Articles Posted in Bankruptcy

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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

Posted in: Bankruptcy, Tax Law

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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

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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

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Blake is a below‐median income debtor who filed for Chapter 13 bankruptcy. In her proposed bankruptcy plan, Blake sought to retain her annual earned income tax credit and a portion of her tax over‐withholdings. Trustee Marshall objected to confirmation of Blake’s plan, arguing that Blake is required to turn over her entire tax refund for use as additional plan payments. The bankruptcy court confirmed the plan over Marshall’s objection, reasoning that tax credits are income under the Bankruptcy Code that must be taken into account when calculating the debtor’s projected disposable income for plan payments but that Blake could retain her tax refund if she prorated it as monthly income and offset it with reasonably necessary expenses to be incurred throughout the year. The Seventh Circuit affirmed. Tax credits are income under the Bankruptcy Code; below‐median income debtors may prorate their annual income tax refund and associated expenses. By confirming Blake’s plan, the bankruptcy court implicitly found, based on the totality of the circumstances, that her plan was proposed in good faith. The court’s approach did not make the plan less feasible and promotes the purposes of Chapter 13. View "Marshall v. Blake" on Justia Law

Posted in: Bankruptcy

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Timothy and Belva Thorpe bought an Illinois house as joint tenants in 1987. They lived in that home until after Belva filed for divorce in October 2012. Timothy filed for bankruptcy protection in June 2013. A month later, an Illinois divorce court awarded Belva the marital home. At the moment Belva filed for divorce, section 503(e) of the Illinois Marriage and Dissolution of Marriage Act granted Timothy and Belva contingent rights in the entire house. The bankruptcy estate acquired Timothy’s half-interest in the marital home at the moment he declared bankruptcy. The district court held that Timothy’s estate took his half-interest subject to Belva’s contingency so that the divorce court’s award divested the estate of any right to the house. The Seventh Circuit affirmed, rejecting the trustee’s argument based on the second sentence of section 503(e), which provides that contingent interests in marital property “shall not encumber that property so as to restrict its transfer, assignment or conveyance.” The plain statutory text demonstrates that the bankruptcy estate took Timothy’s half-interest in the marital home subject to Belva’s contingent interest. View "Reinbold v. Thorpe" on Justia Law

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The “senior Veluchamys” earned great wealth in business. They acquired two banks in the 1990s and merged them. When the bank suffered financial problems, the senior Veluchamys personally borrowed and guaranteed loans totaling $40 million from a predecessor of Bank of America (BoA). The loans went into default in 2008. BoA obtained a judgment against the senior Veluchamys in 2010 for over $43 million. The senior Veluchamys filed a bankruptcy petition in 2011. BoA filed an adversary proceeding against them and their children, the “junior Veluchamys”, alleging a scheme to hinder, delay, or defraud creditors by attempting to hide tens of millions of dollars from BoA and other creditors. The bankruptcy court determined the evidence established all of BoA’s major allegations. The district court and Seventh Circuit agreed, rejecting an argument that turnover to the Estate under 11 U.S.C. 542 was not the appropriate remedy regarding $5,500,000 they claim they transferred to a company in India, particularly when that company was not joined as a necessary party. The Seventh Circuit upheld the language of the district court’s judgment requiring turnover of specific jewelry; its decision in holding the junior Veluchamys jointly and severally liable; and decisions concerning specific stock holdings. View "Veluchamy v. Bank of America, N.A." on Justia Law

Posted in: Bankruptcy

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In 1995, Peoria signed a lease that allowed RTC to construct and operate a gas conversion project at the city’s landfill, providing that when the lease terminated, the city had an absolute right to retain, at no cost, the “structures” and “below‐grade installations and/or improvements” that RTC installed. Years later, RTC entered bankruptcy proceedings. Banco provided RTC with postpetition financing secured with liens and security interests in effectively all of RTC’s assets. RTC defaulted. Litigation ensued. The city notified RTC that it was terminating the lease and would retain the structures and installations. After RTC stopped operating the gas conversion project, Peoria modified the system to comply with environmental regulations for methane and other landfill gasses and continued to use the property. Banco sued, alleging unjust enrichment and arguing that it had a better claim to the property because its loan was secured by a lien on all of RTC’s assets and the bankruptcy court had given its loan “super-priority” status. The Seventh Circuit affirmed summary judgment in favor of the city. No matter the priority of its claim to RTC’s assets, Banco has no claim to Peoria’s assets. By the terms of the lease between RTC and the city, the disputed structures and installations are city property. The lease gave RTC no post‐termination property interest in that property. View "Banco Panamericano, Incorporat v. City of Peoria, Illinois" on Justia Law

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Fadden earned over $100,000 per year but did not submit tax returns. After an audit, the IRS garnished his wages. Fadden filed for bankruptcy, triggering an automatic stay. Fadden claimed that he had no interest in any real property nor in any decedent’s life insurance policy or estate. Fadden actually knew that he would receive proceeds from the sale of his mother’s home (listed by the executor of her estate for $525,000) and would receive thousands of dollars as a beneficiary on his mother’s life insurance policies. A week later, Fadden mentioned his inheritance to a paralegal in the trustee’s office and asked to postpone his bankruptcy. When Fadden finally met with his bankruptcy trustee and an attorney, he confirmed that his schedules were accurate and denied receiving an inheritance. The Seventh Circuit affirmed his convictions under 18 U.S.C. 152(1) for concealing assets in bankruptcy; 18 U.S.C. 152(3) for making false declarations on his bankruptcy documents; and 18 U.S.C. 1001(a)(2) for making false statements during the investigation of his bankruptcy. Counts 1 and 2 required proof of intent to deceive. Fadden proposed a theory-of-defense instruction based on his assertion that his conduct was “sloppiness.” The Seventh Circuit upheld the use of pattern instructions, including that “knowingly means that the defendant realized what he was doing and was aware of the nature of his conduct and did not act through ignorance, mistake or accident.” View "United States v. Fadden" on Justia Law

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Telecommunications retailer OneStar paid its supplier, MCI, $1.9 million during the 90 days before OneStar was forced into bankruptcy. OneStar’s bankruptcy trustee sought to recapture those payments under 11 U.S.C. 547(b), which generally allows debtors to avoid payments made during the 90-day “preference period.” MCI asserted affirmative defenses under 11 U.S.C. 547(c): that the payments were unavoidable because MCI offset them by subsequently providing OneStar with new value--additional telecommunications services--and the payments occurred in the ordinary course of business. The trustee contended that the new value was canceled because, one week before the bankruptcy filing, OneStar assigned its contract with MCI to a newly-formed affiliate, releasing MCI from its contractual obligations to OneStar. MCI was now obligated to provide services to the affiliate, which then relayed those services to OneStar. The bankruptcy judge rejected Verizon’s ordinary-course defense but ruled that the new value MCI advanced during the preference period sufficed to make OneStar’s preferential payments unavoidable; the debt assignment to the newly-formed affiliate was irrelevant. The district judge and Seventh Circuit affirmed. A debtor’s assignment of debt and contractual rights to an affiliate does not have the effect of repaying a creditor for new value. MCI advanced subsequent new value that remained unpaid, so OneStar’s preferential transfers are unavoidable. View "Verizon Business Global, LLC v. Levin" on Justia Law

Posted in: Bankruptcy

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Rose bought $120,000 of products on credit from Caudill and did not pay. Before a district court ruled for Caudill, Rose gave 440 acres of land to his son Matt, then filed for bankruptcy. Caudill began an adversary proceeding, asking the judge to pull the land into the estate under 11 U.S.C. 548. The bankruptcy trustee's similar request was settled for payment of $100,000. The bankruptcy judge approved that settlement over Caudill’s objection. To get a discharge, Rose reaffirmed his debt to Caudill. He promised to pay $100,000, with an immediate $15,000; failure to pay entitles Caudill to a judgment for $300,000. Rose paid the $15,000 but nothing more. Caudill might have sought to rescind the discharge, but filed a new suit based on the reaffirmation agreement, obtaining a $285,000 default judgment. Rose failed to pay. Caudill commenced supplemental proceedings, contending that, under Indiana law, it can execute on the land that was fraudulently conveyed to Matt. Rose and Matt did not deny that the transfer was a fraudulent conveyance but argued that the settlement of the Trustee’s claim precluded further action to collect Rose’s debts from the value of the land. The district court and Seventh Circuit rejected that argument, observing that issue preclusion depends on an actual decision, by a judge, that is necessary to the earlier litigation. Whether the transfer of the land was a fraudulent conveyance was not actually litigated; the Trustee’s claim was settled. View "Caudill Seed & Warehouse Co. v. Rose" on Justia Law