Articles Posted in Case Update

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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 →

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 →

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 →

On February 9, 2015 the Bankruptcy Court for the Northern District of Illinois, Eastern Division ruled in the case of Brandt vs. Rohr-Alpha, a case involving fraudulent transfers and whether certain debts can be avoided in Bankruptcy.

What is a “Fraudulent Transfer?”

A pre-petition payment is avoidable as constructively fraudulent according to 548(a)(1)(B) when the Debtor:

  1. Transfers property or an interest in property;
  2. Within the 2 years preceding its bankruptcy;
  3. Got less than reasonably equivalent value; and
  4. Was insolvent or rendered insolvent as a result.

Reasonably Equivalent Value

To determine whether reasonably equivalent value was exchanged the Court must determine:

  1. Whether at time of transfer the Debtor received value; and, if so,
  2. Whether that value was equivalent to what the debtor gave up.

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

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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.

 

On December 30, 2014 the Delaware Chancery Court decided the case of Prokupek v. Consumer Capital Partners LLC, C.A. 9918-VCN (December 30, 2014), which resolved the following issue: Can  a terminated LLC member enforce “inspection rights” in the company’s Operating Agreement and the Delaware LLC Act? The short answer: “No.” Here’s why.

The Facts

David Prokupek, Chairman and CEO of Smashburger, owned a substantial amount of company stock, with roughly 2/3’s of it unvested. He also held options that would vest when certain performance milestones were met.
Despite being told in November 2013 that he was being terminated, Prokupek remained with Smashburger until February 2014. In April and May 2014 Smashburger told Prokupek how much of his holdings had vested and the fair market value of those holdings. Those sums were paid to him, with the notices from the company.

Prokupek, who disagreed with Smashburger’s valuation and calculation of the number of shares that had vested, demanded to see business and financial records based on the company’s Operating Agreement as well as the Delaware’s LLC Act.

The Opinion

Applying settled law, the Court of Chancery ruled that by its plain language the Delaware LLC Act “confers inspection rights only on current members of the LLC” meaning that a member’s right to inspect books and records terminates upon his firing. Since Prokupek was no longer a member of Smashburger when he made his demand, he had no inspection rights.

The Court also rejected Prokupek’s argument that he retained member status because the proposed price for his holdings was too low; stating that it did not matter whether Smashburger had unreliable figures or even whether the performance hurdles had been met. This was the case, said the Court, even if Prokupek’s allegations that he was intentionally undercompensated were true. All that mattered was that Prokupek was no longer of a member of Smashburger when he demanded his inspection. Of course this decision did not leave Prokupek without a remedy.

The Court pointed out that the recourse for a former shareholder was to assert a breach of contract action against the company.

The Upshot

This case tells us that the rights of former LLC member are not unlimited: and are certainly much more limited than those of a member. The moral of the story may therefore be that shareholders or members who feel insecure about their position should take action before they get the ax.

Your Turn

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Gasunas vs. Yotis, 14-321 (Nov.24) ND IL ED (J. Schmetterer)

The Facts

Yotis, a former Illinois Attorney, borrowed over $50,000 from his Client Gasunas using various tricks and subterfuge: from outright lies to misrepresentations and material omissions of fact designed to manipulate his “friend” and benefactor. Once he had the money, Yotis filed a Chapter 13 Bankruptcy.

The Adversary Complaint

Gasunas fought back against the Bankruptcy by filing a 4-count Adversary Complaint challenging Yotis’ Chapter 13 discharge under a variety of statutory fraud theories under 11 U.S.C. 523(a) including

  • Fraudulent Pretenses;
  • False Representations;
  • Actual Fraud; and
  • Fraud While a Fiduciary

Yotis, in turn, brought a Motion to Dismiss the Adversary Complaint sounding in 11 U.S.C. 12(b)(6) in an effort to have his case confirmed over the objections of his former Client.

The Opinion

In a carefully written and exhaustive Opinion, Judge Schmetterer of the Bankruptcy Court for the Northern District of Illinois, Eastern Division, evaluates each of the arguments in the Motion to Dismiss and applies them to all 4 counts of the Adversary Complaint. Ultimately the Court dismissed Counts I and II without prejudice and with leave to re-plead, while Counts III and IV are allowed to stand without any changes.

Aside from the precise way in which it examines everything from the Federal Rules of Civil and Bankruptcy Procedure to the substantive law of Bankruptcy Fraud and the Relation-Back Doctrine, the Opinion is notable for its recitation of the truly underhanded things that Yotis is alleged to have done in order to weasel money from his Client, including:

+ Crying about his wife and daughter leaving
+ Claiming to need money to pay his mortgage
+ Lying about visiting his sister in an institution
+ Cajoling even while professing false friendship
+ And many other examples of how not to behave

 The Upshot

This Opinion is a solid primer and review concerning the types of Bankruptcy Fraud available through 523(a) – a mainstay of Bankruptcy litigation. Here, the fact that the Debtor was an Attorney and the Plaintiff/Creditor was his former Client simply makes the case that much more of an object lesson.

Your Turn

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In re Meier (Ch. 11) )(Nov.24) 14-10105 ND IL ED (J.Schmetterer)

The Facts

Bob and Martha Meier divorced and entered into a Marital Settlement Agreement (“MSA”) that provided for $4 million in maintenance payable in monthly installments over 10 years; plus a $400,000 property settlement. Bob filed for Chapter 11 sometime later and Martha filed a proof of claim (“PoC”) in the case seeking the rest of her $4 Million as well as the $400K as a “priority as a domestic support obligation” per 11 U.S.C. §507(a)(1)(A).

The Issue

Of course domestic support obligations are exempt from discharge in Bankruptcy, and entitled to priority payment in a plan of reorganization. The tricky part however, is determining just what constitutes a “domestic support obligation” entitled to special treatment, and what does not. For instance, would a spouse’s Attorneys’ Fees be entitled to special treatment? How about interest on unpaid sums? Court sanctions for unpaid support?

The Opinion

Regardless of how much of Martha’s PoC was entitled to priority, one thing was for certain: it would definitely put a crimp in Robert’s Plan of Reorganization. So it is no surprise that Ed Shrock, one of Bob’s creditors under the Plan, objected to Martha’s PoC. According to Shrock, in order for Martha’s claim to be valid, all the domestic support obligations would have to be due at once – not the case here. By contrast, domestic support obligations due in the future like the installments here are NOT allowable claims in Bankruptcy. In response to the Ojection, Martha amended her PoC to reflect $2,333,333 as a “domestic support obligation” and $400,000 as a “property settlement.” Apprently, that amendment did not satisfy Shrock, who believed that none of Martha’s claim was entitled to priority over the debt owed to him.

Following a thorough discussion about jurisdiction, whether the disputed amount constitutes a domestic support obligation in whole or part, whether a Proof of Claim is a “judicial admission,” and the proecess by which PoC’s can be amended under Federal Law, the Court ultimately sustained Shrock’s objection as the amended $2.3 Million domestic support claim – rather than the original $2.7 Million claim – but overruled it as to the property settlement. Ultimately, Martha was left with a claim for the $400K and in potential future claims that would not mature until they were due and owing.

The Upshot

While the numbers in the Meier divorce are large and impressive, the facts and reasoning in this case apply accross the board. Domestic support is still the #1 source of exempt claims in Bankruptcy, as well as a persistent source of confusion to Family Law practitioners and their Clients.

Your Turn

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