Fox v. Hathaway (In Re Chi. Mgmt. Consulting Grp., Inc.)
929 F.3d 803
7th Cir.2019Background
- Novak, sole owner of Chicago Management Consulting Group, died in 2012; the company was thereafter placed in Chapter 7 by Debra Comess, the successor owner.
- Between 2008–2012 Novak made numerous undocumented payments from the company to friends Debra Comess and Julia Hathaway; Hathaway received $45,400.81 and exchanged affectionate emails with Novak.
- Trustee Horace Fox sued to avoid the transfers under 11 U.S.C. § 548 and the Illinois Uniform Fraudulent Transfer Act (IUFTA) and sought discovery sanctions against Hathaway for discovery failures.
- The bankruptcy court credited an accounting expert (Lois West) and found the company insolvent, that transfers to Hathaway lacked reasonably equivalent value, and that unsecured creditors (IRS and credit-card debt) existed for § 544(b) purposes; it avoided the transfers and awarded discovery fees.
- The district court affirmed; Hathaway appealed to the Seventh Circuit but failed to include key items in the record (notably the West report) and provided an incomplete appendix.
- The Seventh Circuit affirmed: no clear error in insolvency, value, or creditor findings; discovery sanctions were within discretion; Rule 38 sanctions request was procedurally improper.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Hathaway) | Held |
|---|---|---|---|
| Insolvency at time of transfers | West expert report showed liabilities > assets across intervals, so debtor was insolvent | Exhibit 32 (gross BP receivables) shows >$2.6M receivables and would make company solvent | Bankruptcy court properly credited West; Exhibit 32 did not rebut insolvency (affirmed) |
| Reasonably equivalent value for transfers | Payments were gratuitous; Hathaway performed little/no documented work; invoices were vague/inconsistent | Hathaway provided consulting labor and invoices justify payments | Court found transfers lacked reasonably equivalent value (affirmed) |
| Existence of creditors under IUFTA / § 544(b) | Company owed IRS and had credit-card debt, so an unsecured creditor existed allowing trustee to invoke IUFTA | debts were nominal or not due/payable (argued but not developed) | Court found unsecured creditors existed and Hathaway waived underdeveloped legal challenges (affirmed) |
| Discovery sanctions | Trustee incurred additional fees litigating Hathaway’s delayed/omitted discovery; sanctions limited and itemized | Hathaway blamed Google, disputed prejudice and fee amounts; claimed eventual compliance | Bankruptcy court acted within discretion; awarded reasonable attorney fees for discovery disputes (affirmed) |
Key Cases Cited
- First Weber Grp., Inc. v. Horsfall, 738 F.3d 767 (7th Cir. 2013) (standard of review: de novo for law, clear error for facts)
- Dexia Crédit Local v. Rogan, 629 F.3d 612 (7th Cir. 2010) (two permissible views of evidence preclude clear-error reversal)
- Baldi v. Samuel Son & Co., Ltd., 548 F.3d 579 (7th Cir. 2008) (definition and proof of insolvency for fraudulent-transfer claims)
- Frierdich v. Mottaz (In re Frierdich), 294 F.3d 864 (7th Cir. 2002) (use of circumstantial evidence to show actual fraud under § 548)
- Leibowitz v. Parkway Bank & Tr. Co. (In re Image Worldwide, Ltd.), 139 F.3d 574 (7th Cir. 1998) (use of § 548 precedents to interpret state fraudulent-transfer claims)
- Smith v. SIPI, LLC (In re Smith), 811 F.3d 228 (7th Cir. 2016) (factors for determining reasonably equivalent value)
- Collins v. Illinois, 554 F.3d 693 (7th Cir. 2009) (reasonableness standard for discovery sanctions)