Articles Posted in Appellate Court

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7th Circuit Court SealSchwartz v. Barclays Capital, Inc.
7th Circuit U.S. Court of Appeals
Docket 15-1416 Date: Aug 24, 2015

Facts
Schwartz was hired as an executive by Barclays Bank. As a perk, Barclays lent Schwartz $400,000 and promised to forgive the loan in 7 installments on the anniversary of his start date. Soon after that period started to run Schwartz was fired, making the unforgiven principal immediately due and payable. ‘

Schwartz refused to pay so the matter went to Arbitration. The Arbitrator sided with Barclays and ordered Schwartz to pay $568,568 which included Attorneys’ Fees and interest. Following the Arbitration decision Schwartz sought Chapter 7 protection.

Between the announcement of the award and the filing of Schwartz’s Petition, he and his wife spent thousands on non-essential consumer goods and services such as tickets to Disney World, private school tuition, and a monthly payment for a Range Rover. Barclays moved to dismiss the case.

Procedural History
The Bankruptcy Court dismissed Schwartz’ Chapter 7 Petition pursuant to 11 U.S.C. 707(a) “for cause.” Schwartz appealed to the District Court and, eventually, to the 7th Circuit – which Affirmed.

Opinion
The 7th Circuit found that the phrase “for cause” as used in the Bankruptcy Code embraces conduct that, even if not a violation of required procedures, avoids repayment of a debt without an adequate reason. In other words, the case was dismissed because the Schwartzes failed to pay as much of their indebtedness as they could.

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7th Circuit Court SealJMB Mfg., Inc vs Harrison Mfg LLC
7th Circuit Court of Appeals, 14-3315
Docket No.14-3306 Issued Aug 24, 2015

In this Opinion the 7th Circuit Court of Appeals ruled on the application of the “Economic Loss Doctrine” to the rejection of non-conforming goods and subsequent suit for damages.

Facts

Child Craft manufactured furniture. Mr. Bienias owns Summit, a supplier. The parties had a long-standing business relationship. Child Craft contracted with Summit to supply wood for a line of high-end baby furniture. Summit sourced the goods from Indonesian manufacturer Cita. At Bienias’s request Child Craft refrained from direct contact with Cita. In 2008-2009 Child Craft issued purchase orders to Summit worth $90,000. Each order included detailed specifications including maximum moisture content of 6-8%. Despite this fact the shipped wood never met those specifications. Child Craft rejected the goods as defective and refused to pay. Summit spent considerable time trying to re-work the products. As it turned out however, Child Craft was never able to sell its intended Line and ceased operations in 2009.

Procedural History

Summit sued for breach of contract and conversion. Child Craft counterclaimed against Summit and its owner, Bienias, for breach of contract and negligent misrepresentation seeking $5 million in compensatory damages and $5 million in punitive damages. Only Child Craft’s counterclaim for negligent misrepresentation against Bienias was tried. The Judge awarded $2.7 million in damages against Bienias and Summit.

Opinion

The 7th Circuit points out that under Indiana law a buyer who has received non-conforming goods cannot sue the seller for negligent misrepresentation to avoid the Economic Loss Doctrine, which limits it to contract remedies for purely economic losses. There is no basis for transforming a breach of contract claim into a tort claim to hold the seller’s president personally liable.

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7th Circuit Court SealDunnet Bay Constr. Co. v. Borggren, No. 14-1493 (7th Cir. 2015)

Dunnet was a highway construction company prequalified to bid and work on Illinois Dept. of Transportation (IDoT) projects and compete for Federally highway contracts that was owned by two white males.

Dunnet, whose average annual receipts were over $52 Million, wanted to be considered a “disadvantaged business enterprise” (DBE) in order to compete for certain jobs. However, the government defines a DBE as a small entity that is owned at least 51% by, and controlled by, so-called “socially and economically disadvantaged individuals” (ie: women and minorities).  A DBE must also have annual receipts of $22.41 Million or less.

Despite the fact that “disadvantaged business” and a “disadvantaged individual” refers to women and minorities, an owner of any race or gender may seek a “waiver.” Dunnet sought but was denied a waiver. As a result, Dunnet brought a discrimination suit claiming that the denial was a violation of its equal protection rights under the Constitution.

The District Court entered Summary Judgment against it and Dunnet appealed. The Seventh Circuit affirmed the summary judgment rejecting Dunnet’s claim that IDoT’s DBE Program discriminates on the basis of race. In fact the Court concluded that Dunnet lacked standing to raise an equal protection challenge based on race and that the Program survived constitutional scrutiny as well as the other challenges raised by Dunnet’s claims.

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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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7th Circuit Court Seal

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.

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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.

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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

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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.

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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.