In re Sarah Michaels, Inc.

• Decision Date: 11 January 2007
• Docket Number: Bankruptcy No. 03 B 19465.,Adversary No. 05 A 01252.
• Citation: 358 B.R. 366
• Parties: In the Matter of SARAH MICHAELS, INC., et al., Debtor. Brenda P. Helms, as Trustee, Plaintiff, v. Certified Packaging Corporation, Defendant. CPC Acquisition, Inc., Plaintiff/Intervenor, v. Michael Froman and Brenda P. Helms, as Chapter 7 Trustee, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

358 B.R. 366

In the Matter of SARAH MICHAELS, INC., et al., Debtor.

Brenda P. Helms, as Trustee, Plaintiff, v. Certified Packaging Corporation, Defendant.

CPC Acquisition, Inc., Plaintiff/Intervenor, v. Michael Froman and Brenda P. Helms, as Chapter 7 Trustee, Defendant.

Bankruptcy No. 03 B 19465.

Adversary No. 05 A 01252.

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

January 11, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gordon E. Gouveia, Allen J. Guon, Matthew A. Swanson, James J. Teich, Shaw Gussis Fishman Glantz, Wolfson & Tow, Chicago, IL, for Movant or Plaintiff.

Ralph S. Schindler, Jr., Law Offices of Ralph J. Schindler, Jr., Chicago, IL, Brad Berish, Chad H. Gettleman, Adelman & Gettleman, Ltd., Chicago, IL, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary proceeding relates to the bankruptcy case of Sarah Michaels, Inc., Sarah Michaels, LLC, and Fasma, LLC (collectively, the "Debtors") originally filed under Chapter 11 of the Bankruptcy Code (the "Code"), 11 U.S.C. § 101 et seq on May 1, 2003, but converted January 26, 2004 to Chapter 7. A dispute was presented here as to lien priority between the Chapter 7 Trustee and the Plaintiff/Intervenor CPC Acquisition, Inc. over certain assets.

The Chapter 7 Trustee Brenda P. Helms ("Trustee") initiated this Adversary Proceeding by filing a complaint on April 29, 2005 ("Complaint") against Certified Packaging Corporation ("Certified") seeking to avoid and recover certain transfers. Certified failed to respond to the Complaint. Therefore, on November 16, 2005, an Order of Default Judgment was entered in favor of the Trustee and against Certified in the total amount of $2,178,928.01 (the "Default Judgment").

On November 18, 2005, the Trustee sought to enforce the Default Judgment by causing a Citation to Discover. Assets (the "Citation") to be served on Certified. On December 12, 2005 Certified filed a Motion to Vacate Default Judgment and for "elated Relief. Certified subsequently withdrew that Motion with prejudice pursuant to an Agreed Order Resolving Motion to Vacate Default Judgment and For Related Relief dated January 12, 2006. In the Agreed Order, Certified consented to service of the Citation and to any and all liens which resulted in favor of the Trustee and it agreed not to take any action to vacate the Citation. However, CPC Acquisition, Inc. intervened here to allege a prior lien on affected assets.

Some time before the citation lien arose, pursuant to a loan agreement between CIT Group/Business Credit, Inc. ("CIT") and Certified, CIT was granted a lien on all of Certified's currently owned or hereafter acquired assets including any proceeds thereof. CIT assigned its interest to LaSalle Bank, N.A. ("LaSalle"), and LaSalle later sold its interest to CPC Acquisition, Inc. ("CPCA").

On December 16, 2000 Certified experienced a fire in one of its plants. Certified's insurance company denied coverage. Indeed, there was no coverage because of apparent fault of Certified's insurance broker in not placing coverage as ordered. On January 24, 2006, Certified settled a suit against its insurance broker for $100,000 based on its professional negligence in failing to properly insure the premises. It was determined that Certified's counsel should be paid $12,000 for his work in effecting that recovery, and the remaining $88,000 balance was to be held in escrow by the Trustee pending resolution of this lien dispute. The Trustee and CPCA each claim the $88,000 net settlement proceeds as assets subject to their respective lien claims..

Still pending is a Complaint Certified filed against Commonwealth Edison, an Exelon Company ("ComEd") in the Circuit Court of Cook County, Illinois. In the ComEd Complaint, Certified alleges, inter alia, recovery for damage to its collateral, and also seeks business interruption damages, all in the amount of $2,000,000. Damages are asserted to result from ComEd's "carelessness and negligence" in maintaining a utility and power line which caused the electric fire. The Trustee and CPCA each claim any proceeds of this action as assets subject to their prior liens.

Following trial, the following Findings of Fact and Conclusions of Law are made and to be entered. For reasons stated below and pursuant to a separate judgment order, it is found that the Trustee has a superior lien over CPCA in the $88,000 recovered in the Rothschild Settlement and any interest thereon; that CPCA has a superior lien over the Trustee for any proceeds recovered in the ComEd Action for damage to its collateral; and the Trustee has a superior lien over CPCA for any proceeds recovered in the ComEd action for any recovery other than for damage to collateral.

FINDINGS OF FACT

Findings of Fact are based on evidence presented at trial, and stipulation of the parties filed herein as to uncontested facts:

The Debtor's Cases and Appointment of the Trustee

1. On May 1, 2003 (the "Petition Date") the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois.

2. On May 7, 2003, this Court entered an order allowing the joint administration of the Debtors' three bankruptcy cases (collectively, the "Cases").

3. On January 26, 2004, an Order was entered converting the Cases to ones under Chapter 7 of the Bankruptcy Code.

4. On February 5, 2004, Brenda P. Helms ("Trustee") was appointed as the Chapter 7 Trustee of the Debtors' bankruptcy estates pursuant to 11 U.S.C. § 701(a)(1).

The Trustee's Adversary Proceeding and Default Judgment Against Certified Packaging Corporation

5. On April 29, 2005, the Trustee initiated the above-captioned Adversary Proceeding by filing a complaint against Certified Packaging Corporation ("Certified") to avoid and recover certain transfers. (Stip. ¶ 1.)

6. On November 15, 2005, this Court made and caused to be entered Findings of Fact and Conclusions of Law and an Order of Default Judgment in favor of the Trustee and against Certified in the amount of $2,100,070.13, plus prejudgment interest in the amount of $78,707.88, plus costs of $150.00, for a total judgment in the amount of $2,178,928.01 (the "Default Judgment"). (Stip. ¶ 2.)

7. On November 18, 2005, the Trustee commenced a supplementary proceeding to enforce the Default Judgment by having the Clerk of the Bankruptcy Court issue a Notice of Citation and Citation to Discover Assets (the "Citation") on Certified, which the Trustee served on Certified. (Stip. ¶ 3; Stip. Ex. A.)

8. On May 18, 2006, this Court entered an order extending the termination date of the Citation for six months from the date of its original termination, through and including November 28, 2006. (Stip. ¶ 4.) On December 1, 2006, this Court entered an order extending the termination date of the Citation for an additional six months, through and including May 28, 2007.

9. On December 12, 2005 Certified filed a Motion to Vacate Default Judgment and for Related Relief ("Motion to Vacate"), which Certified subsequently withdrew with prejudice pursuant to an Agreed Order Resolving Motion to Vacate Default Judgment and For Related Relief dated January 12, 2006 ("January Agreed Order"), whereby Certified consented to the Citation and to any and all liens which arose in favor of the Trustee and agreed not to take any action to vacate the Citation. (Stip. ¶ 5; Stip. Ex. B.)

Certified Packaging Corporation's Loan with LaSalle Bank and the U.C.C. Sale

10. On or about March 29, 2000, Certified entered into a Loan and Security Agreement with CIT Group/Business Credit, Inc. ("Security Agreement"). (Stip. ¶ 6; Stip. Ex. C.)

11. On March 27, 2000 and June 5, 2000, respectively, CIT Group/Business Credit, Inc. ("CIT") filed U.C.C.-1 financing statements with respect to Certified (the "CIT Financing Statements"). (Stip. ¶ 7; Stip. Ex. D.)

12. On or about June 11, 2001, CIT assigned (the "Assignment") its interest as Certified's lender to LaSalle Bank, N.A. ("LaSalle"). (Stip. ¶ 8; Stip. Ex. E.)

13. On August 28, 2001, LaSalle filed U.C.C. financing statements (the "LaSalle Financing Statements") with respect to the Assignment and describing as collateral, amongst other things, commercial tort claims. On or about January 31, 2005 LaSalle filed a continuation statement (the "Continuation Statement") with respect to the CIT Financing Statement. (Stip. ¶ 9; Stip. Ex. F.)

14. On May 20, 2002, Certified and LaSalle executed the Second Amendment to Loan and Security Agreement (the "Amended Certified Security Agreement"). The Certified Security Agreement was amended from time to time after May 20, 2002. (Stip. ¶ 10; Stip. Ex. G.)

15. The Amended Certified Security Agreement defines "Collateral" to include, inter alia, "Commercial Tort Claims listed on Schedule B hereto." See id. The Amended Certified Security Agreement further provides that certain defined terms including, inter alia, "Commercial Tort Claims" and "General Intangibles" "shall have the respective meanings assigned to such terms in the Illinois Commercial Code." See id.

16. No claims are listed on Schedule B of the Amended Certified Security Agreement. See id. at Schedule B.

The. Rothschild Action

17. Certified conducted business on the premises of 3800 Hawthorne Court, Waukegan, Illinois (the "Waukegan Facility") and 1950 Marquette Street, North Chicago, Illinois (the "North Chicago Facility"). In December 2000, there was an electric fire at the North Chicago Facility. (Trial Tr., 51, Oct. 16, 2006.) The fire damaged all equipment and machinery that was connected to an electric source. (Trial Tr., 51-54, Oct. 16, 2006.) In the process of extinguishing the fire, inventory, equipment, and merchandise incurred water damage. (Trial Tr., 51-54, Oct. 16, 2006.) The North Chicago Facility was shut down for approximately one to two months and never again...