OpinionsThe United States Trustee filed a complaint to deny the debtor’s discharge (1) based on an unjustified failure to keep records from which the debtor’s financial condition or business transactions could be ascertained under § 727(a)(3); (2) based on false oaths or accounts in the debtor’s bankruptcy case under § 727(a)(4)(A); and (3) based on the debtor’s failure to satisfactorily explain a loss of assets under § 727(a)(5). The debtor’s receipt and disposition of loan proceeds from the Small Business Administration’s Paycheck Protection Program, and the debtor’s statements made under oath on her bankruptcy schedules, on her Statement of Financial Affairs, and at the meeting of creditors formed the basis for the claims. The court denied the debtor’s motion to dismiss for failure to state a claim upon which relief could be granted. The complaint alleged that the debtor received a PPP loan of $20,833 for the operation of a sole proprietorship in the “Nursing Care Facilities” industry. According to the complaint, within five days after receiving the loan proceeds, the debtor withdrew $20,000 to an account she did not own. The debtor testified at the § 341 meeting of creditors that the loan was used for her nonfiling spouse’s trucking business. She provided a receipt showing the trucking business paid a $9,900 cash deposit towards the purchase of a truck but did not provide any other receipts or invoices. The complaint plausibly alleged that the debtor failed to keep records regarding the disposition of the PPP loan proceeds or records substantiating the use of the PPP loan proceeds. It also plausibly alleged that the debtor only offered vague, indefinite, and uncorroborated statements about the use of the PPP loan proceeds. The complaint also plausibly alleged that the debtor (1) omitted income from a business from her Statement of Financial Affairs in light of business bank statements showing deposits of at least $45,052 in 2021; (2) falsely stated that she received the PPP loan on behalf of an LLC; (3) failed to disclose a sole proprietorship; and (4) failed to disclose that she had given a financial statement about her business since the complaint alleged that the PPP loan forgiveness application required the debtor to make financial statements about her business. In re Archdiocese of Milwaukee, Case No. 11-20059 (September 2024) -- Chief Judge G.M. Halfenger The State of Wisconsin Department of Justice moved to reopen this chapter 11 case, which has been closed since 2016 (following plan confirmation and full administration of the bankruptcy estate), to request access to hard copies of approximately 1,500 proofs of claim and related documents filed and maintained under seal pursuant to a 2011 protective order. The court denied the State's motion to reopen the case (and struck, as improperly filed, the State's motion for access to sealed records) because the State failed to show cause for reopening the case as required by §350(b) of the Bankruptcy Code: the State offered no substantial bankruptcy-related purpose for seeking access to the documents at issue (and several plainly non-bankruptcy-related purposes), and the court concluded that, even if it had, the relevant factors set forth in governing caselaw weigh decisively against reopening the case, including that the State is not entitled to relief from the protective order because there is no applicable legal authority for granting it such relief. In the alternative, the court denied the State's request for access to the sealed filings based on the lack of legal authority for the requested relief and because disclosure of the documents to persons other than those authorized by the protective order, which includes neither the State nor its employees, is not warranted under the circumstances. In re Lang, Case No. 23-20782 (September 2024) -- Judge R.M. Blise After reopening his chapter 7 case, the debtor moved to amend his schedules to disclose and exempt proceeds from a personal injury claim. As a matter of law, the Court determined that a debtor could amend his schedules after a case is reopened only if the debtor demonstrates that the time should be enlarged under Bankruptcy Rule 9006(b), which requires a showing of excusable neglect. The Court considered the factors set forth in Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 385 (1993) – (1) the danger of prejudice to the opposing party; (2) the length of the delay and its potential impact on the proceedings; (3) the reason for the delay, including whether the delay was within the reasonable control of the movant; and (4) whether the movant acted in good faith. The Court found that two factors (prejudice against non-moving party and debtor’s good faith) weighed in favor of excusable neglect, and two factors (length of delay and reason for delay) weighed against. The Court determined that the lack of prejudice should be given great weight under the circumstances of the case. The Court concluded that the debtor had demonstrated excusable neglect and could amend his schedules to disclose and exempt the claim. Huebner v Humphrey (In re Humphrey), Case No. 23-22884, Adv. No. 23-2112 (September 2024) -- Judge R.M. Blise The plaintiff sought a determination that the debtor-defendant owed a nondischargeable debt for alleged misrepresentations in connection with the sale of residential real estate. The plaintiff alleged the debtor misrepresented the condition of the house by failing to disclose defects related to water intrusion in the living room, basement, and kitchen. After trial, the Court concluded that the plaintiff had not sufficiently proven the required elements for nondischargeability under 11 U.S.C. § 523(a)(2)(A) for debt related to any misrepresentation related to water intrusion in the living room and basement. The Court also concluded that the debtor owed a debt to the buyer for a misrepresentation on the pre-sale Real Estate Condition Report (RECR) related to water problems in the kitchen ceiling and that the debt was nondischargeable under § 523(a)(2)(A). In re Thomas Orthodontics, SC, Case No. 23-25432 (September 2024) -- Judge R.M. Blise The only creditor in an impaired class did not return a ballot accepting or rejecting the debtors’ chapter 11 plan by the deadline, and the debtors requested that the Court deem the creditor to have accepted the plan by its silence. After the conclusion of an evidentiary hearing on plan confirmation, the debtors contacted the non-voting creditor and requested that it return a ballot. The creditor returned a ballot accepting the plan, and the debtors filed a motion to deem the creditor’s late ballot timely. The Court denied both motions. The Court held that the “excusable neglect” standard in Bankruptcy Rule 9006(b)(1) should be applied when a request to extend the deadline to submit a ballot is made after expiration of the original deadline. The Court found that the factors set forth in Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 385 (1993) – (1) the danger of prejudice to the opposing party; (2) the length of the delay and its potential impact on the proceedings; (3) the reason for the delay, including whether the delay was within the reasonable control of the movant; and (4) whether the movant acted in good faith – weighed against a finding of excusable neglect. In addition, the Court followed the majority view and concluded that an impaired class cannot accept a chapter 11 plan by silence. Because an impaired class of claims did not accept the plan, the plan could be confirmed only under § 1191(b). In re Goff, No. 23-21549 (Bankr. E.D. Wis. Sept. 24, 2024) (September 2024) -- Judge K.M. Perhach The Chapter 7 trustee identified an asset that was potentially available for creditors, the interest of one of the debtors in a self-settled spendthrift trust. The debtors filed a motion to convert the case to Chapter 13 and the court granted the motion over the Chapter 7 trustee’s objection. After the conversion of the case, the court awarded the former Chapter 7 trustee reasonable compensation for “actual, necessary services” under 11 U.S.C. § 330(a)(1) for the services he performed in the Chapter 7 case but disallowed compensation for services that were not reasonably likely to benefit the debtors’ estate or necessary to the administration of the case as provided in § 330(a)(4)(A). In re Goff, No. 23-21549 (Bankr. E.D. Wis. Sept. 10, 2024) (September 2024) -- Judge K.M. Perhach The court determined that a debtor’s interest in a self-settled spendthrift trust was property of the debtor’s bankruptcy estate. Well before filing his bankruptcy case, the debtor created a trust that would pay him a percentage of the net fair market value of the trust assets each year for his lifetime. He appointed a relative as the trustee. The trust provided that on the debtor’s death, the trustee would distribute the trust principal to a charity. It contained a “spendthrift provision” restraining the transfer of the debtor’s interest. The court concluded that the spendthrift provision in this self-settled trust was not enforceable under Michigan law. Section 541(c)(2) of the Bankruptcy Code did not exclude the debtor’s interest in the trust from the bankruptcy estate. Accordingly, the best-interests-of-creditors test of § 1325(a)(4) required the Chapter 13 debtors to pay holders of allowed unsecured claims as much as they would receive if the asset were liquidated under Chapter 7. The court did not have sufficient evidence to determine the value of the debtor’s interest that was included as property of the estate, so the court scheduled a status conference to determine whether to set an evidentiary hearing to determine the value of the 76-year-old debtor’s interest in the trust or how to otherwise establish an actuarially derived valuation of the interest in future trust disbursements. In re Kumm, Case No. 23-22866 (August 2024) -- Chief Judge G.M. Halfenger The chapter 7 debtor moved to reopen his bankruptcy case to pursue an adversary proceeding seeking a determination that the debt he owed to the Department of Education was not excluded from discharge by section 523(a)(8). The court initially denied the motion, determining that the debtor had not made a showing of why reopening the case was necessary to file the adversary proceeding to request a determination of dischargeability. The debtor filed a “renewed” motion to reopen, asserting that the Department of Education was requiring the debtor to reopen his case before the Department would conduct a review of his federal student loans under the Department’s internal procedures. The court construed the “renewed” motion as a motion for reconsideration and denied that motion, determining that there were no grounds to grant relief under Federal Rule of Civil Procedure 60(b) from the final order denying the motion to reopen, and concluding, among other things, that the court has jurisdiction over a section 523(a)(8) adversary proceeding regardless of whether the underlying bankruptcy case is open or closed. Although denying the motion for reconsideration, the court reopened the case sua sponte, ruling that Federal Rule of Bankruptcy Procedure 4007(b) authorizes (though does not require) reopening to file a complaint requesting a declaration of dischargeability and the Department’s refusal to evaluate the debtor’s student loan debt under its internal procedures unless the bankruptcy case is open adequately amounted to cause under section 350(b) to reopen. In addition to reopening the case, the court ordered as follows: "For all cases and adversary proceedings assigned to the author of this decision and order, the Clerk is directed to reopen any closed bankruptcy case of a debtor who files a complaint requesting a judgment declaring a student loan debt to be dischargeable and reclose the case after entry of judgment or a final order in the resulting adversary proceeding. The Clerk is directed not to await a motion to reopen. In such instances, the court will reopen all the cases sua sponte based on the reasoning of this decision and order." Uecker v. Benishek (In re Benishek), Case No. 23-24120, Adv. No. 23-2142 (Bankr. E.D. Wis. Aug. 2, 2024) (August 2024) -- Judge K.M. Perhach A creditor filed an adversary complaint seeking a determination that a state court judgment was non-dischargeable. The complaint was filed one day after the deadline established in Fed. R. Bankr. P. 4007(c). The court granted the defendant’s motion to dismiss the adversary proceeding. The complaint was untimely, the plaintiff did not move to extend the time to file the complaint before the deadline expired as required by Fed. R. Bankr. P. 4007(c), and Fed. R. Bankr. P. 9006 precluded the court from extending the deadline stated in Fed. R. Bankr. P. 4007(c) based upon “excusable neglect.” Souran v. Motel 6 et al., Case No. 21-25247, Adv. No. 23-2082 (Bankr. E.D. Wis. July 26, 2024) (July 2024) -- Judge K.M. Perhach A pro se debtor asserted claims against Kia America, Inc. based on the theft of a Kia vehicle from a motel parking lot. The court dismissed the debtor’s negligence claim based on lack of subject matter jurisdiction. The court did not have “related to” jurisdiction over the negligence claim. The claim was not property of the estate under 11 U.S.C. § 348(f) because it arose between the date the debtor filed his Chapter 13 bankruptcy case and the date he converted the case to Chapter 7. It could not have had any effect on the estate because any recovery on the claim would not be available to satisfy the claims of creditors in the bankruptcy case. The court also dismissed the debtor’s claim for violation of the automatic stay for failure to state a claim upon which relief could be granted. The only facts pled in support of that claim were that an unknown third party stole a vehicle from a parking lot. The debtor failed to plead sufficient facts that permitted the court to draw the reasonable inference that the manufacturer of the vehicle violated the automatic stay when an unknown third party stole the vehicle. |