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

The debtor owns a shopping center. Broadbent owns 98 percent of equity directly and two percent indirectly. EL-SNPR is its only secured lender; its note (interest at 8.37%) matured in 2010. The debtor did not pay, but commenced bankruptcy and proposed reorganization under which $300,000 of the $10 million secured debt would be paid and the balance written down to $8.2 million, with the difference unsecured. The loan would be extended and the interest rate cut to 6.25%. Unpaid creditors normally receive equity in a reorganized business. The plan cut creditors out of equity. Since the plan pays EL-SNPR less than its contractual entitlement, 11 U.S.C. 1129(b)(2)(B)(ii) provides that Broadbent cannot retain equity interest on his old investment; precedent requires an auction before he could receive equity on new investment. The plan nominally omitted Broadbent, but gave all equity to his wife for $375,000. Wife owns the company that manages the shopping center; Broadbent is CEO. The management contract would continue. The bankruptcy judge held that open competition was unnecessary because wife did not hold an equity interest. The Seventh Circuit reversed, stating that a new-value plan bestowing equity on a spouse can be as effective at evading the absolute-priority rule as a plan bestowing equity on the original investor. View "In the Matter of: Castleton Plaza, L.P." on Justia Law

Plaintiffs controlled Mutual Bank. In an effort to save the bank from insolvency, at the request of FDIC-Corporate, they raised about $30 million mostly in the form of note purchases. In 2008, FDIC-Corporate requested another $70 million, which they were unable to raise. In 2009, regulators issued warnings about the bank. The bank’s board voted to redeem the notes and create deposit accounts for plaintiffs, essentially returning their money. Before FDIC-Corporate responded to a request for required approval, 12 U.S.C. 1821(i), the bank was declared insolvent and FDIC was appointed as receiver. Mutual Bank’s branches opened as branches of United Central Bank the next day. The plaintiffs filed proofs of claim, seeking to redeem the notes and obtain depositor-level priority in post-insolvency distribution scheme. FDIC Receiver rejected the claims and the plaintiffs filed suit, alleging that they had been misled into investing in the bank and prevented from getting their money back. The district court dismissed as moot. The Seventh Circuit affirmed, characterizing the claim as an unauthorized request for “money damages,” 5 U.S.C. 702. The plaintiffs did not first seek administrative review of what was essentially a challenge to the FDIC’s regulatory decision not to act on the redemption approval request. View "Veluchamy v. Fed. Deposit Ins. Corp." on Justia Law

Porayko entered bankruptcy in 2009, having $10,000 in a checking account at TCF. Crowell, holding a $73,000 judgment against Porayko, served Porayko with a citation to discover assets, asserting a lien. 735 ILCS 5/2-1402(m). Crane, the bankruptcy trustee, argued that only a citation served directly on the bank would establish a lien. The bankruptcy judge lifted the automatic stay, 11 U.S.C. 362(d). The district court and Seventh Circuit affirmed. The statute provides that a citation to discover assets creates a lien on all “nonexempt personal property, including money, choses in action, and effects of the judgment debtor,” including “all personal property belonging to the judgment debtor in the possession or control of the judgment debtor or which may thereafter be acquired or come due to the judgment debtor.” A bank account may be an intangible interest, but intangible rights are personal property and a checking account’s holder controls the right to designate who receives the funds on deposit, which makes its value a form of “personal property” under Illinois law. View "Crane v. Crowell" on Justia Law

OCV supplies equipment and licenses software for in-room hotel entertainment and sought a judgment of $641,959.54 against Roti, the owner of companies (Markwell, now defunct) that owned hotels to which OCV provided services. The district judge granted summary judgment, piercing the corporate veil, but rejecting a fraud claim. The Seventh Circuit reversed. While the Markwell companies were under-funded, OCV failed to treat the companies as separate businesses and proceed accordingly in the bankruptcy proceedings of one of the companies and made no effort to determine the solvency of the companies. View "On Command Video Corp. v. Roti" on Justia Law

Knight was owner and CEO of Knight Industries, which owned other companies. Bank had provided credit ($34 million) to the companies, which, in 2009, filed bankruptcy petitions. Chatz was appointed trustee and was authorized to retain the Freeborn law firm. Chatz and the Bank alleged that Knight had made fraudulent transfers, had breached duties of good faith and fair dealing and duties to creditors, had misappropriated corporate opportunities, had committed conversion, and had violated securities laws, and demanded $27 million for the companies and $34 million for the Bank. In 2010 Knight filed a chapter 7 petition, listing the claims, value “unknown.” Chatz, appointed as trustee, requested representation by the Freeborn law firm, without disclosing intent to pursue the claims against Knight. The bankruptcy court approved. Later, the Bank and Chatz asked to assign the companies’ claims to the Bank. Knight objected, arguing that approval of the law firm conflicted with the companies having viable claims against Knight. The bankruptcy court overruled Knight’s objection. The district court and Seventh Circuit affirmed. Failure to disclose intent to pursue the claims did not harm Knight, and other remedies are available. It would be inequitable to permit Knight to reap huge benefits from harmless omission.View "Knight v. Bank of America, N.A." on Justia Law

EAR, a seller of manufacturing equipment, defrauded creditors by financing non-existent or grossly overvalued equipment and pledging equipment multiple times to different creditors. After the fraud was discovered, EAR filed for bankruptcy. As Chief Restructuring Officer, Brandt abandoned and auctioned some assets. Five equipment leases granted a secured interest in EAR’s equipment; by amendment, EAR agreed to pay down the leases ($4.6 million) and give Republic a blanket security interest in all its assets. Republic would forebear on its claims against EAR. The amendment had a typographical error, giving Republic a security interest in Republic’s own assets. Republic filed UCC financing statements claiming a blanket lien on EAR’s assets. After the auction, Republic claimed the largest share of the proceeds. The matter is being separately litigated. First Premier, EAR’s largest creditor, is concerned that Republic, is working with Brandt to enlarge Republic’s secured interests. After the auction, EAR filed an action against its auditors for accounting malpractice, then sought to avoid the $4.6 million transfer to Republic. The bankruptcy court approved a settlement to end the EAR-Republic adversary action, continue the other suit, divvy proceeds from those suits, and retroactively modify the Republic lien to correct the typo. First Premier objected. The district court affirmed. The Seventh Circuit affirmed. First Premier was not prejudiced by the settlement. View "First Premier Capital, LLC v. Republic Bank of Chicago" on Justia Law

The collapse of investment manager Sentinel in 2007 left its customers in a lurch. Instead of maintaining customer assets in segregated accounts as required by the Commodity Exchange Act, 7 U.S.C. 1, Sentinel pledged customer assets to secure an overnight loan at the Bank of New York, giving the bank in a secured position on Sentinel’s $312 million loan. After filing for bankruptcy, Sentinel’s liquidation trustee brought attempted to dislodge the bank’s secured position. After extensive proceedings, the district court rejected the claims. Acknowledging concerns about the bank’s knowledge of Sentinel’s business practices, the Seventh Circuit affirmed. The essential issues were whether Sentinel had actual intent to hinder, delay, or defraud and whether the bank’s conduct was sufficiently egregious to justify equitable subordination, and the district court made the necessary credibility determinations. Even if the contract with the bank enabled illegal activity, the provisions did not themselves cause the segregation violations. View "Grede v. Bank of NY Mellon Corp." on Justia Law

In 2005, Banks, a construction worker, wanted to flip houses, but did not have capital. John, a mortgage broker, suggested that they purchase homes from distressed owners at inflated prices, with the sellers promising to return money above what they owed their own lenders. Owners cooperated rather than face foreclosure. Banks renovated the houses using funds received from sellers and resold them. Johns collected a broker’s fee. When they purchased a house from owners in bankruptcy, they wanted a mortgage to secure payment from the sellers and informed the trustee of the bankruptcy estate. Despite protestations by the trustee, the sale went through, and Banks used the rinsed equity to pay off sellers’ creditors through the trustee. The sellers’ lawyer discovered the scheme, which led to indictments. Johns was convicted of making false representations to the trustee regarding the second mortgage and for receiving property from a debtor with intent to defeat provisions of the Bankruptcy Code. With enhancements for financial loss and for targeting vulnerable victims, Johns was sentenced to 30 months. The Seventh Circuit affirmed the conviction, rejecting challenges to sufficiency of the evidence and jury instructions, but remanded for clarification of sentencing enhancements. View "United States v. Johns" on Justia Law

Losing money on every box fan it sold, Lakewood authorized CAM to practice Lakewood’s patents and put its trademarks on completed fans. Lakewood was to take orders; CAM would ship to customers. CAM was reluctant to gear up for production of about 1.2 million fans that Lakewood estimated it would require during the 2009 season. Lakewood provided assurance by authorizing CAM to sell the 2009 fans for its own account if Lakewood did not purchase them. Months later, Lakewood’s creditors filed an involuntary bankruptcy petition against it. The court-appointed trustee sold Lakewood’s business. Jarden bought the assets, including patents and trademarks. Jarden did not want Lakewood-branded fans CAM had in inventory, nor did it want CAM to sell them in competition with Jarden’s products. Lakewood’s trustee rejected the executory portion of the CAM contract, 11 U.S.C. 365(a). CAM continued to make and sell Lakewood fans. The bankruptcy judge found the contract ambiguous, relied on extrinsic evidence, and concluded that CAM was entitled to make as many fans as Lakewood estimated for the 2009 season and sell them bearing Lakewood’s marks. The Seventh Circuit affirmed, rejecting an argument that CAM had to stop making and selling fans once Lakewood stopped having requirements. View "Sunbeam Prods, Inc. v. Chicago Am. Mfg." on Justia Law

In 2007, Nelson, a minority shareholder and major creditor of RTI sued CHSWC alleging conspiracy with RTI’s majority shareholders to use RTI’s Chapter 11 bankruptcy to enrich themselves, tortious interference with RTI’s loan contract with Nelson, and abusing the bankruptcy process. The Bankruptcy Court found that RTI’s Chapter 11 petition was not filed in bad faith. The district court dismissed Nelson’s federal suit and remanded state law claims to state court. The Seventh Circuit concluded that because RTI had no assets and had terminated business, the adversary proceeding was moot; reversed the remand of state-law claims; and held that dismissal of the abuse-of-process claim did not require dismissal of state-law claims. On remand the district court dismissed, reasoning that the state law claims were predicated on allegation that RTI’s bankruptcy filing was improper, and finding “undisputed facts” and that partial recharacterization of Nelson’s debt as equity was proper. The Seventh Circuit affirmed, reasoning that nothing of legal significance happened after the last appeal. View "Nelson v. Welch" on Justia Law