Metex Mfg. Corporation

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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: 	Chapter 11
In re: 	:
: 	Case No. 12-14554 (CGM)
Metex Mfg. Corporation, 	:
:
:
Debtor. 	:
:
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A P P E A R A N C E S :
REED SMITH LLP
Attorneys for the Debtor
599 Lexington Avenue
New York, NY 10022
Telephone: 	(212) 521-0400
Facsimile: 	(212) 521-5450
By: 	Paul E. Breene, Esq.
-and-
225 Fifth Avenue, Suite 1200
Pittsburgh, PA 15222
Telephone: 	(412) 288-3114
Facsimile: 	(412) 288-3063
By: 	Paul M. Singer, Esq.
OFFICE OF THE ILLINOIS ATTORNEY GENERAL
Counsel for the Illinois Department of Revenue
100 W. Randolph Street
Chicago, IL 60601
Telephone: 	(312) 814-4557
By: 	James D. Newbold, Assistant Attorney General
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
MEMORANDUM DECISION SUSTAINING THE DEBTOR’S OBJECTION TO
PROOF OF CLAIM NO. 4
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Introduction
Before the Court is the Debtor’s objection to a proof of claim filed by the Illinois
Department of Revenue for unpaid taxes owed by the Debtor’s predecessor-in-interest. For the
reasons set forth below, the Court finds that the tax claim was discharged in 1998 by
confirmation of the plan of reorganization in the predecessor’s prior bankruptcy case. Even to the
extent the claims were not discharged, they are barred by the applicable statute of limitations.
Accordingly, the Court sustains the Debtor’s objection.
Jurisdiction
This Court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a),
28 U.S.C. § 157(a) and the Amended Standing Order of Reference signed by Chief Judge Loretta
A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(B)
(allowance or disallowance of claims against the estate).
Background 1
On March 17, 2014, Metex Mfg. Corporation (the “Debtor” or “Metex”) filed an
objection (the “Claim Objection”) to proof of claim number 4 (the “Claim”) filed by the Illinois
Department of Revenue (“IDOR”). See Cl. Obj., ECF No. 461. IDOR filed a response
(“Response”) to the Claim Objection. See Resp., ECF No. 483. The Debtor filed a reply
(“Reply”), and IDOR filed a sur-reply (“Sur-Reply”). See Reply, ECF No. 501; Sur-Reply, ECF
No. 503.
The history of this case dates back to the bankruptcy proceedings of Kentile Floors, Inc.
(“Kentile”), the predecessor entity of the Debtor. Resolution of this Claim Objection requires a
brief discussion of Kentile’s bankruptcy case.
1 Unless otherwise indicated, all citations can be found in case number 12-14554.
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I. 	Kentile’s Bankruptcy Proceedings
According to the Debtor’s disclosure statement (the “Disclosure Statement”), Kentile
began business in the late 1800s as a manufacturer of residential and commercial tile. Discl.
Stmt. 1, ECF No. 438. Until the mid-1980s, Kentile used asbestos in certain of its tiles. Id. at 2.
Kentile conducted some of its manufacturing activities within the state of Illinois. Id. at 1; Reply
¶ 3. After it discontinued the use of asbestos, Kentile experienced difficulties in maintaining
sales and its business deteriorated. Discl. Stmt. 2. As a result, Kentile filed a petition for relief
under chapter 11 of the United States Bankruptcy Code in 1992. Id.
IDOR filed original and amended pre-petition and administrative expense claims in
Kentile’s bankruptcy case for the same liability it now asserts in the Claim. See Resp. ¶ 7; Cl.
Obj. Ex. 2. Specifically, IDOR filed a proof of claim against Kentile for pre-petition Retailers
Occupation and Use tax liabilities in the amount of $10,000 pending completion of an audit,
which was later amended to $218,438, and again to $223,933. See id. at Exs. B–D. 	IDOR also
filed an administrative claim against Kentile for post-petition Retailers Occupation and Use Tax
liabilities in the amount $10,000 pending completion of an audit, which was amended to
$71,352, later amended again to $85,557, and finally to $94,296. See id. at Exs. E–H. 	These
claims covered the same period as the Claim now before the Court. Kentile did not object to
IDOR’s claims, which consequently became allowed tax and administrative expense claims. See
Resp. ¶ 8; Reply ¶ 3.
In December 1998, the Bankruptcy Court confirmed a Plan of Reorganization in
Kentile’s 1992 chapter 11 case (“Kentile’s 1998 Plan”). As part of Kentile’s 1998 Plan: (i) all
outstanding stock of Kentile was cancelled and new shares were issued to United Capital Corp.,
and (ii) Kentile’s name was changed to KF Real Estate Holdings Corporation (“KF”). See
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Kentile’s 1998 Plan § 5.8.2 Thereafter United Capital caused KF to be merged with Metex
Corporation, a subsidiary of United Capital. KF was the survivor of the merger and its name was
changed to Metex Mfg. Corporation. See Discl. Stmt. 2. Kentile’s 1998 Plan provided that all
asbestos claimants were entitled to pursue their asbestos-related claims solely against Kentile’s
insurance coverage provided by Kentile’s various insurers (the “Kentile Insurers”), and enjoined
holders of asbestos claims from commencing actions against Kentile and Metex. See Kentile’s
1998 Plan §§ 4.3, 5.5. Kentile’s 1998 Plan also provided for the payment in full of all allowed
priority and administrative tax claims. See id. §§ 3.1–3.2. All allowed administrative, priority
and tax claims were to be paid by the reorganized debtor (i.e., Metex) from its cash flow. See id.
§§ 5.2–5.4.
II. 	Metex’s 2012 Prepackaged Plan of Reorganization
A number of disputes arose among the Kentile Insurers and Metex in the mid-2000s. In
2008, one of the Kentile Insurers instituted an insurance-coverage action against Metex and the
other Kentile Insurers in New York State Supreme Court. See Nat’l Fire Ins. Co. of Hartford v.
Travelers Cas. & Sur. Co. Index No. 105522/2008 (the “State Court Action”). The parties
agreed to stay the State Court Action in mid-2012 to negotiate a consensual resolution. As part
of this consensual resolution, the parties agreed Metex would solicit a prepackaged plan of
reorganization in which Metex would enter into settlement agreements with the eight remaining
solvent Kentile Insurers (the “Prepackaged Plan”).
In June of 2012, Metex began solicitation of the Prepackaged Plan. By the voting
deadline, only 66.15% in amount of claims voted in favor of the plan, although more than 84%
of those voting cast votes in support. Accordingly, the Prepackaged Plan could not be
2 Kentile’s 1998 Plan is attached as Exhibit I to the Response. See Resp. Ex. I.
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confirmed. See 11 U.S.C. § 1126(c) (requiring two-thirds in amount of claims to vote in favor of
a plan).
III. 	Metex’s Bankruptcy Case and the Claim Objection
After the Prepackaged Plan failed to receive sufficient votes, Metex filed this chapter 11
case on November 9, 2012. On April 4, 2013, IDOR filed a proof of claim for the Claim in the
amount of $575,131.98. See Cl. Obj. Ex. 1. The Claim is for sales taxes (Illinois Retailer’s
Occupation Tax and Illinois Use Tax) based on two audits: (1) an audit of the prepetition periods
from July 1990 to November 1992 for which a tax deficiency of $173,023.31 plus penalties and
interest is asserted; and (2) an audit of the post-petition period from November 1992 through
September 1993 for which a tax deficiency of $58,161 plus penalties and interest is asserted. See
Resp. ¶ 2. The Illinois Retailer’s Occupation Tax imposes a tax on businesses engaged in the
sale of products at retail in the state of Illinois. See 35 Ill. Comp. Stat. 120/2 (2014). The Illinois
Use Tax imposes a tax for the privilege of using tangible personal property purchased at retail
from a retailer. See id. at 105/3. In its proof of claim for the Claim, IDOR classified its claim as
partially secured, partially priority under § 507(a)(8) of the Code, and partially general
unsecured. See Cl. Obj. Ex. 1. IDOR claimed secured status in the amount of $142,741.68,
priority status in the amount of $415,086.30, and general unsecured status in the amount of
$17,304. Id.
On March 17, 2014, the Debtor filed its Claim Objection asserting three grounds: (1) that
Kentile was not subject to either the Illinois Retailer’s Occupation Tax or the Use Tax; (2) that
the Claim is barred by applicable statute of limitations; and (3) that the Claim was discharged by
Kentile’s 1998 Plan. See Claim Obj. ¶¶ 20–24. In the alternative, should the Court allow the
Claim, the Debtor also objects to its classification as partially secured and partially priority. Id.
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¶¶ 25–28. After IDOR filed a Response and the Debtor filed its Reply, IDOR filed its Sur-
Reply. The Sur-Reply acknowledges that the Claim is not entitled to secured status to the extent
that the Debtor has no property in Illinois. See id. ¶ 18. IDOR additionally recognizes that it
erroneously calculated the priority and unsecured portions of the Claim. See id. ¶¶ 25–29.
IDOR now requests that the Court allow the Claim as a priority claim in the amount of
$136,391.82, and as a general unsecured claim in the amount of $438,740.16. See id. ¶ 29.
The Claim Objection was set for hearing on May 8, 2014. Due to counsel to IDOR’s
inability to appear in person at the hearing, IDOR requested that the Court either decide the
Claim Objection on the pleadings or alternatively continue the hearing until a later date. See
Mot., ECF 510. As the parties concurred that the issues involved in the Claim Objection are
legal in nature and do not require an evidentiary hearing, the parties agreed to submit the Claim
Objection to the Court on the pleadings.
Discussion
Section 502(a) of the Code provides that “[a] claim or interest, proof of which is filed
under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.” 11
U.S.C. § 502(a). If a party in interest objects to a claim, § 502(b) provides that, after notice and a
hearing, the court “shall determine the amount of [the] claim . . . and shall allow [the] claim in
such amount, except to the extent that . . . [the] claim is unenforceable against the debtor and
property of the estate under an agreement or applicable law . . . .” 11 U.S.C. § 502(b).
Accordingly, if the creditor’s claim is unenforceable under applicable state law, the claim is
unenforceable against the debtor and should be disallowed. See, e.g., In re Hess, 404 B.R. 747,
751 (Bankr. S.D.N.Y. 2009). For example, where a creditor’s claim has been discharged through
a prior bankruptcy proceeding, the claim is not enforceable against the debtor or its successors-
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in-interest. See 11 U.S.C. § 524(a); see also In re MCI, Inc., 2006 WL 544494, at *1 (Bankr.
S.D.N.Y. Jan. 27, 2006). Similarly, as numerous courts have held including this Court in Brill,
“[a] challenged claim will not be allowed by the bankruptcy court if the claim is barred by the
applicable statute of limitations.” In re Brill, 318 B.R. 49, 53 (Bankr. S.D.N.Y. 2004); see also
Hess, 404 B.R. at 750.
Courts in the Second Circuit apply a burden shifting framework for claims objections.
See In re St. Johnsbury Trucking Co., Inc., 206 B.R. 318, 323 (Bankr. S.D.N.Y. 1997), aff’d, 221
B.R. 692 (S.D.N.Y. 1998), aff’d, 173 F.3d 846 (2d Cir. 1999). A properly filed proof of claim
constitutes prima facie evidence of the claim’s amount and validity. See Fed. R. Bankr. P.
3001(f). When a valid proof of claim is properly filed, the party in interest objecting to the claim
carries the burden of putting forth evidence sufficient to refute the validity of the claim. See St.
Johnsbury Trucking, 206 B.R. at 323. After the objector does so, the burden shifts to the
claimant to establish the validity and amount of its claim by a preponderance of the evidence.
See In re Porter, 374 B.R. 471, 480 (Bankr. D. Conn. 2007). Here, the Debtor does not dispute
that IDOR properly filed a valid proof of claim for the Claim, placing the initial burden on the
Debtor to refute the claim. See Cl. Obj. Ex. 1. For the following reasons, the Debtor has met its
burden of refuting the Claim. In response, IDOR has failed to carry its resulting burden of
establishing the validity and amount of the claim by a preponderance of the evidence.
Accordingly, the Court sustains the Debtor’s Claim Objection.
I. 	The Debtor Is Bound by Kentile’s Failure to Object to the Allowance of Claims
for the Same Liability in Its Prior Bankruptcy Case
The Debtor first argues that it was not subject to either the Illinois Retailers’ Occupation
Tax or Illinois Use Tax. The Debtor asserts that the only business that Kentile ever conducted in
the state of Illinois was the manufacture of flooring tile. Cl. Obj. ¶ 20. Accordingly, the Debtor
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argues that Kentile was not subject to the Illinois Retailer’s Occupation Tax: it never engaged in
a retail business in the state, and is exempt from the Use Tax on equipment used in its
manufacturing process. See 35 Ill. Comp. Stat. 120/2 (2014); id. at 105/3-5(18). In response,
IDOR submits a copy of a sales tax return purporting to demonstrate that Kentile filed sales tax
returns during the periods referenced in the Claim. See Resp. Ex. A. 	IDOR submits that this
constitutes evidence that Kentile was subject to both the Retailers’ Occupation Tax and the Use
Tax. The tax return plainly indicates that it was submitted by “Kentile, Inc.” See id. The Debtor
argues that Kentile, Inc. and Kentile Floors, Inc. are wholly different entities. See Reply ¶ 2.
According to the Debtor, Kentile, Inc. was the entity that purchased Kentile Floors, Inc.’s Illinois
industrial property in a sale pursuant to § 363 of the Code approved by the Court during
Kentile’s 1992 chapter 11 case. See id.
The parties’ arguments notwithstanding, the Court need not reach the issue of whether the
tax return provided by IDOR proves that the Debtor was subject to the Retailers’ Occupation Tax
and the Use Tax. IDOR filed claims for the same tax liability at issue in the instant proceeding
against Kentile during the 1992 proceedings. See Cl. Obj. Ex. 2; Resp. Exs. B–H. Kentile failed
to object to the allowance of these claims. Thus, the claims were deemed allowed as against
Kentile in its bankruptcy proceedings. The Debtor, as successor to Kentile, now seeks to
collaterally attack the determination that those claims were allowed as against Kentile. Such a
collateral attack is impermissible. See Holly’s, Inc. v. City of Kentwood (In re Holly’s, Inc.), 172
B.R. 545, 562–68 (Bankr. W.D. Mich. 1994).
II. 	IDOR’s Claim was Discharged by Confirmation of Kentile’s 1998 Plan
Despite the fact that IDOR had allowed claims against Kentile, the Debtor correctly
asserts that those claims were discharged by confirmation of Kentile’s 1998 Plan in its 1992
bankruptcy proceedings. Article 9.2 of Kentile’s 1998 Plan specifically provided that
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“[c]onfirmation shall discharge and release the Debtor and its Estate from any and all
dischargeable and releasable Claims, debts, liens, security interests, encumbrances and interests
that arose before the Confirmation Date, and any debt of a kind specified in Bankruptcy Code
section 502(g), (h) or (i) . . . .” See Kentile’s 1998 Plan § 9.2; see also 11 U.S.C. § 1141. The
Claim on its face indicates that it arose prior to confirmation of Kentile’s 1998 Plan. See Cl.
Obj. Ex. 1. Accordingly, the Claim was discharged and must be disallowed. See In re MCI, Inc.,
2006 WL 544494, at *1–2 (Bankr. S.D.N.Y. Jan. 27, 2006) (holding that discharged claims are
unenforceable against the debtor).
Attempting to refute this point, IDOR argues that Kentile’s 1998 Plan provided for
payment in full of both priority and administrative tax claims, and cannot be read as
simultaneously discharging those same claims. See Resp. ¶¶ 15–17; see also Kentile’s 1998 Plan
§§ 3.1, 3.2 (providing for payment in full of allowed priority and administrative tax claims).
IDOR’s argument misconstrues the effect of confirmation under § 1141 of the Code.
“Under the Bankruptcy Code, a confirmed plan of reorganization acts like a contract that
is binding on all of the parties, debtor and creditors alike.” Adelphia Recovery Trust v. Bank of
Am., N.A., 390 B.R. 80, 88 (S.D.N.Y. 2008) (quotation omitted), aff’d, 379 F. App’x 10 (2d Cir.
2010). “The effect of confirmation is to discharge the entire pre-confirmation debt, replacing it
with a new indebtedness as provided in the confirmed plan.” In re Penrod, 169 B.R. 910, 916
(Bankr. N.D. Ind. 1994), aff’d, 50 F.3d 459 (7th Cir. 1995). Thus, following confirmation of a
plan of reorganization, the reorganized debtor is obligated to make the payments to creditors that
the plan requires. See In re Jordan Mfg. Co., Inc., 138 B.R. 30, 38 (Bankr. C.D. Ill. 1992)
(quotations and citations omitted). The reorganized debtor’s failure to fulfill its obligations
under the plan does not revive the original, prepetition debt. 	See In re Stratton Grp., Ltd., 12
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B.R. 471, 474 (Bankr. S.D.N.Y. 1981). “Instead, the creditor’s remedy is to enforce the
obligations contained in the confirmed plan.” Jordan, 138 B.R. at 38 (quotations omitted); see
also In re Benjamin Coal Co., 978 F.2d 823, 827 (3d Cir. 1992) (“[E]ach claimant’s remedies for
any future nonpayment of claims acknowledged in the plan are limited to the usual remedies for
the type of claim granted by the plan’s provisions.”); In re Xofox Indus., Ltd., 241 B.R. 541, 543
(Bankr. E.D. Mich. 1999) (“It is black-letter law that if a reorganized debtor defaults on plan
payments to an unsecured creditor, the creditor can pursue the debtor for the restructured debt
under the plan.”). Accordingly, “[a] post confirmation default should be treated as any other
contractual default under state law.” Xofox, 241 B.R. at 543 (quotation omitted).
By confirmation of Kentile’s 1998 Plan, IDOR’s tax claims were replaced by the Metex’s
obligation as the successor entity to Kentile to pay those claims in full as provided by Kentile’s
1998 Plan. See Kentile’s 1998 Plan §§ 3.1–3.2. All allowed administrative, priority and tax
claims were to be paid by the reorganized debtor (i.e., Metex) from its cash flow. See id. §§ 5.2–
5.4. To the extent Metex failed to do so, it breached its contractual obligations under Kentile’s
1998 Plan. IDOR’s remedy is to seek to enforce the obligations in the plan. See Jordan, 138
B.R. at 38. It cannot seek to revive its original prepetition tax claims as it is now attempting to
do. See Stratton, 12 B.R. at 474. 	Those debts were discharged by confirmation of Kentile’s
1998 Plan. See Penrod, 169 B.R. at 916.
III. 	IDOR’s Claim Is Barred Under the Applicable Statute of Limitations in Both
Illinois and New York
A. If Interpreted as a Claim Against Metex for Post-Confirmation Default
on Its Obligations Under the 1998 Plan, IDOR’s Claim Is Time Barred
IDOR’s claim against Metex for defaulting on its obligations under Kentile’s 1998 Plan
is properly viewed as a breach of contract claim. See Xofox, 241 B.R. at 543 (finding that a “post
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confirmation default should be treated as any other contractual default under state law.”).
Kentile’s 1998 Plan specifically provides for New York law to apply. See Kentile’s 1998 Plan §
12.10. Under New York Law, “an action upon a contractual obligation or liability, express or
implied” must be commenced within six years from the date the claim arose. N.Y. C.P.L.R. §
213(2). This chapter 11 case was filed on November 9, 2012, more than 13 years after Metex
was required to make payments due under Kentile’s 1998 Plan. See Kentile’s 1998 Plan §§ 3.1,
3.2. Thus, IDOR’s claim against Metex for its default under Kentile’s 1998 Plan is time-barred
under New York law.
B. Even if Viewed as a Prepetition Tax Claim, IDOR’s Claim Is Time
Barred Under Illinois Law
Even viewing the Claim as a tax claim rather than a breach of contract claim, the Claim is
still time-barred. Neither party disputes that suits on collection of tax revenue for the Illinois
Retailer’s Occupation Tax and Illinois Use Tax are subject to six-year statutes of limitation under
Illinois law. See 35 Ill. Comp. Stat. 120/5, 105/12 (2014); see also Cl. Obj. ¶ 21; Resp. ¶¶ 11–
14. IDOR’s Claim was at least 18 years old as of the commencement date. See Cl. Obj. ¶ 22.
Accordingly, IDOR is time barred from bringing suit against the Debtor to recover the Claim.
IDOR nonetheless argues that its Claim is not time barred as its “options in collecting
sales taxes are not limited to the filing of a law suit.” Resp. ¶ 12. IDOR has the ability under
Illinois law to assert an administrative levy “upon property and rights to property (whether real
or personal, tangible or intangible) of the taxpayer” in order to enforce the tax liability of the
taxpayer. 35 Ill. Comp. Stat. 120/5f (2014). 	This particular statute provides its own statute of
limitations: “No proceedings for a levy under this Section may be commenced more than 20
years after the latest date for filing of the notice of lien under Section 5b of this Act, without
regard to whether such notice was actually filed.” Id. The latest date for filing a notice of lien
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under 35 Ill. Comp. Stat.120/5b is three years after the tax is finalized. See id. at 120/5a, b, f. As
the taxes at issue were finalized on June 14, 1994, IDOR’s right to levy will not be time-barred
until June 14, 2017.
These arguments notwithstanding, IDOR’s right to levy is unavailable under the current
circumstances as Metex owns no property or interest in property in the state of Illinois, nor did it
at the time of the commencement of this bankruptcy case. See Decl. of Anthony J. Miceli ¶¶ 2–
3.3 The Court agrees with the Debtor that “[b]ecause the six year limitations period on IDOR’s
right to bring suit against the Debtor has expired under Illinois law and there is no property that
IDOR can levy upon to recover on its Claim, it would be inequitable to allow IDOR’s Claim to
survive.” Reply ¶ 13. 	Currently, IDOR has no means to recover on its Claims against Metex.
As discussed above, IDOR’s Claim is properly viewed as breach of contract claim to the extent
Metex defaulted on its obligations under Kentile’s 1998 Plan. That claim is time-barred.
Additionally, to the extent that IDOR conceivably still has prepetition claims for Retailers’
Occupation Taxes and Use Taxes, it is time-barred from asserting suit to collect, and Metex has
no property in Illinois against which IDOR can levy.
In sum, IDOR is currently time-barred or otherwise unable to collect on the Claim,
whether the Claim is viewed as a tax claim or a breach of contract claim for the Debtor’s default
under Kentile’s 1998 Plan. If the Court were to allow the Claim, upon confirmation of Metex’s
plan of reorganization, the claim would be replaced “with a new indebtedness as provided in the
confirmed plan.” Penrod, 169 B.R. at 916. This new indebtedness would essentially revive the
currently time-barred claim and subject it to a new statute of limitations (i.e., for breach of
contract under whatever state law is to govern Metex’s plan). Such would be an inequitable
result. See In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1994) (“It is well settled
3 The Miceli Declaration is attached as Exhibit 1 to the Reply. See Reply Ex. 1.
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that bankruptcy courts are courts of equity, empowered to invoke equitable principles to achieve
fairness and justice in the reorganization process.”).
As the Court is disallowing and expunging the Claim, it need not address whether the
claim is properly classified as partially secured, partially priority unsecured, and partially general
unsecured.
Conclusion
For the foregoing reasons, the Court sustains the Claim Objection, and disallows and
expunges the Claim in its entirety. The Debtor is directed to submit an order consistent with this
opinion.
Dated: Poughkeepsie, New York
June 13, 2014 	/s/ Cecelia G. Morris_ 	.
. 	CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
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