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Schaumburg Bank & Trust Co., N.A. v. Alsterda

United States District Court, N.D. Illinois, Eastern Division

March 26, 2015

SCHAUMBURG BANK & TRUST COMPANY, N.A., Appellant,
v.
R. SCOTT ALSTERDA, not individually, but solely as Chapter 7 Trustee for the bankruptcy estate of Hartford & Sons, LLC, Appellee.

MEMORANDUM OPINION AND ORDER

JOHN W. DARRAH, District Judge.

Appellant Schaumburg Bank & Trust Company, N.A., ("Schaumburg") appeals the Bankruptcy Court's October 28, 2014 Order, which overruled Schaumburg's objection to the Trustee's Motion to Approve a Settlement with Thomas Hartford, Jr. ("Hartford Jr."). For the reasons discussed below, the Bankruptcy Order is affirmed.

BACKGROUND

The relevant facts in this case are not disputed. Hartford & Sons, LLC, ("Hartford LLC") operated a site utility construction business, which primarily installed new sewer and water facilities for industrial and commercial customers. Hartford LLC filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois on August 30, 2013. The chapter 11 bankruptcy was converted to a case under chapter 7, and R. Scott Alsterda ("Alsterda" or "Trustee") was appointed as chapter 7 Trustee for the Hartford LLC estate.

Schaumburg holds a valid, first-priority interest in and to all of Hartford LLC's assets, including accounts receivable. Warren F. Thomas Plumbing Company ("Warren") issued a check, dated August 30, 2013, for $24, 680.70 payable to Hartford LLC. The check was endorsed to Hartford Jr. and deposited into his personal bank account the same day. Powers & Sons Construction Company, Inc. ("Powers") issued a check, dated September 9, 2013, for $11, 709.19 payable to Hartford LLC.[1] This check was also endorsed to Hartford Jr. and deposited into his personal bank account on September 12, 2013.

On November 12, 2013, the Bankruptcy Court entered an order that modified the automatic stay and allowed Schaumburg "to exercise its state law remedies with respect to collateral pledged to the movant by the Debtor, and in which Schaumburg asserts a valid, first-priority security interest." ( See Bankruptcy Case Dkt. No. 77.) Sometime after the entry of this order, Schaumburg discovered the Transfers. On April 3, 2014, Schaumburg filed a lawsuit against Hartford Jr. in the Circuit Court of Cook County, seeking to recover the funds as fraudulent transfers. The state court entered judgment in favor of Schaumburg bank on July 30, 2014.

On July 21, 2014, Alsterda filed a Motion to Approve a Settlement Agreement with Hartford Jr. Under the terms of the proposed settlement: Hartford Jr. would pay $36, 389.89 to the Trustee on behalf of the Estate, Hartford Jr. would release the Trustee and Estate from all claims regarding the transfers, and the Trustee would grant Hartford Jr. a release from all claims regarding the transfers ninety-one days after the settlement payment cleared. Schaumburg did not object to the proposed settlement but did object to the Trustee's right to retain the settlement proceeds. On September 16, 2014, the Bankruptcy Court entered an agreed order granting the Trustee's settlement motion, and set a briefing schedule on the disposition of the settlement proceeds.

After full briefing, the Bankruptcy Court overruled Schaumburg's objection. The Bankruptcy Court held that Schaumburg lacked standing to file the lawsuit against Hartford Jr. Specifically, the Bankruptcy Court found that the Stay Relief Motion did not give indication or notice that Schaumburg sought derivative standing to pursue avoidance actions against Hartford Jr. on behalf of the Estate or sought to compel the Trustee to abandon the Estate's interest in any avoidance actions. The Bankruptcy Court also held that Schaumburg's security interest only extended to identifiable proceeds of the Transfers and applied the lowest intermediate balance rule.

Schaumburg has framed the issues presented on appeal as follows:

(1) Whether the Bankruptcy Court erred by ruling that Schaumburg Bank lacked standing to bring its state court fraudulent transfer lawsuit against Thomas O. Hartford, Jr.
(2) Whether the Bankruptcy Court erred by ruling that Schaumburg Bank's security interest in the subject checks does not extend to any greater than the identifiable proceeds of the subject checks.

LEGAL STANDARD

Federal Rule of Bankruptcy Procedure 8013 provides that, on appeal, the district court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree, or remand with instructions for further proceedings." The bankruptcy court's determinations of law are reviewed de novo, while its findings of fact are reviewed for clear error. Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009). The ...


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