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Articles Posted in Bankruptcy

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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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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

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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.

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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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Think you know about Lien Strips, the controversial practice featured in our post here? Well think again, because the law may be changing. Lucky for you we have an update ready to go.

WHAT IS A LIEN STRIP?

11 USC 1322(b) provides that wholly undersecured liens on real property may be removed or “stripped,” and the debt to which they relate treated as unsecured in a Chapter 13 Plan of Reorganization. Lien stripping has 2 distinct, and very desirable, benefits for debtors:

  1. The lien strip removes the junior lien from the property entirely; and
  1. The debtor only pays a percentage of the claim (as if it were an unsecured debt).

CAN A PARTIAL LIEN STRIP SUCCEED?

There is no such thing as a partial lien strip. Bankruptcy Courts will only allow a lien to be stripped if it is wholly undersecured (i.e. unsecured): that is, the secured potion is zero or negative. Moreover, lien stripping is permissible only for claims secured by the Debtor’s principle residence because a lien strip modifies the “total package of rights for which the claim holder bargained.”

QUALIFYING FOR A LIEN STRIP

For a lien to be stripped, the value of the debtor’s property as of filing, minus fully-secured non-target debts, must be = or < $0. Once upon a time meeting these requirements could be challenging; but today, when many homeowners are “underwater” as to their first mortgage and have a HELOC or 2nd mortgage on top of that, the conditions necessary for a lien strip to take place are relatively straightforward and can sometimes be met without much resistance from the affected creditor.

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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.

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