After Cornerstone Pavers LLC and Zenith Tech Inc. sued each other for breach of a highway construction subcontract and the duty of good faith and fair dealing, Zenith sued West Bend Mutual Insurance Company on a bond allegedly insuring the performance of that subcontract. West Bend moved for summary judgment asserting that the bond it issued does not insure the subcontract at issue and, even if it does, Zenith failed to satisfy the conditions precedent to West Bend's obligations and liability under the bond. The court denied West Bend's motion because genuine disputes of material fact remain as to whether the bond insures the performance of the relevant subcontract and, construing the bond as a matter of law against West Bend, the undisputed facts show that Zenith did satisfy the conditions precedent to West Bend's obligations and liability under the bond.
In re Antonio and Angel Terrell, Case No. 18-28674 (July 2022) -- Chief Judge G.M. Halfenger
The State of Wisconsin filed a motion to vacate two orders of this court because they are based on an earlier order recently reversed by the Court of Appeals for the Seventh Circuit. The court stayed consideration of the state's motion to await the issuance of the mandate, after the expiration of the time for the filing of a petition for rehearing in the court of appeals.
U.S. Securities and Exchange Commission v. Greenpoint Tactical Income Fund LLC (In re Greenpoint Tactical Income Fund LLC), Adv. Proc. No. 20-2005 (July 2022) -- Chief Judge G.M. Halfenger
The defendants were debtors in a chapter 11 bankruptcy case and the court confirmed their chapter 11 plan in May 2022. Before confirmation, the plaintiff sued defendants and others in the United States District Court for the Western District of Wisconsin alleging that the debtor-defendants violated certain federal securities laws that give rise to claims for disgorgement, prejudgment interest, and civil penalties. The plaintiff filed this adversary proceeding against the debtor-defendants seeking a determination that those debts are not dischargeable pursuant to 11 U.S.C. §1141(d)(6).
Before confirmation, the defendants objected to plaintiff's proofs of claim in their bankruptcy cases. After the court allowed the plaintiff's claims in the amount of $0 the defendants confirmed chapter 11 plans that provided for payment of the plaintiff's allowed $0 claim in full on the plan's effective date. Once the debtors' chapter 11 plans became effective, the defendants moved to dismiss this adversary proceeding pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, arguing that this proceeding was moot because the debtor-defendants' confirmed plan satisfied the SEC's claim, and the preclusive effect of the claims-allowance order prevented any future adjudication by the Western District that disgorgement or civil penalties should be awarded in an amount greater than $0.
The court ultimately concluded that the Western District of Wisconsin is the appropriate court to determine the preclusive effect of the bankruptcy court's claims-allowance order, and it denied the debtor-defendants' motion to dismiss but stayed the remainder of the adversary proceeding until the Western District adjudicates the SEC's claims in that case.
In re Terrell, No. 21-3059 (July 2022) -- Seventh Circuit Court of Appeals
On direct review, the Seventh Circuit reversed the bankruptcy court's order determining that a claim of the State of Wisconsin is not entitled to priority under 11 U.S.C. §507(a)(1)(B), construing it as an order modifying the debtors' confirmed plan and holding that the bankruptcy court lacked authority to modify the plan.
In re Peete, Case No. 21-23863-beh, 642 B.R. – , 2022 WL 2387652 (June 2022) -- Judge B.E. Hanan
The City of Milwaukee filed an amended proof of claim and an objection to confirmation of the debtor’s Chapter 13 plan. The City asserted that special charges included on the debtor’s tax bill were entitled to priority status under 11 U.S.C. sec. 507(a)(8)(B), as property taxes. The special charges were for past due water/sewer bills, health hazard abatement and related services. The debtor objected to the amended claim, arguing that because the special charges reflected the City’s attempt to recoup monies for specific services, and were not collected for the general benefit of the public, they were not taxes and should be treated like other general unsecured claims. Seventh Circuit caselaw directs courts to undertake a functional analysis and consider the purpose of each charge in determining whether such charge is a tax or a fee. Generally, if a charge levied by a taxing authority is designed to generate public revenue, it is a tax; if the charge is designed to punish or to compensate for specific services, it is not a tax. The City submitted multiple affidavits but none of them explained the nature or purpose of the underlying special charges imposed, and consequently the City did not meet its burden to establish that those charges were taxes entitled to priority treatment. The City’s proof of claim also asserted that interest and penalties on the unpaid balance for these special charges were entitled to priority status under 11 U.S.C. sec. 507(a)(8)(B). The City did not offer authority to entitle the penalties to priority status as taxes, and its argument that the penalties were not dischargeable under 11 U.S.C. sec. 523(a)(7) was countermanded by 11 U.S.C. sec. 1328(a). As for the interest charges included on the tax bill, the Court held that to the extent they were attributable to the actual property tax principal owed (and not the special charges), they were entitled to priority status.
In re Roberts, Case No. 22-20766-beh, 641 B.R. 613 (June 2022) -- Judge B.E. Hanan
The debtors proposed to pay debts owed to Lebakkens Inc. of Wisconsin, a rent-to-own furniture dealer, in Section 3 of their Chapter 13 plan, the section reserved for secured claims. Lebakkens objected to plan confirmation, arguing that the debts owed it belong in the section of the plan reserved for unexpired leases. Lebakkens reasoned that the rent-to-own agreements did not grant the debtors a secured interest in the property until they had completed payments under the contracts or paid down a significant portion of the balance. The agreements, titled “Rental Agreement[s]with ownership provisions,” stated that Lebakkens would maintain title to the goods and afforded the debtors the monthly option either to return the property or to maintain possession of it in exchange for a payment. Applying Wis. Stat. s. 401.203, the statute distinguishing leases from security interests, as well as caselaw recognizing that a unilateral ability to cancel an obligation is a hallmark of a lease, the Court concluded that the agreements gave the debtors a unilateral right to terminate and thus were leases, not security instruments. Alternatively, using the analysis adopted by some courts which weigh factors beyond the unilateral ability to cancel, the Court likewise concluded that the facts of record demonstrated that the agreements were leases. The Court found that the presence of an option to acquire the goods for a nominal price did not convert the agreements into security instruments, noting that the value of the items is greater than the first “renewal” payment, that Lebakkens is required to maintain and service the property, and the likelihood that the consumer goods have useful lives beyond the duration of the agreements. The debtors’ argument that the Wisconsin Consumer Act, which applies to certain consumer credit transactions, controlled the determination that the agreements are credit sales and not leases, was not persuasive. The Court sustained the objection and required debtors to amend their plan.
In re Juan Sandoval, Case No. 21-24190 (March 2022) -- Chief Judge G.M. Halfenger
The chapter 13 debtor filed a plan proposing to modify a claim secured by a reverse mortgage on a duplex that he inherited from his mother. The claim holder objected to confirmation, asserting that 11 U.S.C. §1322(b)(2) bars the proposed modification of the claim because it is "secured only by a security interest in real property that is the debtor's principal residence" and that §1322(c)(2), which provides an exception to §1322(b)(2)'s bar on claim modification, does not apply because "the last payment on the original payment schedule" for the claim is not due until the note's stated maturity date, December 9, 2081, long after "the final payment under the plan is due". The debtor responded that the real property includes but is not only his principal residence (his sister rents the duplex's other unit), so §1322(b)(2) does not bar the proposed modification of the claim, and that, even if it does, §1322(c)(2) applies because the debt matured when his mother died, before the petition was filed. The court concluded that §1322(b)(2)'s anti-modification provision applies because the claim is secured only by a security interest in real property that is the debtor's principal residence (even if it is also an income-generating rental property) but that §1322(c)(2) nevertheless permits the proposed modification because the parties to the note and mortgage intended that the borrower's death would fix (but not accelerate) the contingent maturity of the debt and, as a result, the last payment on the original payment schedule for the claim has been due since the prepetition death of the debtor's mother (the borrower), which occurred "before the date on which the final payment under the plan is due". The court also considered but found unconvincing the claim holder's remaining arguments, including that permitting modification of the claim would impermissibly undermine a federal mortgage insurance program designed to increase the use of reverse mortgages, and overruled the objection to confirmation.
In re Lupton Consulting LLC, Case No. 20-27482-BEH, 2022 WL 850056 (March 2022) -- Judge B.E. Hanan
After the court denied confirmation of two related debtors’ joint plan of reorganization—finding that it contained impermissible nonconsensual third-party releases and injunctions, was not feasible, and was not proposed in good faith—the debtors voluntarily requested that their cases be dismissed, and the debtors’ law firm filed its final application for fees and costs. The U.S. Trustee objected, asserting that the application should be denied in its entirety because counsel failed to demonstrate that its services were necessary or reasonably likely to provide any benefit to the debtors’ estates. Specifically, the U.S. Trustee argued that counsel should have known that the reorganization would not succeed based on its stated goal of obtaining (nonconsensual) releases of guaranties for the debtors’ principal and other insiders, and that the cases were never intended to benefit the debtors’ estates, or even the debtors, but instead the debtors’ principal. As a secondary argument, the U.S. Trustee objected to discrete billing entries, asserting that they should be disallowed for being vague, containing “block-billing,” and reflecting clerical work. The court overruled the first objection, declining to find that counsel's services in pursuing confirmation were not reasonably likely to benefit the estates at the time they were rendered, or that the debtors’ pursuit of third-party releases for the benefit of its principal came at the expense of the debtors’ estates and their creditors, in part because the debtors obtained consent from several creditors for the releases. The court credited the U.S. Trustee’s second objection in part and disallowed certain discrete billing entries for the reasons described above.
In re Harris, Case No. 21-26280-beh, 2022 WL 953483 (March 2022) -- Judge B.E. Hanan
Under a plain reading of 11 U.S.C. § 1322(c)(2), a debtor may bifurcate an undersecured first mortgage on her principal residence that matured prepetition. Section 1322(c)(2) creates an exception to the anti-modification provision of 11 U.S.C. § 1322(b)(2) for “claim[s] secured only by a security interest in real property that is the debtor's principal residence” on which “the last payment on the original payment schedule . . . is due before the date on which the final payment under the plan is due.” For such claims, section 1322(c)(2) allows a debtor’s plan to “provide for the payment of the claim as modified pursuant to section 1325(a)(5)” of the Code—which includes the option of bifurcating the claim into secured and unsecured portions under 11 U.S.C. § 506, and paying the present value of the allowed secured claim while treating the portion of the mortgage that exceeds the value of the home as unsecured. As used in section 1322(c)(2), the verb “modify” is not limited to “payment of the claim,” but instead allows modification of the claim itself.
In re Greenpoint Tactical Income Fund LLC, Case No. 19-29613 (February 2022) -- Chief Judge G.M. Halfenger
Before the debtor filed its chapter 11 petition, one of its equity security holders commenced an arbitration against the debtor and other non-debtor entities for, among other things, rescission and securities fraud under Wis. Stat. §551.509. The debtor and non-debtor entities settled the arbitration with the equity security holder by agreeing to pay him $14 million or, if that payment was not made, transferring $15 million in assets to him. The parties did not pay the $14 million or transfer the assets. Before the equity holder could enforce the settlement agreement, the debtor filed bankruptcy and then rejected the agreement. The arbitration proceeded against the non-debtor respondents, and the arbitrator awarded the equity holder $13,625,000 in damages against the non-debtors for breaching the settlement agreement. The equity holder filed proofs of interests in the debtor's case and filed a claim against the debtor for breach of the settlement agreement. The court subordinated the equity holder's claim under §510(b).
After the equity holder obtained the $13 million award against the non-debtor entities, the debtor objected to the equity holder's proofs of interest. The debtor argued that the equity holder's request for rescission, settlement, and award of damages for non-performance of the settlement agreement defeated his ability to enforce his equity interests under nonbankruptcy law.
The court rejected this argument. It also rejected the debtor's alternative argument that the equity interests were unenforceable under the doctrine of election of remedies.