Articles Posted in Appellate Court

Chapter 13 Bankruptcy

[T]here are known knowns… known unknowns … and unknown unknowns… things we do not know we don’t know.—US Secretary of Defense Donald Rumsfeld

When it comes to Bankruptcy, many Debtors don’t know what they don’t know about real estate taxes. Confused? So were the District Courts until the 7th Circuit Court of Appeals addressed the issue in the case of In re LaMont, Opinion 13-1187 (January 7, 2014).

The 7th Circuit began its analysis in LaMont by acknowledging the 2 kinds of real estate taxes with which Debtors must deal:

(a) Sold; and (b) Unsold.

The 2 are treated differently under State law and receive distinct treatment in a Plan of Reorganization as well:

Unsold taxes can be paid through the Plan in the same way that a Debtor would pay arrears to a secured creditor like a mortgage company. The rationale for such treatment is that the taxing body – the County – is presumed to have a secured lien in the subject property for its taxes. Moreover, those axes cannot be sold once a Bankruptcy Petition is filed. Such taxes generally get paid directly to the County Treasurer via the Plan.

Sold taxes are trickier. They can be paid through the Plan like unsolid taxes, but only so long as the “redemption period” has not expired. Even if the redemption period expires during the Plan, sold taxes can still be paid over the rest of the Plan period. And while that is taking place, the Automatic Stay will remain in effect to prevent Tax Buyers from redeeming the sold taxes or forcing a sale of the underlying property (the typical State law remedy).

In LaMont the issue was sold taxes. The LaMont Debtors owed real property in Minooka, Illinois on which the Village had levied a special assessment that they hadn’t paid. The Court noted that in this context a special assessment was deemed a property tax. Thus, the unpaid assessments were disposed of at a tax sale. Shortly afterwards the Debtors filed Chapter 13 and their Plan provided for payment of the assessment directly to the Village. However, the Plan did not identify. nor did notice go out to, the tax buyer. Nonetheless, the Plan was confirmed and the Debtors made payments to the Trustee who distributed them to the creditors including the Village.

But was the tax buyer bound by the terms of the confirmed Plan even though he had not been notified? In answering the questions the Court conducted a thorough analysis of the Illinois property tax system including tax sales and redemption periods – treating the sold special assessments the way they would sold property taxes.

The upshot of the analysis was that for the entirety of the redemption period – usually 2 to 2 ½ years, – a property owner could redeem his or her sold taxes by paying the County Clerk the past due amount, plus penalties and interest. Between 3 and 6 months before the expiration of the redemption period, a tax buyer had to file a Petition for Tax Deed with the Circuit Court, then take the resulting Order to the County Clerk to secure a Tax Deed, which then had to be recorded within a year. If those steps were not followed the tax buyer would lose his interest in the subject property. That is time enough for the property owners to act, but here the time period was tolled because of the Bankruptcy. Still, the Debtors neither identified the proper party to pay nor made adjustments to their Plan of Reorganization.

The LaMont the tax buyer filed his Petition for Tax Deed with the Circuit Court 3 years after the Debtors filed Bankruptcy and the Circuit Court denied it. The tax buyer then filed a Lift Stay Motion in the Bankruptcy Court, which denied the Motion because he was ostensibly being taken care of in the Plan. The tax buyer appealed, arguing that the Stay should not apply since he was not given notice of the case. But the District Court affirmed the Bankruptcy Court.

The tax buyer had also argued that his interest was in the real property, so it was not an interest against the Debtors. In other words he argued that his interest automatically divested the Debtors of their interest in the property after the redemption period expired. In response the 7th Circuit first examined whether or not the tax buyer had a claim, concluding that he did even though there wasn’t a traditional creditor-debtor relationship present. Nonetheless, the Court found that the tax buyer did not have an executory interest in the property itself: he merely had a tax lien on the property.

In reaching its decision the LaMont Court reviewed Illinois case law in concluding that, while there were differences, precedent favored the treatment of sold taxes as a lien. Since the tax buyer’s claim was deemed to be a lien, it could be modified under Section 1322(b)(2) of the Bankruptcy Code and the Debtors could force him to take payments even past the redemption date as long as the Plan was in effect.

In short, sold taxes can be addressed in a Plan of Reorganization but notice should be given to the payee or the Debtors risk paying into their Plan for 5 years only to end up with no credit towards their sold property taxes – and in the end stand to lose their home. Sad but true.

Business Opportunity Doctrine.jpgLet’s face it. Things are tough economically. Most talking heads agree the economy is undergoing a structural change that will affect everybody. Sadly it looks like not everyone is sharing the pain of the Great Recession, however. The rich are getting richer, while the rest of the population keeps on

sliding,

At a time like this who wouldn’t want to get everything they can? What if you were part of a company that wasn’t doing well and decided to make the best of it by jumping on opportunities unearthed by the company?

This is where the Corporate Opportunity or “Business Opportunity” Doctrine comes in. This equitable principal is employed by Illinois Courts and holds that:

a company fiduciary such as a director, officer. or majority shareholder may not develop an opportunity using company resources, or acquire an interest adverse to the company, or acquire property related to current or future company business, until they present that opportunity to the company and allow it to choose or decline the opportunity.

The hallmark of the Doctrine is the use of company assets to benefit the fiduciary. For instance, if a Director or Officer profited personally by acquiring property they have reason to know the company will need or intends to acquire, the Doctrine is violated. In other words, fiduciaries should not step in to grab things that the company could use.

The Doctrine itself is derived from the duty of undivided loyalty that comes with being a fiduciary. So while it goes without saying a fiduciary must act in the best interests of the company; Directors and Officers must do more: they must deal openly and honestly and exercise the utmost good faith. Levy v. Markal Sales Corp., 268 Ill. App. 3d 355, 364, 205 Ill. Dec. 599, 643 N.E.2d 1206 (1994).

While not codified by statute, the recognized elements of the Doctrine are:

a) The opportunity could benefit the company or benefit its future business;
b) The opportunity fits into the business model established by the company;
c) The company has an actual or in expectancy interest in the opportunity; and
d) The fiduciary has not presented the opportunity to the company yet; or
e) The fiduciary presented it, company chose it, but the fiduciary took it.

Using this analysis the Illinois Appellate Court pronounced in Graham v. Mimms, 111 Ill. App. 3d 751, 761, 67 Ill. Dec. 313, 444 N.E.2d 549 (1982) that the core principle of the Doctrine is that a fiduciary may not usurp a business opportunity developed through the use of corporate assets.

If corporate assets are used to develop an opportunity, the fiduciary cannot deny that the resulting benefit belongs to the company – even if the company couldn’t have pursued the opportunity itself or had no expectation interest. In Preferred Meal Systems v. Guse, 557 N.E.2d 506 (Ill. App. 1 Dist. 1990), the Court held that an officer was liable for breach of his fiduciary duty because, while still employed by the company, he failed to inform his employer that other employees were forming a rival company and soliciting customers and fellow employees to join that rival business.

The touchstone case regarding disclosure of corporate opportunities is Dremco v. South Chapel Hill Gardens, in which the Court enunciated the core principle that a fiduciary may not usurp an opportunity developed through the use of the company assets unless he first discloses and tenders the opportunity to the company – even if he believed that the company would not have been able to take advantage of the opportunity anyway. SEE ALSO Graham v. Mimms; Levy v. Markal.

Factors considered in this context include:

a) The manner in which the offer was communicated to the Corporation;
b) The good faith of the disclosing fiduciary;
c) The use of corporate assets to acquire the opportunity;
d) The degree of disclosure made to the Corporation;
e) Action taken by the Corporation with reference to that opportunity; and
f) The need or interest of the Corporation in the opportunity.

Lindenhurst Drugs, Inc. v. Becker, 154 Ill. App. 3d 61, 68, 506 N.E.2d 645, 650, 106 Ill. Dec. 845, 850 (Ill. App. 2 Dist. 1987).

So the basic tenet of the Corporate Opportunity Doctrine is that fiduciaries cannot compete with the company because they owe duties of loyalty, good faith, transparency, and fair dealing. The original conception of the Doctrine restricted fiduciaries from taking any opportunity that the company could have pursued: but more recent decisions have held that disclosure to the company and its decision not to pursue the opportunity relieves the fiduciary of further obligation. Still,  failure to disclose and tender the opportunity results in the fiduciary being prevented from exploiting the opportunity at all.

If you believe that you have experienced a violation of the Corporate Opportunity Doctrine, or that fiduciaries at your company may be violating their obligations, contact us in confidence to find out what you can do about it.

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In Illinois, as in most jurisdictions, retirement funds like 

  • Pension proceeds
  • 401(k) accounts
  • 403(b) accounts
  • IRA’s and Roth IRA’s 

constitute exempt assets that cannot be taken away in Bankruptcy. 

But what if a Debtor were to inherit an IRA? Would the inheritance still be “exempt?”

This was the issue before the Bankruptcy Court for the Western District of Wisconsin in the case of In re Clark. The Clark Court found that the retirement funds did not retain their exempt character. 

The 7th Circuit Court of Appeals agreed; noting that  11 USC 522(b)(3)(C) and (d)(12) only makes an IRA exempt if it is part of a tax exempt fund  Thus a spouse that inherits or rolls over a retirement fund can take advantage of the exemption because they are bound by the same IRS rules that bound the deceased – that money could not be withdrawn (without penalty) until the inheritor reached age 59 1/2. But if the inheriting spouse wanted to take a distribution before then, the transfer or rollover would be retroactively treated as a taxable event.

Rules applicable to a non-spouse inheritor are even more strict, and those differences played a large role in the decision of the 7th Circuit. As noted by the Court for instance, the Debtor in Clark inherited an IRA from her mother since she was the beneficiary. But an inherited IRA cannot be rolled over into another IRA, and additional funds could be be added to the inheritor’s IRA per 26 USC 408(d)(3)(C)); and since all distributions from the inherited IRA would have to commence within a year according to 26 USC 402(c)(11)(A), the Court refused to treat those funds as exempt because doing so would be the equivalent of form over substance.

Unfortunately, resolving this issue isn’t that easy. The 7th Circuit isn’t the only Federal Appeals Court that has considered this issue: and wouldn’t you know it, there’s a circuit split. 

The 5th and 8th Federal Circuits treat inherited retirement funds as exempt. See In re Nessa, 426 BR 312 (BAP 8th Cir. 2010), In re Chilton, 674 F.3d 486 (5th Cir. 2012). The rationale is that 522(b)(3)(C) of the Bankruptcy Code specifies that retirement funds in the Debtor’s possession are exempt.

The 7th Circuit on the other hand examined the nature of the inherited funds following their distribution. Since such funds could not be held until Debtor’s retirement, to simply treat them as retirement funds would exalt form over substance. Put another way, the 7th Circuit believed inherited IRA funds were an “opportunity for current consumption, not a fund for retirement savings.”

Since there is a Circuit split on this issue, it is important to determine which way the wind blows where you are; and if the Debtor has a choice as to where to file, it would be a wise to keep these factors in mind. An interesting issue not addressed by the Clark opinion is this: 

What if the Debtor in that case had actually within a year of retirement (i.e. 59 1/2 years old)? 

In that instance, an inherited IRA could be held until the Debtor’s retirement. Ultimately that is a case for another day. 

But if Clark is the law of the land then another question comes to mind: 

Is there a way around the harsh results of the 7th Circuit’s Clark decision? 

Well, other than filing in the 5th or 8th Circuits, the answer seems to be that in order to avoid such a problem, estates would have to roll their IRA’s into Trusts having a valid discretionary or spendthrift provision. Under those circumstances the money in the Trust would still be exempt from Bankruptcy execution (albeit not because it was in an IRA but because it was in a spendthrift trust).

As usual, no perfect solution, but it pays to plan. Thinking of your estate or planning for the future? Contact us for a free consultation to find out how to deliver more to your heirs and less to Uncle Sam.

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Q: Can a Citation to Discover Assets filed prior to  a Bankruptcy

case have an affect on the resulting Bankruptcy estate?

A: You Bet It Can …

The Facts


In the 7th Circuit Case of In re Porayko, appealed from the Bankruptcy Court for the Northern District of Illinois, a Citation to Discover Assets was served on a year before the Debtor filed bankruptcy, while a 3rd Party Citation was served on his bank the month he filed. The creditor moved for relief from the Automatic Stay to seize the $10,000 in the Debtor’s bank account and the Trustee objected on the basis that the initial citation had not created a lien, while the 3rd Party Citation was avoidable pursuant to 11 USC 547.

The Law
Citations to Discover Assets are addressed in Illinois Statutes, Section 5/2-1402. According to Sec. 1402(m) a Citation to Discover Assets creates a lien on all

“nonexempt personal property including money, choses in action and effects of judgment debtor” as well as “personal property belonging to the judgment debtor in the possession or control of the judgment debtor or which may thereafter be acquired or come due…”

Illinois cases support the concept that a checking account is personal property to which a lien may attach. See Chicago v. Air Auto Leasing Co., 297 Ill. App. 3d 873, 878 (1st Dist. 1998), a problem for the Trustee.

The Argument
The Trustee in Porayko tried to distinguish Air Auto Leasing by pointing out that other Illinois Courts treated bank accounts as mere promises to pay rather than items of personal property that could be subject to a lien. The leading case of its kind, Citizens Bank of Maryland v. Strumpf, 515 US 16 (1995), dealt with whether a bank could offset a payment while the Debtor was in Bankruptcy. But the Porayko Court found the situation before it to be quite different, and concluded that the creditor’s citation had created a secured interest in the checking account, so the relief from the Automatic Stay granted by the Bankruptcy Court was proper. 

Surprisingly, this meant that under the proper circumstances the lien of a pre-filing creditor could trump the interest of a Bankruptcy Trustee: a notion that would appear to stand the law of insolvency on its head.

The Takeaway
The takeaway from the Porayko case is that Debtors are wise to address debts before their creditors secure judgments that turn into liens. At a minimum, a Debtors ought to file soon enough so that creditors cannot perfect their judgment liens and trump the case Trustee.

Continue reading →

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These are dark times in the galaxy….

Unemployment is stubbornly high. The recovery has nearly stalled. People’s savings are low. The housing market’s so-called rebound has been uneven. Since June 2011 almost a million and a half people have sought bankruptcy protection. The number of filers keeps growing (so much for the salutary effect of BAPCPA).  Is there hope? 

A New Hope

One effective feature of Bankruptcy is the lien strip. Traditionally Chapter 7 debtors could not take advantage of a lien strip, which permits a debtor to treat unsecured mortgages and lines of credit the same way as other unsecured debts such as credit cards. If they could, those debts – previously treated as a “secured loan” or “mortgage” would really be discharged at the end of the case like a credit card debt. 

Instead, Courts have permitted lien strips to be employed only in connection with Chapter 13 reorganizations. Ironically this meant that the Chapter 7 debtors least able to keep their 2nd mortgage or HELOC could not get relief. And Courts have adhered to the Chapter 7 v. Chapter 13 distinction right up to the present - even as real estate values have plummeted.

But in a recent decision the 11th Circuit Appellate Court held that a Chapter 7 debtor could avoid a junior lien, in essence giving millions of Americans a new hope.

The Empire Strikes Back

So what makes Chapter 13 and 7 so different when it comes to the treatment of unsecured mortgages and home equity loans? Why let the Chapter 13 debtor to pursue a lien strip but deny it to the Chapter 7 debtor?

Chapter 7 of course is reserved for those who make less than the median income in their State or can demonstrate that letting them liquidate despite having an above the median income isn’t an abuse of the Code. Chapter 7 cases move quickly- assets are liquidated or abandoned by the case Trustee within a short time-frame. 

Chapter 13 by contrast is the adjustment of debts by those with regular income who can meet their living expenses, but have fallen behind. The theory is they just need to catch up. Chapter 13 debtors are even their own trustees or Debtor in Possession and their repayment plans take up to 5 years to administer. 

But are those really fair characterizations of Chapter 7 and 13 debtors?  These days a sudden job loss, illness, drop in property value, or plain old economic malaise can transform a wage earner into a deadbeat. So why not offer the same benefit to both types of debtors? Why not permit Chapter 7 lien strips?

Return of the Jedi

Speaking of lien strips, what is a lien exactly? Answer: it’s a security interest in real property given or taken in return for value. Typically, a bank lends the money to buy your house and in return you grant a lien in the property. But not all liens are created equal, since only some are perfected. Holders of perfected liens get paid before the holders of unperfected liens. 

That’s where McNeal v. GMAC Mortgage comes into play. In McNeal the 11th Circuit Court of Appeals concluded that Chapter 7 debtors had as much right as Chapter 13 debtors to strip unsecured junior liens. The Court’s reasoning rested largely on a linguistic choice – “stripping down” versus “stripping off.” In fact, policy considerations drove the decision and reversed a long line of precedent.

The facts were these: McNeal, a Chapter 7 debtor, had two mortgages. The amount due as to the first mortgage was $176,413, the amount due as to the second loan was $44,444 and the debtor’s house was wroth only $141,416. This would have qualified the debtor to perform a lien strip in Chapter 13. But this was a Chapter 7. 

The Bankruptcy Court cited a long line of precedent, including a Supreme Court case, all of which pointed in a single direction: Chapter 7 debtors could not ‘strip down’ junior liens. But the 11th Circuit went a different way. It applied the U.S. Supreme Court case of Dewsnup v. Timm which concluded that a Chapter 7 debtor could “strip down” a partially unsecured lien even though the debtor could not ‘strip it off’ altogether. The result was essentially the same – the debtor got out of paying the entire value of the lien.

Boom goes the dynamite!

Epilogue: Yes, There is Hope

Okay, was the 11th Circuit really persuaded by the distinction between a “stripping down” and “stripping off?” Probably not. But for years consumer groups had called for a vehicle by which debtors could strip liens in Chapter 7 and escape crushing debt without losing their house and home. Many of the Circuits criticized Dewsnup too because it seemed to declare once and for all that only Chapter 13 debtors could employ lien strips then stopped just short of overturning the practice altogether. 

So is this an unconditional victory for Chapter 7 debtors? Not exactly. The rest of the Federal Circuits, including the 7th Circuit, have recently reaffirmed their allegiance to Dewsnup and the narrow reading of the practice of lien stripping. But the circuit split means the Supreme Court may yet have to address the issue in its next term. But until then, all bets are once again off.

Want to learn more about qualifying for a lien strip? Read about it on our website and feel free to reach us at 630-378-2200 or at mhedayat@mha-law.com.

Alan J. Mandel Law Offices had been representing a Debtor in Possession (DIP) in Chapter 11 and sought final payment for Attorneys’ fees as well as expenses. Ultimately Mandel received only part of the requested compensation due to its overly broad reading of the Bankruptcy Code and the resulting attempt to fit a square peg into a round hole.
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Officially “No” … Unofficially “Yes”
Multiut, an Illinois Corporation, filed a Chapter 11 Petition on May 14, 2009 due largely to litigation between it and Dynegy Marketing and Trade. Mandel, who was eventually retained with Court approval, served as outside general counsel to Multiut during the litigation and even acted as Bankruptcy Counsel. But Mandel was not hired by Multuit until January 22, 2010 and was not “officially” retained until February 1, 2010; at which point it sought payment for fees and costs retroactive to the Petition Date via a legal technique known as nunc pro tunc (Latin for ‘now, for then’).

But as a creditor of Multuit’s with a stake in the outcome of its Chapter 11 reorganization, Dynegy fought back by voicing its displeasure at the apparent conflict of interest between Mandel the litigator and Mandel the bankruptcy attorney. Due in part to those objections, Multiut’s Plan of Reorganization failed and the case was converted to a Chapter 7 liquidation – ensuring that almost nobody got anything.

It’s the Latin, Stupid
In its ruling, the Court noted that under Sec.330 of the Bankruptcy Code, as well as case law on the subject from the 7th Circuit, an Attorney not retained in accordance with the Code is ineligible for compensation regardless of whether its work benefited the bankruptcy estate. In other words, the Bankruptcy Court would not go out of its way to avoid stiffing a lawyer: if an Attorney failed to plan it looked like they might as well have planned to fail. As for the nunc pro tunc argument, the Mandel Court noted that other courts had considered it and concluded that nunc pro tunc retention ought to be permitted only in “extraordinary circumstances,” whatever that meant. That said, the Court granted Mandel compensation in this case. So all’s well that ends well, right? Well not exactly …

Game of Counsels
The decision to grant some fees and costs to Mandel was not the end of the inquiry. After looking into the facts, the Court noted that many of the services recorded by Mandel were compensable only under Sec. 327(a) of the Bankruptcy Code: not Sec. 327(e). The latter section, which was the basis of the Mandel Application for Compensation, was narrower in scope and did not include the same activities.

So, did Mandel go too far? To the Court there was no question in this case. “General Chapter 11 Administrative” services were not within the purview of 327(e), which explicitly states that services must be for a specific purpose other than the Bankruptcy case itself. The kinds of “day to day activities” recorded by Mandel were clearly connected with the Bankruptcy case and thus not payable under 327(e). What’s more, the Debtor had already obtained 327(a) Counsel to handle the Bankruptcy case, so Mandel should have known it could not take on “day to day” activities and expect to be paid.

A Man’s Got to Know His Limitations
The upshot of the Mandel decision is simple: respect the Bankruptcy Code or face the consequences. Get compensated the right way, or expect to go back to the office at least partially empty-handed.
If you enjoyed this post feel free to contact M. Hedayat & Associates today. The firm has been expertly handling Bankruptcy cases of all kinds for nearly twenty years.
IN RE MULTIUT CORPORATION, Bankr. Court, ND Illinois 2012

While Bernie Madoff serves out his 150-year sentence, the fight over how to satisfy his creditors rages on. Now, an infamous 2011 ruling by the Supreme Court limiting the power of bankruptcy courts may have a bizarre and unintended affect: many of the investors that recovered money when Madoff was first exposed may lose it (again) because the Bankruptcy Court may have overstepped its bounds by giving it to them in the first place. Confused yet?
Collateral Damage
Here’s the problem. Irving Picard, Trustee in the Madoff Bankruptcy, is now attempting to recoup funds lost to Madoff’s Ponzi schemes by means of fraudulent transfer suits. A Ponzi scheme is an illegal investment scheme that involves investors getting returns on their investment not based on profits but by subsequent investors. The enticement for new investors is usually short-term investments that offer an unnaturally high rate of return. Because it is not based on actual profits, it is destined for collapse. Madoff, on his way to becoming the largest financial fraud in U.S. history, created a Ponzi scheme that defrauded investors of billions of dollars. A fraudulent transfer suit is when in an effort to mislead creditors, the debtor transfers assets he knows he does not have. This is a fraudulent conveyance. The “suit” part is when a creditor, or a Bankruptcy Trustee, sues the recipients of the fraudulent conveyances demanding the funds back. In the case of Madoff and his Bankruptcy Trustee Picard, Picard is trying to augment the bankruptcy estate by suing people who originally invested in Madoff’s Ponzi scheme and received a “return” on that investment from Madoff. Picard wants the investors’ funds back, despite it being Madoff who created the fraudulent scheme in the first place. So if you are one of those investors, what do you do?

On June 12, defendants in the fraudulent transfer proceedings filed a brief arguing that the bankruptcy judge cannot rule or recommend rulings on fraudulent transfer suits by Picard, the liquidator of Madoff’s brokerage. The defendants, many of whom after receiving original returns from Madoff invested again only to eventually see that investment vanish, argued that attempts to “augment” a bankrupt estate are based on common law and must be heard in district court. In May, US District Judge Jed S. Rakoff ruled bankruptcy courts could not issue final rulings on claims of fraudulent transfers or unjust enrichment, but they could make recommendations or reports to federal district judges, citing the recent Supreme Court decision Stern v. Marshall. The defendants argued such recommendations by bankruptcy judges are not allowed, as Congress has “considered and rejected bankruptcy judges serving as magistrates, who would issues reports and recommendations.”
TMZ Meets the Supreme Court
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Oddly enough, the fate of the fraudulent transfer suits and the collateral damage of Bernie Madoff rest with the fortunes of an ill-fated and questionably famous starlet, whose case ended at the doorstep of the supreme law of the land. The case of Stern v. Marshall, decided June 23, 2011, involved the estate of the late Anna Nicole Smith and her late husband. Her husband’s estate, worth a modest 1.6 billion, resulted in a protracted legal battle. The case, which outlived many of the original players, was in 2006 compared to “a Harlequin romance novel. It’s part Knots Landing, and part Shakespearean filial betrayal…the protagonists, shall we say, are not without flaws.” Ouch.

The Supreme Court’s ruling issued a stern warning to Congress not to leave judicial duties to anyone other than the judicial branch. With Chief Justice John Roberts writing the majority opinion, the court held unanimously that under a 1984 law, Congress had given the bankruptcy court the power to issue a final ruling in the debtor’s claim, but ruled 5-4 that Congress violated Article III by creating such power in the bankruptcy courts, thus shutting out Smith. The infamous, flaw-filled celebrity diva went home empty-handed. Tragic.
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Roberts argued Congress had grossly overstepped its authority by creating such power in the bankruptcy courts. The ruling states bankruptcy judges cannot constitutionally decide debtor’s claims that are based solely on state law. Bankruptcy judges can still decide cases that are based on federal law or related to a federal regulatory scheme. According to the Court, issuing such decisions from a non-Article III court threatens the entire separation of powers, “…Article III would be transformed from the guardian of individual liberty and separation of powers we have long recognized into mere wishful thinking.” But why do the Madoff victims care about this?
Fight (in Bankruptcy Court) or Flight (out of Bankruptcy Court)
In response, hundreds of former Madoff investors, many of whom were unaware of Madoff’s unapologetic fraud, and facing fraudulent transfer suits in bankruptcy court, are trying to get their case before a federal judge and not a bankruptcy judge, arguing their claim is based solely on state law. Unclear in Stern v. Marshall is whether or not a bankruptcy court can issue recommendations to the relevant federal judges as Rakoff argued in May. Rakoff argued that the specialized expertise of bankruptcy court judges make them better suited to handle such claims and thus should issue recommendations to less experienced federal judges.

If you are concerned that you are a victim of a Ponzi scheme, or could be facing a fraudulent transfer suit, contact the offices of M. Hedayat & Associates. The firm has been expertly handling Bankruptcy proceedings of all kinds for nearly twenty years.

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The SEC filed a complaint. The court appointed a receiver to handle defendants’ assets for distribution among victims of the $31 million fraud. Assets included oil and gas leases. SonCo filed a claim. The parties came to terms; the court entered an agreed order that required SonCo to pay $580,000 for assignment of the leases. The wells were unproductive, because of freeze orders entered to prevent dissipation of assets; the lease operator, ALCO, had posted a $250,000 bond with the Texas Railroad Commission. The bond was, in part, from defrauded investors. SonCo was ordered to replace ALCO as operator and to obtain a bond. More than a year later, SonCo had not posted the bond or obtained Commission authorization to operate the wells, but had paid for the assignment. The judge held SonCo in contempt and ordered it to return the leases, allowing the receiver to keep $600,000 that SonCo had paid. SonCo returned the leases. The Seventh Circuit affirmed that SonCo willfully violated the order, but vacated the sanction. The judge on remand may: reimpose the sanction, upon demonstrating that it is a compensatory remedy for civil contempt; impose a different, or no sanction; or proceed under rules governing criminal contempt.
Download the Opinion in .pdf format.

Justia.com Opinion Summary

Defendant owned companies forced into Chapter 11 bankruptcy, but was not a debtor in the proceedings. The plan was confirmed and prohibited suits against the bankruptcy professionals and certain litigation against pre-bankruptcy creditors. Years later defendant sued plaintiff, pre-judgment creditors, and the bankruptcy professionals in an Indiana state court, based on Indiana law. The creditors removed the suit to bankruptcy court (28 U.S.C. 1452(a)) rather than asking the bankruptcy judge to enforce his order. The statute authorizes removal of any claim of which that court would have jurisdiction under 28 U.S.C. 1334, which confers on the district courts original jurisdiction of all civil proceedings arising under the Bankruptcy Code, or “arising in or related to cases under” the Code. The bankruptcy judge determined that the suit against the bankruptcy professionals was barred. Defendant filed an amended complaint eliminating all defendants except plaintiff and stating that the only claims arose from alleged violations of confidentiality agreements. The bankruptcy judge ruled that, as amended, the complaint was unrelated to the bankruptcy and ordered the suit remanded to the state court. The district judge affirmed. The Seventh Circuit concluded that the dismissal was not subject to review.

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