A creditor moved for sanctions against the debtor-plaintiff’s attorney, asserting that counsel did not conduct a reasonable pre-filing inquiry before filing a complaint seeking to avoid the creditor’s lien, in violation of Rule 9011(b)(2). Because the motion for sanctions was filed just a few hours short of providing the full 21-day safe harbor period of Rule 9011(c)(1)(A), the Court first addressed, sua sponte, the creditor’s technical violation of the rule. The Court concluded that the debtor-plaintiff’s attorney had waived the benefits of the safe-harbor protection in the circumstances, and therefore the creditor’s lack of compliance did not prevent the Court from reaching the merits of the motion. As to the merits, the Court found that the attorney’s pre-filing legal investigation was objectively unreasonable under the circumstances, and therefore violated Rule 9011(b)(2), but declined to award the creditor the full amount of attorney’s fees and costs requested. Instead, the Court concluded that one quarter of the creditor’s reasonable attorney’s fees and costs was an appropriate sanction in the circumstances, after considering equitable factors including the attorney’s prior conduct and practice.
In re Rodriguez, Case No. 18-20215-beh (November 2018) -- Judge B.E. Hanan
The debtor objected to a creditor’s partially secured claim, arguing that the claim should be disallowed in its entirety because it lacked evidence of (1) the transfer from the original claim-holder to the current claimant, and (2) the creditor’s security interest (which, in substance, was actually an assertion that the claim lacked evidence of perfection). The court rejected the debtor’s arguments, noting that Rule 3001 does not require proof of a prepetition transfer of a claim and, even if it did, lack of such evidence is not a basis for disallowance under 11 U.S.C. § 502(b). The debtor did not dispute that she owed the debt, but rather listed both the claimant and the debt (as uncontested and unsecured) on her schedules. In addition, the debtor’s challenge to the secured portion of the claim was really an implied argument that the security interest was not perfected and therefore avoidable under the trustee’s strong-arm powers of § 544(a). This allegation was supported by an affidavit from the debtor’s attorney, not from the debtor or someone with personal knowledge of the relevant facts as required by Local Rule 3007(b), and was insufficient to establish a basis for disallowance.
Robert 100, LLC v. Draper (In re Draper), Case No. 17-26352-beh, Adv. No. 17-2296-beh, 2018 WL 6252865 (November 2018) -- Judge B.E. Hanan
The plaintiff, a commercial property lessor, brought an adversary proceeding alleging that it relied upon a false financial statement signed by the defendant/debtor when it agreed to lease restaurant premises to the debtor’s and his son’s limited liability company, and therefore the $40,817 debt stemming from the breached lease was nondischargeable under 11 U.S.C. § 523(a)(2)(B). Both parties agreed that the financial statement at issue was false, but the debtor denied that he signed either the financial statement or the lease, testifying that his son, who bears the same name, signed both without his knowledge. After trial, the Court determined that: (i) the debtor did not make a statement in writing, because the signature on the financial statement was not his and he did not present the statement to the plaintiff; (ii) the statement at issue was a statement respecting the debtor's or an insider's financial condition; (iii) the plaintiff actually and reasonably relied on the financial statement; and (iv) the plaintiff failed to establish that the debtor caused the written statement to be made or published with intent to deceive, because he did not make the statement and did not intend to deceive. The Court found in favor of the defendant.
In re Patricia Reed, Case No. 18-26531 (November 2018) -- Chief Judge G.M. Halfenger
The court ordered the debtor to file an amended chapter 13 plan by a stated deadline. The debtor failed to do so. After the deadline expired, debtor's counsel instead used the ECF withdrawal event and added text suggesting that the debtor was withdrawing her most recent pre-confirmation plan amendment because counsel determined that the "original plan was correct". In ordering the debtor to show cause why the court should not deny her the opportunity to file an amended plan and dismiss the case under 11 U.S.C. sec. 1307(c)(5), the court explained that a debtor cannot withdraw a pre-confirmation amendment—what 11 U.S.C. sec. 1323 refers to as a "modification"—because section 1323(b) provides that, once a pre-confirmation modification is filed, "the plan as modified becomes the plan." 11 U.S.C. sec. 1323(b). In order to change the terms of a pre-confirmation modification that has already been filed, the chapter 13 debtor must further amend the plan. The court also observed that the debtor's attempted pre-confirmation withdrawal of the plan amendment did not comply with Local Rule 3015(c)(1), because the debtor did not use the court's local form for pre-confirmation amendments.
In re William Wester and Diana Miletich-Wester, Case No. 17-32315 (November 2018) -- Chief Judge G.M. Halfenger
The City of Kenosha City Treasurer filed a proof of claim two days after the expiration of the deadline for governmental units to file proofs of claim. In response to the trustee's objection, the City argued that it mistakenly calculated the proof of claim deadline as being six months— rather than 180 days—from the petition date, as stated in Federal Rule of Bankruptcy Procedure 3002(c)(1). The City asked the court to allow its claim because the minimal delay was unintentional and not prejudicial to the debtors. Rule 9006(b) does not allow the court to enlarge the time under Rule 3002(c) for filing a proof of claim except as permitted by Rule 3002(c). There was no basis for (further) enlarging the time under Rule 3002(c), and, accordingly, the court sustained the trustee's objection and disallowed the claim in its entirety.
In re Kolchinsky, Case No. 17-30872-beh, 2018 WL 5779861 (November 2018) -- Judge B.E. Hanan
In response to the Chapter 13 debtor’s Schedule I disclosure that she is unemployed and her only source of income is a $2,000 monthly contribution from her elderly mother, the Court issued an order requiring the debtor to show cause why her case should not be dismissed for ineligibility under 11 U.S.C. § 109(e), which limits debt relief to “individual[s] with regular income.” The Bankruptcy Code does not define “income” but does define an “individual with regular income” as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13.” Courts have recognized that whether nontraditional sources of income, such as family contributions, create chapter 13 eligibility depends on a matter’s particular facts and circumstances. Although purely gratuitous contributions generally do not qualify as regular income, other considerations may result in a different outcome. Here, the Court found that because the debtor and her mother have shared a household for the preceding eight years and appear to provide mutual support (the debtor’s mother is a widow and the debtor is a disabled, divorced mother with sons living at home), the debtor’s mother has a substantial interest in the debtor's successful completion of her plan, and the contribution is thus consistent and stable enough to qualify the debtor as an “individual with regular income” under § 109(e).
In re Grunewald, Case No. 14-27529 (October 2018) -- Chief Judge G.M. Halfenger
The court closed the debtors' case in August 2015 after granting them a chapter 7 discharge. In September 2018, the former chapter 7 trustee allegedly received a report that the joint debtor expects to receive a payment in settlement of a personal injury claim. Based on that report, the United States trustee moved to reopen the case contending that, because the debtors had not scheduled the personal injury claim, unadministered assets may be available for distribution. The motion's allegations, even if presumed true, do not demonstrate that the joint debtor's personal-injury claim accrued before the debtors filed their bankruptcy petition, and thus do not demonstrate that the claim is property of the bankruptcy estate. As a result, the court reopened the case for the limited purpose of determining whether the personal-injury claim, and thus the proceeds from the settlement of that claim, are property of the bankruptcy estate.
Schonscheck v. Deere & Co., Adv. Proc. No. 18-2027 (October 2018) -- Chief Judge G.M. Halfenger
Plaintiff, a former chapter 12 debtor, is obligated to defendant to repay two loans secured by certain farm collateral. Defendant filed a replevin action in state court in 2009. In January 2010, after defendant moved for default judgment in the state-court replevin action, plaintiff filed a joint chapter 12 case with her spouse. After the bankruptcy case was filed, but before Deere or the state court received notice of it, the state court entered a default judgment and issued a writ of replevin. The court dismissed the plaintiff's chapter 12 case in 2014 and dismissed plaintiff's two subsequent cases in 2016. Defendant then returned to state court to enforce its 2010 judgment. The state court issued a new writ of replevin based on the 2010 judgment, and the defendant seized the collateral based on the new writ. Before the defendant liquidated the collateral, plaintiff filed this adversary proceeding seeking a declaration that the 2010 state-court judgment was void and damages, alleging that the 2010 judgment was void ab initio by operation of 11 U.S.C. §362(a) in the 2010 chapter 12 case. The court annulled the stay and the co-debtor stay, denied the plaintiff's request for actual and punitive damages, and entered summary judgment in favor of defendant.
CoVantage Credit Union v Stangel (In re Stangel), Adv. No. 17-2132, Case No. 17-20394, 593 B.R. 607 (October 2018) -- Judge B.E. Hanan
The court granted the creditor’s motion for default judgment against the debtor for her alleged fraudulent tender of NSF checks, concluding that the creditor had made a prima facie case of “actual fraud” under § 523(a)(2)(A), based on circumstantial evidence that the debtor did not intend to repay the debt when she incurred it. Relevant evidence included the debtor’s retention of bankruptcy counsel before issuing the bad checks, the large amount of the checks in relation to her income at the time, the issuance and cashing of four separate checks in less than 30 hours, and the fact that the checks were issued from a checking account that had been closed for over three months. As to the state law question of the appropriate amount of damages to award under Wis. Stat. § 895.446, the court rejected the creditor’s argument that the statute mandated an award of exemplary damages, recited factors Wisconsin courts consider in determining whether to exercise discretion in awarding exemplary damages, and concluded that exemplary damages were not warranted.
Schouten v. Jakubiak (In re Jakubiak), Adv. Proc. No. 16-2141 (October 2018) -- Chief Judge G.M. Halfenger
Creditor-plaintiff seeks a declaration that a confirmed FINRA arbitration award against debtor-defendant is excepted from discharge by 11 U.S.C. §523(a)(2), (3), (6), and (19). Both parties seek summary judgment.
The decision grants summary judgment to the debtor-defendant on the §523(a)(2) and (6) claims because the creditor-plaintiff did not timely file an adversary proceeding as required by §523(c).
The decision grants summary judgment to the debtor-defendant on creditor-plaintiff's §523(a)(19) claim because, as a matter of law, the confirmed arbitration award cannot be shown to be "for" a violation of a federal or state securities law.
The decision denies summary judgment to both parties on creditor-plaintiff's §523(a)(3) claim. As to §523(a)(3)(A), the uncontested facts show that (i) the debtor-defendant did not list the creditor-plaintiff or schedule the debt to him in time allow him to file a timely claim under Federal Rule of Bankruptcy Procedure 3002(c), and (ii) the creditor-plaintiff did not have notice or actual knowledge of the bankruptcy in time to meet that deadline. The decision reads the plain language of §523(a)(3)(A) to render the debt excepted from discharge. But the decision construes the controlling case law to allow the debtor-defendant to avoid §523(a)(3)(A)'s discharge exception if (i) the clerk gave notice under Federal Rule of Bankruptcy Procedure 2002(e) that there appeared not to be assets available for distribution, (ii) the debt is a garden-variety debt, and (iii) the equities weigh in favor of discharge. The decision concluded neither party was entitled to summary judgment on whether §523(a)(3)(A) excepts the debt from discharge because there is a genuine dispute over the nature of the debt and the parties' summary judgment filings did not address the equities.
As to §523(a)(3)(B), the decision denies summary judgment to both parties because, although the debtor-defendant failed to list or schedule the creditor-plaintiff's debt in time for the creditor-plaintiff to file an adversary proceeding for a determination of nondischargeability, and the creditor-plaintiff lacked notice or knowledge of the bankruptcy during that time, there are genuine disputed issues of material fact regarding whether the debt is of a kind covered by §523(a)(2) or (6).
The decision also rejects the creditor-plaintiff's arguments that the Rooker-Feldman doctrine afforded him a right to summary judgment, and rejects both parties’ arguments that issue and claim preclusion apply.