Lee v. VangLee v. Vang
Plaintiffs Long Lee, Miana Lee, Unlimited Wealth, LLC, David Blong, and Mee Lee (the “Lee Parties“) are victims of Kay Yang, who ran a fraudulent investment scheme in Wisconsin. The Lee Parties say that Yang used some of the funds they invested with her to make below-market mortgage loans to several third parties, including to debtor-defendants Mai L. Vang and Ue Yang (the “Debtors“). The Lee Parties obtained an order in state court determining that the Debtors’ mortgage loan from Yang’s company and several other such loans were fraudulent transfers under
BACKGROUND
Lee Parties’ Investment with Kay Yang
The Lee Parties invested with a company called AK Equity Group, LLC owned by Kay Yang. Yang solicited funds from investors and asked them to wire funds to a bank account at Capital One Bank. The Lee Parties deposited a total of $1,770,000 into the Capital One account between January 25, 2019 and May 30, 2019, believing that they were investing with Yang and AK Equity. (Miana Lee Decl., ECF 27, ¶¶ 3-4.) AK Equity purported to pool and trade investor funds through various offshore brokerage accounts. (Halloin Decl. Ex. 1, ECF 26-1, at 6-8.) It also purported to engage in foreign currency exchange trading. (Id. at 7.)
Yang was investigated by the Wisconsin Department of Financial Institutions (WDFI) for selling unlicensed securities. On July 13, 2020, WDFI entered a Final Order by Consent to Cease and Desist, Revoking Exemptions, and Imposing Disgorgement, Restitution, and Civil Penalties. (Halloin Decl. Ex. 1, ECF
In 2021, the Lee Parties sued Yang in Wisconsin state court to enforce the restitution ordered by WDFI. (Halloin Decl. Ex. 5, ECF 26-5.) The state court entered judgments against Yang in the total amount of $2,443,101.94. (Id. at 2.)
Debtors’ Purchase of the Property
The Lee Parties assert that Yang used money from other investors in the Capital One account to provide a “loan” to the Debtors, who are Yang’s sister-in-law and brother-in-law, in connection with their purchase of residential real property located at 3722 South 18th Street in Sheboygan, Wisconsin (the “Property“). The loan was given through another Yang company called C&K Associates LLC. On November 26, 2018, Yang transferred $225,000 from the account at Capital One containing the funds from the Lee Parties and other investors to an account in the name of C&K Associates at Associated Bank. (Halloin Decl. Ex. 15, ECF 26-15, at 2.) On November 29, 2018, Yang directed that $223,190.65 be wired from the C&K Associates account at Associated Bank to the title company responsible for closing the sale of the Property. (Halloin Decl. Ex. 16, ECF 26-16.)
The Debtors’ purchase of the Property closed on November 30, 2018. The Debtors provided $1,000 in earnest money before the closing, and they needed $223,190.65 in cash to close the transaction. (Halloin Decl. Ex. 17, ECF 26-17.) This entire amount was provided through a loan from C&K Associates. In
State Court Litigation
On May 24, 2022, the Lee Parties filed a complaint in the Circuit Court for Ozaukee County, Wisconsin, Case No. 2022-CV-162, against Yang, the Debtors, and several other persons that the Lee Parties allege similarly purchased properties using funds that originated from the Capital One account. (Halloin Decl. Ex. 6, ECF 26-6.) The Lee Parties alleged that the defendants were liable as transferees of avoidable transfers under
On September 9, 2022, the state court entered an Order for Default Judgment and Judgment and Writ of Attachment Against Mai L Vang and Ue Yang determining that judgment should be entered against the Debtors, jointly and severally, in the total amount of $2,374,290.16. (Halloin Decl. Ex. 8, ECF 26-8.)1 The Lee Parties did not submit evidence that the judgment was docketed pursuant
The state court’s September 9, 2022 order also declared that “[e]ffective immediately, the [Property] is attached by a lien in favor of [the Lee Parties] in the amount of $2,374,290.16.” (Halloin Decl. Ex. 8, ECF 26-8, at 4.) The order states, “This attachment may be filed with the appropriate Register of Deeds.” (Id.) The Lee Parties did not present any evidence that they recorded the order with the Register of Deeds for Sheboygan County, Wisconsin, where the Property is located. Nor does it appear that the Lee Parties followed the requirements of
The Debtors did not appeal the state court’s September 9, 2022 order in Case No. 2022-CV-162.
The Lee Parties separately sued C&K Associates in Ozaukee County, Wisconsin Circuit Court, Case No. 2023-CV-37. (Halloin Decl. Ex. 10, ECF 26-10.) They say one purpose of the lawsuit was to secure the records that were supposed to be maintained for the loan from C&K Associates to the Debtors. (Pls’ Proposed Findings of Fact, ECF 25, at ¶¶ 40-41.) On June 27, 2023, the state court entered a Default Judgment and Order to Compel Against Defendant C&K Associates, LLC.
The same day they sued C&K Associates, the Lee Parties commenced another case in Sheboygan County, Wisconsin Circuit Court against the Debtors and C&K Associates, Case No. 2023-CV-54. (Halloin Decl. Ex. 21, ECF 26-21.) Their complaint alleges that they have a lien on the Property pursuant to
It is unclear what transpired in the nearly 17 months after the filing of the complaint, but on June 19, 2024, the Lee Parties filed a Motion to Execute Against Property. (Halloin Decl. Ex. 24, ECF 26-24.) They requested that the state court “issue an order immediately transferring title of the [Property] to the [Lee Parties] pursuant to the Court’s authority under
The state court held a hearing on the motion on August 2, 2024. (Halloin Decl. Ex. 27, ECF 26-27.) During the hearing, the state court rejected the Debtors’ claimed homestead exemption and ordered that a writ of execution and a writ of assistance be issued. (Id. at 17-21.) The state court may have issued a writ of assistance on August 2, 2024. (See Compl., ECF 1, ¶ 23; Ex. D, ECF 1-4.) The document attached to the complaint is not in the summary judgment record, and the Debtors claimed to lack knowledge regarding the document in their answer. (See Answer ¶ 23, ECF 4.) No writ of execution was issued.4
Procedural History
The Debtors filed a voluntary chapter 7 petition on August 3, 2024, Case No. 24-24067. The Court entered an Order of Discharge on November 13, 2024.
The Lee Parties timely filed this adversary proceeding on November 8, 2024. Their complaint does not include any labeled claims. However, they allege that the Debtors owe them a debt of $2,445,564.41, and they request that the Court declare that:
(a) the Defendants are not entitled to receive a discharge of their debt under
11 U.S.C. section 523(b) [sic], (b) the Defendants are not entitled to the protection of Wisconsin’s homestead exemption, and (c) that the Plaintiffs’ judgment is not dischargeable under Bankruptcy Rule 7001(6), as well as for any taxable attorneys’ fees and costs incurred in this matter.
(Id. at 7.) The Court has assumed that the Lee Parties intended to refer to
The Lee Parties filed a motion for summary judgment requesting that the Court order three forms of declaratory relief. (ECF 24.) They ask the Court to declare that the Lee Parties are secured creditors and that the Debtors must therefore make an election under
The Court noted that the Lee Parties’ complaint did not seek a declaration that they are secured creditors and that the Lee Parties’ objection to the Debtors’ homestead exemption appeared to be untimely under Federal Rule of Bankruptcy Procedure 4003. (ECF 30 at 1-2.) The Court allowed the Lee Parties to file a supplemental brief addressing the Court’s authority to award the requested relief. (Id. at 2.) The Lee Parties then filed a motion for leave to amend their adversary complaint. (ECF 32.) The proposed amended complaint includes three separate claims—one for a declaration that the Lee Parties are secured creditors and that the Debtors must comply with
The Debtors filed their own motion for summary judgment, arguing that the Lee Parties cannot submit evidence sufficient to support the elements of nondischargeability and that the Debtors are entitled to claim a homestead exemption. (ECF 29, 34.) The Debtors also objected to the Lee Parties’ motion for leave to amend the adversary complaint. (ECF 44.)
JURISDICTION
The Court has jurisdiction over this adversary proceeding pursuant to
I. The Lee Parties’ Motion for Leave to Amend
In their summary judgment motion the Lee Parties’ request that the Court declare that the Lee Parties are secured creditors and that Debtors “must make an election under
The Lee Parties’ motion is governed by
“Although the rule reflects a liberal attitude towards the amendment of pleadings, courts in their sound discretion may deny a proposed amendment if the moving party has unduly delayed in filing the motion, if the opposing party would suffer undue prejudice, or if the pleading is futile.” Campania Mgmt. Co. v. Rooks, Pitts & Poust, 290 F.3d 843, 848-49 (7th Cir. 2002). The Lee Parties’ proposed amendment would unduly prejudice the Debtors, and it is futile in any event.
A. Amendment Would Prejudice the Debtors.
“Prejudice to the nonmoving party caused by undue delay is a particularly important consideration when assessing a motion under Rule 15(a)(2).” Allen v. Brown Advisory, LLC, 41 F.4th 843, 853 (7th Cir. 2022). “[P]rejudice is more likely when an amendment comes late in the litigation and will drive the proceedings in a new direction” or “require significant discovery on new issues.” Id.; see also Perrian v. O’Grady, 958 F.2d 192, 195 (7th Cir. 1992) (“Eleventh hour additions are bound to produce delays that burden not only the parties to the litigation but also the judicial system and other litigants.“) (cleaned up). A court has broad discretion to deny a plaintiff leave to amend to add new claims near or after the deadline to complete discovery. Hukic v. Aurora Loan Servs., 588 F.3d 420, 432 (7th Cir. 2009) (affirming denial of motion for leave to amend filed three days before the close of fact discovery); Rodriguez v. City of Green Bay, No. 20-C-1819, 2022 WL 823948, at *1 (E.D. Wis. Mar. 18, 2022) (striking amended complaint filed after the close of discovery and one day before summary judgment motions were due).
The Lee Parties’ motion for leave to amend their complaint was filed after the close of discovery and after the deadline to file motions for summary judgment. At all times during discovery and in preparing to file a motion for summary judgment, the pending claims related to the Debtors’ homestead exemption and the Lee Parties’ request for a declaration of nondischargeability with respect to the money judgment entered by the state court in Case No. 2022-CV-162. The Debtors were not put on notice that they would need to defend against a claim related to security interests in the Property.
The Lee Parties offer no explanation for their failure to include the new claims in their original pleading. See Sanders v. Venture Stores, Inc., 56 F.3d 771, 775 (7th Cir. 1995) (affirming denial of leave to amend after close of discovery and summary judgment briefing where plaintiffs “offered no explanation whatsoever for the delay“). Instead, they say that the dispute as to whether the Lee Parties are secured creditors “is closely intertwined with [the Lee Parties’] original objection to discharge” and that “the Court will necessarily need to make a finding regarding what type of creditor [the Lee Parties] are” as part of the nondischargeability claim. (ECF 33 at 5-6.) The Lee Parties do not explain this assertion.
A claim under
The parties mention
It may be that the Lee Parties think their secured status is relevant to their pending claim for a declaration that the Debtors cannot claim a homestead exemption in the Property. Perhaps they are right. But, as explained herein, the Court is granting summary judgment to the Debtors on this claim because it is untimely. If the only reason to consider the secured status of the Lee Parties’ claim is in relation to the Debtors’ homestead exemption, then the Debtors would be
Upon disposition of the parties’ cross motions for summary judgment, this case will be ready to proceed to trial. If the Court allows the amendment, discovery may need to be reopened5, and the parties could file another round of summary judgment motions on the added claim.6 The Debtors and the public have an interest in a speedy resolution of this case. Perrian, 958 F.2d at 195 (“The burden to the judicial system can justify a denial of a motion to amend even if the amendment would cause no hardship at all to the opposing party” because a late amendment “defeat[s] the public’s interest in speedy resolution of legal disputes.“) (internal quotation marks omitted). The Debtors will be prejudiced by the late amendment, so the Court will deny leave to amend.
B. The Amendment Would Be Futile.
It is appropriate to deny a plaintiff leave to amend a complaint where the amendment would be futile. Moore v. State of Ind., 999 F.2d 1125, 1128 (7th Cir. 1993) (“[T]he court should not allow the plaintiff to amend his complaint when to do so would be futile.“). “[A]n amendment may be futile when it fails to state a valid
In their proposed new claim, the Lee Parties ask the Court to declare that they have a security interest in the Property and that the Debtors are required to make an election with respect to the secured claim under
As to their request for a declaration that they have a security interest in the Property, the Lee Parties have two theories. The first is that they are secured based on the “writ of attachment” issued by the Ozaukee County Circuit Court and docketed in Sheboygan County. (Pls’ Mot. for Summ. J., ECF 24, at 13-14.) The problem with this theory is that no writ of attachment was ever issued, at least not based on the allegations in the amended complaint or the information in the summary judgment record.
The Lee Parties’ second theory is that they are secured by virtue of the mortgage that the Debtors granted to C&K Associates. (Pls’ Mot. for Summ. J., ECF 24, at 15.) In Case No. 2023-CV-37, the Ozaukee County Circuit Court ordered that “[a]ny promissory notes made to C&K Associates, LLC, and mortgages received by it, are ordered assigned to the [Lee Parties], including, without limitation, any
Thus, the Debtors agree that the Lee Parties have a security interest in the Property. There is no live dispute between the parties to adjudicate through a request for declaratory relief. See Powell v. McCormack, 395 U.S. 486, 517-18 (1969) (“The availability of declaratory relief depends on whether there is a live dispute between the parties[.]“). For the same reason, the Court does not have subject matter jurisdiction to adjudicate the Lee Parties’ alternative request that the Court declare that their liens pass through bankruptcy unaffected. (See Proposed Am. Compl., ECF 32-1 at 15.)8
The Debtors’ Statement of Intention did not include an election for the C&K Associates mortgage on the Property (see Case No. 24-24067, ECF 1, at 46), and they say they have no objection to a declaration that they are required to make an election (Defs’ Resp. to Pls’ Mot. for Summ. J., ECF 42, at 3). The Court could, perhaps, require the Debtors to file an untimely statement of intention under
The Debtors can no longer enter into an enforceable reaffirmation agreement because an order of discharge was already entered in the main bankruptcy case. See
For personal property, the consequence of a debtor’s failure to file a timely statement of intention under
Because it is untimely and seeks relief the Court cannot grant, the Court will deny the Lee Parties’ motion for leave to amend the complaint.
Summary judgment is appropriate if the pleadings and affidavits on file show there is no genuine dispute as to any material fact and the moving party can establish it is entitled to judgment as a matter of law. See Fed. R. Bankr. P. 7056;
A. Declaration as to Homestead Exemption
The Lee Parties’ complaint includes a request that the Court declare that “the Defendants are not entitled to the protection of Wisconsin’s homestead exemption.” (Compl., ECF 1, at 7.) Both parties now seek summary judgment on that claim. The Court will grant summary judgment to the Debtors on the Lee Parties’ affirmative claim for a declaration because the claim is untimely.
Pursuant to
The chapter 7 trustee concluded the meeting of creditors on September 9, 2024 and filed a report of no distribution on September 11, 2024. Case No. 24-
In an attempt to save their claim for a declaration as to the Debtors’ homestead exemption, the Lee Parties say they are merely responding to the Debtors’ invocation of the exemption as an affirmative defense to the Lee Parties’ nondischargeability claim. (See ECF 33 at 6-7 (citing ECF 4 at 7).) “An affirmative defense limits or excuses a defendant‘s liability even if the plaintiff establishes a prima facie case.” Bell v. Taylor, 827 F.3d 699, 704-05 (7th Cir. 2016) (internal quotation marks omitted). A plaintiff does not have an affirmative claim against a defendant based on an affirmative defense, so that does not save the Lee Parties’ claim for a declaration denying the Debtors’ homestead exemption.
To the extent the Lee Parties seek summary judgment as to an affirmative defense (as opposed to an affirmative claim for a declaration), the Court will deny that motion. In their answer to the complaint, the Debtors included an affirmative
The Debtors are cautioned that they may raise at trial only affirmative defenses that limit or excuse their liability as to nondischargeability under
B. Nondischargeability Under § 523(a)(2)(A)
The Lee Parties seek a declaration that a debt owed to them is excepted from the Debtors’ discharge under
The term “actual fraud” as used in
A bankruptcy debtor can be liable as a transferee of fraudulently conveyed property where the debtor participated in a scheme to hide an asset from the creditor. See McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir. 2000). In McClellan, the creditor sold his ice-making machinery to the debtor‘s brother for $200,000, payable to the creditor in installments. Id. at 892. The brother defaulted, and the creditor commenced litigation to seek return of the machinery and collection of the remaining balance of the debt. Id. The debtor‘s brother “sold” the machinery to the debtor for $10. Id. The debtor then sold the machinery for $160,000 and refused to disclose where the sale proceeds went. Id. The Seventh Circuit held that the debtor‘s liability for fraudulent conveyance could be rendered nondischargeable if the debtor participated in the fraud and had intent to assist her brother in transferring assets to evade the creditor. Id. at 893-94. The court noted that a transfer that is merely constructively fraudulent, where the debtor did not have knowledge of or intent to participate in a fraudulent scheme to hinder the
The record includes some evidence of the Debtors’ intent, but there are genuine issues of material fact precluding summary judgment.
1. The State Court Order Does Not Establish Intent to Defraud.
To prevail on their nondischargeability claim, the Lee Parties must prove that the Debtors are liable for an actual fraudulent transfer, as opposed to a constructive fraudulent transfer. The Lee Parties rely heavily on the September 9, 2022 order entered in Ozaukee County Case No. 2022-CV-162. (Halloin Decl. Ex. 8, ECF 26-8.) They say, for example, that “[t]he Wisconsin Circuit Court already entered a final order that [the Debtors] were liable for the damages caused by Kay Yang‘s fraud.” (Pls’ Combined Reply Brief, ECF 48, at 21.) The order cannot bear the weight the Lee Parties place on it.
In the September 9 order, the state court stated that “[t]his matter relates to fraudulent transfers from Defendant debtor Kay Yang to the other named Defendants in this action.” (Halloin Decl. Ex. 8, ECF 26-8, at 2.) The court found the Debtors to be in default and concluded that “[t]he allegations of the Complaint are deemed admitted.” (Id. at 4.) The court then entered judgment against the Debtors in the amount of $2,374,290.16. (Id.) The Court‘s order does not specifically state the basis of the Debtors’ liability, other than a reference to fraudulent transfers.
Moreover, the complaint alleged that the transfer was a violation of chapter 242 of the Wisconsin Statutes and requested relief under
2. There Are Material Factual Disputes Regarding Intent.
The key element of a nondischargeability claim for actual fraud is the scienter requirement: the plaintiff must prove fraudulent intent. See Husky, 578 U.S. at 360 (“[A]nything that counts as ‘fraud’ and is done with wrongful intent is ‘actual fraud.‘“). Wrongful intent can be, but rarely is, proven with direct evidence. Intent can also be proven through circumstantial evidence. State statutes usually include a list of “badges of fraud” that can be helpful in determining whether a fraudulent transfer is actually fraudulent, as opposed to constructively fraudulent, and federal courts considering whether intent is proven for purposes of a claim under
As with the intent element in other causes of action, intent under
Before moving on to the evidence on intent, the Court pauses to note an issue of law that was not well-briefed by the parties, which is whose intent is relevant when determining whether a debt for an actual fraudulent transfer is nondischargeable under
In Bartenwerfer, a husband and wife remodeled and sold a house as business partners. Id. at 72. The husband did most of the work during the process, and the wife was largely uninvolved. Id. After the sale, the buyer discovered several undisclosed defects. Id. The buyer sued the couple in state court, alleging various claims for breach of contract, negligence, and nondisclosure, and the court entered judgment against both of them. Id. at 72-73.
The couple filed bankruptcy, and the buyer sought to have the judgment debt declared nondischargeable under
The focus, then, is on the allegedly fraudulent transfer to the Debtors, not on Yang‘s underlying fraud in causing the Lee Parties to part with their money initially. In Husky, the Supreme Court emphasized that the basis for the transferor‘s underlying debt to the creditor is not relevant to nondischargeability based on a fraudulent transfer. 578 U.S. at 365 (rejecting dissent‘s view that a claim under
There is an outstanding question as to whether Kay Yang‘s intent is relevant to the dischargeability of the Debtors’ liability for an actual fraudulent transfer, or whether only the Debtors’ intent matters. The majority opinion in Bartenwerfer suggests that it may not. 598 U.S. at 72 (“Written in the passive voice,
(their discussion focuses on their incorrect argument that the Debtors are liable for Yang‘s underlying fraud), and the Debtors had no opportunity to discuss Bartenwerfer‘s applicability here because the Lee Parties did not cite the case until their reply brief.
The Court need not decide the issue at this juncture because the summary judgment record does not include sufficient facts for the Court to conclude that this could be a case of a fraudster transferor and innocent transferee. The Lee Parties make no argument and present no facts that Yang (or A&K Equity or C&K Associates) had an intent to hinder, delay, or defraud her creditors when she transferred funds to the Debtors to purchase the Property.
The innocent transferee legal issue may not matter if the Lee Parties can present sufficient evidence to prove that the Debtors had an intent to defraud. But the Lee Parties’ briefs are high on rhetoric and short on facts in this regard. The Lee Parties rely primarily on the circumstances and terms of the mortgage loan the Debtors received from C&K Associates. (ECF 24 at 18.) First, the Lee Parties assert that the Debtors did not fill out a loan application or go through any sort of credit check or underwriting process. This fact is not undisputed; the Debtors deny that they did not fill out “traditional loan documents.” (See Defs’ Resp. to Pls’ PFOF, ECF 43, ¶ 68.) Second, the Debtors provided only the $1,000 escrow
For their part, the Debtors say that they were not investors in Yang‘s fraudulent investment scheme. They say they were made aware that Yang was operating C&K Associates and could provide a mortgage loan, “regardless of
Whether the Debtors acted with fraudulent intent sufficient to prevent discharge under
Finally, there are unresolved questions of fact regarding the amount of the debt that may be declared nondischargeable. The Court can declare a debt nondischargeable only ”to the extent [the money was] obtained by . . . false pretenses, a false representation, or actual fraud[.]”
The Debtors received only $223,190.65 from Yang through C&K Associates. The Court cannot declare the entire debt (i.e., the $2,374,290.16 in the state court‘s September 8, 2022 order) to be nondischargeable if such a declaration is not supported by the evidence.16
CONCLUSION
The Lee Parties’ motion for leave to amend the adversary complaint is prejudicially late and is futile. The Lee Parties’ claim for a declaration as to the Debtors’ claimed homestead exemption is untimely, and the Court will grant summary judgment in favor of the Debtors. With respect to the Lee Parties’
Accordingly, IT IS HEREBY ORDERED:
- The Lee Parties’ motion for leave to amend the complaint (ECF 32) is DENIED.
- The Debtors’ motion for summary judgment as to the Lee Parties’ claim for a declaration that the Debtors cannot claim a homestead exemption in bankruptcy is GRANTED and that claim is dismissed with prejudice.
- The motions for summary judgment filed by the Lee Parties and the Debtors with respect to the Lee Parties’ claim for declaration of nondischargeability under
11 U.S.C. § 523(a)(2)(A) are DENIED.
Dated: March 31, 2026
Rachel M. Blise
U.S. Bankruptcy Judge