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    In re Hobbs, No. 20-27572-kmp (Bankr. E.D. Wis. Sept. 30, 2021) and Kasper v. Hobbs (In re Hobbs), Ch. 7 Case No. 20-27572-kmp, Adv. No. 21-2021 (Bankr. E.D. Wis. Sept. 30, 2021) (September 2021) -- Judge K.M. Perhach
    A creditor filed a motion to disqualify one of the debtor’s attorneys from representing the debtor in the Chapter 7 bankruptcy case and in an adversary proceeding the creditor had filed. The creditor’s claim was the largest filed in the Chapter 7 case, followed by the attorney’s claim for legal fees he incurred representing the debtor in a state court case before the filing of the bankruptcy case. The creditor argued that the lawyer had a concurrent conflict of interest because there was a significant risk that his representation of the debtor would be materially limited by his personal interest in realizing as much of his claim as possible. Even if this were the case, the creditor failed to show that the conflict was not waivable under SCR 20:1.7(b), and the Court denied the motion. Essentially, the creditor took issue with the fact that the lawyer was the creditor’s competitor when it came to the funds available for distribution to creditors in the Chapter 7 case. However, disqualification of the attorney would not result in automatic disallowance of his claim.

    Kasper v. Hobbs (In re Hobbs), Ch. 7 Case No. 20-27572-kmp, Adv. No. 21-2021 (Bankr. E.D. Wis. Sept. 30, 2021) (September 2021) -- Judge K.M. Perhach
    The plaintiff sought a determination that the debtor-defendant owed a nondischargeable debt pursuant to 11 U.S.C. § 523(a)(2)(A) and/or § 523(a)(4). The parties were involved in litigation in state court before the debtor-defendant filed the bankruptcy case. The debtor-defendant removed the action to bankruptcy court and filed a motion to dismiss both the nondischargeability action and the removed action for failure to state a claim upon which relief could be granted. The motion to dismiss asserted that the plaintiff could not establish the existence of a “debt” that was nondischargeable because the state court action was time-barred, or subject to dismissal and a new action would be time-barred. The Court denied the motion, rejecting the debtor-defendant’s contention that service in the state court action was insufficient, relying in part on an earlier denial of a motion to dismiss by the state court. Questions of fact existed as to when the plaintiff’s fraud claim accrued and whether it was barred by the statute of limitations. Because the plaintiff also had a pending claim objection, the Court stated that the issues to be decided at trial were (1) whether there was a debt; (2) the amount of the debt; (3) whether the entire debt or a portion of the debt was nondischargeable based upon false representations, fraud, fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; and (4) the amount of the nondischargeable debt.

    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 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.

    Weyauwega Star Dairy, Inc. v. Loehrke (In re Loehrke), Ch. 11 Case No. 20-24784-kmp, Adv. No. 20-2128, 2021 WL 4449020, 2021 Bankr. LEXIS 2650 (Bankr. E.D. Wis. Sept. 28, 2021) (September 2021) -- Judge K.M. Perhach
    Weyauwega Star Dairy filed a complaint accusing the debtors of defrauding it by selling it milk that was 70% water. The dairy sought a determination that the amount it overpaid the debtors, considering the amount of actual milk it received, was nondischargeable under 11 U.S.C. § 523(a)(2)(A) and/or § 523(a)(6). The debtors filed counterclaims for fraud and breach of the duty of good faith and fair dealing and sought damages in the amount of the “expected gross income from milking” and the amount they believed they should have been paid for their last load of milk. After a trial, the Court determined that the debt owed to the dairy was nondischargeable under both § 523(a)(2)(A) and § 523(a)(6). Among other things, cheese made with the debtors’ milk failed to set, later samples of the debtors’ milk contained mostly water, the debtor had asked his brother to switch a milk sample, and the debtors delivered an unusually steady volume of milk to the dairy even though their herd consisted mostly of cows not suitable to be sold as dairy cows. The debtors did not seriously dispute the damage figure the dairy asserted, and the Court awarded the full amount requested. The Court dismissed the debtors’ counterclaims, finding that they failed to prove either counterclaim or establish damages.

    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 Delain, No. 21-20818-kmp (Bankr. E.D. Wis. Sept. 10, 2021) (September 2021) -- Judge K.M. Perhach
    At the time of the dismissal of the debtor’s case filed under Subchapter V of Chapter 11, the Subchapter V trustee had not filed an application for approval of compensation and had not received any payment for services in the case. Following the dismissal, the trustee filed an application requesting approval of almost $25,000 for her extensive involvement with mediating disputes and supervising the parties. The Court approved the application, making the debtor “liable in the ordinary way (that is, outside of bankruptcy proceedings) to pay the debts that [he] had had as debtor in possession.” In re Sweports, Ltd., 777 F.3d 364, 366 (7th Cir. 2015). The approval of the trustee’s application involved the entry of an order the trustee could “take into state court as a basis for obtaining damages.” Id. at 367.

    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), aff’d, No. 21-cv-1070-BHL, 2022 WL 2788437 (E.D. Wis. July 15, 2022) (appeal pending, No. 22-2436) (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.