Bankruptcy Judges Opinions

In re: The Kirk Corporation, et al., Cole Taylor Bank v. The Kirk Corporation, et al. Issued: September 03, 2010

United States Bankruptcy Court Northern District of Illinois Eastern Division
Transmittal Sheet for Opinions Will this opinion be published? NO
Bankruptcy Caption:
Bankruptcy No.:
Adversary Caption:
Adversary No.:
Date of Issuance: Judge:
The Kirk Corporation, et al., 09 B 17236
Cole Taylor Bank v. The Kirk Corporation, et al. 09 A 00788
September 3, 2010 Carol A. Doyle
Appearance of Counsel:
Trustee or Other Attorneys:
Peter J. Roberts, Shaw, Gussis, Fishman, Glantz,
Wolfson & Towbin, LLC
Carol Connor Cohen Caroline Turner English
Arent Fox LLP Counsel for Richard M. Fogel, Trustee
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
Chapter 7 ) Case No. 09 B 17236
In Re: ) ) The Kirk Corporation, )
Debtor. ) ____________________________________)
(Jointly Administered)
) Judge Carol A. Doyle Cole Taylor Bank, )
) Plaintiffs, ) ) v. ) ) The Kirk Corporation, et al., ) ) Defendants. )
Adversary No. 09 A 00788
MEMORANDUM OPINION
This adversary proceeding involves claims by two groups of former employees seeking to recover funds formerly held by an escrow agent under an agreement to provide security for payments owed by the debtor, Kirk Corporation, to former employees for the purchase of stock distributed under the Kirk Employee Stock Option Plan (“ESOP”). The former employees filed cross-claims against Kirk alleging breach of fiduciary duty under ERISA for Kirk’s admitted failure to provide sufficient funding under a letter of credit to satisfy all claims of the cross- plaintiffs. One group of cross-plaintiffs (Group A) also alleges that Kirk breached its fiduciary duty by allowing the later group of former employees (Group B) to sell their shares back to Kirk at inflated prices.
Kirk moved to dismiss the cross-claims on a number of grounds, including that the cross-plaintiffs have failed to allege sufficient facts to support their claims, that Kirk did not owe a fiduciary duty to provide adequate security for the installment notes it issued, and that the cross-plaintiffs cannot allege an injury to the plan as required to state a claim for breach of fiduciary duty under § 502(a)(2) of ERISA, 29 U.S.C. § 1132(a)(2). The motion will be granted with respect to both cross-complaints because the cross-plaintiffs cannot allege an injury to the plan as required for a claim under § 502(a)(2) of ERISA and Group A failed to allege sufficient facts to support its claim regarding the purchase price of stock for Group B.
I. Background
The Kirk Corporation filed for relief under chapter 11 of the Bankruptcy Code in May 2009. The case was converted to chapter 7 in October 2009. Cole Taylor Bank filed this adversary proceeding in August 2009 to deal with funds it held as an escrow agent under an agreement entered among Kirk, Cole Taylor and the former participants in Kirk’s ESOP. Under the ESOP, employees accumulated shares of Kirk stock that were to be distributed to them when their employment with Kirk ended. The ESOP gave participants the right to sell their shares back to Kirk (called a put option) and gave Kirk the right to pay cash for the shares or provide payments in installments over the course of five years. If Kirk chose the installment plan, it was required to provide adequate security for the payments.
Kirk chose the installment approach for all of the individual defendants. To comply with the adequate security requirement, Kirk entered into an escrow agreement with Cole Taylor. Under the agreement, Cole Taylor would be made the beneficiary of an irrevocable standby letter
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of credit and agreed to make payments to any participating former employee if Kirk failed to make payments on an installment note. Each former employee who invoked the put option was given an installment note from Kirk and a certificate of participation in the escrow agreement with Cole Taylor. Kirk obtained a letter of credit equal to the amount owed to the first group of employees who received distributions from the ESOP in 2005 and 2006. As more participants received their stock distributions from the ESOP over time, however, Kirk failed to increase the amount of the letter of credit. The result is that, by the time Cole Taylor was notified in July 2009 that Kirk had defaulted on its payments under the notes, the amount of the letter of credit was approximately $847,000 but the outstanding indebtedness on the notes was approximately $1.7 million.
When Cole Taylor received notice that Kirk had failed to make payments under the notes and had filed for bankruptcy, Cole Taylor drew down on the letter of credit and sought guidance from the bankruptcy court regarding how to distribute the funds among the claimants. The bankruptcy judge hearing the case at that time suggested that Cole Taylor file an interpleader action. Cole Taylor then filed this adversary proceeding naming Kirk and all the former employees who were participants in the escrow agreement as defendants. Cole Taylor has since deposited the escrow funds with the court.
The individual defendants are divided into two categories: the former employees whose employment with Kirk ended in 2005-2006, known as Group A, and the former employees whose employment ended after 2006, known as Group B. Certain Group A defendants (Elizabeth Mugnai, Lisa Schmuldt, Jeff Arnold, Mary Ann Gorog, and Chris Steponaitis) filed a cross-claim against Kirk alleging two breaches of fiduciary duty under the Employee Retirement
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Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq. First, they allege that Kirk breached its fiduciary duty by failing to provide adequate security to cover all the amounts owed on the installment notes issued to former participants of the ESOP. Second, they allege that Kirk breached its fiduciary duty to them by valuing the stock purchased back from Group B under the put option at prices that were too high. Certain Group B defendants (Stacy Barham, Luis Encarnacion, Michele Blasco, John Matustik, Henry Thompson, Robin Straus, and Mark Rank) filed a cross-claim against Kirk that alleges only that Kirk breached its fiduciary duty by failing to provide adequate security for the installment notes.
Kirk filed a motion to dismiss both cross-claims on number of grounds. With regard to the claim made by both groups of cross-plaintiffs that Kirk breached its fiduciary duty by failing to provide adequate security for the notes, Kirk makes three principal arguments. First, it contends that the cross-plaintiffs failed to allege sufficient facts to satisfy Rule 8 of the Federal Rules of Civil Procedure. Second, Kirk argues that the cross-plaintiffs cannot state a claim for breach of fiduciary duty because the obligation to provide adequate security was not a fiduciary duty. Third, Kirk argues that the cross-plaintiffs fail to state a claim for breach of fiduciary duty because they cannot allege a loss to the plan as required under § 502(a)(2) of ERISA, 29 U.S.C. § 502(a)(2). With regard to the claim for breach of fiduciary duty based on the price at which Kirk bought stock back from Group B, Kirk argues that the Group A cross-plaintiffs failed to allege sufficient facts to satisfy Rule 8.
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II. Jurisdiction
The court has core jurisdiction over the cross-claims against Kirk under 28 U.S.C. § 157(b)(2)(B) because they are claims against the debtor.
III. Standard for Motion to Dismiss
In ruling on a motion to dismiss under Rule 12(b)(6) of the Federal Rule of Civil Procedure, which applies to this adversary proceeding through Rule 7012 of the Federal Rules of Bankruptcy Procedure, the court must accept as true all facts alleged in the complaint and draw all reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir. 1999). Rule 8 of the Federal Rules of Civil Procedure generally requires the pleader to provide “a short and plain statement of the claim showing that the plaintiff is entitled to relief” that gives the defendant “fair notice of what the...claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Although a complaint need not contain “detailed allegations,” the plaintiff must provide the grounds for relief through “more than labels and conclusions, and a formulaic recitation of a cause of action’s elements will not do.” Twombly, 550 U.S. at 555. Rather, “to survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, No. 07-1015, 2009 WL 1361536, at *12 (May 18, 2009) (citing Twombly, 550 U.S. at 570). A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft, 2009 WL 1361536, at *12 (citing Twombly, 550 U.S. at 556).
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IV. Breach of Fiduciary Duty under § 502(a)(2) of ERISA
Both cross-complaints allege that Kirk breached its fiduciary duty under ERISA. Section 409 of ERISA makes a fiduciary personally liable for breaches fiduciary duty. 29 U.S.C. § 1109(a). It provides that anyone who is a fiduciary under a plan who breaches any of his duties is personally liable to make good to the plan any losses to the plan resulting from the breach. Id. Section 502 of ERISA creates a private right of action for plan participants to enforce their rights under a plan and for breach of fiduciary duty. 29 U.S.C. § 1132(a).
Under § 3(21)(A) of ERISA, a person is a fiduciary with respect to a plan “to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation . . ., or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A). There are two types of fiduciaries under ERISA: named and unnamed. 6- 153 Labor and Employment Law § 153.02 (Lexis 2010). A “named” fiduciary, such as a plan administrator, trustee, or investment manager, is generally a fiduciary because of the individual’s necessary exercise of discretionary authority or control in administering the plan or managing its assets. Canada Life Assur. Co. v. Lebowitz, 185 F.3d 231, 237 (4th Cir. 1999). Even if a party is not a named fiduciary, it may still be deemed a fiduciary under ERISA to the extent it exercises authority or control as set forth in §3(21)(A). Both named and unnamed fiduciaries owe a fiduciary duty, however, only with respect to those aspects of the plan over which they exercise such authority or control. E.g., Sommers Drug Stores Employee Profit Sharing Trust v. Corrigan Enter., Inc., 883 F.2d 345, 352 (5th Cir. 1989).
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Because a person who is a fiduciary regarding one aspect of a plan may not be a fiduciary regarding other aspects of a plan, the threshold question when evaluating a claim for breach of fiduciary duty under ERISA is whether the defendant was acting as a fiduciary (ie, performing a fiduciary function) when taking the action that is the subject of the complaint. Pegram v. Herdrich, 530 U.S. 211, 226 (2000); Chicago Dist. Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463, 471 (7th Cir. 2006). Courts often refer to non-fiduciary functions as “settlor” functions as opposed to fiduciary functions. Employers who are plan sponsors typically wear both hats: one as a fiduciary in administering or managing the plan for the benefit of participants, and the other as an employer in performing settlor functions such as establishing, funding, amending, and terminating the trust. Hunter v. Caliber System, Inc., 220 F.3d 702, 718 (6th Cir. 2000). See also Johnson v. Georgia-Pacific Corp., 19 F.3d 1184, 1188 (7th Cir. 1994). Courts must therefore determine whether the conduct at issue constitutes management or administration of the plan that may give rise to a fiduciary obligation, or whether it involves a settlor function or merely a business decision that has an effect on an ERISA plan but is not subject to fiduciary standards. Hunter, 220 F.3d at 718.
Although the definition of a fiduciary includes persons who “exercise any discretionary authority or discretionary control respecting management [a] plan,” 29 U.S.C. § 1002(21)(A), the exercise of discretion alone does not make an employer’s action subject to fiduciary standards. The exercise of discretion must relate to plan management or administration. Hunter, 220 F.3d at 718. Basic employer decisions regarding whether to establish, how to design, and whether to amend an ERISA plan are not considered fiduciary functions. McCath v. Auto-Body North Shore, Inc., 7 F.3d 665, 670 (7th Cir. 1993). When employers undertake these types of
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discretionary actions, they do not act as fiduciaries but instead are analogous to settlors of a trust. Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996). Even if an employer implements a business decision that may ultimately affect the security of employees’ benefits, the action is not automatically subject to a fiduciary duty under ERISA. Hunter, 220 F.3d at 718. ERISA is concerned with the elements of the plan and its administration after it has been established, and only discretionary acts of plan management or administration or those acts designed to carry out the very purposes of the plan are subject to ERISA’s fiduciary duties. Musto v. Am. Gen. Corp., 861 F.2d 897, 911 (6th Cir. 1988)(emphasis added); Akers v. Palmer, 71 F.3d 226, 230 (6th Cir. 1995).
A. No Dismissal of Adequate Security Claim under Iqbal Standard
Kirk argues in its motion to dismiss that the cross-plaintiffs have failed to allege sufficient facts to support a claim for breach of fiduciary duty based on inadequate security because they have failed to allege any facts showing that the obligation to provide adequate security was a fiduciary function as opposed to a settlor function. This argument is not persuasive. Kirk is the named fiduciary under the 2002 amendment to the plan so there is no doubt that it is a fiduciary under § 409 of ERISA for many purposes. Fourth Am. to Kirk ESOP, § 17.2. The only question is whether Kirk owed a fiduciary duty to provide adequate security under the put option or whether that was a settlor function. Both cross-claims allege sufficient facts to support this claim. They refer to the plan itself as well as the relevant statutory provisions regarding fiduciary duty and adequate security, which will be central to the determination of which hat Kirk was wearing when it failed to increase the amount of the letter
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of credit as Group B participants exercised their put options. The cross-claims contain sufficient factual allegations to satisfy Iqbal.
B. Failure to Allege Injury to Plan
Kirk also argues that the cross-plaintiffs cannot state a claim for breach of fiduciary duty under § 502(a)(2) of ERISA because only losses to the plan may be recovered under § 502(a) and the cross-plaintiffs did not and cannot allege losses to the plan resulting from Kirk’s failure to provide adequate security. Kirk is correct that only losses to the plan are actionable under § 502(a)(2) of ERISA. Section 502(a) provides plan participants with three potential causes of action to enforce their rights under a plan. First, § 502(a)(1) permits a plan participant to recover benefits due to him under the terms of a plan and to enforce his rights under the terms of a plan. 29 U.S.C. § 1132(a)(1)(B). Second, § 502(a)(2) permits a plan participant to seek “appropriate relief under § 409,” the provision discussed above that governs the liability of a fiduciary under ERISA. 29 U.S.C. § 1132(a)(2). Finally, § 502(a)(3) permits a plan participant to seek to enjoin any act or practice that violates ERISA or the terms of a plan or “to obtain other appropriate equitable relief” with respect to any such act or practice. 29 U.S.C. § 1132(a)(3).
Section 502(a)(2) authorizes only a claim to enforce § 409. Section 409 provides that a plan fiduciary can be held “personally liable to make good to such plan any losses to the plan resulting from each such breach and to restore to such plan any losses to the plan resulting from each such breach, ...” 29 U.S.C. § 1109(a) (emphasis added). The Supreme Court has twice held that the language in § 409 limiting a fiduciary’s liability to losses to a plan limits actions under §502(a)(2) to claims for losses to a plan. In Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142 (1985), the court held that a fiduciary was not liable under § 502(a)(2) for a
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delay in processing benefit claims because the plaintiff had received all the benefits to which she was entitled under the plan and was seeking consequential damages for the delay in receiving those benefits. The court reasoned that Congress carefully crafted the remedies available to participants in § 502 and that this claim for extra-contractual damages did not fall within the remedies provided by Congress. In discussing § 502(a)(2), the court stated that a fair reading of the statute makes it “abundantly clear that is draftsmen were primarily concerned with the possible misuse of plan assets, and with remedies that would protect the entire plan, rather than with the rights of an individual beneficiary.” Russell, 473 U.S. at 142.
The court later clarified in LaRue v. DeWolff, Boberg & Assoc., Inc., 552 U.S. 248, 254 (2008), that the language in Russell regarding protecting the “entire” plan did not mean that a plaintiff had to allege a loss that affected the entire plan (i.e., every participant in the plan). The LaRue Court held that a loss to an individual’s account under a defined benefit plan is a loss to the plan for purposes of § 409 and § 502(a)(2). The court reaffirmed, however, that § 502(a)(2) provides a remedy only for losses to the plan, whether incurred by the plan as a whole or within individual accounts under a plan, not for individual injuries distinct from plan injuries. Id. at 256. See also Rogers v. Baxter Int’l, Inc., 521 F.3d 702 (7th Cir. 2008) (LaRue permits action under § 502(a)(2) when a participant in defined-contribution account suffers a loss even though not all participants in a plan are injured); Harzewski v. Guidant Corp., 489 F.2d 799 (7th Cir. 2007) (former employees who had participated in a defined benefit plan could sue under § 502(a)(2) for breach of fiduciary duty to recover monetary losses sustained in their individual accounts because of the breach).
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Kirk argues that the cross-plaintiffs cannot state a claim for breach of fiduciary duty under § 502(a)(2) because they cannot allege any loss to the plan from Kirk’s failure to increase the amount of the letter of credit or provide other security for the put option installment notes. Kirk is correct. The cross-plaintiffs acknowledge that they were issued the stock to which they were entitled under the plan. The crux of their claim is that Kirk did not comply with the “adequate security” requirement for the put option that came into play only after they received the distribution of stock from the ESOP trust. Kirk’s failure to provide adequate security caused no harm to the plan (or the trust that held stock for distribution under the plan). That failure impacted only the participants individually after they received their stock distributions from the plan. The cross-plaintiffs therefore cannot allege an injury to the plan caused by the failure to provide adequate security that is required to state a claim for breach of fiduciary duty under § 502(a)(2).
Kirk argues that the consequence of this conclusion is that the claim for breach of fiduciary duty based on the failure to provide adequate security must be dismissed under Rule 12(b)(6) because the only possible statutory basis for this claim is § 502(a)(2). This is not necessarily correct. As noted above, § 502(a) provides three possible causes of action to plan participants for violations of the terms of a plan. The first is a claim for benefits or to enforce the terms of a plan under § 502(a)(1)(B). Kirk argues that plaintiffs do not have a viable claim under this provision because they got all the benefits to which they were entitled under the plan. While the cross-plaintiffs may have gotten all the stock to which they were entitled from the ESOP trust that held the stock, the plan also required Kirk to provide adequate security if it chose to make installment payments under the put option. This is clearly an obligation that Kirk
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owed under the plan, whether it involves a fiduciary duty or not, so the cross-plaintiffs may have a viable claim to enforce their rights under the plan under § 502(a)(1)(B).
The other cause of action that could potentially be available to the cross-plaintiffs is under § 502(a)(3). The Supreme Court has held that this provision may be available to plan participants who allege a breach of fiduciary duty and who have suffered an individual injury even though there was no loss to the plan. Varity Corp. v. Howe, 516 U.S. 489 (1996). Thus, plan participants like the cross-plaintiffs who cannot allege a loss to the plan can potentially assert a claim under § 502(a)(3) for equitable relief. The Varity court cautioned, however, that § 502(a)(3) authorizes only “appropriate equitable relief,” and that where Congress provided adequate relief for a participant’s injury elsewhere in § 502, “there will likely be no need for further equitable relief, in which case such relief normally would not be “appropriate.’” Id. at 515. Thus, to the extent a participant is afforded a remedy under § 502(a)(1) or (a)(2), no other relief would generally be “appropriate” under (a)(3). Id. In addition, a plan participant may not obtain damages under § 502(a)(3); only equitable relief is available. See, e.g., Mertens v. Hewett Assoc., 113 U.S. 2063 (1993) (no damages available against third parties for assisting in a breach of fiduciary duty); Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 591-92 (7th Cir. 2000) (Mertens limited “appropriate equitable relief” under § 502(a)(3) to traditional equitable remedies such as injunction or restitution); Clair v. Harris Trust and Sav. Bank, 190 F.3d 495 (7th Cir. 1999) (only traditional equitable remedies available under § 502(a)(3)); Health Cost Controls of Illinois v. Washington, 187 F.3d 703 (7th Cir. 1999) (same). Thus, there are significant limitations on an action for breach of fiduciary duty under § 502(a)(3) but it is
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possible to obtain equitable relief under this provision if relief is not available under other provisions of § 502.
In this case, neither group of cross-plaintiffs has expressly identified the subsection of §502(a) upon which it bases its claim. Kirk assumed in its motion to dismiss that both groups of cross-plaintiffs were proceeding under § 502(a)(2) and the cross-plaintiffs never contested that assumption. Neither cross-claim mentions § 502 at all let alone identifies a particular subsection as the basis for the claim. Neither group of cross-plaintiffs recognized in their responses to the motion the difference between the three types of claims available to plan participants under § 502 and they cited cases decided under all three provisions without discussing the distinctions between the provisions. The cross-complaints allege only claims for breach of fiduciary duty, not a claim for benefits or to enforce the plan under § 502(a)(1).1 The cross-plaintiffs do not seek equitable relief but instead seek damages so they have not stated a claim under § 502(a)(3). The court therefore assumes that the cross-claims are based on § 502(a)(2). These claims are not viable because the cross-plaintiffs cannot allege a loss to the plan resulting from Kirk’s failure to provide adequate security. The claims of both groups of cross-plaintiffs for breach of fiduciary duty based on the failure to provide adequate security must therefore be dismissed for failure to state a claim.2
1The cross-plaintiffs may not have alleged a claim to enforce their rights under the plan under § 502(a)(1) because there is virtually no chance that such a claim would be paid by the bankruptcy estate in light of the lack of assets, while insurance may be available to pay claims for breach of fiduciary duty.
2In light of this conclusion, the court need not address whether the obligation to provide adequate security was a fiduciary function or a settlor function.
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C. Breach of Fiduciary Duty Based on Purchase Price of Group B’s Stock
Group A’s cross claim also alleges that Kirk breached its fiduciary duty under ERISA by buying back Group B’s stock at a price higher than its fair market value. Kirk argues that the cross-plaintiffs have failed to allege sufficient facts to support this claim. The court agrees. The Group A cross-plaintiffs allege only that the debtor (and the Board of Trustees, who are not parties to this case) breached the fiduciary duties owed to Group A participants “because the stock of the Debtor that was purchased ...[from Group B]... was for more than its fair market value.” Cross-claim Par. 34 (Docket No. 93). Group A cites § 409(h)(1)(B) of the Internal Revenue Code, 26 U.S.C. § 409(h)(1)(B), and Section 15.2 of the ESOP for the definition of fair market value. Section 409 of the IRC provides that a plan meets the requirements of the subsection with respect to a put option if the participant has a right to require that the employer repurchase the securities under a fair valuation formula. Section 15.2 of the plan states that the put option permits the participant to sell the company stock back to Kirk at any time for the then fair market value. Section 2.21 of the plan provides that the fair market value shall be based upon a valuation by an independent appraiser.
Group A alleges no facts to support its contention that Group B participants were paid more than the fair market value for the stock. There are no allegations about the price that the members of Group B were paid for their shares, whether any independent appraisal was obtained by Kirk, or the price that Group A contends was the fair market value at the time that each Group B participant exercised the put option. Group A’s conclusory allegations are insufficient to present a plausible basis for recovery with respect to this claim. Group A’s claim for a breach of
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fiduciary duty against Kirk for allegedly paying more than fair market value for Group B’s stock must therefore be dismissed.
V . Conclusion
Kirk’s motion to dismiss is granted.
Dated: September 3, 2010
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In re Linda A. Dzielak Issued: August 11, 2010

United States Bankruptcy Court Northern District of Illinois Western Division
Transmittal Sheet for Opinions for Posting
Will this opinion be Published? Yes Bankruptcy Caption: In re Linda A. Dzielak Bankruptcy No. 08-B-70499 Date of Issuance: August 11, 2010 Judge: Manuel Barbosa Appearance of Counsel: Attorneys for Debtor: Theresa L. Campbell, Esq. Trustee: Bernard J. Natale, Esq.
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS WESTERN DIVISION
In re Linda A. Dzielak, Bankruptcy No. 08-B-70499
Debtor.
Chapter 7 Judge Manuel Barbosa
I. MEMORANDUM OPINION
This matter comes before the Court on the Trustee’s objection to exemption, which the Debtor has only asserted in amended schedules. The Trustee argues first that the Debtor should not be permitted to amend her schedules, and second, that even if she is allowed to amend the schedules, she does not qualify for the exemption asserted. For the reasons set forth herein, the Trustee’s objection is DENIED.
II. JURISDICTION AND PROCEDURE
The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (O).
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III. FACTUAL AND PROCEDURAL BACKGROUND
The Debtor filed a petition for protection under Chapter 7 of the Bankruptcy Code with this Court on February 25, 2008. The Debtor had filed for dissolution of marriage with her husband in the Winnebago County Circuit Court on August 15, 2005, but the dissolution proceeding remained pending as of the bankruptcy petition date. In the Debtor’s petition, she listed her marital status as “separated,” and in her Statement of Financial Affairs, she listed details of the dissolution proceeding, including the case number, location, nature of proceeding and the fact that it was still pending. In her initial schedules, she listed that she had a 50% share in a house with her husband and a 50% share in one vehicle with her husband. She listed a claim for child support arrearage, but did not list any other claim against her husband or any interest in any retirement plan, pension or life insurance policy.
Although the Debtor’s initial schedules listed no assets which were not fully encumbered by a secured claim or subject to a claimed exemption, on April 10, 2008, the Trustee filed a report of assets. On the same day, the Trustee filed an application to employ general counsel to “investigate possible fraudulent conveyance and debtor’s interest in marital property, including but not limited to real estate and object to claims if necessary.” The Court granted the application on April 21, 2008. On August 27, 2008, the Trustee filed an application to employ special counsel “to intervene in the [Debtor’s] divorce proceedings [and] protect any interests of the Estate,” since the Trustee had concluded that there were “substantial issues of real estate and other issues of equity pending in the divorce that may be possible for the benefit of the Estate.” The motion to employ was granted on September 3, 2008. To date, the divorce court has not yet issued a final order or judgment dividing
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the marital property of the Debtor and her ex-husband.
On May 4, 2010, the Debtor filed amended schedules, listing “a contingent interest in her ex- Husband’s 401(k) plan.” The amendment claimed an interest of $36,000 in the 401(k) plan, noting that the division of assets and debts in the divorce case was still pending and undetermined, but “presum[ing] a 50% interest in the total account balance as of the entry of the Judgment of Dissolution which was approximately $72,000.” The amended schedules claimed an exemption of $36,000 under 735 Ill. Comp. Stat. 5/12-1006. The amended schedules also listed a contingent interest or claim against her ex-husband in the amount of $35,750 in respect of a $71,000-$72,000 investment account which she claimed was dissipated by her husband shortly before the divorce case was filed. She did not assert any exemption for this claim or interest. Finally, the amended schedules also added a contingent interest of $12,000 in retroactive child support, which she expected the divorce court would enter to cover the time between the filing of the petition for dissolution and the entry of an order setting child support. The amended schedules asserted an exemption for the child support, which the Trustee does not object to.
After notice and several status hearings neither party requested an evidentiary hearing, instead opting to submit this matter on their pleadings and statements of counsel.1 The Court takes judicial notice of all papers filed by the parties and the case docket.
1 Federal Rule of Bankruptcy Procedure 4003(c), setting forth the burden of proof for objections to exemptions, “clearly permits, but does not require, a hearing.” In re Yonikus, 996 F.2d 866, 873 (7th Cir. 1993).
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IV. DISCUSSION A. Motion to Strike Amended Schedules
A Debtor may amend a bankruptcy schedule “as a matter of course at any time before the case is closed.” Fed. R. Bankr. P. 1009(a). However, the Seventh Circuit Court of Appeals has recognized that “[e]xceptional circumstances may prevent a debtor from amending schedules.” In re Yonikus, 996 F.2d 866, 872 (7th Cir. 1993). Thus, while the Seventh Circuit “endorses the ‘permissive approach’ of allowing amendment of schedules ... an amendment may be denied upon a clear and convincing showing of bad faith by the debtor or prejudice to the creditors.” Id.
i. Bad Faith
The usual ground for a finding of bad faith is either “concealment of assets” or a debtor’s “intentional and deliberate delay in amending an exemption for the purpose of gaining an economic or tactical advantage at the expense of creditors and the estate.” In re Shethi, 389 B.R. 588, 598 (Bankr. N.D. Ill. 2008) (Sonderby, J.) (citing In re Icke, 2006 WL 2860809 (Bankr. S.D. Ill. 2006)). The court in Icke suggested that some form of deception or active concealment was required to constitute ‘bad faith.’ In re Icke, 2006 WL 2860809, at *3 (Bankr. S.D. Ill. 2006) (Altenberger, J.). Here, the Trustee has not alleged any bad faith act or concealment by the Debtor other than the failure to initially schedule her contingent interest in her ex-husband’s 401(k) plan or her asserted exemption in such interest.
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The Trustee argues that the Debtor’s failure to schedule the asset at a minimum constituted a “reckless disregard for the truth of information furnished in the schedules and statements.” However, the 401(k) plan was in the Debtor’s husband’s name, and funded by his salary, meaning that Mrs. Dzielak was not necessarily aware of its existence, its amount, or that she might have a claim to it. The Trustee argues that, because the petition for dissolution of marriage was filed nearly two-and-a-half years before the bankruptcy petition, she must have known of her husband’s assets by the petition date. However, the mere passage of time does not necessarily mean that she was or should have been aware of the account. There is no indication of what discovery occurred in the dissolution proceedings, if the husband complied with discovery requests, or if the husband attempted to conceal assets from the Debtor. Instead, the record indicates that the husband might have hidden assets from his wife. The Debtor has alleged that her ex-husband dissipated over $70,000 in an investment account without her knowledge shortly before the petition for dissolution was filed. Also, while two and a half years might seem like a long time when taken out of context, it is now nearly five years since the dissolution proceedings were commenced, and there still has not been a final judgment entered. Moreover, the Trustee has participated in the divorce proceedings for nearly two years, but apparently just recently became aware of the husband’s account. The Trustee retained special counsel who intervened in the dissolution proceedings as early as September 2008, and yet he was apparently unaware of the 401(k) plan for over a year and a half. This also seems to indicate that the existence of the retirement account was not obvious.
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The Trustee has failed to demonstrate “by clear and convincing evidence” that the Debtor intentionally concealed the 401(k) plan. Instead, it appears more likely that the Debtor was not aware of the existence of the retirement account until shortly before she filed the amended schedules. She disclosed the fact that she had a pending divorce proceeding in her initial petition, and disclosed her potential interest in the car and the house which were jointly owned by her and her husband. The Trustee was not only aware of the divorce proceedings, but actually intervened in them. If the Debtor’s intent was to conceal the asset or to wait until it was too late for the Trustee to do anything about it, the Debtor would have waited until after the divorce court entered a judgment to file the amendments, not before. Instead, the Debtor disclosed the retirement plan while the bankruptcy case was still open and before a final judgment was entered in the divorce proceedings.
ii. Prejudice
As Judge Sonderby has stated, “in determining whether an amendment to the debtor’s exemption claim causes prejudice, ‘the appropriate inquiry is not whether ... creditor[s] will recover less,’ but whether a party – having changed its position in reliance on the original exemption claim – would be adversely affected by an amendment thereto.” In re Shethi, 389 B.R. at 605 (quoting 9 L. King, Collier on Bankruptcy ¶ 1009.02[1] (15th ed. rev. 2007)). If recovering less were sufficient to constitute ‘prejudice,’ then amending a petition to claim an exemption would never be permitted, which would be in conflict with the policy of liberally permitting amendments while the case is open.
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The Trustee claims he incurred additional expenses because of the Debtor’s failure to timely disclose the asset or claim the exemption. He claims that he might not have hired special counsel and gone to the expense of intervening in the divorce proceedings if he knew that the Debtor was going to claim an exemption in marital property. But, the Court believes that the disclosure of the retirement account or claim of exemption would have made it even more likely, not less, that the Trustee would attempt to intervene in the divorce proceedings. For example, the Debtor did disclose the marital residence, and the Trustee admits that it was “[u]pon learning that the former marital residence ... contained non-exempt equity” that he sought to intervene in the divorce proceedings. The existence of more marital assets would have been even more incentive to intervene.
Moreover, the trustee has had the opportunity to intervene in the divorce proceedings to make sure the Debtor and her ex-husband do not collude to divide marital property in a way adverse to the interests of creditors. The couple might have an incentive to divide property by having the Debtor receive all exempt property in exchange for the husband receiving all non-exempt property. But, the Trustee has intervened, and the divorce court has not yet entered a final judgment, so the creditors have not yet been prejudiced. Additionally, the Debtor has only claimed an exemption in up to 50% of the value of the 401(k) plan. The Illinois exemption statute does not have a monetary limit, so if the debtor and her husband were conspiring against the Debtor’s creditors, one would expect the wife to claim an exemption in the full account. Instead, if she is awarded more than a 50% interest in the account, the excess would be available to creditors, since she only claimed an exemption of $36,000.
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The Trustee also seems to argue that the Debtor has increased the Trustee’s costs and wasted his time by failing to provide the information initially in the original schedules. But, this sort of argument was rejected in In re Shethi, where “the only change in position identified by the trustee relate[d] to the fees and expenses that he incurred in investigating and preparing his Objections, his motion for Rule 2004 examinations, and his issuance of subpoenas.” 389 B.R. at 605. The court found that such “circumstances presented do not establish prejudice warranting a denial of the amended exemption claim.” Id. at 606. As noted above, the Court believes that the Trustee would have sought to intervene in the divorce proceedings whether the Debtor had initially scheduled the 401(k) plan or not, and therefore the costs cannot be attributed solely to the failure to schedule or subsequent amendment. Nor can the mere costs incurred in objecting to the amendment be considered prejudice. If that were the case, amendments would never be permitted. A Trustee could block every amendment simply by objecting to the amendment and incurring legal expenses. Of course, there are likely situations in which incurrence of expenses could constitute prejudice, but the Trustee has not demonstrated the type or level of prejudice warranting the Debtor losing her right to amend or her right to claim an exemption to which she is entitled.
iii. Laches
The Trustee also argues that the Debtor should be prohibited from amending her schedules or asserting the exemption on the theory of laches. Laches is “an equitable doctrine which precludes the assertion of a claim by a litigant whose unreasonable delay in raising that claim has prejudiced the opposing party.” In re Gravemann, No. 05-B-35597, 2009 WL 4921416 (Bankr. S.D. Ill. Dec.
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10, 2009) (Altenberger, J.) (citing Tully v. State, 143 Ill.2d 425, 432 (1991)). “The doctrine is grounded in the equitable notion that courts are reluctant to come to the aid of a party who has knowingly slept on his rights to the detriment of the opposing party.” Id. “Two elements are necessary to a finding of laches: 1) lack of diligence by the party asserting the claim and 2) prejudice to the opposing party resulting from the delay.” Id. For the same reasons as noted above, the Trustee has not demonstrated that laches is appropriate. The Trustee has not demonstrated a lack of diligence, since he has not demonstrated that the Debtor knew or should have known of the existence of the 401(k) plan until she filed the amended schedules. Nor has the Trustee demonstrated that the Trustee or any creditor has suffered prejudice from the delay.
B. Objection to Exemption
i. Illinois Exemption
Under Section 522(b) of the Bankruptcy Code, debtors may choose between the exemptions provided by federal law and those provided by state law, unless a state chooses to opt out of the federal exemption scheme. 11 U.S.C.A.§ 522(b) (West 2010). Illinois has chosen to “opt out” of the federal exemption scheme, and therefore the Debtor in this matter must utilize the exemptions provided by Illinois law. In re Laredo, 334 B.R. 401, 409 (Bankr. N.D. Ill .2005) (Squires, J.). In Illinois, “[e]xemption statutes must be liberally construed in favor of the debtor.... Where it is possible to interpret an exemption statute either favorably or unfavorably with respect to the debtor, the favorable method should be selected.” Id. at 410-09 (internal citations omitted).
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Neither party has argued that the Debtor’s potential interest in the 401(k) plan is not property of the estate. As the 7th Circuit Court of Appeals has noted, “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541.” In re Yonikus, 996 F.2d at 869. Therefore, the fact that the divorce court has not yet issued an order distributing an interest in the property is not dispositive. The Debtor has at least a claim for, or contingent interest in, all or part of the retirement account. Neither party has suggested that the Debtor’s interest is not property of the estate by means of Section 541(b)(7) (excluding amounts withheld by or received by an employer for payments as contributions to certain employee benefits plans or deferred compensation plans), Section 541(c)(2) (excluding valid spendthrift trusts), or any other provision of the Bankruptcy Code.
Generally, "[p]roperty interests are created and defined by state law," and "[u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Traveler’s Cas. & Sur. Co. of Am. v. Pacific Gas & Elec. Co., 549 U.S. 443, 451, 127 S. Ct. 1199, 1205 (2007) (quoting Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914 (1979)). The Debtor filed a petition for dissolution nearly two and a half years before filing her bankruptcy petition. Under 750 Ill. Comp. Stat. Ann. 5/503(e), “[e]ach spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action.” (emphasis added).2 Marital property is defined as “all property acquired
2 At least one Illinois Appellate Court has suggested that a spouse might have a recognizable property interest in the assets of his spouse constituting marital property even before the filing of a petition for dissolution. In re Takata, 383 Ill. App. 3d 782, 890 N.E.2d 688 (Ill. App. Ct. 2008) (finding that a husband had “an actual interest in the IRA
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by either spouse subsequent to the marriage,” other than certain specified exceptions. 750 Ill. Comp. Stat. Ann. 5/503(a). The parties do not dispute that the 401(k) plan was acquired by the husband subsequent to the marriage and is not within any of the statutory exemptions, and therefore constitutes marital property. Since the Illinois “equitable distribution law creates statutory rights in marital property, the bankruptcy court should honor those laws unless some federal interest requires a different result.” Szyszko v. Szyszko, No. 01-C-2417, 2001 WL 766905, at *2 (July 6, 2001) (Darrah, J.).
735 Ill. Comp. Stat. Ann. 5/12-1006 provides an exemption for a “debtor's interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan ... if the plan (i) is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended.”3 There is no dispute that the 401(k) plan constitutes a valid “retirement plan” for purposes of the Illinois exemption and the Internal Revenue Code. However, the Trustee argues that, since the plan is in the ex-husband’s name, the contributions were made by the ex-husband, and since the Debtor will only receive an interest in the plan through a divorce settlement or judgment, which has not yet occurred, the Debtor cannot validly assert the exemption. The Trustee’s objection can be broken down into two parts: 1) that, because of its contingent nature,
in [his current wife’s name] as it was [their] marital property,” such that it was subject to turnover to the extent of such “legal interest,” even though the husband and wife had not filed for divorce). The Court need not speak to rights before filing for divorce, however, since here the Debtor filed the petition for dissolution prepetition. 3 The Debtor has not asserted an exemption under 11 U.S.C § 522(b)(3)(C) (providing an exemption for retirement funds to the extent in a fund or account exempt from taxation under section 401, or other specified sections of the Internal Revenue Code), and therefore the Court will only speak to the Illinois exemption.
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the Debtor did not have a sufficient interest in the property as of the petition date to claim an exemption and 2) that the way the Debtor obtained or will obtain her interest in the plan, through a divorce settlement or judgment, changed the nature of the property such that the exemption does not apply.
ii. Contingent Nature of Interest
The Trustee argues that the Debtor cannot exempt any interest in the 401(k) plan under 735 Ill. Comp. Stat. Ann. 5/12-1006 because she did not have a specific interest in the 401(k) plan, but rather only a general claim for ‘marital assets.’ The Court disagrees. As stated above, under Illinois law, “[e]ach spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action,” 750 Ill. Comp. Stat. Ann. § 5/503(e). In this way, Illinois differs from states such as Connecticut and New York, in which “the mere commencement of a dissolution action does not create a legal or equitable interest in either spouse with respect to the other spouse’s property.” Coan v. McAvoy (In re McAvoy), No. 05-B-36352, 07-A-3070, 2009 WL 1120029, at *6 (Bankr. D. Conn. Apr. 27, 2009). This contingent interest ripens into a full ownership interest for any property distributed to such spouse when the divorce court enters an order of distribution or final judgment. The Trustee’s argument perhaps goes too far, since if the Debtor did not have even a contingent interest in the 401(k) plan, then it would not have been property of the estate in the first place.4
4 If a debtor does not have a sufficient interest in marital property as of the petition date, property distributed to such debtor within 180 days post-petition by a property settlement agreement or divorce decree can constitute property of the estate through the claw-back provision in Section 541(a)(5). However, it is now well over 180 days past the bankruptcy petition date, and the divorce court has not entered any order of distribution.
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The Court believes that Illinois courts would find that the state law exemption for retirement plans applies even if the claimant only has a contingent interest in such plan. As noted above, Illinois courts interpret their exemptions liberally in favor of debtors, In re Laredo, 334 B.R. at 409, and there is no language in the exemption indicating a legislative intent to limit the applicability of the exemption. Instead, the statute uses expansive language, referring to any “interest in” a qualified plan “whether vested or not.” 735 Ill. Comp. Stat. Ann. 5/12-1006 (West 2010).
Nor does the Court believe there is any federal interest requiring a different result. It would be an odd result indeed for the Code to so broadly include interests that are contingent, unliquidated, unmatured, or disputed as of the petition date as ‘property of the estate’ and yet flatly exclude such interests from any exemptions. Such an asymmetric policy would conflict with the policy of liberally interpreting exemptions in favor of debtors. Therefore, for example, the 7th Circuit Court of Appeals has held that a debtor with an unliquidated and contingent Truth in Lending Act claim against a third party could apply a ‘wildcard exemption’ under 735 Ill. Comp. Stat. Ann. 5/12-1001(b) to exempt the claim, and that the valuation of the asset was the potential damages award times the likelihood of success as of the petition date. Polis v. Getaways, Inc. (In re Polis), 217 F.3d 899 (7th Cir. 2000). While there are cases in other jurisdictions in which the court refused to allow a debtor to apply a wildcard exemption to property owned by a spouse where the debtor’s only interest was as ‘marital property’ because “the ownership interest necessary to support application of an exemption must be an actual property interest, not a theoretical or potential interest,” In re Horstman, 276 B.R. 80, 82 (Bankr. E.D.N.C. 2002), the marital dissolution laws in those jurisdictions did not create a contingent
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interest upon the filing of a petition for dissolution. See, e.g., Horstman, 276 B.R. at 83 (noting that under North Carolina law the right to distribution of marital property “does not ... create a property right in the marital property”); In re Johnson, 210 B.R. 153 (Bankr. D. Minn. 1997) (while the Minnesota divorce statute creates “a common ownership in marital property,” such interest “vests not later than the time of the entry of the decree,” rather than at the filing of the petition for dissolution). Illinois’ divorce statute is different by vesting an interest in marital property upon the filing of the petition for dissolution, and the Illinois retirement plan exemption statute differs in applying to any interest in a plan, rather than just a full property interest. Therefore, the Illinois law is closer to Ohio law, in which courts have held that “upon the commencement of the divorce proceeding” a debtor “obtained an interest in the Retirement Plan” and “the debtor-wife could exempt her interest in the 401(k) plan even though her interest was contingent on the petition date.” In re Street, 395 B.R. 637, 643-644 (Bankr. S.D. Ohio 2008) (citing In re Greer, 242 B.R. 389 (Bankr. N.D. Ohio 1999)).
iii. Purported Change in Nature of Interest in Property
While a debtor can claim an exemption in a contingent interest, such exemption can apply only if the contingency ultimately occurs. Therefore, the Debtor can claim the exemption now, but itwillonlyapplytopropertyifitisactuallyawardedtoherinthedivorceproceedings. Adebtor cannot apply an exemption for property she is not awarded to property she is awarded. For example, if a couple’s marital property consists of a house and a car, and the wife is awarded the house and the husband the car, the wife cannot apply an automobile exemption to the house. Although the
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divorce court might have considered the value of the car in making its equitable determination to grant the wife the house, the house cannot be considered the ‘proceeds’ of the car.5 In a similar way, a debtor claiming an exemption must herself have a right to claim the exemption. She cannot claim a non-debtor spouse’s exemption, even if they both hold an interest in property. Thus, in upholding an objection to a debtor’s claimed exemption in ‘workers’ compensation benefits’ received through a divorce settlement, the bankruptcy court for the Central District held, “the DEBTOR has no right to claim an exemption in those benefits under [820 Ill. Comp. Stat. Ann. 305/21], notwithstanding her right to receive a portion of those benefits, as marital property under the judgment of dissolution. The exemption is personal to the Debtor’s non-filing former spouse and, absent an independent right of exemption, cannot be claimed by her in this bankruptcy proceeding.” In re Barlow, No. 95-81817, 1996 WL 33401179 (Bankr. C.D. Ill. Jan. 23, 1996) (Altenberger, J.).
The Trustee argues that the Debtor cannot assert the retirement plan exemption because what she will receive is not a ‘retirement plan’ in her hands, and that she is trying to assert her ex- husband’s exemption. The Trustee relies on language in our ruling in In re Johnson, affirmed by Judge Kapala in Johnson v. Natale, No. 07-C-50204 (N.D. Ill. Jan. 22, 2008), where we held that a spouse’s interest in his ex-wife’s workers’ compensation claim, obtained through a marital
5An additional issue is whether ‘proceeds' of marital property would be covered by an exemption for property ordered to be sold by the divorce court. Under 750 Ill. Comp. Stat. Ann. 5/503(i), the divorce court may “make such judgments affecting the marital property as may be just and may enforce such judgments by ordering a sale of marital property, with proceeds therefrom to be applied as determined by the court.” Even though an exemption statute does not refer to proceeds, the “concept of tracing is part of Illinois law even where the exemption statute does not specifically provide for it.” In re Irwin, 371 B.R. 344, 346 (Bankr. C.D. Ill. 2007) (Gorman, J.) (citing Auto Owners Insurance v. Berkshire, 225 Ill. App. 3d 695, 700, 588 N.E.2d 1230, 1234 (Ill. App. Ct. 1992)). However, while the revenue from property sold to a third party by court order might constitute proceeds, where a court merely awards certain property in lieu of other property, it is difficult to characterize the distributed property as ‘proceeds' of property that the ex-spouse would still retain.
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settlement agreement “now is not worker’s compensation to compensate the injured party, but rather a property interest, which is being used to satisfy a marital property obligation.” However, there are differences between the language and policy of the workers’ compensation exemption and the retirement plan exemption, as well as potential factual differences in the marital settlement agreements, that distinguish Johnson from the current case.
The workers’ compensation exemption at issue in Johnson and In re Barlow is provided in 820 Ill. Comp. Stat. Ann. 305/21, which states, “No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages....”6 Each court found that the debtor’s right to payment under the settlement agreement was not a “payment, claim, award or decision” under the Workers’ Compensation Act. In Barlow, the final judgment of dissolution stated that the debtor’s former husband “was ordered to ‘pay to the wife a sum equal to 20% of his net worker’s compensation settlement, if any, at the time he receives the same.’” In re Barlow, 1996 WL 33401179, at *1. In other words, it was an obligation of the husband to pay a monetary amount to his ex-wife. There was no indication that the workers’ compensation claim itself was transferred to the wife, or that the employer (or such employer’s insurance provider or the issuer of any annuity), was obligated to make payments to the debtor. Similarly, in Johnson, the marital settlement agreement simply provided that “Once resolved, HUSBAND will receive 1⁄2 of WIFE’S settlement to her.” While this language was less clear than that in Barlow, again, there was no indication that the actual claim itself was
6 Although the statute does not specifically use the term ‘exempt’ or ‘exemption,’ courts in this district have found that the statute effectively exempts workers’ compensation benefits from judgments of creditors and constitutes an ‘exemption’ for bankruptcy purposes. In re McClure, 175 B.R. 21, 23-24 (Bankr. N.D. Ill. 1994) (Wedoff, J.).
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transferred to the debtor spouse, that such spouse would have standing to pursue the claim, or that the employer would be obligated to make payments to such spouse. There is Illinois case law holding that a spouse who receives an award “as the only dependent left surviving by the [injured party], deceased” may claim the exemption. Weber v. Ridgway, 212 Ill. App. 159, 1918 WL 2017, at *3 (Ill. App. Ct. 1918). However, the court’s decision was based on the fact that the award was made directly to the surviving spouse. Id. (“We think, under the provisions of said statute, that inasmuch as this award was made directly to Vera Weber and is made up from funds derived from said award, it would not be subject to garnishment.”). Under Weber it is likely that a spouse or child who inherited the award could claim the exemption, since the Workers’ Compensation Act contains provisions expressly making a surviving spouse or children beneficiaries of settlement awards upon the death of the injured spouse, 820 Ill. Comp. Stat. Ann. 305/8(h). However, it is doubtful that a spouse who obtained the payment right under a dissolution order would also obtain the right to claim the exemption. The Illinois Supreme Court has stated clearly that a “workers’ compensation award constitutes marital property [if] the claim accrued during the marriage of the parties.” In re Derossett, 173 Ill. 2d 416, 671 N.E.2d 654 (Ill. 1996) (upholding trial court’s award of 30% of workers’ compensation settlement to wife). However, the only Illinois court to explain why such an award would not conflict with the anti-alienation provision in 820 Ill. Comp. Stat. Ann. 305/21 explained:
we are not assigning the claimant's award, or any portion thereof, to the non-injured spouse. We are merely directing trial courts, when equitably apportioning the marital property of the parties under section 503 of the Illinois Marriage and Dissolution of Marriage Act (Ill.Rev.Stat.1977, ch. 40, par. 503), to treat as marital property the workmen's compensation award of an injured spouse, provided the award arose out
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of a claim accruing during the marriage. Equitable distribution of marital assets pursuant to dissolution proceedings is not tantamount to an assignment. These are two distinct and separable legal concepts. Respondent's characterization of equitable apportionment of marital property as an assignment blurs these distinctions, and is not sound. Accordingly, we reject his assertion that classification of a compensation award accruing during the marriage as marital property violates the non-assignability provision of section 21 of the Workmen's Compensation Act.
In re Thomas, 89 Ill. App. 3d 81, 84, 411 N.E.2d 552, 554 (Ill. App. Ct. 1980). If a divorce court does not have the power to actually assign the workers’ compensation award itself, but rather is simply considering the award in making its equitable division of marital property or, at most, assigning the ex-spouse’s interest in the benefits of the award as he receives them, then the award could not be said to be made “directly to” the debtor spouse under Weber. If the award itself is not transferred to the debtor, then the exemption would not apply, first, because the contingent interest in the award never ripened, and second, because what the debtor ultimately receives is not a “payment, claim, award or decision” under the Workers’ Compensation Act, as required by the statute. Instead, it would be a payment or obligation of the ex-spouse alone under the dissolution judgment.
A 401(k) plan, like workers’ compensation benefits, constitutes marital property if “earned during the course of the marriage.” In re Jamieson, 379 Ill. App. 3d 100, 104, 882 N.E.2d 1121, 1225 (Ill. App. Ct. 2008). However, unlike workers’ compensation benefits, a divorce court has the power to fully transfer or assign a retirement plan itself. The anti-alienation provisions for qualified retirement plans under ERISA or the Internal Revenue Code, as applicable, expressly allow a divorce court to assign retirement benefits through a ‘qualified domestic relations order.’ Id., 379 Ill. App. 3d at 103, 882 N.E. 2d at 1224 (“[I]n a divorce or dissolution of marriage proceeding, ERISA
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permits a state court to enter a QDRO which recognizes the existence of an alternate payee’s right to receive a portion of the participant’s retirement benefits as marital property.”) (citing 29 U.S.C. § 1056(d)(3)(A), (d)(3)(B)(i)); see also 26 U.S.C. § 401(a)(13)(B). Here, the divorce court has not yet entered an order of distribution, so it is too soon to tell if it will enter a qualified domestic relations order transferring all or a portion of the retirement plan to the Debtor. However, at issue today is only whether the Debtor has the right to assert an exemption in the still-contingent interest, and not whether the contingency has occurred or whether certain property in the hands of the Debtor constitutes the property for which the exemption was claimed.7 The Debtor has a right to claim an exemption at least in the plan itself, and that is all she has done.
An additional difference between workers’ compensation benefits and retirement plans is that the exemption language for retirement plans is broader than the anti-alienation language in the workers’ compensation statute. For example, in one bankruptcy court case from the Southern District, the court noted that “the language of § 12-1006(a) [is] unequivocal in protecting any interest a debtor may have in the assets of a pension or retirement plan and any right to receive benefits, distributions, or other payments under such a plan.” In re Lummer, 219 B.R. 510, 512 (Bankr. S.D. Ill. 1998) (Meyers, J.). In Lummer, the court held that the Illinois exemption statute applies to retirement plans whether the interest holder earned the interest though his own labor or obtained the rights derivatively, and therefore a spouse who received a partial interest in a military pension earned by her husband and transferred to her pursuant to a divorce judgment prepetition
7 Such an issue could arise in the context of a motion for turn over, if the divorce court assigns something other than an interest in the retirement plan but the Debtor refuses to turn such property over, claiming it constitutes ‘proceeds’ of the exempt plan.
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could assert the exemption. In contrast to workers’ compensation benefits, the key to the exemption for retirement plans is how the assets are held, not their initial source. The purpose behind the exemption for retirement plans is the “desire to preserve funds so they will be available to support a person in retirement.” Johnson, No. 07-C-50204 (N.D. Ill. Jan. 22, 2008). To qualify for the exemption, the retirement plans must be held in “a trust or equivalent arrangement” which is segregated and “cannot be reached by the participant without significant penalty” prior to reaching the appropriate age or requirements. Id. (citing In re Schoonover, 331 F.3d 575, 577 (7th Cir. 2003)). Since, as the court in Lummer held, the initial source of the retirement funds is not relevant to the exemption, a qualified retirement plan qualifies for an exemption whether in the hands of the husband or in the hands of the wife. Therefore, if the divorce proceedings had been complete prior to the petition date, the Debtor could have claimed an exemption in the 401(k) plan if she received it pursuant to those proceedings. As stated above, the contingent nature of the interest as of the petition date does not change the result.
V. CONCLUSION
A divorce court has the power to distribute all or part of the retirement plan to the Debtor pursuant to a qualified domestic relations order. If such plan is in fact transferred to her she would be able to exempt it. That is all she has purported to claim an exemption for, and the contingent nature of the interest does not change the result.
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Therefore, the Trustee’s objection is DENIED. A separate order shall be entered pursuant to Fed. R. Bankr. P. 9021 giving effect to the determinations reached herein.
DATE: August 11, 2010 _____________________________________ The Honorable Manuel Barbosa
United States Bankruptcy Judge
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In re Mid-States Express, Inc. Issued: July 02, 2010

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
Transmittal Sheet for Opinions for Publishing and Posting on Website
Will this Opinion be Published? Bankruptcy Caption: Bankruptcy No. Date of Issuance:
Judge: Appearance of Counsel Trustee: Attorney for the Trustee:
Attorney for the United States Department of Labor:
Yes In re Mid-States Express, Inc. 09 B 10818 7/2/2010 Bruce W. Black
Ronald R. Peterson, Jenner & Block, LLP Landon S. Raiford, Jenner & Block, LLP
Christine Z. Heri, U.S. Dep’t of Labor
IN RE: ) ) MID-STATES EXPRESS, INC., ) ) Debtor. ) ___________________________________ )
Chapter 7 Bankruptcy Case No. 09 B 10818 Honorable Bruce W. Black
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
MEMORANDUM OPINION
Bruce W. Black, United States Bankruptcy Judge. This chapter 7 case is before the court on the trustee’s motion for authorization to (1)
liquidate the employee benefit plan (the “Plan”)1 of Mid-States Express, Inc. (the “Debtor”); (2) disburse the corpus of the Plan to Plan participants; (3) pay the administrative expenses associated with liquidation and disbursement of the Plan from the corpus of the Plan; and (4) waive any distribution for Plan participants whose account balances are less than one hundred dollars. The United States Department of Labor (the “Department”) objected to the trustee’s motion, asserting that this court lacks subject matter jurisdiction, or in the event this court has jurisdiction, that the trustee’s motion violates the Bankruptcy Code2 and the Employee Retirement Income Security Act of 1974, 29 U.S.C. §1001 ff. (“ERISA”). In response to the Department’s objections, the trustee abandoned his request to waive distributions under one hundred dollars but has pursued the remaining requested relief.
1
On the petition date the Debtor was the plan sponsor of the “Mid-States Express, Inc. 401(k) Plan & Trust.” The trustee states that the Debtor was also the plan sponsor of the “Defined Contribution Plan & Trust,” but a closer reading of the documents shows that there is only one Plan to which all the documents apply.
2 another reference is stated.
11 U.S.C. § 101 ff. Any reference to “section” or “the Code” is a reference to the Bankruptcy Code unless -1-
I. BACKGROUND
Prior to its bankruptcy filing, the Debtor was a regional trucking company that employed over 500 individuals. It provided service throughout the Midwest, maintaining a network of terminals. To better care for its employees, the Debtor implemented the Plan and amended it several times. In 2004, the Debtor started experiencing financial difficulties, which only worsened over the next few years. Finally, on March 27, 2009, the Debtor ceased all business operations and filed a petition for relief under chapter 11 of the Bankruptcy Code. At the time of filing, the Debtor was the plan administrator, 3 and the Plan had 157 participants, collectively entitled to $1,261,926.86. The Debtor’s case was subsequently converted to chapter 7, and the trustee was appointed. The trustee now seeks to wind up the Plan through the current motion.
II. DISCUSSION
Whether this court has jurisdiction to grant the trustee’s motion is a difficult question. The case law on point is very limited, and Congress has provided little guidance as to the authority it intended to bestow upon the bankruptcy courts by enacting the section at issue. For the following reasons, however, this court holds in favor of the Department, concluding that this court does not have jurisdiction to grant the relief requested. A.
When Congress amended the Bankruptcy Code in 2005 it added section 704(a)(11) to the list of the trustee’s duties.4 Section 704(a)(11) states in pertinent part:
3
4
The trustee asserts that Consulting Actuarial Group, Inc. was the designated plan administrator at the time the Debtor filed for bankruptcy. However, the Plan documents provided that the Plan administrator must be named in the “Adoption Agreement.” That agreement names Mid-States Express, Inc. the administrator, and it does not appear to be changed by any of the three amendments. It is likely that Mid-States remained plan administrator while employing Consulting Actuarial Group, Inc. to carry out the provisions of the Plan pursuant to Article II of the Plan. This distinction is irrelevant, however, in the context of section 704(a)(11).
Congress also enacted sections 521(a)(7) and 1106(a)(1), which are also devoid of any real instruction. -2-
(a) The trustee shall— .. .
(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of [ERISA])[5] of an employee benefit plan, continue to perform the obligations required of the administrator . . .
11 U.S.C. §704(a)(11). Section 704(a)(11) came at the Department’s behest after years of struggling with the
problems created by “orphan plans,” plans that are abandoned by the employers6 that established them. The Department found that participants in orphan plans are “effectively denied access to their benefits and are otherwise unable to exercise their rights guaranteed under ERISA. At the same time, benefits in such plans are at risk of being significantly diminished by ongoing administrative expenses, rather than being distributed to participants and beneficiaries.” Termination of Abandoned Individual Account Plans, 71 Fed. Reg. 20,820 (Apr. 21, 2006). The Department attempted to remedy this problem through a series of initiatives designed to quickly identify orphan plans and designate a fiduciary7 to be responsible for the assets of the plan. Id.
5 Plan administrator is defined as:
(i) the person specifically so designated by the terms of the instrument under which the plan is operated; (ii) if an administrator is not so designated, the plan sponsor; or (iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.
29 U.S.C. § 1002(16)(A). 6 ERISA terms the employers “plan sponsors.” A “plan sponsor” under ERISA means:
(i) the employer in the case of an employee benefit plan established or maintained by a single employer, (ii) the employee organization in the case of a plan established or maintained by an employee organization, or (iii) in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan.
29 U.S.C. § 1002(16)(B). 7 ERISA defines “fiduciary” as:
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Frequently the fiduciary that the Department was seeking for an orphan plan was either the plan sponsor or the administrator that the plan sponsor had designated to administer the plan. Regardless of who the Department found or appointed as the fiduciary, the goal was to have that person “manage, terminate, and distribute the assets of the plan.” Id.
The Department buttressed its initiatives by backing legislation that would require the bankruptcy trustee to fulfill the role of administrator in cases where the plan sponsor was in bankruptcy. Dep’t of Labor, Advisory Council Report, Report of the Working Group on Orphan Plans (Nov. 8, 2002). The Department recognized plans were at high risk of becoming abandoned when the plan sponsor filed for bankruptcy, if not before. Termination of Abandoned Individual Account Plans, 71 Fed. Reg. 20,820. As a consequence, the language currently found in section 704(a)(11) was introduced as part of the Bankruptcy Reform Act of 2001. S. 220, 107th Cong. (1st Sess. 2001). The proposed law sought to have the plan sponsor continue “his fiduciary responsibilities by terminating the company’s retirement plan or plans” through the chapter 7 trustee. Dep’t of Labor, Advisory Council Report, Report of the Working Group on Orphan Plans (Nov. 8, 2002). The proposal ultimately became law as section 446(b)(2) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Pub. L. No. 109-8, 119 Stat. 23 (2005).
Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 405(c)(1)(B)
29 U.S.C. § 1002(21)(A).
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In the context of the Bankruptcy Code, section 704(a)(11) is simply an additional duty that the trustee must perform. It is, however, quite different from the trustee’s other duties because it confers non-estate responsibilities on the trustee. All of the trustee’s pre-BAPCPA duties relate to the trustee’s role as representative of the bankruptcy estate. See 11 U.S.C. §704(a). This court undoubtedly has jurisdiction to oversee the trustee’s actions when he is acting in that capacity. Section 704(a)(11), however, requires the trustee to disburse assets that do not belong to the bankruptcy estate, for the benefit of persons that are not creditors. See M.P. Sheehan, A Simple Solution and a Radical Change: Orphaned Employee Benefit Plans and BAPCPA, 22 NABTalk 12 (2007). In other words, the trustee is required to administer the assets of an entity that is not in bankruptcy. Whether this court has jurisdiction over the trustee acting as the plan administrator distributing non-estate assets to non-creditors is the heart of the parties’ disagreement. B.
Bankruptcy court jurisdiction finds its foundation in the Constitution, which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. Prior to 1898 Congress used its bankruptcy power sparingly through short-lived laws. See Ralph Brubaker, On The Nature Of Federal Bankruptcy Jurisdiction: A General Statutory And Constitutional Theory, 41 Wm. & Mary L. Rev. 743, 755-800 (2000)(discussing the history of bankruptcy jurisdiction). In 1898 Congress enacted the Bankruptcy Act (the “Bankruptcy Act”), which was the first comprehensive bankruptcy law and lasted eighty years. Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (1898)(repealed 1978). Under the Bankruptcy Act, as frequently amended, jurisdiction was quite complicated:
The Bankruptcy Act of 1898 vested original jurisdiction over all bankruptcy matters in the United States District Courts. In turn, the district judges referred
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certain matters to bankruptcy referees. There were two main types of bankruptcy matters under the Act of 1898: ‘proceedings’ and ‘controversies.’ ‘Proceedings’ generally involved the administration of the bankrupt’s estate and were solely within the province of the bankruptcy court. ‘Controversies’ were collateral disputes arising out of bankruptcy proceedings. These matters involved the trustee and third parties and could be heard by either the bankruptcy court or by a non- bankruptcy court that had jurisdiction. While proceedings fell within the ‘summary jurisdiction’ of the bankruptcy court, controversies sometimes required the court to exercise ‘plenary jurisdiction.’
Torkelsen v. Maggio (In re Guild & Gallery Plus), 72 F.3d 1171, 1176 (3d Cir. 1996) (quoting Thomas S. Marion, Core Proceedings and “New” Bankruptcy Jurisdiction, 35 DePaul L. Rev. 675, 676 (1986)). When the bankruptcy court exercised its summary jurisdiction, it used expedited procedures and was capable of entering final judgments. Id. Matters that fell under the category of plenary jurisdiction could not be heard by the bankruptcy court unless the parties implicitly or expressly consented. Id. Consequently, a good portion of all litigation in the bankruptcy courts regarded jurisdiction. Id.
In 1978 Congress did away with this complex jurisdictional scheme. The Bankruptcy Reform Act of 1978 (the “Reform Act”)8 vested concurrent jurisdiction in the district court and the bankruptcy court over all civil proceedings arising from or related to cases under the Bankruptcy Code. Marion, 35 DePaul L. Rev. at 678 (citing 28 U.S.C. § 1471(c) (repealed 1984)). This scheme allowed bankruptcy courts to enter final judgments in matters that would have been plenary under the Bankruptcy Act. Id.
In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the U.S. Supreme Court held that the new bankruptcy court jurisdictional scheme was unconstitutional. The Court held that a bankruptcy court could not enter a final order on a substantive claim created independent of, and antecedent to, the bankruptcy case. Id. at 84.
8
Referred to substantively as the “Bankruptcy Code.” -6-
Congress thereafter amended the jurisdiction of the bankruptcy courts through the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the “BAFJA”). See Pub. L. 98-353, 98 Stat. 333 (1984)(codified at 28 U.S.C. § 151 ff.). Pursuant to the BAFJA:
the district courts are vested with original and exclusive jurisdiction over all cases under title 11, and original and concurrent jurisdiction over all proceedings arising under or related to title 11. The critical difference between the [Reform Act and the BAFJA] is that under the [BAFJA], bankruptcy courts do not exercise all jurisdiction vested in the district courts. Instead, the bankruptcy court is established as a unit of the district court to which the district court may refer any or all cases and proceedings.
Torkelsen, 72 F.3d at 1177 (quoting Marion, 35 DePaul L. Rev. at 681). The BAFJA reinstitutes much of the jurisdictional structure originally found in the Bankruptcy Act by vesting authority to hear bankruptcy cases in the district court. 28 U.S.C. § 1334(a). The district court is authorized to refer the cases to the bankruptcy court.9 28 U.S.C. § 157(a). Once a case is referred, bankruptcy court jurisdiction is divided into core proceedings and non-core proceedings that are “related to” the bankruptcy case.10 28 U.S.C. § 157(b) and (c). Core proceedings are defined as proceedings “arising under” title 11 and proceedings “arising in” a case under title 11. 28 U.S.C. § 157(b)(1). Bankruptcy courts have the authority to enter final orders in core proceedings. Id. Bankruptcy courts also have jurisdiction to hear non-core proceedings that are “related to” a case under title 11. 28 U.S.C. § 157(c)(1). In non-core, “related to,” proceedings, bankruptcy courts may not enter final judgments. Id. Instead, they submit proposed findings of fact and conclusions of law to the district court for final determination. Id. It is, therefore, necessary to distinguish between core and non-core, “related to,” jurisdiction.
1.
9 bankruptcy cases and proceedings to the bankruptcy judges of this district.
10 3.01[3][b].
United States District Court for the Northern District of Illinois Internal Operating Procedure 15 refers
The term “proceeding” encompasses any matter that occurs within a case. 1 Collier on Bankruptcy ¶ -7-
One type of core proceeding is one “arising under” the Bankruptcy Code. A proceeding “arises under” the Bankruptcy Code if it “invokes a substantive right provided by Title 11.” Diamond Mortgage Corp. of Ill. v. Sugar, 913 F.2d 1233, 1239 (7th Cir. 1990); Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987). This means that the Bankruptcy Code, in a strong sense, is the source of the right or remedy, rather than just the procedural vehicle for the assertion of a right conferred by some other body of law. In re U.S. Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997).
The trustee argues that this matter meets the criteria required for “arising under” jurisdiction because the express obligation under section 704(a)(11) is analogous to situations where the Bankruptcy Code is clearly the source of the substantive right (e.g. preference or fraudulent transfer claims). The trustee’s argument is not well taken. Sections 547 and 548 clearly create the right to avoid preferences and fraudulent transfers under the Bankruptcy Code. See 11 U.S.C. §§ 547-48. Section 544(b) allows the trustee to pursue the same types of claims under state law. 11 U.S.C. § 544(b). Although section 544(b), when taken alone, does not appear to be a substantive right created by the Bankruptcy Code, all of the fraudulent transfer and preference sections work together to “arm the bankruptcy trustee with the avoidance powers of state, as well as federal [law].” Perkins v. Petro Supply Co. (In re Rexplore Drilling), 971 F.2d 1219, 1222 (6th Cir. 1992). Thus, state law avoidance power is merely part and parcel of the substantive right to avoid certain transfers created by the Bankruptcy Code. See Perkins, 971 F.2d at 1222 (holding that “state preference law is an adjunct to, and supplemental of, those powers specifically provided for in the Bankruptcy Code which enable the trustee to avoid certain transfers”). When the trustee invokes his right to avoid a transfer under any of the avoidance sections, the Bankruptcy Code carefully delineates the circumstances under which
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federal bankruptcy proceedings are to be initiated. Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1205 (9th Cir. 2005). Thus, the substantive right to avoid transfers is, in a strong sense, created by the Bankruptcy Code.
It cannot be said that section 704(a)(11) invokes a right created by the Bankruptcy Code in the same strong sense. It is not adjunct to, or supplemental of, any substantive right created by the Bankruptcy Code. Section 704(a)(11) stands alone in putting the trustee in the shoes of the ERISA plan administrator. The plan administrator’s rights and obligations are found in ERISA. The Bankruptcy Code does not alter those rights and obligations. Therefore, when the trustee “asks this court to rule that the requested relief complies with the trustee’s statutory duties” the court must to look to ERISA to determine whether the trustee’s proposed actions actually do comply. Trustee’s Reply filed March 24, 2010, pg. 11 [Doc. 283]. Accordingly, ERISA provides the substantive rights at issue here.
In re AB & C Group, 411 B.R. 284 (Bankr. N.D.W.Va. 2009), and Allard v. Coenen, et al. (In Re Trans-Industries), 419 B.R. 21 (Bankr. E.D. Mich. 2009), support this courts conclusion that it lacks jurisdiction. In both cases, as in this case, the trustees were acting subject to section 704(a)(11). In In re AB & C Group the court held that sections 327, 330, and 365 did not support the trustee’s motion. This left section 704(a)(11) as the sole purported source of “arising under” jurisdiction. The court held that ERISA governed whether the requested relief would be allowed and, accordingly, the matter did not “arise under” the Bankruptcy Code.
The In re Trans-Industries court followed the same reasoning when resolving an adversary proceeding in which an ERISA claim was asserted. The court concluded that it did not have “arising under” jurisdiction because the cause of action was “created and [would] be determined by federal non-bankruptcy law.” In Re Trans-Industries, 419 B.R. at 30. This court
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holds, consistent with those courts, that section 704(a)(11) does not confer “arising under” jurisdiction on this court because the substantive rights at issue are provided by ERISA and not the Bankruptcy Code. 2.
The other type of core proceeding is one “arising in” a case under the Bankruptcy Code. The concept of proceedings “arising in” a bankruptcy case is less clearly defined than those that “arise under” the Bankruptcy Code. In re Wood, 825 F.2d at 97. However, many authorities indicate that “arising in” jurisdiction is a residual category of proceedings that do not fit within the definition of “arising under” but are still core proceedings because they deal with matters inherent to the bankruptcy process. See 1 Collier on Bankruptcy ¶ 3.01 (Alan N Resnick & Henry J. Sommers eds., 16th ed.); In re Wood, 825 F.2d at 97; Royal Indem. Co. v. Admiral Ins. Co., No. 07-2048(RBK), 2007 WL 4171649 (D.N.J. Nov. 19, 2007) (stating “arising in” claims are those intrinsically limited to the bankruptcy context). Consequently, most cases invoking “arising in” jurisdiction create very little controversy. Darrell Dunham, Bankruptcy Court Jurisdiction, 67 UMKC L. Rev. 229, 243 (1998).
Courts have defined “arising in” proceedings as proceedings that due to “their [legal] nature, not their particular factual circumstance, could only arise in the context of a bankruptcy case.” Stoe v. Flaherty, 436 F.3d 209, 218 (3d Cir. 2006); Royal Indem., 2007 WL 4171649 (holding that the legal nature of the proceeding, and not its factual context, is dispositive). As such, they would have no practical existence outside of bankruptcy. In re Diagnostic Intern., Inc., 257 B.R. 511, 515 (Bankr. D. Ariz. 2000); In re Poplar Run Five Ltd. Partnership, 192 B.R. 848, 857 (Bankr. E.D.Va. 1995); Nelson v. Welch (In re Repository Techs., Inc.), 601 F.3d
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710, 719 (7th Cir. 2010). For example, “the filing of a proof of claim or an objection to the discharge of a particular debt” “arise in” a bankruptcy case.11 In re Wood, 825 F.2d at 97.
The trustee believes that this proceeding meets the requirements for “arising in” jurisdiction for two reasons. First, he argues that this proceeding could only arise in the bankruptcy context because the trustee, a creature of the Bankruptcy Code, is merely trying to fulfill one of his statutory duties. However, the trustee has many duties under the Bankruptcy Code that require him to reach outside of bankruptcy law.12 The mere fact that the trustee is the party asserting or defending a right does not mean that the proceeding could only “arise in” a bankruptcy case. See Torkelsen, 72 F.3d at 1182. The trustee does not carry around “arising in” jurisdiction with him. Id.
Second, the trustee argues that “[b]ut for § 704(a)(11) the trustee would not be seeking the requested relief because the trustee would not be required to administer the Debtor’s Plan.” Trustee’s Reply filed March 24, 2010, pg. 9 [Doc. 283]. However, the “but for” test that the trustee relies upon is not well taken because, if applied literally, it would expand the bankruptcy court’s jurisdiction beyond the constitutional limits under Marathon. 1 Collier on Bankruptcy ¶ 3.01; In re Poplar Run Five Ltd. Partnership, 192 B.R. 848, 857 (Bankr. E.D.Va. 1995); Marotta Gund Budd & Dzera LLC v. Costa, 340 B.R. 661 (D.N.H. 2006). Under such a test even a defamation case could be a core proceeding if it would not have arisen “but for” the bankruptcy case. Marotta, 340 B.R. at 667. The problem with such a test is that it takes into account the
11
Additional administrative matters that fall under “arising in” the bankruptcy case are “allowance and disallowance of claims, orders in respect to obtaining credit, determining the dischargeability of debts, discharges, confirmation of plans, and like matters.” 1 Collier on Bankruptcy ¶ 3.01. All of these proceedings must be handled within the bankruptcy case.
12
For example, the trustee has a duty under section 704(a)(5) to object to improper claims. Such claims may be improper because of state law. 11 U.S.C. § 502(b)(1). The trustee also has the duty under section 704(a)(1) to collect and reduce to money the property of the estate. In order to complete this duty the trustee may be required to sue a third party invoking a state law right under section 323. See 1 Collier on Bankruptcy ¶ 704.03.
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factual circumstances that lead to the proceeding. The factual circumstances, however, are irrelevant when determining “arising in” jurisdiction. Velocita Corp. v. Constr. Mgmt. & Inspection, Inc. (In re Velocita Corp.), 169 Fed. App’x 712, 715 (3d Cir. 2006). It is the legal nature of the proceeding that matters. Id. Therefore, this court must determine the legal nature of the motion to determine if “arising in” jurisdiction exists.
The closest analogy to the situation before the court is when the trustee objects to a claim under sections 502(b)(1) and 704(a)(5). “Arising in” jurisdiction clearly exists over such objections. The trustee has a duty to object to improper claims. 11 U.S.C. § 704(a)(5). Claims are improper if they are unenforceable against the debtor and property of the debtor under applicable law. 11. U.S.C. § 502(b)(1). Thus, section 704(a)(5) creates a statutory duty to invoke the debtor’s non-bankruptcy rights. Objections to claims can be, however, divided into two components: the ministerial proceeding to allow or disallow the claim, which is inherent in the bankruptcy process, and the underlying non-bankruptcy law that makes the claim unenforceable against the debtor. St. Vincent's Hosp. v. Norrell (In re Norrell), 198 B.R. 987, 994 n.5 (Bankr. N.D. Ala. 1996). Due the legal nature of the ministerial proceeding to allow or disallow a claim, it can only “arise in” the bankruptcy context. Id. To the contrary, the underlying action to adjudicate the non-bankruptcy rights of the parties could be brought in state court, and can only be brought in bankruptcy court, if at all, under “related to” jurisdiction, discussed below.
Here, as with objections to improper claims, the trustee seeks to act pursuant to one of his statutory duties defined in 704(a). However, it appears that the trustee does not simply want this court to exercise one of its ministerial functions inherent in the bankruptcy process. Instead, he would like this court to adjudicate underlying non-bankruptcy rights governed by ERISA and
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ERISA regulations as promulgated by the Department, 29 C.F.R. 2509 ff. As is true with objections to claims, determining underlying non-bankruptcy rights does not come within “arising in” jurisdiction. The legal nature of such rights is outside of bankruptcy. 3.
The final type of proceeding over which bankruptcy courts have jurisdiction is a non-core proceeding that is “related to” the bankruptcy case. “Related to” jurisdiction is the most expansive of the three types. The circuits do not agree on the definition of proceedings “related to” cases under title 11. Most circuits have adopted the broad Pacor test, which “hold[s] that whenever a proceeding ‘could conceivably have any effect on the bankruptcy estate, it is ‘related to’ a case under Title 11.’” In re Fedpak Sys., 80 F.3d 207, 210 (7th Cir. 1996) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)). The Seventh Circuit, however, “has articulated a more limited and, ... more helpful definition of the bankruptcy court’s ‘related to’ jurisdiction.” In re Fedpak Sys., 80 F.3d at 210. In this circuit the proceeding must affect the amount of property for distribution from the estate or the allocation of property among creditors. Id. at 214. Merely speculative or hypothetical affects on the estate’s property or allocations of the estate’s property are not enough to invoke “related to” jurisdiction. Id. The effect does not, however, have to be absolutely certain. If the proceeding is likely to affect the debtor’s estate the court has “related to” jurisdiction. Black v. U.S. Postal Serv. (In re Heath), 115 F.3d 521, 524 (7th Cir.1997).
The trustee offers two examples of how this proceeding will affect the estate’s property or allocation thereof. First, the trustee argues that the estate’s potential liability to the Plan participants is approximately $1.25 million. So far only four Plan participants have actually filed claims against the estate totaling $25,916.67. If the trustee is authorized to liquidate the plan and
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disburse the corpus to the Plan participants then most, if not all, of the actual claims would be satisfied and the liability eliminated.
Although to the lay person the Plan and the Debtor may seem like the same entity, they are not. Any Plan obligation for the amounts that it owes the participants is just that, a Plan obligation. See 29 U.S.C. § 1132(d)(1). Plan obligations are separate from the estate’s obligations and are improper claims against the estate. It is the trustee’s duty to object to improper claims. 11 U.S.C. § 704(a)(5). Therefore, to the extent that these claims are improper, they cannot affect the estate’s property.
That is not the crux of the trustee’s argument, however. The trustee asserts that the estate is liable to the Plan and its participants for the $1.25 million because of the Debtor’s role as plan administrator. An order authorizing the trustee to disburse the corpus would, he argues, greatly diminish that potential liability. However, even in the event that the trustee did not disburse the plan funds, the estate would not be affected. The trustee has the duty as plan administrator to administer the Plan pursuant to ERISA and the plan documents. If the trustee fails to discharge his duty by not disbursing the funds, then the participants can sue to recover those benefits. 29 U.S.C. § 1132. But such a suit is equitable, not legal; and the relief consists of an order directing the plan administrator to pay the benefits. Hunt v. Hawthorne Assocs., Inc., 119 F.3d 888, 906- 07 (11th Cir. 1997). Extracontractual or punitive damages are not allowable in ERISA claims. Harzewski v. Guidant Corp., 489 F.3d 799, 804 (7th Cir. 2007). The benefits would be paid from the plan and not from the estate. Thus, the trustee could be forced to pay the $1.25 million, but only from the Plan, not from the estate.
The trustee also points to the Debtor’s fiduciary duty to the Plan participants as a potential source of liability for the $1.25 million. However, put generally, the estate is only
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liable to the Plan participants for breach of fiduciary duty under a defined contribution plan13 if “the employer assumes responsibility for making overall plan investment decisions” and “it breaches its ERISA prudent investment and asset diversification duties.” N. Peter Lareau, 6 Labor and Employment Law § 150.03 (Matthew Bender 2010). If the prudent investment duty has been breached, then the liability of the employer is calculated as the difference between the amount in the account and the amount that would be in the account if the breach of fiduciary duty had never occurred. See Harzewski v. Guidant Corp., 489 F.3d 799, 804 (7th Cir. 2007). If the employee is responsible for making the investment decisions then the employer does not have the prudent investor duty.14 Lareau, Labor and Employment Law § 150.03. Therefore, whether the corpus is disbursed or not, the estate’s liability stays the same.15 Accordingly, the affect on the estate is illusory.
Second, the trustee asserts that the estate is potentially liable to the Plan for the administrative costs of liquidating and disbursing the Plan’s assets. The motion would obviate that liability by authorizing the trustee to pay the administrative expenses from the Plan. It appears from the Plan documents that the trustee has the choice to have either the Plan or the
13
A “defined contribution plan” is “a pension plan which provided for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account.” 29 U.S.C. § 1002(34).
14
The Plan documents appear to make the participants responsible for making their own investment decisions. However, to the extent that the individuals do not make their own decisions, Terry Hartmann and Bruce Hartmann are in change of making the decisions as Plan trustees. The Debtor’s fiduciary duty therefore is extremely limited.
15
For example, assume here that the Debtor was making the investment decisions and breached his duty. But for his breach, the Plan would have held $3 million. In that case the liability would be $3 million less the $1.25 million or $1.75 million. Whether or not the $1.25 million is disbursed would not change that amount.
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estate pay the expenses associated with administering the Plan.16 Accordingly, the trustee asserts this situation is akin to where the Debtor and a non-debtor third party are co-obligors. If the non- debtor third party satisfies the obligation then that most definitely changes the distribution and likely the amount of estate property. However, the Department asserts that ERISA would allow the trustee to pay the administrative expenses from the Plan even without an order, and therefore this motion, whether denied or granted, cannot affect the estate. The court agrees with the Department. As the trustee pointed out in his motion, the Plan has been terminated by operation of law. Its termination allows the plan administrator to make the requested distributions to Plan participants. The Plan also provides for the administrative expenses to be paid by the Plan.
Thus, the trustee is not requesting this court to authorize anything that he cannot already do. The trustee’s requested order can have no affect on the amount of estate property or the allocation thereof because it does not change the trustee’s abilities.17 Accordingly, this court lacks non- core “related to” jurisdiction.
CONCLUSION
The trustee’s motion requesting authorization to liquidate the Plan, disburse the corpus to Plan participants, and pay administrative expenses from the Plan is DENIED. This court does
16 Plan.” Accordingly § 2.2, Article II, Administration, reads:
17
Under the Plan, Mid-States Express, Inc. is the “Company,” “Named Fiduciary,” and “Administrator of the
[Mid-States Express, Inc.] may employ legal counsel, accountants, consultants, agents, and clerks and purchase other services as it determines are reasonably necessary to carry out the provisions of the Plan. [Mid-States Express, Inc.] will pay the fees, charges or other costs for these services. [Mid-States Express, Inc.] may, upon notice to [Mid-States Express, Inc.], shift the costs for these services to the Plan.
The Department asserts that the trustee merely seeks a comfort order. The trustee does not object to that assertion. This court does not see how a comfort order could ever, by definition, fit within “related to” jurisdiction. Comfort orders “merely identify and reiterate what has already occurred by operation of law.” In re Hill, 364 B.R. 826, 828 (Bankr. M.D. Fla. 2007). Therefore, either the affect on the estate’s property has already occurred or it has not occurred and a comfort order will not change that. The point of such an order is to give the moving party comfort by cloaking them in judicial immunity. Id. In the end that is what the trustee truly seems to be after.
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not have the requisite subject matter jurisdiction to grant the relief requested. This is not a core proceeding as it does not “arise under” or “arise in” this bankruptcy case. It also cannot “relate to” this bankruptcy case because the outcome does not affect the estate’s property. A separate order will be entered consistent with this opinion.
DATED: July 2, 2010
ENTERED:
_____________________________ Hon. Bruce W. Black United States Bankruptcy Judge
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In re Edward Joseph Signore and Kanella Virginia Signore

James Kafantaris v. Kanella Signore
The court stuck most of the plaintiff's responses to the defendant's Local Rule 7056-1 statement of facts in support of her motion for summary judgment. The plaintiff admitted many of the facts asserted by the defendant. The court deemed as admitted many of the defendant's statements of fact that the plaintiff attempted to dispute because the plaintiff failed to assert them in a separate statement and because the facts the plaintiff asserted did not reference affidavits, parts of the record or other supporting material as required by Local Rule 7056-2.
Issued: September 17, 2010

 

United States Bankruptcy Court Northern District of Illinois Eastern Division
Transmittal Sheet for Opinions for Posting
Will this order be Published? Yes
Bankruptcy Caption: In re Edward Joseph Signore and Kanella Virginia Signore
Bankruptcy No. 09 B 13534
Adversary Caption: James Kafantaris v. Kanella Signore
Adversary No. 09 A 667
Date of Issuance: September 17, 2010 Judge: Judge Jacqueline P. Cox Appearance of Counsel: Attorney for Plaintiff: Julia D. Mannix Attorney for Defendant: Jonathan D. Parker
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
In re: ) ) EDWARD SIGNORE and ) KANELLA SIGNORE, ) ) Debtors. ) ________________________________________ ) ) JAMES KAFANTARIS, ) ) Plaintiff, ) ) v. ) ) KANELLA SIGNORE, ) ) Defendant. )
Case No. 09 B 013534
Adv. No. 09 A 00667
Judge Jacqueline P. Cox
ORDER ON DEFENDANT’S MOTION TO STRIKE (Dkt. No. 34)
The Bankruptcy Court for the Northern District of Illinois has promulgated Local Rules 7056-1 and 7056-2 (“LR 7056-1” and “LR 7056-2”) which govern how parties are to present and defend motions for summary judgment. The Rules are modeled on Federal Rule of Bankruptcy Procedure 7056 and Local Rule 56.1 (“LR 56.1”) of the Local Rules of the District Court for the Northern District of Illinois. Case law construing LR 56.1 applies to matters considered under LR 7056-1. Grochocinski v. Rieger (In re Rieger), 414 B.R. 416, 424 (Bankr. N.D. Ill. 2009).
LR 7056-1 provides, in its entirety, as follows:
A. Supporting Documents Required
With each motion for summary judgment filed under Fed. R. Bankr. P. 7056, the moving party must serve and file a supporting memorandum of law and a statement of material facts as to which the moving party contends there is no genuine issue and that entitles the moving party to judgment as a matter of law, and that also includes:
(1) a description of the parties; (2) all facts supporting venue and jurisdiction in this court; and
(3) any affidavits and other materials referred to in Fed. R. Civ. P. 56(e).
B. Form - Statement of Facts
The statement of facts must consist of short numbered paragraphs, including within each paragraph specific references to the affidavits, parts of the record, and other supporting material relied upon to support the facts set forth in that paragraph. Failure to submit such a statement constitutes grounds for denial of the motion.
C. Subsequent Filings by Moving Party
If additional material facts are submitted by the opposing party pursuant to Rule 7056-2, the moving party may submit a concise reply in the form prescribed in Rule 7056-2 for response. All material facts set forth in the opposing party’s statement filed under section A(2)(b) of Rule 7056-2 will be deemed admitted unless controverted by the statement of the moving party.
LR 7056-2 states, in its entirety, as follows:
A. Supporting Documents Required
Each party opposing a motion for summary judgment under Fed. R. Bankr. P. 7056 shall serve and file the following:
B. Effect
(1) a supporting memorandum of law; (2) a concise response to the movant’s statement of facts that shall
contain: (a) a response to each numbered paragraph in the moving
party’s statement, including, in the case of any disagreement, specific references to the affidavits, parts of the record, and other supporting materials relied upon; and
(b) a statement, consisting of short numbered paragraphs, of any additional facts that require the denial of summary judgment, including references to the affidavits, parts of the record, and other supporting materials relied upon; and
(3) any opposing affidavits and other materials referred to in Fed. R. Civ. P. 56(e).
All material facts set forth in the statement required of the moving party will be deemed to be admitted unless controverted by the statement of the opposing party.
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LR 7056-2 requires that the nonmoving party respond to the movant’s LR 7056-1 Statement. The response must address “each numbered paragraph in the moving party’s statement, including, in the case of disagreement, specific references to the affidavits, parts of the record, and other supporting materials relied upon[.]” LR 7056-2(A)(2)(a). “If a nonmovant fails to properly respond to a movant’s 56.1(a) statement, the movant’s factual allegations are deemed admitted.” Kasak v. Vill. of Bedford Park, 563 F. Supp. 2d 864, 867 (N.D. Ill. 2008). The evidence supporting the factual statements must represent admissible evidence. Malec v. Sanford, 191 F.R.D. 581, 585 (N.D. Ill. 2000).
Paragraph 8 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits in paragraph 8 that Billy’s Fountain and Grill relocated, that the Plaintiff became its owner, that he owed his parents $30,000.00 for its purchase, that he made payments of $260.35 a month, and that the $30,000.00 note was not fully repaid. The Plaintiff also affirmatively states that his mother Jean Kafantaris (“Jean”) forgave the $13,000.00 balance on the debt, that the note shows that its balance was forgiven, and that Jean said that the Plaintiff’s wife Linda Kafantaris (“Linda”) would recover the money anyway upon Jean’s death. The court will strike the portion of the Plaintiff’s response that asserts additional facts. Section A(2)(b) of LR 7056-2 provides that additional facts that require the denial of summary judgment be made in a separate statement. Thus, the court strikes in the Plaintiff’s response to paragraph 8 everything after the words “paragraph 8.” The court deems all of paragraph 8 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraphs 12 and 13 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the facts stated in paragraphs 12 and 13 but denies knowledge with regard to the repayment of the condominium (as to paragraph 12) and the income of the Defendant’s husband Edward Signore (as to paragraph 13). The Plaintiff’s unsupported denials of paragraphs 12 and 13 are improper. Section A(2)(a) of LR 7056-2 provides that “in the case of any disagreement, specific references to the affidavits, parts of the record, and other supporting materials relied upon” must be included. Thus, the court strikes the words in the
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Plaintiff’s response to paragraph 12 after the words “paragraph 12” and also strikes the words in the Plaintiff’s response to paragraph 13 after the words “paragraph 13.” The court deems all of paragraphs 12 and 13 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraph 14 of the Defendant’s LR 7056-1 Statement
The Plaintiff denies assertions of paragraph 14 that the Defendant’s highest level of education was one year of college, that she stopped working in 1990, that she once worked as a hostess at a restaurant for $2.00 an hour plus tips, and that her only current source of income is $684.00 per month in Social Security benefits. The Plaintiff affirmatively asserts in addition that the Defendant worked at Olympia Star Restaurant as a hostess through 2006 and that the Plaintiff has no knowledge with regard to the Defendant’s Social Security benefits. The Plaintiff’s response to paragraph 14 is stricken. LR 7056-2 requires that, in the case of disagreement, “specific references” be made to “the affidavits, parts of the record, and other supporting materials relied upon[.]” The Plaintiff’s denial fails to cite to affidavits, parts of the record, or other supporting materials. Requiring the court to search the record to find support for the Plaintiff’s denial would be improper. See Kasak, 563 F. Supp. 2d at 868. Additionally, the Plaintiff is entitled to submit new factual matters in addition to those in his response; injecting such additional material into the response, however, is not appropriate. LR 7056-2 requires that additional facts be separately asserted. Because the denial is unsupported and the additional statement is improperly injected into the response, the Plaintiff’s entire response to paragraph 14 is stricken. The facts in the Defendant’s LR 7056-1 Statement at paragraph 14 are deemed admitted.
Paragraph 16 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statements in paragraph 16 and affirmatively asserts that his wife Linda and the Defendant had a close relationship, referencing page 74 of Linda’s deposition. The Plaintiff is entitled to submit new factual matters in addition to those in his response. Injecting such additional material into the response, however, is not appropriate. Thus, the court strikes the words in the Plaintiff’s response appearing after the words “paragraph 16.” The court deems all of the statements of paragraph 16 of the Defendant’s LR 7056-1 Statement
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admitted by the Plaintiff.
Paragraph 23 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statements in paragraph 23 and affirmatively asserts that Jean stayed with the Plaintiff on occasion. The Plaintiff is entitled to submit new factual matters in addition to those in his response. Injecting such additional material into the response, however, is improper. Thus, the court strikes the words appearing in the Plaintiff’s response after “paragraph 23.” The court deems all of the statements of paragraph 23 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraph 24 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits that he did not come to Thanksgiving dinner but states that he has no knowledge of any of the other statements in paragraph 24. The “no knowledge” response is not supported by a reference to affidavits, parts of the record, and other supporting materials. Thus, everything after the word “dinner” is stricken. The entirety of paragraph 24 of the Defendant’s LR 7056-1 Statement is deemed admitted by the Plaintiff.
Paragraph 27 of the Defendant’s LR 7056-1 Statement
Paragraph 27 of the Defendant’s LR 7056-1 Statement asserts as follows:
During the latter part of 2003, Jean had several separate meetings with an individual named John “Jack” Flood (hereinafter “Flood”). (Jack Flood Aff. ¶ 3.) Flood advised Jean as to how to receive more favorable tax treatment for her investments. (Flood Aff. ¶7.) Subsequent to those meetings, Jean decided to withdraw her money from her then- existing bank accounts in order to re-invest the money in accounts with more favorable tax treatment. (Jack Flood Aff. ¶ 8.) Defendant was not present at any of these conversations. (Jack Flood Aff. ¶ 9.) Plaintiff has never heard of Jack Flood. (Pl.’s Dep. 85:15-22.)
The Plaintiff admits that he did not know of John “Jack” Flood (“Flood”). The Plaintiff also asserts that he has “insufficient knowledge to admit or deny any of the remaining statements.” Additionally, the Plaintiff asserts that Flood “does not affirmatively state that the accounts in [the] Plaintiff’s name were to be closed and placed in the name of either the
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Defendant or her daughter Elaine Schima.” The Plaintiff is entitled to submit new factual matters in addition to those in his response. Injecting such additional material into the response, however, is improper. Therefore, the words in the Plaintiff’s response to paragraph 27 after the words “did not know of Jack Flood” are stricken. Because the Plaintiff has not properly responded to the first four sentences in paragraph 27, those sentences of the Defendant’s LR 7056-1 Statement are deemed admitted by the Plaintiff.
Paragraph 32 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statements in paragraph 32 and affirmatively states that there was another TCF account, number 2864336114, that was in both his and Jean’s names. The Plaintiff is entitled to submit new factual matters in addition to those in his response. Injecting such additional material into the response, however, is improper. Thus, the court strikes the second sentence of the Plaintiff’s response to paragraph 32 of the Defendant’s LR 7056-1 Statement. The court deems all of paragraph 32 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraphs 33, 34, 35, and 36 of the Defendant’s LR 7056-1 Statement
The Plaintiff responds that he has no knowledge of the transactions described in paragraphs 33 through 36 which, the Plaintiff argues, are supported only by self-serving affidavits. The Plaintiff is required to respond by specifically referencing affidavits, parts of the record, and other supporting materials. He has not done so. His responses to paragraphs 33 through 36 are, therefore, stricken, and the statements in the corresponding paragraphs of the Defendant’s LR 7056-1 Statement are deemed admitted. Of particular note is the Plaintiff’s response to paragraph 36–that he has no knowledge of the November 19, 2003 withdrawal of $86,531.77 from account 8053155958 at Charter One Bank. It is hard to believe that the Plaintiff has no knowledge of this transaction, as he alleges in paragraph 22 of his Complaint that on November 19, 2003, $86,531.77 was transferred from the Charter One account to the Defendant. Similarly, in paragraph 37 of his Complaint, the Plaintiff alleges that the Defendant either used her power of attorney to transfer $86,531.77 to herself on November 19, 2003, unduly influenced Jean to transfer those funds to her, or forged Jean’s signature in order to
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withdraw the funds.
Paragraph 38 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statements in paragraph 38 but states that he cannot admit or deny who was present at the time the described transactions were made. The Plaintiff’s response regarding who was present at the time of the transactions is insufficient, as he does not cite to affidavits, parts of the record, and other materials to support his response. Thus, the Plaintiff is deemed to have admitted paragraph 38 in its entirety, including the statement that “[p]resent at the execution of the above described transactions were Defendant, Jean and . . . Elaine Schima.”
Paragraph 39 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits in paragraph 39 that an account was opened but also asserts that he cannot admit or deny the remainder of the statement. The Plaintiff is entitled to submit additional facts in opposition to a motion for summary judgment. However, injecting them into the response is improper. LR 7056-2 provides that additional facts that require the denial of summary judgment be made in a separate statement. Thus, the court deems all of paragraph 39 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraph 43 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statements in paragraph 43 and affirmatively asserts that Jean would not close an account if doing so would cause her to lose interest. The Plaintiff is entitled to submit new factual matters in addition to those in his response. Injecting such additional material into the response, however, is improper. Thus, the court strikes the words in the Plaintiff’s response appearing after “paragraph 43.” The court deems all of paragraph 43 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraph 45 of the Defendant’s LR 7056-1 Statement
The Plaintiff states that he has “no knowledge as to admit or deny the statements in paragraph 45.” The Plaintiff is required to respond by specifically referencing affidavits, parts of the record, and other supporting materials. He has not done so. Thus, the Plaintiff’s response to
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paragraph 45 is stricken. The statements in paragraph 45 of the Defendant’s LR 7056-1 Statement are deemed admitted by the Plaintiff.
Paragraph 46 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statements in paragraph 46 and affirmatively asserts that Jean retired the promissory note for the restaurant in 2002, long before the will was drafted, and that the Plaintiff was named executor of Jean’s will. The Plaintiff is entitled to submit new factual matters in addition to those in his response. Injecting such additional material into the response, however, is improper. Additionally, the Defendant challenges the Plaintiff’s response to paragraph 46 because it refers to a note that includes the word “paid” on it and, thus, the Defendant argues, constitutes inadmissible hearsay. The court will not strike the second sentence of the Plaintiff’s response to paragraph 46 on this ground. Whether the lenders were the ones who marked the note as “paid” is unknown. If the lenders marked the note as “paid,” reference to the note could be admissible as a business record. Nevertheless, the court strikes the second and third sentences of the Plaintiff’s response to paragraph 46 of the Defendant’s LR 7056-1 Statement because they have not been asserted separately as required by LR 7056-2. The court deems all of the statements in paragraph 46 of the Defendant’s LR 7056-1 Statement admitted by the Plaintiff.
Paragraph 48 of the Defendant’s LR 7056-1 Statement
The Plaintiff admits the statement in paragraph 48 that he never discussed Jean’s estate plan with Jean but asserts that he has no knowledge with regard to the Defendant’s knowledge of Jean’s assets. Additionally, the Plaintiff affirmatively states that he and Linda spoke with Jean and William regarding their estate plan and that his parents wanted their assets to be divided equally. The Defendant argues that this response should be stricken because it is based on inadmissible hearsay. The court overrules the hearsay objection as the Plaintiff does not quote William and Jean making an out of court statement and merely summarizes what their wishes were. However, the Plaintiff’s assertion about what William and Jean wanted and his claim to have no knowledge with regard to what the Defendant knew about Jean’s assets are stricken, as the assertion and the claim are not based on affidavits, parts of the record, or other supporting
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materials. The Plaintiff’s assertion and claim are also stricken as being improperly injected into the Plaintiff’s response. LR 7056-2 requires that additional statements by a party opposing a motion for summary judgment be stated separately. All statements of paragraph 48 of the Defendant’s LR 7056-1 Statement are deemed admitted by the Plaintiff.
The court notes that a review of the docket in this adversary proceeding reveals that the Plaintiff has not filed a separate LR 7056-2 Statement in opposition to the Defendant’s LR 7056- 1 Statement.
Dated: September 17, 2010
ENTERED:
________________________________ Jacqueline P. Cox United States Bankruptcy Judge
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In re Florica Marcela Bulgarea

Ilene F. Goldstein, Trustee v. National City Mortgage Company and LaSalle Bank, N.A., n/k/a Bank of America
Issued: September 09, 2010

 

United States Bankruptcy Court Northern District of Illinois Eastern Division
Transmittal Sheet for Opinions for Publishing and Posting on Website
Will This Opinion be Published? No
Bankruptcy Caption: In re Florica Marcela Bulgarea
Bankruptcy No. 08 B 19992
Adversary Caption: Ilene F. Goldstein, Trustee v. National City Mortgage Company and LaSalle Bank, N.A., n/k/a Bank of America
Adversary No. 08 A 1019
Date of Issuance: September 9, 2010
Judge: A. Benjamin Goldgar
Appearance of Counsel:
Attorney for plaintiff Ilene F. Goldstein, Trustee: Joel A. Schechter, Law Offices of Joel Schechter, Chicago, IL
Attorney for defendant National City Mortgage Co.: James A. Campion, Campion, Curran Dunlop, Lamb & Cunabaugh, Crystal Lake, IL
Attorney for defendant LaSalle Bank, N.A.: Jerold J. Shapiro, Kamm, Shapiro & Demuth, Ltd., Chicago, IL
In re: ) ) FLORICA MARCELA BULGAREA, ) f/k/a FLORICA MARCELA CIMPAN, ) ) Debtor. ) ______________________________________ ) ) ILENE F. GOLDSTEIN, Trustee, ) ) Plaintiff, ) ) v. ) ) NATIONAL CITY MORTGAGE ) COMPANY and LASALLE BANK, N.A., ) n/k/a BANK OF AMERICA, ) ) Defendants. )
Chapter 7 No. 08 B 19992
No. 08 A 1019
Judge Goldgar
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
MEMORANDUM OPINION
Before the court for ruling is the motion of plaintiff Ilene F. Goldstein (“Goldstein”), chapter 7 trustee, for partial summary judgment on her adversary complaint against defendant National City Mortgage Company (“National City”). The complaint seeks to avoid the first mortgage that National City holds on the residence of debtor Florica Marcela Bulgarea (“Bulgarea”). The complaint also alleges a claim against LaSalle Bank, N.A. (“LaSalle”) requiring LaSalle to “prove up” the amount of its second mortgage on Bulgarea’s residence.
For the reasons that follow, Goldstein’s motion for summary judgment on her claim against National City will be granted. The claim against LaSalle will be dismissed on the court’s own motion for lack of jurisdiction.
1. Jurisdiction
The court has subject matter jurisdiction over the action against National City pursuant to 28 U.S.C. § 1334(b) and the district court’s Internal Operating Procedure 15(a). The claim against National City is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (K). As to the claim against LaSalle, the court has jurisdiction to determine its own jurisdiction. See Bayo v. Napolitano, 593 F.3d 495, 500 (7th Cir. 2010).
2. Facts
The following facts are not in dispute. As of July 31, 2008, Bulgarea owned property at 325 Garrison Circle, Port Barrington, Illinois (“the property”). (Def. L.R. 7056-2 Resp. ¶ 7). The property is located in McHenry County, Illinois. (Id.). Bulgarea purchased the property from the Roger E. Hedberg, Jr. Trust (“the Hedberg Trust”) in June 2003. (Id. ¶ 9 and Pl. L.R. 7056-1 Stmt., Ex. A).
To purchase the property, Bulgarea borrowed $244,000 from IVC Mortgage Group, Inc. (“IVC”). (Id. ¶ 9). She executed a promissory note and a mortgage in IVC’s favor to secure payment of the note. (Id. ¶¶ 9-10). IVC immediately assigned the note and mortgage to National City. (Id. ¶ 11). However, National City mistakenly recorded the mortgage in the office of the Lake County Recorder of Deeds, not in the office of the McHenry County Recorder of Deeds. (Id. ¶ 12). As far as the record shows, National City’s mortgage still had not been recorded in McHenry County as of July 31, 2008.
As of July 31, 2008, the deed from the Hedberg Trust conveying the property to Bulgarea also had not been recorded in McHenry County. (Pl. Resp. to L.R. 7056-2 Add’l Stmt. ¶ 3). The deed was instead mistakenly recorded in Lake County in July 2003 at the same time as National City’s mortgage. (Id. ¶ 1).
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In April 2005, Bulgarea and her husband obtained a $75,000 line of credit from LaSalle. (Compl. ¶ 16; LaSalle Answer ¶ 16). In connection with the line of credit, they executed a mortgage on the property in favor of LaSalle. (Id. ¶ 17). In May 2005, LaSalle recorded its mortgage in McHenry County where the property is located. (Id. ¶ 18).
On July 31, 2008, Bulgarea filed a chapter 7 bankruptcy case. (Bankr. Dkt. No. 1). As of the petition date, the McHenry County record showed title to the property still in the Hedberg Trust and also showed a mortgage from Bulgarea to LaSalle. It did not show Bulgarea’s title or National City’s mortgage.
Goldstein was appointed trustee of Bulgarea’s estate, and in December 2008, she commenced this adversary proceeding against National City and LaSalle. Her single-count complaint asserted a claim against National City in which she sought to avoid National City’s mortgage pursuant to section 544(a) of the Bankruptcy Code, 11 U.S.C. § 544(a). The claim in the complaint against LaSalle “request[ed] that LaSalle be compelled to prove up the amount of its lien claim against the Property in anticipation of a sale of the Property.” (Compl. ¶ 22). Goldstein now moves for partial summary judgment on her claim against National City.
3. Discussion
Summary judgment is appropriate when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c)(2) (made applicable by Fed. R. Bankr. P. 7056). On a motion for summary judgment, “[t]he court has one task and one task only: to decide, based on the evidence of record, whether there is any material dispute of fact that requires a trial.” Payne v. Pauley, 337 F.3d 767, 770 (7th Cir. 2003) (internal quotation omitted).
No facts are in dispute here, and Goldstein is entitled to judgment as a matter of law -3-
because her “strong arm” power in sections 544(a)(1) and (3) of the Code gives her an interest in the property superior to National City’s interest. The motion for summary judgment will therefore be granted, and National City’s mortgage on the property will be avoided. On the court’s own motion, however, the claim against LaSalle will be dismissed for lack of jurisdiction. The complaint alleges no case or controversy between Goldstein and LaSalle.
a. Claim Against National City
The undisputed facts establish Goldstein’s superior right to the property as a hypothetical judicial lien creditor and bona fide purchaser under sections 544(a)(1) and (3), respectively. As of the petition date, such a creditor or purchaser would have had no notice – not even inquiry notice – that National City held a mortgage on the property.
Section 544(a) grants a trustee in bankruptcy what is called the “strong arm” power. Section 544(a)(1) allows the trustee to avoid a transfer of the debtor’s property voidable by a creditor who “extends credit to the debtor at the time of the commencement of the case” and “obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien . . . .” 11 U.S.C. § 544(a)(1). Section 544(a)(3) allows a trustee to avoid a transfer voidable by “a bona fide purchaser of real property” who “obtains the status of a bona fide purchaser . . . at the time of the commencement of the case . . . .” 11 U.S.C. § 544(a)(3). Whether a judicial lien creditor or bona fide purchaser can avoid a transfer depends on applicable state law. Belisle v. Plunkett, 877 F.2d 512, 515 (7th Cir. 1989); Sandy Ridge Oil Co. v. Centerre Bank, N.A. (In re Sandy Ridge Oil Co.), 807 F.2d 1332, 1336 (7th Cir. 1986).
Under Illinois law, a mortgage is ineffective against a purchaser or creditor who lacks actual or constructive notice of it. National City Bank of Ottawa v. Cowdin, 343 Ill. 430, 436,
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175 N.E. 411, 413 (1931); Allison v. White, 285 Ill. 311, 324, 120 N.E. 809, 813 (1918). The Bankruptcy Code rules out actual notice in this case, since section 544 confers rights “without regard to any knowledge of the trustee.” 11 U.S.C. § 544(a); Belisle, 877 F.2d at 514 n.2 (stating that section 544(a) “specifies that the trustee shall be treated as a person without actual notice”) (emphasis in original); Sandy Ridge, 807 F.2d at 1334-36.
Constructive notice can take two forms: record notice and inquiry notice. Goldberg v. Ehrlich (In re Ehrlich), 59 B.R. 646, 650 (Bankr. N.D. Ill. 1986).1/ Record notice means notice under section 30 of the Illinois Conveyances Act from an instrument duly recorded in the appropriate public office. See 765 ILCS 5/30 (2008). Section 30 “imputes to a purchaser knowledge that could be gained from an examination of the grantor-grantee index in the office of the Recorder of Deeds,” as well as from court records for the county in which the property in question is located. Ehrlich, 59 B.R. at 650; see also In re Richardson, 75 B.R. 601, 605 (Bankr. C.D. Ill. 1987).
Here, Goldstein unquestionably lacked record notice of National City’s mortgage as of the petition date because the mortgage was not recorded in McHenry County, the location of the property. Cf. Banco Popular v. Beneficial Sys., Inc., 335 Ill. App. 3d 196, 204, 780 N.E.2d 1113, 1120 (1st Dist. 2002) (finding no record notice of deed that was unrecorded). National City
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Ehrlich and some of the other cases cited here concerned bona fide purchasers rather than judgment lien creditors. Goldstein insists that as a judgment lien creditor under section 544(a)(1) she is not subject to the constructive notice standard applicable to a bona fide purchaser under section 544(a)(3). (Pl. Supp. Br. at 4-5). She is mistaken. Under Illinois law, the constructive notice standards for judgment lien creditors and bona fide purchasers are the same. See In re Buchner, 202 F. 979, 987 (S.D. Ill. 1912) (“In Illinois judgment creditors and purchasers stand on equal footing with respect to prior liens or interests of which they have no notice”); German-Am. Nat’l Bank of Lincoln v. Martin, 277 Ill. 629, 648, 115 N.E. 721, 729 (1917) (stating that section 30 of the Illinois Conveyances Act “places creditors on the same footing as subsequent purchasers”).
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suggests no other source from which Goldstein might have had record notice. That leaves inquiry notice. Inquiry notice imputes to a purchaser or creditor knowledge
of facts that a diligent inquiry would have brought to light. Davis v. Elite Mortg. Servs., Inc., 592 F. Supp. 2d 1052, 1056 (N.D. Ill. 2009); Ehrlich, 59 B.R. at 650. A duty to inquire may arise from the state of the record itself. See Allison, 285 Ill. at 319, 120 N.E. at 812 (stating that people are “chargeable with notice of what appeared in the records, and if unusual facts appeared, such as would cause a reasonably prudent man to suspect the title, they are chargeable with knowledge of whatever would have been discovered by diligent inquiry”).
Just as she lacked record notice of the National City mortgage, Goldstein lacked inquiry notice. As of the petition date, the record in McHenry County, where the property was located, gave no indication of any mortgage encumbering property other than Bulgarea’s mortgage to LaSalle. No other circumstance in this case would have alerted a hypothetical judgment lien creditor or a bona fide purchaser to National City’s mortgage. True, the National City mortgage was recorded in Lake County. But the property was not located in Lake County, and a creditor or purchaser would have no reason at all to examine the record in a county other than the county in which the property was located. Id. at 319, 120 N.E. at 811. Goldstein is therefore entitled to use her strong arm power to avoid National City’s mortgage.
National City, though, disagrees. According to National City, an examination of the record in McHenry County would have put a reasonable person on inquiry notice because the record failed to reflect not only the National City mortgage but also Bulgarea’s title to the property: the 2003 deed from the Hedberg Trust conveying the property to her was also mistakenly recorded in Lake rather than McHenry County. That fact, National City contends, would have required a reasonable person to inquire by what right Bulgarea purported to own the
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property – and would have led to the discovery of the mortgage recorded in Lake County. Not so. Certainly, the record in McHenry County, showing title still in the Hedberg
Trust, would have required a reasonable person to inquire into the basis of Bulgarea’s ownership of the property. Id. But that inquiry would not have led to the discovery of National City’s mortgage. Even an unrecorded deed is effective as between the parties to the conveyance upon delivery of the deed. See Farmers State Bank v. Neese, 281 Ill. App. 3d 98, 105, 665 N.E.2d 534, 538 (4th Dist. 1996). If a reasonable person, whether a creditor or a purchaser, had asked Bulgarea about her right to occupy the property, she could have responded adequately by simply producing her deed from the Hedberg Trust.
Since a recorded deed is unnecessary to establish ownership, production of Bulgarea’s unrecorded deed would have been enough to allay any concerns a reasonable person might have about her title. Nothing in the record in McHenry County, and nothing about Bulgarea’s production of the unrecorded deed, would have prompted a person concerned only with title to ask Bulgarea additional questions about possible unrecorded mortgages, let alone search for mortgages mistakenly recorded in other counties. See Greer v. Carter Oil Co., 373 Ill. 168, 173, 25 N.E.2d 805, 808 (1940) (“The law only charges purchasers with notice of conveyances in the direct line of title.”); Allison, 285 Ill. at 319, 120 N.E. at 811 (noting that purchasers and creditors are not “chargeable with notice of facts by records not in their chain of title”); 5 Herbert Thorndike Tiffany, The Law of Real Property § 1265 at 21 (3d ed. 1939).
Because nothing would have put a judicial lien creditor or bona fide purchaser on inquiry notice of National City’s mortgage as of the petition date in this case, sections 544(a)(1) and (3) of the Code make Goldstein’s interest in the property superior to the interest of National City. Goldstein’s motion for summary judgment will be granted.
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b. Claim Against LaSalle
Goldstein has not moved for summary judgment on her separate claim against LaSalle, but it is necessary to address that claim nonetheless. In her complaint, Goldstein requests relief against LaSalle but alleges no dispute between LaSalle and herself. Without a dispute, her claim presents no case or controversy and must be dismissed for lack of jurisdiction.
Discussions of bankruptcy jurisdiction typically focus on 28 U.S.C. § 1334. Sometimes overlooked are the broader requirements of Article III of the Constitution restricting the jurisdiction of federal courts to “cases” or “controversies.” U.S. Const. art. III, § 2, cl. 1; Valley Forge Christian Coll. v. Americans United for Separation of Church & State, Inc., 454 U.S. 464, 476 n.13 (1982). The limits Article III imposes on federal jurisdiction generally apply to bankruptcy courts. Bank One, NA v. Knopfler (In re Holstein), Nos. 00 B 18138, 03 A 638, 2004 WL 26516, at *5 (Bankr. N.D. Ill. Jan. 5, 2004); Day v. Klingler (In re Klingler), 301 B.R. 519, 523 (Bankr. N.D. Ill. 2003); Kilen v. United States (In re Kilen), 129 B.R. 538, 543 (Bankr. N.D. Ill. 1991).
To satisfy the case-or-controversy requirement, there must be, at a minimum, an “actual dispute[ ] between adverse parties.” Richardson v. Ramirez, 418 U.S. 24, 36 (1974); see also City of Erie v. Pap’s A.M., 529 U.S. 277, 305-06 (2000) (Scalia, J., concurring in judgment); GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375, 383-84 (1980) (underscoring the importance of “[t]he clash of adverse parties”); Erwin Chemerinsky, Federal Jurisdiction § 2.2 at 49 (5th ed. 2007). This is a “bedrock requirement.” Valley Forge, 454 U.S. at 471. If there is no dispute, or if the parties are not adverse (or sufficiently adverse), there is no federal jurisdiction. Holstein, 2004 WL 26516, at *5.
The adversary complaint here discloses no dispute between Goldstein and LaSalle. -8-
Goldstein alleges the loan from LaSalle as well as the execution and recording of the mortgage in LaSalle’s favor. (Compl. ¶¶ 16-18). Goldstein also “requests that LaSalle be compelled to prove up the amount of its lien claim against the property in anticipation of a sale of the Property.” (Id. ¶ 22). But Goldstein does not challenge the validity of the mortgage, nor does she allege any disagreement over the amount of LaSalle’s claim. It may be that Goldstein is uncertain about the amount of that claim, but federal courts do not have jurisdiction to cure that kind of uncertainty. Without an allegation that Goldstein contends LaSalle’s claim is one amount and LaSalle contends it is another, there is no “actual dispute[ ] between adverse parties” to confer jurisdiction under Article III. Richardson, 418 U.S. at 36.
Subject matter jurisdiction is a threshold question, “the first question in every case.” State of Ill. v. City of Chi., 137 F.3d 474, 478 (7th Cir. 1998), because without jurisdiction the “court cannot proceed at all,” Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94 (1998) (internal quotation omitted). Federal courts therefore have a duty to examine their own subject matter jurisdiction, Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986), even where, as here, the parties have not questioned it, Smith v. American Gen. Life & Accident Ins. Co., 337 F.3d 888, 892 (7th Cir. 2003). When jurisdiction is absent, dismissal sua sponte is not only appropriate but required. Durant, Nichols, Houston, Hodgson & Cortese-Costa, P.C. v. Dupont, 565 F.3d 56, 62-63 (2d Cir. 2009).
Because the adversary complaint alleges no case or controversy involving LaSalle, Goldstein’s claim against LaSalle will be dismissed for lack of jurisdiction.
4. Conclusion
For these reasons, the motion of plaintiff Ilene F. Goldstein for summary judgment on her claim against defendant National City Mortgage Company is granted. Goldstein’s claim against
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defendant LaSalle Bank, N.A. is dismissed for lack of jurisdiction. A separate judgment will be entered consistent with this opinion. Dated: September 9, 2010
__________________________________________ A. Benjamin Goldgar
United States Bankruptcy Judge
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