Articles Posted in Chapter 11

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7th Circuit Court Seal

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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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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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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7th Circuit Court Seal

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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seal of the supreme court

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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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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For Debtors, Chapter 7 Liquidation is the ultimate relief, while Chapter 13 and 11 Reorganization offers an opportunity to reduce their Debtor’s payments in light of their income. In either type of case however, the Creditor is not entitled to anything until it has filed is Proof of Claim.

What Is a Proof of Claim?

The Proof of Claim or “PoC” is the means by which Creditors state:

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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).

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In the recent case of Beeman et. al. v. Borders Liquidating Trust et al. from the Circuit Court for the Southern District of New York decided on October 29, that Court examined what ought to happen when relief that could be granted, for practical reasons is not.

This controversial policy, referred to as “Equitable Mootness” means certain judgments will not be issued – even though they could – because doing so upsets the established order in a Bankruptcy case. It is obviously a touchy subject, but squarely within a court’s discretion.

Here, more than $17 Million had been distributed to creditors of Borders Bookstores in its Chapter 11 reorganization when 3 of its customers whose store gift cards became useless when it went bankrupt sought to be placed in a special “class” of claimants. The Plaintiffs started in the Bankruptcy Court but did not get traction there, so they proceeded in District Court.