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

BMD was a subcontractor for Industrial, a subcontractor for Walbridge, the general contractor for construction of a factory near Indianapolis. Fidelity was surety for Industrial’s obligations to BMD. The project proceeded for about a year before the manufacturer declared bankruptcy. Walbridge failed to pay Industrial, Industrial failed to pay BMD, and Fidelity refused to pay BMD, which sued Fidelity on the bond. Their subcontract conditioned Industrial's duty to pay on its own receipt of payment. The district court held that the pay-if-paid clause required Industrial to pay BMD only if Industrial received payment from Walbridge, rejecting an argument that it controlled only the timing of Industrial's obligation. The court held that pay-if-paid clauses are valid under public policy and that Fidelity could assert all defenses of its principal. The Sixth Circuit affirmed. The subcontract expressly provides that Industrial's receipt of payment is a condition precedent to its obligation; it could have stated that BMD assumed the risk of the owner’s insolvency, but additional language was not necessary. Pay-if-paid clauses are valid under Indiana law and, under surety law, Fidelity may assert all defenses of its principal. Industrial was never obligated to pay BMD; BMD may not recover on the bond.

The SEC filed a complaint. The court appointed a receiver to handle defendants' assets for distribution among victims of the $31 million fraud. Assets included oil and gas leases. SonCo filed a claim. The parties came to terms; the court entered an agreed order that required SonCo to pay $580,000 for assignment of the leases. The wells were unproductive, because of freeze orders entered to prevent dissipation of assets; the lease operator, ALCO, had posted a $250,000 bond with the Texas Railroad Commission. The bond was, in part, from defrauded investors. SonCo was ordered to replace ALCO as operator and to obtain a bond. More than a year later, SonCo had not posted the bond or obtained Commission authorization to operate the wells, but had paid for the assignment. The judge held SonCo in contempt and ordered it to return the leases, allowing the receiver to keep $600,000 that SonCo had paid. SonCo returned the leases. The Seventh Circuit affirmed that SonCo willfully violated the order, but vacated the sanction. The judge on remand may: reimpose the sanction, upon demonstrating that it is a compensatory remedy for civil contempt; impose a different, or no sanction; or proceed under rules governing criminal contempt.

Defendant attempted to murder his ex-wife by beating her with a baseball bat, sealing her in a garbage can filled with snow, and leaving her in an unheated storage facility. He was convicted and sentenced to life in prison. The victim suffered severe injuries that resulted in her suffering a miscarriage and the amputation of all her toes. A Wisconsin state court awarded her $3.4 million for battery, false imprisonment, and intentional infliction of emotional distress, and her husband and daughters $300,000 for loss of consortium. Defendant filed for bankruptcy under Chapter 7. The bankruptcy judge ruled that his debts were nondischargeable as debts "for willful and malicious injury," 11 U.S.C. 523(a)(6). The district court affirmed. The Seventh Circuit affirmed, noting that the purpose of bankruptcy law is to provide a fresh start for the honest, but unfortunate, debtor.

In 2002 Bell established mutual funds and raised about $2.5 billion for investment. Most of the firms to which the funds routed money were controlled by Petters. He was running a Ponzi scheme. There was no inventory. New investments paid older debts, with some money siphoned off for personal use. When Petters was caught in 2008, the funds collapsed; about 60% of the money was gone. The funds' bankruptcy trustee filed suit against the funds' auditor, alleging negligence. The district court dismissed without deciding whether the auditor had acted competently, invoking the doctrine of in pari delicto, based on Bell's knowledge of the scheme. The Seventh Circuit vacated, noting that Bell was not stealing funds and that the extent of his knowledge cannot be determined at this stage. An allegation that Bell was negligent but not criminally culpable in 2006 and 2007 makes the claim against the auditor sufficient.

The company, formed in 2003 to franchise stores, was forced into reorganization bankruptcy under Chapter 11. The bankruptcy judge granted a motion to convert to Chapter 7 liquidation, over objection by a five percent shareholder who had been the company’s president (Wallis). The judge rejected allegations of fraud and a request that the court compel franchisees to pay what Wallis claimed they owed. The district court and Seventh Circuit affirmed, first holding that it had jurisdiction although the bankruptcy case has not been closed. The court rejected an argument that, because creditors’ claims were based on contracts that were subject to arbitration, they were outside the jurisdiction of bankruptcy court. The court noted that Wallis has filed eight appeals to the district court and five to the Seventh Circuit, "all pro se and frivolous. Enough is enough. The next time he files a frivolous appeal he will be sanctioned."

The debtor's single asset is a commercial building. The lender promptly started foreclosure proceedings in state court, prevailed, and a foreclosure sale of the property was scheduled, but was stayed when the debtor filed for bankruptcy, 11 U.S.C. 362(a)(4). The lender became a participant in the bankruptcy The bankruptcy court rejected the debtor's plan to exchange the mortgage for an "indubitable equivalent," lifted the stay, and dismissed the bankruptcy. The Seventh Circuit affirmed, noting that the lender has waited years to enforce its lien and that the court was not required to further stretch the wait. The lien on Treasury bonds proposed by the debtor would not be equivalent to the lender retaining its lien on the building.

Debtor, a company that operated a tug boat service, filed for Chapter 11 bankruptcy and the bankruptcy court converted the case to a Chapter 7 liquidation. The principals were going through a divorce, and each sought ownership of real property used to operate the business. They reached a settlement that divided $911,620 from the sale of the property. The principals each received $229,126; the bankruptcy estate received $458,252. The principals paid the bankruptcy attorneys $65,000 from their personal shares. A financial services firm, a creditor of the estate that provided financial consulting services during the Chapter 11 proceedings, objected to the payout to the attorneys. The bankruptcy court rejected the claim. The district court and Seventh Circuit affirmed, finding the settlement to be in the best interests of the estate.

A medical provider filed proofs of claim in about 3,200 bankruptcy cases, 2003-2008, listing the debtors' medical treatment information. The filings were public and available on the docket. Debtors filed class action suits under a statute that allows individuals to sue if their health care records are disclosed without permission, Wis. Stat. 146.84. The bankruptcy judge granted the provider summary judgment. The Seventh Circuit dismissed and remanded for lack of jurisdiction. Bankruptcy judges lack authority under Article III of the Constitution to enter final judgments on claims that constitute "the stuff of the traditional actions at common law." The debtors' claims are based on a state law that is "independent of the federal bankruptcy law" and not necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy.

Under the Multiemployer Pension Plan Amendments Act of 1980, all "trades or businesses" under "common control" are treated as a single employer for purposes of determining withdrawal liability. 29 U.S.C. 1301(b)(1). SCOFBP incurred withdrawal liability for unfunded pension benefits in 2001 when it ceased operations and paying into a union pension fund. The district court held that the solvent MCRI and MCOF, which were part of a complex set of entities and trusts under control of a single businessman (who went through personal bankruptcy in 1999), were both trades or businesses that were under common control with insolvent SCOFBP at the relevant times, so that both are liable for SCOFBP's withdrawal liability. The Seventh Circuit affirmed, rejecting arguments that MCRI and MCOF were only passive investment vehicles rather than trades or businesses and that the businessman's personal bankruptcy disrupted what had been common control of the three entities.

Plaintiff had filed a state suit against the corporation, which owned and operated a shopping center, alleging that he was entitled to a percentage of profits under a written agreement. After the bankruptcy petition, a stay automatically issued against the state-court litigation, 11 U.S.C. 362(a). Plaintiff filed a notice of claim with the bankruptcy court; he argued that a lis pendens that he filed in connection with his state-court lawsuit made his claim a secured one. The bankruptcy court disagreed and later disallowed the claim in its entirety, reasoning that plaintiff could have nothing more than an equity interest, which would necessarily be subordinate to all other creditors' claims and thus worthless. The Seventh Circuit dismissed an appeal, noting plaintiff's failure to obtain a stay of the sale of the debtor's property pending appeal, as required under 11 U.S.C. 363(m), and his failure to file a notice of appeal that challenged the bankruptcy court order approving the joint liquidation plan that distributed the sales proceeds.