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.
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.
In Carhart’s subsequent action to execute on the judgment, CHI’s only asset was its Wisconsin suit against Carhart. The Court ordered the sale of CHI’s suit at a public auction. When the auction was held, Carhart was the only bidder and bought the suit for $10,000, ending all possibility that CHI could proceed against him for his alleged plundering of the company.
7th Circuit Opinion
On appeal, the 7th Circuit reversed, and held that auctioning off the lawsuit placed Carhart ahead of CHI’s other creditors, in violation of the Bankruptcy Code’s requirements. Moreover, it found that Carhart had not been a “good faith” purchaser and that no valid interest was impaired by rescinding the sale and enabling CHI to prosecute its suit against Carhart.
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