Justia Bankruptcy Opinion SummariesArticles Posted in US Court of Appeals for the Seventh Circuit
Dimas v. Stergiadis
Stergiadis, Dimas, and Theo formed 1600 South LLC, executed an operating agreement, purchased land on which to build a fruit market, and began construction. The 2008 recession stopped construction and eventually led to the LLC’s 2009 dissolution. The partners disagreed about whether they impliedly agreed to equalize their capital contributions. The operating agreement provided that the three each held a one-third membership interest in the LLC; each member agreed to make an initial capital contribution on the date of execution but the amount was left blank. In 2008 Stergiadis sued Dimas in state court seeking to equalize the capital contributions. Dimas filed for bankruptcy, triggering the automatic stay. Dimas ultimately filed seven such petitions and received a discharge in 2016. The U.S. Trustee moved to reopen the bankruptcy to recover the value of an undisclosed property. The bankruptcy court agreed. Stergiadis filed a proof of claim in Dimas’s reopened bankruptcy seeking the same amount he was seeking in state court. The partners disputed the amounts of their respective contributions.The bankruptcy court allowed Stergiadis’s claim, awarding $618,974, finding that the members had an implied equalization agreement. The district court and Seventh Circuit affirmed, rejecting an argument that the LLC’s operating agreement precluded an implied equalization contract. The bankruptcy court properly relied on extrinsic evidence in finding such a contract. View "Dimas v. Stergiadis" on Justia Law
Sandton Rail Company LLC v. San Luis & Rio Grande Railroad, Inc.
Big Shoulders sued the railroads (SLRG), with federal jurisdiction ostensibly based on diversity of citizenship, and requested that the district court appoint a receiver to handle SLRG’s assets. That court did so, which brought the case to the attention of several creditors. One of them, Sandton, intervened and challenged the appointment of the receiver and the district court’s jurisdiction. Sandton alleged that Big Shoulders failed to join necessary parties who, if added, would destroy diversity of citizenship. Meanwhile, other creditors (Petitioning Creditors) filed an involuntary bankruptcy petition on behalf of SLRG in federal bankruptcy court in Colorado. The receiver objected. Because the judicially approved receivership agreement contained an anti-litigation injunction, the district court initially concluded that the bankruptcy petition was void. On reconsideration, however, the district court determined that it did not have the authority to enjoin the bankruptcy. The bankruptcy continued. After Big Shoulders refused to continue to fund the receivership, the district court approved its termination.The Seventh Circuit consolidated several appeals, each of which involved questions of standing or mootness. The court concluded that those justiciability questions required the dismissal of all but Sandton’s appeal. As for Sandton’s argument that diversity jurisdiction is lacking, the court remanded to the district court for an application in the first instance of the “nerve center test” to determine if SLRG and Mt. Hood are citizens of Illinois. View "Sandton Rail Company LLC v. San Luis & Rio Grande Railroad, Inc." on Justia Law
Halperin v. Richards
While Appvion was in financial distress, 2012-2016, the defendants allegedly fraudulently inflated stock valuations to enrich the directors and officers, whose pay was tied to the valuations of its ERISA-covered Employee Stock Ownership Plan (ESOP). They allegedly carried out this scheme with knowing aid from the ESOP trustee, Argent, and its independent appraiser, Stout. Appvion directors allegedly provided unlawful dividends to its parent company by forgiving intercompany notes. Appvion filed for bankruptcy protection. Appvion’s bankruptcy creditors were given authority to pursue certain corporation-law claims on behalf of Appvion to recover losses from the defendants’ alleged wrongs against the corporation; they brought state law claims against the directors and officers for breaching their corporate fiduciary duties; alleged that Argent and Stout aided and abetted those breaches, and asserted state-law unlawful dividend claims. The defendants argued that their roles in Appvion’s ESOP valuations were governed by the Employee Retirement Income Security Act (ERISA), which preempted state corporation-law liability and that, despite their dual roles as corporate and ERISA fiduciaries, they acted exclusively under ERISA when carrying out ESOP activities, 29 U.S.C. 1002(21)(A). The district court agreed and dismissed.The Seventh Circuit reversed in part. ERISA does not preempt the claims against directors and officers. ERISA expressly contemplates parallel corporate liability against those who serve dual roles as both corporate and ERISA fiduciaries. ERISA preempts the claims against Argent and Stout. Corporation-law aiding and abetting liability against these defendants would interfere with the cornerstone of ERISA’s fiduciary duties—Section 404's exclusive benefit rule. View "Halperin v. Richards" on Justia Law
In re: Algozine Masonry Restoration, Inc.
Algozine employed members of the Union and, pursuant to a collective bargaining agreement, was required to submit contributions to three employee benefit funds on behalf of employees who performed covered work: the Welfare Fund; the Pension Fund; and the Annuity Fund. All are multi-employer benefit funds under the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002. Algozine fell behind on its contributions and filed a Chapter 11 bankruptcy petition.The Funds filed separate proofs of claims under 11 U.S.C. 507(a)(5) for unpaid contributions. Section 507(a) affords priority status up to a specified point to certain types of unsecured claims, including claims for unpaid contributions to an employee benefit plan. The Welfare Fund sought $21,334.30, the Pension Fund sought $18,453.40, and the Annuity Fund sought $11,607.16. Algozine argued that the total should be reduced to $5,556.34 because the Funds erred by applying the priority cap that appears in section 507(a)(5) to each individual Fund’s claims rather than the Funds’ aggregate claims. The bankruptcy court, district court, and the Seventh Circuit agreed with the Funds that section 507(a)(5) does not require assessing distinct benefit plans collectively. View "In re: Algozine Masonry Restoration, Inc." on Justia Law
Bullock v. Simon
Bullock petitioned for Chapter 13 bankruptcy but failed to disclose on his Schedule B list of assets a pending workers’ compensation claim. On his Schedule C list of exemptions, he failed to declare an exemption for the claim. Bullock proposed a 60-month plan of reorganization to pay $148 per month plus possible tax refunds. The bankruptcy court confirmed the plan in October 2014. In 2017, Bullock received a workers’ compensation settlement award for $92,430.84. The trustee moved to compel Bullock to disclose it. Bullock then listed the settlement proceeds as personal property on Schedule B and declared the proceeds exempt on Schedule C under 820 ILCS 305/21; 735 ILCS. 5/12-1001(b). The trustee successfully moved to compel Bullock to file an amended plan under 11 U.S.C. 1329(a) that would provide for the turnover of Bullock’s workers’ compensation award for distributions to general unsecured creditors. Bullock had already spent the award proceeds. The bankruptcy court confirmed Bullock’s amended plan, requiring Bullock to pay a lump-sum of approximately $15,000 before the plan’s expiration. Bullock failed to make the final payment under the plan. An appeal from the dismissal of the bankruptcy case is pending. The Seventh Circuit affirmed the district court’s dismissal of the adversary proceeding on mootness grounds. That issue is mooted because he complied with the very order requiring the reorganization plan’s amendment that he now seeks to challenge and because his underlying bankruptcy case was dismissed. View "Bullock v. Simon" on Justia Law
City of Chicago v. Kiera Cherry
Chicago assesses fines for parking and other vehicular offenses against the owner. If the owner filed bankruptcy, keeping the car in the estate meant that the automatic stay prevented the city from using collection devices such as towing or booting. The Seventh Circuit previously held 11 U.S.C. 1327(b), which provides that “confirmation of a plan vests all of the property of the estate in the debtor” precludes debtors from avoiding such fines by keeping the car in the estate except when a court enters a case-specific order, supported by good case-specific reasons. Bankruptcy judges then changed their form confirmation order, adding a checkbox through which debtors could elect a departure from the statutory presumption. The Seventh Circuit then held that vehicular fines are administrative expenses that bankruptcy estates must pay even though not listed on debtors’ 11 U.S.C.507(a)(2) schedules. Whether a car’s title returns to the owner on confirmation of the plan or remains in the estate, vehicular fines must be paid.The Seventh Circuit then reversed confirmation orders that were based only on the debtor’s choice. Immunity from traffic laws is not an outcome plausibly attributed to the Bankruptcy Code. A bankruptcy court must confirm any plan that satisfies 11 U.S.C. 1325(a) and "other applicable provisions of this title”; section 1327(b) is an applicable provision. A bankruptcy court may confirm a plan that holds property in the estate only after finding good case-specific reasons for that action. View "City of Chicago v. Kiera Cherry" on Justia Law
Bastanipour v. Wells Fargo Bank, N.A.
After filing a Chapter 13 bankruptcy petition, Bastani asked the judge to stay a pending state court foreclosure procedure. Bastani’s previous bankruptcy petition had been dismissed less than a year earlier, creating a presumption that the new filing was not in good faith, 11 U.S.C. 362(c)(3)(C)(i), and meaning that the automatic stay would end 30 days after the new proceeding began. The bankruptcy and district courts denied Bastani’s motion.The Seventh Circuit denied relief and also denied Bastani’s motion for leave to file in forma pauperis under 28 U.S.C. 1915. Chapter 13 is designed for people who can pay most of their debts; someone eligible for Chapter 13 relief cannot establish that she cannot pay judicial fees in the absence of extraordinary circumstances. The court further concluded that Bastani’s second bankruptcy petition was filed in actual bad faith; Bastani appeared to be trying to achieve a Chapter 13 benefit (keeping her home) without the detriment of having to pay her debts. View "Bastanipour v. Wells Fargo Bank, N.A." on Justia Law
Hazelton v. Board of Regents for the University of Wisconsin System
The Hazeltons sought sanctions against the University for collecting an educational debt after their debts were discharged in a Chapter 7 bankruptcy. The district court reversed a bankruptcy court holding that the debt was nondischargeable and remanded. The Seventh Circuit dismissed an appeal, citing its jurisdiction in bankruptcy cases under 28 U.S.C. 158(d)(1), which is limited to orders that resolve “discrete disputes” within the bankruptcy case. The district court did not resolve the dispute regarding sanctions but decided a subsidiary legal issue. View "Hazelton v. Board of Regents for the University of Wisconsin System" on Justia Law
Whirlpool Corp. v. Wells Fargo Bank, N.A.
In 2011 Wells Fargo entered into a loan and security agreement with hhgregg to provide the retailer with operating credit. Wells Fargo had a perfected first-priority, floating lien on nearly all of hhgregg’s assets. In 2017, hhgregg petitioned for Chapter 11 bankruptcy, owing Wells Fargo $66 million. Wells Fargo agreed to provide debtor-in-possession (DIP) financing in return for a priming, first-priority security interest on substantially all of hhgregg’s assets, including existing and after-acquired inventory and its proceeds. The bankruptcy judge approved the DIP financing agreement and the super-priority security interest. Whirlpool had long delivered home appliances to hhgregg on credit for resale. Three days after the approval of the DIP financing, Whirlpool sent a reclamation demand seeking the return of $16.3 million of unpaid inventory delivered during 45 days before the petition date and filed an adversary complaint, seeking a declaration that its reclamation claim was first in priority as to the reclaimed goods. Reorganization proved unsuccessful. The bankruptcy judge authorized hhgregg to sell its inventory—including the Whirlpool goods—in going-out-of-business sales and entered summary judgment for Wells Fargo.The Seventh Circuit affirmed. Reclamation is a limited remedy that permits a seller to recover possession of goods delivered to an insolvent purchaser, subject to significant restrictions, 11 U.S.C. 546(c). A seller’s right to reclaim goods is “subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof.” Whirlpool’s later-in-time reclamation demand is “subject to” Wells Fargo’s prior rights as a secured creditor; its reclamation claim is subordinate to the DIP financing lien. View "Whirlpool Corp. v. Wells Fargo Bank, N.A." on Justia Law
Burciaga v. Moglia
Burciaga lost his job and filed for bankruptcy a week later. On the date the bankruptcy proceeding began, Burciaga’s former employer owed him approximately $24,000 for unused vacation time. Illinois treats vacation pay as a form of wages. Exemptions for debtors in Illinois rest on state law, 11 U.S.C. 522(b)(2). Burciaga asked the district court to treat 85% of the vacation pay as exempt from creditors’ claims. Illinois permits creditors to reach 15% of unpaid wages but forbids debt collection from the rest. The Chapter 7 Trustee, objected. The bankruptcy judge and district court sided with the Trustee. The Seventh Circuit reversed, finding nothing ambiguous about Illinois law or section 522(b)(2) and (3)(A); 85% of unpaid wages are exempt from creditors’ claims in Illinois, and vacation pay is a form of wages. View "Burciaga v. Moglia" on Justia Law