In re American Telecom Corp.

319 B.R. 857

In re AMERICAN TELECOM CORP., Debtor.

No. 03 B 46296.

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

September 21, 2004.

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Paul M. Heller, for Movant.

Bert J. Zaczek, Chicago, IL, for Respondent.

AMENDED MEMORANDUM OPINION on Siemens'"Motion for Assessment of Attorney's Fees"

JACQUELINE P. COX, Bankruptcy Judge.

After the Court granted creditor Siemens Information and Communications Network's ("Siemens") motion to dismiss the Chapter 7 case of debtor American Telecom Corporation ("ATC") and denying the debtor's motion to reconsider the same, Siemens' instant "Motion for Assessment of Attorney's Fees" brought pursuant to Federal Rule of Bankruptcy Procedure 9011 was still before the Court. Specifically, Siemens requested that it be reimbursed for the legal work its attorney performed in response to the debtor ATC's voluntary petition in an amount of $5,500 to be assessed against ATC's attorney.

A federal trial court may retain jurisdiction after the dismissal of a case for the limited purpose of adjudicating Rule 11 (or Rule 9011) litigation, as this Court has done here. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 395, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); e.g., Matter of King, 83 B.R. 843, 845 (Bankr.M.D.Ga.1988). Motions for Rule 9011 sanctions are "core" proceedings over which bankruptcy courts have referred jurisdiction under 28 U.S.C. § 157(a)-(b)(2)(A) and § 1334(b). See In re Wulfekuhl, 267 B.R. 856, 857 (Bankr.W.D.Mo.2001).

Background and Procedural History

Siemens obtained a judgment of $173,000 for copyright and patent infringement against ATC in the U.S. District Court for the Northern District of Georgia on August 10, 2000, while ATC's antitrust counterclaims against Siemens in the same lawsuit were defeated on a summary-judgment motion. See Telecomm Tech. Servs. v. Siemens Rolm Communs., 150 F.Supp.2d 1365 (N.D.Ga.2000), affirmed, 388 F.3d 820 (11th Cir.2004). ATC and several other co-defendants appealed this judgment to the U.S. Court of Appeals for the 11^th Circuit, though ATC did not post an appeal bond to stay enforcement of the money judgment. Consequently, during January 2001, Siemens began collection efforts by registering its foreign judgment in Illinois, where ATC is domiciled. By the time Siemens conducted its citation-to-discover-assets proceeding in 2002, the debtor ATC had not conducted any substantial operations since the end of 2001 and had virtually no assets from which Siemens could collect the judgment. Siemens initiated an additional Illinois collection suit against ATC's two shareholders/principals, the Glubisz brothers, in an effort to pierce ATC's corporate veil under state law. A state court judge subsequently consolidated the two collection suits and set the final trial date for the alter-ego suit to be November 17, 2003. After the attorney for ATC and the Glubisz brothers brought two unsuccessful motions to stay the collection effort until the appeal pending in the 11^th Circuit was resolved, he filed this Chapter 7 bankruptcy case for ATC four days before the alter-ego trial. Relying on Seventh Circuit bankruptcy authority, ATC asserted to the Illinois court that the alter-ego action against the Glubisz brothers is an asset of the bankruptcy estate that can only be prosecuted by the Chapter 7 case trustee. The state court judge obliged its request to independently stay the alter-ego trial regardless of whether the automatic stay of 11 U.S.C. § 362(a) applied to the same, thereby giving deference to this Court's interpretation of the automatic stay provisions protecting bankruptcy-estate property.

ATC originally filed the Chapter 7 listing Siemens as its only creditor. Later it asserted that Berry & Leftwich, the law firm representing it in the 11^th Circuit appeal, would have a contingent claim as a result of its contingency contract with this firm; it also amended its schedules to reflect the claims of ATC's two insiders, the Glubisz brothers, for accrued and unpaid rent and salary obligations in the amounts of $170,250 and $115,500.

In response to the Chapter 7 filing, Siemens filed a "Revised Motion to Dismiss" the bankruptcy case of ATC and an alternative "Request to Lift Stay" to permit the alter-ego action against the Chapter 7 debtor's two principals to proceed in the Circuit Court of Cook County. Specifically, Siemens contended that "cause" for dismissal was present within the meaning of 11 U.S.C. § 707(a) because ATC had filed the bankruptcy petition in bad faith and for the purpose of hindering and delaying Siemens in what was essentially a two-party dispute.

In its opinion granting Siemens' motion to dismiss, In re American Telecom Corporation, 304 B.R. 867 (Bankr.N.D.Ill.2004), the Court looked to the underlying purposes of corporate Chapter 7 cases and found that they have a very limited purpose: the fair and orderly liquidation of corporate assets for the benefit of creditors. The Court found that administration of the two causes of action — the defeated antitrust counterclaim pending on appeal and the alter-ego action against nondebtor insiders — did not implicate the fair and orderly liquidation of corporate assets to creditors in any way except the most technical sense. That is, depending on the outcome of the appeal, ATC's Chapter 7 was either a no-asset case or an asset case producing a pot a money that did not require bankruptcy administration to distribute. Moreover, the use of § 362(a) in a liquidation case like ATC's is potentially subject to manipulation in favor of the debtor's insiders without any substantial corresponding benefit to noninsider creditors. Thus, the Court found that the case was primarily a tool for thwarting the collection efforts of a single creditor holding a disputed money judgment against an inoperative corporate shell and attempting to look to the shareholders for judgment satisfaction. Two matters that were inextricably linked had been stayed: (1) the citation-to-discover-assets proceeding stemming from Siemens' $173,000 money judgment and (2) the alter-ego action to collect the same amount from ATC's two principals. Due to the inextricable link, the Court concluded that the replacement of an appeal bond and/or the stay in two different civil actions did not count any more than in those cases in which an appeal-bond substitute in a single matter was an insufficient justification for a bankruptcy case.

ATC brought a motion for reconsideration under Bankruptcy Rule 9023 in response to the Court's "Memorandum Opinion and Order" dismissing its bankruptcy case. ATC contended that the Court made a manifest error of fact in basing its decision on the conclusion that the case involved only one noninsider creditor rather than eight noninsider creditors. It relied on the "Cost Sharing Agreement Regarding Rolm Company Litigation" ("CSA"), a contract to which ATC is a party, to assert the existence of four additional creditors other than the law firm handling the antitrust litigation, Berry & Leftwich. These other creditors, like ATC, had joint contractual obligations to make periodic deposits to a cost trust fund for common litigation expenses and to pay an additional assessment for any expense that was predominantly attributable to a single party's own claim and defense against the Siemens-related entities; ATC's own assessments due the fund totaled at least $31,894.60 in unpaid litigation expenses. Berry & Leftwich and the other four parties to the CSA also had a lien on ATC's antitrust counterclaim against Siemens for the purpose of securing payment of the various costs and expenses. The CSA made the law firm the authorized agent for handling the potential proceeds of the antitrust litigation and distributing them first to satisfy the CSA expense claims that were secured by the same proceeds.

In denying the Rule 9023 reconsideration motion, the Court found that the legal arrangement created by the CSA had been inadequately disclosed at the hearing on the § 707(a) motion to dismiss and that the bankruptcy schedules and creditor lists had never adequately supported the oral-argument assertion that additional creditors existed — even though Siemens had argued all along that the original petition's identification of it as the lone creditor a few days before the alter-ego trial was circumstantial evidence of an improper purpose for the filing. Furthermore, the Court found that the contention involving additional creditors was forfeited the first time it considered the merits of ATC's position on the § 707(a) motion, meaning that the argument was a new post-hearing argument that would not be considered for Rule 9023 purposes.

In denying the Rule 9023 reconsideration motion, the Court further held that even after considering ATC's new argument, the sheer number of creditors created by the CSA did not solve a number of the problems noted in the original decision American Telecom, 304 B.R. 867 (Bankr.N.D.Ill.2004). One additional problem was the potential lack of assets for distribution in this particular Chapter 7 case and not the lack of creditors; moreover, the Court noted that the type of asset that may one day exist was not one that would require bankruptcy administration. ATC either had no significant assets to satisfy any of it debts, or it had coming a future judgment fund from which the expenses under the CSA could be subtracted and paid by the law firm acting as a trustee for that fund. In the latter scenario, Siemens' related infringement claim will have been either defeated or offset by a mutual antitrust liability, and ATC's surplus fund would presumably not require a federal proceeding to apportion between its two shareholders. In fact, the Court found that the addition of other creditors at a late stage of the game highlighted the necessity of such an effort to...