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

Jepson executed a note and mortgage on Illinois property, listing America’s Wholesale Lender as the lender and Mortgage Electronics Registration Systems (MERS) as its nominee. Jepson’s note was endorsed in blank by Countrywide, “doing business as America’s Wholesale Lender” and transferred to CWABS, a residential mortgage trust that pools loans and sells certificates backed by the mortgages to investors. CWABS was formed and governed by a Pooling and Service Agreement (PSA). BNYM, trustee for CWABS, now possesses Jepson’s note. MERS assigned Jepson’s mortgage to BNYM. Jepson defaulted. BNYM filed a foreclosure complaint. Jepson filed a Chapter 7 bankruptcy petition. BNYM sought to lift the automatic stay. Jepson filed an adversary complaint, seeking a declaration that BNYM had no interest in her mortgage because the note did not include a complete chain of intervening endorsements and was endorsed after the closing date in the PSA and that America’s is a fictitious entity, so that the note was void and not negotiable under Illinois law. The bankruptcy court held that, under governing New York law, Jepson lacked standing to challenge alleged violations of the PSA, dismissed the adversary complaint, and modified the automatic stay to allow BNYM to proceed with its Illinois foreclosure action. The district court affirmed. The Seventh Circuit agreed that Jepson lacks standing to raise challenges based on the PSA, but remanded for consideration of her other claims. View "Jepson v. Bank of NY Mellon" on Justia Law

Illinois attorney Jahrling was contacted and paid by attorney Rywak to prepare documents for the sale of 90-year-old Cora’s home. Rywak’s clients paid $35,000 for Cora’s property, which was worth at least $106,000 and was later resold by the purchasers for $145,000. Cora later alleged he understood that he would keep a life estate to live in the upstairs apartment of the home rent-free. Jahrling’s sale documents did not include that life estate. Jahrling and Cora could not communicate directly and privately because Cora spoke only Polish and Jahrling spoke no Polish. Jahrling relied on counsel for the adverse parties for all communication with Cora. After the buyers tried to evict Cora, Cora sued Jahrling in state court for legal malpractice. After a partial settlement with a third party and offsets, the court awarded Cora’s estate $26,000, plus costs. Jahrling filed for Chapter 7 bankruptcy protection. Cora’s estate filed an adversary proceeding alleging that the judgment was not dischargeable under 11 U.S.C. 523(a)(4) because the debt was the result of defalcation by the debtor acting as a fiduciary. The bankruptcy court found in favor of the estate. The Seventh Circuit affirmed.Jahrling’s egregious breaches of his fiduciary duty were reckless and the resulting malpractice judgment is not dischargeable. View "Jahrling v. Estate of Cora" on Justia Law

Great Lakes, which automotive service stores throughout the Midwest, filed for Chapter 11 bankruptcy. The unsecured creditors’ committee filed an adversary action against T.D., which had leased two oil-change stores to Great Lakes. Great Lakes had negotiated the termination of the leases 52 days before it declared bankruptcy, and the creditors’ committee contends that the termination was either a preferential (11U.S.C. 547(b)) or a fraudulent (11 U.S.C. 548(A)(1)) transfer of the leases to T.D. The bankruptcy judge rejected that claim. The Seventh Circuit reversed and remanded for determination of the value of Great Lakes’ transfer to T.D. and whether T.D. has any defenses to the creditors’ claims. View "In re: Great Lakes Quick Lube, LP" on Justia Law

Debtor, a construction business, filed a voluntary Chapter 11 bankruptcy petition, which was converted to chapter 7. A The Bank holds a valid, first-priority security interest in all of the Debtor’s assets, including accounts receivable. The Trustee discovered that checks payable to the Debtor had been negotiated and deposited into the personal account of Hartford, the father of Debtor’s principal, totalling $36,389.89. Before initiating adversary litigation, the Trustee engaged in settlement talks with Hartford, who agreed to pay $36,389.89 to the estate and release the estate from all claims involving the transfers. While the Trustee was pursuing settlement., the Bank obtained an order modifying the automatic stay to allow it to exercise its state law remedies with respect to collateral, then filed suit to recover from Hartford the value of the checks. A state court entered judgment in favor of the Bank. The next day, the Trustee successfully moved for approval of the Hartford settlement. The Bank objected. The bankruptcy court rejected the Bank’s argument that the order granting relief from the automatic stay allowed it to pursue the fraudulent transfer action in state court. The district court affirmed. The Seventh Circuit dismissed for lack of jurisdiction, finding that the bankruptcy court entered no final judgment or appealable order. View "Schaumburg Bank & Trust Co. v. Alsterda" on Justia Law

Robinson filed a Chapter 7 bankruptcy petition, seeking to discharge unsecured debt of $23,834.00. Among her scheduled personal property, Robinson listed an “old Morm[o]n bible.” At the creditors’ meeting, the trustee inquired about the Book of Mormon. Robinson confirmed that it was an 1830 first edition and that she possessed several additional copies in print or digital form. In 2003, while employed at the local library, she made an agreement with the director that, if she cleaned out a storage area, she could use the area as an office and keep any books she found. She found the Book of Mormon and had it authenticated one of only 5,000 copies printed by Joseph Smith, then valued at $10,000.00. The trustee objected to the claimed exemption, acknowledging an exemption in 735 ILCS 5/12-1001(a) for a “bible,” but arguing that, given that Robinson owned many copies, the valuable edition should be used for the benefit of the creditors. The bankruptcy court believed that allowing the exemption would violate the statutory purpose, “to protect a bible of ordinary value so as not to deprive a debtor of a worship aid.” The district court vacated. The Seventh Circuit affirmed, finding that the statute's plain language allows the exemption without respect to value. View "Robinson v. Hagan" on Justia Law

The Smiths lived in a Joliet home, title to which passed to wife in 2004 as an inheritance. Real estate taxes had gone unpaid in 2000, resulting in a tax lien. At a 2001 auction, SIPI purchased the tax lien and paid the delinquent taxes—$4,046.26—plus costs and was awarded a Certificate of Purchase. Smith did not redeem her tax obligation. SIPI recorded its tax deed in 2005 and sold the property to Midwest for $50,000. In 2007, the Smiths filed for Chapter 13 bankruptcy relief and sought to avoid the tax sale. The bankruptcy judge and the Seventh Circuit found a fraudulent transfer (11 U.S.C. 548(a)(1)(B)) because the property was not transferred for reasonably equivalent value, but found Midwest a subsequent transferee in good faith. The 1994 Supreme Court decision, BFP v. Resolution Trust, that a mortgage foreclosure sale that complies with state law is deemed for “reasonably equivalent value” as a matter of law, does not apply in Illinois. Unlike mortgage foreclosure sales and some other states’ tax sales, Illinois tax sales do not involve competitive bidding where the highest bid wins. Instead, bidders bid how little money they are willing to accept in return for payment of the owner’s delinquent taxes. The lowest bid wins; bid amounts bear no relationship to the value of the real estate. View "Smith v. Sipi, LLC" on Justia Law

Sentinel, a cash-management firm, invested customers' cash in liquid low-risk securities. It also traded on its own account, using money borrowed from BNYM, pledging customers’ securities; 7 U.S.C. 6d(a)(2), 6d(b)), and the customers’ contracts required the securities to be held in segregated accounts. Sentinel experienced losses that prevented it from maintaining its collateral with BNYM and meeting customer demands for redemption of their securities. Sentinel used its BNYM line of credit to meet those demands. In 2007 it owed BNYM $573 million; it halted customer redemptions and declared bankruptcy. BNYM notified Sentinel that it planned to liquidate the collateral securing the loan. The bankruptcy trustee refused to classify BNYM as a senior secured creditor, considering the use of customer funds as collateral to be fraudulent transfers, 11 U.S.C. 548(a)(1)(A) and claiming that BNYM was aware of suspicious facts that should have led it to investigate. The district judge dismissed the claim, finding that Sentinel had not been shown to have intended to defraud its customers. The Seventh Circuit reversed, holding that Sentinel made fraudulent transfers. On remand, the judge neither conducted an evidentiary hearing nor made additional findings, but issued a “supplemental opinion” that BNYM was entitled to accept the collateral without investigation. The Seventh Circuit reversed in part. BNYM remains a creditor in the bankruptcy proceeding, but is an unsecured creditor because it was on inquiry notice that the pledged assets had been fraudulently conveyed. View "Grede v. Bank of New York" on Justia Law

Brown began working as a United flight attendant in 1991. He suffered from depression and bipolar disorder and was disciplined for absenteeism and unprofessionalism. In 2000, he required psychiatric hospitalization. The Flight Attendants Board of Adjustment directed that he be permitted to return to work if his treating physician and a United doctor found him medically fit. Brown never complied. In 2005, the Board affirmed his termination. Meanwhile, United filed for bankruptcy. Brown filed a claim seeking back pay ($80,000). In 2004, Brown sued United in California state court, seeking more than $500,000. United sought transfer to the Illinois bankruptcy court, which did not lift the automatic stay. For 18 months, Brown did not pursue the case. In 2006, a California bankruptcy court granted transfer of Brown’s lawsuit, calling it an adversary proceeding, to Illinois. Brown had never filed a new or amended proof of claim and had not objected to United’s reorganization plan, which was confirmed in 2006, days after Brown’s lawsuit was transferred. The plan discharged claims “filed by Union-represented employees pertaining to rights collectively bargained for.” The clerk’s office mistakenly returned Brown’s file to California. None of the courts took any further action; neither did Brown. The bankruptcy closed in 2009. In 2013, Brown moved to reopen so that his California claims could be litigated. The bankruptcy court, district court, and Seventh Circuit rejected Brown’s arguments. Brown’s years of inaction amounted to abandonment of those claims. View "Brown v. UAL Corp." on Justia Law

CEOC, the Chapter 11 debtor, owns and operates casinos. Caesars (CEC) is CEOC's principal owner. CEOC borrowed billions of dollars, issuing notes guaranteed by CEC. As CEOC’s financial position worsened, CEC tried to eliminate its guaranty obligations by selling assets of CEOC to other parties and terminating the guaranties. CEOC's creditors, who had received the guaranties, challenged CEC’s repudiation, seeking approximately $12 billion. CEOC, in its bankruptcy proceeding, asserted claims alleging that CEC caused CEOC to transfer valuable assets to CEC at less than fair value, leaving CEOC saddled with debt (fraudulent transfers) and that the guaranty suits will thwart CEOC’s multi‐billion‐dollar restructuring effort, which depends on a substantial contribution from CEC in settlement of CEOC’s claims, and will let the guaranty plaintiffs take precedence over other creditors. The bankruptcy judge, and a district judge refused CEOC's request to enjoin the guaranty suits until 60 days after a bankruptcy examiner completes his report. The bankruptcy judge’s exercise of jurisdiction over the other suits would have been constitutional, but he thought he lacked statutory authority to enter an injunction under 11 U.S.C. 105(a). The Seventh Circuit vacated, finding that the judges misinterpreted the statute and that issuance of a temporary injunction could facilitate a prompt wind‐up of the bankruptcy. View "Caesars Entm't Operating Co., Inc. v. BOKF, N.A." on Justia Law

In 1997, Player and his wife established EAR, purportedly to refurbish high-tech machinery . In 2005-2009, EAR defrauded creditors and the couple obtained $17 million in fraudulent transfers from EAR. Before the fraud was detected, they used funds for their personal benefit and spent large amounts at the Horseshoe Casino, Player was known to “walk with chips,” rather than cashing them in, and giving chips to a third party to cash in. Neither is illegal, but are potentially indicative of “structuring” transactions to avoid triggering the $10,000 reporting requirement, a federal crime, 31 U.S.C. 5324. When the fraud was discovered, EAR filed for Chapter 11 bankruptcy. The plan administrator sought to avoid transfers to Horseshoe, alleging that Horseshoe had reasons to believe that Player’s money came from EAR. Horseshoe objected to a motion to compel under 31 C.F.R. 1021.320(e), which governs Suspicious Activity Reports filed by financial institutions, including casinos, to detect money laundering and other violations of the Bank Secrecy Act. The district court ordered an ex parte filing by Horseshoe, which was inaccessible to EAR. The Seventh Circuit affirmed denial of the motion, finding that Horseshoe accepted the transfers without knowledge of the fraud at EAR and could not have uncovered the fraud if it had investigated. View "Brandt v. Horseshoe Hammond, LLC" on Justia Law