Articles Posted in US Court of Appeals for the Seventh Circuit

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Fadden earned over $100,000 per year but did not submit tax returns. After an audit, the IRS garnished his wages. Fadden filed for bankruptcy, triggering an automatic stay. Fadden claimed that he had no interest in any real property nor in any decedent’s life insurance policy or estate. Fadden actually knew that he would receive proceeds from the sale of his mother’s home (listed by the executor of her estate for $525,000) and would receive thousands of dollars as a beneficiary on his mother’s life insurance policies. A week later, Fadden mentioned his inheritance to a paralegal in the trustee’s office and asked to postpone his bankruptcy. When Fadden finally met with his bankruptcy trustee and an attorney, he confirmed that his schedules were accurate and denied receiving an inheritance. The Seventh Circuit affirmed his convictions under 18 U.S.C. 152(1) for concealing assets in bankruptcy; 18 U.S.C. 152(3) for making false declarations on his bankruptcy documents; and 18 U.S.C. 1001(a)(2) for making false statements during the investigation of his bankruptcy. Counts 1 and 2 required proof of intent to deceive. Fadden proposed a theory-of-defense instruction based on his assertion that his conduct was “sloppiness.” The Seventh Circuit upheld the use of pattern instructions, including that “knowingly means that the defendant realized what he was doing and was aware of the nature of his conduct and did not act through ignorance, mistake or accident.” View "United States v. Fadden" on Justia Law

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Telecommunications retailer OneStar paid its supplier, MCI, $1.9 million during the 90 days before OneStar was forced into bankruptcy. OneStar’s bankruptcy trustee sought to recapture those payments under 11 U.S.C. 547(b), which generally allows debtors to avoid payments made during the 90-day “preference period.” MCI asserted affirmative defenses under 11 U.S.C. 547(c): that the payments were unavoidable because MCI offset them by subsequently providing OneStar with new value--additional telecommunications services--and the payments occurred in the ordinary course of business. The trustee contended that the new value was canceled because, one week before the bankruptcy filing, OneStar assigned its contract with MCI to a newly-formed affiliate, releasing MCI from its contractual obligations to OneStar. MCI was now obligated to provide services to the affiliate, which then relayed those services to OneStar. The bankruptcy judge rejected Verizon’s ordinary-course defense but ruled that the new value MCI advanced during the preference period sufficed to make OneStar’s preferential payments unavoidable; the debt assignment to the newly-formed affiliate was irrelevant. The district judge and Seventh Circuit affirmed. A debtor’s assignment of debt and contractual rights to an affiliate does not have the effect of repaying a creditor for new value. MCI advanced subsequent new value that remained unpaid, so OneStar’s preferential transfers are unavoidable. View "Verizon Business Global, LLC v. Levin" on Justia Law

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Rose bought $120,000 of products on credit from Caudill and did not pay. Before a district court ruled for Caudill, Rose gave 440 acres of land to his son Matt, then filed for bankruptcy. Caudill began an adversary proceeding, asking the judge to pull the land into the estate under 11 U.S.C. 548. The bankruptcy trustee's similar request was settled for payment of $100,000. The bankruptcy judge approved that settlement over Caudill’s objection. To get a discharge, Rose reaffirmed his debt to Caudill. He promised to pay $100,000, with an immediate $15,000; failure to pay entitles Caudill to a judgment for $300,000. Rose paid the $15,000 but nothing more. Caudill might have sought to rescind the discharge, but filed a new suit based on the reaffirmation agreement, obtaining a $285,000 default judgment. Rose failed to pay. Caudill commenced supplemental proceedings, contending that, under Indiana law, it can execute on the land that was fraudulently conveyed to Matt. Rose and Matt did not deny that the transfer was a fraudulent conveyance but argued that the settlement of the Trustee’s claim precluded further action to collect Rose’s debts from the value of the land. The district court and Seventh Circuit rejected that argument, observing that issue preclusion depends on an actual decision, by a judge, that is necessary to the earlier litigation. Whether the transfer of the land was a fraudulent conveyance was not actually litigated; the Trustee’s claim was settled. View "Caudill Seed & Warehouse Co. v. Rose" on Justia Law

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Sentinel managed investments for futures commission merchants (FCMs) like FCStone, which act as financial intermediaries between investors and futures markets. Sentinel itself was an FCM. Sentinel organized its customers into “SEGs.” FCM customer assets were held in SEG 1. SEG 1 and SEG 3 customers have special protections under the Commodity Exchange Act, the Investment Advisers Act, and SEC regulations, which required Sentinel to hold customer funds separately. Sentinel, however, routinely used securities it had allocated to customers as collateral for Sentinel’s own borrowing and trading. In 2007, Sentinel’s scheme collapsed. Sentinel halted redemptions and sold a large portfolio of SEG 1 securities, depositing the proceeds in a SEG 1 Bank of New York (BNY) cash account. The next day, Sentinel filed for Chapter 11 bankruptcy. The bankruptcy court authorized BNY to disburse funds to SEG 1 customers, less a five percent holdback ($25,000,000). The trustee waited a year before challenging that transfer but the district court allowed its avoidance under 11 U.S.C. 549. The Seventh Circuit reversed. rejecting the trustee's argument that an after-the-fact “clarification” by the bankruptcy judge was entitled to preclusive effect. “Whether the property belonged to the estate or not,” the Seventh Circuit reasoned, the disbursal order “ended any discussion ... the disputed property cannot later be clawed back.” The $25 million held in reserve under the confirmed bankruptcy plan was not estate property subject to pro rata distribution. FCStone and similarly situated customers preserved their right to recover their trust property. View "Grede v. FCStone LLC" on Justia Law

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The U.S. Trustee alleged that Husain’s bankruptcy filings regularly failed to include debtors’ genuine signatures. Bankruptcy Judge Cox of the Northern District of Illinois made extensive findings, disbarred Husain, and ordered him to refund fees to 18 clients. When he did not do so, Judge Cox held him in contempt of court. The court’s Executive Committee affirmed the disbarment and dismissed the appeal from the order holding Husain in contempt but did not transfer the contempt appeal to a single judge, although 28 U.S.C. 158(a) entitles Husain to review by at least one district judge. The Seventh Circuit affirmed the disbarment and remanded the contempt appeal for decision by a single judge. The court noted extensive evidence that Husain submitted false signatures, documents that could not have been honest, and petitions on behalf of ineligible debtors; he omitted assets and lied on the stand during the hearing. The court noted that Husain’s appeal was handled under seal and stated that: There is no secrecy to maintain, no reason to depart from the strong norm that judicial proceedings are open to public view. View "In re: Husain" on Justia Law

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Peregrine was a registered futures commissions merchant, a registered forex dealer member of the National Futures Association, and dealt in retail foreign currency (retailforex) and spot metal transactions. The Commodity Futures Trading Commission notified Wasendorf, Peregrine’s CEO and the Chairman of the Board, that Peregrine’s accounts were going to be electronically monitored. Wasendorf attempted suicide, after penning a statement admitting to 20 years of embezzlement. He pled guilty to misappropriating nearly $200 million from Peregrine’s segregated customer futures accounts. Peregrine filed for bankruptcy. Bodenstein was appointed as trustee. The bankruptcy of a futures commissions merchant is governed by 11 U.S.C. 761-767, which provides for the distribution of “customer property” in priority to all other claims. “Customer property” is defined as including funds received in connection with a commodity contract, which is defined in section 761(4). Bodenstein excluded one group of plaintiffs from that priority distribution, concluding that forex and spot metal transactions did not constitute “commodity contracts.” After the plaintiffs' adversary proceeding was terminated, another group of customers filed a class action adversary proceeding, alleging fraud, breach of fiduciary duty, unjust enrichment, and conversion, and seeking the imposition of a constructive trust. The bankruptcy court dismissed the action as untimely. In a consolidated appeal, the Seventh Circuit affirmed the bankruptcy court and the district court, rejecting the claims. View "Miller v. Bodenstein" on Justia Law

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From 1977-1984 Banco reinsured 2% of the Insurer’s business. The Insurer stopped writing policies in 1985, went into receivership in 1986, and began liquidating in 1987. Through 1993 the liquidator complied with contractual provisions requiring balances to be calculated quarterly and statements sent. If the Insurer owed reinsurers net balances for the previous quarter, it paid them; if the reinsurers owed the Insurer, bills were sent. In 1993, the liquidator stopped sending checks or bills without explanation. In 2008, the liquidator notified Banco that Banco was owed $225,000 as the net on 1993-1999 business. For periods before 1993, the Insurer was owed $2.5 million. In 2010, Banco protested the bill as untimely. Pine bought the Insurer’s receivables and, in 2012, sued Banco. Litigation about procedural issues, arising from the fact that Banco is wholly owned by Uruguay, consumed several years. The Seventh Circuit affirmed summary judgment, holding that Pine’s claim is untimely. Each contract required scheduled netting of claims and payment of the balance. Claims against Banco accrued no later than 1993. The contracts specify application of Illinois law, which allowed 10 years (until 2003) to sue on contracts. A statute concerning insurance liquidation, 215 ILCS 5/206, does not permit a liquidator to wait until the end to net the firm’s debits and credits. View "Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado" on Justia Law

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Catherine’s parents, Mary and Henry, settled an inter vivos trust with real estate as the trust property. The trust document included a standard spendthrift provision meant to shield the trust’s future benefits from the reach of beneficiaries and their creditors and directed the trustee to evenly divide all remaining principal among their three children at the time of the surviving spouse’s death. Any share belonging to a child who did not survive the surviving spouse by 60 days would go to the child’s successors. The trustee was given the discretion to delay the distribution for six months. Henry survived Mary and died in July 2012. Catherine and her husband filed for Chapter 7 bankruptcy seven months later in February 2013. They claimed $30,000 for “Wife’s Father’s Estate” as property exempt from liquidation under 11 U.S.C. 522. The bankruptcy trustee objected, arguing that her father’s death gave Catherine an immediate and unconditional right to receive her interest in the trust property, which removed the interest from the purview of the trust’s spendthrift provision. The bankruptcy court, district court, and Seventh Circuit agreed. Catherine’s trust interest fully vested before the bankruptcy filing, so the property belongs to the bankruptcy estate. View "Carroll v. Takada" on Justia Law

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Nightingale provided home health care and received Medicare reimbursements. The Indiana State Department of Health (ISDH) visited Nightingale’s facility and concluded that Nightingale had deficiencies that placed patients in “immediate jeopardy.” ISDH recommended that the Centers for Medicare & Medicaid Services (CMS), terminate Nightingale’s Medicare agreement. ISDH conducted a revisit and concluded that Nightingale had not complied. Before CMS terminated the agreement, Nightingale filed a petition to reorganize in bankruptcy and commenced sought to enjoin CMS from terminating its provider agreement during the reorganization, to compel CMS to pay for services already provided, and to compel CMS to continue to reimburse for services rendered. The bankruptcy court granted Nightingale relief. While an appeal was pending, ISDH again found “immediate jeopardy.” The injunction was dissolved. A Medicare ALJ and the Departmental Appeals Board affirmed termination. After failing to complete a sale of its assets, Nightingale discharged patients and closed its Indiana operations by August 17, 2016. On September 16, 2016, the district court concluded that the bankruptcy court had lacked subject-matter jurisdiction to issue the injunction and stated that the government could seek restitution for reimbursements for post-injunction services. CMS filed a claim for restitution that is pending. Nightingale separately initiated a civil rights action, which was dismissed. In consolidated appeals, the Seventh Circuit vacated the decisions. The issue of whether the bankruptcy court properly granted the injunction was moot. Nightingale’s constitutional claims were jurisdictionally barred by 42 U.S.C. 405(g). View "Nightingale Home Healthcare, Inc. v. United States" on Justia Law