Articles Posted in Bankruptcy

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7th Circuit Court Seal

Jepson v. Bank of New York Mellon
Court of Appeals for the 7th Circuit  Docket No. 14-2459

Opinion Date: March 22, 2016

This case is a testament to the subprime crisis and illustrates how complex and devastating mortgage securitization and pooling was to ordinary homeowners; middle-class people faced with sudden and insurmountable mortgage debt. Sadly, this decision also illustrates just how hard it is to stand up to the holders of pooled mortgage loans.

The underlying facts of the case are so common that the Plaintiff could have been anyone; while the tortuous path of the case up to the 7th Circuit – years after the underlying foreclosure and bankruptcy – left this Plaintiff financially devastated.

Factual Background

Patricia Jepson (Jepson) executed a Note and Mortgage issued by “America’s Wholesale Lender” – a d/b/a of notorious subprime mortgagee Countrywide – and Mortgage Electronics Registration Systems (MERS), its nominee. The Note was endorsed by Countrywide d/b/a America’s Wholesale Lender and transferred to CWABS, a residential mortgage trust operating under New York law that pooled loans and sells mortgage-backed securities sold on Wall Street. CWABS is governed by a Pooling and Service Agreement (PSA). Bank of New York Mellon (BNYM) was the Trustee for CWABS. MERS therefore assigned Jepson’s mortgage to BNYM.

When Jepson eventually defaulted on her mortgage – a common scenario in such subprime traps – BNYM filed a Foreclosure complaint in State Court. Jepson inturn filed Chapter 7 Bankruptcy. BNYM predictably moved to lift the Automatic Stay. But instead of lying down and letting the Bank proceed, Jepson filed an Adversary Complaint and Objection seeking a declaration that BNYM had no interest in her mortgage because, inter alia, the note did not proceed through a complete chain of intervening endorsements; was endorsed after the closing date in the PSA; and that America Wholesale Lender was a fictitious entity rendering the Note was void under Illinois law. Continue reading

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In re: Great Lakes Quick Lube, LP
7th Circuit Federal Court of Appeals
No. 15-2093 Decided Mar. 11, 2016

In this case the value of unexpired commercial leases was put to the test. When a popular auto-repair/oil-change franchise went into Chapter 11, its unsecured creditors sought to recoup the value of 2 unexpired leases it relinquished just before filing. The 7th Circuit analyzed the issue under 2 provisions of the Bankruptcy Code and ultimately decided that the terminated leases were an asset of the Estate and that letting them go was tantamount to an improper pre-filing transfer.

Factual Background

Great Lakes Quick Lube LP (Great Lakes) owned oil change and automotive repair stores throughout the Midwest. Its business model included selling stores to shareholders and leasing them back. One such arrangement was made with T.D. Investments I, LLP (TDI), which leased 2 stores to Great Lakes. But in 2012, under mounting financial pressure, Great Lakes terminated its TDI leases.

Adversary Case in Bankruptcy

Ultimately, Great Lakes sought Chapter 11 Bankruptcy protection less than 60 days after terminating the TDI leases. The Estate’s Unsecured Creditors’ Committee filed an Adversary action contending that those lease terminations amounted to either a preferential or fraudulent transfer by Great Lakes to TDI, and that the value of those leases should be disgorged to the Bankruptcy Estate. The Bankruptcy Court denied relief to the Unsecured Creditors’ Committee because, in its analysis, termination of the TDI leases was not a “transfer” at all – much less a preferential or fraudulent transfer.

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Smith v. Sipi, LLC
7th Circuit U.S. Court of Appeals
Docket 15-1166 Date:Jan. 20, 2016

In this case from right in our neighborhood – Joliet, Illinois – the Bankruptcy Court and 7th Circuit agree that using the market value of property instead of its artificially low disposal price in a tax sale reflects the real intent of both Bankruptcy law and Illinois law. At the same time, both Courts agree that one taking from a tax-sale buyer is entitled to bona fide purchaser protection.

Background

The Smiths lived in a single-family home in Joliet, Illinois. In 2004 Mrs. Smith inherited the property. While living there in 2000, she and her husband failed to pay the real estate taxes, giving rise to a tax lien in favor of Will County. At a 2001 auction, SIPI purchased the tax lien and paid the delinquent taxes of $4,046.26 plus costs.Mrs. Smith did not redeem that tax obligation and SIPI recorded its Tax Deed in 2005; ultimately selling the property to Midwest for $50,000.

Procedural History

In 2007 the Smiths filed for Chapter 13 Bankruptcy protection and successfully sought to avoid the Tax Sale. Both the Bankruptcy Court and the 7th Circuit Court of Appeals agreed that under the terms of 11 U.S.C. 548(a)(1)(B) the property was not transferred for reasonably equivalent value. However, both Courts did find that Midwest was a “subsequent transferee in good faith” (i.e. a bona fide purchaser) entitled to retain the value of the property it had purchased.

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BK Ct. ND IL EDAmerican Eagle vs. Friedman, 13-AP-01199

Bankruptcy Court, N.D. Ill., Eastern Div.  Opinion: December 29, 2015.

JACK B. SCHMETTERER, Bankruptcy Judge.

This case resulted in a Summary Judgment finding despite the assertion by the Debtor-Defendant of his 5th Amendment right to be free from self-incrimination.

Specifically, this Adversary Case arose from the Chapter 7 Bankruptcy filed by Arthur Friedman (“Debtor”). Creditor-Plaintiff, American Eagle Bank (the “Plaintiff) filed a 3-count Complaint to determine the dischargeability of debt as follows:

Count I  –  per 11 U.S.C. § 523(a)(2)(A)
Count II –  per 11 U.S.C. § 523(a)(6)
Count III-  per 11 U.S.C. §§ 727(a)(3) and (a)(5)
Count IV- per  11 U.S.C. §§ 727(a)(2), (4),(5) and (7)

Count IV was added in the Amended Complaint. The Debtor answered both the Complaint and the Amended Complaint.

On August 4, 2015 the Plaintiff served Requests for Admission pursuant to Fed.R.Bankr.P.7036. The Debtor never responded, and the Plaintiff brought a Motion for Summary Judgment as to Count IV, alleging that the unanswered Requests were deemed admitted under Fed.R.Civ.P.36(a)(3). The Court agreed, and Summary Judgment was granted on Count IV.

I. JURISDICTION AND VENUE

Subject matter jurisdiction is proper in the Bankruptcy Court per 28 U.S.C. §1334, and this is a “core proceeding” under 28 U.S.C. §§157(b)(2)(A), (I), and (O) since it seeks to determine the dischargeability of a debt. Therefore, it “stems from the bankruptcy itself” and may be decided by a Bankruptcy Court (See: Stern v. Marshall, 131 S.Ct. 2594, 2618 (2011)).

II. UNCONTESTED FACTS

The Plaintiff filed a Statement of Material Facts as required by Local Rules, but the Debtor failed to file an opposing statement; thus “[a]ll material facts in [Plaintiff’s] statement…[were] deemed admitted.” Accordingly, the following was taken from the Plaintiff’s Statement of Material Facts, Debtor’s Answers, and the Requests for Admission:

Debtor was a principal and the president of Prestige Leasing (“Prestige”). Before filing, the Debtor was party to a lawsuit that was settled in his favor. As a result, the Debtor received $75,000 annually, minus attorneys’ fees.  Payments were made to Prestige until it was closed in 2011. After that time, payments were made to the Debtor. In his Answers the Debtor admitted as much, and that payments were received within a year of filing bankruptcy.

Moreover since the Debtor did not respond to the Requests for Admission within the 30-day time limit prescribed by the rules, the resulting admission could be deemed a violation of his Fifth Amendment right not to incriminate himself. Therefore, the Court’s inquiry began with a discussion of the Debtor’s Fifth Amendment rights.

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7th Circuit Court Seal

EAR vs. Brandt/Brandt vs. Horseshoe Hammond, 14‐2174
Appeal from District Court (ND IL ED) 12‐cv‐00271
Decided Oct. 13, 2015

Introduction

In an Adversary Proceeding in the Chapter 11 Bankruptcy case of Equipment Acquisition Resources (EAR), Plan Administrator William Brandt (Brand) sought to avoid and recover the so-called “fraudulent transfers” made to EAR’s founder that he subsequently lost gambling at Horseshoe Casino.

Facts

EAR was established in 1997 to manufacture and refurbish machinery for use in creating technology products. Beginning in 2005 however, it also began defrauding creditors through crooked equipment financing activities. As a result, founder Sheldon Player and a company Officer named Malone pocketed about $17 Million each.

It was not until September 2009 that an outside forensic accounting firm hired by EAR’s Board of Directors detected the fraud. In response to the revelation about the wrongdoing, the company’s Board and all Officers resigned. EAR’s shareholders then elected William Brandt as the sole Board Member and Chief Restructuring Officer. Shortly thereafter the company sought Chapter 11 Bankruptcy protection.

Procedural History

Brandt filed an Adversary proceeding against Player and Malone in the Chapter 11 case pursuant to 11 U.S.C. 544, 548, and 550 to avoid and recover the transfers made to them. Brandt prevailed, then had to collect from Horseshoe.

In the ensuing case in the District Court, Horseshoe moved for Summary Judgment under the aegis of the statutory “Good Faith” defense in 11 U.S.C. 550(b)(1). Horseshoe prevailed in the District Court.

Brandt appealed the District Court’s ruling, arguing that it had misinterpreted §550(b)(1) and, in addition, it should have granted his prior Motion to Compel production of documents related to investigations conducted by Horseshoe concerning Player.

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Seymour vs. Collins, 2015 IL 118432

Supreme Court of Illinois, September 24, 2015

In Seymour the Illinois Supreme Court addresses whether action, or inaction, in connection with a Federal case such as a Bankruptcy, should give rise to estoppel in connection with a State cause such as personal injury. The Answer is something of a surprise.

Facts

In 2008 the Seymours filed a Chapter 13 Bankruptcy Petition. 2 years into their Plan or Reorganization, they filed a personal injury action based on a 2010 automobile accident. In 2010 they successfully moved to modify their Plan; reducing their monthly payments because Mr. Seymour was unable to work due to the accident and the couple’s sole source of income was now workers’ compensation.

Procedural Background

Despite having moved to modify their Plan, the Seymours never officially apprised the Bankruptcy Court that their circumstances changed; nor did they amend their Bankruptcy Schedules. On that basis, the Defendants in the State Court case were able to secure summary judgment using an estoppel argument. The notion was that since the Debtors failed to advise the Bankruptcy Court of their case, they should not be permitted to proceed in State Court Continue reading

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7th Circuit Court Seal

Duff v. Central Sleep Diagnostics, LLC
7 Cir. U.S. Court of Appeals Docket No. 13-3837 Opinion September 10, 2015

Original Claim
Investors in Central Sleep sued the company as well as Dachman, its promoter, and others. Their claims included fraud, the Racketeering Influenced and Corrupt Organizations Act (RICO), conversion, fraudulent conveyance, civil conspiracy, and securities fraud. Dachman was also singled out for fraudulent conduct; he spent stolen investor funds on a tattoo parlor, vacations, cruises, a new Land Rover, rare books, personal stock trading, and gambling. The Judge ordered Central Sleep into receivership and issued a stay against “all civil legal proceedings” involving Defendants.

Attorney Claim
Attorney Goodman had represented the Defendants and obtained a judgment for his unpaid legal fees. He submitted a claim to the Receiver for that amount; but also filed a lien on the proceeds of Dachmans’ separate State Court medical malpractice suit. Neither Goodman nor the Dachmans informed the Receiver or Judge about those proceedings. When the Receiver learned of the malpractice suit he immediately recovered the settlement proceeds and proposed a distribution plan. Goodman objected to the plan and argued that unlike the other creditors he was entitled him to full – rather than pro rata – payment.
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Unsecured Creditors’ Comm. v. Ind. Family & Soc.Servs. Admin.

7 Cir. Court of Appeals Case No.14-2420 Date August 28, 2015

Facts

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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