Thomas M. Lynch, United States Bankruptcy Judge
In this Adversary Proceeding BMO Harris Bank, NA. seeks a determination
The Debtor, Vista Marketing Group, Ltd., filed a voluntary petition under Chapter 11 on August 30, 2012. As of the petition date, the Debtor owned and operated three retail gas stations in the Rockford area. On January 3, 2013, the court granted the Debtor's motion to sell two of the stations pursuant to a sale agreement, which was "approved in all respects,"
(Id.)
Creditor BMO Harris initially objected to the motions to sell. The original motions
Ultimately, the parties agreed on the form of the order that was ultimately entered by this court. It provided for payment from the Riverside Property proceeds first to BMO Harris on its first mortgage, next to the Rockford Local Development Corporation on its second mortgage, and all remaining proceeds to be held subject to court order with all liens, claims, encumbrances and other interests to attach to the remaining proceeds. (Order Granting Mot. to Sell, ECF No. 69.) Although the agreed order provided for deferral of the adjudication of rights in the remaining proceeds, IDOR does not allege that it participated in the negotiations over the terms of the sale order, which made no reference to IDOR or to retailer occupation taxes.
The motions to approve the sale were served on the Illinois Department of Revenue on November 21, 2012, more than 21 days before the initial hearing on December 19, 2012. (Mot, to Sell Meridian Prop., ECF No. 43; Mot. to Sell Riverside Prop., ECF No. 44.) Neither the Illinois Department of Revenue nor the State of Illinois objected to the motion or sale, nor have they appealed the sale order. According to the docket and claims registry IDOR's first active participation in the bankruptcy case was to file a proof of claim on February 4, 2013. (Claim No. 13-1.) IDOR first appeared in the case when it filed its response to the purchaser's motion for rule to show cause against it on March 27, 2013. (IDOR Resp., ECF No. 93.)
Pursuant to this court's sale order, the Riverside and Meridian Properties were sold to Kelley Williamson Co. on January 31, 2013. (Id. ¶ 26.) The Riverside Property was sold for $2,820,000.00 for the real estate and $39,391.28 for fuel and convenience store inventory. (Id. ¶ 32, Ex. J.) Out of these proceeds, the first of four promissory notes in favor of BMO Harris was paid in full for $2,063,812.86 and a loan from the U.S. Small Business Administration or Rockford Local Development Corporation loan was paid off for $318,183.35. After paying outstanding property taxes and utilities for the property and closing costs, the remaining $303,151.49 in proceeds was paid to the Debtor's attorney to be held in escrow. The Meridian Property
BMO Harris' Pre-Sale Mortgage Liens on the Riverside and Meridian Properties
Both the State of Illinois and the IDOR concede that as of the time of the sale of the Riverside and Meridian properties to Kelley Williamson, BMO Harris held valid mortgages in both properties. (Ill. Resp. ¶¶ 9, 10, ECF No. 53; IDOR Resp. ¶¶ 9, 10, ECF No. 70.) Specifically, BMO Harris' predecessor in interest lent the Debtor money in four transactions between 2007 and 2009, secured by mortgages in the Riverside or Meridian Properties.
In February 2007, BMO Harris' predecessor lent the Debtor $2,335,811.00 (the "2007 Note"). (Id. ¶ 8.) On or about that date the Debtor granted the lender a mortgage in the Riverside Property, which was recorded with the Winnebago County Recorder on February 12, 2007 (the "2007 Riverside Mortgage"). (Id. ¶ 9.) The 2007 Riverside Mortgage secured "all obligations, debts and liabilities, plus interest thereon" of the Debtor to the lender as well as all claims by the lender against the Debtor "whether now existing or hereafter arising" including "all future advances made by" lender to the Debtor. However, the Riverside Mortgage had an express maximum lien amount of $2,335,811.00. (Id. ¶ 9; BMO Mot. for Summ. J., ECF No. 50, Ex. E.)
Subsequent to the 2007 Riverside Mortgage, either the U.S. Small Business Administration or the Rockford Local Development Corporation lent funds secured by a mortgage against the Riverside Property that was recorded on October 31, 2007. (Ill. Resp. ¶ 29, ECF No. 53; IDOR Resp. ¶ 29, ECF No. 70.)
BMO Harris' predecessor lent the Debtor an additional $350,000 on May 7, 2008 (the "2008 Note"), $435,000 on March 13, 2009 (the "March 2009 Note") and $2,925,221 on December 14, 2009 (the "December 2009 Note"). (Id. ¶¶ 5, 6, 7.)
The Debtor granted BMO Harris' predecessor an additional mortgage in the Riverside Property with a maximum lien of $3,466,402.00. This additional mortgage
The four promissory notes were also secured by a security interest in the business assets of the Debtor, including, but not limited to, the accounts, equipment, general intangibles, and inventory, under a Commercial Security Agreement dated August 28, 2007. (Id. ¶ 11.) This security agreement included a cross-collateralization and future advance clause and was perfected by a UCC-1 Financing Statement filed with the Delaware Secretary of State on April 28, 2004. (Id. ¶¶ 11, 12.)
As of September 29, 2011, only BMO Harris, the U.S. Small Business Administration and the Rockford Local Development Corporation had recorded any lien against the Riverside Property.
On December 19, 2012, this court lifted the automatic stay for BMO Harris to continue its foreclosure proceeding against the Weaver Property in Winnebago County, Illinois. (Order Lifting Automatic Stay, ECF No. 62; BMO Mot. for Summ. J., ECF No. 50, Ex. O.) The state court determined that after the application of the proceeds from the sale of the Weaver Property, the Debtor still owed to BMO Harris $2,658,693.85 as of May 30, 2013. The deficiency after sale of the Riverside, Meridian and Weaver Properties is further supported by BMO Harris' proof of claim for $2,658,693.85 filed on May 1, 2013. Neither the IDOR nor the State of Illinois objected to that proof of claim. (Ill. Resp. ¶¶ 39-41, ECF No. 53; IDOR Resp. ¶¶ 39-41, ECF No. 70.)
Subsequent to the sale of the Riverside and Meridian Properties, the IDOR filed a proof of claim on February 4, 2013, for $707,109.60 for pre-petition sales and use taxes of the Debtor in 2011 and 2012. (Claim No. 13-1.) Of this, IDOR asserts $242,142.20 as a priority unsecured claim
The State of Illinois filed a proof of claim on May 1, 2013 for $61,741.88 for unpaid estate taxes. (Claim No. 15-1.) The state asserts the entire amount of the claim is secured by a statutory lien in $313,000 in "[p]roperty, or proceeds from sale of property, subject to Illinois Estate Tax statutory lien." (Id.) Although the basis for the state's asserted interest is not clear from its proof of claim, the state now states that it believes that the Riverside Property or some portion of it constitute proceeds of property from the estate of Lois Williams, who died on August 5, 1999. (See Ill. Resp., ECF No. 53; Ill. Am. Resp., ECF No. 66.) The state contends that it had a statutory lien in property of the Lois Williams estate to secure unpaid estate taxes, and that such lien attached to the Riverside Property and to the proceeds of sale of that property. To date, the State of Illinois has been unable to elaborate precisely what property of the Williams estate it alleges to have been converted into the Riverside Property or any other theory why the Riverside Property would constitute proceeds of property of the Williams estate. (Id.)
BMO Harris initially sought a determination that it was entitled to the escrowed sales proceeds by filing a motion to compel turnover. IDOR, the State of Illinois and several other parties filed objections, and this court ultimately denied the motion without prejudice on July 15, 2013, as a matter more appropriately brought as an adversary proceeding. (Order Denying Turnover, Case No. 12-B-833168, ECF No. 144.) See Fed. R. Bankr. P. 7001.
On August 13, 2013, Debtor's counsel sought leave to transfer $156,945.23 of the $313,950.46 to BMO Harris' counsel to be held in escrow and on the same terms as under the sale order entered on January 3, 2013, so that the amount held in escrow would not exceed the insurance coverage limits set by the FDIC for depository accounts. The motion was granted on August 21, 2013.
On January 30, 2014, BMO Harris commenced this adversary proceeding, seeking a declaration that it is entitled to the full $313,950.46 in sale proceeds held by Debtor's and BMO Harris' counsel, and for the proceeds to be turned over to BMO Harris.
On July 1, 2014, IDOR answered the amended complaint and filed its counterclaim against BMO Harris and crossclaim against the Debtor, Stenstrom Petroleum Services Group, N.L. Stevens, III, S. Kinnie Smith, Jr., and James Stevens in his capacity as Ch. 7 Trustee. (IDOR Answer
At the status hearing on August 25, 2014, the State of Illinois indicated it wished to take discovery. Although the matter was continued to enable the parties to do so, it appears that only the State of Illinois availed itself of this opportunity. Before briefing on the summary judgment motions closed in 2015, BMO Harris, IDOR and the State of Illinois confirmed that they did not need to take further discovery.
On October 8, 2014, BMO Harris filed the pending motion for summary judgment, together with its statement of material facts, memorandum in support and other supporting documents. The creditor's motion sought summary judgment on both counts of its complaint as well as on IDOR's counterclaim. (BMO Mot. for Summ. J., ECF No. 50; BMO Stmt., ECF No. 51: BMO Mem., ECF. No. 58.)
On October 20, 2014, the State of Illinois filed a response to the motion for summary judgment, attaching an affidavit of Rosalie Lowery, the Springfield bureau chief of the Illinois Attorney General's Revenue Litigation Office. In the affidavit, notarized on October 20, 2014, Ms. Lowery stated that on an unspecified date in April 2013 and in an unspecified manner
On December 8, 2014, counsel for the State of Illinois took a deposition of William Williams, III. He testified that he was president of the Debtor for the prior 17 years, (Williams Dep. 8:1-6, ECF No. 66, Ex. B), and that Lois Williams was his mother. He further accounted that prior
In January 2015, the State of Illinois informed the court that in response to discovery requests, it had permission to go through the warehouse where Debtor's records were held. The court further ordered that the State have access to a specified storage unit between January 28 and 29, 2015 for the purpose of inspection and copying of the Debtor's corporate records. (Order Granting Mot. for Leave, ECF No. 64.)
The State subsequently amended its brief in opposition to BMO Harris' motion for summary judgment, and filed a "supplemental" response to BMO Harris' statement of facts.
In the meantime, IDOR had filed its motion for summary judgment, together with supporting memorandum and statement of facts, seeking summary judgment in its favor on both its cross claim and on both counts of BMO Harris' amended complaint. (IDOR Mot. for Summ. J., ECF No. 69; IDOR Mem. of Law, ECF No. 71.) BMO Harris filed its response to IDOR's statement of facts, (BMO Resp., ECF No. 81), as well as a combined reply in support of BMO Harris' motion for summary judgment and in response to IDOR's motion on March 25, 2015. (BMO Reply, ECF No. 79.) To these submissions, IDOR also replied. (IDOR Reply Br., ECF No. 86.)
At a May 13, 2015 status hearing, counsel for the State of Illinois stated in open court that it did not contend that it had been deprived of the opportunity for discovery, but had found no other evidence of a transfer from the Williams estate to the Debtor other than an alleged statement of Ms. Williams' son.
When BMO Harris objected that the October 2014 affidavit of Ms. Lowery contained inadmissible hearsay, the State of Illinois filed with leave of court a supplemental memorandum and response, dated June 2, 2015, which included a so-called "Foundation Statement in Support of Lowery Affidavit Submitted by the Office of the Illinois Attorney General." (Ill. Suppl.
The Foundation Statement states that the alleged conversation between Ms. Lowery and Mr. Williams consisted of a telephone conversation that Mr. Williams supposedly initiated. This document claims that Mr. Williams called Ms. Lowery to discuss the possibility of settling the state's estate tax claims against him, and Ms. Lowery terminated the call as soon as Mr. Williams mentioned the Debtor's pending bankruptcy case, indicating to him that any further communications should be made through counsel. The Foundation Statement does not suggest how Ms. Lowery was able to identify the caller and admits that Ms. Lowery made no contemporaneous notes of the conversation. The document also acknowledges that there is no record of the date of the alleged conversation.
The unsworn Foundation Statement also attempts to supplement the affidavit to claim that counsel for the State of Illinois met with Mr. Williams on January 28, 2015 for the purpose of reviewing the Debtor's corporate documents. At that time, according to the document, Mr. Williams indicated that he had no recollection of making statements concerning assets of the Lois Williams Estate being liquidated in the Vista Marketing bankruptcy. The state also attached several alleged e-mails between Mr. Williams, his attorney, and Ms. Lowery dated May 13, 2013 to its statement. Why it chose to do so is puzzling. However, none of these e-mails reference any purported statements by Mr. Williams to the assets of the Lois Williams estate being liquidated in the Debtor's bankruptcy.
This proceeding seeks interpretation of this court's prior orders authorizing the sale of property of the estate, a determination of the validity, extent, or priority of liens on property of the estate and the allowance of claims against and liquidation of property of the estate. It constitutes a core proceeding. 28 U.S.C. § 157(b)(2)(A), (B), (K), (N), (O). To the extent the matter involves interpretation of this court's orders pursuant to Section 363 of the Bankruptcy Code, the matter "stems from the bankruptcy itself." Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011). To the extent the matter involves a determination of the validity, extent and priority of liens on property of the estate and claims against such property, the matter "would necessarily be resolved in the claims allowance process." Id. In either case, it is a matter within this court's constitutional authority to enter final judgment. In open court before the court reached its decision, BMO
The parties do not dispute BMO Harris' assertion that, to the extent the funds in escrow constitute proceeds of the Riverside Property or fuel inventory at the Meridian Property, BMO Harris has a perfected lien on such proceeds on account of its mortgages, security agreement and UCC financing statement. The parties also do not dispute that BMO Harris is entitled to the $10,738.97 portion of the sale proceeds attributable to fuel inventory from the Meridian Property, and is entitled to the other proceeds it has already received pursuant to the sale order. (See, e.g., IDOR Mem. of Law 4, ECF No. 71 ("what IDOR seeks by way of its cross-motion is a determination that it has a right to turn-over of the balance in the amount of $303,211.49.").) The State of Illinois argues rather that summary judgment is not appropriate because there is a material dispute as to whether the state can assert a statutory lien with higher priority than BMO Harris' lien. IDOR argues that there is no dispute of fact, but as a matter of law it is entitled to the proceeds either as adequate protection for its terminated state law right to obtain payment from the purchaser Kelley Williamson or because the funds in escrow are not really proceeds of sale but rather constitute money that Kelley Williamson paid to satisfy Kelley Williamson's obligations to the State of Illinois.
For purposes of the motion for summary judgment, the parties agree that Lois Williams died on August 5, 1999. (BMO Resp. ¶ 60, ECF No. 77.) An Illinois estate tax return was filed for Ms. Williams, and the Illinois Attorney General's Office assessed a tax liability of Ms. Williams' estate in the amount of $209,917.00. (Id. at ¶¶ 61-62.) Pursuant to 35 ILCS 405/6(b), Ms. Williams' estate was permitted to defer payment of $86,306.00 and to pay that amount by installments. (Id. at ¶ 63.) The Williams estate made certain payments between May 18, 2001 and May 19, 2010. (Id. at ¶¶ 64-65.) After the estate failed to make a scheduled payment in 2011, the state accelerated the remaining tax due, of which together with statutory interest and penalties, amounted to $61,748.88 as of May 1, 2013. (Id. at ¶¶ 66-68.)
The State of Illinois alleges that in April 2013 the state learned "that assets of the Lois Williams Estate had been transferred to Debtor Vista Marketing." (Id. at ¶ 69.) Based on this allegation, which BMO Harris disputes, the state argues that it had a lien on the Riverside Property and, now, in the sale proceeds thereof that is senior to BMO Harris' interest. BMO Harris argues that the state has failed to present admissible evidence to show any connection between the Williams estate and the Riverside Property, and that even if the state had a lien in the Riverside Property, the state did not record its lien and, therefore, its interest is junior to BMO Harris' lien.
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a), incorporated by reference by Fed. R. Bankr.P. 7056. For purposes of a motion for summary judgment, the court "must construe all facts and draw all reasonable inferences in favor of the non-movant." Srail v. Village of Lisle, 588 F.3d 940, 949 (7th Cir.2009).
The "nonmoving party need not meet ... the preponderance of the evidence standard, but must still provide more than a `mere scintilla' of evidence to show that there is a genuine issue of material fact." Id. In particular, a party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
Fed.R.Civ.P. 56(c)(1). An "affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated." Fed.R.Civ.P. 56(c)(4). A party "may not rely on inadmissible hearsay to avoid summary judgment." MMG Fin. Corp. v. Midwest Amusements Park, LLC, 630 F.3d 651, 657 (7th Cir.2011). Thus, "affidavits, consisting of nonspecific and hearsay testimony, are insufficient to preclude summary judgment." House of Brides, Inc. v. Alfred Angelo, Inc., F.Supp.3d ___, ___, 2016 WL 698093, at *8 (N.D.Ill. Feb. 19, 2016) (citing Haywood v. Lucent Techs., Inc., 323 F.3d 524, 533 (7th Cir.2003); Ward v. First Fed. Say. Bank, 173 F.3d 611, 618 (7th Cir.1999)).
The State of Illinois had over fifteen months from when it first appeared before this court in response to the original motion for turnover until it filed its original response to BMO Harris' motion for summary judgment. After it filed that response, the state requested and received additional opportunity for discovery and during this time took the deposition of William Williams, III. This court granted the state's request to examine the files of the Debtor, and ordered that the state take possession of the records of the Debtor from Debtor's counsel. (Order Granting Mot. for Leave, ECF No. 95.) The state admits that it was able to inspect these documents. Indeed, at a status hearing held on May 15, 2015 — over fifteen months after the complaint was filed, and more than two years after the original motion for turnover was filed — the state's attorney confirmed that her client did not contend that it had been deprived of the opportunity to take its discovery. Further, over the months following its initial response to BMO Harris' motion, the court permitted the state to file amended and
In that affidavit, Ms. Lowery stated that on an unspecified date in April 2013 in an unspecified manner she somehow was contacted by William R. Williams, III, who "inquired as to why this Office was not seeking recovery of the amount due for Illinois Estate Tax in the then-pending Vista bankruptcy." According to this account, Williams "indicated that the assets of the Williams Estate were being liquidated in the Vista Bankruptcy." (Lowery Aff. ¶¶ 18-21, ECF No. 66, Ex. A.) Ms. Lowery further stated that she "declined to have further discussions with Mr. Williams on this matter, and directed other Assistant Attorneys General involved with this case to do the same." (Id. ¶ 22.)
The state offers Ms. Lowery's affidavit as its only evidence in support of its claim and to contradict the deposition testimony of Mr. Williams. BMO Harris objects on the grounds that the affidavit is inadmissible hearsay which may not be interposed to avoid summary judgment. See House of Brides, ___ F.Supp.3d ___, 2016 WL 698093. The state concedes that none of the specifically stated exceptions to the hearsay rule applies, relying instead on the residual exception set out in Fed.R.Evid. 807 to argue for its admissibility.
Hearsay is presumptively inadmissible and the burden is on its proponent to overcome that presumption. Messer v. Indiana State Police, 586 F.Supp.2d 1044, 1057 (N.D.Ind.2008). For the residual exception to apply, the state must demonstrate: "(1) the statement has equivalent circumstantial guarantees of trustworthiness; (2) it is offered as evidence of a material fact; (3) it is more probative on the point for which it is offered than any other evidence that the proponent can obtain through reasonable efforts; and (4) admitting it will best serve the purposes of these rules and the interests of justice." Fed.R.Evid. 807(a).
Courts have identified a number of recurring factors evidencing "circumstantial guarantees of trustworthiness, including: the spontaneity of the hearsay statement and lapse of time between the event and the statement, the declarant's motivation and spontaneity, whether the statement was recorded or reaffirmed, and whether the declarant's firsthand knowledge is clearly demonstrated. 2 KENNETH S. BROUN, et al., McCORMICK ON EVID. § 324, at 563-565 (7th ed.2013). Here, the state presents little to demonstrate the trustworthiness of the hearsay statements found in its affidavit. Ms. Lowery's affidavit setting out her purported communication with Mr, Williams is hardly spontaneous having been prepared after a lapse of well over a year from the alleged telephone conversation with Williams. Ms. Lowery, one of the Attorney General's bureau chiefs, is not shown to be a person without interest in the outcome of this proceeding or someone whom Mr. Williams would take into confidence and speak as a confident. Compare, e.g., U.S. v. Vretta, 790 F.2d 651, 659 (7th Cir.1986) (no reason to lie to a close friend). Ms. Lowery gives no details as to when or how the purported communication with Mr. Williams took place other than the general statement that it occurred some time during April 2013. She does not state in the affidavit whether she knew or had any dealings with Mr. Williams before the purported communication or how she knew that it was in fact he who was contacting her, and the court is left to assume that he was a stranger to her at the time of the call. Ms. Lowery states that she had no further discussions on the matter with Mr. Williams after the call. The state does not claim that any contemporaneous record of the call exists nor does it demonstrate or even suggest how its proponent is able to reliably recall the statements months before she signed her affidavit. No recording, or contemporaneous record or any notes of this conversation exists according to the state, and the state does not suggest how she was able to recall its details long after her one conversation with Mr. Williams.
In addition, Rule 807(a)(3) requires that the party offering the hearsay account demonstrate that it is "more probative on the point for which it is offered than any other evidence that the proponent can obtain through reasonable efforts." Huff, 609 F.2d at 291. The state has not explained why it was unable to obtain more probative evidence through reasonable efforts than the unsupported hearsay statement by a not disinterested witness. As discussed above, the state was provided more than adequate time for discovery, and indeed, was granted every opportunity to take discovery it requested. The Debtor's physical records were turned over to it. The state took the deposition under oath of the alleged hearsay declarant, Mr. Williams, yet asked him no questions about the purported conversation with Ms. Lowery even after he flatly denied under oath any knowledge that assets transferred to the children of Lois Williams after her
According to Ms. Lowery's affidavit, Mr. Williams told her while not under oath that assets of the Lois Williams estate were being liquidated in the Debtor's bankruptcy case at a time that he was a defendant in a suit by the Lois Williams estate. The state suggests that Mr. Williams "can be presumed to have wished to induce the state to file its claim in this bankruptcy rather than pursue him personally." (Ill. Am. Suppl. Mem. of Law 6, ECF No. 102.) The state appears to argue however, that Mr. Williams should be presumed to have spoken the truth out of fear of potential civil liability for fraud because at the time the State of Illinois was apparently seeking recovery of taxes from him. But in doing so the state does not explain Mr. Williams' subsequent denial of these allegation while under oath, presumably an even greater cause for caution, if not fear, during his December 2014 deposition.
The transcript of the December 2014 deposition of William Williams reveals that while the state's attorney questioned him about Lois Williams' estate and about the Debtor, he incredibly failed to ask any questions about Mr. Williams' alleged communication with Ms. Lowery in April 2013. Indeed, it appears that the deposition transcript offered by the state contradicts the key points of Ms. Lowery's written account. Thus, the court cannot conclude that Ms. Lowery's hearsay account is "more probative on the point for which [it] is offered than any other evidence [the proponent] can obtain through reasonable efforts." Rosenbaum v. Freight, Lime & Sand Hauling, Inc., 2013 WL 785481, at *3, 2013 U.S. Dist. LEXIS 28289, at *9 (N.D.Ind.2013).
Finally, the state fails to demonstrate that the admission of this hearsay "will best serve the purposes of these rules and the interests of justice." Fed.R.Evid. 807(a)(4); Keri, 458 F.3d at 631. A court is not required to remedy the proponent's simple failure to take discovery or deficient preparations for the adjudication of this claim when it had adequate opportunity to do so. See Abernathy v. Superior Hardwoods, Inc., 704 F.2d 963, 970 (7th Cir.1983) (affirming trial court's refusal to admit the hearsay testimony of party's private investigator when the party could have subpoenaed the records in question and depose the record custodian).
The unsworn self-styled "Foundation Statement" offered by the state in support of admissibility, essentially another unsupported hearsay account, appears if anything to work at cross-purposes to the state's. The vague representations and more importantly, omissions, contained in this submission undermine the argument that the hearsay is trustworthy, more probative and serves the interests of justice. In the Foundation Statement the state admits that no notes of the alleged call were taken and that it is unable to determine even the actual date of the alleged conversation. The Foundation Statement then acknowledges that Mr. Williams has denied making those statements. The hearsay statement contained in email correspondence attached to the Foundation Statement appear to have little relevance to the admissibility issue, as they purportedly relate to a potential settlement of IDOR's personal claims against Mr. Williams. Thus, the circumstances alleged in the Foundation Statement about the affidavit do not enable this court to conclude that the hearsay account of the
The state has failed to demonstrate that its admittedly hearsay evidence offered in opposition to the BMO Harris motion meets the requirements of Fed.R.Evid. 807. Therefore, the purported statements attributable to Mr. Williams contained in Ms. Lowery's affidavit are inadmissible. As such they cannot be used to preclude summary judgment. See House of Brides, ___ F.Supp.3d ___, 2016 WL 698093. The State of Illinois also fails to present admissible evidence that even supports its assertion that any assets liquidated in the Debtor's bankruptcy case were in fact assets of the Williams Estate or traceable proceeds of assets of the Williams Estate or that, based on any interest it may have regarding the Williams probate estate, it holds a lien on the proceeds of the Riverside Property, the Meridian Property or any other assets sold in the January 2014 sale approved by this court. Further, the State of Illinois does not dispute BMO Harris' lien in the proceeds. Thus, because the state fails to demonstrate that it has a valid lien interest in the proceeds or that a genuine issue of material fact otherwise exists regarding BMO Harris' lien in the proceeds, summary judgment must be entered in favor of BMO Harris and against the State of Illinois.
IDOR concedes that it has no right to the $10,738.97 portion of the sale proceeds attributable to fuel inventory. (See IDOR Mem. of Law, ECF No. 71.) The department also concedes that BMO Harris "held valid liens against the Meridian and Riverside Properties." Moreover, IDOR has not alleged that it held any lien interest in the Riverside Property that would be superior to BMO Harris' mortgage interest. To the contrary, IDOR states that it does not "argue that it has priority over BMO Harris based on any tax liens that IDOR recorded" and "is not asserting a claim to the proceeds based on liens recorded against the Debtor." (Id.) Instead, it argues either that it was granted a right in the proceeds by this court's sale order as "adequate protection" for its extinguished right to collect from the purchaser or that all or a portion of the escrowed funds are not proceeds from the sale of the real estate.
BMO Harris does not dispute, at least for purposes of this motion, that as of the petition date the Debtor owed $707,109.60 in Retailers' Occupation Taxes and related pre-petition penalties and interest and that the IDOR also filed a claim for Motor Fuel Tax liability in the amount of $989,635.31. (BMO Resp., ECF No. 81.) Both IDOR claims, (Claim Nos. 13-1, 14-1), were filed after the sale was completed.
Under state law, the Illinois Department of Revenue can instruct a purchaser of the major part of the stock of goods, furniture or fixtures, machinery and equipment or the real property of a business subject to the Illinois Retailers' Occupation Tax Act to withhold a portion of the purchase price to cover the seller's outstanding tax liabilities. If the purchaser does not remit the appropriate amount of withheld money to IDOR upon demand, the purchaser becomes liable to the department for the seller's outstanding tax liabilities up to the reasonable value of property acquired. 35 ILCS 120/5j
In this case, however, IDOR failed to appear or object to the Debtor's motions to approve the sale of the Riverside and Meridian Properties, despite receiving notice of the motions, and the court entered an order approving the sales "free and clear of all liens with all liens to attach to the proceeds pursuant to 11 U.S.C. § 363." (Order Granting Mot. to Sell, ECF No. 69.) IDOR initially attempted to enforce the Debtor's tax liability against the purchaser, Kelley Williamson, but this court found that "any potential liability of Kelley Williamson under 35 ILCS 120/5j and 35 ILCS 5/902 is an `interest' subject to Section 363(f)" and, that "IDOR's `interest' was extinguished pursuant to Section 363(f) of the Bankruptcy Code, as part of the sale of the Debtors' property during the underlying bankruptcy case." In re Vista Marketing Group Ltd., 2014 WL 1330112 (Bankr.N.D.Ill. Mar. 28, 2014).
IDOR argues that, despite its failure to timely assert its interest under the Illinois tax statutes, this court did grant it adequate protection in the sale order. To support this, the department points to language in the order stating that "[a]ll remaining proceeds from the sale of the Riverside Property, with all liens, claims, encumbrances and other interest into and against those remaining proceeds to attach thereto are to be held subject to further order of the Bankruptcy Court." (Order Granting Mot. to Sell, ECF No. 69.) IDOR argues that its interest or right to be paid attached to the proceeds of the sale. But even if that is true, BMO Harris' mortgage lien in the property also attached to the proceeds. BMO Harris' argument is not that IDOR had no lien or other interest in the proceeds. Rather, the creditor claims that its mortgage interest in the proceeds is prior and superior to the interest of any other party. Were there any ambiguity in the sale order itself, the sale motion makes clear that any liens, claims, encumbrances or other interests into and against the Riverside Property attached to the proceeds of sale in the same priority as they were against the Riverside Property prior to the sale. (See Mot. to Sell Riverside Prop. ¶ 7, ECF No. 44 ("with any such liens or encumbrances to attach to the proceeds of sale in the same order of priority that such liens and encumbrances possessed against the Real Property").)
IDOR does not allege let alone demonstrate that it had a lien or other interest in the Riverside Property senior to BMO Harris' mortgage interest, and for that reason has failed to prove that it has a
Admitting that it is not asserting a lien, IDOR argues that under 35 ILCS 120/5j, the Debtor would have been unable to sell the Riverside Property outside of bankruptcy without IDOR having a right collect its tax debt from either the proceeds of the sale or from the purchaser. From this the department appears to argue that since it was unable to collect the tax debt from Kelley Williamson it should be able to collect the tax debt from the sale proceeds. But, the issue in this Adversary Proceeding is not IDOR's rights against the purchaser
To the contrary, in one of its responses to BMO Harris' original motion for turnover, IDOR appears to concede that Section 120/5j would not apply to a judicial sale in connection with a foreclosure proceeding. The department states in its submissions that if a secured creditor finds a debtor's proposed sale to a third party unacceptable, "it is free [to] reject the proposed bulk sale by refusing to release liens and instead foreclose and either take back its collateral or have it sold at a sheriffs sale in which case transferee liability under § 5j does not apply." (IDOR Obj. to Mot. for Turnover ¶ 18, ECF No. 100.) IDOR suggests that the "result which applies outside of bankruptcy should also apply to sales made in bankruptcy," (Id.) By this, IDOR presumably means that a Section 363 sale in bankruptcy should be treated like a non-judicial sale
However, even were 35 ILCS 120/5j to apply to Section 363(f) sales, IDOR does not dispute that Section 363(f) can terminate the right or "interest" that the department would otherwise have under state law to collect the seller's tax obligation from the purchaser in a sale authorized under Section 363(f). Instead, IDOR argues that it has the right to adequate protection of such interest. But to the extent that IDOR seeks such adequate protection against the sale proceeds, the department's argument ignores the fact that BMO Harris was also entitled to adequate protection before its mortgage interest was terminated. It is uncontroverted that both claimants had notice of and the opportunity to appear at the hearing on the motions to authorize the sale of the properties.
The department correctly notes that two recent decisions by the district court have found that IDOR's right to seek recovery from a bulk sale purchaser under 35 ILCS 120/5j has value that may be subject to adequate protection before such right is extinguished by a Section 363(f) sale. In re Elk Grove Vill. Petroleum, 510 B.R. 594, (Bankr.N.D.Ill.2014): In re Naperville Theater, LLC, 2016 WL 930659 (N.D.Ill., March 10, 2016). However, neither of those cases held that the department has a right to recovery to the prejudice of a holder of a senior interest in the collateral. In the Elk Grove and Naperville
The Bankruptcy Code provides for adequate protection of certain interests in property, but such protection must generally be requested. For example, the holder of an interest that will be extinguished by a Section 363(f) sale has "the right to seek protection under section 363(e), and upon request, the bankruptcy court is obligated to ensure that their interests are adequately protected." Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548 (7th Cir.2003) (emphasis added). Section 363(e) provides that "on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest." 11 U.S.C. § 363(e) (emphasis added). If a secured creditor or interest-holder fails to object or request adequate protection, they risk waiving their right to such protection. See, e.g., In re Greives, 81 B.R. 912, 965 (Bankr.N.D.Ind.1987) ("The secured creditor should not be allowed to file an adequate protection motion and obtain an order that would require substantial adequate protection payments retroactively"); In re T.A. Brinkoetter & Sons, Inc., 2012 WL 1865485 (Bankr.C.D.Ill. May 22, 2012) ("The concept of waiver is implicit in those cases that hold that a secured creditor's right to begin receiving adequate protection does not arise until the creditor files a motion requesting such relief.") (citing In re Blackwood Assocs., L.P., 153 F.3d 61, 68 (2nd Cir.1998); In re Brian Wise Trucking, Inc., 386 B.R. 215 (Bankr. N.D.Ind.2008)). As noted by the bankruptcy court in In re Robinson, "a creditor is entitled to adequate protection only from the time the same is requested. `Colloquially expressed, if you don't ask for it, you won't get it.'" 225 B.R. 228, 233 (Bankr.N.D.Okla.1998) (citing In re Kain, 86 B.R. 506, 512 (Bankr.W.D.Mich.1988); In re Continental Airlines, Inc., 134 B.R. 536, 544 (Bankr.D.Del.1991); In re Cason, 190 B.R. 917, 928 (Bankr.N.D.Ala.1995)). While the trustee or debtor-in-possession "has the burden of proof on the issue of adequate protection," 11 U.S.C. § 363(p)(1), the "entity asserting an interest in property has the burden of proof on the issue of the validity, priority, or extent of such interest." 11 U.S.C. § 363(p)(1). The "onus [is] on the creditor, rather than on the debtor, to seek judicial relief if it believes that its interests are not adequately protected." Thompson v. General Motors Acceptance Corp., 566 F.3d 699, 707 (7th Cir.2009). Here, there is no dispute that the department had sufficient notice of the motions to approve sale, but failed to object to the motions before they were granted or to timely appeal or seek reconsideration of the orders.
IDOR refers the court People's Capital & Leasing Corp. v. Big3D, Inc. (In re Big3D, Inc.) as support for its assertion that it is entitled to receive retroactively adequate protection. 438 B.R. 214 (9th Cir. BAP 2010). There the Ninth Circuit Bankruptcy Appellate Panel, sitting en banc, affirmed the bankruptcy court's refusal to grant retroactive adequate protection. Id. However, numerous features of
Moreover, even if the department did have a right to adequate protection, it does not demonstrate that it has such a right to the prejudice of BMO Harris' interest in the Riverside Property or proceeds thereof. Section 361(2) provides that adequate protection may be provided by providing an additional or replacement lien in other property. The provision does not specifically authorize the grant of a lien in property in which another entity has an interest. But even if a grant of such a lien is permitted, the interest of the other creditor must be adequately protected. 11 U.S.C. § 363(e). This is most clearly seen in Section 364(d)(1), which allows for the grant of a priming lien to secure post-petition credit only if "there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted." 11 U.S.C. § 364(d)(1). In other words, even if IDOR had a right to adequate protection, it did not have a right to BMO Harris' collateral. Nothing in the sale order suggests that IDOR was granted any interest in the proceeds of sale ahead of BMO Harris. To the contrary, as discussed above, the order indicates that BMO Harris' senior interest in the Riverside Property was to be transferred to a similarly senior interest in the proceeds of sale.
Finally, IDOR argues that the funds in escrow are not really proceeds of
To the contrary, the history of the motion and order tends to support the meaning of the sale order exactly opposite to the department's proposed interpretation. The original motion to approve the sale actually made reference to occupation taxes, stating that approval of the sale "would pay off all liens on said property and, by virtue of paying off liens filed on behalf of the Illinois Department of Revenue for unpaid retailer's occupation taxes, would also serve to remove such liens from other real estate owned by the Debtor." (Mot. to Sell Riverside Prop. ¶ 6, ECF No. 44.) The original proposed order attached to the motion provided for payment not only of real estate taxes but also payment of "any other taxes related to the sale of the property." (Id.) However, BMO Harris objected to the motion as originally proposed, and specifically objected to any payment to IDOR. (BMO Obj., ECF No. 54.) BMO Harris objected that IDOR had not recorded any notices of liens on the Riverside Property and that the sale proceeds were not enough to even pay off BMO Harris' full mortgage indebtedness. (Id.) Thus BMO Harris contended that the order should provide for payment to: "1) BMO Harris Bank all amounts due under Note 4; 2) all amounts due and owing to the U.S. Small Business Administration and the Rockford Local Development Corporation; and 3) all remaining proceeds to BMO Harris Bank under Notes 1, 2, and 3." (Id.)
Eventually, the parties contesting the motion to authorize the sale agreed on a form of the order to propose to this court which provided for payment first to BMO Harris on its first mortgage, second to the United States S.B.A./Rockford Local Development Corporation on its second mortgage, and the remaining proceeds to be held subject to court order with all liens, claims, encumbrances and other interests to attach to the remaining proceeds. After further hearing on the matter the court accepted and entered that proposed order. (Order Granting Mot. to Sell, ECF No. 69). While it is true that the final order did not expressly determine who was entitled to the escrowed proceeds, there is no evidence that the compromise was intended specifically to preserve IDOR's rights. As discussed above and in this court's earlier decision on the effect of the sale of the properties under Section 363(f), IDOR had not objected to the motion
Because the sale order preserved the pre-sale priority of interests in the proceeds of the Riverside Property, and because there is no dispute of genuine fact that BMO Harris' interest in both the Riverside Property and the proceeds thereof are superior to the rights and interests of IDOR, summary judgment must be entered in favor of BMO Harris and against the department.
For the foregoing reasons, BMO Harris' motion for summary judgment is granted and IDOR's cross-motion for summary judgment is denied. Summary judgment shall be entered in favor of BMO Harris and against IDOR and the State of Illinois on its Amended Adversary Complaint, and judgment shall be entered against IDOR and in favor of BMO Harris on its counter-complaint. The Cross Complaint of IDOR is rendered moot.
A separate order shall be entered giving effect to the determinations reached herein.
