In re Zolner
| Decision Date | 08 June 2000 |
| Docket Number | No. 97 C 0771.,97 C 0771. |
| Parties | In re Anthony ZOLNER, d/b/a Titan Trucking Company, Debtor. |
| Court | U.S. District Court — Northern District of Illinois |
Thwarted in their effort to pursue a legal malpractice claim assigned to them by the Debtor, Appellant pension funds now claim that the Debtor defrauded them when he executed the assignment. Appellant, The Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Health and Welfare and Pension Funds (hereinafter "the Funds"), appeals the December 23, 1996 decision of the bankruptcy court that sua sponte dismissed the Funds' motion under 11 U.S.C. § 1144 to revoke confirmation of the Plan of Reorganization of Debtor Anthony Zolner, d/b/a Titan Trucking Company. The bankruptcy court dismissed the motion for two reasons: (1) the Funds did not file an Adversary Complaint as required by FED. R. BANKR. P. 7001(5); and (2) the Funds did not adequately allege the fraud necessary to revoke confirmation under 11 U.S.C. § 1144. For the following reasons, the decision of the bankruptcy court is affirmed.
Appellee, debtor Anthony Zolner, owns and operates Titan Trucking Company, a trucking business for transporting frozen foods and hazardous wastes. The Funds are employee benefit plans within the meaning of Section 3 of the Employee Retirement Security Act of 1984 ("ERISA") and third party beneficiaries of collective bargaining agreements entered into between contributing employers and the Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) ("CTDU Union").
Zolner was signatory to a series of collective bargaining agreements with the CTDU Union during 1979 to 1991, obligating him to make health, welfare, and pension contributions to the Funds. Under the labor agreements, unless the employer or the CTDU Union gave notice of modification or termination of the contract, they remained in effect.
Zolner was required to make employee benefit contributions to the Funds on behalf of all of his employees, but did so only for employees that were members of the CTDU Union. Consequently, the Funds sued Zolner in federal district court in 1989. Attorney Arnold Burke of the law firm of Siegan, Barbakoff, Gomberg & Kane, Ltd. represented Zolner in this suit. District Court Judge Charles Norgle for the Northern District of Illinois found Zolner liable for contributions on behalf of all of his employees on March 11, 1993.2
On June 16, 1993, Zolner filed a Chapter 11 petition. His case was assigned to Judge Schmetterer of the Bankruptcy Court for the Northern District of Illinois. Zolner's counsel during the bankruptcy proceedings was attorney William L. Needler of the law firm of William L. Needler & Associates, Ltd. The Funds sought $453,406.31 in delinquent contributions for the Pension Fund, $575,906.34 in delinquent contributions for the Health and Welfare Fund, and $303,488.68 in withdrawal liability for the Pension Fund.
Following an October 21, 1994 hearing held pursuant to FED. R. BANKR. P. 3018(a), Judge Schmetterer estimated the Funds' claims at $611,490.64 for purposes of counting their votes against Zolner's proposed Plan of Reorganization. See In re Zolner, 173 B.R. 629 (Bankr.N.D.Ill.1994). Of note, had the Funds cast its votes against the proposed Plan of Reorganization, the Plan could not have been confirmed under the requirements of 11 U.S.C. § 1129(a)(8).3
In an attempt to resolve the Funds' objections to the proposed Plan of Reorganization, the parties entered into settlement discussions. The Funds made an unusual proposal: the Funds offered to withdraw their objections and vote in favor of the confirmation of Zolner's proposed Plan of Reorganization in exchange for Zolner's assignment of any legal malpractice claims against his present and former attorneys. The parties' opening briefs are curiously silent about the nature of the alleged malpractice, but the Funds explain in their reply brief that Arnold Burke and the Siegan, Barbakoff attorneys who represented Zolner in the collection action allegedly failed to advise him that his liability to the Funds would have been "substantially curtailed if he had notified the Union of his intent to cancel the collective bargaining agreement." (Appellant's Reply Brief, at 4.) With respect to Attorney Needler, who represented Zolner in the bankruptcy court, the Funds assert that he "failed to seek rejection of the Union's collective bargaining agreement under 11 U.S.C. § 1113, thus increasing the eventual liability Zolner will owe to the Funds." (Id.)
There is no indication in the record of whether or to what extent the nature of these claims was explored in the settlement negotiations. Particularly noticeable for its absence is any explanation of how Attorney Needler, who presumably participated in the negotiations, responded to the proposal that his client should assign malpractice claims against Needler himself. What is clear, however, is that on April 18, 1995, the parties did enter into a settlement agreement and that Zolner executed an assignment of his malpractice claims. Central to this appeal is the provision in the assignment that Zolner would "cooperate with the Funds in executing and delivery any further documents and taking any further actions necessary or appropriate to effectuate the intent and purpose of this Agreement." (Assignment of Claim, Ex. A to Brief and Appendix of Appellants (hereinafter "Appellants' Brief"), at 3.) Judge Schmetterer entered an order approving the assignment on June 7, 1995. Following the Funds' vote in favor of the proposed Plan of Reorganization, Judge Schmetterer entered an order confirming the Plan on March 18, 1996. The case was closed on July 1, 1996.
Soon after Zolner executed the assignment, the Funds filed a legal malpractice lawsuit against Burke, the Siegan Barbakoff law firm, Needler, and the Needler law firm in the Circuit Court of County, Illinois on June 16, 1995. Both sets of Defendants promptly moved to dismiss on the grounds that Illinois law prohibits the assignment of a legal malpractice claim because of the personal nature of the attorney client relationship and the potential for abuse. (Motion to Dismiss the Appellant's Complaint in the Circuit Court of Cook County, Illinois Action filed by Siegan, Barbakoff & Gomberg, Ltd. and Arnold Burke ¶ 6, Ex. C to Appellee's Brief; Motion to Dismiss the Appellant's Complaint in the Circuit Court of Cook County, Illinois filed by William L. Needler and William L. Needler and Associates, Ltd. ¶ 5, Ex. D to Appellee's Brief.) See Brocato v. Prairie State Farmers Ins. Ass'n, 166 Ill.App.3d 986, 988-89, 117 Ill.Dec. 849, 520 N.E.2d 1200 (4th Dist.1988) ().
Realizing their losing position, the Funds requested that Zolner substitute himself as plaintiff in the malpractice lawsuit pursuant to the understanding that Zolner provide the Funds with all necessary assistance and cooperation to effectuate the intent and purpose of the agreement. Zolner refused to do so. Instead, on July 17, 1996, he executed an affidavit stating, in effect, that he knew of no legal malpractice claim and would not participate in any suit against his former attorneys. (See Zolner Aff. ¶¶ 5, 11, Ex. F to Appellant's Brief.) On July 19, 1996, the Illinois state court judge granted the motion to dismiss in the Funds' lawsuit.
On August 2, 1996, the Funds returned to the bankruptcy court and filed a motion seeking revocation of the confirmation of Zolner's plan of reorganization pursuant to 11 U.S.C. § 1144 and FED. R. BANKR. PRO. 7001(5). Section 1144 allows for revocation of an order of confirmation "on request of a party in interest at any time before 180 days after the entry of the order of confirmation . . . if any only if such order was procured by fraud." In this case, the 180-day period expired on September 14, 1996. Under FED. R. BANKR. PRO. 7001(5), an "adversary proceeding" includes "a proceeding . . . to revoke an order of confirmation of a chapter 11 . . . plan," meaning those brought under section 1144. An adversary proceeding must be commenced by a properly filed and served complaint. See In re Perkins, 902 F.2d 1254, 1258 (7th Cir.1990).
It is undisputed that the Funds did not file an adversary proceeding before September 14, 1996. Zolner filed a response to the Funds' August 2, 1996 motion on the merits on September 4, 1996. On September 25, 1996, Zolner claimed that the Funds' attempt to revoke confirmation could only proceed as an adversary proceeding.
At a hearing on October 23, 1996, the bankruptcy court initially overruled Zolner's procedural objection to the Funds' motion, ruling that the Funds were not required to file an adversary proceeding to revoke confirmation of the plan of reorganization. (Transcript of Oct. 23, 1996 Proceedings (hereinafter "Proceedings I"), at 5, Ex. J to Appellant's Brief.) The bankruptcy court instead treated the contested motion as a contested matter under Bankruptcy Rule 9014 and required the Funds to file an amended motion specifying the particular fraud grounds asserted. (Id. at 15.)
After a further hearing on December 11, 1996, however, the bankruptcy court sua sponte dismissed the Funds' motion. In his oral ruling, Judge Schmetterer cited two reasons for his ruling. First, he noted, "an application to object to discharge must be filed by an adversary complaint as required by Bankruptcy Rule 7001." Second, in Judge Schmetterer's view, the motion did not state a "cause of action for fraud because it has not been demonstrated that the Funds have been defrauded of anything based on the facts alleged." (Transcript of Dec. 11, 1996 Proceed...
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