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    Mann v. LSQ Funding Group, L.C. (In re Engstrom, Inc.), Ch. 7 Case No. 20-22839-kmp, Adv. No. 20-2062 (Bankr. E.D. Wis. Aug. 31, 2021) (appeal pending, 21-cv-1070-BHL) (August 2021) -- Judge K.M. Perhach
    The Chapter 7 trustee sued the defendant to avoid and recover an alleged preferential transfer under 11 U.S.C. § 547 and an alleged fraudulent transfer under 11 U.S.C. §§ 544 and 548. The transfer in dispute was a $10 million wire transfer made by a third party to the defendant to pay off a factoring agreement debt owed by the debtor to the defendant. The defendant brought a motion for summary judgment, arguing that the “earmarking” doctrine applied, and because the debtor did not exercise control over the transfer, because the transaction did not diminish the debtor’s estate, and because the transaction simply substituted the third party for the defendant as the debtor’s principal creditor, no “transfer of an interest of the debtor in property” had occurred, an essential element of each of the trustee’s claims. The Court agreed and granted summary judgment to the defendant. This decision is currently on appeal.

    In re Lupton Consulting, LLC, Case No. 20-27482-BEH, 2021 WL 3890593 (August 2021) -- Judge B.E. Hanan
    A secured creditor and the U.S. Trustee objected to confirmation of a Chapter 11 (subchapter V) joint plan of reorganization filed by two fitness clubs, alleging that the plan contained impermissible third-party releases and injunctions. The U.S. Trustee further asserted that the plan could not be confirmed because it was not feasible and was not proposed in good faith. The Court sustained the objections and denied confirmation. The Court concluded that each of the plan’s three separate non-consensual injunctive provisions—providing for (1) the extinguishment of liens on non-estate property as of the confirmation date; (2) a temporary injunction of actions against guarantors during the term of the plan; and (3) a release of guarantors after completion of the plan—was neither narrowly tailored nor essential to the reorganization as a whole, as required under Seventh Circuit precedent. The Court also concluded that the debtors had failed to meet their burden to establish that the plan was feasible because their financial projections were not borne out by the available historical data, and they offered no credible evidence to explain away material discrepancies. Finally, the Court was unable to find that the plan was proposed in good faith, due to a combination of factors: (1) the debtors initially failed to disclose accurately the amount of prepetition insider transfers made to or for the benefit of the debtors’ manager (primarily due to the manager’s poor record-keeping practices and use of personal loans to fund business expenses); (2) the plan did not provide for payments to all creditors and appeared to afford preferential treatment to some general unsecured claims; and (3) the plan provided for the payment of what appeared to be excessive personal expenses of the debtors’ manager and his family, while simultaneously providing fractional distributions to unsecured creditors and proposing to release the debtors’ manager from his guarantees of significant amounts of unsecured debt.

    Grose v. City of Milwaukee (In re Grose), Case No. 20-25361, Adv. No. 20-02110, 2021 WL 2955041 (July 2021) -- Judge B.E. Hanan
    The debtor filed a complaint, seeking a declaration that the defendant, the City of Milwaukee, engaged in a transaction that is voidable under 11 U.S.C. § 548(a)(1)(B) when it foreclosed real property to satisfy outstanding property tax obligations, and to set aside that transfer pursuant to § 522(h). The City of Milwaukee filed a motion to dismiss, which was converted to a motion for summary judgment, arguing that the debtor lacked standing to bring the complaint. The City asserted that once the owner of record failed to redeem the property, she was divested of her ownership interest and was unable to transfer the property to the debtor via quitclaim deed. The debtor argued that it is the foreclosure judgment date, and not the redemption deadline, that transfers ownership interest. The Court found that the original owner retained an interest sufficient to transfer her interest to the debtor. Alternatively, even if the redemption deadline served to divest the original owner of her interest, the City’s subsequent communications were sufficient to extend the redemption deadline.

    In re Ryan 1000, LLC, Case No. 21-21326-beh, and In re Ryan 8641, LLC, Case No. 21-21327-beh, 2021 WL 2787603 (July 2021) -- Judge B.E. Hanan
    Chapter 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.

    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.