JORGE L. ALONSO, United States District Judge.
Before the Court are the consolidated appeals of Julia Hathaway (Case No. 15 C 8917) and Debra Comess (Case No. 15 C 8921) and the cross-appeal of Chicago Management Consulting Group, Inc., ("CMCG") from the bankruptcy court's September 3, 2015 amended memorandum of decision on entry of final judgment and motion for sanctions. (Bankr. Case No. 14-00294 Dkt. 235). CMCG has also filed motions to dismiss appellants' appeals [69]
These appeals stem from CMCG's voluntary Chapter 7 bankruptcy case. (Bankr. Am. Mem. at 2.) CMCG provided consulting services to BP America. (Id.) Hathaway and Comess, the defendants, were personal friends of CMCG's sole owner, Frank Novak. (Id.) In 1999, Novak retained Hathaway and Comess to perform work on behalf of CMCG. (Id. at 3.) Novak died by suicide in February 2012, and pursuant to his will and trust, Comess was entitled to all of Novak's property, including CMCG. (Id.) Comess retained counsel and filed the bankruptcy proceeding, in which CMCG's trustee sought: (1) to avoid alleged fraudulent transfers of CMCG's assets that Novak made to Comess and Hathaway; and (2) relief from evidence spoliation and delayed discovery responses. (Id. at 2-3.) On September 3, 2015, after trial, the bankruptcy court issued an amended memorandum and judgment in which it found that the challenged transfers to Hathaway, the challenged retainer payments to Comess, three payments on Novak's life insurance policy, and payment to the probate attorney handling Novak's estate demonstrated an actual intent to deceive creditors by clear and convincing evidence under § 548(a)(1)(B) of the Bankruptcy Code and § 5(a)(2) of the Illinois Uniform Fraudulent Transfer Act ("IUFTA"). (Id. at 10-11.) The court also found that Comess breached her duty to preserve evidence on Novak's laptop and caused the trustee to incur damages when he retained a computer expert to determine what had been deleted from the computer. (Id. at 12.) Finally, the court held that the trustee was entitled to attorney's fees and expenses he incurred pursuing delayed discovery from Comess and Hathaway. (Id. at 15.) Ultimately, the court awarded the trustee $50,276.20 against Comess
The Court sits as an appellate court for bankruptcy court proceedings. See 28 U.S.C. § 158(a)(1). We review the bankruptcy court's findings of fact for clear error and its legal conclusions de novo. See In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). "A finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." In re Herman, 737 F.3d 449, 452 (7th Cir. 2013) (citation omitted). If there are two permissible views of the facts, a court's choice between them cannot be clearly erroneous. See First Weber Grp., Inc., v. Horsfall, 738 F.3d 767, 776 (7th Cir. 2013).
"A bankruptcy court's decision to impose sanctions is reviewed for an abuse of discretion." In re Kuttner, 15 C 980, 2015 WL 3578966, at *3 (N.D. Ill. June 8, 2015) (citing In re Hancock, 192 F.3d 1083, 1085 (7th Cir. 1999)). "Unless the sanctioning court has acted contrary to the law or reached an unreasonable result," the decision will be affirmed. In re Rimsat, Ltd., 212 F.3d 1039, 1046 (7th Cir. 2000).
After each side filed their opening briefs, CMCG filed a motion to dismiss appellants' brief. In support thereof, CMCG argues that appellants violated the Federal Rules of Bankruptcy Procedure by not compiling a complete or sufficient record for the Court to make a meaningful review. (Mot. to Dismiss at 2.) Specifically, CMCG contends that appellants have failed to submit relevant trial court transcripts and exhibits and that their brief lacks a statement of facts, standard of review, jurisdictional statement, and statement of the case, as required by the bankruptcy rules. (Id. at 2-7.) CMCG asks the Court to dismiss appellants' appeals and award it attorneys' fees and costs as sanctions. (Id. at 8-9.) Rather than respond to CMCG's arguments, appellants argue that the trustee did not object to appellants' designation of record on appeal or procedural defects in their brief until he filed his motion, and then point out (as if the Court was unaware) that the trustee has requested and received several extensions to properly file his record on appeal, opening brief, and response. (Resp. at 2-3.) Without citing any authority, appellants assert that the trustee's objections are untimely and should be disregarded. (Id. at 3.)
At the outset, the Court notes that both sides sought extensions and still failed to provide the Court with a complete, consolidated record with which to conduct its review. A review of the dockets in the two cases confirms that both sides have submitted a statement of issues to be presented and designated items to be included in the record of appeal.
In their statement of issues presented, Hathaway and Comess challenge the following bankruptcy court rulings: 1) whether CMCG was insolvent at the time of the transfers at issue; 2) whether CMCG received value for those transfers; 3) whether CMCG had creditors within the meaning of the statute during the entire four-year period at issue; 4) whether sanctions were appropriate; and 5) whether finding Comess liable for spoliation was appropriate. (Appellants' Br. at 1-2.) In his response, the trustee contends that none of bankruptcy court's findings were clearly erroneous. (Trustee's Resp. at 3-4.) In their reply, the appellants clarify their position that the bankruptcy court ignored substantial evidence of solvency, improperly shifted the burden regarding transfers for value, disregarded the standards for spoliation of evidence, and imposed sanctions where there was no prejudice. (Appellants' Reply at 1.)
The appellants contend that the bankruptcy court erred when it found CMCG insolvent during the relevant time frame (2008-2012). They argue that the accountant expert who prepared the insolvency report knew it would benefit the trustee to make a finding of insolvency and assert that she only reviewed CMCG's business records of liabilities, not assets. (Appellants' Br. at 2-3.) They contend that one of the trustee's exhibits, unlike the QuickBooks entries on which the accountant relied, contradicts the expert's report and reflects that CMCG was solvent throughout the relevant time frame. (Id. at 4-6.) Citing very little and out-of-Circuit authority, appellants also argue that the expert report does not tie CMCG's financial condition to the dates of the transfers as required. (Id. at 6.) Ultimately, the appellants contend that the accountant's report did not provide an accurate depiction of CMCG's financial condition throughout the four-year time period. (Id. at 7.) The trustee counters that it was not clearly erroneous for the bankruptcy court to reply on the trustee's expert witness's testimony that CMCG was insolvent at all relevant times because hers was the only expert testimony presented on the issue. (Trustee's Resp. at 8.) The trustee asserts that it is improper for the Court to consider appellants' counsel's opinion about fact issues related to insolvency. (Id. at 9.) The trustee also argues that the appellants present no legal authority prohibiting the court from relying on the expert's report or any evidence that CMCG was operating at a net profit on any given date. (Id. at 10.)
"Insolvency is a question of fact, and the bankruptcy court has broad discretion to determine insolvency." Grochocinski
The Court finds baseless appellants' arguments that the bankruptcy court clearly erred when it found CMCG insolvent during the relevant time frame. According to Illinois law and the Bankruptcy Code, a debtor is insolvent when its liabilities exceed its assets. The accountant expert's chart shows that CMCG's liabilities exceeded its assets during the relevant four-year time period, and it cannot have been erroneous for the bankruptcy court to rely on that chart instead of an Excel spreadsheet of unknown origin that shows only the monthly deposits CMCG received. Appellants' attempt to contradict the expert's conclusion by plugging in larger amounts for accounts receivable and total assets
Next, appellants contend that the bankruptcy court erred when it held that CMCG did not receive value for transfers it made to Comess and Hathaway. Comess states that she worked for CMCG on the American Society of Corporate Security database, attended industry group meetings, and consulted with CMCG from 2008 to 2012. (Appellants' Br. at 8.) She argues that her invoices reflect payment for these services and reimbursement for expenses and that the trustee did not produce any contradictory evidence. (Id. at 8-9.) Hathaway asserts that during the relevant time period, she consulted for CMCG on IT project management, workshop training, documentation, process flow, and general business and that her invoices reflect payment for those services. (Id. at 9-10.) Hathaway also asserts that she testified that she believed any gifts she received came from Novak personally, not CMCG. (Id. at 11.) The trustee contends that CMCG's records reflect that it sent appellants checks even though it received no invoices from appellants. (Trustee's Resp. at 12.) Further, the trustee states that CMCG did not consider the appellants bona fide contractors because they were never issued 1099 forms nor were they listed with CMCG's 1099 subcontractors. (Id. at 13.) The trustee asserts that any evidence of invoices provided by appellants was created after this action was filed. (Id. at 13-15.)
In ruling that payments CMCG made to Hathaway and Comess were not for work done for reasonably equivalent value, the bankruptcy court relied on the following evidence: (1) Hathaway and Novak's close friendship; (2) Hathaway's acknowledgement that Novak paid for her yoga studio's equipment; (3) email correspondence indicating that Hathaway had a practice of asking Novak to pay for her personal expenses; (4) only Hathaway's testimony and the bills she prepared demonstrate any work done for CMCG; (5) the bills Hathaway testified she submitted were irregular in form; (6) Hathaway's invoices did not correspond to payments CMCG made to her; (7) CMCG's payments to Hathaway increased significantly in 2008 when she began working full-time in her yoga studio; (8) the close personal relationship between Comess and Novak; and (9) the lack of evidence of any work done for monthly retainers, particularly in light of the additional invoices Comess submitted for updating CMCG's database and out-of-pocket expenses.
"In determining whether a debtor received `reasonably equivalent value,' courts consider all the circumstances of the transfer including the `fair market value of what was transferred and received, whether the transaction took place at arm's length, and the good faith of the transferee.'" In re Wierzbicki, 830 F.3d 683, 687 (7th Cir. 2016) (quoting In re Smith, 811 F.3d 228, 240 (7th Cir. 2016)). The Court again notes that appellants have resubmitted their largely unaltered post-trial briefs from the bankruptcy court proceedings as their briefs in this proceeding without indicating why the bankruptcy court's reliance on the extensive evidence they cited was clear error. The only new argument appellants raise is that the invoices Comess and Hathaway submitted to
Appellants next argue that the bankruptcy court erred when it found that CMCG's credit-card and tax obligations amounted to its having creditors. (Appellants' Br. at 16.) They assert that the tax obligations were nominal and that there was no evidence that the credit-card debt was due or that CMCG was unable to pay it. (Id.) The trustee argues that based on the evidence before the bankruptcy court, it was plausible for the court to conclude that the IRS was an unsecured creditor during the relevant time frame and that CMCG was indebted on credit cards. (Trustee's Resp. at 16.) The trustee also contends that appellants cite no evidence or legal authority to support their arguments. (Id.)
In determining that CMCG had unpaid taxes and outstanding credit-card charges during the relevant time frame, the bankruptcy court relied on evidence submitted by plaintiff, including notice from the IRS of unpaid taxes and the expert accountant's report. (Bankr. Am. Mem. at 9.) Appellants cite no authority for the premise that nominal tax obligations do not render the IRS a creditor or even what constitutes a nominal tax obligation. Further, appellants do not submit any evidence supporting their assertion that CMCG had the capital to pay the outstanding taxes or credit-card debts or that they were not due.
Appellants next challenge the fees the bankruptcy court imposed against them as sanctions. Without citing any authority, appellants contend that the attorney time connected with the motions to quash and motions to compel production of emails was wasted and should not be recoverable. (Appellants' Br. at 19.) They further assert that the trustee's counsel should not be reimbursed for review of email because nothing useful was produced. (Id. at 20-21.) In addition to arguing that the sanctions for in camera review of emails should be stricken, appellants also argue that the trustee's counsel should be sanctioned for falsely accusing Comess and Hathaway of withholding emails. (Id. at 21.) Finally, appellants argue that the time awarded for issuing subpoenas for non-parties should be stricken because Hathaway did not cause any of the related delays. (Id. at 21-22.) They assert that the bankruptcy court erred when it awarded sanctions for delays
In sanctioning appellants, the bankruptcy court explicitly held that "sanctions [were] levied only to the extent that the defendants' failure to comply with court orders caused the trustee to expend additional time and resources." (Am. Bankr. Mem. at 13.) Further, the bankruptcy court did not award sanctions for appellants' alleged failure to properly answer interrogatories or failure to produce tax and other documents. (Id. at 14.) The court awarded the trustee attorney's fees and expenses in pursuing discovery matters related to appellants' emails that the bankruptcy court twice ordered to be turned over.
"Courts have broad discretion to select the appropriate sanction for a discovery violation in light of the unique factual circumstances of the case," In re Kmart Corp., 371 B.R. 823, 840 (Bankr. N.D. Ill. 2007), and "[u]nder the abuse of discretion standard, `an appellant faces an uphill battle' in seeking to reverse a lower court's sanction order," Grochocinski, 402 B.R. at 842 (quoting In re Golant, 239 F.3d 931, 937 (7th Cir. 2001)). The bankruptcy court was clear that it awarded the trustee sanctions related to appellants' alleged violations of court orders to produce discovery. While the bankruptcy court ultimately found that the failure to produce some emails was not caused by the appellants and other unproduced emails were not relevant, it awarded the trustee fees and expenses related to the motion practice that aided the court in reaching that conclusion. It appears the attorney's fees and expenses were incurred determining whether the appellants were responsible for a gap in production and whether the unproduced emails were relevant.
Finally, Comess contends that the bankruptcy court erred in awarding sanctions to the trustee despite ruling that he had not proved spoliation of evidence.
In its cross-appeal,
As discussed above, in sanctioning appellants for alleged failure to produce emails, the bankruptcy court awarded the trustee only those fees and costs associated with determining whether appellants were responsible for non-production. (Bankr. Am. Mem. at 14.) When an in camera review revealed they were not, the court awarded only costs and fees that were required for that determination. (Id. at 14-15.) While the court noted that the gap in production was "suspect," it ultimately found that it was caused by the email providers' production, not the appellants' failure to disclose documents. (Id. at 14.) Without evidence of the alleged "financial arrangement" between Novak and Hathaway, the bankruptcy court refrained from sanctioning Hathaway beyond attorney's fees related to the motions for sanctions. While the trustee reiterates that he was prejudiced in receiving other documents late or not at all, it appears to this Court that the bankruptcy court thoroughly and repeatedly reviewed all outstanding discovery and found that it had been produced or that trustee had not been prejudiced. (Id. at 14; see also Case No. 15 C 8917 Dkt. 40, Tr. of 8/12/15 Sanctions Mot. Hr'g in Bankr. Case No. 14-00294.) Given the court's broad discretion in leveling sanctions, this Court cannot find an abuse of discretion in the bankruptcy court's reasonable conclusion. Accordingly, the Court affirms the bankruptcy court's rulings.
For the reasons set forth above, CMCG's motions to dismiss [69] and [72]
