Commercial Banking, Collections, and Bankruptcy

Dist. Ct. did not err in denying defendant’s motion to compel arbitration of plaintiff’s class action lawsuit alleging that defendant sold plaintiff worthless credit score that plaintiff could not use to obtain lower loan rate when purchasing car in violation of Illinois Consumer Fraud and Deceptive Business Practices Act. While defendant argued that instant lawsuit was subject of arbitration clause that was in scrollable box that contained Service Agreement on defendant’s website, where plaintiff purchased his credit score, Ct. found that arbitration clause was not part of instant contract between plaintiff and defendant, where: (1) arbitration clause was buried in Service Agreement; (2) instant process to purchase credit score did not require that plaintiff assent to terms of Service Agreement, when clicking “I accept” button; and (3) defendant’s website contained no clear statement that plaintiff’s purchase of credit score was subject to any terms or conditions of sale. Moreover, defendant actively mislead plaintiff by failing to inform him that clicking box that authorized defendant to obtain his personal information also contained message about assenting to terms in Service Agreement. Fact that arbitration clause was contained in hidden portion of Service Agreement on website did not require different result.

Dist. Ct. did not err in finding for plaintiff in bench trial on claim that defendant breached contract to purchase crop-insurance business by failing to pay plaintiff $25.4 million purchase price and then, after reselling said business to third-party for $40.5 million, fraudulently transferred sale proceeds to entities controlled by defendant so as to prevent defendant from paying plaintiff original purchase price for said business. Defendant’s justification for transfer of sale proceeds to controlled entities (i.e., payments for non-competition agreements and reinsurance treaty) either lacked legitimate business purpose, where controlled entities did not pose competitive threat to third-party or (with respect to reinsurance treaty) was overpriced. Moreover, Indiana Uniform Fraudulent Transfer Act prevented defendant from transferring sale proceeds to controlled entities, where plaintiff had open claim against defendant, defendant was technically insolvent at time of transfer, and defendant received only $16.5 million of $40.5 sale proceeds that prevented it from satisfying its debt to plaintiff. Also, Dist. Ct. could render controlled entities and individual family members who controlled said entities liable for instant judgment under Indiana statute and alter-ego theory, where record showed that: (1) corporate formalities among controlled entities were cosmetic and ignored; (2) assets among entities were commingled; and (3) one family member was principal agent of all relevant entities and was architect of instant re-sale of business to third-party.

In Chapter 7 proceeding, Bankruptcy Ct. did not err in granting creditor/trustee of residential mortgage-back securities trust’s motion to modify automatic stay and in denying first count of debtor’s adversary complaint alleging that trustee had no interest in debtor’s defaulted home mortgage note due to trustee’s failure to comply with terms of Pooling and Service Agreement (PSA) that applied to instant private trust. Under New York law, debtor lacked standing to challenge any alleged violation of PSA, since: (1) debtor was not third-party beneficiary of instant private trust; and (2) only certificate-holders of instant trust are intended beneficiaries that had standing to raise any PSA violations. As such, Bankruptcy Ct. could properly lift automatic stay and allow trustee to proceed on pending mortgage foreclosure action in state court. Bankruptcy Ct. erred, though, in dismissing second count of adversary proceeding that was not based on alleged PSA violations, which raised state-court claims alleging that creditor could not foreclose on mortgage. On remand, Bankruptcy Ct. may wish to abstain from considering said claims and allow state court to consider them in pending state-court foreclosure action.

In Chapter 7 proceeding filed by debtor-lawyer, Bankruptcy Ct. did not err in finding under 11 USC section 523(a)(4) that malpractice judgment against debtor was not dischargeable, where said judgment arose out of debtor’s “defalcation” while acting in fiduciary capacity when representing 90-year-old client in real estate transaction that resulted in client selling his home for substantially less than market value without debtor retaining life estate in said home, which resulted in client being evicted from home. Record showed that: (1) debtor could not communicate directly with Polish-speaking client, and that debtor communicated with client via translations made by opposing counsel; and (2) client obtained malpractice judgment, after state court found that debtor’s reliance on translations made by opposing counsel to communicate with his client was per se unreasonable. Moreover, Bankruptcy Ct. could properly look to debtor’s violation of at least three rules of professional responsibility to find that debtor’s substandard representation of client satisfied level of recklessness that in turn was sufficient to establish instant defalcation under section 523(a)(4).

In Chapter 11 bankruptcy proceeding in which creditors’ Committee sought return of value of two leases that debtor surrendered back to leasing creditor 52 days prior to debtor filing for bankruptcy, Bankruptcy Judge erred in denying Committee’s request based upon finding that no “transfer” had occurred under 11 USC section 547(b). Debtor’s act of surrendering profitable leases back to leasing creditor could potentially be viewed as improper preferential transfer of assets, where record showed that leases were worth $777,000 to debtor, and thus would have had significant value to other creditors of bankruptcy estate. As such, instant surrender of leases was potentially avoidable, and remand was required for determination of value of surrender of leases, as well as determination of amount debtor had received for said surrender.  At remand, creditor receiving surrendered leases may also present any defenses to Committee’s claims to value of said leases.