Judge Janet S. Baer - Opinions

Judge Janet S. Baer

17 B 07037, 17 A 00319
Plaintiff and judgment creditor Nick Boscarino filed an adversary complaint against debtor-defendant Lewis J. Borsellino, seeking (1) a determination that the debt owed to him by Borsellino was not dischargeable pursuant to § 523(a)(6), and (2) denial of Borsellino’s bankruptcy discharge pursuant to § 727(a)(2)(A).  Boscarino subsequently filed a motion for summary judgment, arguing that principles of claim and issue preclusion precluded Borsellino from relitigating the factual issues decided in prior state court proceedings. According to Boscarino, the state court found that (1) Borsellino was the owner of a boat which was subject to Boscarino’s citation lien at the time it was sold, and (2) Borsellino committed perjury in his state court trial testimony and backdated an agreement to shield ownership of the boat. In response, Borsellino argued that neither of those issues had been decided by the state court and claimed that he did not own the boat, as it had been transferred to an LLC that he managed. After reviewing the state court record and considering the elements of the statutory provisions at issue, the Court concluded that the necessary facts had been previously decided in Boscarino’s favor to support his § 523(a)(6) claim. Specifically, the Court held that the record established that (1) Borsellino had intentionally transferred the boat in violation of the citation lien, (2) the transfer caused injury to a property interest held by Boscarino, and (3) the transfer was made without just cause or excuse. Thus, summary judgment was granted as to the § 523(a)(6) count. The Court further held that, although the state court found that Borsellino owned the boat at the time of the transfer, it did not find that he had fraudulently created the agreement or committed perjury. As such, summary judgment was denied on the § 727(a)(2)(A) count.

17 B 06666, 17 A 00424
Dimitri Karras filed an adversary complaint against Bryce Stirlen, seeking a determination that a debt owed to him by Stirlen was not dischargeable pursuant to §§ 523(a)(2)(A), (a)(4), and (a)(6). In response, Stirlen filed a counterclaim, asserting that he was entitled to set off the alleged debt pursuant to an asset purchase agreement (the “APA”) under which his company American Weapons Components, Inc. (“AWC”) acquired the assets of Lycurgan, Inc., a corporation owned by Karras. Subsequently, Karras filed two motions to dismiss the counterclaim under subsections (b)(1) and (b)(6) of Rule 12 of the Federal Rules of Civil Procedure. As to the Rule 12(b)(6) motion, Karras argued that Stirlen’s setoff defense failed because Karras had no personal liability under the APA since he executed the agreement as Lycurgan’s agent. Karras further argued that only AWC, Stirlen’s corporate principal, could assert a setoff defense. Finding that both Karras and Stirlen were guarantors under the APA and that AWC’s registration was suspended for failure to pay taxes, the Court observed that a guarantor may raise any defense available to its principal, as well as any defenses or setoffs that the principal could have asserted had it not been unable to defend itself by virtue of its suspension. Ultimately, the Court found that Stirlen’s setoff defense was pleaded sufficiently to survive the 12(b)(6) motion and thus denied Karras’s motion to dismiss for failure to state a claim upon which relief can be granted. In his 12(b)(1) motion, Karras argued that Stirlen had no standing to assert setoff because that right became estate property when Stilen filed for bankruptcy and only the chapter 7 trustee has standing to prosecute claims belonging to the estate. Karras further argued that the Court had no jurisdiction to decide the setoff defense because that defense constituted a common law breach of contract claim, a non-core matter under Stern v. Marshall, 564 U.S. 462 (2011). The Court found that Stirlen could pursue his setoff right as an affirmative defense existing under California law (which governed the interpretation of the APA); that the “heart” of the Stern decision went to a bankruptcy court’s ability to render a final judgment which was not a matter at issue; and that even if the Court did not have plenary authority over Stirlen’s defense, resolution of the matter would fall within the Court’s ancillary jurisdiction. As such, the Court denied Karras’s 12(b)(1) motion to dismiss.

18 B 28055
Debtor Fayyaz Karim (“Karim”) filed a motion for entry of an order of contempt against the Illinois Department of Revenue (“IDOR”), alleging that IDOR had violated the discharge injunction by attempting to collect a penalty debt that had been discharged in his chapter 7 bankruptcy case. The penalty debt at issue was imposed under the Illinois Cigarette Tax Act, 35 ILCS 130/1 et seq., which prohibits the possession of contraband cigarettes. According to Karim, the penalty was a tax penalty within the meaning of § 523(a)(7) and was discharged by operation of subsection (B) of that section, which provides for the discharge of tax penalties imposed with respect to a transaction or event that occurred more than three years before the petition date. IDOR responded by arguing that the penalty debt had not been discharged because it was either not a tax penalty within the meaning of § 523(a)(7) or, if the debt was a tax penalty within the meaning of the statute, because the penalty was imposed with respect to a transaction or event that occurred within three years of the petition date. The Court held that the penalty debt at issue was a tax penalty and that the relevant transaction or event for purposes of § 523(a)(7) occurred within three years of the petition date. As such, the Court found that the debt was nondischargeable and that IDOR thus did not violate the discharge injunction. Accordingly, the Court denied Karim’s motion for entry of an order of contempt.

In re Gerald O. McInerney
November 15, 2019

16 B 40442
Gina B. Krol (the "Trustee"), chapter 7 trustee for the bankruptcy estate of Gerald O. McInerney (the "Debtor"), filed a motion for turnover of the estate’s interest in the Debtor’s federal and state income tax refunds for 2016 pursuant to 11 U.S.C. §§ 541 and 542. At issue was the proper allocation of those refunds which were filed jointly by the Debtor and his non-debtor spouse. The Trustee argued that the refunds should be divided equally between the Debtor and his spouse under the "50/50 Rule." The Debtor contended that, based on an agreement executed with his spouse after the filing of the bankruptcy petition, the refunds should be allocated using a "Hybrid Approach" of the "Separate Filings Rule" and the 50/50 Rule, whereby any tax benefit derived from the spouses’ decision to file jointly is equally divided between them, and the rest of the refund is then apportioned based on the balance owed or the refund due as calculated on hypothetical married-filing-separately tax returns. The Court found that, without a pre-petition agreement between the parties, the determination as to the division of the refunds must be made by the Court. Examining the various methods that other courts have used, as well as the Hybrid Approach advanced by the Debtor, the Court held that the appropriate method of allocating the refunds between the Debtor and his non-debtor spouse was the "Withholding Rule," under which the refund is divided between spouses in proportion to their respective tax withholdings during the relevant tax year. Applying that Rule, the Court found that, absent adjustments consensually made by the parties, the estate’s interest in the refunds totaled $6,254.91, and the Debtor was ordered to turn over to the Trustee, in addition to the amount he had already tendered, the sum of $5,035.42.

13 B 10864, 16 A 00552
Chapter 7 trustee and plaintiff Brenda P. Helms filed an adversary complaint against Metropolitan Life Insurance Company, debtor Michael K. O’Malley, his spouse Tracy Zellmer, and Zellmer’s company TAMO, LLC, seeking: a declaratory judgment that O’Malley’s interest in an excess benefit retirement plan was non-exempt property of the estate (Count I), turnover of the proceeds of the retirement plan (Count II), avoidance and recovery of certain post-petition transfers related to the retirement plan (Counts III and IV), an award of damages for willful violations of the automatic stay (Count V), and disallowance of any claims filed by Zellmer or TAMO (Count VI).  Helms subsequently filed a motion for summary judgment on Counts I–V, and O’Malley filed a cross-motion for summary judgment on all six counts of the complaint.  At the outset, O’Malley argued that the complaint was barred because the Trustee failed to file a timely objection to the exemption of the retirement plan and that the Trustee was judicially estopped from challenging the validity of the exemption.  The Court found that the Trustee had no obligation to file an objection because O’Malley failed to properly claim the exemption in the plan in the first instance.  The Court further found that the Trustee was not judicially estopped from bringing the adversary proceeding because pursuit of the action would not give the Trustee an unfair advantage or impose on O’Malley an unfair detriment and applying judicial estoppel would adversely affect O’Malley’s creditors.  As for the cross-motions for summary judgment, the Court found that there were no genuine issues of material fact in dispute, that the Trustee was entitled to judgment as a matter of law on Counts I–IV, and that O’Malley was entitled to judgment as a matter of law on Count V.  Regarding Counts I–IV, the Court found that: the retirement plan was non-exempt, and the plan and related proceeds constituted property of the estate (Count I); O’Malley’s unauthorized payment election under the plan was an avoidable post-petition transfer which restored the payment election right to the estate (Count III); the Trustee was entitled to both avoidance and recovery post-petition transfers made under the plan (Count IV); and the Trustee was entitled to turnover of those proceeds (Count II).  As to Count V, the Court found as a matter of law that a trustee cannot recover damages under § 362(k) and that the circumstances of the case did not warrant the exercise of the Court’s civil contempt power under § 105(a).  Because neither Zellmer nor TAMO filed any proofs of claim, Count VI was dismissed by the Court sua sponte.

16 A 00223, 15 B 04436
Plaintiff Christopher Salgado filed an adversary complaint against debtor-defendant David E. Lenoci, II, seeking a determination that a state court judgment debt for battery is not dischargeable under 11 U.S.C. § 523(a)(6).  Salgado alleged that Lenoci struck him in the face with a baseball bat during a fight, while Lenoci claimed that someone else struck Salgado with a bicycle kickstand.  At a bench trial, the Court admitted various documents into evidence and heard the testimony of Salgado, his brother, and Lenoci.  After considering the evidence and testimony, the Court determined that the doctrine of issue preclusion did not bar Lenoci from disputing that he struck Salgado because: (1)  Lenoci did not have a full and fair opportunity to be heard in the prior criminal and civil state court cases that arose from the same facts, and (2) the records from the prior suits lacked specific findings as to which issues had been actually litigated and determined.  Turning to the merits of Salgado’s § 523(a)(6) claim, the Court found that Salgado and his brother were more credible than Lenoci.  Thus, the Court accepted Salgado’s version of the story and found both that Lenoci injured Salgado and that Lenoci’s actions were willful and malicious.  Accordingly, the Court concluded that the state court judgment debt was not dischargeable under § 523(a)(6).

18 B 13481, 18 A 00212
Debtor George Burciaga filed an adversary complaint against chapter 7 trustee Alex D. Moglia, seeking a determination that certain severance pay is not property of the estate under 11 U.S.C. § 541(a)(1) but, rather, constitutes excluded post-petition earnings under 11 U.S.C. § 541(a)(6). The parties subsequently filed cross-motions for judgment on the pleadings. The Debtor argued that the severance pay is not property of the estate because his receipt of that pay was contingent on his execution of a separation agreement and his subsequent compliance with the post-petition conditions outlined therein. The Trustee argued that the severance pay is property of the estate because it is based on both the Debtor’s pre-petition employment and pre-petition termination from that employment. Applying the U.S. Supreme Court’s "sufficiently-rooted test" in Segal v. Rochelle, 382 U.S. 375 (1966), the Court found that the severance pay is both pre-petition property of the bankruptcy estate and post-petition earnings for services excluded therefrom and concluded that a fair allocation of the pay between the estate and the Debtor is 50/50. As such, the Court granted in part and denied in part both parties’ motions for judgment on the pleadings.

12 B 17133, 18 A 00021
Plaintiffs Richard and Elizabeth Reuland (the “Reulands”) filed an adversary complaint against the Internal Revenue Service (the “IRS”), seeking (1) a determination that the IRS had violated the discharge injunction by attempting to collect certain tax debt that had been discharged through their chapter 13 bankruptcy case, (2) a permanent injunction against the IRS barring future attempts to collect that debt, and (3) attorney’s fees and costs.  The IRS moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted because the tax debt at issue is not dischargeable pursuant to 11 U.S.C. §§ 1328(a)(2) and 523(a)(1)(B)(ii) (excepting from discharge debts for tax returns filed both late and less than two years before bankruptcy).  The Reulands conceded that the tax debt was nondischargeable pursuant to those provisions.  They argued, however, that under United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), the tax debt at issue was discharged because their plan provided for the debt and the IRS failed to object to or appeal confirmation.  In response, the IRS argued that Espinosa was inapplicable because the Reulands’ plan did not contain any specific language purporting to discharge the tax debt.  After distinguishing Espinosa from the Reulands’ case and considering other cases with similar facts, the Court held that the tax debt at issue had not been discharged because it is nondischargeable under §§ 1328(a)(2) and 523(a)(1)(B) and the Reulands’ plan did not contain specific language that provided for the discharge of the debt.  Thus, the Court granted the IRS’s motion, and dismissed the Reulands’ complaint with prejudice because, as a matter of law, it failed to state a claim upon which relief can be granted.

15 B 26538, 15 A 00771
Raymond Michael Chuipek filed an adversary complaint against his former employer Scott C. Gilmore, seeking a determination that a debt owed to him by Gilmore by virtue of a state court judgment entered on a jury verdict was not dischargeable pursuant to § 523(a)(2)(6). Chuipek subsequently filed a motion for summary judgment, arguing that the questions answered by the jury were sufficient to meet the willful and malicious standard of § 523(a)(2)(6) and that, thus, Gilmore was precluded from re-litigating the factual issues decided in the state court under the doctrine of collateral estoppel. Gilmore contended that although the jury found in Chuipek’s favor, there was no finding of subjective intent to willfully and maliciously injure Chuipek. Therefore, Gilmore asserted, collateral estoppel could not be applied. Based on a close inspection of the entire state court record, the Court found that the facts necessarily implied by the jury’s verdict established that Gilmore’s conduct was willful and malicious and that it caused injury to Chuipek for purposes of § 523(a)(6). Accordingly, the Court concluded that the prior case presented the same issues and that collateral estoppel applied to the factual record in the nondischargeability action, thus barring Gilmore from relitigating the underlying facts decided in the state court case. As such, the Court granted Chuipek’s motion and entered judgment in his favor.

15 B 28696, 16 A 00026
Plaintiff Tillman Enterprises, LLC (“Tillman”) filed a three-count adversary complaint against Todd S. Horlbeck (“Horlbeck”), seeking a determination that a debt owed to it by Horlbeck for alleged securities violations and fraud was not dischargeable pursuant to 11 U.S.C. §§ 523(a)(19), (a)(2)(A), and (a)(2)(B).  After Tillman amended the complaint and Horlbeck’s motion to dismiss was denied, the parties’ filed cross-motions for summary judgment.  No material facts were in dispute.  Tillman argued that Horlbeck had violated securities laws by reporting inflated account values while managing a hedge fund in which Tillman had invested.  In addition, Tillman alleged that Horlbeck misrepresented and omitted material information while the parties negotiated the settlement of those securities claims.  Horlbeck admitted to reporting inaccurate values but contested whether Tillman could prove the requisite elements of its claims.  After establishing that it had jurisdiction to determine liability for the violation of securities laws under § 523(a)(19), the Court found that Tillman had failed to prove that Horlbeck violated any securities laws.  As such, the Court granted Horlbeck’s motion for summary judgment under § 523(a)(19) and denied Tillman’s cross-motion.  Turning to §§ 523(a)(2)(A) and (a)(2)(B), the Court first found that Tillman could maintain claims under both subsections because they were based on separate alleged misrepresentations.  On the merits, the Court found that Horlbeck had failed to disclose liabilities on a financial statement, and that he had misrepresented information about a regulatory investigation and his management of the hedge fund.  Tillman, in turn, had relied on those misrepresentations and omissions while deciding to enter into a settlement agreement and extend credit under a promissory note.  Thus, the Court found that the debt Horlbeck owes under the settlement agreement and promissory note is not dischargeable under §§ 523(a)(2)(A) and (a)(2)(B), granted Tillman’s motion for summary judgment, and entered judgment in its favor.

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