Commercial Banking, Collections, and Bankruptcy

Dist. Ct. did not err in denying creditor-law firm’s objection to distribution of assets of receivership, even though creditor argued that its lien on estate property (i.e., settlement proceeds of medical-malpractice claim) that arose out of its claim to legal fees owed to it by debtors entitled it to be paid in full directly from settlement proceeds, rather than sharing same with other creditors. Record showed that Dist. Ct. had previously entered stay order that prevented all creditors from proceeding against debtors, and that although creditor had received limited lifting of said order in order to obtain judgment against debtors based on amount of fees owed to it, creditor obtained lien on settlement proceeds in violation of said stay order. As such, Dist. Ct. could properly ignore instant lien and make pro rata distribution of receivership assets. Ct. also imposed Rule 38 sanctions against creditor for filing frivolous appeal.

Dist. Ct. erred in dismissing for failure to state cause of action plaintiff’s breach of contract action alleging that defendant breached its mortgage agreement with him by using payout from his homeowner’s insurance policy to pay down his loan rather than use payout to repair plaintiff’s damaged home that was subject to said mortgage. While Dist. Ct. found that plaintiff was barred from pursuing his contract claim because he had materially defaulted on his own contractual obligations by missing several mortgage payments prior to defendant’s purported breach, Ct. of Appeals found that plaintiff had viable contract claim, where mortgage required that defendant apply insurance proceeds to restoration of home if it was economically feasible to do so, and defendant never indicated that repairing plaintiff’s home was economically infeasible. Fact that defendant had missed certain mortgage payments did not require different result since remedy provision in mortgage agreement for missed payments did not include application of insurance proceeds to loan balance. Moreover, result is same even if defendant could have accelerated plaintiff’s loan in response to missed mortgage payments.

Dist. Ct. did not err in granting defendants’ motion for summary judgment in plaintiff-bank’s action seeking to foreclose on mortgage where defendants had defaulted on underlying note. Record showed that plaintiff had previously filed action on two occasions against defendants to recover on instant note and had voluntarily dismissed both actions, and thus plaintiff was barred from filing instant action where it could not enforce underlying promissory note under Illinois “single re-filing” rule as set forth in 735 ILCS 5/13-217. Ct. found that plaintiff had waived any argument that Wisconsin law applied to instant action where it had failed to raise said argument in Dist. Ct. Moreover, Ct. held that plaintiff could not get around single re-filing rule by arguing that instant action was different from prior actions seeking to enforce promissory note.

Dist. Ct. erred in reversing Bankruptcy Ct. determination that defendant violated automatic stay provisions by continuing to withhold Medicaid reimbursements from plaintiff to satisfy plaintiff’s obligation to pay Hospital Assessment Fee after plaintiff had filed Chapter 11 bankruptcy petition. Said fee was pre-petition claim under applicable “conduct test,” where calculation of said fee had taken place prior to filing of bankruptcy petition, and thus defendant’s efforts to collect on said fee were subject to automatic stay provisions of Bankruptcy Code. Ct. rejected defendant’s claim that relevant conduct was plaintiff-hospital’s operations that occurred after date of bankruptcy petition.

Dist. Ct. did not err in granting defendant-Michael Keaton’s motion for summary judgment in plaintiff’s action alleging that Keaton breached terms of contract calling for him to be lead actor and director of plaintiff’s film (The Merry Gentleman), where plaintiff accused Keaton of failing to either timely produce certain preliminary versions of film, cooperate with plaintiff, and/or adequately promote said film. Dist. Ct. could properly find that plaintiff could not obtain under reliance damages theory entire $5.5 million that plaintiff spent on film, where: (1) plaintiff could not show any causal link between plaintiff’s claim for reliance damages and any breach of contract by Keaton; and (2) record showed that Keaton had substantially performed on contract by acting in movie and producing movie that had received certain critical acclaim.

Record failed to support defendant’s counterclaim seeking purely economic damages under theory of negligent misrepresentation arising out of plaintiff’s delivery of wood products purchased by defendant that did not meet defendant’s specifications, which, according to defendant, required it to cancel orders of its products made from such wood. While Dist. Ct. awarded defendant more than $2.7 million on theory that instant non-conforming goods caused complete destruction of defendant’s business, under Indiana law buyer who has received non-conforming goods cannot seek tort remedy for negligent misrepresentation to avoid economic loss doctrine, which otherwise limits defendant’s damages to contract remedy for any purely economic loss.

Bankruptcy Ct. did not err in granting creditor’s motion under 11 USC section 707 to dismiss debtors’ bankruptcy petition, where creditor argued that after arbitrator directed debtors to pay creditor $568,568, but before debtors had filed instant bankruptcy petition, debtors spent thousands of dollars on inessential consumer goods and services rather than making effort to pay off their debts. Bankruptcy Ct. could properly dismiss instant petition “for cause” under 11 USC section 707(a), where: (1) debtors had $9,500 per month in income, yet were spending $11,000 per month on items including vacation, expensive car and private education; and (2) debtors had no excuse for their failure to use otherwise available money to pay off any part of their debt owed to instant creditor.

Dist. Ct. erred in granting defendant’s motion for summary judgment in action seeking rescission with respect to series of plaintiff’s purchases of mortgage-backed securities from defendant, where plaintiff alleged that defendant made material misrepresentations as to whether underlying mortgage loans complied with applicable underwriting guidelines. Record showed that approximately 40.8% of underlying mortgage loans had violated underwriting guidelines that materially increased credit risk of loans, and reasonable fact finder could find under course-of-dealing evidence that plaintiff’s decision-maker actually relied on guidelines-compliance representations that were reasonably expected to be included in defendant’s prospectuses when purchasing instant securities. Record also contained question of fact as to whether defendant’s representative repeatedly assured plaintiff’s decision-maker that extensive due diligence had been performed on relevant loan pools, and that said assurances did not amount to mere puffery. Dist. Ct. also erred in finding that instant rescission action was subject to Wisconsin’s 6-year limitations period applicable to contracts, since instant rescission action sought to disaffirm subject contracts and not sue upon them.

In class action that resulted in settlement that gave plaintiff-class free drink vouchers to replace vouchers that defendant-airline had unilaterally terminated, Dist. Ct. did not err in awarding class counsel $1.6 million in fees based on lodestar method of calculation, rather than on value of coupons actually redeemed. Lodestar method could be used under section 1712 of Class Action Fairness Act, even though instant settlement concerned award of coupons instead of monetary relief. Moreover, instant settlement was fair to class members, where class members essentially received all relief that it could expect to get where defendant exchanged on one-for-one basis current vouchers for expired vouchers. Fact that defendant was willing to potentially pay $3 million in fees to class counsel did not mean that class members should have held out for more relief. Ct., though, eliminated $15K award to one class representative and $15K in fees to one class counsel as sanction for failure of counsel to alert Dist. Ct. to potential conflict of interest arising out of fact that representative and counsel were co-counsel in separate lawsuit.

Dist. Ct. erred in granting defendant’s motion to dismiss plaintiff’s action alleging that defendant breached terms of plaintiff’s Federal Student Loan Master Promissory Note, when it assessed plaintiff over $4,500 in collection costs after plaintiff defaulted on her student loan, but then successfully entered into alternative repayment agreement. Dist. Ct. improperly found that instant contract claim was preempted by Higher Education Act (HEA), where federal law did not preempt or displace plaintiff’s state-law contract action that did not otherwise conflict with HEA or its associated regulations. Fact that HEA did not provide plaintiff with private cause of action did not preclude plaintiff from bringing state-law breach of contract action. Also, although HEA and its regulations impose collection costs on borrowers who default on their student loans under certain circumstances, plaintiff stated viable cause of action, where HEA regulations prohibited defendant from imposing collection costs, where plaintiff was first-time defaulter who entered into rehabilitation agreement within 60 days of notice that defendant had paid default claim of plaintiff’s lender, and where plaintiff had complied with rehabilitation agreement. Ct. rejected defendant’s argument that it retained discretion to assess collection costs whenever it wanted. (Dissent filed.)