Official Comm. of Unsecured Creditors v. Fountainhead Grp., Inc. (In re Bridgeview Aerosol, LLC), Case No. 09 B 41021

• Decision Date: 28 September 2015
• Docket Number: Adv. No. 11 A 2299,Case No. 09 B 41021
• Citation: 538 B.R. 477
• Parties: In re: Bridgeview Aerosol, LLC, et al., Debtors. Official Committee of Unsecured Creditors, Plaintiff, v. The Fountainhead Group, Inc., John F. Romano, Linda E. Romano, and Bunno Boarding, LLC, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

538 B.R. 477

In re: Bridgeview Aerosol, LLC, et al., Debtors.Official Committee of Unsecured Creditors, Plaintiff

v.The Fountainhead Group, Inc., John F. Romano, Linda E. Romano, and Bunno Boarding, LLC, Defendants.

Case No. 09 B 41021

Adv. No. 11 A 2299

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

Issued September 28, 2015

William Cross, Michael K. Desmond, Figliulo & Silverman, P.C., Chicago, IL, for Plaintiff.

Daniel B. Berman, Hancock Estabrook LLP, Syracuse, NY, Nancy A. Temple, Katten & Temple LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION

PAMELA S. HOLLIS, United States Bankruptcy Judge

This matter comes before the court following trial on the complaint filed by the Official Committee of Unsecured Creditors of Bridgeview Aerosol, LLC (the “Committee ”) against John Romano and Linda Romano (“John, ” “Linda ” or the “Romanos ”) and two corporate entities controlled by them, The Fountainhead Group, Inc. (“Fountainhead ”) and Bunno Boarding, LLC (“Bunno ”) (collectively, “Defendants ”). The court held a four day trial, taking testimony from numerous witnesses and admitting dozens of exhibits into evidence. Having reviewed all of the submitted material, the court will enter judgment in favor of Defendants on Counts I (in part), II, III, IV and V. The court will enter judgment in favor of Plaintiffs on Counts I (in part), VI, VII, VIII, IX and X.

JURISDICTION

Under 28 U.S.C. § 1334, district courts have original and exclusive jurisdiction of all cases under Title 11. The underlying bankruptcy case was automatically referred to this court pursuant to Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois, as authorized by 28 U.S.C. § 157(a). This adversary proceeding was commenced by the filing of the Committee's complaint on October 28, 2011, four months after the Supreme Court's decision in Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) was issued. As noted by the Court in Stern:

The manner in which a bankruptcy judge may act on a referred proceeding depends on the type of proceeding involved. Bankruptcy judges may hear and enter final judgments in all core proceedings arising under title 11, or arising in a case under title 11. § 157(b)(1). Core proceedings include, but are not limited to 16 different types of matters [listed in § 157(b)(2) ].

Id. at 2603 (internal quotation marks omitted).

The Stern Court went on to note that “[i]n past cases, we have suggested that a proceeding's ‘core’ status alone authorizes a bankruptcy judge, as a statutory matter, to enter final judgment in the proceeding.” Id. at 2604. It then concluded that although § 157(b) permitted the bankruptcy court to enter final judgment on a particular category of core claims, “Article III of the Constitution does not.” Id. at 2608. This type of core claim became known as a Stern claim—“a claim designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter.”

Executive Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 2170, 189 L.Ed.2d 83 (2014) (footnote omitted).

The ten counts in the instant proceeding sound in breach of fiduciary duty as well as in avoidance and recovery of fraudulent and preferential transfers. Until June of this year, this court's authority to resolve most of these claims was in question. If the claims were non-core, the court could have submitted proposed findings of fact and conclusions of law to the district court. See 28 U.S.C. § 157(c)(1). But the parties admitted that these claims were core. Therefore, § 157(c)(1) did not permit the issuance of proposed findings and conclusions. And although § 157(b) would have permitted entry of a final judgment on these core claims, the Constitution would not.

This conundrum has been locally referred to as “the Ortiz hole,” so named for the case that explained that where a claim qualifies as a core proceeding, it does not fit under § 157(c)(1) and thus proposed findings of fact and conclusions of law cannot be issued, see Ortiz v. Aurora Health Care, Inc. (In re Ortiz), 665 F.3d 906 (7th Cir.2011).

The depth of the Ortiz hole was illustrated in Wellness Int'l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir.2013),¹ a decision issued just ten days before the parties submitted their post-trial briefs. At a status hearing held two weeks later, this court explained that in light of the Seventh Circuit's Wellness decision, it could not begin drafting an opinion:

You keep thinking there is an option to do a report and recommendation. Wellness said explicitly, there is no option, okay? And they said the only way to handle this is to withdraw the reference, of course not addressing those cases where a judge has already completely tried the case.

....

If it's a core structurally deficient situation, which is what this is ... I don't think there is any way out of that based on what I see. We have no authority to do what you suggested.

Hr'g Tr. 4:15–21, 5:21–6:1, Sept. 5, 2013.

Fortunately, a very recent decision from the Supreme Court put to rest all questions as to this court's constitutional authority to enter a final judgment on every one of these claims. As the Court ruled earlier this year in overturning the Seventh Circuit, “Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.” Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015). By contrast, the Court noted, “ Stern —like its predecessor, Northern Pipeline —turned on the fact that the litigant did not truly consent to resolution of the claim against it in a non-Article III forum.” Id. at 1946 (quotation marks and citation omitted). See also Executive Benefits, 134 S.Ct. at 2170 n. 4 (“[T]his case does not require us to address whether EBIA in fact consented to the Bankruptcy Court's adjudication of a Stern claim and whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. We reserve that question for another day.”).

It is clear that the parties to this proceeding “knowingly and voluntarily” consented to adjudication of the complaint by this court. At the very beginning of the first day of trial, the court asked: “[H]ave both sides consented to me entering a final judgment one way or the other?” Trial Tr. vol. 1, 5:18–19, May 13, 2013 . Counsel for the Committee immediately responded that its client consented. Id. at 5. Counsel for the Defendants indicated that they had not considered the issue, but after consultation between attorney and client, counsel announced “[w]e consent, Your Honor.” Id. at 7:3–4. See also Id. at 8:23–24 (“Yes, we've already consented.”). The “key inquiry is whether the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case before the non-Article III adjudicator.” Wellness, 135 S.Ct. at 1948 (quotation marks and citations omitted).

Having found that the parties knowingly and voluntarily consented, this court has the constitutional authority to enter a final judgment on all claims in this proceeding.

Venue is proper in this court pursuant to 28 U.S.C. § 1409(a).

FINDINGS OF FACT

The Romanos and Affiliated Entities

Siblings John Romano and Linda Romano owned, controlled, managed and/or directed a network of companies. Although both John and Linda are New York residents, Joint Stip. ¶¶ 7, 10 , they came before this court when three of their affiliated companies filed for relief under the Bankruptcy Code. All three of the affiliates are New York limited liability companies, but the first to file was Bridgeview Aerosol (“Bridgeview ”), which did business in Illinois. Bridgeview was accompanied into bankruptcy by AeroNuevo, LLC and USAerosols, LLC (collectively, “Debtors ”).

Bridgeview's sole member and parent company was USAerosols, and USAerosols' sole members as of Bridgeview's bankruptcy filing were John and Linda. John was USAerosols' President, and Linda served as its Senior Vice President and Secretary. Am. Answer ¶¶ 14–17 .

USAerosols was also the sole member of AeroNuevo, of which John was the President and Linda served as Senior Vice President and Secretary. Id. ¶¶ 21–22.

John owned, controlled or held the power to vote the majority interest in all three of the Debtors. He and Linda were the only operating managers of Bridgeview. John served as Chief Executive Officer of Bridgeview and Linda as Vice President and Secretary. Joint Stip. ¶¶ 8, 11; Am. Answer ¶¶ 18–19. Linda, who graduated from the University of Virginia School of Law more than 35 years ago and practiced law continuously since her graduation, also served as general counsel for Bridgeview. Trial Tr. vol. 3, 625, 628–29, May 16, 2013 .

Bridgeview was in the business of filling and supplying aerosol products to companies. Am. Answer ¶ 20 . AeroNuevo owned the real estate on which Bridgeview operated. Id. ¶ 23. USAerosols had no business operations other than its ownership of Bridgeview and AeroNuevo. Joint Stip. ¶ 19 .

John was also the majority interest holder in Fountainhead. Both John and Linda were directors and officers of Fountainhead. Id. ¶¶ 9, 12.

John was the 100% owner of Bunno as well as an officer and director. Bunno's sole asset is a condominium located at 1212 North Lake Shore Drive, Unit 12AS, Chicago, Illinois. Id. ¶¶ 9, 14–15.

In April 2006, Fountainhead owned a 93.125% interest in Black Flag Brands, LLC (“Black Flag ”). In addition to owning a controlling interest in Fountainhead, which owned nearly all of Black Flag, John was a manager of Black Flag. Am. Answer ¶¶ 24, 29–30 .

Sale of Inventory to Black Flag

The Romanos acquired Bridgeview from Hydrosol in the spring of 2006. Trial Tr. vol. 2, 379–80, May 14, 2013 . Shortly thereafter, Bridgeview entered into a supply agreement with Black Flag ...