1756 W. LAKE STREET LLC, Plaintiff-Appellant, v. AMERICAN CHARTERED BANK and Scherston Real Estate Investments, LLC, Defendants-Appellees.
No. 14-3435.
United States Court of Appeals, Seventh Circuit.
Argued April 6, 2015. Decided May 15, 2015.
787 F.3d 383
But Zada does challenge the civil penalty, which effectively doubles the amount he owes the SEC. In a securities-fraud case, if the defendant‘s actions “resulted in substantial losses or created a significant risk of substantial losses to other persons[,]” then the court may impose civil penalties up to the greater of $100,000 or “the gross amount of pecuniary gain to [the] defendant as a result of the violation[.]”
Here, the district court imposed a civil penalty which equaled the gross amount of Zada‘s “ill-gotten gain“: $56,571,242.99. The court explained that a large penalty was necessary because of “Zada‘s lack of acceptance of responsibility, in addition to the egregiousness of the offenses and the large amounts of money that he stole.” The court also noted “Zada‘s high degree of scienter,” and that Zada‘s scheme was “not isolated, but continued over an extensive period of time.”
Zada argues that, by punishing him for a “lack of acceptance of responsibility,” the district court in fact punished him for invoking his Fifth Amendment privilege against self-incrimination. That argument has some force. Under the circumstances here—where Zada had not even been indicted yet for the subject transactions, much less convicted and sentenced—it was unreasonable for the court to expect that he would waive his Fifth Amendment rights. His decision not to testify, viewed realistically, reflects not a denial of responsibility, but a desire to preserve his options in a criminal case that had not yet even begun. That said, the other factors cited by the district court—and the record as a whole—make clear that the court‘s reference to Zada‘s “lack of acceptance of responsibility” was not essential to the penalty imposed here. The reference was therefore harmless; and the civil penalty was otherwise not an abuse of discretion.
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The district court‘s judgment is affirmed.
Jordan M. Litwin, David L. Kane, Meltzer, Purtill & Stelle LLC, Chicago, IL, for Defendants-Appellees.
Before POSNER and SYKES, Circuit Judges, and SIMON, Chief District Judge.*
POSNER, Circuit Judge.
The plaintiff, a debtor in possession in a Chapter 11 bankruptcy, brought this adversary proceeding against a bank that had lent it money and an affiliate of the bank, claiming that the bank (with assistance from the affiliate) had defrauded the plaintiff. A debtor in possession has the powers of a trustee in bankruptcy,
As well as defending the district court‘s decision on the merits, the bank
Although there thus were multiple violations of the federal rules, they were harmless. The function of a notice of appeal is to notify the opposing party and the trial and appellate courts of the appeal and the party taking the appeal. The notice was properly captioned—Lake Street versus the bank (the bank‘s affiliate was not mentioned, but is anyway immaterial to the appeal, as we‘ll see)—and knowing that Bambulas was not either plaintiff or defendant the bank had to know that the appeal was by Bambulas‘s company, not by Bambulas himself. See Spain v. Board of Education, 214 F.3d 925, 929 (7th Cir. 2000) (“even though Mr. Spain was not named in the body of the notice of аppeal, his ‘intent to appeal is otherwise clear from the notice‘“). Lake Street was between lawyers when its notice of appeal was due, and the notice that Bambulas filed achieved the purpose of a notice of appeal—to notify. And because Lake Street is represented by counsel in the appeal there is no mеaningful violation of the requirement that a limited liability company be represented in litigation by a lawyer. See United States v. Hagerman, 549 F.3d 536, 538 (7th Cir. 2008).
Although Torres v. Oakland Scavenger Co., 487 U.S. 312 (1988), had held that naming the appellant is a jurisdictional requirement for an appeal and its absence could not be excused as harmless, that decision preceded by five years a revision of
So we come to the merits. Before it went bankrupt, Lake Street was obligated to repay a $1.5 million loan made to it by American Chartered Bank (actually a pair of loans, though that‘s an unimportant detail) secured by a mortgage. Unable to repay, Lake Street negotiated with the
Lake Street defaulted, Scherston recorded the deed in its own name, and Lake Street now complains that the recording was a fraudulent transfer. It focuses on the deed rather than on the mortgage because it claims that the deeded property is worth more than the mortgage. But it was its own decision to give the deed to the bank (via the escrow agent and Sсherston) in the event that it defaulted on the mortgage loan; it did so in order to induce the bank‘s forbearance to foreclose, by giving the bank additional security. There is no contention that the bank employed unlawful or unethical practices to induce Lake Street to transfer the deed, or that any unsecured creditors were harmed by the transaction—there is оnly one unsecured creditor in this bankruptcy, and his claim is worth less than a thousand dollars. We therefore don‘t understand the contention that the transfer of the property was fraudulent.
At the time that Lake Street agreed to place its deed in escrow (the first step on the road to the deed‘s eventual transfer to the bank‘s affiliate), the property may have been worth $1.7 million. That is Lake Street‘s contention, at any rate, and let‘s assume it‘s true. Lake Street could have allowed the bank to foreclose the mortgage. The foreclosure sale would have yielded Lake Street, if its valuation of the property is correct, $200,000 (the difference between the property‘s value—$1.7 million—and Lake Street‘s $1.5 million debt to the bank, which the bank would collect by foreclosing). If instead Lake Street placed the deed in escrow, then while it would risk losing the $200,000 because the bank would now own the property rather than being entitled just to the payment of Lake Street‘s debt to it, Lake Street would be continuing to use the property in its business with the hope (which may have come to pass, as we‘ll see) that the use would yield it income greater than $200,000, and even (as we‘ll also see) that it might keep the property.
So why did Lake Street file for bankruptcy? The only reason that comes to mind is that the Bankruptcy Code allows a trustee in bankruptcy (and therefore, as we noted at the outset of this opinion, a debtor in possession) to avoid a transfer of the debtor‘s property if, so far as concerns this case, the debtor “received less than a reasonably equivalent value in exchange for such transfer ... and was insolvent on the date that such transfer was made or such obligation was incurred.”
As an original matter one might think that having given up its deed to the property to avoid foreclosure, thus gambling that the property might eventually be worth even more than it was thought to be worth—and if it was worth more than Lake Street‘s mortgage debt the surplus would accrue to the bank as owner of the property by virtue of having acquired the deed—Lake Street has no ground to stand on. But the parties agree, rightly or
The bank ripostеs that even if Lake Street‘s appraisal is sound, $1.5 million is 88 percent of $1.7 million and so by being forgiven its $1.5 million debt to the bank Lake Street has received the statutory “reasonable equivalent” of the value of the property. The bank further argues, on the basis both of its own appraisal and of a purchase offer that it received, that the property is actually worth оnly $1.3 million. And finally it argues that the various forbearances that it granted to Lake Street, including loans to Lake Street affiliates, repeated extensions of the maturity date of the bank‘s loan, and reductions in monthly payments and interest rates on the loan, were worth at least $200,000 to Lake Street and therefore closed the gap between the $1.5 million in debt forgiveness (for with the property in the bank‘s hands, and assuming it‘s worth $1.5 million and not the $1.3 million argued by the bank, the bank is being repaid in full) and the $1.7 million that Lake Street claims the property is worth.
The bank‘s first argument is no good. Reasonably equivalent should be understood to mean not part payment but that the debtor received or will receive value for the property that he transferred that is as close tо true equivalence as circumstances permit. Evidence of reasonable equivalence in this case includes the fact that both parties were sophisticated business firms negotiating in good faith and at arms’ length, so that a disparity in the value of the deal to each party may have stemmed from uncertainty or disagreement about the value of the property rather than from sharp practices by the bank.
As for the bank‘s second argument, concerning the conflict in appraisals, the record compiled in the summary judgment proceeding (for there has yet to be a trial) does not permit a confident inference as to which appraisal is more accurate. Real estate appraisal is not a science, and each party doubtless hired an appraiser who it had reason to believe would provide an appraisal favorable to it. We also know nothing about the purchase offer that the bank claims to have received—whether for example the offerer had the financial wherewithal to close the deal.
But the bank‘s third argument—that it gave at least $200,000 worth of forbearances to Lake Street—is solid, despite the scantiness of the briefs and record, which leaves us with an imperfect understanding of the transactions between the parties. The mortgage loan had been issued in 2006 in the amount of $1,400,000. The bank had lent Lake Street another $100,000 in 2008. By 2013, $1,500,000 was due on the combined loans. But Lake Street must have missed payments requirеd by the mortgage (such as payment of real estate taxes), or otherwise courted default, earlier. For beginning in 2009 and ending in 2013 (which was when it defaulted and the deed was given by the escrow agent to the bank), it negotiated no fewer than eleven forbearance agreements with the bank, agreements that by easing the repayment terms of the loans kept Lake Street оut of bankruptcy for the next four years. The agreements also provided additional loans to Lake Street‘s affiliates of $650,000, though the bank received, be-
Lake Street points out that the benefits of the forbearance agreements to it and to the bank were not quantified and so cannot be compared for purposes of determining whether Lake Street received less than equivalent value fоr giving up its property to the bank‘s affiliate. It argues that the bank‘s failure to quantify them is fatal to the defense of reasonable equivalence. But reasonable equivalence is not a defense. As the plaintiff, Lake Street had the burden of proof, and sought to carry it only by getting an appraisal of its property. And that appraisal—its own appraisal—even if thought impeccable, exceeded the debt forgiveness (having received the property securing its mortgage, the bank had no further claim to Lake Street‘s repaying its loan) by only $200,000. If the value it derived from the forbearance agreements and related concessions from the bank equaled or exceeded that number, Lake Street ended up where it wanted to be. It must have known what benefits it derived from the bank‘s concessions, yet it failed to quantify them. All we know is that the bank‘s concessions kept its debtor in business for four years, and that Lake Street‘s Statement of Financial Affairs lists gross income of $129,413 in 2011, $167,000 in 2012, and $139,333 in 2013—three of the four years of extended life that the bank gave it. The total, $435,746, though incomplete because of the missing year, is more than twice the amount by which its appraisal of its property exceeded the bank‘s.
It remains to note the oddity that an almost identical case is pending in the same district court, though before a different judge. That case is 1800 W. Lake Street, LLC v. American Chartered Bank & Scherston Real Estate Investments, LLC, No. 14 C 420, 2014 WL 7330924 (N.D. Ill.). 1800 W. Lake Street is another building owned by an LLC owned by Chris Bambulas (and one other person) and financed by American Chartered Bank. The case involves a similar seriеs of forbearance agreements culminating in a transfer of the deed to that property to the bank after a default, and a fraudulent transfer action by the debtor in possession (1800 W. Lake Street, LLC). The case is a little behind this one in time, and when the judge ruled on the defendants’ motion for summary judgment in that case he had the benefit of the district court‘s opinion in this one. But he denied summary judgment in December of last year, distinguishing the present case on the ground that in his case the spread between the discharged debt and the plaintiff‘s appraisal was “greater by several orders of magnitude” than in the present case. That is not technically correct, of course. An order of magnitude is a multiple of 10. One order of magnitude raises $200,000 to $2 million, two ordеrs of magnitude raise it to $20 million, and three orders (the smallest number that one would refer to as “several“) to $200 million. Nevertheless the spread between the plaintiff‘s appraisal and the discharged debt in the 1800 W. Lake Street case is significantly greater than in the present case: it is the differ-
Still, the cases are very similar and arguably intertwined, and it is surprising that they were not consolidated in the district court, especially since the two bankruptcies are being handled by the same bankruptcy judge. Overlap is possible, for example if the bank in the ongoing proceeding concerning 1800 West Lаke Street argues that the forbearances granted the Bambulases with regard to the property in our case also benefited them with regard to the other property. That would hurt 1800 W. Lake Street LLC‘s avoidance case. The issue is not argued in our case, however, and we leave it to the district court in the 1800 W. Lake Street case to sort out.
AFFIRMED
No. 14-2587.
United States Court of Appeals, Seventh Circuit.
Argued Dec. 8, 2014. Decided May 18, 2015.