OpinionsThe court granted a mortgage creditor’s motion for in rem relief from the automatic stay under 11 U.S.C. § 362(d)(4), based on the debtor’s history of unsuccessful bankruptcy filings and lack of apparent effort to pay or to adequately address her mortgage debt. The debtor had filed six Chapter 13 cases in fewer than six years. All five of her prior cases were dismissed without a confirmed plan, and the fifth was dismissed with a 180-day bar to future bankruptcy filings. During her prior cases, the debtor neglected basic obligations under the Bankruptcy Code--including the duty to timely file her schedules and plan and to attend the § 341 meeting of creditors--and repeatedly failed to comply with court orders requiring her to timely file amended feasible plans (or successfully participate in mortgage modification mediation) and to resume payments to her mortgage creditor. When she filed her sixth case, the debtor was entering her eighth consecutive year of mortgage default. Based on this record, the court concluded that the debtor’s conduct demonstrated a scheme to delay or hinder the mortgage creditor’s efforts to protect its interest in the property, warranting in rem relief under § 362(d)(4). In re Kleynerman, Case No. 18-26659-BEH, 638 B.R. 111, aff’d sub nom. Smith v. Kleynerman, 647 B.R. 196 (E.D. Wis. 2022), aff'd sub nom. Matter of Kleynerman, No. 22-2947, 2024 WL 804103 (7th Cir. Feb. 27, 2024) (January 2022) -- Judge B.E. Hanan The court granted the debtor’s motion to reopen his case and to avoid a judicial lien where the case had been closed only two months prior and the motion was a response to a recent state court ruling construing a 2018 charging order as outside the reach of a bankruptcy discharge under applicable state law. The court found that the debtor met the criteria to avoid the lien under 11 U.S.C. § 522(f) and the relatively short passage of time did not prejudice the creditor, particularly where the creditor did not dispute the valuation of the asset while the case was open and had not previously asserted its rights under the charging order. To ameliorate potential prejudice, the court ordered the debtor to pay those fees and costs of the creditor attributable to the recent collection effort. In re Pagan, Case No. 19-20047-BEH, 2022 WL 209612 (January 2022) -- Judge B.E. Hanan The Chapter 13 debtor’s special plan provision in section 8.1 providing that secured creditors would retain their liens until the earlier of payment in full of the secured portion of the creditor’s proof of claim or discharge was ambiguous when compared with the model plan language in section 3.3 mirroring lien retention rights in 11 U.S.C. § 1325(a)(5)(B)(i)(I). Section 3.3 provided that the named car creditor would retain its lien until discharge or the payment of the underlying debt under nonbankruptcy law. The creditor did not object to plan confirmation. After an accident that totaled her car, the debtor proposed a plan modification to keep the balance of the insurance proceeds that exceeded the remainder of her plan payments on this claim. The creditor objected, arguing that it was entitled to retain the lien on the entirety of the proceeds because they were less than the amount the debtor owed on the claim under applicable nonbankruptcy law. The creditor also sought to be paid at the contractual interest rate instead of the lower rate prescribed in the confirmed plan. The court found the special provision language ambiguous and construed it against the drafter. The interest rate language was not ambiguous. Accordingly, the creditor could retain its lien on the entirety of the proceeds during the term of the plan, with the disputed balance held in trust to allow the debtor an opportunity to obtain a discharge and retain the excess proceeds. The creditor’s objection as to the interest rate was overruled. In re Randell, Case No. 21-25175-BEH, and In re Sellers, Case No. 21-25284, 2022 WL 174210 (January 2022) -- Judge B.E. Hanan On motions for reconsideration of orders sustaining an objection to confirmation and requiring equal monthly payments to a secured creditor, the court did not accept the debtors’ argument that cure-and-maintain mortgage claims paid “within a reasonable time” in accordance with 11 U.S.C. § 1322(b)(5) were exempt from § 1325(a)(5)(B)(iii)(I)’s mandate that property be distributed “in equal monthly payments,” relying in part on Rake v. Wade, 508 U.S. 464 (1993). The fact that the debtors’ plans proposed to pay only prepetition mortgage arrearages through the plans did not alter the conclusion that the enactment of § 1322(e) (which partially abrogated Rake v. Wade) did not remove cure payments from coverage under § 1325(a)(5). The court also reminded that an order denying plan confirmation is not a final, appealable order subject to reconsideration under Fed. R. Civ. P. 60(b) or 59(e), but instead exercised its discretion to reconsider its interlocutory order. In re Urgent Care Physicians, Ltd., Case No. 21-24000-BEH, 2021 WL 6090985 (December 2021) -- Judge B.E. Hanan The U.S. Trustee objected to confirmation of a nonconsensual Chapter 11, Subchapter V, plan of reorganization, asserting that the debtor should be required to extend the plan’s three-year term to five years to satisfy the “fair and equitable” test of 11 U.S.C. § 1191(c)(2)). Finding the text of the Code silent as to how bankruptcy courts should “fix” the term of a Subchapter V plan under § 1191(c)(2), the court considered analogous Code provisions applicable to Chapter 12 plans, as well as the legislative history of Subchapter V, to conclude that the debtor’s proposed three-year plan term was fair and equitable in the circumstances, as it properly balanced the risks and rewards for all stakeholders. In re Harrington, Case No. 16-25279-BEH, 2021 WL 4465568 (September 2021) -- Judge B.E. Hanan “Plan shortening” special provision in Chapter 13 plan providing that plan would end once it reached 36 months and unsecured creditors had received “not less than 1% of their respective total claims” did not conflict with separate plan provision requiring the debtor to turn over to the Chapter 13 trustee half of all net federal and state income tax refunds “received during the term of the plan.” Debtor’s obligation to make monthly plan payments to the trustee was in addition to his obligation to turn over a portion of his tax refunds, and because the debtor received his 2020 tax refunds before unsecured creditors had received at least 1% on their claims—i.e., during the term of the plan—the debtor was required to turn over the full amount to the trustee for payment to unsecured creditors, even if the resulting distribution would be greater than 1%. 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. Reinhart FoodService LLC v. Schlundt (In re Schlundt), Adv. No. 20-02091-beh, Case No. 14-20454-BEH, 2021 WL 3700401 (Bankr. E.D. Wis. Aug. 19, 2021), rev'd and remanded sub nom. Reinhart FoodService LLC v. Schlundt, No. 21-CV-1027-BHL, 2022 WL 15523157 (August 2021) -- Judge B.E. Hanan A Chapter 7 debtor received a discharge in a no-asset case in April 2014. Years before filing his petition, he signed a personal guaranty for the debts of his wholly-owned LLC. In 2018, the LLC went out of business, and the creditor to whom the debtor guaranteed the LLC’s debts moved to reopen the case for a determination that the debtor’s liability for the debt incurred by the LLC after April 2014 was not discharged. The Court recognized a split in case law on whether liability created by a guaranty executed prepetition survives a discharge if the relevant charges are incurred post-discharge. Applying the conduct test adopted in the Seventh Circuit and as described in Saint Catherine Hosp. of Ind., LLC v. Ind. Family and Soc. Servs. Admin., 800 F.3d 312 (7th Cir. 2015), the Court concluded that the conduct giving rise to the creditor’s claim against the debtor was the prepetition signing of the personal guaranty, the debt under the personal guaranty was contingent on a future default, and therefore the debt was dischargeable as part of the debtors' 2014 bankruptcy discharge. 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. |