In re Papa's Market Cafe, Inc.

• Decision Date: 14 December 1993
• Docket Number: Bankruptcy No. 87 B 09074. Adv. No. 93 A 0536.
• Citation: 162 BR 519
• Parties: In re PAPA'S MARKET CAFE, INC. d/b/a Papa's Cafe & Bar, Debtor. Sheldon L. SOLOW, Trustee, Plaintiff, v. FIRST OF AMERICA BANK — GOLF MILL, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

162 B.R. 519 (1993)

In re PAPA'S MARKET CAFE, INC. d/b/a Papa's Cafe & Bar, Debtor Sheldon L. SOLOW, Trustee, Plaintiff, v. FIRST OF AMERICA BANK — GOLF MILL, Defendant.

Bankruptcy No. 87 B 09074. Adv. No. 93 A 0536.

United States Bankruptcy Court, N.D. Illinois, E.D.

December 14, 1993.

COPYRIGHT MATERIAL OMITTED

Sheldon Solow, Sachnoff & Weaver, Ltd., Chicago, IL, Trustee.

Murray Westler, Chicago, IL, Arnstein & Zeller, Skokie, IL, for defendant.

MEMORANDUM OPINION

DAVID H. COAR, Bankruptcy Judge.

This matter comes before the Court on Defendant's motion to strike and dismiss Plaintiff's complaint on the grounds that the Court lacks authority to grant the relief requested and that the claim is not timely under § 549(d) of the Bankruptcy Code. After reviewing the pleadings, the briefs submitted by the parties, and the applicable law, the Court now issues Findings of Fact and Conclusions of Law.

BACKGROUND

The Debtor, Papa's Market & Cafe, Inc., d/b/a/ Papa's Cafe & Bar Papa's Cafe, was owned and managed by Derrik Grove Grove, John E. Westman and Claudia Westman the Westmans. On or around August 23, 1984, Grove and the Westmans sought to obtain funds to operate Papa's Cafe. They executed an installment promissory note for $290,000 in favor of Golf Mill State Bank, a predecessor to the Defendant, First of America Bank of Golf Mill Golf Mill. The note was secured by a lien on all of the Debtor's assets, including equipment and trade fixtures. The note to Golf Mill was to be repaid in 35 installments at a rate of 2% over prime with the final installment due on August 22, 1987. Papa's Cafe guaranteed Grove's and the Westmans' obligations to Golf Mill.

In June, 1987, Papa's Cafe filed a voluntary petition under chapter 11 of the Bankruptcy Code. At that time, the remaining indebtedness on the note was about $124,101.33. In September, 1987, Golf Mill filed a motion to modify the automatic stay to provide adequate protection for its liens on Papa's Cafe's assets. Grove, the Westmans, the Debtor and the U.S. Trustee were served with notice of the motion.¹ The Defendant and Papa's Cafe as debtor in possession subsequently entered into an agreement to provide adequate protection to Golf Mill. On November 24, 1987, the Court entered an order Agreed Order which approved and memorialized the parties' agreement to modify the automatic stay. The Agreed Order provided, in relevant part:

Pursuant to a note executed May 24, 1984, Derrik Grove is indebted to Golf Mill State Bank in the amount of $124,101.33 with interest accrued at a per diem of $37.58;

In return for said borrowing, Derrik Grove granted unto Golf Mill State Bank a valid and perfected security interest in and unto all of the assets used by the Debtor in the operation of its business, said assets being located on the premises of the Debtor;

Derrik Grove, also Debtor in these proceedings, is the legal and equitable title holder to the assets described herein;

Golf Mill State Bank is entitled to payments from the Debtor as lessee and/or Derrik Grove as owner of said assets as adequate protection for the use of its collateral IT IS HEREBY ORDERED that PAPA\'S MARKET CAFE, INC., d/b/a/ PAPA\'S CAFE AND BAR, be and they are hereby authorized, empowered, and directed to pay Golf Mill State Bank the sum of $4,151.89 per month with the initial payment coming due on November 15, 1987 and each and every subsequent payment coming due 30 days thereafter. Said payments being made for a period of three years until the indebtedness to Golf Mill State Bank has been paid in full. Furthermore, back interest in the sum of $3,851.33 shall be paid no later than December 31, 1987, and

IT IS FURTHER ORDERED that pursuant to the note executed by Derrik Grove, said attorneys shall be paid the sum of $1,750.00 no later than December 1, 1987.

Papa's Cafe, as debtor in possession, made payments to Golf Mill pursuant to the Agreed Order. In February, 1989, the Court directed the United States Trustee to appoint a trustee to administer the estate. David R. Herzog Herzog was appointed chapter 11 trustee on February 8th of that year. Herzog made payments to Golf Mill pursuant to the Agreed Order until October 20, 1992, when the case was converted to chapter 7. The Plaintiff, Sheldon L. Solow Trustee, was appointed chapter 7 trustee. At that time, approximately $74,000 had been paid to Golf Mill under the Agreed Order.

Trustee filed this adversary complaint on May 7, 1993. Count I seeks to vacate the November 24, 1987 Agreed Order. Count II seeks to avoid the payments made to Golf Mill after November 24, 1990 under § 549 of the Code. Golf Mill responded with a motion to strike and dismiss the complaint.

STANDARD OF REVIEW

Although Golf Mill does not articulate the statutory basis for its motion to dismiss, the Court will assume that the motion is brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, as incorporated by Fed.R.Bankr.P. 7012.² A Rule 12(b)(6) motion should be granted if the complaint does not state a cause of action upon which relief may be granted. Corcoran v. Chicago Park Dist., 875 F.2d 609, 611 (7th Cir.1989). When evaluating a motion to dismiss, the Court must assume that all of the factual allegations in the pleadings are true, and must construe the pleadings and all reasonable inferences which derive therefrom in favor of the non-moving party. Prince v. Rescorp Realty, 940 F.2d 1104, 1106 (7th Cir.1991). Unless it appears beyond doubt that the plaintiff can prove no facts which would entitle him to relief, the Court must deny the motion. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).

DISCUSSION

Trustee alleges that Golf Mill was paid by either Papa's Cafe or Herzog, and that Golf Mill received more than it was entitled to receive as adequate protection under the Agreed Order. Moreover, Trustee maintains that notice of the motion to modify the automatic stay was not provided to creditors as required by Bankruptcy Rule 4001(d), so the Agreed Order was void ab initio. Trustee also maintains that regardless of the validity of the Agreed Order, Golf Mill received payments from either Papa's Cafe or Herzog in excess of the amounts authorized by the Court. Accordingly, Trustee seeks to vacate the Agreed Order and to recover the excess payments made to Golf Mill. Golf Mill responds that the Agreed Order is a final order not subject to modification at this late date, and that Trustee's claim is time barred by § 549(d) of the Bankruptcy Code.

Is the Agreed Order a Valid, Final Order

The finality of the Agreed Order is dispositive of Count I, which seeks to vacate that ruling. If the Agreed Order was not final, it may be modified or vacated by the Court; if it was final, the Court has no authority to grant the relief requested under Count I. 11 U.S.C. § 105(a); Fed.R.Civ.P. 60(b), as incorporated by Fed.R.Bankr.P. 9024. However, Count II pertains to payments exceeding the scope of the Agreed Order. Thus the issue of whether the Agreed Order was final is irrelevant to the relief sought and the issues presented under Count II.

Trustee urges that the Agreed Order must be vacated because insufficient notice was afforded to creditors in contravention of Bankruptcy Rule 4001(d).³ Rule 4001(d)(1) provides, in relevant part:

A motion for approval of an agreement . . . (C) to modify or terminate the stay provided for in § 362 . . . shall be served on any committee elected pursuant to § 705, or appointed pursuant to § 1102 of the Code or its authorized agent, or, if the case is a . . . chapter 11 reorganization case and no committee of unsecured creditors has been appointed pursuant to § 1102, on the creditors included on the list filed pursuant to Rule 1007(d), and on such other entities as the court may direct. The motion shall be accompanied by a copy of the agreement.

The purpose of Rule 4001(d) is to protect the interests of all parties that may be adversely affected by an undisclosed agreement by affording them notice and the opportunity to timely object, and to remedy what were perceived as "sweetheart deals" between the debtor and secured creditors. In re Manchester Center, 123 B.R. 378, 381 (Bankr.C.D.Cal.1991); In re Prairie Trunk Ry., 112 B.R. 924, 928 (Bankr.N.D.Ill.1990); In re Weber, 99 B.R. 1001, 1005 n. 3 (Bankr. D.Utah 1989). Therefore, notice must be served on all creditors' committees (or all creditors listed by the Debtor if there is no committee) in case of a motion for approval of an agreement to provide adequate protection or to modify the stay. After the proper notice is filed and if there are no objections, the court may then enter an order to approve or disapprove an agreement without further hearings. Prairie Trunk Ry., 112 B.R. at 928. This is the minimum protection the court can afford interested creditors and other parties. In re Ridgeline Structures, Inc., 154 B.R. 831, 832 (Bankr.D.N.H.1993).⁴

Noncompliance with Rule 4001(d) does not ipso facto constitute a violation of due process necessary to set aside an order. Manchester Center, 123 B.R. at 382. However, a court generally cannot infer knowledge of an adequate protection order on parties who did not receive actual notice in compliance with Rule 4001(d) or some comparable provision. In re Gatlinburg Motel Enters., 106 B.R. 492, 495-96 (Bankr.E.D.Tenn.1989).

Here, the Agreed Order states that due notice was given to all parties in interest, but the record does not indicate that a Rule 4001(d)(1) notice was sent out. In fact, only five parties were included on the service list for Golf Mill's Notice of Motion and for the Motion for Modification of the Automatic Stay: Grove, the Westmans, the Debtor and its counsel, and the United States Trustee. Thus no creditor received actual notice of the Agreed Order. The unsecured creditors who were intended to be protected by Rule 4001(d)(1) were completely without notice of what was transpiring....