Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

Articles Posted in Bankruptcy
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The case involves a dispute between the Trustee for the bankrupt company BWGS, LLC and BMO Harris Bank N.A. and Sun Capital Partners VI, L.P. The Trustee sought to avoid a payment made by BWGS to BMO Harris, which was used to finance the acquisition of BWGS by Sun Capital's subsidiary. The Trustee argued that the payment constituted a constructively fraudulent transfer under the U.S. Bankruptcy Code and Indiana state law.The United States Court of Appeals for the Seventh Circuit had to address two novel issues: whether Section 546(e) of the Bankruptcy Code, which protects certain transactions made “in connection with a securities contract,” applies to transactions involving private securities; and, if so, whether it also preempts state law claims seeking similar relief.The Court held that Section 546(e) does apply to transactions involving private securities and does preempt state law claims seeking similar relief. Consequently, the Trustee's attempt to avoid the payment under the Bankruptcy Code and Indiana law was barred by Section 546(e). The Court also rejected the Trustee's argument that he could recover the value of the payment from Sun Capital under a different provision of the Bankruptcy Code, holding that this claim was also preempted by Section 546(e). The Court thus affirmed the lower court's decision to dismiss the Trustee's complaint with prejudice. View "Petr v. BMO Harris Bank N.A." on Justia Law

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The case in question originated in the United States Court of Appeals for the Seventh Circuit. The dispute arose after the dissolution of a business partnership between Gregory Kleynerman and Scott Smith, which resulted in Smith obtaining a state court judgment of $499,000 against Kleynerman. This judgment was secured by Kleynerman's membership interest in Red Flag Cargo Security Systems LLC. Following this, Kleynerman filed for bankruptcy and valued his interest in Red Flag at $0. Smith argued in the bankruptcy court that the state court's judgment was a result of Kleynerman's fraud and thus could not be discharged. However, the bankruptcy court rejected this argument.After the bankruptcy case was closed, Kleynerman asked the state court to deem the $499,000 judgment discharged. Smith contended that under Wisconsin law, only debts secured by real property can be avoided. The state court agreed with Smith, which led Kleynerman to request the bankruptcy court to reopen the case and clearly state that both the $499,000 debt and the lien on Kleynerman’s interest in Red Flag no longer existed.The bankruptcy court reopened the case and the district court affirmed the decision. The appellate court agreed with the lower courts, stating that the bankruptcy judge had authority to reopen the case, and that Kleynerman had cause for reopening.Furthermore, the court held that the value of Kleynerman’s interest in Red Flag was a matter for the bankruptcy judge to decide before the discharge. Smith had an opportunity to object to Kleynerman's valuation of his interest in Red Flag but failed to do so until after the bankruptcy court had entered its discharge order. The court concluded that Smith's post-discharge subpoenas seeking information about the value of Kleynerman’s interest in Red Flag were a fishing expedition and an exercise in harassment, which was properly rejected by the bankruptcy judge. Therefore, the court affirmed the decision of the lower courts. View "Smith v. Kleynerman" on Justia Law

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Fliss, Wojciak, and Barr took out a $200,000 bank loan for their jointly owned companies. Each man personally guaranteed the loan. When the borrowers defaulted, the bank obtained a state court $208,639.95 consent judgment, holding the guarantors jointly and severally liable. Wojciak then entered into an agreement with the bank, through his company, Capital I, to purchase the promissory note and judgment debt for $240,000, then entered into a settlement agreement with the bank, agreeing to pay $240,000. Wojciak's other company, Capital II wired the bank $240,000. The state court substituted Capital I for the bank as the plaintiff. Wojciak moved to enforce the judgment: Capital I commenced a supplemental proceeding and sought property turnovers. Fliss and Barr unsuccessfully argued that the debt was extinguished when the Wojciaks paid $240,000 in exchange for settlement.Fliss filed a Chapter 13 bankruptcy petition. Wojciak had Capital I file a secured claim, seeking to enforce the judgment–$359,967.69 including post-judgment interest. The bankruptcy court disallowed that claim, finding that Wojciak used Capital I as his alter ego and became both the creditor and debtor, which extinguished the debt. The district court and Seventh Circuit affirmed. The bankruptcy court had subject matter jurisdiction to consider the claim objection—the Rooker-Feldman doctrine posed no obstacle. Capital I failed to demonstrate the existence of a final judgment as required by res judicata and collateral estoppel. View "Generation Capital I, LLC v. Fliss" on Justia Law

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LSQ provides invoice-factoring services to other businesses, including Engstrom. Weeks before Engstrom declared bankruptcy, its CEO, Campion orchestrated a payoff agreement between LSQ and a new lender, Millennium. Pursuant to the agreement, Millennium paid Engstrom’s debt to LSQ, replacing LSQ as Engstrom’s creditor. In exchange, LSQ released all of its interest in Engstrom’s accounts, which immediately went to Millennium. Once Engstrom filed for bankruptcy, the Trustee of its estate sued LSQ in an attempt to avoid the payoff, alleging that the accounts Millennium purchased were worthless and that LSQ conspired with Engstrom to leave Millennium with the phony accounts when Engstrom’s business fell apart. The Trustee claims Engstrom used the new financing from Millennium to pay off LSQ, keep LSQ quiet about the Debtor having fake accounts, and keep its Ponzi scheme running. The Trustee argued that the payoff agreement was avoidable as both a preferential and a fraudulent transfer.The bankruptcy court dismissed the suit, holding that the payoff agreement was not avoidable because it did not qualify as a transfer of “an interest of the debtor in property,” 11 U.S.C. 547, 548. The district court and Seventh Circuit agreed. Because the transaction had no effect on Engstrom’s bankruptcy estate, the Bankruptcy Code’s avoidance provisions play no role. View "Mann v. LSQ Funding Group LC" on Justia Law

Posted in: Bankruptcy
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The United States Bankruptcy Court for the Northern District of Illinois ruled that all assets held by the Soad Wattar Revocable Living Trust—including the Wattar family home—were part of the bankruptcy estate of Richard Sharif. Sharif was the son of Soad Wattar, now de‐ ceased. As the sole trustee of the Wattar trust. Sharif’s sisters, Haifa and Ragda Sharifeh, soon launched an effort to keep the trust proceeds out of their brother’s bankruptcy estate. At issue in these appeals are the bankruptcy court’s rulings on three motions: (1) Haifa’s 2015 motion to vacate the court’s decision that all trust assets belonged to the bankruptcy estate; (2) the sisters’ joint 2016 motion for leave to sue the Chapter 7 trustee assigned to Sharif’s bankruptcy for purported due process violations; and (3) Ragda’s motion seeking both reimbursement of money she allegedly spent on the family home and the proceeds from Wattar’s life insurance policy, which the court had found to be an asset of the trust and therefore part of the bankruptcy estate.   The Seventh Circuit affirmed. The court held that even if Haifa were really the executor, she simply waited too long to assert the estate’s rights. In the bankruptcy and district courts, the trustee raised the equitable defense of laches, which cuts off the right to sue when (1) the plaintiff has inexcusably delayed bringing suit and (2) that delay harmed the defendant. Next, the court held that the bankruptcy court correctly concluded that the motion did not set forth a prima facie case for a right to relief against the trustee. View "Estate of Soad Wattar v. Horace Fox, Jr." on Justia Law

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Jelena filed for Chapter 7 bankruptcy. The Trustee sued her mother, Jorgovanka, in a “turnover” proceeding, 11 U.S.C. 542, to recover a stake in a company registered in Jorgovanka’s name. The Trustee successfully argued before the bankruptcy court that Jorgovanka served as Jelena’s nominee—a party who holds title for another’s benefit. The court ruled that equitable ownership of the stake in the company belonged to Jelena, and was subject to turnover to the bankruptcy estate.The district court and Seventh Circuit affirmed, rejecting Jorgovanka’s argument that the bankruptcy court incorrectly applied a preponderance of the evidence standard of proof, rather than clear and convincing evidence. A preponderance standard applies unless particularly important individual interests are involved or the estate’s theory for property turnover imposes a higher standard of proof. Neither situation exists here. The bankruptcy court did not clearly err in finding that the Trustee had met his burden of establishing Jelena’s equitable ownership. The court properly considered the close personal relationship, the consideration given for the property, the anticipation of collection activity, the failure to record the conveyance, and the transferor’s continued control over the property. Because Jorgovanka presented a colorable legal argument, the court declined to award sanctions. View "Dordevic v. Paloian" on Justia Law

Posted in: Bankruptcy
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Peraica represented Dordevic in her Chapter 7 bankruptcy proceeding and submitted a Statement of Financial Affairs (Rule 2016 disclosure) in which he reported that Dordevic had paid him $5,000. As the Trustee learned during discovery, Dordevic had actually paid Peraica $21,500. The Trustee informed Peraica that he needed to file an updated Rule 2016 fee disclosure. Peraica instead sent the Trustee an informal accounting document listing $21,500 in fees. The Trustee responded: “The Rule 2016 disclosures actually need to be filed with the Court” by submitting “an official form.” Peraica repeatedly ignored the Trustee’s reminders. The Trustee filed a motion, 11 U.S.C. 329, to examine the fees. Peraica failed to respond; the Trustee then requested that all fees be forfeited. The bankruptcy court granted the motion.The district court and Seventh Circuit affirmed. Beyond Peraica’s brazen disregard of the Trustee’s advice, Peraica’s proffered explanation for not updating his fee disclosure lacking, if not false. Peraica had been involved in more than 350 bankruptcy cases in the Northern District of Illinois alone. The bankruptcy court ordered Peraica to disgorge all past fees as a penalty for his blatant lack of compliance with his obligations. There is no leeway for partial or incomplete disclosure. View "Peraica v. Layng" on Justia Law

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Kimball entered annexation agreements with Illinois municipalities and contracted separately with Fidelity as a surety to issue bonds securing performance on those obligations. Fidelity required Kimball to indemnify it. In 2008, Kimball filed for Chapter 11 bankruptcy relief before it satisfied its development obligations. The municipalities and Fidelity filed proofs of claim.Fidelity voted in favor of Kimball's reorganization plan. The confirmation order released the claims of every party that voted for the plan; an injunction prohibited those entities from seeking payment on their claims. Kimball’s assets, “free and clear of any and all liens, claims, encumbrances, and interests,” went into a trust that sold its development interests to TRG. The bankruptcy court later allowed the municipalities to sue Kimball to establish liability in order to recover the proceeds of the performance bonds.The municipalities sued Fidelity in state court to collect on the bonds. Fidelity interpleaded TRG. TRG asked the bankruptcy court to enforce the Kimball plan confirmation order and injunction against Fidelity and alleged “knowing and intentional violation of the confirmation order.” The bankruptcy court held Fidelity in contempt of that order, concluded that the order extinguished Kimball’s duty to indemnify Fidelity, and awarded TRG $9.5 million in sanctions, The district court and Seventh Circuit affirmed. The bankruptcy court undertook a careful and detailed analysis in finding Fidelity in contempt and assessing sanctions based on TRG's costs. There was no legal or factual error. View "Fidelity and Deposit Company of Maryland v. TRG Venture Two, LLC" on Justia Law

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Bankruptcy trustees can recover some transfers made to outside parties during the 90 days before the debtor files a petition, 11 U.S.C. 547(b)(4)(A). Warsco, the trustee in the Harris bankruptcy, discovered that about $3,700 had been paid to Creditmax during those 90 days under a garnishment order, which was issued by an Indiana state court more than 90 days before Harris filed his bankruptcy petition. Warsco began an adversary proceeding to recover the $3,700Creditmax argued that the definition of a “transfer” under section 547 depends on state law and that under Indiana law a “transfer” occurs when a garnishment order is entered, not when money is paid. The bankruptcy court denied the Trustee’s application. The Seventh Circuit overruled and remanded the decision, citing a 1992 Supreme Court holding that federal rather than state law defines the meaning of “transfer.” The “transfer” occurs when money changes hands. View "Warsco v. Creditmax Collection Agency, Inc." on Justia Law

Posted in: Bankruptcy
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Ryan sought worker’s compensation and entered into a settlement with his employer, calling for "$150,000 to Rodney Ryan, minus attorney fees and costs listed below; $400,000 to the Trust Account of Fortune & McGillis for disbursement to medical providers and lienholders, it being understood that from any balance remaining Mr. Ryan shall receive 80% and Fortune & McGillis shall receive 20%.” Fortune, Ryan’s law firm, received $30,000 in fees. The employer agreed to fund a Medicare Set Aside for Ryan’s future medical expenses. A state administrative law judge approved the Settlement.Weeks later, before any of the $400,000 was distributed to his doctors, Ryan filed for bankruptcy and attempted to exempt the $400,000 from the estate, citing Wisconsin Statutes 102.27(1), which says no “claim for [worker’s] compensation, or compensation awarded, or paid, [may] be taken for the debts of the party entitled thereto.” Ryan owed more than $800,000 in unpaid medical bills. His medical creditors cited Section 102.26(3)(b)(2), “[a]t the request of the claimant[,] medical expense[s], witness fees[,] and other charges associated with the claim may be ordered paid out of the amount awarded.” The district court and Sixth Circuit affirmed the bankruptcy court holding that Ryan could not exempt the $400,000. The Order created an express trust in favor of the doctors with Fortune as trustee. There were also "grounds to impose a constructive trust because allowing Ryan to keep the $400,000 would have amounted to unjust enrichment.” View "Ryan v Branko Prpa MD LLC" on Justia Law

Posted in: Bankruptcy