Justia Bankruptcy Opinion Summaries

Margaret’s husband, Bart, was general counsel for a Chicago-area real estate developer. He embezzled $1.2 million from his employer while the two were married. To evade detection, he attempted to replenish the stolen funds, borrowing $400,000 from his friend Farley on the ruse that the money would be used for a real-estate development. Bart gave Farley a third-priority lien on the couple’s home, forging Margaret’s signature on the note and mortgage. Bart’s employer discovered the embezzlement. Bart was convicted of felony theft. Margaret divorced him; the couple’s home went into foreclosure. Farley filed a cross-claim, seeking to enforce his lien, but the sale of the home did not yield nearly enough to cover even the first mortgage. Margaret filed for bankruptcy while the foreclosure was pending, which stayed Farley’s claim. Farley then filed an adversary complaint challenging Margaret’s eligibility for a Chapter 7 discharge. He claimed that she made a fraudulent transfer after filing her bankruptcy petition and made multiple false statements in her bankruptcy schedules. Margaret testified at trial that these were innocent mistakes. The bankruptcy judge credited her testimony and rejected each of Farley’s contentions. The district court and Seventh Circuit affirmed, describing Farley’s as “ill-considered” and noting that credibility determinations are almost never disturbed on appeal. View "Farley v. Kempff" on Justia Law

Debtor filed a petition for Chapter 7 bankruptcy and claimed the assets in her health savings account (HSA) as property exempt from the bankruptcy estate. On appeal, the court certified the following questions to the Supreme Court of Georgia: 1. Does a debtor’s health savings account constitute a right to receive a “disability, illness, or unemployment benefit” for the purposes of O.C.G.A. 44–13–100(a)(2)(C)? 2. Does a debtor’s health savings account constitute a right to receive a “payment under a pension, annuity, or similar plan or contract” for the purposes of O.C.G.A. 44–13–100(a)(2)(E)? Because the Supreme Court of Georgia answered both questions in the negative, debtor's arguments on appeal are foreclosed. The court concluded that, under Georgia law, debtor was not entitled to claim the assets in her HSA as property exempt from the bankruptcy estate. The court affirmed the judgment. View "Mooney v. Webster" on Justia Law

BMS provides administrative services to bankruptcy trustees. It uses Rabobank as the depositary for banking services that BMS provides through its software. Crane, the trustee in the Integrated bankruptcy, hired BMS; the contract required Crane to hire Rabobank for banking services in the proceeding. In a separate contract, Crane authorized Rabobank to withdraw its monthly fee. The plaintiff, a law firm, was a creditor of Integrated and filed a bankruptcy claim, ultimately receiving a distribution of $12,472.55. It would have received $12,666.90, but for its part of Rabobank’s fee, and more had Rabobank paid interest on the estate’s deposits. Plaintiff sued under the Bank Holding Company Act, 12 U.S.C. 1972(1)(E), which states that a bank shall not "extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition … that the customer shall not obtain some other credit, property, or service from a competitor of such bank … other than a condition … to assure the soundness of the credit.” The Seventh Circuit affirmed dismissal. Had Rabobank conditioned its provision of services on the trustee never hiring any other bank in any bankruptcy proceeding, it would constitute exclusive dealing. No one forced Crane to deal with BMS and Rabobank and there was no argument that the fee was exorbitant, or would have been lower with a different bank. View "McGarry & McGarry, LLC v. Rabobank, N.A." on Justia Law

Debtors challenge the bankruptcy court's order and decision sustaining the trustee's objection to debtors' claimed homestead exemption. 11 U.S.C. 522(o) requires the bankruptcy court to determine the extent to which the improvements debtors made to their homestead increased the value of debtors' interest in their homestead. The panel concluded that the bankruptcy court failed to do so in this case, and the panel remanded for the bankruptcy court to make this determination. View "Crabtree v. McDermott" on Justia Law

Debtors challenged the Bankruptcy Appellate Panel's (BAP) judgment affirming the bankruptcy court's decision that the claim of Kenneth Barton was not subordinated pursuant to the provisions of 11 U.S.C. 510(b), and converted debtors’ Chapter 13 bankruptcy proceedings to Chapter 7 proceedings. The court disagreed with BAP and Khan I. See Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v. Freeman (In re Del Biaggio), holding that section 510(b) does apply when debtors are individuals. Nevertheless, the court concluded that the bankruptcy court did not err when it refused to subordinate Barton’s claims pursuant to section 510(b). In this case, Barton sought and obtained damages. Even though his damage award for conversion was based on the value of the securities at the time of conversion, his action did not arise out of the purchase of the securities and the risks that the purchase might entail. Rather, his actions arose out of debtors' conversion of the securities many years later. The court rejected debtors arguments that the bankruptcy court clearly erred when it found bad faith, and abused its discretion when it converted their Chapter 13 proceedings to Chapter 7 proceedings. Accordingly, the court affirmed the judgment. View "Khan v. Barton" on Justia Law

Debtor filed a voluntary Chapter 13 petition that included a mortgage claim held by PNC and secured by a deed of trust on debtor's primary residence. The anti-modification clause in 11 U.S.C. 1322(b)(2) of the Bankruptcy Code protects a mortgagee from having its claim in a Chapter 13 bankruptcy proceeding modified, if the mortgage is secured “only by a security interest in real property that is the debtor’s principal residence.” The court held that reference in the Deed of Trust to escrow funds, insurance proceeds, or miscellaneous proceeds constitute incidental property, rather than additional collateral, which entitles debtor to anti-modification protection under section 1322(b)(2). In this case, the Deed of Trust on debtor's residence is secured only by real property that is also his principal residence. Escrow funds, insurance proceeds, and miscellaneous proceeds do not constitute additional collateral. The court affirmed the judgment. View "Birmingham v. PNC Bank, N.A." on Justia Law

Qi obtained a $2,500,000 state court judgment against the Zengas and filed involuntary chapter 7 bankruptcy petitions against them. They moved to dismiss, asserting that because they had 12 or more creditors, the involuntary petitions required at least three petitioning creditors (11 U.S.C. 303(b)(1)), and that the cases were not in the best interest of creditors. Qi argued that the Zengas were estopped from presenting evidence that they had more than 11 creditors due to their responses to post-judgment sworn interrogatories in the state court proceedings. The bankruptcy court denied the motions to dismiss and entered orders for relief against the Zengas. The Sixth Circuit Bankruptcy Appellate Panel vacated, holding that the threshold number of petitioning creditors is not jurisdictional. The Supreme Court’s 2014 holding in Law v. Siegel cannot be extended to prevent use of equitable doctrines when the statutory provision is not jurisdictional. Given the bankruptcy court’s failure to find actual and substantial detriment to Qi and Qi’s inability to point to any detriment other than loss of time, the court held that the bankruptcy court erred in applying equitable estoppel to bar the Zengas from introducing evidence of the existence of more than 11 creditors. View "In re: Zenga" on Justia Law

The bankruptcy court granted summary judgment for the Department of Labor and declared that debtor's debt is nondischargeable under 11 U.S.C. 523(a)(4). Debtor appeals. The Department had obtained a pre-bankruptcy judgment against debtor in district court. The district court found that, under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1001 et seq., that debtor breached his fiduciary duty when the company of which he was CEO failed to remit funds withheld from its employees' paychecks for their health insurance plan. The BAP concluded that a trust res was created in this case because the trust was created when the employer withholds wages for payments to a plan providing benefits to employees; debtor had fiduciary responsibilities with respect to funds that had been withheld from wages for payment to HealthPartners; and debtor committed defalcation when he knowingly failed to remit employee contributions and instead knowingly used those funds to pay for other corporate expenses. Accordingly, the BAP affirmed the judgment. View "U.S. Department of Labor v. Harris" on Justia Law

After the bankruptcy court held that a Minnesota property tax refund under Minn. Stat. Ann. 290A.04 is not exempt under Section 550.37 (Subd. 14) of the Minnesota statutes as “government assistance based on need,” following this panel’s decision in Manty v. Johnson, debtor appealed. The BAP rejected debtor's claim that Johnson was implicitly overruled by the Eighth Circuit's subsequent opinion in In re Hardy. The BAP concluded that Hardy in no way alters the ruling in Johnson. The BAP explained that the amendments to the federal Additional Child Tax Credit statute discussed in Hardy have no bearing on the Minnesota property tax refund statute at issue here and in Johnson. Accordingly, the BAP affirmed the judgment. View "Hanson v. Seaver" on Justia Law

Barbara Wortley, Trafford's president and shareholder, filed a Chapter 7 petition for bankruptcy on Trafford's behalf and the case was assigned to Bankruptcy Judge John Olson. Judge Olson appointed Michael Bakst as a trustee. While Bakst was litigating the Trafford adversary cases, his law firm, Ruden McClosky, hired Judge Olson's fiance, Steven Fender, to join its bankruptcy group. Judge Olson eventually ordered the Wortley parties to pay over $2.5 million to Trafford's bankruptcy estate. The Wortley parties then filed suit in state court alleging that Bakst hired Fender as part of a scheme to improperly influence Judge Olson and to secure favorable rulings. The state court action was removed to federal bankruptcy court, where it was dismissed. The court concluded that it does not have appellate jurisdiction to consider the merits of the Wortley parties' appeal. The court explained that the bankruptcy court had only "related to" jurisdiction over the claims asserted against Bakst and Fender by the Wortley parties, and as a result it did not have authority to enter a final order of dismissal. The bankruptcy court should have submitted a report with proposed conclusions of law recommending dismissal of the complaint to the district court. Because the case should have gone there first, the court transferred the unauthorized order to the district court for review as a report with proposed conclusions of law under 28 U.S.C. 157(c)(1). View "Wortley v. Bakst" on Justia Law