Justia Bankruptcy Opinion Summaries

XMH sought Chapter 11 bankruptcy relief and obtained permission to sell a subsidiary's assets (11 U.S.C. 363), indicating that a contract between the subsidiary and WG would be assigned to purchasers. WG objected, claiming that the contract was a sublicense of a trademark and could not be assigned without permission. The bankruptcy judge agreed with WG, but allowed XMH to renegotiate so that the subsidiary would retain title to the contract but the purchasers would assume all duties and receive all fees. The district court granted a motion substituting the purchasers for XMH and ruled that the order barring assignment was erroneous. First holding that the order was appealable and that it should exercise jurisdiction despite the absence of the bankruptcy trustee as a party, the Seventh Circuit affirmed. If WG had wanted to prevent assignment, it could have identified the contract as a trademark sublicense to trigger a default rule that trademark licenses are assumed to be not assignable. The contract was not simply a sublicense: WG retained control over "all other aspects of the production and sale of the Trademarked Apparel." Such a designation would have been more effective than a clause forbidding assignment because it would have survived bankruptcy.

In 2006 creditors forced the corporation, which owned a golf course, into Chapter 11 bankruptcy and the trustee approved sale of the course to the local recreation district over the objections of the corporation's owners. The sale, at a price higher than market value, closed in 2007 and creditors were paid in full. The bankruptcy court rejected multiple allegations of fraud and closed the case in 2010. The Seventh Circuit affirmed and awarded damages and costs, calling the allegations and multiple motions, not only groundless, but "obsessive, a form of harassment, unprofessional, and an abuse of the bankruptcy court, the district court, and this court."

Defendant owned companies forced into Chapter 11 bankruptcy, but was not a debtor in the proceedings. The plan was confirmed and prohibited suits against the bankruptcy professionals and certain litigation against pre-bankruptcy creditors. Years later defendant sued plaintiff, pre-judgment creditors, and the bankruptcy professionals in an Indiana state court, based on Indiana law. The creditors removed the suit to bankruptcy court (28 U.S.C. 1452(a)) rather than asking the bankruptcy judge to enforce his order. The statute authorizes removal of any claim of which that court would have jurisdiction under 28 U.S.C. 1334, which confers on the district courts original jurisdiction of all civil proceedings arising under the Bankruptcy Code, or "arising in or related to cases under" the Code. The bankruptcy judge determined that the suit against the bankruptcy professionals was barred. Defendant filed an amended complaint eliminating all defendants except plaintiff and stating that the only claims arose from alleged violations of confidentiality agreements. The bankruptcy judge ruled that, as amended, the complaint was unrelated to the bankruptcy and ordered the suit remanded to the state court. The district judge affirmed. The Seventh Circuit concluded that the dismissal was not subject to review.

The Wisconsin smelting plant owed more than $1.3 million in delinquent utility charges to the local municipal utility when it filed for Chapter 11 bankruptcy. Months later, despite the automatic stay, the utility implemented a process pursuant to sections 66.0809 and 66.0627, Wisconsin Statutes and local ordinance, under which unpaid utility bills become a lien against the property. The bankruptcy court and district court found that none of the exceptions to the automatic stay applied to the debt, which constituted more than one-third of the utility's operating revenue. The Seventh Circuit affirmed, holding that no exception to the stay applied. The utility did not obtain a pre-petition security interest in the plant property by providing service or billing. The utility bills were not a tax or special assessment.

A citizen of Illinois brought personal-injury claims against the driver of a tractor-trailer and his employer, citizens of Indiana, shortly before expiration of the limitations period. Service of process on the employer occurred eight months later. After the driver notified the district court that he had filed for Chapter 13 bankruptcy, the district court stayed the case as to the driver, as required by the Bankruptcy Code, then dismissed the case against the employer with prejudice, finding that plaintiff failed to exercise reasonable diligence in serving process. The Seventh Circuit dismissed for lack of jurisdiction; dismissal of claims against the employer was not a final judgment because plaintiff continues to seek adjudication of his claims against the driver. The court noted that plaintiff has taken different positions with respect to the viability of the claim against the driver and has filed a state court suit against the driver.

The borrowers, former high-level employees, participated in the company’s shared investment program by purchasing company stock. The entire purchase price was funded by personal loans from banks. The company guaranteed the loans, received loan proceeds directly from the banks, and held the shares. Some participants made a profit, but in 2001 the company filed for bankruptcy. After settling with the lenders, the bankruptcy trustee filed actions against the borrowers. The district court ruled in favor of the trustee. The Seventh Circuit vacated and remanded. The borrowers may have enough evidence to satisfy the "in the business of supplying information" element of a negligent misrepresentation defense. The borrowers may raise margin Regulations G and U as an affirmative excuse-of-nonperformance defense; it is not clear whether the borrowers, the banks, the company, or the plan violated those regulations. Summary judgment on the Securities and Exchange Act Section 10(b) and Section 17(a) illegality defenses was also in error.

The debtors filed Chapter 11 petitions and the court ordered joint administration. The court rejected the debtors' proposed procedures for auctioning property, holding that the plan did not qualify for "fair and equitable" status and could not be approved over the objections of creditors. The Seventh Circuit affirmed, first holding that the matter was not moot, despite the fact that the reorganization plan is no longer before the court. When a debtor’s reorganization plan has not been approved by its secured creditors and proposes the sale of encumbered assets free and clear of liens, Section 1129(b)(2)(A) provides the exclusive means by which it can be confirmed. In this case, the proposed auctions would deny secured lenders the ability to credit bid, and lack a crucial check against undervaluation.

The United States has a $60 million judgment against the defendant, who fled the country, for Medicare and Medicaid fraud. The government served a writ of garnishment (28 U.S.C. 3205) against his interest in a Georgia company, which paid secured creditors, liquidated its assets, and placed slightly more than $4 million in escrow for the claim. Creditors of the Georgia company claimed $175,000. The district court ruled in favor of the government because the creditors had not obtained a writ. The Seventh Circuit vacated and remanded, reasoning that the creditors' claim was against the Georgia company, not against the defendant, and that the defendant's equity interest in the company (which was reachable by the government) may have been subordinate to the interests of creditors. The court noted many unanswered questions about the creditors' interest in the company.

In 2004 the bank made a loan secured by a mortgage and all rents from the property. Three years later the borrower defaulted. The IRS filed a tax lien against the property. A receiver, appointed at the request of the bank, rented the property and collected $82,675. The district court held that the IRS lien had priority. The Seventh Circuit reversed and remanded. The bank had perfected its security interest in the rents under Indiana law; 26.U.S.C. 6323 gives such an interest priority over a federal tax lien if the property subject to the interest was "in existence" when the federal tax lien was filed. The property at issue is the real estate, not the rental income, and was in existence at the time the lien was filed.

The company was established in 1998 to develop systems for high-speed Internet connections for home computers. After a decision to not respond to an acquisition offer, the company was in financial trouble by 2000 and took an $11 million loan for 90 days and a second loan for $9 million, on which it defaulted. The company exchanged its assets for stock in an amount that would have satisfied creditors and preferred stockholders. The stock, the company's only asset in bankruptcy, fell to a value less than the claims of creditors. Common shareholders brought suit. The district court entered summary judgment for the defendants. The Seventh Circuit reversed and remanded, stating that the company's failure was not likely solely the result of the "burst of the dot-com bubble." Even if the directors were excused from liability for failure to exercise due care, as permitted by Delaware law, there was evidence of disloyalty, which was not excused. Evidence of disloyalty switched the burden of proving "entire fairness" with respect to the loans on the directors. There was enough evidence of causation and that certain preferred stockholders (venture capital groups) aided and abetted the directors to submit the question to a jury.