Commercial Banking, Collections, and Bankruptcy

In a bankruptcy matter, the appellant-lender argued a district court order affirming the findings of the bankruptcy judge regarding insolvency should be reversed by arguing that the balance-sheet test was the sole legally permissible approach to defining solvency. The Seventh Circuit affirmed, finding that the lender’s argument on appeal was inconsistent with Illinois’ adoption of the Uniform Fraudulent Transfer Act, which allows for multiple ways in which a business can be insolvent, and that the lender had forfeited the argument by raising it for the first time on appeal. (JACKSON-AKIWUMI and LEE, concurring)

In action by bankruptcy Trustee seeking to avoid $25 million transfer to defendant-bank by defendant-corporation that borrowed said money from said bank to purchase stock of subsidiary corporation, where transfer was used to pay off said bridge loan, Dist. Ct. did not err in dismissing Trustee’s complaint, even though Trustee claimed that said transfer was fraudulent, where subsidiary corporation subsequently defaulted on loans made by other creditors, who subsequently filed instant involuntary bankruptcy petition. Section 546(e) of Bankruptcy Code contains safe harbor that precludes Trustee from seeking to avoid transfers made by or to financial institutions in connection with securities contract. Ct. of Appeals found that safe harbor in section 546(e) applied to instant purchase of stock of private corporation. Moreover, state law that allowed same avoidance was preempted by section 456(e).

Bankruptcy Ct. did not err in reopening bankruptcy case of debtor who sought discharge of $499,000 debt owed to creditor and to discharge lien on debtor’s interest in company. Record showed that creditor obtained $499,000 state-court judgment against debtor, who in turned filed for bankruptcy protection. Bankruptcy Ct. thereafter rejected creditor’s claim that instant debt was procured through debtor’s fraud and thus was not dischargeable. Creditor thereafter obtained state-court judgment that found that only debts secured by real property can be avoided. As such, Bankruptcy Ct. had jurisdiction to reopen debtor’s bankruptcy proceeding to address effect of second state-court action and to discharge instant debt. Also, Bankruptcy Court did not err in failing to allow creditor in renewed proceeding to contest debtor’s valuation of interest in business at below $15,000, where creditor failed to contest said valuation in original bankruptcy proceeding.

Dist. Ct. did not err in affirming Bankruptcy Ct.’s disallowance of defendant-creditor’s claim in plaintiff’s Chapter 13 bankruptcy proceeding as a discovery sanction. Record showed that bank had previously obtained state-court consent judgment against plaintiff and defendant, and that defendant had paid bank to take over as judgment creditor to bring instant claim in plaintiff’s Chapter 13 proceedings. Ct. of Appeals rejected defendant’s contention that Rooker-Feldman doctrine precluded plaintiff from objecting to defendant’s claim in bankruptcy court, since state-court had never previously resolved defendant’s claim under bankruptcy law. Ct. of Appeals also rejected defendant’s claim that res judicata and collateral estoppel precluded plaintiff from objecting to defendant’s claim in bankruptcy court proceeding: (1) state-court consent judgment is not entitled to collateral estoppel effect; and (2) while state court consent judgment has preclusive effect as to issues of existence of debt and amount of debt for purposes of res judicata doctrine, instant state-court consent judgment was not final for purposes of applying res judicata doctrine.