In re World Wines, Ltd.

Decision Date14 July 1987
Docket NumberBankruptcy No. 85 B 2556.
Citation77 BR 653
PartiesIn re WORLD WINES, LTD., Debtor.
CourtU.S. Bankruptcy Court — Northern District of Illinois

McDermott, Will & Emery, Chicago, Ill., for Bates Abrasive Products, Inc.

Lord, Bissell & Brook, Chicago, Ill., for First Midwest Bank of Waukegan.


DAVID H. COAR, Bankruptcy Judge.

This cause coming on to be heard upon the Amendment to Application for Payment of Rental Arrearages, filed by BATES ABRASIVE PRODUCTS, INC., represented by McDERMOTT, WILL & EMERY, against the FIRST MIDWEST BANK OF WAUKEGAN, represented by LORD, BISSELL & BROOK, and the Court, having considered the record in this case, and the pleadings on file, and having examined the memoranda of law filed by the respective parties in support of their respective positions, and being fully advised in the premises;

The Court Finds:

1. World Wines, Ltd. was engaged in the business of importing and distributing at wholesale alcoholic and nonalcoholic beverages. On February 27, 1985, World Wines, Ltd. filed its voluntary petition under Chapter 11 of the Bankruptcy Code. World Wines operated its business as a debtor-in-possession until July 1, 1986, the date when the debtor, upon its own motion, converted its case to a Chapter 7. Bates Abrasive Products, Inc. Bates is the debtor's former landlord. First Midwest Bank of Waukegan Bank is the debtor's former secured creditor. The dispute between Bates and the Bank is centered around events which occurred while World Wines was operating its business under Chapter 11.

2. On July 27, 1984, World Wines granted the Bank a security interest and liens upon all of its assets in order to secure the debtor's indebtedness to the Bank, which at the time of the Chapter 11 petition was approximately $2,875,000. On March 6, 1985, the Court entered the first of many orders which allowed World Wines to use the Bank's cash collateral in order to meet its business expenses while operating in Chapter 11. World Wines was required to make adequate protection payments to the Bank for the use of its cash collateral. Under the cash collateral order of March 6, 1985, World Wines waived, on behalf of itself and any subsequent trustees, the right to bring any claim against the Bank under Section 506(c) of the Bankruptcy Code.1 11 U.S.C. § 506(c).

3. World Wines leased warehouse and office facilities from Bates. These facilities were located at 622 South Oak Park Avenue, Chicago, Illinois. On May 14, 1985, the Court entered an order approving World Wines' assumption of the lease with Bates for the warehouse and office facilities located at 622 South Oak Park Avenue, Chicago, Illinois. In addition to setting forth World Wines' current monthly rental obligations, the terms of the order required World Wines to make payments on past due rents owed to Bates. On November 13, 1985, the Court entered an order modifying the May 14, 1985 order which approved World Wines' assumption of the lease with Bates. The November 13, 1985 order again set forth World Wines' current monthly rental obligations and it restructured World Wines' payment schedule on the rental arrearages. As indicated on the face of both orders, the rental arrearages were for prepetition rent defaults: January 1985, $5,950.00; February 1985, $5,950.00. The Bank was not a party to either the May 14th order or the November 13th order; nor was the Bank ever mentioned in these orders.

4. On May 7, 1987 World Wines and Bates presented to the Court an agreed order authorizing the rejection of the subject lease, and approving World Wines' payment of rental arrearages in the amount of $12,500.00. On June 5, 1986, the Court entered an order authorizing World Wines to reject the lease with Bates, and this rejection was made effective May 1, 1986. The order also required World Wines to surrender possession of the warehouse and office facilities immediately. Bates' application for payment of rental arrearages from World Wines was continued by the June 5th order.

5. On May 13, 1986, the Bank brought an emergency motion requesting relief from the automatic stay imposed by Section 362 of the Bankruptcy Code. 11 U.S.C. § 362. On May 27, 1986, the Court lifted the automatic stay enabling the Bank to dispose of its collateral which, of course, included all of World Wines' assets: in particular, certain quantities of wine which were stored at the warehouse facility debtor had leased from Bates.

6. On June 17, 1986, Bates filed an amendment to its application for payment of rental arrearages. In its amended application, Bates now seeks payment of the $12,500 in rental arrearage from the Bank since there are no unencumbered assets in the debtor's estate which could be used to pay this rental arrearage. Bates' theory is that since the Bank did not object to the entry of the two orders which required the debtor to pay the rental arrearage under the assumed lease, the Bank gave its implied consent to the expenses created, and that the Bank derived a benefit from the lease inasmuch as the Bank's collateral was preserved. Bates insists that its application is predicated upon the protections afforded lessors under Section 365 of the Bankruptcy Code, and not upon Section 506(c) of the Bankruptcy Code which allows for the recovery of administrative expenses from the secured creditors' collateral. 11 U.S.C. §§ 365, 506(c). Bates argues that its application is brought simply to enforce the court orders which required the debtor to pay the rental arrearage under the assumed lease.

Secondly, Bates seeks rental payment or storage fees from the Bank at $231.67 per day for wine which was stored by the debtor at the warehouse facility from the date the automatic stay was lifted, May 27, 1986, until the time when the wine was removed, or two weeks later. The Bank was authorized to dispose of its collateral when the automatic stay was lifted. Bates posits that at this time the ownership in the wine was transferred from the debtor to the Bank, and, consequently, the Bank should be held accountable for these storage fees.

7. In response, the Bank argues that this Court lost jurisdiction to resolve the disputes which exist between the Bank and Bates when the automatic stay was lifted on May 27, 1986, which action enabled the Bank to liquidate its collateral. The Bank further argues that even if the Court has jurisdiction over these disputes, Bates, as a lessor, does not have standing under Section 506(c) inasmuch as that section limits rights of recovery against the collateral of the secured creditor to the trustee or debtor-in-possession. In addition, the Bank takes the position that Bates' right to recover against the Bank's collateral were waived by the debtor in the provision set forth in the cash collateral order.

I. The Court's Jurisdiction

The first issue to be addressed concerns whether or not this Court has subject matter jurisdiction to adjudicate Bates' claim for rental arrearage and its claim for storage fees both of which are directed at the Bank. Analysis of this issue begins with the proposition that bankruptcy courts lack jurisdiction to adjudicate controversies which are solely and exclusively between third parties and which do not involve, directly or indirectly, the debtor or its property. First State Bank & Trust Co. v. Sand Springs State Bank, 528 F.2d 350, 353 (10th Cir.1976); Citizens Bank and Trust Company v. Melrose Park National Bank (In re Crystal Manufacturing & Packaging, Inc.), 60 B.R. 816, 818 (N.D.Ill.1986). Courts have consistently held that, if a controversy does not involve property in which the debtor's estate asserts an interest, and the resolution of the claim will not affect the administration of the estate, then the bankruptcy court has no subject matter jurisdiction to adjudicate the claim. In re Shirley Duke Assoc., 611 F.2d 15, 19 (2d Cir.1979); In re Crystal Manufacturing & Packaging, Inc., 60 B.R. 816, 818; In re Stoner Investments, 20 B.R. 143, 145 (Bankr.N.D.Ill.1982).

From the date the debtor's Chapter 11 petition was filed, the lease between Bates and the debtor was property of the estate under Section 541, 11 U.S.C. § 541, until May 1, 1986, the date when the debtor's rejection of the lease became effective. The debtor's estate further asserted an interest in the lease upon its assumption which was approved by orders of court. These orders made provision for the rental arrearages. Bates' claim for rental arrearage arose while the lease was property of the estate and, therefore, this Court has jurisdiction to determine how that claim is to be satisfied, i.e., either against the assets of the debtor, or as a charge against the collateral of debtor's secured creditors, and such a determination in either event would be deemed a core proceeding. 28 U.S.C. § 157(b)(2)(A).

The debtor owned the wine which was stored at the warehouse facilities. The Bank was allowed to liquidate its collateral and to exercise its state law rights and remedies against the collateral, which included the stored wine, when the automatic stay was lifted on May 27, 1986. The order lifting the automatic stay directed the debtor to turn over the collateral to the Bank. The order did not, however, transfer ownership of the wine to the Bank. The debtor still owned the wine during the two-week period it remained on the lessor's premises. The debtor's ownership interest in the wine continued until such time as the Bank exercised its state law rights and remedies against the collateral. Bates' claim for storage fees is directed against property which at the time belonged to the debtor. This Court has jurisdiction to resolve Bates' claim which arises from the expenses generated from the storage of the debtor's property. Furthermore, this Court has jurisdiction to determine whether the storage of the wine should be charged to the debtor's secured creditor, the Bank, under Section 506(c). 11 U.S.C. § 506...

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