In re Rosebud Farm, Inc.

660 B.R. 222

IN RE: ROSEBUD FARM, INC., Debtor.

Case No. 18bk24763

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

Signed April 30, 2024

Attorney for Alex D. Moglia, Chapter 7 Trustee: David A. Warfield, Thompson Coburn LLP, St. Louis, MO

Attorney for Longo and Associates Ltd.: Joseph Anthony Longo, Mount Prospect, IL

Attorney for Robert Smith: Thomas W. Drexler, Chicago, IL

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

The matter before the court has a tortured history made worse by the insistence of a claimant in charting his own path in the claims resolution process and the District Court's implicit acceptance of that behavior on appeal.¹ It demonstrates some of the worst of claims litigation in bankruptcy. At its best, it is about a dispute between an attorney and his former client—both creditors of the bankruptcy estate—over who should take first from litigation proceeds. That is a matter better taken up by the state courts and not this one. At its worst, it is a matter that has taken enormous amounts of time and energy from the court and the parties on what should have been a relatively straightforward chapter 7 liquidation, all while the estate's available assets are diminishing.

The matter comes on for consideration first and foremost on the Memorandum Opinion and Order of the District Court in Longo v. Rosebud Farm, Inc., 638 B.R. 600 (N.D. Ill. 2022) [Dkt. No. 228]² (the "Remand" or "Longo"), appeal dismissed, Case No. 22-1627, 2022 WL 10328334 (7th Cir. June 10, 2022). But because of the issues raised in the Remand, the matter also involves the following:

1. Claim Nos. 4-5, 4-6, 4-7, 4-8, 4-9 and 6-1 (collectively, "Claim No. 4" or the "Longo Claim");³ 2. Claim No. 5 ("Claim No. 5" or the "Smith Claim"); and

3. Claim No. 7 ("Claim No. 7" or the "Longo/Smith Claim" and collectively with the Longo Claim and the Smith Claim, the "Claims").

Here the court has been forced to reengage with a difficult party over what should have been a straightforward matter. The result, while it differs in the order of distribution from the estate, is not substantively different than what was first ordered by the court. The court then declined to determine the parties' rights vis-à-vis each other and does so here again.

As this court has stated on a number of occasions, the court's role in claims litigation is narrow. It is to determine what, if anything, a party should be allowed to take from a bankruptcy estate. It is not to replicate the merits litigation between parties that would have occurred outside of bankruptcy. To do the latter would grind bankruptcy matters to a halt and defeat the purpose of efficient and timely adjudication of bankruptcy cases. It is even more limited when much of that claims litigation is about intercreditor disputes that do not affect the bankruptcy estate.

In keeping with the role, the court must first determine whether parties have met their burdens under title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the "Bankruptcy Code") and the Federal Rules of Bankruptcy Procedures (the "Bankruptcy Rules" and as to each individually, "Bankruptcy Rule ___"). This results in quicker and narrower litigation of matters that, had they been heard at the District Court, would have involved more elaborate processes. More often than not, an evidentiary hearing is not called for. Claims resolution can and should be resolved without the need for testimony, which adds little to the evidentiary record before the court. That is what has happened here, both before the Remand and after.

For the reasons more fully addressed herein, the court finds that Claim No. 4 may be allowed in part, but only as an unsecured claim. Claim No. 5 is allowable as a secured claim, but not in the amounts asserted. Claim No. 7 has no role in the Chapter 7 Case and is disallowed.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under 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 court judge to whom a case has been referred has statutory authority to enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy court 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 bankruptcy court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court judge 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 judge 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 court judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 464, 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 judge hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 669, 135 S.Ct. 1932, 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").

The claims objections described herein seek a determination by the court as to whether a claim should be allowed or disallowed pursuant to section 502 of the Bankruptcy Code. 11 U.S.C. § 502. This contested matter, concerning the allowance or disallowance of a claim against the bankruptcy estate, is expressly a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Further, in accordance with Stern, 564 U.S. at 499, 131 S.Ct. 2594, the court has constitutional authority to decide claim objections, as such objections may arise only in a case under the Bankruptcy Code and necessarily stem from the bankruptcy case itself. In re Montalbano, 486 B.R. 436, 438-39 (Bankr. N.D. Ill. 2013) (Barnes, J.) (citing Lenior v. GE Capital Corp. (In re Lenior), 231 B.R. 662, 667 (Bankr. N.D. Ill. 1999) (Schmetterer, J.); Knox v. Sunstar Acceptance Corp. (In re Knox), 237 B.R. 687, 693 (Bankr. N.D. Ill. 1999) (Schmetterer, J.)). Further, questions of trustee distributions, under section 726 or otherwise, are also core proceedings and within this court's constitutional authority. In re Bird, 565 B.R. 382, 393 (Bankr. S.D. Tex. 2017).

Accordingly, the court has the jurisdiction, statutory authority and constitutional authority to hear and determine the matter before the court as to whether the Claims should be disallowed and whether and how the estate funds should be distributed.⁴

HISTORY

The matter before the court has occurred in three essential stages. First, there was everything that led up to and included the claims litigation that proceeded the Remand. Following that, there was the Remand itself. Finally, there is the claims litigation that has followed the Remand.

The court will consider each in turn.

A. The Initial History

Much of what is summarized here has already been set forth by this court in its prior ruling on the matter. In re Rosebud Farm, Inc., 619 B.R. 202, 207 (Bankr. N.D. Ill. 2020) (Barnes, J.) [Dkt. No. 146] (the "Original Decision" or "Rosebud Farm"), aff'd in part, remanded in part sub nom. Longo v. Rosebud Farm, Inc., 638 B.R. 600 (N.D. Ill. 2022).⁵

The claims in question arise out of the following circumstances: On August 31, 2018 (the "Petition Date"), the debtor, Rosebud Farm, Inc. (the "Debtor"), filed the above-captioned chapter 7 bankruptcy liquidation (the "Chapter 7 Case"). Prior to that time, the Debtor operated as a local grocery store. In that capacity, it employed Robert Smith ("Smith") to work behind the meat counter and, during employment with the Debtor, Smith alleged that he was subject to sexual harassment in violation of Title VII, racial discrimination in violation of 42 U.S.C. § 1981, retaliation in violation of Title VII and section 1981, and gender violence in violation of the Illinois Gender Violence Act. See Smith v. Rosebud Farmstand, Case No. 11-cv-09147 (N.D. Ill. filed December 23, 2011) (the "Prepetition Action"). A jury found in favor of Smith on all the foregoing. Smith v. Farmstand, No. 11-CV-9147, 2016 WL 5912886 (N.D. Ill. Oct. 11, 2016), aff'd sub nom. Smith v. Rosebud Farm, Inc., 898 F.3d 747 (7th Cir. 2018).⁶

Longo and Associates Ltd. and Joseph Anthony Longo (collectively, "Longo") represented the plaintiff, Smith, in the Prepetition Action. Final judgment in the Prepetition Action was entered against the Debtor and in favor of Smith on July 24, 2017, effective retroactively from July 14, 2017, in the amount of $559,656.57. Judgment in a Civil Case [Prepetition Action, Dkt. No. 339] (the "Judgment"). The Judgment was recorded with...