OpinionsA 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. 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 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. Crescent Electric Supply Company v. Coates (In re Coates), Ch. 7 Case No. 19-29067-kmp, Adv. No. 19-2211 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiff in this adversary proceeding alleged that the debtor-defendant breached his fiduciary duties under Wisconsin’s theft-by-contractor statute and the resulting debt was nondischargeable under 11 U.S.C. § 523(a)(4). The Court denied the plaintiff’s motion for summary judgment. The plaintiff, a supplier of electrical materials and fixtures, proved that the sums paid by project owners constituted a trust fund and that the debtor-defendant was a fiduciary of the trust. However, fact issues remained as to the debtor-defendant’s state of mind. Fact issues also remained as to the plaintiff’s damages, including whether the debtor-defendant paid the plaintiff “proportionally” as required by the theft-by-contractor statute and whether the plaintiff was entitled to treble damages under the statute. Faust v. Coates (In re Coates), Ch. 7 Case No. 19-29067-kmp, Adv. No. 19-2210 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiffs in this adversary proceeding were former employees of Coates Electric, LLC, a defunct electrical contractor solely owned by the debtor-defendant. They sought a determination that their unpaid wages were nondischargeable under 11 U.S.C. § 523(a)(4) due to the debtor’s embezzlement of funds from the LLC. The Court denied the plaintiffs’ motion for summary judgment. The plaintiffs failed to establish that the debtor personally owed them a debt for civil theft. There were genuine disputes of material fact as to whether the LLC fraudulently transferred money to the debtor or for his benefit and whether the debtor acted with fraudulent intent in causing the LLC to make the transfers, as § 523(a)(4) requires. Fischer v. Millis (In re Millis), Ch. 7 Case No. 20-21271-kmp, Adv. No. 20-2078, 2021 WL 1346533, 2021 Bankr. LEXIS 870 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiff, a commercial landlord, sought a determination that the debtor-defendant, a former tenant, owed him a nondischargeable debt based on her failure to turn over funds received from subtenants and damage to and theft of appliances. The debtor-defendant moved to dismiss the claims under 11 U.S.C. § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6) for failure to state a claim upon which relief could be granted. The Court dismissed the plaintiff’s claim that the debtor obtained the funds from the subtenants through larceny. Larceny only occurs if the debtor has wrongfully taken property from its owner with fraudulent intent, and the plaintiff never owned the funds. The Court denied the motion to dismiss the plaintiff’s other claims. Andringa v. Acker (In re Acker), Ch. 7 Case No. 19-21349-kmp, Adv. No. 19-2089, 2021 WL 1346575, 2021 Bankr. LEXIS 848 (Bankr. E.D. Wis. Mar. 31, 2021) (March 2021) -- Judge K.M. Perhach The plaintiffs sought a determination that the debtors owed them a debt in the amount of their investment in a restaurant chain and that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A), § 523(a)(2)(B), and/or § 523(a)(4). After a trial, the Court found that the plaintiffs did not meet their burden of proving that their investment was nondischargeable under any of these provisions. Moreover, the plaintiffs presented no evidence that the joint debtor was involved in the restaurant offering at all, so the Court was easily able to dispose of the question of whether the plaintiffs were entitled to a nondischargeable judgment against her. In re Ganske, No. 20-21042-kmp, 2021 WL 1396563, 2021 Bankr. LEXIS 574 (Bankr. E.D. Wis. Mar. 5, 2021) (March 2021) -- Judge K.M. Perhach The Chapter 11 debtors sought to assume a “Handling and Storage Lease Agreement” under which a barge terminal on the Illinois River would furnish equipment, personnel, and facilities necessary to receive, unload, store and load out fertilizer furnished by the debtor. The Court determined that the debtor failed to pay accounts receivable within the time established by the parties’ course of performance. This was a material breach excusing the barge terminal from performance. Because the agreement was terminated before the bankruptcy case was filed, there was no agreement for the debtors to assume. The Court denied the motion. |