Articles Posted in Bankruptcy

Hernandez filed a voluntary Chapter 7 bankruptcy petition in December 2016, reporting one sizable asset: a pending workers’ compensation claim valued at $31,000. To place that claim beyond the reach of creditors, she listed it as exempt under section 21 of the Illinois Workers’ Compensation Act, 820 ILCS 305/21, applicable via 11 U.S.C. 522(b). Two days after filing for bankruptcy, Hernandez settled the claim. Hernandez owed significant sums to three healthcare providers who treated her work-related injuries. The providers objected to her claimed exemption, arguing that 2005 amendments to the Illinois Act enable unpaid healthcare providers to reach workers’ compensation awards and settlements. The bankruptcy court denied the exemption and the district judge affirmed. The Seventh Circuit certified to the Illinois Supreme Court the question: Whether the Illinois Workers’ Compensation Act, as amended, allows care-provider creditors to reach the proceeds of workers’ compensation claims. The court noted that Section 21 has been interpreted by bankruptcy courts to create an exemption for these assets; 2005 amendments imposed a new fee schedule and billing procedure for care providers seeking remuneration. The Illinois Supreme Court has not addressed the interplay between these competing components of state workers’ compensation law. View "Hernandez v. Marque Medicos Fullerton, LLC" on Justia Law

Chicago makes a car’s owner, rather than its driver, liable for many fines, including those for speeding, running a red light, and illegal parking. After their Chapter 13 bankruptcy payment plans were confirmed, the seven debtors incurred, and failed to pay, at least 72 fines aggregating almost $12,000. The debtors argued that a Chapter 13 plan does not provide for the payment of post-petition fines and that the automatic stay of 11 U.S.C. 362 prevented their cars from being towed or booted. The bankruptcy court ordered that the vehicles were the property of the estate for the duration of the payment plan. Reversing the order, the Seventh Circuit noted that the holding could be seen as permission to violate traffic laws with the fines never to be paid. The court noted that, while a Chapter 13 petition transfers most of the debtor’s assets to the bankruptcy estate, upon the confirmation of a payment plan, 11 U.S.C. 1327(b) presumptively returns that property to the debtor, who becomes personally responsible for the expenses of maintaining the property. The bankruptcy court gave no explanation for departing from that scheme. View "City of Chicago v. Marshall" on Justia Law

In 2006 Trinity borrowed about $2 million from a bank, secured by a mortgage. The bank sold the note and mortgage to ColFin, which relied on Midland to collect the payments. In 2013, Midland recorded a “satisfaction,” stating that the loan had been paid and the mortgage released. The loan was actually still outstanding. Trinity continued paying. In 2015, ColFin realized Midland’s mistake and recorded a document canceling the satisfaction. Trinity stopped paying. ColFin filed a state court foreclosure action. Trinity commenced a bankruptcy proceeding, which stayed the foreclosure, then filed an adversary action against ColFin, contending that the release extinguished the debt and security interest. The bankruptcy court, district court, and Seventh Circuit rejected that argument and an argument that the matter was moot because the property had been sold under the bankruptcy court’s auspices. There is a live controversy about who should get the sale proceeds; 11 U.S.C. 363(m), which protects the validity of the sale, does not address the disposition of the proceeds. Under Illinois law, Trinity did not obtain rights from the 2013 filing, which was unilateral and without consideration; no one (including Trinity) detrimentally relied on the release, so ColFin could rescind it. ColFin caught the problem before Trinity filed its bankruptcy petition, so a hypothetical lien perfected on the date of the bankruptcy would have been junior to ColFin’s interest. View "Trinity 83 Development LLC v. Colfin Midwest Funding LLC" on Justia Law

Anderson and Kaiser jointly borrowed about $700,000 from the Bank, secured by a mortgage. They did not pay; the Bank filed a foreclosure action in state court. That action was put on hold when Anderson commenced a bankruptcy proceeding. The Bank obtained relief from the automatic stay, 11 U.S.C. 362, to proceed with the foreclosure litigation. In state court, the Bank obtained approval to put the property up for auction. The sale was confirmed. The Bank then obtained a state court deficiency judgment against Kaiser; it did not appeal the omission of a deficiency judgment against Anderson. The state litigation ended in 2015. In the bankruptcy court, the Bank made a claim against Anderson for the same $650,000 shortfall that the state judge had awarded against Kaiser. On interlocutory appeal, the district court held that the absence of a deficiency judgment against Anderson in the state case blocks any further proceedings against him related to this loan. The Seventh Circuit affirmed, citing claim preclusion. The court rejected the Bank’s argument that the automatic bankruptcy stay deprived the state court of “jurisdiction” to make any decision at all, except to the extent allowed by the bankruptcy judge. View "BMO Harris Bank N.A. v. Anderson" on Justia Law

The Social Security Administration (SSA) reduced the payment of a back-award that it owed Berg by the amount of an earlier overpayment that Berg owed to SSA. Berg contested this setoff because it was taken during the 90-day period before the filing of her bankruptcy petition. The bankruptcy court concluded that SSA permissibly recovered $17,385 of overpayment but impermissibly improved its position by $2,015. The Seventh Circuit affirmed. Under 11 U.S.C. 553(b)(2), a debtor (Berg) may recover from a creditor (SSA) an amount set off by the creditor in the 90 days preceding the filing of the bankruptcy petition only to the extent that the creditor improved its position during that 90-day period. The bankruptcy court correctly calculated the accrual of Berg’s benefits as occurring on the dates that she had a right to benefits--the last day of each month that she was eligible for benefits and survived to the end of the month. On May 9, 2014, 90 days before the filing of the petition, that amount was $17,385. Because Berg then owed SSA $19,400, the insufficiency on that date was $2,015. On July 30, the date the SSA took the setoff, Berg still owed SSA $19,400, but SSA owed her $20,307; SSA improved its position by $2,015 during the 90-day preference period. That is the amount that Berg may now recover. View "Berg v. Social Security Administration" on Justia Law

Irwin is a holding company for two banks. When the 2007–2008 financial crisis began, regulators and Irwin’s outside legal counsel advised the company to buoy up its sinking subsidiaries. Irwin’s Board of Directors instructed the officers to save the banks. Private investors showed little interest and federal regulators indicated that a bailout was unlikely. In 2009, Irwin received a $76 million tax refund. The Board authorized Irwin’s officers to transfer the refund to the banks, believing that the refund legally belonged to the banks. The banks ultimately failed. Irwin filed for bankruptcy. Levin, the Chapter 7 trustee, sued Irwin’s former officers, alleging that they breached their fiduciary duty to provide the Board with material information concerning the tax refund. Levin claimed the officers should have known the banks were going to fail and should have investigated alternatives to transferring the tax refund; had the officers done so, they would have discovered that Irwin might be able to claim the $76 million as an asset in bankruptcy, so that the Board would have declared bankruptcy earlier, maximizing Irwin's value for creditors. The Seventh Circuit rejected the argument. Corporate officers have a duty to furnish the Board of Directors with material information, subject to the Board’s contrary directives. On the advice of government regulators and expert outside legal counsel, the Board had prioritized saving the banks. The officers had no authority to second-guess the Board’s judgment with their own independent investigation. View "Levin v. Miller" on Justia Law

Lester and William Lee created LIA in 1974 as a public company. William’s sons (Lester's nephews) later joined the business. LIA subsequently bought out the public shareholders, leaving Lester owning 516 shares; William owned 484. William created the Trust to hold his shares. The nephews served as trustees. Lester encountered difficulties with another company he owned, Maxim. He proposed that Maxim merge with LIA; William rejected this idea. Lester told the nephews, “I will screw you at every opportunity,” and made other threats, then, as majority shareholder, approved a merger of LIA and another company. The Trust asserted its rights under Indiana’s Dissenters’ Rights Statute. Lester gutted LIA to prevent the Trust from collecting the value of its LIA shares. He bought property from LIA on terms favorable to him and realized substantial profits. LIA subsidiaries were transferred for little or no consideration to Lester’s immediate family. Lester also perpetrated a collusive lawsuit, resulting in an agreed judgment that all LIA assets should be transferred to him and his companies. Lester did not disclose these actions to the nephews. In 2008, the Jennings Circuit Court conducted an appraisal in the dissenters’ rights action. Between the trial and the judgment, Lester dissolved LIA. The court entered a $7,522,879.73 judgment for the Trust. In 2012, Lester petitioned for Chapter 7 bankruptcy. The Trust initiated a successful adversary proceeding to pierce LIA’s corporate veil and hold Lester personally liable for the judgment. The Seventh Circuit affirmed, noting the facts were undisputed. View "William R. Lee Irrevocable Trust v. Lee" on Justia Law

The bankrupt businesses had debts that far exceeded the value of their assets. Bankruptcy courts authorized the sale of their principal assets (gasoline stations and a movie theater and café). Under Illinois law, the Illinois Department of Revenue (IDOR) may pursue the purchaser in a bulk sale for state taxes owed by the seller. To facilitate sales of the debtors’ properties, the bankruptcy court (11 U.S.C. 363(f)) allowed the sales to proceed free of any interests other than the bankruptcy estate's. Under section 363(e), a party whose interest has been removed is entitled to “adequate protection,” typically payment from the sale proceeds to compensate for the decrease in value of the party's interest. Each bankruptcy court assumed that IDOR was entitled to adequate protection but concluded that, because the sale proceeds were insufficient to satisfy the claims of the senior-most creditors (mortgages holders), IDOR was entitled to no portion of the sale proceeds. There were no other assets available. The Seventh Circuit affirmed. While the removal of IDOR’s interest likely increased the price bidders were willing to pay for the properties, IDOR has not given a realistic assessment of the value of its interest. The court rejected an argument that IDOR would have recovered 100 percent of the tax delinquency from an informed purchaser; IDOR’s claims were properly denied for want of evidence enabling the bankruptcy court to assign a reasonable value under section 363(e). View "Illinois Department of Revenue v. First Community Financial Bank" on Justia Law

In 2003, Williams, behind on paying SCCA condominium association fees, filed the first of five, Chapter 13 Bankruptcy petitions so that creditors were stayed from initiating collection. Her scheme was to not make payments required by her Chapter 13 plan so that the court would dismiss the case; SCCA would file eviction and collection suits; Williams would then file a new Chapter 13 petition. After voluntarily dismissing her second bankruptcy petition, Williams signed a deed transferring the condominium to Wilke. A deed recorded weeks later returned title to Williams. Wilke paid nothing and never occupied the condominium but obtained loans secured by the condominium. In her subsequent bankruptcy petitions, Williams failed to disclose the transfers but stated, falsely, that Wilke was a co‐debtor and would contribute toward the mortgage. After dismissing Williams’s fifth petition, the court barred Williams from filing a new petition for 180 days. She again deeded the condominium to Wilke, who filed a bankruptcy petition stating it was his property. The court dismissed the case. Both were charged with bankruptcy fraud, 18 U.S.C. 157. Wilke pled guilty and cooperated. The court limited the defense’s cross-examination of SCCA's board member and attorney about a class action lawsuit Williams had filed against SCCA and about SCCA’s treatment of Williams relative to other tenants, reasoning that the topics were an irrelevant attack on the underlying debt. Williams was convicted. With enhancements for causing a loss of $193, 291 and because the offense involved 10 or more victims, her Guidelines Range was 51–63 months’ imprisonment. The court sentenced her to 46 months. The Seventh Circuit affirmed, rejecting challenges to the court’s limitation on cross-examination and to the sentencing enhancements. View "United States v. Williams" on Justia Law

In Jansen’s bankruptcy case, Gleason brought an adversary proceeding, 11 U.S.C. 523(a)(2)(A), regarding a default judgment ($400,000) obtained in a case involving a phony investment scheme. Gleason unsuccessfully argued that Jansen was not entitled to relitigate that judgment. A bench trial revealed that Gleason gave $141,000 to Jansen’s company, Baytree, for closing costs in a business acquisition. The deal never closed and Jansen never fully refunded the money. Gleason’s checks, endorsed by “Talcott Financial … D/B/A Baytree,” were deposited, then disappeared. Jansen later pleaded guilty to unrelated money-skimming charges, involving a bank account in the name of Talcott Financial, which was involuntarily dissolved in 1999. Jansen testified that the “Talcotts” were two different businesses with separate accounts. The bankruptcy court credited Jansen’s story and concluded the debt was dischargeable. Meanwhile, Jansen tried to withdraw his guilty plea. Despite a warning that invoking the privilege against self-incrimination could lead to an adverse inference for bankruptcy purposes, Jansen asserted that privilege repeatedly. Gleason filed the “merits appeal,” then found publicly-available records in previous litigation, including bank statements. The bankruptcy court declined Gleason's motion for relief from the judgment, reasoning the evidence, easily found on PACER, was not new. Gleason then filed a “Rule 60 appeal.” After procedural confusion, during which the merits appeal was dismissed, the district court and Seventh Circuit affirmed. The district court’s mistaken assumption that it could reach the merits of the case in the later-filed Rule 60 appeal is not enough to revive the dismissed merits appeal. View "Gleason v. Jansen" on Justia Law