Leibowitz v. Kalamata Capital Grp. LLC (In re Gayety Candy Co.)

• Citation: 625 B.R. 390
• Decision Date: 05 February 2021
• Docket Number: Adv. No. 20ap00010,Case No. 18bk32437
• Parties: IN RE: GAYETY CANDY CO., INC., Debtor. David P. Leibowitz, as Chapter 7 Trustee for the Estate of Gayety Candy Co., Inc., Plaintiff, v. Kalamata Capital Group LLC, Factor Funding LLC, Sable Distributors, CAN Capital, Inc., Aureolin Services, Sound Garden, Capital One NA successor to Capital One FSB; United States of America – Department of Treasury – Internal Revenue Service; and State of Illinois Department of Revenue, Defendants.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

625 B.R. 390

IN RE: GAYETY CANDY CO., INC., Debtor.

David P. Leibowitz, as Chapter 7 Trustee for the Estate of Gayety Candy Co., Inc., Plaintiff,

v.Kalamata Capital Group LLC, Factor Funding LLC, Sable Distributors, CAN Capital, Inc., Aureolin Services, Sound Garden, Capital One NA successor to Capital One FSB; United States of America – Department of Treasury – Internal Revenue Service; and State of Illinois Department of Revenue, Defendants.

Case No. 18bk32437

Adv. No. 20ap00010

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

Signed February 5, 2021

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

These matters come on for consideration on the Defendant United States of America's Motion for Summary Judgment [Adv. Dkt. No. 31]¹ (the "IRS Motion") and the Motion of Illinois Departemt [sic] of Revenue for Partial Summary Judgment [Adv. Dkt. No. 32] (the "IDOR Motion" and collectively with the IRS Motion, the "Motions"). In each of the Motions, the respective movant seeks summary judgment in its favor on the Complaint to Determine Validity, Priority, and Extent of Liens [Adv. Dkt. No. 1] (the "Complaint") brought by the plaintiff, David P. Leibowitz, chapter 7 trustee (the "Trustee") for the bankruptcy estate of Gayety Candy Co., Inc. (the "Debtor").

In the Complaint, the Trustee seeks a determination from the court under section 506(a) of the Bankruptcy Code (defined below) of the nature, extent, validity and priority of claims against assets of the Debtor's chapter 7 bankruptcy estate. As the Trustee has sold all the assets of the estate, see Order Authorizing Chapter 7 Trustee to Sell Certain Assets Free and Clear of Liens Pursuant to 11 U.S.C. § 363(b) and (f), and Shortening Notice [Dkt. No. 25] (the "Sale Order"), what remains is a determination of how such lien claims entitle the respective claimants, if at all, to claim against the proceeds of the sale. Alongside its Motion, the Internal Revenue Service (the "IRS") also seeks vacation or modification of the Sale Order to the extent the Sale Order affords the Illinois Department of Revenue ("IDOR") priority over the IRS to which IDOR is not entitled. See Creditor United States’ Motion for Relief (if Necessary) from Arguable Priority Ruling in Sale Order [Dkt. No. 43] (the "Motion to Vacate").

Aside from the IRS and IDOR, all other defendants have been defaulted. [Adv. Dkt. Nos. 20, 30]. What remains is Count I of the Complaint, under which the Trustee seeks a determination of the extent and priority of the IRS's lien claim, and Count VII of the Complaint, under which the Trustee seeks a determination of the extent and priority of IDOR's inchoate interest in the property. The IRS and IDOR, by apparent agreement, each seek to resolve the crossing claims via summary judgment and thus bring the respective Motions.² The Trustee has voiced support for the IRS Motion, but otherwise states that he simply awaits a determination by the court of the competing claims.

The Motions turn in part on the Seventh Circuit's ruling in Ill. Dep't of Revenue v. Hanmi Bank , 895 F.3d 465 (7th Cir. 2018), reh'g denied (Aug. 24, 2018), and the cases underlying the same. The Motions have been fully briefed and were argued before the court on August 31, 2020 (the "Hearing"). At a status hearing on November 31, 2020, the parties agreed that a resolution of the IRS Motion in favor of the IRS would moot the Motion to Vacate and conclude the relief sought in the Complaint.

This Memorandum Decision constitutes the court's statement on the record for granting or denying the Motions.³ For the reasons more fully set forth below, upon review of the parties’ respective filings and after having heard the arguments of the parties at the Hearing, the court finds that, but for the yet to be determined Motion to Vacate, there exists no genuine issue as to any material fact.

In considering each of the Motions under the standards applicable thereto and presuming first that the order in question remains in force, held: (i) As to the assets not segregated under the Sale Order, the IRS has met the standards for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, made applicable here by Rule 7056 of the Federal Rules of Bankruptcy Procedure,⁴ for judgment in its favor by demonstrating that it has a senior secured claim to the proceeds of the section 363(f) sale of the Debtor's assets, which secured claim is senior in priority to the State of Illinois's inchoate interest in those same assets; and (ii) As to the assets segregated under the Sale Order, neither the IRS nor IDOR has met the standards for summary judgment under Civil Rule 56 for judgment in its favor, but summary judgment is possible on the undisputed facts before the court. The express terms of the Sale Order provide that the IRS's senior secured claim does not attach to such proceeds. The Sale Order does not, however, attach an interest in favor of the State of Illinois to such proceeds. The State of Illinois failed to show that any right of adequate protection exists for its inchoate interest. As such, there is no claim against such assets of the nature set forth in section 725 of the Bankruptcy Code, and the segregated proceeds must be distributed to creditors in the manner set forth in section 726 of the Bankruptcy Code.

Should the Sale Order's stripping of the IRS's lien against the sale proceeds be vacated, the IRS will have met the standards for summary judgment under Civil Rule 56 for judgment in its favor by demonstrating that it has a senior secured claim to all of the proceeds of the section 363(f) sale of the Debtor's assets which secured claim is senior in priority to the State of Illinois's inchoate interest in those same assets.

As the result here turns on a motion yet to be resolved, the court holds judgment in this matter until the Motion to Vacate is heard and determined. Upon such a determination, judgment will be entered here concurrent with the court's determination of the Motion to Vacate. As such judgment will conclude all affirmative claims for relief in the adversary proceeding, the adversary proceeding will be concluded thereby.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred has statutory authority to enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the bankruptcy court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1), (c). Absent consent, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in noncore matters, where the matter is either one that falls within the public rights exception, id. , or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S. Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

A proceeding to determine the validity, extent, or priority of liens pursuant to section 506 of the Bankruptcy Code is a matter arising under the Bankruptcy Code and is a core proceeding. 28 U.S.C. § 157(b)(2)(K) ; Matrix IV, Inc. v. American Nat. Bank and Tr. Co. of Chi. , 649 F.3d 539, 550 (7th Cir. 2011) (" ‘core’ proceedings ... include ‘determinations of the validity, extent and priority of liens’ "). It follows that a motion for summary judgment under Civil Rule 56, made applicable by Bankruptcy Rule 7056 to adversary proceedings, in such a matter is also a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) & (2) ; see also Maxwell v. U.S. (In re Horizon Grp. Mgmt., LLC ), 617 B.R. 581, 585 (Bankr. N.D. Ill. 2020) (Barnes, J.).

In addition to being a core proceeding, each of the foregoing "stems from the bankruptcy itself." Stern , 564 U.S. at 499, 131 S.Ct. 2594. Therefore, the court also has constitutional authority to enter final orders in this matter.

More importantly, no party has contested the jurisdiction or authority of this court in entering final orders in this matter. Accordingly, the court has the jurisdiction, statutory authority and constitutional authority...