- Case Type:
- Case Status:
- Nos. 147-1575 (N.D. Ill. Bankr. Case No. 12-49658) & 17-2004 (N.D. Ill. Bankr. Case No. 15-05384) (consolidated appeals) (7th Circuit, Jul 09,2018) Published
- 7th Circuit Court of Appeals affirmed the decision of both Bankruptcy Courts, holding that TDOR's interest, the right to pursue Bulk Sale purchasers personally for sellers' unpaid state taxes, was not entitled to adequate protection pursuant to section 363(f) where TDOR did not prove any decrease in the realizable value of its interest in property that was extinguished by 363(f). The only protection to which creditors are entitled is for their respective interests to attach to the proceeds, after which payment(s) must continue to be governed by the priority scheme of the Code.
- Procedural context:
- The Bankruptcy Court in both cases ruled that TDOR was entitled to nothing from the Section 363 sales, because holding otherwise would allow TDOR to "jump the quieu" in which the banks stood first both outside and inside of Bankruptcy. The District Court in both cases remanded for the Bankruptcy Court to take evidence as to the value of TDOR's interest had the assets been sold outside of Bankruptcy. And in both cases, the Bankruptcy Court held that TDOR could not or at least did not prove that either Elk Grove's purchaser (SPE with no other assets other than the purchased assets) or Naperville's purchaser would have had assets to pay the seller's/debtor's taxes after such sales, and therefore TDOR was not entitled to adequate protection in the form of compensation from the sale proceeds. TDOR appealed directly to the 7th Circuit Court of Appeals and requested that appeals be consolidated.
- Two businesses / debtors independently sought bankruptcy protection under Chapter 11 in order to sell substantially all of their respective assets "free and clear" of all claims and interests. Debtor #1 operated 5 BP gas stations in Elk Grove Village and other Chicago suburbs ("Elk Grove"). Debtor #2 operated a cinema and café in Naperville, another Chicago suburb ("Naperville"). Both Elk Grove and Naperville had secured bank debts that far exceeded the total value of their respective assets. Both also owed substantial state taxes to the Illinois Department of Revenue ("IDOR"). Outside of Bankruptcy, IDOR would have been able to pursue and hold the respective purchasers of Elk Grove's and Naperville's assets personally liable for state taxes owed by the seller/debtor pursuant to Illinois' statutory "Bulk Sales Provisions," However, the bankruptcy court, pursuant to section 363(f) of the Bankruptcy Code, allowed the sales to proceed "free and clear" of the interests in those properties held by any entity other than the bankruptcy estates, including IDOR's interest under the Bulk Sales Provisions. IDOR sought adequate protection of its interest in connection with both sales; however, both Bankruptcy Court judges held that whether the sales were consummated inside or outside of Bankruptcy, IDOR's interest would be junior to the respective secured banks, and therefore "out of the money" because the sales proceeds were insufficient to satisfy the mortgage banks. Both cases were converted to Chapter 7 after the Section 363 sales were consummated.
- BUAER, FLAUM, and ROVNER
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