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

The Commodity Futures Trading Commission and the Securities and Exchange Commission concluded that Battoo committed fraud. Battoo and his companies, all located outside the United States, defaulted in the suits. The district judge froze all assets pending a final decision about ownership. The court appointed a Receiver to marshal the remaining assets and try to determine ownership. The Receiver has been recognized as the assets’ legitimate controller in several other nations, including China (Hong Kong), Guernsey, and the Bahamas. Battoo defied the injunction and transferred control of some investment vehicles, located in the British Virgin Islands, to court-appointed Liquidators, who asked the judge to modify the injunction and allow them to distribute assets located in the U.S. or England immediately. The Liquidators maintain that, because Battoo no longer has control, the justification for freezing the assets has lapsed. The court assumed that the Liquidators are now under judicial control, but declined to modify the injunction, ruling that the funds should remain available so that an eventual master plan of distribution can treat all investors equitably. The Seventh Circuit affirmed. It is not clear whether some investment interests can be disentangled reliably from those affected by Battoo’s frauds against U.S. investors; the Liquidators have not argued that any investor is suffering loss as a result of the Receiver’s investment decisions. View "Commodity Futures Trading Comm'n v. Battoo" on Justia Law

Carhart and Halaska own CHI. CHI terminated its sales agent, MRO, which filed a federal suit for breach of contract. Carhart bought MRO’s claim for $150,000 and became the plaintiff in a suit against a company of which he was a half owner. Halaska then sued Carhart in Wisconsin state court for breach of fiduciary duties to CHI and Halaska by becoming the plaintiff and by writing checks on CHI bank accounts without approval, depositing payments owed CHI into Carhart’s own account, and withholding accounting and other financial information from Halaska. A receiver was appointed, informed the federal court that CHI had no assets out of which to pay a lawyer, and consented to entry of a $242,000 default judgment (the amount sought by Carhart), giving Carhart a potential profit of $92,000 on his purchase of MRO’s claim. In Carhart’s suit to execute that judgment, CHI’s only asset was its Wisconsin suit against Carhart. The court ordered the sale of CHI’s lawsuit at public auction; Carhart, the only bidder, bought it for $10,000, ending all possibility that CHI could proceed against him for his alleged plundering of the company. The Seventh Circuit reversed. Auctioning off the lawsuit placed Carhart ahead of CHI’s other creditors. Carhart was not a purchaser in good faith. No valid interest is impaired by rescinding the sale, enabling CHI to prosecute its suit against Carhart. View "Carhart v. Carhart-Halaska Int'l, LLC" on Justia Law

Since 1989 Sveum and his brother owned a Wisconsin home-building company, Kegonsa. Kegonsa’s creditor, Stoughton Lumber had sued Sveum and his brother and Kegonsa under Wisconsin law, alleging breach of contract and theft by contractors. Under Wisconsin law, money paid to a contractor by an owner for improvements, constitutes a trust fund in the hands of the contractor until all claims have been paid. The use of such money by a contractor for any other purpose until claims have been paid, is theft by contractor. The suit settled for $650,000. Sveum violated the settlement agreement. Stoughton sued again and obtained a $589,638.10 default judgment. Sveum filed for Chapter 7 bankruptcy, seeking to discharge his debts, including the debt to Stoughton. Stoughton responded with an adversary proceeding, claiming that Sveum’s debt to Staughton was not dischargeable. The bankruptcy judge agreed and denied discharge. The district court affirmed. The Seventh Circuit affirmed, noting Sveum’s false representations and use of funds held in trust for Stoughton to pay other creditors ahead of Stoughton. The Bankruptcy Code forbids discharge of a debt under those circumstances, 11 U.S.C. 523(a)(4).“ View "Stoughton Lumber Co., Inc. v. Sveum" on Justia Law

Lake Street was obligated under a $1.5 million loan made by American Chartered Bank, secured by a mortgage. Unable to repay, Lake Street negotiated several forbearance-to-foreclose agreements. One required Lake Street to give the deed to the mortgaged property (its only significant asset) to an escrow agent who, in the event of default, would give the deed to Scherston, the bank’s affiliate. The bank’s charter forbids it to own real estate. Lake Street defaulted, Scherston recorded the deed. Lake Street, a debtor in possession in a Chapter 11 bankruptcy, brought an adversary proceeding against the bank and Scherston. The district court granted the bank summary judgment. The Seventh Circuit affirmed, noting that Lake Street focused on the deed rather than on the mortgage, claiming that the deeded property is worth more than the mortgage. It was Lake Street’s decision to give the deed to the bank; it did so to induce the bank’s forbearance, by giving additional security. There is no contention that the bank employed unlawful or unethical practices to the transfer, or that any unsecured creditors were harmed by the transaction—there is only one unsecured creditor and his claim is worth less than a thousand dollars. View "1756 W. Lake St. LLC v. Am. Chartered Bank" on Justia Law

After Pajian filed for bankruptcy, Lisle Savings Bank, a creditor, filed a proof of claim ($330,472.19) in the bankruptcy court, but missed the bankruptcy court’s filing deadline (set under FED. R. BANKR. P. 3002(c)) by several months. The Bank argued that Rule 3002(c) applies only to unsecured creditors; as a secured creditor, it asserted, it was entitled to file a proof of claim at any time until plan confirmation. The bankruptcy court agreed with the Bank. The Seventh Circuit reversed, holding that a secured creditor must file its proof of claim by the 90-day deadline specified by Rule 3002(c). View "Pijian v. Lisle Savings Bank" on Justia Law

Chivalry contracted with Rehtmeyer to develop and manufacture a board game. Chivalry paid Rehtmeyer over $128,000, but the relationship deteriorated. Rehtmeyer never produced the game. Chivalry sued for breach of contract and won a judgment of $168,331.59, plus $621.25 in costs in Illinois state court. Rehtmeyer never paid. Chivalry issued a citation to discover assets. At the citation examination, Rehtmeyer testified that she had no ownership interest in any real estate; securities, stocks, bonds or similar assets; office or electronic equipment; nor a personal checking or savings account. Because Rehtmeryer had not produced required documents, Chivalry continued the citation and filed a motion to compel production, which was granted. She did not comply. The state court twice more ordered her to produce all the documents required by the citation. Months later, Chivalry sought a rule to show cause. The day before the scheduled hearing, Rehtmeyer filed a Chapter 7 bankruptcy petition. Chivalry appeared to object to the discharge of the debt owed to it, claiming that Rehtmeyer had concealed her assets and income during the citation proceedings. The bankruptcy court denied Chivalry’s objection. The district court affirmed. The Seventh Circuit reversed, finding that Rehtmeyer concealed assets with the requisite intent. View "Jacobs v. Marcus-Rehtmeyer" on Justia Law

Brooks, a mother of two minor children, filed for Chapter 13 bankruptcy. Brooks reported her monthly wages of $6214.50 and her $400.00 monthly child support payments from her ex-husband; claimed applicable standardized deductions for living expenses for a household of three people; and deducted her $400.00 monthly child support payments in response to an instruction to “[e]nter the monthly average of any child support payments … for a dependent child … that you received in accordance with applicable nonbankruptcy law, to the extent reasonably necessary to be expended for such child,” 11 U.S.C. 1325(b)(2). Brooks’s monthly disposable income was reduced to $111.46. Brooks deducted another $141.00 for day care, which left her with negative disposable income. Brooks submitted a plan, proposing to pay $100.00 per month for 60 months, which would have resulted in no distribution to unsecured creditors; substantially all payments would have gone to other arrearages, and trustee’s and attorney’s fees. The bankruptcy court concluded that Brooks’s child support payments were fully excludable from disposable income; although a double deduction would be theoretically possible, Congress’s desire to preserve child support payments for their intended beneficiaries prevailed over that risk and the “reasonably necessary” qualification functions as an independent backstop. The district court and Seventh Circuit affirmed. View "Clark v. Brooks" on Justia Law

France had a Chicago dental business and fraudulently billed insurers for city employees. France closed his practice after being injured in an accident and started collecting benefits from a disability income policy. In 1999, he exchanged monthly payments, for a limited time, for a lump sum of $300,000. He transferred this money to other people, including his wife, Duperon, before filing a Chapter 7 bankruptcy petition. He failed to disclose the payment or transfers. He later pleaded guilty to mail fraud, 18 U.S.C. 1341, and to knowingly making a false declaration under penalty of perjury, 18 U.S.C. 152(3). The district court sentenced France to 30 months in prison and ordered him to pay $800,000 in restitution. The bankruptcy trustee obtained title to ongoing disability insurance payments. France and Duperon divorced. A California court approved a settlement with payments for child support from the disability payments. France’s insurance company sued in California to resolve conflicting claims. The parties reached an agreement, which the bankruptcy court approved, purporting to control all other judgments, but did not mention the criminal restitution lien. The government filed Illinois citations to discover assets. France moved to quash, but the insurance company responded and began withholding $9,296 that had been going to France. The government moved to garnish the entire distribution under the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. 3613(a). The Seventh Circuit affirmed a ruling allowing the government to garnish the entire disability payment. View "United States v. France" on Justia Law

The Glenns, real estate developers, asked a loan broker (Chung) to find them a loan. Attorney Sullivan agreed to lend the Glenns $250,000 repayable in two weeks with interest of $5,000 per week. They needed the money for longer, but Chung told them and Sullivan that a bank had agreed to give the Glenns a $1 million line of credit that would be available in a few weeks. The Glenns and Chung signed promissory notes. There was no line of credit. The loan was never repaid. Chung declared bankruptcy. Sullivan filed an adversary complaint, claiming that Chung was not entitled to discharge the debt created by her note because it was her fraudulent assurance that the line of credit had been approved that had induced him to make the loan. The Bankruptcy Code bars discharge of a debt “obtained by … false pretenses, a false representation, or actual fraud,” 11 U.S.C. 523(a)(2)(A). The court denied Chung her discharge. The Glenns also declared bankruptcy. Sullivan filed adversary complaints. The bankruptcy judge found that the Glenns had not committed fraud and refused to impute Chung’s fraud to them under an agency theory. The district court and Seventh Circuit affirmed. If a debt is the result of fraud, the debtor can discharge it in bankruptcy if he was not complicit in the fraud, even if the fraud was created by his agent. View "Sullivan v. Glenn" on Justia Law

Matichak was injured at work in 2009 and filed a workers’ compensation claim. Matichak filed a Chapter 7 bankruptcy petition in 2010, disclosing the claim, valued at $7,500. About a year after the discharge, Matichak filed a tort suit against firms that, he maintained, had contributed to his injury, seeking substantial damages. Defendants sought summary judgment, because Matichak had not listed any tort claim in his bankruptcy assets. Matichak then notified the Trustee, who reopened the bankruptcy and moved to replace Matichak as the plaintiff in the tort suit. The district court allowed the substitution but held that recovery could not exceed the value of debts that had not been paid in 2010. The Seventh Circuit reversed. The judge did not find that Matichak deliberately hid the tort claim; he claims that he thought that the workers’ compensation claim was his only potential source of compensation. Allowing the tort suit to proceed without a damages cap will allow the Trustee to hire counsel to take the suit on a contingent fee. If Matichak was trying to deceive his creditors, the bankruptcy judge may decide to give the creditors a bonus, or to return any excess to the tort defendants. View "Metrou v. M.A. Mortenson Co." on Justia Law