Midway Motor Lodge of Elk Grove v. Innkeepers' Telemanagement & Equipment Corp., 94-3703

• Decision Date: 05 May 1995
• Docket Number: No. 94-3703,94-3703
• Citation: 54 F.3d 406
• Parties: , Bankr. L. Rep. P 76,510 MIDWAY MOTOR LODGE OF ELK GROVE, Plaintiff-Appellee, v. INNKEEPERS' TELEMANAGEMENT & EQUIPMENT CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 406

54 F.3d 406

27 Bankr.Ct.Dec. 253, Bankr. L. Rep. P 76,510

MIDWAY MOTOR LODGE OF ELK GROVE, Plaintiff-Appellee, v. INNKEEPERS' TELEMANAGEMENT & EQUIPMENT CORPORATION,

Defendant-Appellant.

No. 94-3703.

United States Court of Appeals,

Seventh Circuit.

Argued April 12, 1995.

Decided May 5, 1995.

Jerome R. Kerkman, Andrew M. Barnes, Quarles & Brady, Milwaukee, WI, Elizabeth L.R. Donley, Quarles & Brady, Madison, WI, and Daniel A. Zazove (argued) and Michael A. Kraft, Siegan, Barbakoff & Gomberg, Chicago, IL, for appellant.

William H. Alverson, Michael B. Apfeld (argued), Godfrey & Kahn, and Randall D. Crocker, Von Briesen & Purtell, Milwaukee, WI, for debtor-appellee.

Before ALDISERT, ^* EASTERBROOK, and ROVNER, Circuit Judges.

EASTERBROOK, Circuit Judge.

During the course of its reorganization under Chapter 11 of the Bankruptcy Code of 1978, Midway Motor Lodge of Elk Grove ("Elk Grove") rejected a contract for the lease of telephones and related equipment. 11 U.S.C. Sec. 365(a). Rejection avoids specific performance, but the debtor assumes a financial obligation equivalent to damages for breach of contract. 11 U.S.C. Sec. 502(g); NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531, 104 S.Ct. 1188, 1199, 79 L.Ed.2d 482 (1984); Douglas G. Baird, The Elements of Bankruptcy 117-27 (rev. ed. 1993). Elk Grove said that it had no liability, because the lessor, Innkeepers' Telemanagement & Equipment Corp. (ITEC), had not satisfied its obligation to furnish "state of the art" equipment and had broken other promises. ITEC insisted that its equipment was up to date, that Elk Grove had breached first, and that it should receive substantial damages.

Elk Grove is a partnership. Its partners are solvent, so creditors expected to receive 100cents on the dollar--as Elk Grove's plan of reorganization promised. But Elk Grove's principal lender said that it would withdraw support unless the plan were confirmed by May 15, 1993. Elk Grove did not reject the lease until mid-February 1993, which left only three months to determine Elk Grove's liability to ITEC. Instead of ruling promptly on the question whether Elk Grove had any liability at all, the bankruptcy judge told the parties that he would estimate ITEC's claim under 11 U.S.C. Sec. 502(c)(1). Elk Grove had argued that ITEC's recovery could not in any event exceed $4,500, but ITEC was demanding more than $200,000. Quantification one way or the other would permit the confirmation of a plan, postponing the question whether Elk Grove (or its partners) had to pay anything. Discovery was abbreviated; the bankruptcy judge allowed one day for trial.

Elk Grove is one of a dozen hotels flying the "Midway" banner that had contracted with ITEC for phone equipment and service. (The Elk Grove property is the only one in bankruptcy.) By mid-1992 the parties were at loggerheads about the adequacy of ITEC's performance--not only whether ITEC's equipment was "state of the art" but also whether ITEC was making proper payments to the hotels for calls made with calling cards. In January 1992 counsel for the hotels sent ITEC a notice of default. Discussions went nowhere. That summer the hotels began to deduct, from payments made to ITEC, the amounts they thought were their due for calling card rebates. Later in 1992 ITEC stopped paying telephone carriers for service to the hotels (one of its duties under the contracts), and in November 1992 ITEC sent the Midway hotels notices terminating the agreements. In December 1992 ITEC filed suit in an Illinois court demanding immediate return of its phone equipment. The suit was removed to federal court and a six-day evidentiary hearing held in February 1993 to determine the right to possession. So the notice of rejection Elk Grove filed in the bankruptcy court that month could not have been a surprise; one wonders why Elk Grove bothered. (Recall that rejection is a device to avoid specific performance, which ITEC did not want.) During the February 1993 hearing in Illinois, counsel for the Midway hotels stipulated that ITEC could remove its equipment, which the firm did by early April 1993. The February 1993 hearing in Illinois also served as the functional equivalent of discovery in the bankruptcy case.

On March 31, 1993, the bankruptcy court held a pretrial conference at which counsel for Elk Grove made it abundantly clear that in his view the hotel owed nothing because ITEC had not kept its promises. Counsel asked for prompt decision. The bankruptcy court's order following this hearing, scheduling trial for April 29, mentioned only a Sec. 502(c) estimation procedure, but it also required the parties to file documents more suited to a trial on the merits. Among the documents filed was ITEC's request that the bankruptcy judge "enter a directed verdict in favor of ITEC" on the existence of a breach. Come April 29, the bankruptcy judge announced in open court that the proceeding entailed "the trial on the debtor's objection to claim ... and the Sec. 502(c) motion of the debtor in possession.... That trial also took place simultaneously with the hearing pertaining to the claims. The matter was calendared, but not posted." The judge asked ITEC's lawyer: "Does that cause any problems"? Counsel replied "No, Your Honor." The bankruptcy judge ruled, on the merits, in favor of Elk Grove. Counsel did not protest. The bankruptcy court then confirmed Elk Grove's plan of reorganization.

ITEC was not as complaisant as its trial lawyer. It hired a new law firm, which has protested loudly. The district court rejected ITEC's arguments and affirmed. In this court ITEC contends that it was surprised by a decision on the merits after what it had supposed was an estimation procedure--which, it says, it did not fight vigorously because an estimate is just that, and it planned to pursue the solvent partners. Indeed, ITEC insists, the time to decision was so short, the notice so poor, and the discovery so abbreviated, that it was deprived of due process of law.

Three things about this argument stand out. First, ITEC never told the bankruptcy judge that it had been ambushed. It is too late now. Chicago Downs Ass'n v. Chase, 944 F.2d 366, 370-71 (7th Cir.1991); Goldberg v. Household Bank, f.s.b., 890 F.2d 965, 968 (7th Cir.1989). Second, ITEC does not seriously contest the decision on the merits. It does not say that the evidence (not only the evidence heard in open court but also that relayed from the Illinois proceeding) required or even permitted decision in its favor. It makes a procedural claim and nothing but. Third, this procedural claim does not rest on any part of the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure. ITEC invokes the due process clause of the fifth amendment. But that clause says nothing about pretrial discovery, for the most part an invention of the twentieth century. Even in criminal cases there is no constitutional right to pretrial discovery. Wardius v. Oregon, 412 U.S. 470, 474, 93 S.Ct. 2208, 2211-12, 37 L.Ed.2d 82 (1973). (Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10...