11 A 02299
Defendants were owners, managers and officers of the Debtors and various entities. The Official Committee of Unsecured Creditors alleged that Defendants breached their fiduciary duties to the Debtors, made a fraudulent transfer by settling a promissory note, and were liable for preferential transfers. After the parties gave express consent for the court to enter final judgment, a four day trial was held. Since Defendants were self-interested in the transactions at issue, they bore the burden of demonstrating that those transactions were fair and served the Debtor's best interests. The court found that Defendants met their burden, and did not breach their fiduciary duties except as to one series of payments. Further, the court found that settling the promissory note was not a fraudulent transfer under the Bankruptcy Code because the Committee did not prove a lack of reasonably equivalent value, nor was it a fraudulent transfer under Illinois law because there was no transfer of an asset. Finally, the court held that the same payments that gave rise to a breach of fiduciary duty were also preferential transfers that could be avoided and recovered.
Chief Judge Pamela S. Hollis - Opinions
Chief Judge Pamela S. Hollis
September 29, 2015
11 A 02299
12 B 15638, 12 A 00947
Ex-wife sought finding that monetary award in divorce settlement was nondischargeable pursuant to 523(a)(2)(A), (a)(5), (a)(6) and (a)(15). Ex-husband prevailed on three of the four counts: 523(a)(5) because there was no evidence that the award was in the nature of alimony, maintenance or support; 523(a)(6) because tortious conduct (such as conversion) is required for a breach of contract to result in a nondischargeable debt, and a claim for money cannot be the subject of conversion; and 523(a)(15) because the underlying bankruptcy case is a Chapter 13. Based on the very specific facts of this case, however, the award was nondischargeable under 523(a)(2)(A). The ex-husband had no intention of paying his ex-wife at the time they entered into the settlement, and his subsequent conduct was consistent with that intent.
March 25, 2014
12 B 29855
Debtors own a two-flat and live in one of the units. They proposed a Chapter 13 plan in which the mortgage holder's claim would be modified. The mortgage holder objected on the grounds that its claim was "secured only by a security interest in real property that is the debtor's principal residence" pursuant to 1322(b)(2). After finding the statutory language ambiguous, the court turned to the legislative history and determined that Congress intended this anti-modification provision would protect only those mortgage holders whose claims were secured by real property that is exclusively the debtor's principal residence. Consequently, the debtors in this case could modify the mortgage holder's claim and the plan was confirmed. The court also found that the relevant date for determining the property's status is the date on which the security interest was created.
October 22, 2013
12 B 43452
Chapter 13 Trustee objected to confirmation on the grounds that by continuing to make voluntary 401(k) contributions, the Debtor was not applying all projected disposable income to make payments to unsecured creditors in violation of section 1325(b)(1)(B). In this order, the court first reviewed the split in case law over the interpretation of section 541(b)(7). This subsection states that certain contributions to retirement accounts "shall not constitute disposable income, as defined in section 1325(b)(2)." The court determined that the majority viewpoint was correct and section 541(b)(7) is not limited to prepetition contributions. Postpetition voluntary retirement contributions are excluded from the calculation of projected disposable income. In dicta the court noted that even if the Debtor had not been making voluntary 401(k) contributions during the six months prior to filing her case, any future contributions would still be excluded from projected disposable income. Objection overruled.
March 13, 2013
08 B 31707, 11 A 02415
Debtors/Plaintiffs filed for relief under Chapter 13 and confirmed their plan. They fell behind on plan payments, attempted to catch up, then voluntarily dismissed their case. The Chapter 13 Trustee was left holding a sum of money at dismissal. Debtors filed an adversary proceeding seeking turnover of the funds. The Chapter 13 Trustee argued that she must distribute the funds to creditors. Debtors filed a motion for judgment on the pleadings, since no facts were in dispute. HELD: The funds must be returned to the Debtors. 11 U.S.C. 1326(a)(2), which instructs trustees to distribute certain payments to creditors in accordance with the plan, applies only to preconfirmation payments. Postconfirmation, trustees must make payments under the plan pursuant to 1326(c). At dismissal, however, 349(b)(3) revests property of the estate in the entity in which such property was vested immediately before the commencement of the case, which in the case of funds paid into the plan, held by the Chapter 13 Trustee and not yet distributed, is the Debtors.
09 B 26595, 09 A 01045
Debtor/Defendant had a successful remodeling and construction business. He and Plaintiff, a salaried and less-successful tool and die designer, became close friends. When Plaintiff sold his home and found himself with some extra cash, they agreed to invest in new construction. Defendant chose the location, acted as the general contractor and arranged for construction financing. Plaintiff put up the money and his name alone was on the title and loan. The house was completed just in time for the real estate market to crash. The bank foreclosed and got a deficiency judgment against Plaintiff, who asked Defendant where all the money had gone. Defendant could only account for about three-quarters of the funds. Plaintiff sought a finding that Defendant's debt was nondischargeable under 523(a)(2) and (a)(4). Following a multi-day trial, the parties briefed the issues and Plaintiff dropped the 523(a)(2) count. HELD: The parties had a fiduciary relationship because of the difference in knowledge and power which gave Defendant a position of ascendancy over Plaintiff. The debt was caused by Defendant's defalcation while acting in a fiduciary capacity, and is nondischargeable pursuant to 523(a)(4)
October 11, 2012
Private equity fund Sun Capital purchased a 100+ year old family-owned retailer, financed the purchase through an LBO, ended up as the secured lender, and put the company in Chapter 11 less than 18 months later. After Sun obtained a covenant not to be sued, Debtor filed suit against its former shareholders, three siblings. Debtor sought avoidance of the sale and recovery of sale proceeds, alleging that the LBO was a fraudulent conveyance that rendered the Debtor insolvent or undercapitalized. After several days of trial and review of two expert valuation reports as well as thousands of pages of deposition testimony and other exhibits, the court entered judgment for the Defendants. The court declined to collapse the LBO, which would have been enough to end the lawsuit. The court then analyzed the expert reports, determining that it was not the sale that left the company insolvent or undercapitalized.
September 29, 2011
Lakewood entered into an agreement to outsource its box fan manufacturing to Chicago American Manufacturing (CAM). The agreement included remedies for CAM if Lakewood failed to purchase the forecasted amounts of box fans within a certain time period. After an involuntary petition was filed against Lakewood, the Trustee rejected the agreement and brought suit against CAM to enjoin further manufacturing as well as selling any of the unpurchased box fans. The court first determined that the agreement was ambiguous, then interpreted the ambiguous provisions using parol evidence, and concluded (among other findings) that CAM's remedies included a license to manufacture and sell box fans using Lakewood's patents and trademarks. Rejection of the agreement did not terminate that license, and all box fans that CAM manufactured and sold were covered by the license granted in the agreement. Judgment for the defendant on all counts.
Defendant brought a motion for summary judgment on Plaintiffs' adversary complaint which sought to except certain debts from discharge under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), & (a)(6). Defendant sought a determination that Plaintiffs' complaint was barred by res judicata because of a prior action brought in state court. The court ruled that Plaintiffs were judicially estopped from denying a final judgment had been entered in the state court as Plaintiffs had engaged in supplementary proceedings, treating the judgment as final. Summary judgment was granted in favor of Defendant on Counts I and II. Defendant did not succeed on Count III because Plaintiffs did receive a judgment which could support a willful and malicious injury.
June 8, 2011
Creditor objected to approval of disclosure statement where plan contemplated using rents from apartment complex after the automatic stay had been lifted with respect to the apartment complex and creditor had asserted its right to take possession of the apartment complex and the rents. Creditor’s objection was sustained on the basis that the rents were no longer property of the estate.