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

Articles Posted in Bankruptcy
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In a previous appeal, the Seventh Circuit held that the confirmation of a Chapter 13 payment plan causes the debtor’s assets, including automobiles, to revert to the debtor’s personal ownership unless the judge has made a debtor-specific finding under 11 U.S.C.1327(b). After bankruptcy judges confirmed their Chapter 13 payment plans, the debtors used their cars in ways that led to fines for running red lights, illegal parking, and similar offenses. They refused to pay, observing that the confirmed plans do not require them to pay fines (as opposed to other expenses). Chicago argued that the fines were administrative expenses of the estates in bankruptcy, as long as the vehicles remain assets of the estates, and entitled to priority payment, 11 U.S.C. 507(a)(2). On rehearing, the Seventh Circuit ruled in favor of the city, holding that automotive fines incurred by estates during confirmed Chapter 13 payment plans should be treated as administrative expenses that must be paid promptly and in full. The question is whether operating a vehicle is necessary to earn the money needed to perform the Chapter 13 plan. The debtors insisted that cars are essential. View "City of Chicago v. Marshall" on Justia Law

Posted in: Bankruptcy
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The Bushes owed $100,000 in taxes. The IRS sought a 75% fraud penalty (26 U.S.C. 6663(a)); the Bushes proposed a 20% negligence penalty (section 6662(a)). On the date set for Tax Court trial, the Bushes filed for bankruptcy. The automatic stay prevented the Tax Court from proceeding. The government filed a proof of claim, proposing that the tax debt be given priority over other unsecured debts and that the penalty was nondischargeable. The Bushes initiated an adversary proceeding, asking for a 20% penalty, citing 11 U.S.C. 505(a)(1), which states that the court may determine the amount or legality of any tax, any fine or penalty relating to a tax ... whether or not contested before … [an] administrative tribunal. The IRS argued that section 505 does not grant subject-matter jurisdiction to bankruptcy judges and that only a potential effect on creditors’ distributions justifies a decision by a bankruptcy judge about any tax dispute. The Seventh Circuit held that a bankruptcy court can determine the amount of a debtor’s tax obligations. Section 505 does not address jurisdiction bu simply sets out a task for bankruptcy judges. Whether the judge should exercise that authority to determine tax liability is a distinct question. The bankruptcy is apparently done; the estate’s available assets have been used to pay debts and the stay has expired. This residual dispute should not remain with the bankruptcy judge but should be left to the Tax Court. View "Bush v. United States" on Justia Law

Posted in: Bankruptcy
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The debtor obtained a commercial loan from Bank. The agreement dated March 9, 2015, granted Bank a security interest in substantially all of the debtor’s assets, described in 26 categories of collateral, such as accounts, cash, equipment, instruments, goods, inventory, and all proceeds of any assets. Bank filed a financing statement with the Illinois Secretary of State, to cover “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015.” Two years later, the debtor defaulted and filed a voluntary Chapter 7 bankruptcy petition. Bank sought to recover $7.6 million on the loan and filed a declaration that its security interest was properly perfected and senior to the interests of all other claimants. The trustee countered that the security interest was not properly perfected because its financing statement did not independently describe the underlying collateral, but instead incorporated the list of assets by reference, and cited 11 U.S.C. 544(a), which empowers a trustee to avoid interests in the debtor’s property that are unperfected as of the petition date. The bankruptcy court ruled that ”[a] financing statement that fails to contain any description of collateral fails to give the particularized kind of notice” required by UCC Article 9. The trustee sold the assets for $1.9 million and holds the proceeds pending resolution of this dispute. The Seventh Circuit reversed, citing the plain and ordinary meaning of the Illinois UCC statute, and how courts typically treat financing statements. View "First Midwest Bank v. Reinbold" on Justia Law

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After a creditor in a closed Chapter 7 bankruptcy case tried for a third time to bring a price-fixing claim against BMS, the district court granted BMS's motion to dismiss. The Seventh Circuit affirmed, holding that the creditor did not participate in the market for bankruptcy software services in any way that would make it a proper plaintiff to bring an antitrust claim against a firm that provides those services to bankruptcy trustees. Therefore, the creditor's injury was entirely derivative of the estate's injury and merely derivative injuries sustained by creditors of an injured company did not constitute antitrust injury sufficient to confer antitrust standing. View "McGarry & McGarry, LLC v. Bankruptcy Management Solutions, Inc." on Justia Law

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Sterling owed Southlake Health Club outstanding fees ($250). In 2001, Southlake's counsel, Austgen, instituted a state court collection action. A federal bankruptcy court discharged Sterling’s debt to Southlake in 2010. Although Sterling notified Southlake of the discharge, no one notified Austgen or the Indiana court. Sterling failed to appear in the state-court collection proceedings; that court issued a warrant for her arrest. A year later, Sterling was arrested and jailed for two days. Southlake and Austgen dropped pursuit of the debt. Sterling instituted adversary proceedings in bankruptcy court, seeking to have Southlake and Austgen held in contempt for continuing to collect a debt that had been discharged, 11 U.S.C. 524. The bankruptcy court and the district court ruled against Sterling. The Seventh Circuit affirmed in part; Austgen’s lack of knowledge of the discharge prevents it from being held in contempt. Southlake, however, must be held liable for the actions taken by counsel on its behalf. Southlake, a sophisticated party, had knowledge of the discharge yet turned a blind eye to the progress of Sterling’s case. Holding otherwise “would create a loophole in the law through which creditors could avoid liability simply by remaining ignorant of their agents’ actions or by failing to notify their agents of debtors’ bankruptcy proceedings.” View "In re: Sterling" on Justia Law

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In 1998, Williams hired Jaffe as her attorney. The statute of limitations expired before Jaffe filed a complaint. Williams sued for legal malpractice, obtained a default judgment, and recorded that judgment on property owned by Jaffe and his wife as tenants by the entirety. Jaffe filed a chapter 7 bankruptcy petition in 2015, which identified that debt, indicating it was secured by a judgment lien on his residence. On the petition date, Jaffe and his wife owned the property as tenants by the entirety. Before bankruptcy proceedings were complete Jaffe’s wife died. When she died the tenancy by the entirety terminated; Jaffe held the property individually in fee simple. In Illinois, a creditor cannot force the sale of the tenancy by the entirety property to collect a debt against only one of the tenants but not all interests held by tenants by the entirety are immune from process. Jaffe argued that his contingent future interest in the property was exempt under 11 U.S.C. 522(b)(3)(B), which refers to “any interest in property which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law. UnThe Seventh Circuit reasoned that the statute exempts any interest held by an individual as a tenant by the entirety to the extent that state law exempts that particular interest so that the property cannot be excluded from the bankruptcy estate. View "Williams v. Jaffe" on Justia Law

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Under 28 U.S.C. 1930(a)(6), quarterly fees paid by a chapter 11 debtor to the bankruptcy Trustee are based on the debtor’s disbursements. The Bankruptcy Court determined that certain payments made by the customers of CranGrow to its lender should not be considered “disbursements” for purposes of that calculation. The payments covered a post-petition revolving line of credit that was used both to pay operating expenses and reduce the balance of CranGrow’s pre-petition debt to the same lender. CranGrow’s customers made payments to the lender directly. The Seventh Circuit reversed, holding that the language of the fee statute requires that payments made by CranGrow’s customers to CranGrow’s lender be considered disbursements. The term “disbursements” has been interpreted broadly to mean all payments by or on behalf of the debtor. The payments by CranGrow’s customers to CoBank were payments made on behalf of CranGrow and resulted in the reduction of CranGrow’s prepetition debt. The customer payments, therefore, are disbursements under section 1930(a)(6). The court found no authority for a waiver and declined “CranGrow’s belated invitation to consider the constitutionality of the fee statute. View "Cranberry Growers Cooperative v. Layng" on Justia Law

Posted in: Bankruptcy
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Novak was the sole shareholder of CMCG. By 2008, CMCG’s solvency was questionable. In 2012 Novak committed suicide, leaving CMCG to Comess, who filed a voluntary Chapter 7 petition weeks later. For four years before the bankruptcy filing, Comess and Hathaway, another friend of Novak’s, had received significant payments from CMCG, though they were not employees. Hathaway received $45,400.81; she runs a small yoga studio and her email correspondence indicated that the payments were personal gifts. The trustee brought an avoidance action and sought discovery sanctions against Hathaway. The bankruptcy judge determined that the women had received money from CMCG while it was insolvent, that Novak typically failed to record the transactions, that CMCG did not receive reasonably equivalent value in exchange, and that the transfers were voidable under 11 U.S.C. 548 and the Illinois Uniform Fraudulent Transfer Act (IUFTA), which applied under section 544(b)(1) because CMCG had unsecured creditors at the time of the conveyances, the IRS and a credit-card company. The judge declined to impose sanctions for Hathaway’s failure to respond to interrogatories and produce tax returns but imposed sanctions ($11,187.25) for Hathaway’s delay and failure to comply with court orders concerning emails causing the Trustee to expend additional time and resources. The district judge and Seventh Circuit affirmed, rejecting arguments concerning trial exhibits for evaluating CMCG's financial health; challenging the finding that CMCG did not receive reasonably equivalent value; and that CMCG did not have IUFTA “creditors.” The court noted Hathaway's violations of appellate procedure. View "Fox v. Hathaway" on Justia Law

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The Debtors each owed debts to the Illinois Department of Human Services (DHS). Dennis owed $7,962.25 for overpayments made to her under the Illinois Child Care Assistance Program; Halbert owed for overpayments made to her under the Supplemental Nutrition Assistance Program. The Debtors each filed for bankruptcy. The bankruptcy court in each case held that the overpayment debts were not priority domestic support obligations, 11 U.S.C. 547(c)(7). The Seventh Circuit affirmed. Debtors do not owe DHS money for support payments; they owe DHS because they received money they were not statutorily entitled to. Because such a payment is not in the nature of alimony, maintenance, or support, this is merely an overpayment of benefits and the debt is subject to avoidance in bankruptcy. View "Halbert v. Dimas" on Justia Law

Posted in: Bankruptcy
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Chicago's Code permits the city to immobilize and impound a vehicle if its owner has three or more “final determinations of liability,” or two final determinations that are over a year old, “for parking, standing, compliance, automated traffic law enforcement system, or automated speed enforcement system violation[s].” Fines range from $25 to $500. Failure to pay the fine within 25 days automatically doubles the penalty. After a vehicle is impounded, the owner is further subjected to towing and storage fees and to the city’s costs and attorney’s fees. A 2016 amendment created a possessory lien in favor of the city in the amount required to obtain the vehicle's release. Chicago began refusing to release impounded vehicles to debtors who had filed Chapter 13 petitions. In each of four consolidated cases, the bankruptcy courts each held that Chicago violated the automatic stay by “exercising control” over bankruptcy estate property and that none of the exceptions to the stay applied. The courts ordered the city to return debtors’ vehicles and imposed sanctions for violating the stay. The Seventh Circuit affirmed, noting that it addressed the issue in 2009 and held that a creditor must comply with the automatic stay and return a debtor’s vehicle upon her filing of a bankruptcy petition. View "City of Chicago v. Fulton" on Justia Law