The opinion of the court was delivered by: Reagan, District Judge
I. Procedural and Jurisdictional Overview
On September 10, 2009, United States Bankruptcy Judge Kenneth J. Meyers entered Judgment for Avoidance and Recovery of Fraudulent Transfer in Adversary Number 09-06023, and it is this judgment from which Hal D. Hicks and Jeanine Hicks ("Appellants") appeal to this District Court. Subject matter jurisdiction lies under 28 U.S.C. § 158(a)("district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees... of bankruptcy judges entered in cases" referred to them under 28 U.S.C. § 157.). This appeal was timely filed, and the parties have thoroughly briefed the questions presented herein.
On August 28, 2008, SLM Trans, Inc. ("SLM"), filed a Chapter 11 petition in the United States Bankruptcy Court for the Southern District of Illinois (Case No. 08-60477). The case was then converted to a Chapter 7 proceeding on October 7, 2008. On April 2, 2009, Plaintiff/Appellee, Robert T. Bruegge, Trustee of the SLM Estate ("the Trustee"), instituted this action in the Bankruptcy Court for the Southern District of Illinois (Adv. No. 09-06023). The Complaint sought avoidance and recovery of an allegedly fraudulent transfer from Hal Hicks to Jeanine Hicks. More specifically, the complaint alleges that a June 8, 2004, transfer of real property located in Wayne County, Illinois, from Hal Hicks to Jeanine Hicks was fraudulent pursuant to Illinois's Uniform Fraudulent Transfer Act.
Appellants raise the following issues:
1. Whether the Bankruptcy Court had jurisdiction over this proceeding;
2. Whether the Bankruptcy Court erred in denying Appellant's Motion to Reconsider and Set Aside Entry of Default and Default Judgment;
3. Whether the Bankruptcy Court erred in conditioning vacation of the default judgment against Appellants on Appellant Hal D. Hicks agreeing to an injunction prohibiting him from transferring any property while the case remained pending; and
4. Whether the Bankruptcy Court erred in its disqualification of Attorney John Theil from representation of Appellants.
On May 11, 2010, the Court found waiver of issues on appeal and granted the Trustee's motion to strike those portions of Appellants' principal and reply briefs that relate to the requirements the Bankruptcy Court imposed as conditions for denying the Trustee's motion for entry of a default judgment, i.e., that Hal Hicks was required to agree to an injunction prohibiting him from transferring any property (Issue No. 3) (Doc. 18). The Court now undertakes analysis of the remaining issues raised in Appellants' appeal.
Federal Rule of Bankruptcy Procedure 8013 provides that, on appeal, the District Court "may affirm, modify, or reverse a bankruptcy judge's... order... or remand with instructions for further proceedings." Rule 8013 further provides:
Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
Case law of this Circuit similarly instructs that a bankruptcy judge's "[f]actual findings are reviewed for clear error; [and] legal conclusions are reviewed de novo." In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007) (citing FED.R.BANKR.P. 8013 and
In re Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998). Accord Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir. 1994)(district court reviews bankruptcy judge's fact findings for clear error and legal conclusions de novo). Disqualification of counsel, where there has been an evidentiary hearing and findings of fact, is reviewed under the deferential abuse of discretion standard. In re Thomas Consolidated Industries, Inc., 289 B.R. 647, 650 (N.D.Ill. 2003)(citing Cromley v. Board of Education of Lockport Township, 17 F.3d 1059, 1063 (7th Cir. 1994))
A. Whether the Bankruptcy Court Lacked Jurisdiction Over the Adversary Proceeding
Appellants contend that the undersigned District Judge should reverse the decisions of the Bankruptcy Court and dismiss this adversary proceeding because the Bankruptcy Court lacked jursidiction over this case. According to Appellants, the adversary proceeding is not related to the underlying bankruptcy case because the property at issue is not part of the bankruptcy estate and there is no allegation that SLM ever had any ownership interest in the property. Appellants also assert that this is not a cause of action created by the Bankruptcy Code but is a state-law fraudulent conveyance action.
The Trustee submits that the fraudulent transfer action stems from a default judgment entered by the Bankruptcy Court in favor of the Trustee and against the Defendants that avoided the transfer of the Wayne County property. The judgment was in the amount of $305,714.50. Defendants filed a motion to vacate the judgment, which the Bankruptcy Court denied. The May 12, 2010, Report of Sale indicates that the Wayne County property sold for $623,875.00, with the proceeds ($135,707,75) deposited in the estate's checking account (08-60477, Doc. 588).
The court below premised its jurisdiction on 28 U.S.C. § 1334 and 11 U.S.C. §§ 105 and 363 (Doc. 582). The court found that the action was a "core" proceeding within the contemplation of 28 U.S.C. § 157(b)(2)(A) and (O). Id. The court concluded that the Trustee had demonstrated good and sufficient reason as well as compelling circumstances for the sale pursuant to § 363(b) of the Bankruptcy Code and found that ...