Justia Bankruptcy Opinion Summaries

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

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