First Premier Capital LLC nka Commend Capital LLC v. Brandt
Filing
26
MEMORANDUM Opinion and Order Signed by the Honorable Elaine E. Bucklo on 12/19/2011:Mailed notice(mpj, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FIRST PREMIER CAPITAL LLC n/k/a
COMMEND CAPITAL, LLC,
Appellant,
v.
WILLIAM A. BRANDT, JR., acting solely
in his capacity as Plan Administrator
for EQUIPMENT ACQUISITION RESOURCES,
INC.,
Appellee.
_____________________________________
IN RE:
EQUIPMENT ACQUISITION RESOURCES, INC.
Debtor.
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No. 11 C 6249
On appeal from the
United States
Bankruptcy Court,
Northern District of
Illinois
Bankruptcy Case
No. 09 B 399937
MEMORANDUM OPINION AND ORDER
In 2008, Equipment Acquisition Resources, Inc. (“EAR”) entered
into five equipment leases with Alliance Commercial Capital, Inc.
(“Alliance”).
Alliance subsequently assigned all of its rights,
title and interest in the leases and equipment to Republic Bank of
Chicago (“Republic Bank”).
into
agreements
Modifications”).
to
In 2009, EAR and Republic Bank entered
modify
each
of
the
leases
(the
“Lease
In the Lease Modifications, EAR agreed to pay
approximately $4.6 million due under the leases and the parties
agreed that EAR would give Republic Bank a blanket security
interest in all of EAR’s assets.
The parties acknowledge that,
despite this agreement, the Lease Modifications each contained a
typographical error which stated that EAR granted Republic Bank, as
Assignee, a security interest in Republic Bank’s own assets, rather
than EAR’s assets. In any event, Republic Bank filed UCC financing
statements with the Illinois Secretary of State claiming it had a
blanket security interest in EAR’s assets.
On October 23, 2009, EAR petitioned the bankruptcy court for
relief pursuant to Chapter 11 of the Bankruptcy Code.1
William A.
Brandt, Jr. (“Brandt”) was appointed Plan Administrator.
On
December 10, 2009, EAR abandoned its assets and the abandoned
equipment was subsequently sold at auction.
There is currently an
action pending in the Circuit Court of Cook County wherein nearly
all of EAR’s creditors are engaged in a process to divide the sale
proceeds among them.
First Premier Capital LLC (“First Premier”)
is one of EAR’s creditors and is a party to the Cook County
litigation.
On December 20, 2010, EAR filed an adversary action against
VonLehman & Company, Inc. (“VonLehman”) and Brian Malthouse, EAR’s
outside auditors, for accounting malpractice/negligence.
1
EAR had
EAR, an Illinois corporation operating in the semiconductor
equipment sales and servicing industry, engaged in a massive fraud
from 2005 to 2009. That fraud included, but was not limited to,
selling semiconductor equipment at inflated prices, leasing the
equipment back, misrepresenting the value of the equipment, and
pledging certain pieces of equipment multiple times to various
creditors to secure financing.
2
previously agreed to settle its claims against VonLehman and
Malthouse through a settlement agreement, but the bankruptcy court
denied
EAR’s
request
to
approve
the
settlement
due
to
the
objections of First Premier and other creditors. Republic Bank had
also filed a lawsuit against VonLehman based on representations
made by VonLehman to Republic Bank.
On January 7, 2011, EAR filed an adversary proceeding against
Republic Bank seeking the avoidance and recovery of an alleged
fraudulent transfer, a declaratory judgment rejecting Republic
Bank’s assertion of a lien over EAR’s assets and an injunction
against
Republic
VonLehman.
Republic
Bank’s
prosecution
of
its
lawsuit
against
Brandt subsequently filed an amended complaint, and
Bank
moved
to
dismiss
all
counts
of
EAR’s
amended
adversary complaint.
On May 25, 2011, Brandt filed a motion to approve a settlement
between Republic Bank and the bankruptcy estate.
The Settlement
Agreement provided that (1) EAR and Republic Bank will continue to
prosecute their respective lawsuits against VonLehman but will
cooperate with one another in the prosecution; (2) the proceeds of
either of those lawsuits (the “VL Proceeds”) will be divided up
between EAR and Republic Bank; (3) Brandt has no objection to the
allowance of Republic Bank’s filed Proof of Claim, but Republic
Bank waives its claim to post-petition interest and attorney’s
fees; and (4) the language of the Lease Modifications will be
3
corrected to reflect that EAR granted Republic Bank a blanket lien
on EAR’s assets, subject to a “Lien Carve-Out.”
The parties
further agreed that the “Lien Carve-Out includes, but is not
limited to, any and all claims which EAR and/or Brandt have against
(i)
the
United
States
of
America,
Internal
Revenue
Service;
(ii) Rio Properties, Inc., Harrah’s Entertainment, Inc., Luxor
Hotel and Casino, and Wynn Las Vegas LLC or any other casinos;
(iii) governmental or other entities which received restitution
payments; and (iv) FTI Consulting Inc.”
ROA 2-19, p. 8.
First Premier filed objections to the motion to approve the
settlement.
On July 12, 2011, the Bankruptcy Court granted
Brandt’s motion over First Premier’s objections.
First Premier now appeals the bankruptcy court’s decision to
grant the motion to approve the settlement. The first issue I must
address is the proper standard of review I must employ. Brandt and
Republic Bank assert that the applicable standard of review is
abuse of discretion.
In re Doctors Hospital of Hyde Park, 474 F.3d
421, 426 (7th Cir. 2007) (a bankruptcy court’s approval of a
settlement is reviewed “deferentially, for abuse of discretion”).
Under this type of review, factual findings are reviewed for clear
error and legal conclusions are reviewed de novo. Id. Conversely,
although acknowledging that this is, in fact, an appeal from the
approval of a settlement, First Premier argues that a de novo
standard is appropriate here. In a rather creative argument, First
4
Premier
argues
that
the
bankruptcy
judge,
in
approving
the
settlement, effectively awarded Republic Bank an allowed secured
claim.
Thus, according to First Premier’s logic, this appeal
actually
flows
from
the
bankruptcy
court’s
denial
of
First
Premier’s objection to Republic Bank’s claim under Federal Rule of
Bankruptcy Procedure 3007(a).
Despite First Premier’s attempt at artful advocacy, I do not
agree that this action is an appeal from the denial of a claim
objection. First Premier could have filed on objection to Republic
Bank’s claim, but chose not to.
As discussed more fully below, I
reject First Premier’s assertion that the bankruptcy judge “allowed
a secured claim,” as the record reflects that the judge did not
rule on any legal issues relating to the reformation of the Lease
Modifications.
Instead, he properly ruled on a motion to approve
a settlement.
Thus, this appeal cannot be characterized as an
objection
bankruptcy
to
a
“claim.”
court’s
Because
approval
of
a
this
is
an
settlement,
standard of review is abuse of discretion.
appeal
the
of
the
applicable
Doctors Hospital, 474
F.3d at 426. An abuse of discretion occurs when a court’s decision
“is premised on an incorrect legal principle or a clearly erroneous
factual finding, or when the record contains no evidence on which
the court rationally could have relied.”
In re Airadigm Comm.,
Inc., 616 F.3d 642, 652 (7th Cir. 2010).
The paramount question in approving a bankruptcy settlement is
5
whether the compromise is in the best interests of the estate.
Doctors Hospital, 474 F.3d at 426.
“The linchpin of the ‘best
interests of the estate’ test is a comparison of the value of the
settlement with the probable costs and benefits of litigating.”
Id. (citing In re Energy Coop., 886 F.2d 921, 927-29 (7th Cir.
1989)).
Factors
litigation’s
that
the
probability
inconvenience,
and
delay,
court
of
should
success,
“including
consider
complexity,
the
are
the
expense,
possibility
disapproving the settlement will cause wasting of assets.”
that
Id.
(quoting In re Am. Reserve, 841 F.2d 159, 161 (7th Cir. 1987)).
“As part of this test, the value of the settlement must be
reasonably equivalent to the value of the claims surrendered. This
reasonable equivalence standard is met if the settlement falls
within the reasonable range of possible litigation outcomes.” Id.
In conducting such an analysis, “a precise determination of likely
outcomes is not required, since ‘an exact judicial determination of
the values in issue would defeat the purpose of compromising the
claim.’” In re Telesphere Communications, Inc., 179 B.R. 544, 553
(Bankr. N.D. Ill. 1994) (quoting In re Energy Coop., 886 F.2d at
927).
Further,
when
the
bankruptcy
court
has
a
thorough
understanding of the case, reviewing courts should show deference.
“If the decision demonstrates a command of the case, we will not
engage in second-guessing; the bankruptcy court is in a better
position
to
‘consider
the
equities
6
and
reasonableness
of
a
particular
compromise.’”
Doctors
Hospital,
474
F.3d
at
426
(quoting In re Am. Reserve, 841 F.2d at 162).
First Premier argues that the bankruptcy court “erred by
purporting to refuse to rule on the question of law of whether the
Modification Agreements could be reformed.” Appellant’s Br. at 23.
First Premier acknowledges that the bankruptcy judge maintained
that he was not conclusively ruling on the issue of whether the
Lease Modifications could be reformed, but instead concluded that
reformation was “possible.”
The bankruptcy judge stated:
The objections raised . . . are predicated on essentially
reducing Republic Bank’s claim to virtually completely
unsecured status. That appears to be less than likely.
I do think reformation would be possible. And, in fact,
that was one of the things, I think, sought from the
pleadings in the case under the Illinois law cited by the
bank and the administrator, which I have considered.
So it’s my view that there would be a likely successful
resolution of that, after trial, if I were required to
sit through all the evidence of what I know at this point
in time because of what Mr. Darcy [on behalf of First
Premier] has candidly indicated was a mistake in one
paragraph of the lease amendments[.]
ROA 2-23, p. 18.
The judge went on to make clear that he was not,
in fact, making a legal ruling on the issue of reformation: “Since
it is without prejudice to any of the contentions the parties may
raise in other litigation in other fora in which the state or some
other court may take a different view whether or not the amendments
could be appropriately reformed. . . . I’m not making any final
determination in that regard.”
ROA 2-23, p. 20.
Despite the
judge’s statement, First Premier argues that the court’s “granting
7
of the Settlement Motion and approval of the settlement agreement’s
terms – which allowed for the reformation of the Modification
Agreements, thereby giving Republic [Bank] an allowed secured claim
– clearly belie that contention.” First Premier Appellant’s Br. at
24.
I do not agree that the bankruptcy court erred in “purporting
to refuse to rule” on the legal issue of the reformation of the
Lease Modifications.
To the contrary, in determining whether a
settlement is in the best interest of the estate, “a precise
determination of likely outcomes is not required, since ‘an exact
judicial determination of the values in issue would defeat the
purpose
of
compromising
the
claim.’”
In
re
Telesphere
Communications, Inc., 179 B.R. at 553 (quoting In re Energy Coop.,
886 F.2d at 927).
Thus, the court was under no obligation to issue
a definitive legal ruling on the reformation question.
Rather, in
determining the risk of an adverse outcome for the estate in the
lawsuit with Republic Bank, he considered the case law cited by the
parties, including case law from Illinois which supported the
notion that reformation was possible in the event of a scrivener’s
error or mutual mistake.
Against this, First Premier offered
multiple cases (all of which were distinguishable in some way from
the present case) which it claimed supported the notion that an
inadvertent error in a security agreement prevents the security
interest from attaching to the collateral. In considering whether
8
the settlement was in the best interest of the estate, and with
these two competing sets of authorities in mind, the bankruptcy
court concluded that reformation was at least a “possible” outcome,
thus indicating that the outcome of any litigation was uncertain.
Keeping in mind that the judge was not required to – and, indeed,
did not – make a “precise determination” concerning the issue, I
see no error in the judge’s statements regarding reformation.
Nor
am
reformation
Grinding.2
I
was
convinced
“possible”
that
is
the
judge’s
directly
conclusion
foreclosed
by
that
Martin
In Martin Grinding, the bank loaned the debtor funds in
exchange for the debtor’s grant of a security interest in the
debtor’s machinery, equipment, furniture, fixtures, inventory and
accounts receivable.
793 F.2d at 593.
The security agreement,
however, inadvertently omitted inventory and accounts receivable
from its description of the secured collateral. In addition to the
security agreement, the debtor executed other loan documents which
included inventory and accounts receivable as secured property.
The Seventh Circuit held that the narrower security agreement
2
In addition, the bankruptcy judge’s reference to the
“composite documents doctrine” is not a basis for reversal. While
the cases cited by Premier Capital suggest that the doctrine –
which can apply when there is no separate security agreement – is
not applicable here, the bankruptcy judge’s reference to that
doctrine was merely an alternative basis which supported his
decision to approve the settlement. In the end, the bankruptcy
judge’s reference to this doctrine was not critical since all of
the parties agreed that the error in the Lease Modifications did
not reflect the parties’ true intentions.
9
controlled.
The court noted that a subsequent creditor that is
considering extending credit to a debtor needs to rely on the
public documents reflecting any security interests.
While
Martin Grinding
certainly supports First Premier’s
argument against reformation, it is not identical to this case, and
therefore certain of its characteristics make it distinguishable.
In his oral ruling, the bankruptcy judge distinguished this case
from Martin Grinding by noting that this case did not involve an
omission of a class or category or collateral.
Martin Grinding
involved the omission of certain assets in a security agreement,
and did not address whether a lease could be reformed.
Addressing
a point made in Martin Grinding that creditors need to be able to
rely on statements made in public documents, the bankruptcy judge
pointed out that the public statements filed by Republic Bank
reflected the fact that Republic Bank had a blanket security
interest in EAR,3 thus reducing the potential that any creditor of
EAR’s would get duped.
Granted, some of these differences are
minor but they do support the notion that a reasonable jurist could
consider Martin Grinding and not be 100 percent convinced that
Republic Bank would lose, especially when that jurist was not
3
First Premier and Republic Bank dispute whether or not
Republic Bank had a blanket security interest in EAR’s assets prior
to the Lease Amendments.
That dispute need not be resolved,
however, as all parties agree that Republic Bank and EAR intended
to grant Republic Bank a blanket security interest in the Lease
Modifications, and the UCC financing statement filed by Republic
Bank reflected that intention.
10
tasked with making a definitive legal conclusion on the issue.
In
light of these differences, and in light of the fact that the judge
also considered Illinois law which allowed for the reformation of
contracts where there was “mutual mistake,” I conclude that the
bankruptcy judge did not err in concluding that the outcome of the
litigation was uncertain and that reformation was at least a
“possible” outcome if the matter proceeded to litigation.4
In
granting
the
motion
approving
the
settlement,
the
bankruptcy judge considered the factors deemed important by the
Seventh Circuit, including the litigation’s probability of success,
expense and delay, and the possibility that disapproving the
settlement will cause wasting of assets.
The bankruptcy judge,
having presided over the case, was in an excellent position to
consider the relevant factors in determining that the settlement
was in the best interest of the estate.
The judge was very
familiar with EAR, the reasons it filed for bankruptcy and all
possible litigation recoveries. The oral ruling given by the judge
demonstrated his understanding of the case.
judge
recognized
recoveries.
the
importance
of
the
In particular, the
lien
carve-out
on
With the lien carve-out, the estate would be allowed
4
For the first time in reply, First Premier argues that the
security interest referenced in the Lease Modifications only
secured the amount due under one of the leases.
Because First
Premier failed to properly raise this and discuss its impact in its
opening brief, it is waived. See Carter v. Tennant Co., 383 F.3d
673, 679 (7th Cir. 2004) (arguments raised for first time in reply
brief are waived).
11
to keep any recoveries from its suits against the IRS, four
casinos, and FTI for the benefit of the creditors.
Further, the
judge demonstrated that he understood how the sharing agreement
between Brandt and Republic Bank relating to the VL Proceeds would
benefit the estate.
The judge made clear that it was concerned
that
adversary
fighting
entirely.
over
cases
could
deplete
the
estate
The judge also made clear that the settlement would
relieve the estate of the substantial costs which would have been
incurred in litigation against Republic Bank.
He also noted that
any dispute with Republic Bank would undoubtedly be heated, costly
and protracted.
In addition, the judge considered the possible
litigation outcomes and concluded that settlement was appropriate.
In light of the above, I reject First Premier’s assertion that
there was no support in the record for the judge’s decision.
While Premier Capital did not specifically address this issue,
the settlement is also within the range of outcomes.
The law is
clear that only if a settlement “falls below the low end of
possible
litigation
equivalence standard.”
outcomes
will
it
fail
the
reasonable
Doctors Hospital, 474 F.3d at 426.
Under
this test, the settlement is within the range of possible outcomes.
In the end, the benefits to the estate were substantial. While the
estate gave up its $4.6 million fraudulent transfer claim against
Republic Bank, the lien carve-out has resulted in an additional
$3.2 million for the estate and the estate also has a judgment
12
against
the
additional
United
States
$871,608.00.
Internal
In
Revenue
addition,
Service
Brandt
for
has
an
filed
approximately sixty new lawsuits which have potential recoveries in
the millions of dollars.
The collections from those lawsuits,
pursuant to the settlement, would directly benefit the estate.
In
addition, the estate will share in any recoveries by Republic Bank
against VonLehman.
This is significant for the estate because
Republic Bank’s lawsuit against VonLehman was filed first and
VonLehman has a “wasting insurance policy.”
Thus the settlement
makes it much more likely that the estate will share in any
recoveries from VonLehman.
With respect to the reformation issue,
the estate did not lose any value in agreeing to amend the Lease
Modifications, as it had already abandoned its assets.
Finally,
while not given a value by the bankruptcy judge, the estate
benefitted greatly by avoiding the time, effort and expense of
protracted litigation against Republic Bank.5
5
I am not convinced by First Premier’s assertion that Brandt
somehow violated his fiduciary duty by entering into the settlement
with Republic Bank.
I see no evidence that Brandt improperly
sought to advantage Republic Bank over other creditors. While the
settlement benefitted Republic Bank in some sense (although the
ultimate determination of whether or not reformation is possible
will likely be decided in state court), it also benefitted all the
creditors by bringing in millions of dollars to the estate. In the
end, Brandt’s and the bankruptcy court’s conclusion that settlement
with Republic Bank was in the best interest of the estate was
reasonable in light of the factors discussed above. Likewise, I
am not convinced by First Premier’s assertion that it was error for
Brandt to file the settlement motion without also providing an
affidavit. First Premier provides no case authority for the notion
that such action is required and, in any event, Brandt was
13
In conclusion, the decision of the bankruptcy court to grant
Brandt’s motion to approve the settlement is affirmed.
ENTER ORDER:
____________________________
Elaine E. Bucklo
United States District Judge
Dated:
December 19, 2011
available to testify, if either party (including First Premier) or
the court thought it necessary.
14
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