Commercial Banking, Collections, and Bankruptcy

Ct. of Appeals denied debtor’s motion to stay mandate pending resolution of debtor’s petition for writ of certiorari. Ct. concluded that stay was not warranted because: (1) it doubted whether four Supreme Court Justices would vote to grant debtor’s certiorari petition that challenged Ct. of Appeal’s finding that debtor lacked prudential standing to assert that trust that held mortgage note on debtor’s home violated terms of Pooling and Service Agreement; and (2) there was no conflict among circuits with respect to instant decision by Ct. of Appeals. Fact that debtor claimed that she would incur simultaneous legal expenses while litigating in Bankruptcy Ct. and Supreme Ct. issue regarding whether certain assignments of instant mortgage note were void did not require different result.

Dist. Ct. did not err in granting defendant-bank’s motion for summary judgment in review of Bankruptcy Judge's order in adversary proceeding in which plaintiff-Trustee attempted to avoid bank’s mortgage lien on debtors’ property, where such property was subject to land contract in which debtors sold property to third-party with understanding that debtors would obtain mortgage in their own name, and that buyers of said property would pay off mortgage at future date. Trustee argued that: (1) under Wisc. law instant mortgage attached lien to nothing, since debtors’ interest in instant land contract, which consisted of future payments from buyers, was only personal property that could not be subject to any real estate mortgage; and (2) payments under said contract accordingly would be available to unsecured creditors rather than bank. Ct. of Appeals, though, found that: (1) debtors’ interest as vendors under land contract was sufficient to secure bank’s mortgage loan as matter of law; and (2) while bank did not perfect its security interest under UCC procedures, it did properly record instant mortgage in county land records, which was sufficient to preclude Trustee from using strong-armed powers to avoid bank’s lien on debtors’ interest under land contact.

Dist. Ct. erred in granting defendants’ motion for summary judgment in plaintiff-debtor’s action under section 1692g(a)(2) of Fair Debt Collective Practice Act, alleging that defendants improperly failed to disclose identity of actual creditor in either its initial communication with plaintiff or in written notice sent within next five days. While Dist. Ct. properly found that language in instant dunning letter was ambiguous as to identify of current creditor, it erred in finding that any ambiguity was immaterial, since failure to clearly identify current creditor constitutes violation of section 1692g(a)(2) without need of plaintiff to prove additional materiality element or having to present extrinsic evidence of consumer confusion.

Bankruptcy Ct. did not err in rejecting creditors’ claim that debtor was not entitled to discharge of debts generated when creditors loaned money to debtor upon debtor’s representations that money would be repaid once debtor sold condominium units that had been converted from apartments, even though creditors claimed that debtor made fraudulent misrepresentations regarding his intention to repay said loans and subsequently transferred units to different entities that had no legal obligation to them. While Bankruptcy Code does not discharge debts for money obtained by false premises, relevant Ill. statute of limitations for fraud claims is five years, and record showed that limitations period had expired by time creditors had filed instant adversary action. Ct., though, held out possibility that Dist. Ct. could deny discharge of debt of one creditor based on argument that debtor committed fraud when he subsequently transferred units within limitations period to other entities in effort to keep proceeds out of hands of creditor, but could only so hold if U.S. Supreme Ct. ultimately finds in pending case in that Court that there can be fraud claim without allegation that individual made overt fraudulent statement to victim.

Dist. Ct. did not err in granting defendant’s (manufacturer of lubricant) motion for summary judgment in plaintiff’s fraud/breach of contract claim alleging that distributor of defendant’s lubricant improperly substituted inferior additive to lubricant without knowledge of plaintiff before selling said lubricant to plaintiff. Record showed that distributor was not agent of defendant so as to render it liable for distributor’s conduct, where: (1) at time of improper substitution defendant had severed ties with distributor; and (2) plaintiff failed to present any evidence that defendant had told plaintiff that distributor was anything other than distributor of its product so as to make distributor its agent. Also, plaintiff did not present evidence establishing that it had special relationship with defendant, so as to require that defendant inform plaintiff that distributor was supplying inferior additive, where defendant had no contractual relationship with plaintiff.

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).