In re POC Props., LLC, Case No. 15–33291–svk

• Decision Date: 05 December 2017
• Docket Number: Case No. 15–33291–svk
• Parties: IN RE POC PROPERTIES, LLC, et al., Debtors.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin

580 B.R. 504

IN RE POC PROPERTIES, LLC, et al.¹ , Debtors.

Case No. 15–33291–svk

United States Bankruptcy Court, E.D. Wisconsin.

Signed December 5, 2017

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Gregory M. Schrieber, Jerome R. Kerkman, Kerkman Wagner & Dunn, Milwaukee, WI, for Debtors.

DECISION AND ORDER ESTIMATING CLAIMS OF MONTY TITLING TRUST 1 FOR PURPOSES OF VOTING AND DISTRIBUTION

Susan V. Kelley, Chief U.S. Bankruptcy Judge

The Debtors in these jointly-administered cases own commercial properties in New Mexico. M & I Marshall & Ilsley Bank ("M & I") made loans to enable the Debtors to purchase the properties, and the Debtors' principals, Warren and Steven Blumenthal, personally guaranteed the loans. The lending relationship between the Blumenthals and M & I spanned decades. When several of the Debtors' notes came due on April 1, 2011, the notes enjoyed good ratings in the M & I system.

Things changed when BMO Harris Bank ("BMO") acquired M & I in July 2011.² The notes were renewed for two 90–day periods ending on December 1, 2011. A July 6, 2011 email states that the Bank "will be looking at possible options for longer term renewals now that we have received the projections for each property." (Docket No. 301–2 at 8.) Unbeknownst to the Debtors, on July 16, 2011, the Bank downgraded the loans, put them on a watch list, and the loans were under review by the Bank's Special Assets Management Unit.

Eventually, after months of protracted communications, BMO proposed forbearance terms, but the parties never reached an agreement. The Debtors contend that BMO misled them as to its willingness to renew the notes while internally it had downgraded the Debtors' loans and sought to have the Debtors refinance elsewhere. BMO filed foreclosure actions against the properties and sued the Blumenthals as guarantors of the loans. The Blumenthals filed their own state court action against BMO alleging bad faith and misrepresentation, and BMO counterclaimed. Monty Titling Trust 1 ("Monty") then acquired the loans from BMO. After more litigation in the state court, the Debtors filed these bankruptcy cases and sought to enjoin the state court litigation. The Court granted a preliminary injunction, and the parties agreed to an extension of the injunction until the conclusion of the hearing on confirmation of the Debtors' plans. (Adv. No. 16–02054 at Docket No. 16.)

Monty filed proofs of claim for the amount due on the notes. The Debtors objected to the claims, asserting counterclaims including intentional misrepresentation, negligent misrepresentation, strict responsibility misrepresentation, and breach of the implied duty of good faith and fair dealing, all stemming from the Bank's conduct during the time the Debtors sought renewal of the notes. The Debtors also filed a motion asking the Court to estimate Monty's claims for purposes of voting on confirmation of a plan and distribution under the plan. While Monty did not object to estimation of its claims at the Debtors' proposed amounts for the purposes of voting, it did object to estimation for the purpose of distribution under a confirmed plan. After determining that the estimation decision would not be binding in the state court litigation and would be used only as a vehicle to enable the Debtors to proceed to confirmation for the benefit of their other creditors, the Court granted the Debtors' motion and conducted an extended hearing on estimating the claims.

The thrust of the Debtors' allegations is that despite having determined its strategy

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was to have the Debtors refinance with another institution, the Bank represented to the Debtors that it would work with them to renew their loans on a long-term basis. Had the Bank told the Blumenthals in late 2011 or early 2012 that it did not intend to proceed with a long-term renewal and wanted them to refinance with another lender, they would have paid the Bank in full. Their strategy would have included borrowing against the Bank's collateral and selling other assets owned or controlled by the Blumenthals, and the Debtors' experts opined that these sales would have generated sufficient proceeds to repay the Bank in full.

I. The Court Can Make a Non-Binding Estimate of Monty's Claims for the Purpose of Distribution under a Plan

Section 502(c) of the Bankruptcy Code provides that

There shall be estimated for purpose of allowance under this section—

(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case; or

(2) any right to payment arising from a right to an equitable remedy for breach of performance.

Initially, Monty argued that despite the fact that 28 U.S.C. § 157(b)(2)(B) provides that bankruptcy courts may hear and determine the estimation of claims for the purposes of confirming a Chapter 11 plan, absent Monty's consent, the Court lacks the constitutional authority to enter a final order on state law counterclaims in light of Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The Debtors agreed that a claims estimation would not provide a final determination on the merits and thus would not deny Monty the opportunity to have the matter finally adjudicated before a court with jurisdiction over the counterclaims. The Debtors' disclosure statement provides that

the state court proceedings will be reopened upon conclusion of these bankruptcy Cases to liquidate the claims. Until resolution of the objections, the Debtors will pay Monty based upon the deemed amounts of its Claims stated in the Plan. The Debtors do not expect that these claims will need to be resolved (or that they will be timely resolved) prior to seeking confirmation of the Plan.

(Docket No. 91 at 15.)

The purpose of § 502(c) is to "allow estimation of claims in order to avoid undue delay in the administration of bankruptcy proceedings." Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.) , 10 F.3d 944, 957 (2d Cir. 1993). Estimation "avoid[s] the need to await the resolution of outside lawsuits to determine issues of liability or amount owed by means of anticipating and estimating the likely outcome of these actions," and "promote[s] a fair distribution to creditors through a realistic assessment of uncertain claims." In re Continental Airlines , 981 F.2d 1450, 1461 (5th Cir. 1993). Courts have observed that it is "well established" that an estimation proceeding may be used to "determine the allowed amount for distribution purposes." In re Trident Shipworks, Inc. , 247 B.R. 513, 514 (Bankr. M.D. Fla. 2000) ; see also In re Wallace's Bookstores, Inc. , 317 B.R. 720, 725 (Bankr. E.D. Ky. 2004) (recognizing that § 502(c) permits estimation "for purpose of allowance" and does not contain a requirement that all parties consent to estimation for the purposes of distribution).

The Debtors sought an estimation of the amount of Monty's claims after accounting for their counterclaims, similar to the situation in In re Loucheschi LLC , 471 B.R. 777 (Bankr. D. Mass. 2012). In that case, the debtor objected to allowance of a lender's

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claim, incorporating claims, causes of action, defenses, and set-offs the debtor and its principals had asserted in an adversary proceeding against the lender, including counts for misrepresentation and breach of the covenant of good faith and fair dealing. See Goldsmith v. LBM Fin., LLC (In re Loucheschi LLC) , Ch. 7 Case No. 11-42578-MSH, Adv. No. 11-4122, 2013 WL 6009947, 2013 Bankr. LEXIS 4811 (Bankr. D. Mass. Nov. 13, 2013). The bankruptcy court held an evidentiary hearing to consider the lender's motion to estimate its claim to determine its rights for the purposes of confirmation. After the evidentiary hearing, the court concluded the debtor met its burden as to one of the counts of its complaint.

This Court similarly can estimate Monty's claims in a non-binding manner for purposes of confirmation and distribution without running afoul of the jurisdictional implications of Stern v. Marshall . The Court held an evidentiary hearing over several days and heard testimony from the Blumenthals, and Bank officers Austin Mautz, Jon Dexter, and Joseph Gessner. Several expert witnesses testified for the Debtors. In briefing following the hearing, the Debtors argued that the Bank breached its duty of good faith through its conduct before the notes matured. They also argued that the Bank is liable for intentional, negligent, or strict responsibility misrepresentation. Because both the claim objections and the estimation motion asserted additional causes of action, Monty requested that the Court treat any other arguments as having been abandoned. (Brief, Docket No. 343 at 46–47.)

II. The Court Will Estimate the Claims Using a Methodology that Determines the Likelihood that a Trier of Fact Would Accept Each Party's Version

Courts have discretion and flexibility in determining the best method to estimate a claim. Although some courts adopt an "all or nothing" approach to estimation, see, e.g., Bittner v. Borne Chemical Co. , 691 F.2d 134, 136 (3d Cir. 1982), others adopt a method that estimates the probability a claim will succeed and apply the probability to the damages, reasoning that they should take into...