Justia Bankruptcy Opinion Summaries

Four upper-level managers at Tradesmen, a construction staffing company, formed a competing company in 2009. Tradesmen filed suit alleging breach of contract, misappropriation of trade secrets and confidential information, breach of duty of loyalty, tortious interference with contractual relations, tortious interference with business expectancy, conversion, and civil conspiracy, and seeking a declaratory judgment with respect to covenants not to compete and injunctive relief. Proceedings against one defendant were stayed, due to bankruptcy. The district court granted summary judgment to the remaining defendants, except with respect to the declaratory judgment count, but found that the covenants had already expired. The district court denied attorney’s fees. The Seventh Circuit held that because of the stay, the summary judgment ruling was not a final decision, so that it lacked jurisdiction on appeal under 28 U.S.C. 1291, except with respect to the request for injunctive relief (28 U.S.C. 1292(a)(1)). The court affirmed on that issue, reasoning that Tradesmen failed to show that it suffered any harm, let alone irreparable harm, from the remaining defendants’ actions. View "Tradesmen Int'l, Inc. v. Black" on Justia Law

Stern represented Allen in a discrimination suit, after which they became romantically involved. Allen and her husband had separated and had executed a settlement agreement awarding Allen $95,000, to be paid in installments. A month later, Allen visited a bankruptcy attorney, Losey, giving Stern’s name as “friend/referral” on an intake form. In filing for bankruptcy, Allen did not disclose the marital settlement. While her bankruptcy was pending, Allen received the money. A month after her bankruptcy discharge, Allen transferred the settlement proceeds to Stern, who opened a CD in his name. The attorney for Allen’s ex-husband informed the bankruptcy trustee that Allen failed to disclose the settlementand the discharge was revoked. Allen pleaded guilty to making a false declaration in a bankruptcy proceeding, 18 U.S.C. 152(3). She told a grand jury that Stern had not referred her to Losey and was convicted of making a material false statement in a grand jury proceeding, 18 U.S.C. 1623. The court admitted Losey’s client-intake form as evidence of perjury. Stern was convicted of conspiring to commit money laundering, 18 U.S.C. 1956(h). The Seventh Circuit affirmed Allen’s conviction, holding that the intake form was not a communication in furtherance of legal representation and was not subject to attorney-client privilege. Reversing Stern’s conviction, the court held that the judge erred in excluding Stern’s testimony about why he purchased the CDs. View "United States v. Stern" on Justia Law

The Palomars filed for bankruptcy under Chapter 7. The trustee reported that the estate contained nothing that could be sold to obtain money for unsecured creditors. A discharge of dischargeable debts was entered and the bankruptcy case was closed. The day before the trustee issued his report, the Palomars had filed an adversary action against the bank that held a second mortgage on their home. The balance on their first mortgage, but the house was valued at $165,000. The Palomars argued that the second mortgage should be dissolved under 11 U.S.C. 506(a). Deciding that the adversary action was meritless, the judge refused to reopen the bankruptcy proceeding. The district court and Seventh Circuit affirmed, noting that the only debts normally extinguished are those for which a claim was rejected. The bank made no claim; this was a no-asset bankruptcy. Failing to extinguish the lien only deprives the debtors of the chance to make money should the value of their home ever exceed the balance on the first mortgage. View "Palomar v. First Am. Bank" on Justia Law

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