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In Re: Montgomery Ward

March 9, 2011

IN RE: MONTGOMERY WARD, LLC, ET AL, DEBTORS, DIKA-WARD LLC, APPELLANT
IN RE: MONTGOMERY WARD, LLC, ET AL, DEBTORS, PLAN ADMINISTRATOR OF MONTGOMERY WARD, LLC; PA COMM OF MONTGOMERY WARD, LLC, APPELLANTS



On Appeal from the United States District Court for the District of Delaware (D. C. Nos. 2-08-cv-00201; 2-08-cv-00202) District Judge: Honorable Joseph J. Farnan

The opinion of the court was delivered by: Roth, Circuit Judge

PRECEDENTIAL

Argued on June 2, 2010

Before: JORDAN, ROTH and TASHIMA*, Circuit Judges

*Honorable A. Wallace Tashima, Senior United States Circuit Judge for the Ninth Circuit, sitting by designation.

OPINION

Dika-Ward filed a proof of claim in Montgomery Ward=s second bankruptcy proceeding for amounts allegedly due under a mortgage and a lease. The Bankruptcy Court, ruling on the parties= motion and cross motion for summary judgment, held that (1) Montgomery Ward was not personally liable under the mortgage, (2) Montgomery Ward had no liability for common area maintenance expenses under the lease, and (3) Montgomery Ward=s Plan Administrator was precluded from challenging whether the lease was a true lease, as this was res judicata from Montgomery Ward=s first bankruptcy proceeding. Both parties appealed this order, and the District Court affirmed the judgment of the Bankruptcy Court. We will affirm the summary judgment order as to the claims for the mortgage note and for common area maintenance. However, we will vacate the Bankruptcy Court=s order, ruling that res judicata precluded the Plan Administrator=s cause of action, and remand this case to the District Court for remand to the Bankruptcy Court so that the Plan Administrator may challenge the nature of the lease.

I. BACKGROUND

Prior to its bankruptcy petitions, Montgomery Ward operated one of the largest retail merchandising organizations in the United States. Montgomery Ward=s plans in the 1970s to develop the Jefferson Square Mall in Joliet, Illinois, and a new department store there gave rise to the disputed claims in this appeal. Montgomery Ward, Joliet Mall Associates, and Wieboldt Stores entered into a Reciprocal Construction, Operation and Easement Agreement (RCOEA) in which the parties agreed to develop the mall and share certain expenses, including common area maintenance and repair expenses (collectively referred to as Common Area Maintenance, or CAM, expenses).

Montgomery Ward contracted with Jolward Associates Limited Partnership (Jolward) to construct a department store (the Department Store) on a parcel of land that Montgomery Ward owned at the planned site of the Jefferson Square Mall (the Land). The parties entered into a Ground Lease whereby Montgomery Ward leased the Land to Jolward and Jolward agreed to construct the Department Store. Montgomery Ward consented to pledge its fee interest in the Land to secure financing for the Department Store=s construction, with Ait being expressly understood and agreed that Lessor[Montgomery Ward] assumes no personal liability for the payment of any principal, interest or premium on the Notes by so doing.@ State Farm Life Insurance Co. financed the Department Store=s construction, with Jolward executing a note (the Note) secured by Jolward=s rights in the Ground Lease, the Lease and Sublease Agreement (as described below), and the Department Store (the Mortgage).

Montgomery Ward joined in the execution of the Mortgage to grant State Farm a security interest in its rights in and to the Land, the Department Store, and the RCOEA. The Mortgage agreement reiterated that Montgomery Ward Aassumes no personal liability for the payment of any principal, interest or premium, if any, on the Note@; that is, the Mortgage was without recourse to Montgomery Ward.

Jolward leased the Department Store and the Land back to Montgomery Ward under a Lease and Sublease Agreement. Montgomery Ward received an option to purchase the Department Store at the end of the lease, and it agreed to indemnify Jolward for any expenses or liabilities incurred as a result of Jolward=s interest in the estate.

Over twenty years later, in 1997 and again in 2000, Montgomery Ward filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code. Creditors filed proofs of claim in each of these bankruptcies on account of the Mortgage and the Lease and Sublease Agreement, as described below.

A. Ward I

In Montgomery Ward=s first bankruptcy proceeding (Ward I), State Farm filed a proof of claim for the outstanding balance of the Mortgage. The Confirmed Plan ofReorganization (the Ward I Plan) provided for no distributions to State Farm on account of the Mortgage; State Farm simply retained its security interest.

The Ward I debtor-in-possession (the Ward I Debtor) assumed the Lease and Sublease Agreement, meaning that it agreed to continue to be bound by the agreement and to pay any past-due amounts to Jolward. State Farm, as assignee of Jolward=s interest in the Lease and Sublease Agreement, filed a proof of claim for these past due ...


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