UNITED STATES BANKRUPTCY COURT FOR
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
IN RE:
WALLACE’S BOOKSTORES, INC. CASE NO. 01-50545
DEBTOR
MEMORANDUM OPINION AND ORDER
1. Introduction and factual background
Lyndon Property Insurance Company (“Lyndon”) has filed a Motion for Adjudication of Subrogation Rights (“the Subrogation Motion”)in regard to certain bonds it issued on behalf of the Debtor to assure its performance of contractual obligations to Southern University (“Southern”). Lyndon’s liability on these bonds was established in Adversary Proceeding No. 02-5032, Lyndon Property Insurance Company v. E.K.U., et al. (“the Universities Matter”). Southern has filed its Opposition to Motion for Adjudication of Subrogation Rights. The parties have filed briefs in support of their respective positions, and the Liquidating Supervisor, Bernard Katz (“Katz”), has filed a Response to Brief in Support of Lyndon’s Right of Subrogation to the Claim of Southern University.
On March 19, 2007 an Order Establishing Briefing Schedule was entered. This Order directed that Lyndon file a brief in support of the Subrogation Motion concerning the effect the release and settlement between Southern and Katz has on the Subrogation Motion. The release and settlement was pursuant to a Settlement Agreement entered into on September 3, 2003 in Adversary Proceeding No. 03-5043, Katz v. Southern University System, a preference action (“the Settlement Agreement”). The Settlement Agreement was approved by the court by order entered on December 23, 2003. Southern also filed a Motion and Memorandum to Dismiss and/or Strike Lyndon’s Motion for Adjudication of Subrogation Rights (“the Motion to Dismiss”), and Lyndon filed a Response. All these matters were subsequently heard on July 12, 2007, and taken under consideration for decision.
2. The Motion to Dismiss
The Motion to Dismiss raises the issue of this court’s jurisdiction to hear the Subrogation Motion. Southern contends that Lyndon’s effort to be subrogated to any rights it (Southern) retains against the Debtor is simply a contract dispute involving two non-debtors. Further, Southern contends, the outcome of this dispute in regard to the Debtor is “economically neutral.” In the Universities Matter, from which this matter flows, the court determined that it was a non-core, related proceeding in which it could hear and enter final orders and/or a judgment pursuant to Judicial Code section 157(c)(1) and (2). All parties to the proceeding, including Southern, consented to the court’s hearing the matter and entering final orders. There is no reason why that determination does not continue to apply here. The court finds that it has jurisdiction and will therefore overrule the Motion to Dismiss.
3. The Subrogation Motion
Lyndon contends that it is entitled to be subrogated to any claim which Southern retains against the Debtor. Southern responds that Lyndon is not entitled to subrogation because its claim against the Debtor has not been paid in full. In the Universities Matter the court determined that Lyndon was liable on its bonds, and awarded Southern judgment on its counterclaim therein in the amount of $210,000.00 (the combined bond amount in favor of Southern) plus interest. This award was upheld on appeal, and Lyndon has paid it. As this court recognized in the Universities Matter, Southern’s total claim against the Debtor was over $400,000.00. The amount over and above the amount awarded pursuant to the bonds has not been paid according to Southern, and it argues that pursuant to Bankruptcy Code section 509(c) Lyndon’s claim for subrogation must be subordinated to Southern’s claim until the balance of it is paid.
As set out above, Southern entered into a Settlement Agreement with Katz in Adversary Proceeding No. 03-5043. One of the terms of the Settlement Agreement provides that Southern
waive[s] any and all pending Proofs of Claim against Debtors or Debtors’ estate, any Proof of Claim or application for administrative expenses and any Proof of Claim in regard to the Settlement Amount, provided that such waiver and settlement does not constitute, is not considered, nor otherwise deemed to be, a waiver, set off, or reduction of any amount claimed to be due and owing to [Southern] by Lyndon Property Insurance Company, which claims are the subject of the Adversary Proceeding entitled ‘Lyndon Property Insurance Company v. Wallace’s Bookstores, et al.,’ No. 02-5032 on the docket of this Court.
Settlement Agreement, pp. 3-4. This provision is relevant in the instant matter for several reasons. First of all, Southern waived its claims against the Debtor and cannot now contend that it is still owed the balance of its claim. Southern’s argument appears to be that Lyndon is responsible for the balance of its claim, but presents no authority for the proposition that Lyndon is liable on any amount over and above the amount of its bonds.
At the time that the Settlement Agreement was approved by the court, the Universities Matter, and specifically the question of Lyndon’s liability on its bonds, had not been decided. Southern’s reservation of rights against Lyndon in the Settlement Agreement was in regard to the Universities Matter. In the Universities Matter, Southern sued on the total amount owed under the bonds, $210,000.00, and Southern does not dispute that this amount has been paid. Southern has no further claims against Lyndon. On the other hand, Lyndon is in no better position to prevail on its Subrogation Motion. As Katz points out in his Response, the estate has no obligation to either Southern or Lyndon, and there is no claim to which subrogation could apply. It therefore appears that Lyndon’s Subrogation Motion is moot, and the court so concludes. It is therefore hereby ordered that Lyndon’s Motion for Adjudication of Subrogation Rights is overruled.
Copies to:
Wendell L. Jones, Esq.
Michael H. Piper, Esq.
Gregory R. Schaaf, Esq.