaint seeks to avoid the guaranty and Second Mortgage as constituting a fraudulent conveyance pursuant to Section 548(a)(2) of the Code. Count II, as an alternative count, seeks to avoid the same transfer as a preference under Section 547(b) of the Code. Count III, also pleaded in the alternative to Count I, alleges that the guaranty and Second Mortgage constitute a voidable preference within the meaning of Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir.1989) ("Deprizio"). Finally, Count IV seeks a sale of the Realty pursuant to Section 363(f)(3) and Section 363(f)(4) of the Code.
On or about November 7, 1990, the Bank filed the present Motion to Dismiss. Because the Trustee had a potential bidder on the Realty (Polyglass, S.p.A.) the Court took evidence and considered the issues under Count IV of the Complaint on November 19, 1990. It was found that if Trustee prevails in his Adversary case, the bid of Polyglass, in the amount of $1,920,000, would exceed both the Bank's secured claim and the first mortgage lien of WMR Partners. The bid would thus exceed the aggregate value of liens against the Realty, and the Trustee could therefore sell said assets to Polyglass free and clear of liens and over the Bank's objections pursuant to Section 363(f)(3).1 However, the Court found that because the Trustee had not yet proven his case, the sale could not be authorized under Section 363(f)(3).
However, it was also found that evidence demonstrated a bona fide dispute between the Trustee and the Bank as to Counts I and III of the Adversary Complaint. Thus, the Court allowed the sale to Polyglass or any higher bidder to proceed over the Bank's objection pursuant to Section 363(f)(4).2 Findings of Fact and Conclusions of Law were then entered in support of that ruling. In re Octagon Roofing, 123 B.R. 583 (Bankr.N.D.Ill.1991).
Accordingly, on November 29, 1990, the sale of the Realty took place. Pursuant to 11 U.S.C. § 363(k), the Bank was allowed to make a credit bid of its claim on the Realty, and consequently made the high bid of $2,220,000. Pursuant to the order of this Court, the Bank posted an irrevocable letter of credit drawn on another bank in order to protect the Trustee. The letter of credit guaranteed payment of up to $416,008.90 to the Trustee in the event Trustee ultimately prevails in his Adversary case and the credit bid proves to be more than the Bank's secured debt.
United States District Courts have subject matter jurisdiction over cases arising under, arising in, or related to proceedings under Title 11. 28 U.S.C. § 1334(a), (b). Each District Court is authorized to refer such proceedings to bankruptcy judges for the district. 28 U.S.C. § 157(a). The United States District Court for the Northern District of Illinois has made such referral pursuant to Local District Rule 2.33.
In a core proceeding that arises in or under Title 11, a bankruptcy judge has jurisdiction to hear and determine the proceeding and issue final orders and judgments. 28 U.S.C. § 157(a). A proceeding to determine, avoid, or recover preferences is a core proceeding. 28 U.S.C. § 157(b)(2)(F). A proceeding to determine, avoid, or recover fraudulent conveyances is a core proceeding. 28 U.S.C. § 157(b)(2)(H). Accordingly, the Complaint filed here rests on this Court's core jurisdiction.
The Bank's Motion to Dismiss is brought pursuant to Bankruptcy Rule 7012 which makes Rule 12(b)(6) of Fed.R.Civ.P. applicable to adversary proceedings. For the Bank to prevail on its Motion to Dismiss, it must clearly appear from the pleadings that the Trustee can prove no set of facts in support of his claims which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Swanson v. Wabash, Inc., 577 F.Supp. 1308 (N.D.Ill.1983). The Court must consider both pleaded facts and reasonable inferences drawn from pleaded facts, in a light most favorable to Plaintiff when reviewing the Bank's motion to dismiss. Mescall v. Burrus, 603 F.2d 1266, 1269 (7th Cir.1979); City of Milwaukee v. Saxbe, 546 F.2d 693, 704 (7th Cir.1976); Corcoran v. Chicago Park District, 875 F.2d 609 (7th Cir.1989); Westland v. Sero of New Haven, Inc., 601 F.Supp. 163, 166 (N.D.Ill.1985).
Count I of the Adversary Complaint seeks to avoid the guaranty and Second Mortgage as constituting a fraudulent conveyance under 11 U.S.C. § 548(a)(2). Trustee pleads Count I in the alternative to preference Counts II and III in the event the Court ultimately finds that the purpose of the Second Mortgage was not to secure Debtor's antecedent obligations, but rather to secure Debtor's guaranty of ARS' debt to the Bank.
Unlike Section 548(a)(1) which requires a plaintiff to allege actual fraud, Section 548(a)(2) requires a plaintiff to allege only constructive fraud. Wieboldt Stores,...
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