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In re Chicago Management Consulting Group, Inc.

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

June 2, 2017

HORACE FOX, as Trustee for the Estate of CHICAGO MANAGEMENT CONSULTING GROUP, INC., Plaintiff-Appellee & Cross-Appellant. DEBRA COMESS and TECHNICALLY DRIVEN INC., & JULIA HATHAWAY and STUDIO OM, LLC, Defendants-Appellants,


          JORGE L. ALONSO United States District Judge.

         Before the Court are the consolidated appeals of Julia Hathaway (Case No. 15 C 8917) and Debra Comess (Case No. 15 C 8921) and the cross-appeal of Chicago Management Consulting Group, Inc., (“CMCG”) from the bankruptcy court's September 3, 2015 amended memorandum of decision on entry of final judgment and motion for sanctions. (Bankr. Case No. 14-00294 Dkt. 235). CMCG has also filed motions to dismiss appellants' appeals [69][1] and [72].[2] For the reasons set forth below, CMCG's motions to dismiss are denied, and the Court affirms the rulings of the bankruptcy court.


         These appeals stem from CMCG's voluntary Chapter 7 bankruptcy case. (Bankr. Am. Mem. at 2.) CMCG provided consulting services to BP America. (Id.) Hathaway and Comess, the defendants, were personal friends of CMCG's sole owner, Frank Novak. (Id.) In 1999, Novak retained Hathaway and Comess to perform work on behalf of CMCG. (Id. at 3.) Novak died by suicide in February 2012, and pursuant to his will and trust, Comess was entitled to all of Novak's property, including CMCG. (Id.) Comess retained counsel and filed the bankruptcy proceeding, in which CMCG's trustee sought: (1) to avoid alleged fraudulent transfers of CMCG's assets that Novak made to Comess and Hathaway; and (2) relief from evidence spoliation and delayed discovery responses. (Id. at 2-3.) On September 3, 2015, after trial, the bankruptcy court issued an amended memorandum and judgment in which it found that the challenged transfers to Hathaway, the challenged retainer payments to Comess, three payments on Novak's life insurance policy, and payment to the probate attorney handling Novak's estate demonstrated an actual intent to deceive creditors by clear and convincing evidence under § 548(a)(1)(B) of the Bankruptcy Code and § 5(a)(2) of the Illinois Uniform Fraudulent Transfer Act (“IUFTA”). (Id. at 10-11.) The court also found that Comess breached her duty to preserve evidence on Novak's laptop and caused the trustee to incur damages when he retained a computer expert to determine what had been deleted from the computer. (Id. at 12.) Finally, the court held that the trustee was entitled to attorney's fees and expenses he incurred pursuing delayed discovery from Comess and Hathaway. (Id. at 15.) Ultimately, the court awarded the trustee $50, 276.20 against Comess[3] and $56, 588.06 against Hathaway.[4] These appeals followed.


         The Court sits as an appellate court for bankruptcy court proceedings. See 28 U.S.C. § 158(a)(1). We review the bankruptcy court's findings of fact for clear error and its legal conclusions de novo. See In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). “A finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” In re Herman, 737 F.3d 449, 452 (7th Cir. 2013) (citation omitted). If there are two permissible views of the facts, a court's choice between them cannot be clearly erroneous. See First Weber Grp., Inc., v. Horsfall, 738 F.3d 767, 776 (7th Cir. 2013).

         “A bankruptcy court's decision to impose sanctions is reviewed for an abuse of discretion.” In re Kuttner, 15 C 980, 2015 WL 3578966, at *3 (N.D. Ill. June 8, 2015) (citing In re Hancock, 192 F.3d 1083, 1085 (7th Cir. 1999)). “Unless the sanctioning court has acted contrary to the law or reached an unreasonable result, ” the decision will be affirmed. In re Rimsat, Ltd., 212 F.3d 1039, 1046 (7th Cir. 2000).


         CMCG's Motions to Dismiss

         After each side filed their opening briefs, CMCG filed a motion to dismiss appellants' brief. In support thereof, CMCG argues that appellants violated the Federal Rules of Bankruptcy Procedure by not compiling a complete or sufficient record for the Court to make a meaningful review. (Mot. to Dismiss at 2.) Specifically, CMCG contends that appellants have failed to submit relevant trial court transcripts and exhibits and that their brief lacks a statement of facts, standard of review, jurisdictional statement, and statement of the case, as required by the bankruptcy rules. (Id. at 2-7.) CMCG asks the Court to dismiss appellants' appeals and award it attorneys' fees and costs as sanctions. (Id. at 8-9.) Rather than respond to CMCG's arguments, appellants argue that the trustee did not object to appellants' designation of record on appeal or procedural defects in their brief until he filed his motion, and then point out (as if the Court was unaware) that the trustee has requested and received several extensions to properly file his record on appeal, opening brief, and response. (Resp. at 2-3.) Without citing any authority, appellants assert that the trustee's objections are untimely and should be disregarded. (Id. at 3.)

         At the outset, the Court notes that both sides sought extensions and still failed to provide the Court with a complete, consolidated record with which to conduct its review. A review of the dockets in the two cases confirms that both sides have submitted a statement of issues to be presented and designated items to be included in the record of appeal.[5] Despite having to scour the dockets, the Court has located many of the designated documents and exhibits[6] and concludes it can conduct a review of the issues the parties have presented. The Court acknowledges that the appellants' brief fails to include a statement of facts, standard of review, and jurisdictional statement, but does not conclude that such negligence compels dismissal. See In re Stotler and Co., 166 B.R. 114, 117 (N.D. Ill. 1994) (court considered appellant's appeal even though he “failed to brief [the] appeal according to the bankruptcy rules” and found that deficiencies in appellant's briefing led the court to affirm the bankruptcy court's ruling). Accordingly, the trustee's motions to dismiss are denied.

         Hathaway and Comess's Appeal

         In their statement of issues presented, Hathaway and Comess challenge the following bankruptcy court rulings: 1) whether CMCG was insolvent at the time of the transfers at issue; 2) whether CMCG received value for those transfers; 3) whether CMCG had creditors within the meaning of the statute during the entire four-year period at issue; 4) whether sanctions were appropriate; and 5) whether finding Comess liable for spoliation was appropriate. (Appellants' Br. at 1-2.) In his response, the trustee contends that none of bankruptcy court's findings were clearly erroneous. (Trustee's Resp. at 3-4.) In their reply, the appellants clarify their position that the bankruptcy court ignored substantial evidence of solvency, improperly shifted the burden regarding transfers for value, disregarded the standards for spoliation of evidence, and imposed sanctions where there was no prejudice. (Appellants' Reply at 1.) and [82]. The trustee's designations are in Case No. 15 C 8917 [7], [39], [40] and in Case No. 15 C 8921 [17] and [40]. The Court notes that the trustee filed two motions in 15 C 8917 for leave to file certain exhibits under seal [54] and [64]. Those motions were granted [60] and [66]. As best as the Court can tell, the trustee never filed those exhibits on the record even though he did file a letter [71] he sent to the bankruptcy court asking that court to place exhibits on the dockets of the district court cases. The Court received two flash drives from the trustee that contain certain exhibits. To the extent those exhibits are not filed on the dockets in Case Nos. 15 C 8917 and 15 C 8921, the Court has not considered them.


         The appellants contend that the bankruptcy court erred when it found CMCG insolvent during the relevant time frame (2008-2012). They argue that the accountant expert who prepared the insolvency report knew it would benefit the trustee to make a finding of insolvency and assert that she only reviewed CMCG's business records of liabilities, not assets. (Appellants' Br. at 2-3.) They contend that one of the trustee's exhibits, unlike the QuickBooks entries on which the accountant relied, contradicts the expert's report and reflects that CMCG was solvent throughout the relevant time frame. (Id. at 4-6.) Citing very little and out-of-Circuit) authority, appellants also argue that the expert report does not tie CMCG's financial condition to the dates of the transfers as required. (Id. at 6.) Ultimately, the appellants contend that the accountant's report did not provide an accurate depiction of CMCG's financial condition throughout the four-year time period. (Id. at 7.) The trustee counters that it was not clearly erroneous for the bankruptcy court to reply on the trustee's expert witness's testimony that CMCG was insolvent at all relevant times because hers was the only expert testimony presented on the issue. (Trustee's Resp. at 8.) The trustee asserts that it is improper for the Court to consider appellants' counsel's opinion about fact issues related to insolvency. (Id. at 9.) The trustee also argues that the appellants present no legal authority prohibiting the court from relying on the expert's report or any evidence that CMCG was operating at a net profit on any given date. (Id. at 10.)

         “Insolvency is a question of fact, and the bankruptcy court has broad discretion to determine insolvency.” Grochocinski v. Schlossberg,402 B.R. 825, 836 (N.D. Ill. 2009). According to the IUFTA and the Bankruptcy Code, “a debtor is insolvent if the sum of [its] debts is greater than all of [its] assets at a fair valuation.” In re CF Graphics, Inc., No. 06 B 00459, 2009 WL 2215089, at *10 (N.D. Ill. July 21, 2009) (quoting 740 ILCS 160/3(a) and citing 11 U.S.C § 101(32)). The bankruptcy court relied on the QuickBooks data maintained by Novak and the accountant expert to determine CMCG's financial condition during the relevant time period. (Bankr. Am. Mem. at 3.) Further, the court overruled defendants' challenges to the expert's determination that CMCG's assets were less than its outstanding liabilities during the relevant period. (Id. at 3-4.) This Court notes that the appellants have copied and pasted the post-trial briefs they submitted in the bankruptcy court proceeding into the briefs they submitted in this proceeding. Compare Post-Trial Arg. of Julia Hathaway Case No. 15 C 8917 [6-2] at 48-51; 73-77 and Post-Trial Arg. of Debra Comess Case No. 15 C 8921 [7-2] at 41-44; 86-90 with Appellants' Br. at 2-7. To their regurgitated arguments, the appellants add a few sentences asserting that the bankruptcy court missed the point and that solvency should not be determined by comparing CMCG's total assets to its total liabilities but rather whether there was any cash or accounts receivable not accounted for in the accountant's analysis of CMCG's QuickBooks data. (Appellants' Br. at 7.) The bankruptcy court dismissed a similar objection as misguided, reasoning that the chart on which appellants urge this Court to rely reflects only accounts receivable at monthly intervals and does not compare CMCG's total asset value ...

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