569 B.R. 722
N.D. Ill.2017Background
- CMCG, a consulting company owned by Frank Novak, filed a voluntary Chapter 7 bankruptcy; Novak died in 2012 and his estate transferred CMCG to Debra Comess.
- The Chapter 7 trustee sought to avoid transfers Novak made to friends/contractors Julia Hathaway and Debra Comess as fraudulent, and sought sanctions for discovery violations and alleged spoliation.
- After trial, the bankruptcy court found by clear and convincing evidence that numerous transfers (payments to Hathaway, retainer payments to Comess, life-insurance payments, and probate attorney payment) were fraudulent under 11 U.S.C. § 548(a)(1)(B) and the Illinois Uniform Fraudulent Transfer Act.
- The bankruptcy court also found Comess breached her duty to preserve Novak’s laptop and awarded fees for a computer forensic expert; it awarded additional discovery-related attorney’s fees against both appellants.
- Total awards: $50,276.20 against Comess (including retainer recovery, expert, and discovery sanctions) and $56,588.06 against Hathaway (fraudulent-transfer recovery plus discovery sanctions).
- The district court denied CMCG’s motions to dismiss the appeals for procedural/record defects and affirmed the bankruptcy court on insolvency, fraudulent transfers, existence of creditors, discovery sanctions, and spoliation-related expert costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Insolvency of CMCG during 2008–2012 | Trustee: expert and QuickBooks-based analysis show liabilities exceeded assets | Hathaway/Comess: expert biased, analysis omitted assets, alternate spreadsheets show solvency | Court: affirmed insolvency; bankruptcy court reasonably relied on expert and records |
| Whether transfers conferred reasonably equivalent value | Trustee: records and circumstances show payments were personal/gifts, not arm’s-length compensation | Defendants: invoices and services rendered justify payments | Court: affirmed that most payments lacked reasonably equivalent value given close relationships and contradictory evidence |
| Existence of creditors (taxes, credit-card debt) | Trustee: IRS notices and accountant report show unsecured creditors existed | Defendants: obligations were nominal or not due; no evidence of non-payment | Court: affirmed existence of unsecured creditors based on IRS notice and expert report |
| Sanctions and spoliation-related costs | Trustee: discovery violations and deletion concerns forced expert retention and motion practice expenses | Defendants: delays/prejudice minimal; expert unnecessary because laptop could have been requested earlier; some delays not their fault | Court: affirmed sanctions; awarded fees tied to work required to determine non-production responsibility and costs for computer expert to quantify deletions |
Key Cases Cited
- In re Mississippi Valley Livestock, Inc., 745 F.3d 299 (7th Cir.) (appellate standards for bankruptcy findings)
- In re Herman, 737 F.3d 449 (7th Cir.) (clear-error standard explanation)
- First Weber Group, Inc. v. Horsfall, 738 F.3d 767 (7th Cir.) (deference where two permissible factual views exist)
- In re Hancock, 192 F.3d 1083 (7th Cir.) (sanctions reviewed for abuse of discretion)
- In re Rimsat, Ltd., 212 F.3d 1039 (7th Cir.) (sanctions affirmed absent legal error or unreasonable result)
- In re Wierzbicki, 830 F.3d 683 (7th Cir.) (elements for reasonably equivalent value inquiry)
- In re Smith, 811 F.3d 228 (7th Cir.) (factors in assessing reasonably equivalent value)
- In re Ball, 611 F. App'x 356 (7th Cir.) (appellant’s failure to rebut trial findings warrants affirmance)