In re Olde Prairie Block Owner Llc

• Decision Date: 25 August 2011
• Docket Number: No. 10 B 22668.,10 B 22668.
• Citation: 457 B.R. 692
• Parties: In re OLDE PRAIRIE BLOCK OWNER, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

457 B.R. 692

In re OLDE PRAIRIE BLOCK OWNER, LLC, Debtor.

No. 10 B 22668.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Aug. 25, 2011.

OPINION TEXT STARTS HEREWest CodenotesRecognized as Unconstitutional28 U.S.C.A. § 157(b)(2)(C) George R. Mesires, Ungaretti & Harris LLP, Chicago, IL, Joanne H. Yi, John E. Gierum, William J. Mantas, Gierum & Mantas, Rosemont, IL, John Ruskusky, Michael K. Desmond, Figliulo & Silverman PC, Chicago, IL, Neil E. Holmen, Walker, Wilcox, Matousek LLP, Chicago, IL, Patrick F. Ross, Richard Henry Tilghman, IV, Ungaretti & Harris, LLP, Chicago, IL, for Debtor.

ADDITIONAL CONCLUSIONS OF LAW ON DEBTOR'S COUNTERCLAIMS [Docket No. 312] TO CENTERPOINT'S CLAIM

JACK B. SCHMETTERER, Bankruptcy Judge.

The latest dispute in this hotly contested bankruptcy case is whether a Bankruptcy Judge may enter final judgments on five counterclaims filed against the claim of the secured creditor CenterPoint Properties Trust (“CenterPoint”). As to each counterclaim, either the counterclaim was necessarily resolved in order to rule on the creditor's claim, see Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2620, 180 L.Ed.2d 475 (2011), or the parties have consented to final adjudication by a Bankruptcy Judge, see 28 U.S.C. § 157(c)(2). Final judgments may therefore be entered by a Bankruptcy Judge on all of the counterclaims.¹

BACKGROUND

Debtor Olde Prairie Block Owner, LLC, is an aspiring hotel developer that owns two parcels of land adjacent to the McCormick Place convention center in Chicago, Illinois. Debtor funded its activities through borrowing, eventually refinancing its debt with CenterPoint. Debtor was unable to repay CenterPoint's loan when it came due in February 2009, and CenterPoint promptly foreclosed. After extensive litigation in the state court foreclosure proceeding, Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code, Title 11 U.S.C., on May 18, 2010. CenterPoint filed a Proof of Claim asserting a secured claim for unpaid amounts due under the loan contract between the parties. Debtor objected to CenterPoint's claim and asserted several counterclaims.

Shortly after Debtor and CenterPoint had executed their loan contract, the Metropolitan Pier and Exposition Authority (the “MPEA”), a quasi-governmental body that operates McCormick Place, sought to acquire one of Debtor's parcels through a condemnation proceeding. The condemnation was not resolved until the MPEA abandoned the proceeding in 2010, after Debtor had filed for bankruptcy.

CenterPoint's Claim and Debtor's Counterclaims

CenterPoint filed a claim for $48,762,842.19 plus interest, fees, and costs. Debtor pleaded five counterclaims against that claim.

In Count I, Debtor sought to rescind its loan contract with CenterPoint on grounds of economic duress. Debtor alleged that CenterPoint wrongfully pressured Debtor to accept onerous terms when it entered into the loan contract, depriving Debtor of free choice by requiring those terms late in negotiations when Debtor had no other financing options.

In Count II, Debtor sought damages for CenterPoint's alleged tortious interference with a sale of one of Debtor's real estate parcels to the MPEA. Debtor alleged that it had a deal to sell a parcel of land to the MPEA in lieu of condemnation, but that CenterPoint improperly induced one of the MPEA's board members, who had founded CenterPoint but was no longer affiliated with the organization, to stop the deal.

Debtor asserted in Count III that CenterPoint breached its contractual duty of good faith and fair dealing. The contract between the parties vested CenterPoint with contractual discretion to control any condemnation proceeding brought against Debtor's real estate. Debtor alleged that CenterPoint violated the duty of good faith and fair dealing by asserting its contractual discretion but then failing to settle the MPEA's condemnation proceeding and by interfering with Debtor's own efforts to settle.

In Count IV, Debtor asserted that CenterPoint breached an extracontractual fiduciary duty. Specifically, Debtor argued that CenterPoint owed a fiduciary duty to Debtor on account of its exclusive control of over the MPEA's condemnation proceeding, and that CenterPoint breached this duty by failing to settle that proceeding.

In Count V, Debtor sought damages for alleged negligence. It argued that CenterPoint had undertaken a duty in controlling the MPEA's condemnation proceeding, but had breached that duty by failing to settle the action.

Pretrial Proceedings

Under Rules 3007(b) and 7001(2) Fed. R. Bankr.P., a counterclaim to a claim that challenges the validity or extent of a secured creditor's lien should usually proceed as an Adversary proceeding. While a separate Adversary proceeding was not filed here, the counterclaim Counts proceeded as a “contested matter” under Rule 9014 Fed. R. Bankr.P. Pursuant to that Rule, procedural Adversary rules were applied. As required by court order, all of the counterclaims were re-pleaded in compliance with pleading requirements for Adversary proceedings. Pursuant to Rules 7008(a) and 7012(b) Fed. R. Bankr.P., the parties expressly consented in their pleadings to entry of final judgments by a Bankruptcy Judge on all of Debtor's counterclaims, even if any were determined to be non-core matters. (Debtor's Statement in Resp. to Second Amendment to Final Pretrial Order, Docket No. 346; CenterPoint Properties Trust's Second Amendment to its Mot. to Dismiss Debtor's Supplemental Am. Objection to Claim No. 1, Docket No. 350.) Pursuant to those consents, the parties consented to the Bankruptcy Judge eventually entering final judgment as to each Counterclaim Count pursuant to 28 U.S.C. § 157(c)(2).

Counts I, II, IV, and V were eventually dismissed on Center–Point's motion for failure to state plausible claims. In re Olde Prairie Block Owner, LLC, 442 B.R. 675 (Bankr.N.D.Ill.2011) (Docket No. 660); In re Olde Prairie Block Owner, LLC, 441 B.R. 298 (Bankr.N.D.Ill.2010) (Docket No. 369). Given the long history of litigation and ample opportunity for discovery, those dismissals were eventually made with prejudice (Am. Order on Mot. of CenterPoint to Dismiss Debtor's Am. Objection to CenterPoint's Claim, Docket No. 665 (as to Count II); Order, Docket No. 419 (as to Counts I, IV, and V)). However, those rulings were not then certified for immediate appeal pursuant to Rule 54(b) Fed.R.Civ.P. (made applicable by Rule 7054 Fed. R. Bankr.P.), it being determined without objection from the parties that any appeals should follow conclusion of all work on the five Counterclaims.

Count III, in which Debtor asserted a breach of CenterPoint's contractual duty of good faith and fair dealing under Illinois law, remained as the sole Counterclaim to be tried. In asserting this Counterclaim, Debtor sought an award of damages “for the loss suffered by Debtor as a result of CenterPoint's breach of contract.” (Supplemental Am. Objection to Claim No. 1, Docket No. 312, at 29.) Essentially, Debtor sought thereby to reduce or offset the CenterPoint claim by $17.7 million in claims purportedly resulting when the MPEA withdrew its condemnation offer in that amount.

Trial and Ruling on Count III

Debtor's remaining Counterclaim in Count III was consolidated for trial with CenterPoint's claim, and one trial was held as to both. On June 22, 2011, Findings of Fact and Conclusions of Law were made entered concluding that CenterPoint's claim should be allowed in full (except for some fees and costs that CenterPoint had not proved) and that judgment should be entered in CenterPoint's favor on Debtor's counterclaim in Count III. In re Olde Prairie Block Owner, LLC, 452 B.R. 687 (Bankr.N.D.Ill.) (Docket No. 937).

The next day, however, before judgment was entered, the Supreme Court issued its opinion in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). That decision called into question in certain specified situations the extent of authority of Bankruptcy Judges to enter final judgments on counterclaims to claims filed in their cases. Therefore, the parties here were ordered to submit supplemental post-trial briefs as to whether the Stern ruling applied here, and if so how. They did file those briefs.

DISCUSSION

Jurisdiction

Subject matter jurisdiction lies under 28 U.S.C. § 1334. This proceeding is before the Court pursuant to 28 U.S.C. § 157 and is referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. §§ 1408 and 1409.

It must now be determined whether a Bankruptcy Judge appointed under Article I of the Constitution may enter final judgment on any or all of the Debtor's Counterclaim Counts either as a core proceeding under 28 U.S.C. § 157(b) if the Counterclaim rulings are required to adjudicate the claim itself, see Stern, 131 S.Ct. at 2620, or by consent if a non-core but otherwise related proceeding under 28 U.S.C. § 157(c)(2). In light of Stern, each Counterclaim Count must be separately analyzed.

By statute, a Bankruptcy Judge may enter final orders and judgments in core proceedings arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Core proceedings include, among other things, “counterclaims by the estate against persons filing claims against the estate.” Id. § 157(b)(2)(C). Bankruptcy Judges were thereby authorized by that provision to enter final dispositions of counterclaims against a creditor claim.

But a Bankruptcy Judge's authority in that regard has now been held to be limited under the Constitution. As determined in Stern, a Bankruptcy Judge “lack[s] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.” 131 S.Ct. at 2620. Counterclaims of that nature are instead to be treated as non-core proceedings, see id. (“W...