OpinionsChapter 11 debtors-in-possession sought to employ bankruptcy counsel more than two months after the petition date. The U.S. Trustee objected to the debtors’ applications to employ and simultaneously moved to dismiss the cases under 11 U.S.C. section 1112(b)(4)(D), based on the debtors’ unauthorized use of cash collateral that, according to the U.S. Trustee, was substantially harmful to one or more creditors. The Court denied the debtors’ applications to employ and the U.S. Trustee’s motions to dismiss. In declining to approve the employment of counsel for the debtors, the Court found that (1) counsel’s representation of the debtors, while simultaneously representing their individual owners and codebtors in a pending Chapter 13 bankruptcy case, posed a conflict of interest; and (2) in light of counsel’s lack of Chapter 11 experience or demonstrated ability in the cases, counsel had not established that appointment was in the best interest of the debtors’ estates. The Court denied the U.S. Trustee’s motions to dismiss because, although the debtors had used a secured creditor’s cash collateral without consent from the creditor or authorization from the Court, the U.S. Trustee failed to prove that such use was substantially harmful to the secured creditor or any other creditors. The debtors used the cash to pay for repairs, insurance, and other regular expenses necessary for continued operations, a substantial equity cushion existed to protect the secured creditor’s interest in the debtors’ collateral, and the debtors’ most recent operating reports reflected positive net income. Crescent Electric Supply Company v. Coates (In re Coates), Ch. 7 Case No. 19-29067-kmp, Adv. No. 19-2211 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiff in this adversary proceeding alleged that the debtor-defendant breached his fiduciary duties under Wisconsin’s theft-by-contractor statute and the resulting debt was nondischargeable under 11 U.S.C. § 523(a)(4). The Court denied the plaintiff’s motion for summary judgment. The plaintiff, a supplier of electrical materials and fixtures, proved that the sums paid by project owners constituted a trust fund and that the debtor-defendant was a fiduciary of the trust. However, fact issues remained as to the debtor-defendant’s state of mind. Fact issues also remained as to the plaintiff’s damages, including whether the debtor-defendant paid the plaintiff “proportionally” as required by the theft-by-contractor statute and whether the plaintiff was entitled to treble damages under the statute. Faust v. Coates (In re Coates), Ch. 7 Case No. 19-29067-kmp, Adv. No. 19-2210 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiffs in this adversary proceeding were former employees of Coates Electric, LLC, a defunct electrical contractor solely owned by the debtor-defendant. They sought a determination that their unpaid wages were nondischargeable under 11 U.S.C. § 523(a)(4) due to the debtor’s embezzlement of funds from the LLC. The Court denied the plaintiffs’ motion for summary judgment. The plaintiffs failed to establish that the debtor personally owed them a debt for civil theft. There were genuine disputes of material fact as to whether the LLC fraudulently transferred money to the debtor or for his benefit and whether the debtor acted with fraudulent intent in causing the LLC to make the transfers, as § 523(a)(4) requires. Fischer v. Millis (In re Millis), Ch. 7 Case No. 20-21271-kmp, Adv. No. 20-2078, 2021 WL 1346533, 2021 Bankr. LEXIS 870 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiff, a commercial landlord, sought a determination that the debtor-defendant, a former tenant, owed him a nondischargeable debt based on her failure to turn over funds received from subtenants and damage to and theft of appliances. The debtor-defendant moved to dismiss the claims under 11 U.S.C. § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6) for failure to state a claim upon which relief could be granted. The Court dismissed the plaintiff’s claim that the debtor obtained the funds from the subtenants through larceny. Larceny only occurs if the debtor has wrongfully taken property from its owner with fraudulent intent, and the plaintiff never owned the funds. The Court denied the motion to dismiss the plaintiff’s other claims. Andringa v. Acker (In re Acker), Ch. 7 Case No. 19-21349-kmp, Adv. No. 19-2089, 2021 WL 1346575, 2021 Bankr. LEXIS 848 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiffs sought a determination that the debtors owed them a debt in the amount of their investment in a restaurant chain and that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A), § 523(a)(2)(B), and/or § 523(a)(4). After a trial, the Court found that the plaintiffs did not meet their burden of proving that their investment was nondischargeable under any of these provisions. Moreover, the plaintiffs presented no evidence that the joint debtor was involved in the restaurant offering at all, so the Court was easily able to dispose of the question of whether the plaintiffs were entitled to a nondischargeable judgment against her. In re Chapman, Case Nos. 18-30442, 19-22820, 19-26731, 2021 WL 1346046 (March 2021) -- Judge B.E. Hanan After the debtor’s daughter filed three bankruptcy cases in her representative capacity under a durable power of attorney, the debtor sought to expunge or seal the records. The Court determined that it did not have authority to equitably expunge the bankruptcy cases. Because the debtor executed a durable power of attorney which authorized her attorney-in-fact to institute bankruptcy proceedings, and because she never formally revoked that authority, the Court found that the filings were authorized, which foreclosed any basis for sealing or annotation of the record. The Court noted, however, that cases initiated by an attorney-in-fact should take extra precautions to make clear the signer’s representative capacity. Branko Prpa, LLC v. Ryan et al. (In re Ryan), 629 B.R. 616, aff’d sub nom. Ryan v. Branko Prpa MD LLC, No. 21-CV-0449-BHL, 2022 WL 613313 (E.D. Wis. Mar. 2, 2022) (on appeal) (March 2021) -- Judge B.E. Hanan Prior to filing for bankruptcy, the debtor entered into a compromise agreement concerning a workers’ compensation claim, which an administrative law judge approved in an order directing that part of the total compromise amount be paid to the debtor, part be paid to the debtor’s workers’ compensation counsel, and the remainder be paid to the debtor’s counsel’s law firm’s trust account “for disbursement to medical providers and lienholders.” The debtor tried to exempt the entire amount of the compromise, and one of the medical-provider creditors objected, asserting that the amount ordered to be set aside for the medical providers and lienholders was not the property of the debtor and therefore could not be exempted. The creditor also requested that the Court declare an express trust or impose a constructive trust on those set-aside funds. The Court granted summary judgment in favor of the creditor, concluding that, under Wisconsin law, the state court administrative order created an express trust, or, in the alternative, imposition of constructive trust was appropriate, meaning the funds ordered to be set aside for disbursement to third parties were not the property of the debtor and could not be exempted. In re Ganske, No. 20-21042-kmp, 2021 WL 1396563, 2021 Bankr. LEXIS 574 (Bankr. E.D. Wis. Mar. 5, 2021) (March 2021) -- Judge K.M. Perhach The Chapter 11 debtors sought to assume a “Handling and Storage Lease Agreement” under which a barge terminal on the Illinois River would furnish equipment, personnel, and facilities necessary to receive, unload, store and load out fertilizer furnished by the debtor. The Court determined that the debtor failed to pay accounts receivable within the time established by the parties’ course of performance. This was a material breach excusing the barge terminal from performance. Because the agreement was terminated before the bankruptcy case was filed, there was no agreement for the debtors to assume. The Court denied the motion. Archer-Daniels-Midland Co. v. Country Visions Coop., 628 B.R. 315 (E.D. Wis. 2021), aff’d, 29 F.4th 956 (7th Cir. 2022) (February 2021) -- District Court Appellant sought the reversal of a bankruptcy court order that denied appellant’s “motion to enforce” an earlier plan confirmation order issued by the same bankruptcy judge. Through its motion, the appellant asked the bankruptcy court to enforce a 2011 confirmation order against the appellee even though the appellee was not a party to the bankruptcy case at confirmation. The appellant also requested an injunction that would have prevented appellee from continuing state court litigation related to a right of first refusal on real property that the appellant purchased pursuant to the confirmation order. The bankruptcy court denied the motion, concluding that because the appellee had not received proper notice of the bankruptcy proceedings, its rights could not be affected by the confirmation order consistent with due process. The bankruptcy court also rejected appellant’s alternate theory that it was a “good faith” or “bona fide” purchaser of the property. For the reasons stated, the bankruptcy court’s ruling is affirmed. In re Glenn Buettner, Case No. 20-24696 (February 2021) -- Chief Judge G.M. Halfenger The trustee objected to confirmation of the chapter 13 debtor's plan, asserting that 11 U.S.C. §1325(a)(4) requires that a chapter 13 plan must pay at least as much on allowed unsecured claims as would have been paid on those claims if the case had been filed under chapter 7 and the estate had been liquidated (i.e., without regard to any administrative expenses incurred in the chapter 13 case, including attorney's fees, that would not have been incurred in a chapter 7 case). The court disagreed, concluding that, by its plain terms, §1325(a)(4) requires a determination of the amount that would have been paid on each allowed unsecured claim if the estate were liquidated under chapter 7 on the effective date of the plan (the confirmation date), which would necessarily require the payment of all allowed administrative expenses as of that date, including any attorney's fees allowed in the chapter 13 case, before payment on any lower-priority allowed unsecured claims. The court sustained the trustee's objection to confirmation of the chapter 13 plan, however, because the present value of the deferred payments on allowed unsecured claims provided for by the plan was less than the amount that would have been paid on those claims had the estate been liquidated under chapter 7 on the plan's effective date. |