Illinois Bankruptcy Lawyer Blog

Recently the 7th Circuit Court of Appeals heard a case arising from the Chapter 11 reorganization of a golf course; although their actual decision is about the application of a seldom-used cause of action known as fraud on the court

The Facts:

Principals of a golf course tried to reorganize but ran into trouble when disgruntled creditors presented evidence of their  managerial incompetence and convinced the Bankruptcy Court in the Southern District of Illinois to put a Trustee in place to operate the business.

The principals of the course decided not to cooperate and started a new entity with the intention of transferring the course into it. Of course an Automatic Stay was in effect. Not only that, but their antics amounted to a series of transfers that were both fraudulent and preferential. So when the Court found out what had happened, it enjoined the principals from taking further action of any kind.

By then the Trustee had sold the golf course for a profit. But the principals did not want the sale confirmed and objected on 2 bases: fraud (ironically), and fraud on the court. The Bankruptcy Court shot down both arguments, and the principals appealed to the District Court, and eventually the Appellate Court.

The Opinion:

The 7th Circuit spends several pages defining fraud on the court and points out that there is no statute of limitations on the action (like murder). But fraud on the court is not formally defined in the Bankruptcy Code, the Rules, or the Rules of Civil Procedure. Instead it's loosely defined as fraud that defiles the court or is committed by an officer of the court and would not be discovered even after diligent inquiry. Examples include Attorneys committing perjury or forgery, falsifying documents, tampering with a jury, or bribing a judge.

Following their analysis however, the 7th Circuit concluded that even if there had been perjury by a shareholder that was also a lawyer, it did not rise to the level of fraud on the court because the alleged wrongdoer was not acting in his capacity as an officer of the court when he lied.

The Decision:

Since the principals of the course had not alleged that the attorney-shareholder in question lied in his official capacity but rather had conspired with the Trustee to inflate the price of the course the Court of Appeals, like the District Court, that no fraud on the court had taken place.

Hole in one.

We help Debtors keep their homes in a Chapter 13 reorganization by making the mortgage company accept past due payments over time. But even that won't reduce future payments. That calls for mortgage modification or a lien strip. What's a Chapter 13 lien strip? Allow me to explain.

The lien strip technique permits Chapter 13 debtors to remove wholly unsecured mortgages from their primary residences. See In re McDonald, 205 F.3d 606 (3 Cir. 2000), which explains a lien strip may only be used by one in Chapter 13; Dewsnup v. Timm, 502 U.S. 410 (1987) explains why Chapter 7 debtors may not take advantage of the lien strip. Not that if joint debtors own their primary residence jointly or in tenancy by the entirety, they must both be in bankruptcy to affect a lien strip.

Example:  Debbie and Danny Debtor bought a house in 2002 for $150,000 and put down $0; so the first mortgage is $150,000. Over the next few years the house appreciated in value on paper (ahhh, the good old days ...) so they naturally took out a pair of $25,000 lines of credit. In 2011 however, their house is worth a mere $100,000 but they still owe $140,000 with respect to their 1st mortgage and $25K a piece on the two HELOCs. Hence the two junior mortgages are wholly unsecured and can be dealt with via lien strip.

http://www.newser.com/story/125587/law-school-duped-us-about-job-prospects-al...

Mazyar M. Hedayat, Esq.
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