OpinionsThe United States Trustee (UST) moved to dismiss two chapter 13 cases pursuant to 11 U.S.C. § 1307(c) for cause on the grounds that the debtors filed their petitions in bad faith by intentionally omitting certain financial information from their schedules. In both cases, the debtor filed a chapter 13 plan, the trustee eventually recommended confirmation, and the Court issued an order confirming the plan that included a finding that the plan met all the requirements of 11 U.S.C. § 1325. The Court held that the confirmation orders necessarily included a finding under 11 U.S.C. § 1325(a)(7) that the debtors had filed their petitions in good faith, and that those findings were res judicata. Granting the UST’s motions to dismiss would require revisiting those findings, and the UST did not provide any basis for doing so. No provision in Federal Rule of Civil Procedure 60(b) warranted relief from the confirmation orders, and the orders could not be revoked for fraud under 11 U.S.C. § 1330 because the UST filed his motions after the 180-day deadline in that statute. The Court rejected the UST’s argument that because § 1307(c) does not include a time limit, a case can be dismissed regardless of whether the basis for dismissal contradicts an earlier order. The Court held that § 1307(c) was not intended to be used as a mechanism to evade the factual findings in prior orders, so the UST could not seek dismissal based on the debtors’ pre-confirmation conduct. The Court also declined to find cause to dismiss under § 1307(c) based on the debtors’ post-confirmation conduct in failing to comply with the Court’s Rule 2004 orders requiring them to produce documents and appear for examination by the UST. The Court held that if the sole purpose of the Rule 2004 examinations was to bring the motions to dismiss based on the debtors’ pre-confirmation conduct, then the Court would not penalize the debtors for failing to comply because such a ruling would allow the UST to evade the res judicata effect of the earlier confirmation orders. The motions to dismiss in both cases were denied without prejudice to the UST’s ability to bring further motions to dismiss based on the debtors’ post-confirmation conduct. Cornerstone Pavers, LLC v. Zenith Tech, Inc. (In re Cornerstone Pavers, LLC), Adv. Proc. No. 21-02044 (September 2023) -- Chief Judge G.M. Halfenger After denying the plaintiff's motion to compel the defendant to produce communications withheld during discovery as privileged and rejecting a separate and largely unrelated rationale for production of privileged communications introduced by the third-party defendant after the motion to compel was fully briefed, the court ordered the plaintiff and the third-party defendant to explain why they and their attorneys should not be required to pay the defendant's expenses reasonably incurred in opposing their requests to compel production, pursuant to Federal Rule of Civil Procedure 37(a)(5)(B). Based on the record and the parties' responses, the court concluded that the plaintiff was substantially justified in bringing its motion to compel but that the third-party defendant's distinct rationale for an order compelling production lacked a reasonable basis in fact and law such that the third-party defendant (or its attorney), but not the plaintiff, must pay the expenses reasonably incurred by the defendant in responding to the third-party defendant's additional rationale for an order compelling production. Ruck v. McGill, 22-02074 (September 2023) -- Chief Judge G.M. Halfenger Plaintiff sued the debtor-defendant seeking an award of damages for violation of Wisconsin Statutes section 779.02(5) and a declaration that the award is not dischargeable pursuant to 11 U.S.C. section 523(a)(4). After trial plaintiff argued that debtor-defendant also owed her attorney’s fees pursuant to Wisconsin Statutes section 895.446. The court ruled that debtor-defendant owes plaintiff a debt pursuant to Wisconsin Statutes section 779.02(5) that is not dischargeable under 11 U.S.C. section 523(a)(4), but the plaintiff did not prove a right to relief under Wisconsin Statute section 895.446. Cornerstone Pavers, LLC v. Zenith Tech, Inc. (In re Cornerstone Pavers, LLC), Adv. Proc. No. 21-02044-gmh (September 2023) -- Chief Judge G.M. Halfenger Plaintiff Cornerstone Pavers, LLC and defendant Zenith Tech, Inc. assert claims and counterclaims for breach of a subcontract between them related to a highway-construction project, and Zenith seeks to recover on a surety bond allegedly issued by third-party defendant West Bend Mutual Insurance Company to insure the performance of the subcontract. Cornerstone and West Bend both moved for summary judgment against Zenith arguing that they are entitled to judgment as a matter of law based on Zenith's purported failure to satisfy certain notice requirements in the subcontract and bond before it terminated the subcontract and replaced Cornerstone with another subcontractor. The court denied both motions because the record does not establish, beyond all genuine disputes of material fact, that Zenith cannot prevail at trial. Rogers v. TitleMax of Wisconsin, Inc. (In re Rogers), Adv. No. 22-2129, Case No. 22-25190, 2023 WL 5354417 (August 2023) -- Judge B.E. Hanan Creditor’s failure to return debtor’s repossessed vehicle for 26 days postpetition, until after the Court considered the creditor’s concerns regarding adequate protection, did not amount to an act to “exercise control” over property of the estate in violation of 11 U.S.C. section 362(a)(3), nor did the creditor’s conduct violate section 362(a)(4) (prohibiting acts to “enforce a lien against property of the estate”) or section 362(a)(6) (prohibiting acts to collect a prepetition claim). Jackson Family Dentistry, LLC v. Major Dental Partners, LLC (In re Charmoli), Adv. Proc. No. 22-02136 (August 2023) -- Chief Judge G.M. Halfenger The defendants moved for remand and abstention with respect to the claims and counterclaims pending in this adversary proceeding, which were originally asserted in state court and removed to this court under 28 U.S.C. §1452(a) after one of the plaintiffs commenced the underlying chapter 11 case with his spouse. Two of the defendants also moved in the main case for a stay of their related adversary proceeding under 11 U.S.C. §523(a)(2) & (6), for a determination as to the dischargeability of debts allegedly owed to them by the debtor-plaintiff, and for relief from the stay under 11 U.S.C. §362(a), to allow them to continue the state-court litigation after remand. The court denied the defendants' motions because all of the removed claims and counterclaims are "core proceedings" under 28 U.S.C. §157(b)(2), thus not "related to" proceedings subject to mandatory abstention under 28 U.S.C. §1334(c)(2), and the relevant factors do not weigh in favor of permissive abstention under §1334(c)(1) or remand under §1452(b), so there is no good reason to stay the defendants' dischargeability proceeding, nor is there cause to grant the defendants relief from the §362(a) stay. In re Dixson, No. 22-22589 (June 2023) -- Judge R.M. Blise The Bankruptcy Court denied confirmation of a proposed chapter 13 plan pursuant to 11 U.S.C. § 1325(a)(1), concluding that the plan was not feasible. The debtor’s amended chapter 13 plan provided for equal monthly payments to a secured creditor and to the debtor’s attorney. The monthly payment amount proposed in the plan would be just enough to cover these equal monthly payments, along with the trustee’s fee. However, the plan also provided that the debtor’s monthly payments would be spread over 26 bi-weekly payments per year under an employer wage order. This meant that in some months the debtor (through her employer) would remit less than the monthly payments provided for in the plan and in some the debtor would remit more than the monthly payment amount. In the months that the trustee received less than the full payment amount, the trustee would have insufficient funds to disburse the equal monthly payments along with the trustee’s fee. The debtor argued that the trustee could simply reduce the payments to the secured creditor and the debtor’s attorney in the months that the trustee received two bi-weekly payments and then make “catch up” payments in the months that the trustee received three bi-weekly payments. The Court disagreed and held that a plan that the trustee cannot faithfully administer is not feasible. The Court acknowledged that sometimes chapter 13 debtors fall behind on their payments, and that those defaults require the trustee to make the sort of distributions that the debtor contemplated here, with smaller payments being made in some months and “catch up” payments made when the debtor cures the default. But those cases are different because the confirmed plan does not expressly contemplate that the trustee will not be able to distribute the payments called for in the plan, and it was only the debtor’s later default that caused a problem with administration. The Court declined to confirm a plan that contemplated an issue with distributions from the outset. Moreover, the secured creditor had previously objected to the plan on the basis that it should receive equal monthly payments 11 U.S.C. § 1325(a)(5)(b)(iii) and had withdrawn that objection when the debtor proposed a plan that would pay equal monthly payments. Because the debtor would not be remitting sufficient funds to make equal payments each month, the creditor would not receive the equal payments contemplated in the plan. The Court therefore denied confirmation of the plan proposed by the debtor. Mann, Chapter 7 Trustee v. LSQ Funding Group, L.C., 71 F.4th 640 (7th Cir. 2023) (June 2023) -- Seventh Circuit Court of Appeals The Chapter 7 trustee filed an adversary complaint against a factoring company seeking to avoid and recover an alleged preference or fraudulent transfer. The trustee sought to avoid and recover a $10.3M wire transfer made by the new factoring company to the old factoring company in the weeks before the debtor filed for bankruptcy. The trustee alleged that the accounts that the new factoring company purchased were worthless and that the old factoring company conspired with the debtor to leave the new factoring company with phony accounts when the debtor’s business failed. The bankruptcy court granted the old factoring company’s motion for summary judgment, holding that the transfer was not avoidable because it did not qualify as a transfer of “an interest of the debtor in property” as required by 11 U.S.C. §§ 547, 548. The district court affirmed. The Seventh Circuit Court of Appeals affirmed the decision of the district court, holding that (1) the transfer at issue did not involve “an interest of the debtor in property” and so could not be avoided as a preference; (2) fraud alone cannot bring a transfer within the avoidance powers of the Bankruptcy Code because the Code requires a transfer of “an interest of the debtor in property”; and (3) even if fraud had occurred, the transfer at issue had no impact on the property of the debtor and thus did not fall within the Code’s avoidance provision for fraudulent transfers. In re Rios, Case No. 22-21161, 2023 WL 4055909, 2023 Bankr. LEXIS 1589 (Bankr. E.D. Wis. June 16, 2023) (June 2023) -- Judge K.M. Perhach The debtors moved to stay the court’s order modifying the automatic stay to permit the Internal Revenue Service to enforce its tax lien on the debtors’ right to Social Security benefits while they pursued an appeal of the court’s order to the district court. The court denied the debtor’s motion for a stay pending appeal. Granting a stay pending appeal would not cause the debtors to begin receiving their Social Security benefits, so the debtors did not show that they would suffer irreparable harm in the absence of a stay. The debtors also did not demonstrate that they had a likelihood of success on the merits of their appeal. The debtors intended to argue on appeal that (1) they did not acquire a “right to property” in their Social Security benefits until they survived until the end of the month and actually received funds; (2) at the time the bankruptcy case was filed, the IRS only had a lien on the Social Security benefits the debtors had actually received pre-petition; (3) during the debtors’ bankruptcy case, the automatic stay prevented the IRS’s statutory tax lien from attaching to the Social Security benefits that the debtors received post-petition; and (4) a discharge would prevent the IRS’s statutory lien from attaching to the Social Security benefits received by the debtors after their discharge. However, the IRS’s statutory lien attached to all of the debtors’ property and rights to property, including their right to receive future Social Security benefits. The lien on the right to receive future payment of Social Security benefits arose pre-petition and would survive a discharge under § 1328(a). The debtors proposed to use the Social Security benefits to make their Chapter 13 plan payments without proposing adequate protection of the IRS’s interest in the benefits, so the IRS was entitled to relief from the automatic stay. Charmoli v. Aspen American Insurance Company, Adv. Proc. No. 22-02130 (June 2023) -- Chief Judge G.M. Halfenger Defendant issued professional liability policies to plaintiff, and plaintiff filed this adversary proceeding seeking a declaration that defendant was required to defend and indemnify him from malpractice claims asserted by his former patients. After the court denied defendant’s motion to dismiss the complaint, ruling that the complaint’s factual allegations and facts of which the court could take judicial notice did not establish that defendant’s rescission was timely under Wis. Stat. section 631.11 as a matter of law, defendant filed a motion for leave to appeal to the district court. The defendant then filed a motion requesting that the bankruptcy court stay the adversary proceeding pending the district court’s action on its appeal motion. The bankruptcy court denied the motion for a stay pending appeal, concluding that defendant was not likely to succeed on the merits of the motion for leave to appeal or the appeal itself, and further concluding that defendant had not demonstrated irreparable harm. |