In re Montgomery Ward, L.L.C.

469 B.R. 522

In re MONTGOMERY WARD, L.L.C., et al., Reorganized Debtors.

No. 00–4667 (KG).

United States Bankruptcy Court, D. Delaware.

April 20, 2012.

Gregg M. Galardi, Skadden Arps Slate Meagher, Wilmington, DE, Daniel B. Butz, Wilmington, DE, Richard H. Cross, Cross and Simon, LLC, Wilmington, DE, Faye B. Feinstein, Quarles and Brady LLP, Chicago, IL, for Debtors.

MEMORANDUM OPINION¹

KEVIN GROSS, Bankruptcy Judge.

INTRODUCTION

Montgomery Ward, LLC (“Montgomery Ward”) once operated one of the largest retail organizations in the United States. To conduct its business, Montgomery Ward and its affiliates (collectively, the “Debtors”) entered into contracts for the construction and operation of its department stores. Unfortunately, circumstances caused the Debtors to file for bankruptcy twice within three years. This second case resulted in the filing of various claims based on the contracts and a lengthy claims resolution process, appeals and ultimately, remand. Consequently, the Court now has before it the Debtors' Motion to Disallow Certain Claims [Dkt. Nos. 2737 & 3631], Dika–Ward's Motion for Summary Judgment [Dkt. No. 6492], and the Plan Administrator's Cross–Motion for Summary Judgment [Dkt. No. 6522]. Resolution of these motions turns on whether the agreements between the Debtors and Dika–Ward, as assignee, were true leases or a disguised financing arrangement. For the reasons explained below, the Court will deny both summary judgment motions.

RELEVANT FACTS

Montgomery Ward owned a parcel of land (the “Land”) at 2500 W. Jefferson in Joliet, Ill., the site for a planned shopping mall that had not yet been constructed. On April 18, 1973, Montgomery Ward Development Corp. (“MWD”) entered into a reciprocal construction, operation and easement agreement (the “RCOEA”) with Joliet Mall Associates (“Joliet Assocs.”) and Weiboldt Stores, Inc. (“Weiboldt”) to develop the Jefferson Square Mall on the Land and two adjacent parcels of land owned by Joliet Assocs., and Weiboldt. Pursuant to the RCOEA terms, MWD and Weiboldt would each construct a department store on their respective parcels of land and pay a pro rata share of common area maintenance expenses (“CAM expenses”) as well as other maintenance and utility charges. Upon 90 days' written notice to Joliet Assocs., MWD could opt out of the CAM expenses, relieving it of the obligation to share the costs and expenses of the contractor for the common area.

On January 2, 1974, MWD entered into a contract (the “Ground Lease”) with Jolward Associates Limited Partnership (“Jolward”) to construct a department store (the “Building”) on the Land. Pursuant to the Ground Lease, MWD leased the Land to Jolward, which required Jolward to construct the Building. MWD also agreed to indemnify Jolward for any expenses or liabilities incurred as a result Jolward's leasehold interest in the Land. On October 1, 1974, Jolward leased the Building and the Land to Montgomery Ward & Co., Inc. (“MWC”) via a lease and sublease agreement (the “Sublease Agreement”).

State Farm Life Insurance Co. (“State Farm”), agreed to finance the construction project in exchange for a note from Jolward, secured by the assignment of Jolward's rights in the Ground Lease, the Building, and Sublease Agreement, including the direct payment of obligations owed by MWC under the Sublease Agreement. Additionally, MWD granted State Farm a non-recourse security interest in its rights to the RCOEA and the Land. Thus, upon default, State Farm had the right to accelerate the obligations under the note and foreclose on the property, without exposing MWD to personal liability.

The First Bankruptcy

In 1997, Montgomery Ward and its affiliated entities filed for chapter 11 bankruptcy protection. State Farm, as assignee of Jolward, filed an unsecured claim for real estate taxes due under the Sublease Agreement and past due CAM expenses. State Farm also filed a secured claim for the balance of the note. Montgomery Ward scheduled two claims by Jefferson Square Mall, LLC (“Jefferson”), which had acquired Joliet Assocs.'s interest in the RCOEA after Joliet Assocs. was placed in receivership. Jefferson had not filed any claims in the bankruptcy proceeding. Pursuant to the reorganization plan, Montgomery Ward assumed the Sublease Agreement. Although Montgomery Ward initially disputed State Farm's claim under the Sublease Agreement, on April 20, 2000, the parties entered into a settlement that resulted in State Farm receiving the full amount of its allowed unsecured claim and retaining its secured claim. Montgomery Ward's confirmed plan provided for no distribution to State Farm on account of the mortgage claim.

The Second Bankruptcy

On December 28, 2000, less than 18 months after emerging from bankruptcy, Montgomery Ward and affiliates filed a second chapter 11 petition, this time seeking to liquidate all of its assets. State Farm filed a secured claim for the full amount of the note. Jolward filed a claim for unpaid rent, taxes, maintenance, and indemnification of CAM expenses. Jefferson filed three claims for unpaid CAM expenses. Dika–Jefferson, an affiliate of Dika–Ward that purchased the Jefferson Square Mall in 2000, also filed three claims for unpaid CAM expenses. After the claims were filed, Dika–Ward purchased State Farm's secured claim and Jolward's unsecured claim.

Montgomery Ward settled with Dika–Jefferson, satisfying the unpaid CAM expenses claim. Pursuant to a stipulation approved by the Court in October 2001, Montgomery Ward conveyed the Land to Dika–Jefferson by quitclaim deed and paid Dika–Jefferson, which fully satisfied Dika–Jefferson and Jefferson's claims against Montgomery Ward.² In 2001, Montgomery Ward rejected the Ground Lease and the Sublease Agreement and objected to Dika–Ward's claim for damages from rejection of the Sublease Agreement. Montgomery Ward's plan administrator (the “Plan Administrator”) filed a supplemental objection (the objection and supplemental objection are jointly referred to as the “Objection”) to the claim, asserting that the Sublease Agreement was not a true lease, but rather a structured financing and, as such, limited Dika–Ward's remedy to only the secured collateral.

The Motions

Dika–Ward opposed the objection by filing the Motion for Summary Judgment, arguing that Montgomery Ward was personally liable because the reorganization plan transformed the non-recourse loan into a recourse loan after the first bankruptcy pursuant to Bankruptcy Code § 1111(b) and that Dika–Ward was entitled to rejection damages under the Sublease Agreement. Dika–Ward further argued that Montgomery Ward's first confirmed plan precluded the Plan Administrator from challenging the nature of the Sublease Agreement based on principles of res judicata, equitable estoppel, and waiver. The Plan Administrator then filed the Cross–Motion for Summary Judgment, asserting the same arguments set forth in the Objection.

After a hearing on the Motions, the bankruptcy court granted summary judgment in favor of Dika–Ward based on res judicata. On appeal, the district court affirmed the decision, agreeing with the reasoning of the bankruptcy court, but the Third Circuit reversed, explaining that res judicata did not apply because the Plan Administrator was not a privy of the debtor in the first bankruptcy proceeding. After holding that the Plan Administrator was not barred by res judicata, equitable estoppel, or waiver, the Third Circuit remanded the case to the bankruptcy court to allow the Plan Administrator to challenge the nature of the Sublease Agreement. In re Montgomery Ward, LLC, 634 F.3d 732 (3d Cir.2011).

Now, on remand, Dika–Ward argues that the Plan Administrator's Supplemental Objection is deficient because the allegation regarding the economic life of the Building is unsupported. Dika–Ward further argues that the Supplemental Objection relies on inapplicable legal authority because the Illinois Uniform Commercial Code does not apply to this real property transaction and, even if it does, the lease constitutes a true lease.

DISCUSSION

Jurisdiction

Bankruptcy courts possess jurisdiction over all cases and civil proceedings under title 11 and proceedings under, arising in, or related to a case under title 11. 28 U.S.C. §§ 157, 1334(b). A proceeding is related to a case under title 11 “if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which, in any way, impacts upon the handling and administration of the bankruptcy estate.” Sportsman's Warehouse v. McGillis/Eckman Investments–Billings, LLC (In re Sportsman's Warehouse, Inc.), 457 B.R. 372, 385 (Bankr.D.Del.2011) (quoting Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984)). Bankruptcy courts have the statutory authority to hear and determine the “allowance or disallowance of claims against the estate.” 28 U.S.C. § 157(b)(2)(B).

After the confirmation of a reorganization plan, the bankruptcy court's jurisdiction narrows to only matters that bear a “close nexus” to the bankruptcy proceeding, including claims that “affect the interpretation, implementation, consummation, execution, or administration of the confirmed plan.” Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 167 (3d Cir.2004). Although it requires the application of relevant state law, interpretation of a lease agreement necessary to the claims allowance process may bear a close nexus to the bankruptcy proceedings that would provide the court with related to jurisdiction over the claim. See Sportsman's Warehouse, 457 B.R. at 387.

Here, as part of the claims allowance process, the parties raised the issue of whether the Ground Lease and Sublease Agreement are truly leases or instead constitute a financing arrangement. A determination of the nature of these agreements is imperative to the claims allowance process as the Bankruptcy Code provisions treat...