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

Ryan failed to pay federal income taxes 2006-2010 and owed $136,898.93. In 2011, the IRS recorded a tax lien, 26 U.S.C. 6326. Ryan filed a voluntary Chapter 13 bankruptcy petition, 11 U.S.C. 1301. He had personal possessions worth $1,625. He admitted to the tax liabilities, and alleged that his residence had been sold for delinquent real estate taxes and that he did not own a bank account, vehicle, or retirement account. In an adversary proceeding, he alleged that the secured claim for 2009 taxes was limited $1,625 and that the remaining claim was unsecured, 11 U.S.C. 506(a), and void, 11 U.S.C. 506(d). The bankruptcy court held that section 506(d), as interpreted by the Supreme Court, did not allow Ryan to void, or “strip down” the lien. The Seventh Circuit affirmed. Section 506(d) provides: To the extent that a lien secures a claim that is not an allowed secured claim, such lien is void, unless such claim was disallowed only under section 502(b)(5) or 502(e) or such claim is not an allowed secured claim due only to failure to file a proof of such claim. “Allowed secured claim” in 506(d) is not defined by 506(a), but means a claim that is allowed under 502 and secured by a lien enforceable under state law. View "Ryan v. United States" on Justia Law

Pro-Pac, a packaging business, filed for Chapter 11 bankruptcy in 2006, then filed an adversary proceeding against WOW, a logistics service provider, for aiding and abetting a Pro-Pac employee’s breach of fiduciary duty. The bankruptcy court found that WOW had aided and abetted the Pro-Pac employee, but based its award on an independent unjust enrichment claim. The district court ordered the bankruptcy court to dismiss, reasoning that the unjust-enrichment argument had been introduced too late in the case. The Seventh Circuit reversed and remanded, finding that the district court erred in dismissing the case, but that the bankruptcy court erred in assessing Pro-Pac’s damages. On remand, the bankruptcy court must reexamine issues relating to WOW’s tort liability. If the bankruptcy court wants to award punitive damages, it must first award compensatory damages based on the harm Pro-Pac suffered. View "Pro-Pac Inc. v. WOW Logistics Inc." on Justia Law

Spehar, hired by CMGT to assist in finding financing for its business, sued CMGT over a dispute related to this agreement and obtained a $17 million default judgment against CMGT, which had no assets. Spehar Capital devised a plan to: force CMGT into bankruptcy; convince the bankruptcy trustee to bring a malpractice action against CMGT’s law firm on the theory that but for the firm’s negligence, Spehar would not have obtained the default judgment; win the malpractice action or force a settlement; obtain a share of the payment to the bankruptcy estate. The bankruptcy trustee sued CMGT’s law firm, Mayer Brown. The district court granted Mayer Brown summary judgment, reasoning that the doctrine of judicial estoppel barred the inconsistencies in the suit, based on undisputed facts. The Seventh Circuit affirmed. If the trustee were to prevail, there would be a clear impression that a court was misled. It would be “absurd” for Spehar to recover when proving the causation element of malpractice would require the trustee to prove that Spehar was not entitled to prevail in the earlier suit. View "Grochocinski v. Mayer, Brown, Rowe & Maw, LLP" on Justia Law

Peoples Bank loaned Debtors $214,044, secured by a mortgage recorded in 2004. In 2008, Debtors obtained a $296,000 construction loan from Banterra, secured with a second mortgage on the same property. Banterra was aware of the first mortgage, but did not know was that in 2007, Debtors obtained a second loan from Peoples, for $400,000, secured by another mortgage on a different piece of property. The 2004 Peoples mortgage contained a cross-collateralization provision, stating that “In addition to the Note, this Mortgage secures all obligations … of Grantor to Lender … now existing or hereafter arising,” and a provision that “At no time shall the principal amount of the Indebtedness secured by the Mortgage … exceed $214,044.26 … “Indebtedness” … includes all amounts that may be indirectly secured by the Cross-Collateralization provision.” In 2010 Debtors filed a Chapter 11 bankruptcy petition. The balance due on Peoples 2004 loan was then $115,044.26. Debtors received permission and sold the property for $388,500.00. Out of these proceeds, Peoples claimed the balance due on the 2004 loan plus partial payment of the 2007, up to the cap. The Bankruptcy Court found in favor of Peoples. The district court reversed. The Seventh Circuit reversed, upholding the “plain language” of the cross-collateralization agreement. View "Peoples Nat'l Bank v. Banterra Bank" on Justia Law

Retirement accounts are exempt from creditors’ claims in bankruptcy, 11 U.S.C. 22(b)(3)(C) and (d)(12). The debtor inherited, from her mother, a non-spousal individual retirement account worth about $300,000. The bankruptcy court held that the inherited IRA was not exempt from claims by the debtor’s creditors. The district court reversed. Noting a conflict with other circuits, the Seventh Circuit reversed, reinstating the bankruptcy court holding. The court noted that while it remains sheltered from taxation until the money is withdrawn, many of the account’s other attributes changed. No new contributions can be made, and the balance cannot be rolled over or merged with any other account. 26 U.S.C. 408(d)(3)(C); instead of being dedicated to the debtor/heir’s retirement years, the inherited IRA must begin distributing its assets within a year of the original owner’s death. 26 U.S.C. 402(c)(11)(A). View "Rameker v. Clark" on Justia Law

Krieger, age 53, cannot pay her debts. She lives with her mother in a rural community; they have only monthly income from governmental programs. She is too poor to move and her car, more than 10 years old, needs repairs. She lacks Internet access. In her bankruptcy proceeding, Educational Credit moved to exempt her student loans from discharge; 11 U.S.C.523(a)(8) excludes educational loans “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor.” The district court reversed the bankruptcy court, noting that Krieger, although unable to pay even $1 per year, had not enrolled in a program that offered a 25-year payment schedule. The Seventh Circuit reversed, in favor of Krieger. “Undue hardship” requires showing that the debtor cannot maintain a minimal standard of living if forced to repay; that additional circumstances exist indicating that this situation is likely to persist for a significant portion of the repayment period; and that the debtor has made good faith efforts to repay. The court noted that Krieger incurred the debt to obtain paralegal training at a community college, has made about 200 applications in 10 years, and used a substantial part of her divorce settlement to pay off as much of the educational loan as possible. View "Krieger v. Educ. Credit Mgmt. Corp." on Justia Law

Draiman filed for Chapter 11 bankruptcy in 2009, but converted to a Chapter 7 bankruptcy one day short of two years after his initial filing. That same day Fogel was appointed interim trustee. He became the permanent trustee by default more than two years after the initial filing. The statute of limitations governing avoidance is two years from filing bankruptcy, 11 U.S.C. 546(a)(1)(A), but the period is extended to one year from the “appointment or election of the first trustee under section 702…if such appointment or such election occurs before the expiration of the period.” The issue was whether the date of Fogel’s appointment was when he became permanent trustee, more than two years after the initial filing, or =when he became interim trustee. The bankruptcy court held that ambiguity is best resolved by allowing the extension when the trustee is an interim trustee who, because creditors never elected a permanent trustee, became permanent trustee by default. The Seventh Circuit reversed, reasoning that creditors could “game” the system in similar conversion cases. They might put off their meeting to elect a permanent trustee until two years were nearly up, to obtain the maximum limitations period, knowing that if they waited too long they could meet without electing a trustee, so that the period would be extended by one year from the date of appointment of the interim trustee. The statute as written discourages creditors from dawdling after conversion. If, without fault, creditors cannot procure appointment of a permanent trustee within the deadline, equitable tolling would permit an extension. View "In re: Draiman" on Justia Law

In 2006 a coal-mining company borrowed $7 million from Caterpillar secured by mining equipment. The company was also indebted to Peabody, for an earlier loan, and at Peabody’s request, transferred title to the same equipment, subject to Caterpillar’s security interest, to a Peabody affiliate. In 2008, Peoples Bank lent the mining company $1.8 million secured by the same equipment and filed a financing statement. Wanting priority, the bank negotiated a subordination agreement with Peabody. After the mining company defaulted, the bank obtained possession of the assets and told Caterpillar it would try to sell them for $2.5 million. Caterpillar did not object, but claimed that its security interest was senior. The bank sold the equipment for $2.5 million but retained $1.4 million and sent a check for $1.1 million to Caterpillar. Caterpillar neither cashed nor returned the check. The district court awarded Caterpillar $2.4 million plus prejudgment interest. The Seventh Circuit affirmed. The bank’s claim of priority derives from its dealings with Peabody. The bank did not obtain a copy of a security agreement for Peabody’s loan; a security interest is not enforceable unless the debtor has authenticated a security agreement that provides a description of the collateral. View "Caterpillar Fin. Servs. v. Peoples Nat'l Bank" on Justia Law

In 2000 the SEC charged violation of securities law. The court appointed a receiver to distribute assets among victims of the $31 million fraud. The receiver found that assets had been used to acquire oil and gas leases. SonCo claimed an interest in the leases. In 2010, the district court issued an “agreed order,” requiring SonCo to pay $600,000 for quitclaim assignment of the leases and release of claims in Canadian litigation. Alco operated the wells and had posted a $250,000 cash bond with the Texas Railroad Commission. Alco could get its $250,000 back if replaced by new operator that posted an equivalent bond. The $250,000 had come, in part, from defrauded investors. Alco was incurring environmental liabilities, with little prospect of offsetting revenues. SonCo was to replace Alco, but failed to so, after multiple extensions. The district judge held SonCo in civil contempt, ordered it to return the leases, and allowed the receiver to keep the $600,000. The Seventh Circuit upheld the finding of civil contempt. Following remand, the Seventh Circuit affirmed the sanction; considering additional environmental compliance costs and receivership fees, a plausible estimate of the harm would be $2 million. ”SonCo will be courting additional sanctions, of increasing severity, if it does not desist forthwith from its obstructionist tactics.” View "Sec. & Exch. Comm'n v. First Choice Mgmt Servs., Inc." on Justia Law

Canopy Financial developed and marketed software for banks and health-care payers to handle health-related savings accounts and administered the health-care funds of almost 2,000 entities. When Canopy entered bankruptcy in 2009, it came to light that Banas and Blackburn had misappropriated more than $90 million from Canopy’s investors and the customers. Each was sentenced to more than 10 years’ imprisonment. Blackburn committed suicide. The Trustee for the benefit of Canopy’s creditors has recovered about $50 million by seizing assets from Blackburn’s mansion and is attempting to recover from recipients of fraudulent conveyances, transfers made while Canopy was insolvent, not in exchange for reasonably equivalent value, 11 U.S.C. 544(b), 548, 550; 740 ILCS 160/1 to 160/12. According to the Trustee, Banas and Blackburn spent more than $80,000 of Canopy’s money at a Nevada nightclub. After obtaining default judgment, the Trustee began to collect from its assets in Nevada. The owner sought to vacate the default under Rule 60(b)(1) for excusable neglect by its agent for service of process. The bankruptcy judge declined. The Seventh Circuit affirmed, noting that the owner had the burden of proof, but chose not to present any evidence about whether the agent received the essential documents. View "Buddha Entm't, LLC v. Paloian" on Justia Law