Articles Posted in Appellate Court

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Baker Botts L.L.P. v. ASARCO LLC, 14-109 (Jun 15) U.S. Sup.Ct.

Background

ASARCO hired the plaintiff law firms to assist it in carrying out its duties as a Chapter 11 Debtor in Possession (DiP) per 11 U.S.C. 327(a). When ASARCO emerged from Bankruptcy the law firms filed Fee Applications pursuant to 11 U.S.C. 330(a)(1), which permits the Bankruptcy Court to “award …reasonable compensation for actual, necessary services” by professionals.

Lower Court Rulings

ASARCO objected to the Fee Applications brought by its Attorneys. The Bankruptcy Court rejected ASARCO’s objections and went on to award fees for time spent defending the Fee Applications. On appeal from the Bankruptcy Court Order, The District Court held that the Law Firms could be awarded fees for defending their Fee Applications. On appeal from the District Court’s Order, the Fifth Circuit Court of Appeals reversed. Continue reading →

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Carhart v. Carhart-Halaska Int’l, LLC 14-2968 (Jun 08)(7th Cir.)

Background

Federal Case

Carhart and Halaska own CHI. CHI terminated sales agent MRO. MRO filed a Federal suit for breach of contract. Carhart bought MRO’s Federal claim for $150,000 and became nominal Plaintiff. That lawsuit was actually against a company of which he was 1/2 owner.

State Case

Halaska sued Carhart in Wisconsin State Court, alleging that Carhart had breached his fiduciary duty by becoming the Plaintiff in the MRO Federal case, by writing checks against CHI accounts without approval, by depositing payments owed to CHI into Carhart’s account, and by withholding accounting and financial information.  The Wisconsin State Court appointed a Receiver, who informed the Federal court that CHI had no assets with which to pay a lawyer and consented to the entry of a $242,000 default judgment (the sum sought by Carhart), giving Carhart a profit of $92,000 on the purchase. Continue reading →

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BoA v. Caulkett, 13–1421 (Jun 1) Supreme Court of the United States

Background

This case came to the Supreme Court due to a Circuit split on the issue of “Lien Stripping.” In this pair of cases the Debtors both filed Chapter 7 Bankruptcy cases, owned houses encumbered with senior mortgages and “underwater” junior mortgages held by the Petitioner banks. Because the amount owed on each senior mortgage was greater than each house’s current market value, the Banks would have received nothing if they foreclosed on the junior liens (i.e. underwater).

Debtors sought to void their junior mortgage liens under the terms of Bankruptcy Code §506, which provides that “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 USC §506(d). In each case, the Bankruptcy Court granted the Debtor’s respective motions, and both the District Court and the Eleventh Circuit Court of Appeals affirmed.

Continue reading →

United States Supreme Court, Docket: 14-116 Opinion Date: May 4, 2015

Appellant Bullard filed a Chapter 13 Bankruptcy case and proposed Plan. The Debtor’s mortgage lender objected to the treatment of its claim under the Plan and the Bankruptcy Court sustained that objection, denying confirmation of the Plan with leave to amend.

First Appeal

The Debtor appealed the denial of confirmation to the 1st Circuit Bankruptcy Appellate Panel, which concluded that denial of confirmation was not a final, appealable order under 28 U.S.C.158(a)(1). Nonetheless, the BAP heard the issue as an interlocutory appeal – the operative provision in the Bankruptcy Code requiring “with leave of the court.” Tha BAP agreed that Bullard’s proposed Plan did not accord proper treatment to the mortgage company and upheld the ruling of the Bankruptcy Court.

Continue reading →

The Facts

In 2004 Miller sought to build a 4-unit condominium project on her lot in Monona, Wisconsin. The process stalled while Miller bought another lot, amended the plan, and abated an unexpected asbestos problem. Then her real problems began.

Miller negotiated unsuccessfully with her neighbor, a former mayor, who trespassed onto her property at the direction of city officials and took photographs for use at a planning commission meeting to oppose her project. Citations were issued for creating a public nuisance and working without the proper permit; the Wisconsin Department of Natural Resources issued a “Stop Work” Order due to the asbestos. Miller was also required to erect a fence, was told that weeds were too high, and was ordered to remove various structures.

State Courts

A Wisconsin State Court rejected 3 of the citations issued against her, stating that while “some of the efforts to enforce compliance were unreasonable” Miller had not pointed to any similarly situated person who had been treated differently. With the Court on its side, Monona refused to adjust taxes on the property to reflect the demolition of existing structures, and Officials continued to trespass by parking cars on her property. Continue reading →

Today’s post features a pair of cases in which a foreclosure defense Attorney seems to have gone too far. Foreclosure defense has become a veritable cottage industry over the past decade and it is common for Clients to expect their lawyer to do more than fight. They want to delay “by any means necessary.” But the Courts still regard the law as a genteel profession. This means that what Clients see as run of the mill zealous lawyering comes off to the Judge as unprofessional or worse. This pair of cases highlights that point.

Case #1: In re Wendy A. Nora

Facts

Nora was known for using tactics to prolong her Clients’ cases. Here she had removed a matter to Federal Court based on what she called “recently uncovered research” to the effect that Freddy Mac was the true party in interest. The case was already 4 years old. But the District Court rejected her argument and remanded back to State Court, awarding PNC its Attorney’s fees and costs.

Nora moved for reconsideration. The Court did not change its position and called her pleading “frivolous” because she made “no good faith argument for changing existing law and offered no meritorious arguments for reconsidering the decision to award fees.” The Court went on to say that Nora “repeatedly used procedural feints to delay the foreclosure” and noted that she’d been suspended from practice in Minnesota for that very reason.

Back in State Court Nora continued her tactics: accusing the Judge and the Court Reporter of manipulating transcripts even as she asserted that the District Judge had pursued a campaign of libel and Opposing Counsel engaged in “civil fraud” and “racketeering.” Nora also made repeatedly references to rejected arguments from prior motions and stated that if she were given an evidentiary hearing she would be vindicated.

Findings

In her defense, Nora characterized her comments as mere rudeness. The Court disagreed, stating that her repeated and factually baseless accusations of criminal conduct were “unacceptable.” It then found that:

  • Nora’s actions were meant solely to delay her Clients’ foreclosure; and that
  • Her outbursts  were “unbecoming a member of the bar” in violation of Rule 38 of the Rules of Federal Appellate Procedure.

Holding

The Court Imposed sanctions of $2,500 on Nora and ordered she be suspended from practicing before it. The holding was forwarded to the Office of Lawyer Regulation of the Wisconsin Supreme Court, where a disciplinary case is underway.

Case #2: Nora v. HSBC Bank USA, N.A.

Facts

HSBC initiated a Wisconsin foreclosure against the Rinaldis, who counterclaimed alleging that certain paperwork had been fraudulently altered and that HSBC lacked standing to enforce the mortgage. The Rinaldis lost at summary judgment and did not appeal. HSBC later agreed to modify its mortgage and the Court vacated the Judgment of Foreclosure. The Rinaldis filed a new suit reasserting their counterclaims. Before the Court could rule on HSBC’s motion to dismiss, the Rinaldis filed Bankruptcy. HSBC filed a Proof of Claim in the Bankruptcy, but the Rinaldis objected and filed Adversary claims alleging fraud, abuse of process, tortious interference, breach of contract, and violations of RICO and the Fair Debt Collection Practices Act.

Holding

The Bankruptcy Court recommended denial of the Adversary action and the District Court agreed.The Court also warned the Rinaldis that if they filed additional frivolous claims they would be sanctions due to the “vexatious and time and resource-consuming” nature of their “nigh-unintelligible” filings.

Did that deter the Rinadldis? Perish the thought. Following several additional filings of the same type the Rinaldis voluntarily dismissed their Bankruptcy but their Attorney, Nora, filed additional motions. Consequently the Court ordered a sanction of $1,000 against Nora, which the 7th  Circuit upheld on appeal.

The Upshot

Lawyers are asked to be advocates, but how zealous is too zealous? While cases such as the ones above could answer that question, it is not clear that they do. Was Nora too zealous in this case or just too rude? Should she not have stepped into a Courtroom to begin with? Should she have done more diligence or tossed out her Client because they were asking for too much? Sadly, the simple fact is that even if an Attorney is prepared to draw the line, they can bet there is another lawyer around the corner that won’t.

No wonder Shakespeare wrote “The first thing we do, let’s kill all the lawyers.”

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

In Kmart v. Footstar and Liberty Mutual the 7th Circuit Court of Appeals was presented with 2 primary issues:

  • Is an indemnification clause triggered when an employee acts outside the scope of his duties?
  • Does an insurance company have a duty to defend the lawsuit arising from such an incident?

The Facts

Footstar operated the footwear department at various Kmart locations. Footstar employees could only work in shoe department unless they had written permission from Kmart. The agreement between the two stores provided that Footstar was to “reimburse, indemnify, defend and hold [Kmart] harmless” in the event of an accident. Footstar also bought insurance from Liberty Mutual.

In 2005 a Kmart customer asked for assistance retrieving a stroller. Both a Kmart and Footstar employee attempted to secure the stroller, which fell out of the box and hit the customer in the face. The accident took place well outside the Footstar department. The customer sued Kmart in negligence. Kmart in turn sued Footstar and Liberty Mutual, alleging that they owed a duty to defend and indemnify it.

The Opinion

First, the 7th Circuit ruled that Footstar and Liberty Mutual did not have a duty to indemnify Kmart: for such a duty to arise the injury would have to arise “pursuant to” or “under” the agreement between the stores. But that agreement in this case prohibited Footstar employees from taking action outside the footwear department. The Court also noted that the duty to indemnify arises only where the insured’s activity and resulting damages fall within the policy’s coverage terms. Since the Footstar employee here was acting in an extra-contractual manner, there was no indemnification requirement.

Second, the Court noted that under Illinois and New Jersey law Footstar and Liberty Mutual were liable for defense costs incurred following notice of the lawsuit because an insurer may be required to defend its insured even when there will ultimately be no obligation to indemnify. In other words, an insurer has a duty to defend unless the complaint in issue simply did not involve its insured.

In summary, the Court concluded that the actions of the Footstar employee were “potentially covered” and arose out of his performance under the agreement between the stores.

The Upshot

This case reminds us that even in this day and age contract drafting is a nuanced but critical part of what lawyers do. Here, the Agreement and the Policy were both deemed ambiguous by the Court, which left them open to competing interpretations. Had they been better written, the issue may not have come up at all.

 

Kashwere, LLC vs. Kashwere USAJPN, LLC
Before the U.S. Court of Appeals 7th Circuit
Docket No. 13-3730 Decided November 13

The Facts

Diversity jurisdiction brought this complex commercial case before the 7th Circuit, which applied Illinois law to a series of trademark and business questions. At issue was whether the developer of chenille fabric under the tradename “Kashwere” (Selzer) could prevent a series of transactions via a non-compete agreement (“NCA”) and, conversely, whether the buyer of the Kashwere trademark (Kashwere LLC) could prevent Selzer from using a conduit company and distributors (Kashwere USAJPN) to get around that same NCA.

The Issues

The background in the case makes the opinion lengthy and complex: in fact, the Court goes out of its way to mention the convoluted facts and blames the litigants’ Attorneys for failing to keep it simple. But the issues are actually limited and familiar. In a nutshell, they are:

1) Can Kashwere LLC, as licensee of the Kashwere trademark, prevent Selzer from using USAJPN to market overseas via distributors; and
2) Can Kashwere USAJPN prevent Kashwere from allegedly violating the same NCA by attempting to sell directly into the Japanese market.

Put another way, the issues were:

(A) Does the NCA prevent distributors – not the signatories themselves but their distributors – from selling Kashwere?
(B) If not, do the equitable obligations of good faith and fair dealing implied in Illinois contracts prevent the same?

The Decision

The Appellate Court concluded that the facts indicated Selzer was not playing fair (so licensee Kashwere LLC has a cause of action) but it is dubious whether the NCA would affect the right of distributors of USAJPN to sell the product once they bought it. In other words, the NCA could only bind the signatories, not prevent the distributors from selling the product.

The Upshot

The Opinion basically favors free commerce and reads the NCA – a document the parties hoped would prevent future litigation – narrowly. That narrow reading means that there is only the slightest wiggle room for Selzer, so licensee, Kashwere LLC, ought to obtain relief on remand (although not the draconian relief that it was seeking initially). As for Selzer and his would-be Japanese conduit USAJPN, they do not fair well in this opinion at all.

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

As a Bankruptcy lawyer I can’t count how many times people have asked why Courts won’t reduce their mortgage debt to match the deflated value of their home, or why they should pay anything on that second mortgage, line of credit, or HELOC, when they’re underwater. I even discussed these questions and the state of the law concerning lien strips in this post. Now, the very cases referred to in that post have made it to the U.S. Supreme Court and the stage is set for the battle of the lien strip cases.

Of course this all started with the Supreme Court’s 1992 Opinion in Dewsnup v. Timm that the Bankruptcy Code does not permit the cramdown of a partially secured mortgage. Some Courts took this to mean that lien-strips are a no-no. Others interpreted it to mean that lien-strips were permissible under the right circumstances. So in some parts of the country a completely unsecured second mortgage can be stripped, but only in a Chapter 13 reorganization; while in other parts it can be stripped in a Chapter 7 liquidation, too.

So, with Courts in disagreement, what’s a home-owner to do? Remember, in Dewsnup the Court ruled the Bankruptcy Code doesn’t permit mortgages to be written down to the value of the home – even though that practice, known as the cram down,  is acceptable as to vehicles. Ironically, one of the Court’s primary concerns in Dewsnup was to prevent windfall gains to home-owners who strip away their loans, then enjoy the profits as their homes rise in value.

But that didn’t exactly happen, did it? These days, most people’s homes are more a burden than a boon. Luckily the Supreme Court has agreed to take another look at the question. And just in time: being underwater with your 1st mortgage while having an unsecured 2nd is the new normal. And nowhere is that more true than in Florida where both cases to be consolidated and heard by the Court, Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, started off as Chapter 7 Bankruptcies.

In a nutshell, the issue to be decided is whether, in a Chapter 7, partially secured mortgages can be written down and unsecured ones written off, despite the Supreme Court’s Dewsnup decision. Here, Florida home-owners filed Chapter 7 and were allowed to strip their unsecured second mortgages. That decision by the Bankruptcy Court was affirmed by the Federal District Court as well as the 11th Circuit Court of Appeals. Bank of American now wants the Supreme Court to outlaw Chapter 7 lien strips once and for all.

Stay tuned to this station as the case goes up for argument and decision. We’ll bring you the opinion as soon as it’s available.

Your Turn

Want to share your thoughts on the largest municipal Bankruptcy in U.S. history? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Many small business owners find comfort and success capitalizing on a franchise. Franchisors use Non-Compete (“NCA”) and Non-Disclosure (“NDA”) clauses as well as mandatory arbitration provisions to protect themselves. But should such a provision be effective against a non-signing spouse? That was the question before the Appellate Court in the recent 7th Circuit case of Everett vs. Paul Davis Restoration. The short answer? Yes, it is.

The Family Business

Davis Restoration entered into a Franchise Agreement with Matthew Everett, husband of Plaintiff Renee, as the “principal owner” of Franchisee EA Green Bay. Sometime after signing as the sole owner of EA, Matthew transferred 50% of the company to his wife despite not securing permission from the Franchisor beforehand. Eventually, the Franchise Agreement was terminated and the 2-year non-compete provision took effect. Matthew then transferred the remaining 45% of EA to his wife, who continued to operate it under the name “Building Werks” from the same location with the same customers and employees. Moreover, the Franchisor contended, Building Werks continued to capitalize on its good will and reputation.

Reversal of Fortune

The Franchisor reacted to the breach of its NCA by initiating arbitration with Mrs. Everett, who sought a declaratory judgment in District Court to the effect that she should not be bound by the Arbitration Clause because the Franchise Agreement was signed by her husband. The District Court, however, found “abundant evidence” that she had benefited from the Franchise Agreement and therefore could be compelled to arbitrate according its terms. This was the so-called Direct Benefits Doctrine.

Following arbitration, the Franchisor went back to Court to confirm the unanimous finding in its favor. To its great surprise, this time the District Court denied confirmation and declared that its earlier ruling had been in error. Now, the Court felt, the benefit to Renee from the Franchise Agreement had not been “direct” but “indirect” through her ownership interest in EA and relationship to her husband. As a result, she could not be compelled to accept the arbitration award.

The Doctrine of Direct Benefits Estoppel

The Franchisor appealed to the 7th Circuit, which set about deciding whether the obligation to arbitrate in such a document was limited to those who had personally signed it or could include non-signatories benefited by it. Ultimately the Appellate Court reached same basic conclusion drawn by the District Court the first time around: that the non-signing, benefited party could not escape her obligation to arbitrate because she was estopped from doing so by the Doctrine of Direct Benefits.

As the Court observed, a direct benefit is derived the subject agreement itself. An indirect benefit by contrast would be one derived from exploitation of the contractual relationship of the parties. The 7th Circuit found that Mrs. Everett received the same benefits as her husband, including the ability to trade on the name, goodwill, and reputation of the Franchisor. In fact, Mrs. Everett’s ownership in EA had only arisen because EA had been formed to satisfy the requirements of the Franchisor. In every sense, Renee had benefitted from Matthew’s relationship with the Franchisor.

The Upshot

Perhaps the primary message of this case was that those who live by the Franchise Agreement, die by the Franchise Agreement…. So to speak. If a party directly benefits from a deal, they should be made to comply with its less glorious features as well. After all, any other conclusion would end up handing franchisees a giant loophole.

Questions about your own situation? Business owner looking for answers? Call us in confidence at 630-378-2200 or reach out to us by e-mail at mhedayat[at]mha-law.com.