Illinois Department of Revenue v. Naperville Theater, LLC et al

Filing 45

MEMORANDUM Opinion: Signed by the Honorable Samuel Der-Yeghiayan on 3/10/2016. Mailed notice (aee, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re:

)
)
NAPERVILLE THEATER, LLC,
)
)
Debtor.
)
____________________________________ )
)
ILLINOIS DEPARTMENT OF
)
REVENUE,
)
)
Appellant,
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v.
)
)
NAPERVILLE THEATER, LLC et al.
)
)
Appellees.
)

15 C 3697

MEMORANDUM OPINION
SAMUEL DER-YEGHIAYAN, District Judge
This matter is before the court on Appellant Illinois Department of Revenue’s
(IDOR) appeal from the ruling of the bankruptcy court (Bankruptcy Court) in
bankruptcy case number 15 B 05384. For the reasons stated below, this court
reverses the Bankruptcy Court’s decision.

BACKGROUND
In February 2015, Naperville Theater, LLC (Debtor) filed for chapter 11

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bankruptcy. Debtor then filed a motion (Sale Motion) to establish bidding
procedures and sell substantially all of its assets (Sale) under the Bankruptcy Code.
On April 6, 2015, Debtor conducted an auction, acting as a debtor-in-possession and
Appellee Brixmor Property Group, Inc.’s and Brixmor Holdings 6 SPE, LLC’s
(collectively referred to as “Brixmor”) were the high bidder. Appellee First
Community Financial Bank (FCFB) was a secured creditor seeking to recover the
proceeds from the Sale pursuant to its lien. IDOR had filed a pre-petition claim
against the Debtor for withholding and sales taxes. On April 9, 2015, IDOR filed in
the bankruptcy proceedings a Limited Objection to the Motion to Approve Sale
(Limited Objection), arguing that the Sale could not be approved free and clear of the
amounts owed to IDOR and requesting that certain amounts be turned over to IDOR.
At a hearing on the Sale Motion on April 13, 2014, the Bankruptcy Court overruled
IDOR’s Limited Objection and entered an order (Sale Order) approving the Sale to
Brixmor free and clear of claims and encumbrances. On April 27, 2015, IDOR filed
the instant appeal. On May 28, 2015, the sale to Brixmor was closed and the Assets
were transferred to Brixmor. Brixmor then resold the Assets to a third party.
In the instant appeal, FCFB, the Trustee of the Debtor’s estate, and Brixmor
initially moved to dismiss the appeal, and on October 29, 2015, the court granted
Brixmor’s motion to dismiss, granted the Trustee’s motion to dismiss, and denied
FCFB’s motion to dismiss. FCFB now pursues the instant appeal, requesting that the
court reverse the Bankruptcy Court’s decision.

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LEGAL STANDARD
A federal district court has jurisdiction, pursuant to 28 U.S.C. § 158, to hear
appeals from the rulings of a bankruptcy court. 28 U.S.C. § 158. On appeal, the
district court reviews the factual findings of the bankruptcy court under the clearly
erroneous standard and reviews the bankruptcy court’s legal findings under the de
novo standard. Wiese v. Community Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir.
2009)(stating that the court “review[s] the bankruptcy court’s determinations of law
de novo and findings of fact for clear error,” but “where the bankruptcy code
commits a decision to the discretion of the bankruptcy court, [the court] reviews that
decision only for an abuse of discretion”); see also In re A-1 Paving and
Contracting, Inc., 116 F.3d 242, 243 (7th Cir. 1997)(stating that a “bankruptcy
court’s findings of fact are upheld unless clearly erroneous and the legal conclusions
are reviewed de novo”). Where there are mixed questions of law and fact, the district
court conducts a de novo review. Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th
Cir. 2008).

DISCUSSION
Pursuant to 11 U.S.C. § 363(e) (Section 363(e)), “on request of an entity that
has an interest in property used, sold, or leased, or proposed to be used, sold, or
leased, by the trustee, the court, with or without a hearing, shall prohibit or condition
such use, sale, or lease as is necessary to provide adequate protection of such
interest.” Id. (emphasis added); see also 11 U.S.C. § 363(f)(explaining conditions
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for sale of property by trustee). In this case, the Bankruptcy Court relied on In re Elk
Grove Vill. Petroleum, 510 B.R. 594 (Bankr. N.D. Ill. 2014) in overruling IDOR’s
Limited Objection. (DE 26-9: 6); (DE 26-1:9). The Bankruptcy Court held that
although IDOR possessed an interest in property that would ordinarily be entitled to
protection under Section 363(e) and 11 U.S.C. § 363(f) (Section 363(f)), the interest
no longer had any value because there are secured creditors that would have priority
over any unsecured creditor such as IDOR. Id. The Bankruptcy Court thus
concluded that IDOR’s interest was not entitled to “adequate protection” under
Section 363(e) and Section 363(f). Id. IDOR argues on appeal that the Bankruptcy
Court erred in finding that its interest no longer had any value, and erred in declining
to provide IDOR with adequate protection under Section 363(e) and Section 363(f).

I. Issues Not Raised on Appeal
FCFB in its appellee brief seeks to challenge the Bankruptcy Court’s
conclusion that IDOR held an interest under Section 363(e) and Section 363(f).
(FCFB 4-6). The Bankruptcy Court held that IDOR had an interest in the Section
363(e) and Section 363(f) context, in adopting the reasoning in Elk Grove Vill. that
“even though the [IDOR] had an interest, . . . the interest had no value. . . .” (DE 269). FCFB is not the appellant in this appeal. According to IDOR, none of the parties
raised the issue before the Bankruptcy Court either. (IDOR Open 7). The record
does not reflect that FCFB ever filed any appeal in this matter and the court will not
give advisory opinions on issues that are not properly before this court on appeal.
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The court notes that IDOR also requests on appeal that the court order that a
certain level of compensation be made to IDOR. However, the Bankruptcy Court
has not had an opportunity to address the proper criteria for calculating any
compensation owed to IDOR. Even IDOR in its opening brief acknowledges that
there may not be sufficient information in the record on appeal to address the
compensation issue at this juncture. (IDOR Open 12). Thus, it is premature to
address the compensation issue on appeal.

II. IDOR’s Interest Had Value that Was Entitled to Adequate Protection
IDOR contends that it held an interest that was entitled to adequate protection
under Section 363(e). The basis for liability to IDOR in this case is the Illinois Bulk
Sales Provisions, which require a purchaser in a bulk sale to withhold taxes owed to
IDOR by the seller and to turn over such taxes to IDOR if the seller does not pay the
taxes. 35 ILCS 5/902(d)(stating that the purchaser “shall be personally liable”); 35
ILCS 120/5j (stating that the purchaser “shall be personally liable”); Illinois Dep’t of
Revenue v. Elk Grove Vill. Petroleum, LLC, 541 B.R. 673, 679 (N.D. Ill. 2015).
IDOR’s claim against the purchaser of the Assets is a claim for personal liability.
Even when considering the priority of liens and the fact that IDOR does not stand as
secured creditor, IDOR has its separate claim for personal liability against the
purchaser of the Assets. IDOR’s successor liability claim would stand apart from
such liens. The Seventh Circuit has made clear that an interest in the Section 363(e)
and Section 363(f) context is not limited to secured liens. See Precision Indus., Inc.
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v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 545 (7th Cir. 2003)(stating that the
Bankruptcy “Code itself does not suggest that an ‘interest’ should be understood in a
special or narrow sense; on the contrary, the use of the term ‘any’ counsels in favor
of a broad interpretation”).
As indicated above, the Bankruptcy Court expressly relied upon Elk Grove
Vill. in overruling IDOR’s Limited Objection. (DE 26-9: 6); (DE 26-1: 9). In Elk
Grove Vill., IDOR was as in this case seeking to recover taxes after a sale of the
debtor’s assets, and seeking adequate protection under Section 363(e). Id.
However, after the Bankruptcy Court’s reliance in this case on Elk Grove Vill., the
district court on appeal reversed in part the decision in Elk Grove Vill. 541 B.R. at
681. The district court held that the bankruptcy court had erred in finding that
IDOR’s interest in that case was of no value due to IDOR’s unsecured status. Id.
The district court found that the bankruptcy court had failed to adequately consider
the personal liability owed to IDOR, emphasizing the importance of that personal
liability, and remanded the case for a determination of the value, if any, of IDOR’s
extinguished interest. Id. at 679-81. The Bankruptcy Court in this case did not have
the benefit of the district court’s ruling when making its decision in this case. The
Bankruptcy Court in this case similarly improperly concluded that IDOR’s interest
held no value that was entitled to adequate protection under Section 363(a). The
successor personal liability claim in this case had value and IDOR was entitled to
adequate protection in this case under Section 363(a). IDOR is entitled to
compensation for the extinguishment of its ability to enforce that interest.
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III. FCFB’s Constitutional Rights and Equities
FCFB also argues that to allow IDOR to claim any funds at this point would
be an impermissible taking of FCFB’s property without due process or just
compensation in violation of FCFB’s Fifth Amendment rights. However, IDOR
correctly points out that the statutory bases for personal liability to IDOR were in
place prior to 2011 when FCFB sought to perfect the security liens. IDOR can
properly seek adequate protection pursuant to Section 363(e) and an assertion of such
rights does not violate any of FCFB’s constitutional rights. Nor would allowing
IDOR to pursue its successor liability claim in this instance materially impact the lien
priority scheme in the Bankruptcy Code or violate Illinois state law relating to the
priority of security interests.
The court also notes that the equities do not favor FCFB in this instance.
IDOR correctly points out that FCFB’s recovery from the sale was likely artificially
high due to the inaccurate portrayal of the Assets as being free and clear of
encumbrances like IDOR’s transferee liability claim. FCFB, in refusing to provide
IDOR with its just share of the proceeds, is improperly seeking to gain a windfall
from the bankruptcy proceedings at the expense of the public which depends on the
payment of taxes. Therefore, based on the above, the Bankruptcy Court’s decision is
reversed and this action is remanded for a determination of the value, if any, of
IDOR’s extinguished interest.

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CONCLUSION
Based on the foregoing analysis, the Bankruptcy Court’s decision is reversed
and this case is remanded to the Bankruptcy Court for further proceedings consistent
with this Opinion.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: March 10, 2016

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