When there was a knowing violation of injunctions in the plan and confirmation order, the Seventh Circuit said that the appeal bordered on frivolous.

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Case Type:
Case Status:
22-1724 (7th Circuit, Mar 03,2023) Published
The Seventh Circuit affirmed the award of more than $9.5M in damages to third party TRG Venture Two LLC (“TRG”) caused by creditor Fidelity and Deposit Company’s (“Fidelity”) pursuit of claims extinguished by a confirmation order.
Procedural context:
After being dragged into state court surety bond litigation by Fidelity through interpleader, TRG moved the bankruptcy court to enforce the confirmation order and injunction against Fidelity. The bankruptcy court held Fidelity in contempt of the confirmation order for pursuing claims it knowingly voted to extinguish, and awarded just over $9.5M to TRG, which included costs to defend itself from Fidelity’s state court indemnity claims. On appeal, the Seventh Circuit dismissed all three arguments raised by Fidelity. First, Fidelity’s argument that the Seventh Circuit did not have jurisdiction to interpret and enforce the confirmation order was summarily rejected, as the Seventh Circuit found the bankruptcy court’s retention of authority to resolve disputes was “a textbook example.” On the merits, the Seventh Circuit found no errors with the bankruptcy court’s application of the Taggart v. Lorenzen, 139 S.Ct. 1795 (2019), objective standard. Specifically, the bankruptcy court recognized that the burden to show that “no objectively reasonable basis for concluding that [Fidelity]’s conduct might be lawful under the [] order” remained with and was satisfied by TRG. The fact that “the bankruptcy court rejected Fidelity’s argument on the merits does not mean that the court failed to follow Taggart’s objective standard.” Moreover, TRG’s acquisition of the development interests from the liquidating trust did nothing to change the bankruptcy court’s conclusion of no “fair ground of doubt” that Fidelity flagrantly violated the confirmation order, as “[p]re-petition claims extinguished upon plan confirmation do not spring back into existence upon post-confirmation asset sales.” Fidelity’s failure to appreciate the distinction between property-based (those that ran with the land and survived plan confirmation) and entity-based (it was only KHI, not TRG, that agreed to indemnify Fidelity) claims, caused Fidelity to lose “sight of the bigger picture” – that its pre-petition claims against KHI were extinguished upon confirmation. Fidelity’s last argument - that it was not the proximate cause of TRG’s state court litigation fees since TRG would have had to defend itself against claims brought separately by the municipalities –ignores reality, as TRG only became a party to the state court litigation through Fidelity’s interpleading.
Pre-petition, Kimball Hall, Inc. (“KHI”) entered into development agreements with Illinois municipalities. Pursuant to those agreements, KHI contracted with Fidelity to issue performance bonds to secure KHI’s obligations, while KHI indemnified Fidelity should KHI fail to develop the properties. Following KHI’s default, Fidelity filed a proof of claim grounded in potential liability related to payment on the surety bonds. Confirmation of KHI’s liquidation plan provided for the release of claims of all parties that voted in favor of confirmation, including Fidelity, while the accompanying injunction provided that the bankruptcy court retained jurisdiction to resolve plan and confirmation order disputes. The liquidating trust established as part of the confirmation process received all KHI’s assets “free and clear of any and all liens, claims, encumbrances and interests.” TRG purchased KHI’s development interests from the liquidating trust.
Scudder (opinion author), Kirsch, and Jackson-Akiwumi

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