In re Kimball Hill, Inc. (Bankr. N.D. Ill.) – Asset Purchaser Obtains $10 Million in Compensatory Civil Contempt Damages from Prepetition Creditor Due to Assertion of Successor Liability Claims in Violation of Injunctions and Releases Contained in Plan of Reorganization

The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:

SUMMARY:

An asset purchaser has obtained $10 million in compensatory civil contempt damages from a prepetition creditor due to the creditor’s assertion of successor liability claims, in violation of the injunctions and releases contained in a Chapter 11 plan of reorganization. [In re Kimball Hill, Inc., 2019 Westlaw 93311 (Bankr. N.D. Ill.).]

Facts: A construction company obtained completion bonds from a surety. After its construction projects ran into difficulty, it filed a Chapter 11 petition. Under the terms of the plan of reorganization, the assets of the entities were to be sold. The purchaser was protected by an injunction and a release barring the estate’s creditors from pursuing their claims against the purchaser.

Following the sale of the assets, the surety nevertheless filed suit in state court, seeking to hold the asset purchaser liable as the debtor’s successor in interest. After a complex procedural history, the asset purchaser sought relief in the bankruptcy court, asserting that it was entitled to compensatory and punitive damages because the surety’s behavior was in contempt of the injunction and release previously issued by the bankruptcy court.

Reasoning: The bankruptcy court ruled in favor of the asset purchaser, ultimately awarding nearly $10 million in compensatory relief. The court declined to award punitive damages, on the ground that the court’s civil contempt powers did not extend to punitive measures.

The court reasoned that in addition to all of the direct costs imposed on the asset purchaser by the surety’s wrongful conduct (including attorneys’ fees), the award had to include the purchaser’s lost property values, lost sales opportunities, and carrying costs:

Litigation regarding real property unquestionably clouds title and affects the ability of an owner to sell such real property. When litigation asserts claims such as those asserted here, substantial claims that [the surety] argues run with the real property, the connection between the litigation and the marketability of the real property is not difficult to demonstrate. For example, title insurers customarily search for pending litigation. If litigation is pending, title insurers may not issue insurance as they will be bound to cover the claims therein . . . .

Even if title insurance can be obtained, . . . a purchaser is unlikely to close on a purchase when such closings routinely require a showing that liability arising from judgments pertaining to the property has been discharged . . . .

[D]uring the pendency of [the surety’s] claims against [the purchaser], [the purchaser’s] sale efforts have been frustrated. As a result, [the purchaser] has been required to maintain the unsold Property, which takes coordination and results in costs. The State Court Lawsuits have affected [the purchaser’s] ability to sell the Property and thereby the value of the Property.

Author’s Comment: There are very few (if any) published opinions involving contempt proceedings brought on behalf of asset purchasers. The harsh remedy developed by the court is very useful: if asset purchasers in bankruptcy sales are well-protected against wrongful post-sale third-party claims, the purchasers will be willing to pay more for those assets.

From a drafting perspective, it may make sense if the plan and the asset purchase agreement were to expressly authorize the asset purchaser to seek damages for contempt against anyone violating the injunctions and releases. Strong language may warn off creditors thinking about pursuing the purchaser under a “successor liability” theory.

Substantively, however, I have some doubt about the measure of damages adopted by the court in this particular case. I think that the damages for loss of property value may be inflated, since the property can now be sold for its full fair market value; further, it may have appreciated in the interim. The damages to the purchaser should be measured by the carrying costs while the property was tied up in litigation, rather than by the gross value of the property. I would not be surprised to see a substantial reduction of the total award on appeal.

For discussions of cases involving related issues, see:

• 2014-05 Comm. Fin. News. NL 9, Broadly-Worded Release Contained in Trustee’s Settlement of Fraudulent Transfer Claim Destroys Non-Debtor Personal Injury Plaintiffs’ Ability to Assert Successor Liability Claims Against Pre-Petition Asset Purchaser.
• 2003 Comm. Fin. News. 74, Bankruptcy Sale “Free and Clear” Insulates Buyer from Successor Liability for Prepetition Torts.

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw.  Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.