In re D/C Distribution, LLC

617 B.R. 600

IN RE: D/C DISTRIBUTION, LLC, Debtor.

Case No. 07bk12776

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

Signed July 21, 2020

Attorney for Chapter 7 Trustee: Jeremy C. Kleinman, FrankGecker, LLP, Chicago, IL

Attorneys for Asbestos Claimants: Reed A. Heiligman, Hiltz Zanzig & Heiligman LLC, Chicago, IL, Bryn G. Letsch, Brayton Purcell LLP, Novato, CA

Attorney for Kaanapali Land, LLC: Richard G. Ziegler, Mayer Brown LLP, Chicago, IL

Attorneys for the United States of America: Karl Fingerhood, Patricia L. Hurst, United States Department of Justice, Washington, D.C., David DeCelles, Office of the United States Attorney for the Northern District of Illinois, Chicago, IL

Attorneys for Fireman's Fund Insurance Company: Todd C. Jacobs, John E. Bucheit, Bradley & Riley PC, Chicago, IL, Mark D. Plevin, Tacie H. Yoon, Crowell & Moring LLP, Washington, D.C.

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

This matter comes before the court on the Motion for Relief from the Automatic Stay as to Certain Asbestos Claimants [Dkt. No. 224] (the "Motion") filed by Roderick Johnston, Rosalyn Johnston, Gary Neto, Larry Walker (through his estate), Thomas Sinclair, Carlton Keathley and Douglas Kuznik (collectively, the "Claimants"). The Claimants seek relief from the automatic stay to pursue in another forum asbestos-related personal injury claims against D/C Distribution, LLC (the "Debtor") nominally, though they seek not to recover monetarily from the Debtor or its bankruptcy estate but rather to recover solely to the extent of and from any available insurance coverage. Kaanapali Land Company, LLC ("KLLLC"), the United States of America, on behalf of the Department of Defense, the Department of the Navy, and the Environmental Protection Agency (the "United States"), Fireman's Fund Insurance Company ("FFIC" and together with KLLLC and the United States, the "Objecting Parties") and Alex D. Moglia, chapter 7 trustee (the "Trustee"), filed objections or responses to the Motion. The Motion has been fully briefed and the parties have appeared before this court on April 13, 2020 (the "Hearing"), at which Hearing the court heard oral argument on the Motion. The Motion, therefore, is ripe for determination.

For the reasons stated below, the Claimants have established both cause for relief from the stay and that the Debtor lacks equity in the subject property. The Motion will, therefore, be granted by separate order entered concurrently with this Memorandum Decision.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. §§ 101, et seq . (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred has statutory authority to enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1), (c). Absent consent, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in noncore matters, where the matter is either one that falls within the public rights exception, id ., or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g. , Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S. Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

Motions to terminate, annul, or modify the automatic stay are core proceedings arising under the Bankruptcy Code in which the bankruptcy court is empowered to enter final orders. 28 U.S.C. § 157(b)(2)(G) ; In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig. , 140 B.R. 969, 976–77 (N.D. Ill. 1992) ; In re Quade , 482 B.R. 217, 221 (Bankr. N.D. Ill. 2012) (Barnes, J.), aff'd , 498 B.R. 852 (N.D. Ill. 2013). The automatic stay arises from federal statutory law and only within the context of a bankruptcy case. As such, the court has constitutional authority to hear and determine any motion seeking relief form the automatic stay, including the Motion. The Klarchek Family Tr. v. Costello (In re Klarchek ), 508 B.R. 386, 389 (Bankr. N.D. Ill. 2014) (Barnes, J.). Further, no party has objected to the court entering final orders on the Motion and thus all parties have impliedly consented to this court's jurisdiction. See Wellness , 135 S. Ct. at 1939 ; Richer , 798 F.3d at 490.

Accordingly, determination of the Motion is within the scope of the court's jurisdiction and statutory and constitutional authority.

HISTORY

This controversy, much like this case, has existed for some time. The Debtor filed for chapter 7 bankruptcy relief over thirteen years ago, on July 17, 2007. The Debtor, formerly known as AMFAC Distribution Corporation, was the successor-in-interest by merger to three California corporations, who merged between 1976 and 1979. The companies are described by the Claimants as plumbing supply houses.

The Claimants allege that they have sustained asbestos-related injuries due to exposure caused by the Debtor or its pre-merger predecessors and that the automatic stay in this case is preventing them from seeking redress. As such, they ask for relief from that stay to seek recovery against insurance policies under which the Debtor and/or its predecessors were defended and indemnified during the relevant time periods (the "Policies"). Recovery will only be sought to the extent of and from insurance coverage.

No one disputes that the Debtor's bankruptcy estate has limited funds. This means that the Policies are one of the few potential sources of recovery for eligible claimants. The coverage contained in the Policies is described by the Trustee as "ample" and likely somewhere in excess of $100 million. The Trustee argues that he cannot, however, determine the insurance policy or policies potentially triggered by the Claimants' claims without further information.

Further complicating the matter, this is not the first time this dispute has come before the bankruptcy court. A nearly identical motion was filed in this case in 2015. Motion for Relief from the Automatic Stay [Dkt. No. 86] (the "Prior Motion"). The Prior Motion sought relief from the automatic stay for eight asbestos claimants, two of which are involved with the present Motion.¹ Over the opposition of the same Objecting Parties and the Trustee, the judge to whom this case was then assigned granted the Prior Motion. Order re: Motion for Relief from the Automatic Stay [Dkt. No. 95] (the "Prior Order"). Each of the Objecting Parties and the Trustee filed motions to reconsider the Prior Order, all of which were withdrawn or denied. Orders [Dkt. Nos. 110, 111, 113, 114]. Thereafter, the Objecting Parties filed appeals of the Prior Order to the District Court. Notices of Appeal [Dkt. Nos. 119, 123, 126].

On appeal, the District Court found that the bankruptcy court had not fully applied the factors set forth in In re Fernstrom Storage & Van Co. , 938 F.2d 731, 735 (7th Cir. 1991), and reversed and remanded the Prior Motion for further proceedings. In re D/C Distribution LLC , Case Nos. 15 C 5092, 2016 WL 1073094 (N.D. Ill. March 18, 2016) (the " Appellate Opinion").

Just prior to the issuance of the Appellate Opinion, the bankruptcy case was reassigned from the prior judge to the undersigned, Reassignment Order [Dkt. No. 159], so that this case could be heard alongside the pending, prior case of the Debtor's affiliate, Oahu Sugar Company, LLC ("Oahu Sugar").² No party, however, informed the undersigned of the unresolved status of the Prior Motion in light of the Appellate Opinion.³ The case thus continued without any resolution of the issues raised in the Appellate Opinion.

For many years thereafter, this case and the Oahu Sugar case slowly ground on as the Objecting Parties and the Trustee, both in his capacity as chapter 7 trustee of this case and also in his capacity as the chapter 7 trustee appointed in Oahu Sugar's case, attempted to settle disputes regarding environmental response and defense costs related thereto. A year ago, on the motion of the Trustee in his capacity as chapter 7 trustee in the Oahu Sugar case, and in order to facilitate a resolution of these issues, the court modified the automatic stay in ...