Hoseman, Daniel v. Weinschneider, Sidne ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-2634
DANIEL HOSEMAN, Trustee,
Plaintiff-Appellant,
v.
SIDNEY WEINSCHNEIDER,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 6135—Elaine E. Bucklo, Judge.
____________
ARGUED DECEMBER 13, 2002—DECIDED MARCH 6, 2003
____________
Before RIPPLE, KANNE, and ROVNER, Circuit Judges.
KANNE, Circuit Judge. Bankruptcy Trustee Daniel Hose-
man appeals the entry of judgment in favor of Debtor Sid-
ney Weinschneider. The Trustee contends that Wein-
schneider’s claim for 23% of the profits of G.W. Burton,
asserted by Weinschneider in a 1996 lawsuit against the
company and its principals, is rightfully part of the bank-
ruptcy estate, and the Trustee brought this declaratory
judgment action to settle the issue. Weinschneider ar-
gues that his claim against Burton is not part of the
bankruptcy estate and, even if it is, the Trustee signed a
waiver of claims against Weinschneider as well as a
covenant not to sue after the Trustee had knowledge of
2 No. 02-2634
Weinschneider’s 1996 lawsuit. Because we find that
the Trustee has waived any right to bring this suit
by executing a valid release of claims against Wein-
schneider, we affirm the district court’s judgment in favor
of Weinschneider.
I. HISTORY
Sidney Weinschneider has been in the business of
operating nursing homes since 1973. During the late
1980s, he had acquired an interest in four nursing homes
in Illinois, but by 1989, those homes were experiencing
financial and regulatory difficulties. By March 1989, Home
Savings, Weinschneider’s mortgagee, had foreclosed on
the mortgages of the four nursing homes then owned by
Weinschneider, eventually taking over their operation.
Because of Weinschneider’s experience in operating nurs-
ing homes, Home Savings proposed at some point in 1989
that he put together a management team to continue
running the homes.
During the summer of 1989, Weinschneider approached
his friend Burton Behr about the possibility of managing
the homes now owned by Home Savings. The two met
face-to-face in August to continue their discussions, and
it was at this meeting that Behr suggested that the two
involve Harold Geiser, a CPA and friend of Behr’s, in
their management team. The three apparently met sev-
eral times throughout September and October of 1989. On
September 25, 1989, Weinschneider proposed to Home
Savings that a new entity called G.W. Burton (“Burton”),
which was to be owned by Weinschneider, Behr, and Geiser,
manage the nursing homes. Home Savings expressed
interest in working with the Burton enterprise and asked
if it could meet with the other members of the proposed
management team. Weinschneider scheduled this meet-
ing for October 12, 1989. Before this meeting took place,
No. 02-2634 3
on October 10, 1989, Weinschneider filed a Chapter 11
petition in bankruptcy court. Nevertheless, the meeting
between Weinschneider, Behr, Geiser, and Home Savings
took place as scheduled. On October 19, 1989, Burton
was incorporated. On December 1, 1989, Burton secured
the contract to manage the Home Savings nursing homes.
Sometime in September or October 1989—the exact
date is the subject of dispute—while Weinschneider, Behr,
and Geiser were discussing the formation of Burton, the
three agreed that Weinschneider would own 23% of the
new entity, and would receive profits from that owner-
ship interest if Burton became the owner or lessee of the
nursing homes and if those homes operated at a profit. In
return for his interest, Weinschneider agreed to continue
his efforts to secure for Burton a management agreement
and purchase option with Home Savings, and to continue
to advise Behr and Geiser regarding how to manage the
nursing homes. The agreement that Weinschneider owned
23% of Burton was memorialized in a December 8, 1989
letter from Behr to Weinschneider.
As noted above, Weinschneider filed his petition for
bankruptcy on October 10, 1989, in the midst of the activ-
ity surrounding the formation of Burton. On November
15, 1989, Weinschneider filed his “Statement of Finan-
cial Affairs, Schedules of Assets and Liabilities, State of
Executory Contracts” with the bankruptcy court. His
statement did not list any interest in Burton, nor any
claims he had against the company. On May 12, 1990,
Weinschneider’s Chapter 11 case was converted to a
Chapter 7 case, and Daniel Hoseman was appointed
Trustee.
In June 1990, the Official Unsecured Creditors Com-
mittee filed an adversary action against Weinschneider
and others seeking, among other things, the turnover of
certain property. The Trustee, on behalf of the creditors,
4 No. 02-2634
settled this litigation in 1992; the settlement agreement
was approved by the bankruptcy court in an order dated
July 28, 1992, after proper notice was provided to all
creditors.
In December 1996, pursuant to the settlement agree-
ment, the Trustee executed a broad release and covenant
not to sue. The release provided that the Trustee “hereby
remise[d], release[d], and forever discharge[d] all claims,
known or unknown, against [Weinschneider, his wife, and
certain trusts].” (Appellant’s Supp. App. at 200.) The
covenant not to sue stated that the Trustee would re-
frain from “instituting, prosecuting or participating in
any suit or action, at law or in equity, or to take any
action to collect, enforce or recover on any claim, known
or unknown, which the [bankruptcy estate] may, could
or have against [Weinschneider, his wife, and certain
trusts].” (Appellant’s Supp. App. at 202.) Pursuant to
the agreement, Weinschneider and others turned over
one million dollars worth of property to the Trustees of
Weinschneider’s and his wife’s estates.
In June 1995—following the 1992 settlement agreement,
but prior to the Trustee’s execution of the release and
covenant not to sue—Weinschneider filed an amendment
to his bankruptcy Schedule B-3, indicating that he held
a 23% interest in G.W. Burton. The amendment stated:
Debtor amends his Schedule B-3 to list a post-peti-
tion acquired claim that is not property of the bank-
ruptcy estate. This Amendment is made for disclosure
purposes only and does not make this claim property
of the bankruptcy estate. The post-petition claim is
as follows:
Claim for a 23% interest in G.W. Burton and Associ-
ates, L.T.D. (“G.W. Burton”) based on an agreement
made between debtor, Burton W. Behr and Harold
Geiser . . . . The debtor’s claim for this interest is
not property of the estate because the interest was
No. 02-2634 5
acquired after the 10/10/89 bankruptcy filing and the
debtor did not have any sort of claim for such interest
as of the bankruptcy filing. Such claim cannot be
characterized as proceeds or other progeny of property
of the bankruptcy estate under code sec. 541(a)(6).
Likewise, the interest in G.W. Burton was given to
Sidney Weinschneider in exchange for his post-petition
services to G.W. Burton. The value of this claim is
listed as unknown because it is highly speculative.
Debtor had made several demands to formally obtain
the interest in G.W. Burton. It appears that a lawsuit
may have to be filed in order to enforce the above
described agreement and acknowledgment.
Hoseman v. Weinschneider (In re Weinschneider), No. 89 B
17026, 1999 Bankr. LEXIS 1079, at *18-19 (Bankr. N.D.
Ill. Aug. 30, 2001). A June 15, 1995 letter sent to the
Trustee in connection with this amendment did not men-
tion any of Weinschneider’s activities or negotiations
that occurred prior to the filing of his Chapter 11 petition,
but the Trustee was apparently able to learn additional
details about the formation and early activities of the enter-
prise through later communications with Weinschneider’s
attorneys.
In February 1996, Weinschneider filed an Illinois state
court contract action against Burton, Behr, and Geiser
seeking his share of Burton’s profits. In December 1996,
the Trustee executed the release and the covenant not
to sue. On February 27, 1998, the Trustee sued in bank-
ruptcy court seeking a declaration that the state court
lawsuit was the property of the bankruptcy estate. In
response to the Trustee’s lawsuit, Weinschneider argued
that his claim against Burton arose after he filed for
bankruptcy and was therefore not part of the bankruptcy
estate. Weinschneider also raised as an affirmative de-
fense the release signed by the Trustee in late 1996—
6 No. 02-2634
after Weinschneider’s suit had been filed. Both parties
filed for summary judgment.
The bankruptcy court granted summary judgment in
favor of the Trustee on his claim that the state court
suit was the property of the bankruptcy estate. The bank-
ruptcy court denied both parties’ motions for summary
judgment on Weinschneider’s affirmative defense, finding
disputed issues of material fact about whether Wein-
schneider concealed his claim against Burton, or whether
Weinschneider provided false or incomplete information
in his bankruptcy filings in an attempt to mislead the
Trustee. After trial on the defense issue, the bankruptcy
court ruled that the Trustee’s action was not barred by
the release and covenant not to sue because there was
evidence that Weinschneider fraudulently induced the
Trustee’s execution of the release by making false state-
ments in his amended Schedule B-3, rendering the re-
lease void.
Weinschneider appealed the bankruptcy court decision
to the district court, which first held that the question
of whether Weinschneider’s claim against Burton was
part of the bankruptcy estate raised an issue of fact,
precluding summary judgment. The district court went
on, however, to find that the release and covenant not to
sue signed by the Trustee in 1996 were not fraudulently
induced by Weinschneider and that those documents, by
their terms, barred the Trustee’s suit. The court there-
fore entered judgment in favor of Weinschneider, and
the Trustee brought this appeal. We affirm the judgment
of the district court.
II. ANALYSIS
We review the bankruptcy court’s factual findings for
clear error, while conclusions of law by both the bank-
ruptcy court and the district court are reviewed de novo.
No. 02-2634 7
In re Image Worldwide, Ltd., 139 F.3d 574, 576 (7th Cir.
1998). The disposition of cross-motions for summary
judgment is reviewed de novo, with all the facts and
the inferences therefrom viewed in a light most favorable
to each nonmoving party. Ozlowski v. Henderson, 237
F.3d 837, 839 (7th Cir. 2001) (citing Hendricks-Robinson
v. Excel Corp., 154 F.3d 685, 692 (7th Cir. 1998)). Sum-
mary judgment in favor of one party is appropriate when
the record shows that “there is no genuine issue as to
any material fact and that the moving party is entitled to
a judgment as a matter of law.” FED. R. CIV. P. 56(c). See
also Celotex Corp. v. Catrett, 477 U.S. 317 (1986).
In this appeal, the Trustee first argues that the district
court erred in reversing the bankruptcy court’s deter-
mination that Weinschneider’s claim against Burton and
its principals was part of the bankruptcy estate. The
bankruptcy court found that Weinschneider’s claim arose
out of activities rooted in his prebankruptcy past, hold-
ing that the claim was therefore part of the bankruptcy
estate. The district court disagreed, finding that, for
summary judgment purposes, an issue of material fact
had been raised with respect to whether Weinschneider’s
interest in Burton was secured pre- or post-bankruptcy.
We need not consider such intricate questions of tim-
ing, however, as the second issue raised in this appeal—
whether the release and covenant not to sue that the
Trustee had executed in 1996 bar this lawsuit—is dis-
positive in precluding this suit by the Trustee.
A. Applicability of the Release and Covenant Not to Sue
The first argument presented by the Trustee is that
this lawsuit does not fall within the scope of the release
and covenant not to sue. In fact, the Trustee goes to
great lengths to distinguish the instant suit from one
that would be covered by the literal terms of those doc-
uments. But both the release and the covenant are
8 No. 02-2634
phrased in rather broad language. Under Illinois law, “[a]
release is a contract and, as such, is subject to the tradi-
tional rules of contract interpretation . . . . The intention of
the parties, thus, controls the scope and effect of the
release, and this intent is discerned from the release’s
express language as well as the circumstances surround-
ing the agreement.” Doctor’s Assoc., Inc. v. Duree, 745
N.E.2d 1270, 1281-82 (Ill. App. 2001) (citations omitted).
The express language of the release and covenant at
issue here is clear and broad enough to remove any
doubt as to their application to this lawsuit. The explicit
language of the release covers “all claims, known or un-
known.” The covenant not to sue obligates the Trustee
to decline to institute “any suit or action, at law or in
equity” to pursue a claim against Weinschneider.
The Trustee argues, however, that a declaratory judg-
ment action is neither an action at law nor a suit
in equity and thus is not within the literal terms of the
covenant. While this Court has noted that declaratory
judgment actions are neither legal nor equitable, see
Moretrench Am. Corp. v. S.J. Groves & Sons Co., 839 F.2d
1284, 1286 (7th Cir. 1988), the Trustee fails to consider
the additional language in the covenant, precluding
him from “tak[ing] any action” in pursuit of a claim against
Weinschneider. Thus, even assuming that a declara-
tory judgment suits not “any suit or action, at law or
in equity,” we believe that the covenant’s language—as
well as that of the release—is still broad enough to en-
compass this suit within its prohibition.
The Trustee also cites Chandler Bank of Lyons v. Ray,
a Tenth Circuit case, for the proposition that an in
personam action against the debtor and an in rem ac-
tion against the debtor’s property are distinguishable. 804
F.2d 577 (10th Cir. 1986). In that case, the creditor bank
sought to enforce its lien against the property of a debtor
subsequent to the debtor’s discharge in bankruptcy, be-
No. 02-2634 9
fore which the bank had taken no action in the bank-
ruptcy proceedings to preserve its claim. Id. at 578.
The court allowed the suit to go forward despite the dis-
charge, noting that “[t]he Bank was simply seeking to
establish . . . that its lien . . . could be pursued by the Bank.
Thus it was strictly an in rem action. It did not seek
generally to proceed against the bankrupt in an in
personam action. Therefore, its in rem action on the se-
cured claim survived the bankruptcy.” Id. at 579. In
this case, the Trustee argues that his suit is similarly an
in rem action against Weinschneider’s claim, not against
Weinschneider personally. Thus, the argument goes, the
covenant—which applies only to actions “against [Wein-
schneider, his wife, and certain trusts]”—does not apply.
Both the bankruptcy court and the district court rightly
rejected this argument. The Trustee’s complaint names
Weinschneider himself as defendant. The bankruptcy court
noted that regardless of the Trustee’s characterization
of the suit, “it does seek to affect Weinschneider’s rights
vis á vis the State Court Suit. As such, it is a claim
against Weinschneider.” Weinschneider, 1999 Bankr. LEXIS
1079, at *37. The district court agreed with this reason-
ing, and so do we. However the Trustee chooses to charac-
terize this suit, the result will potentially alter Wein-
schneider’s right to bring the claim. Unlike an automobile
(the property at issue in Chandler Bank), a claim for a
share of profits has no real existence apart from the
ability of its owner to assert it. Therefore, the Trustee’s
attempt to assert the claim on behalf of the bankruptcy
estate is in reality an action against Weinschneider.
B. Formal Abandonment Procedure
The Trustee next argues that the 1996 release of any
claim he may have had regarding Weinschneider’s law-
10 No. 02-2634
suit against Burton is invalid, as the claim was not re-
linquished pursuant to the formal abandonment proce-
dures set forth in the Bankruptcy Code.1 Because the
release and covenant not to sue executed by the Trustee
were part of a compromise settlement entered into by
the Trustee with bankruptcy court approval under Rule
9019 of the Bankruptcy Code, compliance with the for-
mal abandonment procedures was not necessary in this
situation. In addition, bankruptcy trustees regularly
make use of releases and waivers in administering bank-
ruptcy estates, and such decisions do not always amount
to “abandonment” of estate property. Rather, the giving of
a release in exchange for some action by the debtor (in
this case, the turning over of one million dollars worth of
property), as part of a generally beneficial compromise
settlement, may be the most efficient and fair means
of administering the estate. In any event, compliance
with the Bankruptcy Code’s abandonment provisions is
meant to ensure the fair treatment of creditors, see
Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609,
618 (7th Cir. 2002), and we believe that those interests
have been adequately protected here.
We first note that bankruptcy trustees, who have a
fiduciary obligation to the claimants against the bank-
ruptcy estate, are generally given broad discretion to
determine the best way to pursue the administration of
the bankruptcy estate, and equally broad discretion to
decide whether a compromise settlement—which may
include a release of future claims or a covenant not to
1
The Bankruptcy Code provides in pertinent part: “(a) After
notice and hearing, the trustee may abandon any property of
the estate that is burdensome to the estate or that is of incon-
sequential value and benefit to the estate.” 11 U.S.C. § 554(a)
(2002).
No. 02-2634 11
sue—is preferable to protracted litigation. As one bank-
ruptcy court has noted:
The administration of bankruptcy estates has twin
goals of maximization of realization on creditors’ claims
and of prompt and efficient administration of the
estate. To carry out this fiduciary duty to meet these
goals, the trustee has a generally-recognized discre-
tionary authority to take the actions that are neces-
sary to accomplish them.
Iannacone v. Foothill Capital Corp. (In re Hancock-Nelson
Mercantile Co.), 95 B.R. 982, 1003 (Bankr. D. Minn. 1989).
See also Official Comm. of Unsecured Creditors v. James
Talcott, Inc. (In re Int’l Distribution Centers, Inc.), 103 B.R.
420, 422-23 (S.D.N.Y. 1989) (“[A] court need not conduct
an independent investigation in formulating its opinion
as to the reasonableness of a settlement. A court may
give weight to the Trustee’s informed judgment that a
compromise is fair and equitable . . . .”). Given these twin
goals and the discretion vested in the Trustee to pur-
sue them, we cannot say that the Trustee’s decision
to release future claims against Weinschneider in ex-
change for the turn over of one million dollars worth of
property was contrary to the goal of protecting creditors
embodied in the Bankruptcy Code.
In addition, the compromise settlement between the
Trustee and Weinschneider was submitted to and approved
by the bankruptcy court, after proper notice to Wein-
schneider’s creditors and opportunity for a hearing on
any objections (one objection, in fact, was considered by
the court). In this case, the release and covenant not to
sue were included in the compromise settlement agreed
to by the parties in 1992. This settlement was approved
by the bankruptcy court on July 28, 1992, after “due
and proper notice of this application [for approval of the
compromise] having been given to all parties in interest
12 No. 02-2634
and to all creditors . . . .” (Appellant’s Supp. App. at 178.)
Given this notice and opportunity to be heard, and the
ultimate judicial approval of the settlement, we cannot
say that the creditors were deprived of any protections
afforded by the Bankruptcy Code.
Even after agreement was reached, the Trustee did not
execute the release and covenant until four years later,
as he waited for Weinschneider to comply with his end
of the deal. In the end, however, the Trustee signed the
release and covenant not to sue, foregoing any known or
unknown future claims against Weinschneider in ex-
change for the turnover of one million dollars in property.
The Trustee’s execution of the release and covenant not
to sue at issue here, as part of a comprehensive compro-
mise settlement agreed to by the Trustee, submitted to
the creditors with the opportunity for objections, and
approved by the bankruptcy court, was a valid exercise
of the Trustee’s discretion in pursuing a fair and effi-
cient administration of the bankruptcy estate.
C. Fraudulent Inducement
Finally, the Trustee argues that even if the terms of the
release and covenant not to sue are construed to apply
to this suit, they are nonetheless invalid as they were
obtained as the result of fraudulent misrepresentations
by Weinschneider. “As with any contract, ‘[a] release may
be set aside if there is fraud in the inducement.’ ” Havoco
of Am., Ltd. v. Sumitomo Corp. of Am., 971 F.2d 1332,
1341 (7th Cir. 1992) (quoting Phil Dressler & Assoc. v. Old
Oak Brook Inv. Corp., 548 N.E.2d 1343, 1347 (Ill. App.
1989)). To invalidate the release and covenant not to
sue under a theory of fraudulent inducement, the Trustee
bore the burden of proving, by clear and convincing evi-
dence, each of the elements of such a claim. Id. (citation
omitted). In Illinois, fraudulent inducement requires
No. 02-2634 13
proof of five elements: “(1) a false statement of material
fact; (2) known or believed to be false by the person mak-
ing it; (3) an intent to induce the other party to act;
(4) action by the other party in reliance on the truth of
the statement; and (5) damage to the other party result-
ing from such reliance.” Id. (quoting Cotter v. Parrish, 520
N.E.2d 1172, 1175 (Ill. App. 1988)). We agree with the
district court that the Trustee has failed to meet his
burden.
The district court found that the Trustee was unable
to establish the first element of his claim—that Wein-
schneider made a false statement of material fact in
his amended Schedule B-3, filed on June 12, 1995. The
Trustee argued that Weinschneider’s assertion in that
form that his claim against Burton was acquired post-
petition, in exchange for post-petition services, qualified
as a false statement of material fact. Because the dis-
trict court found that the claim was acquired pre-petition,
and was therefore not part of the bankruptcy estate, it
held that Weinschneider’s assertions were not false. We
need not, however, answer the question as to whether
the claim was or was not part of the bankruptcy estate
to find that the Trustee’s claim of fraudulent inducement
fails.2
2
Satisfaction of the first fraudulent-inducement element is
problematic for another reason. As the district court noted,
Weinschneider’s assertion that the claim against Burton was
not part of the bankruptcy estate because it arose post-petition
is more appropriately characterized as a legal conclusion,
rather than a statement of material fact. A misrepresentation
as to the law cannot give rise to a claim of fraudulent induce-
ment: “As a general rule, one is not entitled to rely upon a
representation of law since both parties are presumed to be
equally capable of knowing and interpreting the law.” City of
Aurora v. Green, 467 N.E.2d 610, 613 (Ill. App. 1984).
14 No. 02-2634
The district court also found that the Trustee was unable
to establish the second element of a fraudulent induce-
ment claim in arguing that Weinschneider knew or be-
lieved he was making a false statement on his amended
Schedule B-3 by asserting that his claim against Burton
was acquired post-petition. The district court noted that
even assuming Weinschneider acquired the claim pre-
petition (an argument on which we express no opinion),
such a determination was “not obvious. His rights in the
matter depend on a rather subtle issue of law . . . .”
Hoseman v. Weinschneider, 277 B.R. 894, 903 (N.D. Ill.
2002). The court noted that Weinschneider did not at-
tempt to conceal any of his pre-petition activities with
respect to Burton; the false statement identified by the
Trustee only goes to the legal relevance of those activ-
ities. As the district court concluded, even if Wein-
schneider came to the wrong legal conclusion about wheth-
er his claim against Burton was part of the bankruptcy
estate or not, the worst that can be said of that conclu-
sion is that it may amount to a negligent misrepresenta-
tion. Id. (citing Stewart v. Thrasher, 610 N.E.2d 799, 802
(Ill. App. 1993) (“A negligent misrepresentation is a rep-
resentation the maker believes to be true, but is, in
fact, false.”). An action for fraudulent misrepresentation
requires more: “the making of a representation which
the maker knows to be false, or is made with reckless
disregard for its truth or falsity.” Id. at 903-04. We agree
with the district court that nothing in the record indi-
cates that Weinschneider made a knowingly false state-
ment of material fact to the Trustee regarding his claim
against Burton. The Trustee therefore has failed to make
out a claim for fraudulent inducement.
III. CONCLUSION
This action falls squarely within the prohibition of the
release and covenant not to sue executed by the Trustee
No. 02-2634 15
in 1996, and we find both to be valid. Therefore, those
documents bar this lawsuit by the Trustee. Judgment in
favor of Weinschneider is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-6-03