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. Mann v. LSQ Funding Group, L.C., No. 21-CV-1070-BHL (E.D. Wis. July 15, 2022) (appeal pending, No. 22-2436) (July 2022) -- District Court The Chapter 7 trustee appealed the court’s order granting summary judgment in favor of LSQ Funding Group L.C. on the trustee’s fraudulent conveyance and preference claims. See Mann v. LSQ Funding Group, L.C. (In re Engstrom, Inc.), Ch. 7 Case No. 20-22839-kmp, Adv. No. 20-2062-kmp (Bankr. E.D. Wis. 2021). Because the bankruptcy court correctly applied the earmarking and diminution of the estate doctrines to dismiss the trustee’s adversary claims, the district court determined that the appeal failed and affirmed the bankruptcy court’s decision. This decision is on appeal to the United States Court of Appeals for the Seventh Circuit. 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 Terrell, No. 21-3059 (July 2022) -- Seventh Circuit Court of Appeals On direct review, the Seventh Circuit reversed the bankruptcy court's order determining that a claim of the State of Wisconsin is not entitled to priority under 11 U.S.C. §507(a)(1)(B), construing it as an order modifying the debtors' confirmed plan and holding that the bankruptcy court lacked authority to modify the plan. Bach v. Milwaukee County et al. (In re Bach), Ch. 7 Case No. 20-23343, Adv. No. 21-2020 (Bankr. E.D. Wis. July 1, 2022), aff’d, No. 22-CV-0806-BHL (E.D. Wis. Jan. 24, 2023) (July 2022) -- Judge K.M. Perhach A debtor claimed that Milwaukee County and various county officials violated the discharge injunction. The County and officials had two judgment liens on the debtor’s property. The debtor argued that they violated the discharge injunction because they were named by the mortgage creditor as additional defendants in a foreclosure lawsuit against her. She further claimed that one of the officials violated the discharge injunction because an attorney filed a notice of appearance on the official’s behalf in a separate foreclosure lawsuit and filed letters in that case stating that the attorney did not intend to appear at scheduled motion hearings. The attorney also filed a notice of demand for surplus, asserting a claim to any surplus funds remaining after the proceeds of any sheriff’s sale were applied to the foreclosure judgment. The court granted the motion for summary judgment filed by Milwaukee County and the related defendants and dismissed all the claims asserted against them. The district court affirmed this decision on appeal. In re Peete, Case No. 21-23863-beh, 642 B.R. – , 2022 WL 2387652 (June 2022) -- Judge B.E. Hanan The City of Milwaukee filed an amended proof of claim and an objection to confirmation of the debtor’s Chapter 13 plan. The City asserted that special charges included on the debtor’s tax bill were entitled to priority status under 11 U.S.C. sec. 507(a)(8)(B), as property taxes. The special charges were for past due water/sewer bills, health hazard abatement and related services. The debtor objected to the amended claim, arguing that because the special charges reflected the City’s attempt to recoup monies for specific services, and were not collected for the general benefit of the public, they were not taxes and should be treated like other general unsecured claims. Seventh Circuit caselaw directs courts to undertake a functional analysis and consider the purpose of each charge in determining whether such charge is a tax or a fee. Generally, if a charge levied by a taxing authority is designed to generate public revenue, it is a tax; if the charge is designed to punish or to compensate for specific services, it is not a tax. The City submitted multiple affidavits but none of them explained the nature or purpose of the underlying special charges imposed, and consequently the City did not meet its burden to establish that those charges were taxes entitled to priority treatment. The City’s proof of claim also asserted that interest and penalties on the unpaid balance for these special charges were entitled to priority status under 11 U.S.C. sec. 507(a)(8)(B). The City did not offer authority to entitle the penalties to priority status as taxes, and its argument that the penalties were not dischargeable under 11 U.S.C. sec. 523(a)(7) was countermanded by 11 U.S.C. sec. 1328(a). As for the interest charges included on the tax bill, the Court held that to the extent they were attributable to the actual property tax principal owed (and not the special charges), they were entitled to priority status. In re Roberts, Case No. 22-20766-beh, 641 B.R. 613 (June 2022) -- Judge B.E. Hanan The debtors proposed to pay debts owed to Lebakkens Inc. of Wisconsin, a rent-to-own furniture dealer, in Section 3 of their Chapter 13 plan, the section reserved for secured claims. Lebakkens objected to plan confirmation, arguing that the debts owed it belong in the section of the plan reserved for unexpired leases. Lebakkens reasoned that the rent-to-own agreements did not grant the debtors a secured interest in the property until they had completed payments under the contracts or paid down a significant portion of the balance. The agreements, titled “Rental Agreement[s]with ownership provisions,” stated that Lebakkens would maintain title to the goods and afforded the debtors the monthly option either to return the property or to maintain possession of it in exchange for a payment. Applying Wis. Stat. s. 401.203, the statute distinguishing leases from security interests, as well as caselaw recognizing that a unilateral ability to cancel an obligation is a hallmark of a lease, the Court concluded that the agreements gave the debtors a unilateral right to terminate and thus were leases, not security instruments. Alternatively, using the analysis adopted by some courts which weigh factors beyond the unilateral ability to cancel, the Court likewise concluded that the facts of record demonstrated that the agreements were leases. The Court found that the presence of an option to acquire the goods for a nominal price did not convert the agreements into security instruments, noting that the value of the items is greater than the first “renewal” payment, that Lebakkens is required to maintain and service the property, and the likelihood that the consumer goods have useful lives beyond the duration of the agreements. The debtors’ argument that the Wisconsin Consumer Act, which applies to certain consumer credit transactions, controlled the determination that the agreements are credit sales and not leases, was not persuasive. The Court sustained the objection and required debtors to amend their plan. Bach v. Office of Lawyer Regulation (In re Bach), Ch. 7 Case No. 20-23343, Adv. No. 21-2020 (Bankr. E.D. Wis. June 8, 2022), aff’d, No. 22-CV-0866-BHL (E.D. Wis. Jan. 24, 2023) (June 2022) -- Judge K.M. Perhach A debtor sought a determination that her Chapter 7 bankruptcy discharged debt she owed to the State of Wisconsin Office of Lawyer Regulation for the costs associated with her attorney disciplinary proceeding. Finding Osicka v. Office of Lawyer Regulation, 25 F.4th 501 (7th Cir. 2022) directly on point, the court determined the debt was excepted from discharge under 11 U.S.C. § 523(a)(7). The court granted the Office of Lawyer Regulation's motion for summary judgment. The district court affirmed the decision on appeal. In re Neitzel, No. 21-25185 (Bankr. E.D. Wis. May 10, 2022) (May 2022) -- Judge K.M. Perhach The court denied a debtor’s motion for an order finding a creditor in contempt for violation of the automatic stay. The creditor filed a summons and complaint with a Minnesota state court after the debtor had filed the bankruptcy case. In Minnesota, a civil action is commenced when the summons is served on the defendant. The Minnesota rules further provide that the lawsuit is deemed dismissed with prejudice if the plaintiff fails to file the summons and complaint with the court within one year of service of the summons. The creditor commenced the litigation by serving the summons and complaint on the debtor before the debtor filed the bankruptcy case. Under the facts of the case, the creditor’s filing of the summons and complaint with the Minnesota state court after the debtor filed the bankruptcy case did not constitute a continuation of the litigation in violation of the automatic stay. The creditor only sought a judgment against a non-debtor defendant. Simultaneously with the filing of the summons and complaint, the creditor filed a notice in which it sought to dismiss its claims against the debtor due to his bankruptcy filing as well as a proposed order dismissing the claims against the debtor. When the Minnesota state court did not docket the dismissal as it expected, the creditor followed up to have the claims against the debtor dismissed. Accord In re Neitzel, No. 21-25186-rmb (Bankr. E.D. Wis. April 1, 2022). Archer-Daniels-Midland Co. v. Country Visions Coop., 29 F.4th 956 (7th Cir. 2022) (April 2022) -- Seventh Circuit Court of Appeals Affirming decision that purchaser of real estate did not acquire parcel in good faith under 11 U.S.C. § 363(m). |