In re Octagon Roofing
| Decision Date | 24 June 1993 |
| Docket Number | Bankruptcy No. 90 B 8656. |
| Parties | In re OCTAGON ROOFING, d/b/a Western Modified Roofing, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Donald E. Johnson, trustee, Hollis and Johnson, Chicago, IL, for debtor Octagon.
Cheryl L. Urbanski, Jones Day Reavis & Pogue, Chicago, IL, Fordham E. Huffman, Jones Day Reavis & Pogue, Columbus, OH, for Braas Systems.
FINDINGS OF FACT AND CONCLUSIONS OF LAW CONCERNING THE AMENDED CLAIM OF BRAAS SYSTEM, INC.
Braas System, Inc. ("BSI") filed an amended proof of claim against the estate of Debtor Octagon Roofing in which it asserts a $250,000 secured claim plus interest, costs and attorney's fees. Mr. Donald Johnson, the Trustee of Debtor's Chapter 7 estate, has objected to this amended proof of claim, maintaining that BSI is only entitled to an unsecured claim. A trial was held, at which both parties presented stipulated facts and documents and then rested. Having considered these stipulations as well as arguments of counsel, the Court now makes and enters Findings of Fact and Conclusions of Law. Pursuant thereto, by separate order the objection is sustained, the secured claim is disallowed, and BSI's claim is allowed only as an unsecured claim.
1. On May 10, 1990, an involuntary petition under Chapter 7 of the Bankruptcy Code was filed under 11 U.S.C. § 303 against Octagon Roofing d/b/a Western Modified Roofing. On June 21, 1990, Octagon consented to entry of an order for relief under Chapter 7. On July 9, 1990, the United States Trustee appointed Mr. Donald Johnson to serve as trustee to Octagon's Chapter 7 estate ("Trustee").
2. Prior to this bankruptcy proceeding, Octagon owned a manufacturing facility in Fernley, Nevada where it manufactured and sold roofing materials. Its principal assets were that facility and the equipment, inventory, and other personal property located therein (collectively, the "Plant").
3. On October 9, 1990, Trustee Johnson moved to sell the Plant along with the real estate on which it was located. The NBD Park Ridge Bank objected to that motion, claiming a security interest in all those assets. The Trustee responded by filing an Adversary complaint against NBD which attacked the validity of the asserted NBD liens.
4. In Findings of Fact and Conclusions of Law entered on January 3, 1991, In re Octagon Roofing, 123 B.R. 583 (Bankr. N.D.Ill.1991), this Court held:
The facts and discussion contained in that opinion are incorporated into these Findings by reference, and they will not be repeated here.
5. In connection with the Trustee's motion to sell assets, WMR Partners moved for allowance of its secured claim on November 27, 1990. WMR Partners is one of the entities that held a partnership interest in Octagon. The basis for its secured claim was a Deed of Trust given by Octagon in connection with an advance of $525,000 made by WMR Partners to Octagon on June 9, 1989.
6. On December 7, 1990, BSI filed an objection to the motion of WMR Partners. In addition opposing that motion, BSI also sought equitable subordination of the WMR Partners' lien to BSI's own claim, pursuant to 11 U.S.C. § 510(c). BSI also sought to impress a constructive trust in favor of it upon WMR Partners' lien. Along with this pleading, BSI filed a proof of claim asserting that Debtor owed it $250,000 "plus accrued interest, costs and attorneys fees". Joint Ex. 8. Paragraph 8 of this proof of claim stated that "no security interest is held for this claim." Id. The basis for that claim was a term note in the amount of $250,000 executed by Octagon in favor of BSI.
7. By an order entered December 12, 1990, this Court determined that WMR Partners held a perfected, first priority mortgage in the real property where the Plant was located.
8. Ultimately, the assets were sold by the Trustee to NBD via a credit bid. In approving the sale, the Court ordered NBD to pay WMR Partners $613,991.10 plus per diem interest accruing after November 30, 1990. However, WMR Partners was ordered to hold $275,000 of that money in escrow pending resolution of BSI's claim against it. See Joint Ex. 15 ().
9. Therefore, after the sale of Octagon's assets was completed, the various parties in this bankruptcy held the following:
10. On December 30, 1991, the Court approved an agreement between the Trustee and NBD to settle the Trustee's Adversary suit. In return for dismissing the complaint, NBD paid $202,500 into Octagon's estate.
11. The Trustee characterizes this payment as proceeds from the settlement of the Adversary. However, it is clear that this payment must truly be characterized as proceeds from the sale of the Plant and real estate. NBD agreed to pay a set amount for the assets. The only dispute was whether this amount could be paid via a credit bid or a cash payment to the estate. If the Trustee prevailed in his Adversary, then a portion of NBD's lien would have been invalidated, and thus a part of the purchase price would have to be paid in cash. On the other hand, if NBD prevailed, then its lien would not have been invalidated, and that part of the purchase price would have been paid with a credit bid. The settlement of the Adversary basically split the difference between the Trustee and NBD. As a result of that settlement, $202,500 of cash would be paid to the estate while the remaining amount secured by the letter of credit would go towards the satisfaction of NBD's lien.
12. Therefore, after examining the record of this bankruptcy case, the money paid as a result of the settlement agreement must be construed as proceeds from the sale of the Plant and real estate. Thus, any entity having a security interest in those assets would have a security interest in that $202,500 payment. BSI claims such an interest.
13. As of November 30, 1992, the Trustee held $90,491.15 in two bank accounts. These funds are comprised of (i) the remainder of the funds received on account of the settlement with NBD, (ii) $2,269.25 in proceeds from pre-petition bank accounts, and (iii) $400 from the post-petition sale of a truck owned by Octagon.
14. On May 5, 1992, the deadline for filing claims in this case, BSI amended its proof of claim to assert a secured claim in the same amount of its original proof of claim. BSI claimed to have an equitable lien on "all inventory, accounts receivable, machinery, equipment, buildings, fixtures, and land of Debtor, including the plant in Fernley, Nevada." Joint Ex. 9 (BSI's Amended Proof of Claim).
15. The basis for BSI's equitable lien claim is language in the term note executed by Octagon:
The undersigned Octagon hereby grant to BSI a security interest in all inventory, accounts receivable, machinery, equipment, buildings, fixtures, and land now owned or hereafter acquired by Western Modified Roofing. . . . The undersigned shall promptly execute and deliver any such mortgages, financing statements, or other instruments reasonably requested by BSI to perfect its security interest in the foregoing collateral.
Joint Ex. 6. BSI argues that it tendered documents necessary to perfect its security interest to Octagon. However, in an alleged violation of the Note, these documents were never executed.
16. BSI's equitable subordination claim was tried before this Court in February of 1992, and judgment was rendered in favor of WMR Partners. In re Octagon Roofing (Braas System, Inc. v. WMR Partners), 141 B.R. 968 (Bankr.N.D.Ill.1992). The factual findings contained in that opinion are incorporated into these Findings by reference, and they need not be repeated here. However, it should be pointed out that the documents originally tendered by BSI were not prepared correctly. Id. at B.R. 978. An attorney for Octagon wrote to BSI's attorney, stating that his client would execute properly prepared documents. Id. However, proper documents were not sent before Octagon's parent entities were placed in involuntary bankruptcy proceedings. Id.
17. BSI alleges that its equitable lien attached to all cash held by the Trustee except for the $400 received from the sale of the truck. However, BSI has stipulated that it does not have a recorded or perfected lien against any assets in Octagon's estate. The Trustee...
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