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
In an opinion affirming a contempt finding by the U.S. Bankruptcy Court for the Northern District of Illinois (BC) affirmed by the U.S. District Court for the Northern District of Illinois (DC), the U.S. Court of Appeals for the Seventh Circuit (Circuit) explained that § 1334(b)'s jurisdictional grant extends to creditor conduct within the scope of a confirmation order, when a court, as here, retained injunctive jurisdiction therein, and ratified the BC's construal of the objective contempt standard in Taggart v. Lorenzen to appellant's (mis)deeds, its appellate counters close to "frivolous."
Procedural context:
The BC found the creditor, Fidelity and Deposit Company (Fidelity), in clear contempt of its plan confirmation order and imposed sizeable sanctions of $9.5 million in 2017. Fidelity appealed to the DC. While this appeal was pending, Taggart was decided, and the DC therefore remanded to allow the BC to reevaluate sanctions under Taggart's objective standard. On remand, the BC reinstated its original contempt findings and re-imposed the $9.5 million in sanctions against Fidelity. On appeal, the DC upheld the decision. Fidelity appealed, seeking to avoid paying the sanctions for conduct.
In the early 2000s, Kimball Hill, Inc. (DR) entered land development agreements with municipalities in Illinois. As part of these agreements, the DR contracted separately with Fidelity as a surety to issue bonds securing performance on the underlying development obligations. On April 23, 2008, soon after the global financial crisis arrived, the DR filed for chapter 11 relief in bankruptcy court. On March 12, 2009, the BC entered an order confirming the DR's plan to liquidate and distribute the estate. Among other things, this plan created a trust to administer the DR's estate upon entry of the confirmation order (Trust). Post-petition, matters proceeded on multiple tracks. In 2010 the Trust sold its development interests in the municipalities' land to TRG Venture Two LLC (TRG). Meanwhile, the impacted municipalities returned to the BC, as the confirmation order enjoined them from suing the DR to legally establish its nonperformance, a prerequisite for drawing upon the Fidelity bonds. The BC granted them leave to do so, but never modified the order as to Fidelity's claims against the DR. By 2013, many of the municipalities successfully established grounds to recover on the surety bonds and therefore sought payment from Fidelity. In that same year, on the heels of these entities' successful liability suits, the Trust objected to Fidelity's $43 million claim; ultimately, the BC sustained the objection in part and revised the amount downward to reflect Fidelity's aggregate payouts to the municipalities at that time. It was in state court that things took a turn for the worse, at least for Fidelity. As noted above, the municipalities had sued Fidelity in state court to collect on the surety bonds; Fidelity reacted by interpleading TRG. TRG successfully moved to dismiss these interpleader claims, but Fidelity filed subsequent appeals that brought TRG back into the state court. Believing Fidelity's actions to be in bad faith and in violation of the confirmation order, TRG asked the BC to enforce the confirmation order and related injunction against Fidelity. More specifically, it requested that this tribunal "not only to order Fidelity to dismiss the state court claims, but also to sanction Fidelity for its knowing and intentional violation of the confirmation order."
Michael Y. Scudder; Thomas Kirsch; and Candace Jackson-Akiwumi

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