OpinionsThe 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 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 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. In re Terrell, Case No. 18-28674 (November 2021) -- Chief Judge G.M. Halfenger The debtors’ confirmed plan required them to make payments to the trustee for five years. The debtors named the Wisconsin Department of Children and Families as a creditor in the section of the model plan designed for listing domestic support obligations owed to governmental entities that are entitled to priority under 11 U.S.C. §507(a)(1)(B). After the plan was confirmed, two events occurred: (1) the debtors modified their plan to surrender collateral and reduce the plan’s payments to secured creditors and (2) the Seventh Circuit Court of Appeals determined that claims for benefit overpayments (like the one the Wisconsin Department of Children and Families asserted in the Terrells’ case) were not domestic support obligations entitled to priority under 11 U.S.C. §507(a)(1)(B). As a result of these events, the debtors moved to modify their chapter 13 plan under 11 U.S.C. §1329(a) to reduce the time within which they had to make payments to the trustee from five years to three, and the debtors objected to the priority of the Department’s claim. In In re Terrell, Case No. 18-28674-gmh, 2021 WL 4304839 (Bankr. E.D. Wis. Sept. 21, 2021), this court sustained the debtors’ objection and determined that the Department’s claim was not entitled to priority. The Department objected to the debtors’ motion to modify their confirmed plan to reduce the plan term from five years to three. The court overruled the Department’s objection, concluding that §1329(a) permits the requested modifications. In re Michael Galesky, Case No. 20-25509 (September 2021) -- Chief Judge G.M. Halfenger The trustee and a creditor objected to the debtor's claim of exemptions, primarily asserting that the debtor's exemptions under Wisconsin law should be denied pursuant to a state statute that affords a court the discretion to deny exemptions if the debtor has procured or transferred assets with the intention of defrauding creditors. After an evidentiary hearing, the court found no evidence of fraud or fraudulent intent and principally reasoned that the debtor engaged in permissible transactions to convert property from non-exemptible to exemptible forms before commencing his bankruptcy case, a practice broadly accepted in relevant state and federal caselaw as not fraudulent in itself. The court overruled the objections. In re Michael and Sandra Lampe, Case No. 19-30044 (September 2021) -- Chief Judge G.M. Halfenger The trustee objected to the chapter 7 debtors' claim of real property in Wisconsin as an exempt homestead under that state's law because the debtors did not occupy the property at the relevant time as Wisconsin law requires. The court concluded that, despite Federal Rule of Bankruptcy Procedure 4003(c) assigning the burden of proof to the trustee, Wisconsin law governed that assignment under these circumstances and the debtors were required to prove that they did not impair their homestead exemptions because their removal from the property was temporary and with the intention to reoccupy the premises as a homestead. After an evidentiary hearing, the court sustained the trustee's objections, finding that the debtors failed to show that their removal from their claimed homestead was temporary or that they had a sufficiently certain intention to return and reside there. In re Antonio and Angel Terrell, Case No. 18-28674 (September 2021) -- Chief Judge G.M. Halfenger After the court confirmed the chapter 13 debtors' plan, the debtors objected to a claim of the Wisconsin Department of Children and Families, requesting a determination that the claim is not entitled to priority under 11 U.S.C. §507(a)(1)(B) based on new, post-confirmation precedent. The Department's response argued that the court should overrule the objection because the debtors' confirmed chapter 13 plan provided for the claim as a priority claim. The court sustained the objection, ruling that the applicable doctrines of law of the case and judicial estoppel did not preclude adjudicating the objection based on the post-confirmation precedent. 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. In re Edward and Linda Tolliver, Case No. 20-22408 (September 2020) -- Chief Judge G.M. Halfenger A creditor objected that the chapter 13 plan could not be confirmed because it proposed to modify the creditor's rights as the holder of a claim secured only by a security interest in the debtors' principal residence, in violation of 11 U.S.C. §1322(b)(2). The debtors responded that the proposed modification of the creditor's rights was permissible under §1322(c)(2) because the last payment on the original payment schedule for the claim was due before the final payment under the plan was due. The creditor replied that the debtors had agreed to extend the original payment schedule for the claim to a date past when the final payment under the plan was due, making §1322(c)(2) inapplicable. The court sustained the creditor's objection to confirmation of the plan because, under Wisconsin law, the debtors' agreement to a new payment schedule on the debt, in exchange for being deemed current on payments, resulted in a new contract; that new contract gave rise to the creditor's "claim", defined in the Bankruptcy Code as a "right to payment"; and the original (and only) payment schedule for that claim ends after the final payment under the plan is due. |