Case Summary:
The Debtor filed a Chapter 13 plan in November 1992. Great Lakes Higher Education Corporation, a predecessor to movant Educational Credit Management Corporation, then filed an unsecured claim in the amount of $31,530.08 for educational loans made between 1981 through 1987 to the Debtor. The plan was completed in 1997. A discharge of Debtor’s debts was entered using an outdated discharge order form which did not accurately reflect the law regarding the dischargeability of student loans. The case was reopened and Educational Credit Management Corporation filed its motion to reconsider the discharge order. It was determined that the discharge order was incorrect and misstated the law. Those portions of the order were ruled void and a new discharge order was entered in the form currently in use.

Statute/Rule References:
11 U.S.C. § 523(a)(8) -- Nondischargeability - Student Loans
11 U.S.C. § 1328(a) -- Discharge

Key Terms:
Student Loans

Case Summary:
In March 2003 this Court issued a memorandum decision and judgment awarding Plaintiff, Western Wisconsin Water, Inc. d/b/a La Crosse Premium Water (“Western”) damages against the Defendant, Quality Beverages of Wisconsin, Inc. (“Quality”) for Quality’s breach of contract to give Western a first right of refusal to acquire certain accounts. In mitigating its damages, Western recovered 400 of the 552 accounts that Quality should have offered. Western was awarded sums for lost profits based on the 152 accounts that Western did not recover and in mitigation expenses.

Western moved to amend the judgment on two theories. First, Western argued that profits from the resale of the 400 accounts that it recovered should have been included in its damages because the market for the accounts evaporated after Quality’s actions. Western stated that it showed that it could resell the 400 accounts. They further argued that the court should add to Western’s damages the difference between the value of all 552 accounts before Quality’s breach and the value of the 400 accounts recovered after Quality’s breach.

Second, Western contended that its mitigation expenses were higher than the estimated net profit Western would have realized in the future from its mitigation efforts and produced exhibits detailing its actual out-of-pocket expense in establishing its own distributorship.

Western’s first claim amounted to a request for damages that Western did not make successfully at trial. Western sought the profits that it claimed it could not realize from the resale of the recovered accounts because of the effects of Quality’s actions on the market. At trial, however, Western did not establish that Quality’s actions affected the market in the manner and to the extent claimed. Western also failed to demonstrate that the expected net profit is in fact the market price. It was determined that the potential windfall of retaining the recovered accounts and receiving the profits from the resale of the recovered accounts is inconsistent with Wisconsin’s application of the expectation interest in breaches of contract.

As to Western’s second claim, it was determined that mitigation damages in a breach of contract are an injured party’s actual expenditures made in reasonable efforts to minimize its losses. In arguing its motion, some confusion arose as to Western’s reference to its “net mitigation amount” and to its “startup costs”. It appears that a manifest factual error had been made and Western’s claimed actual cost of mitigation incurred

Statute/Rule References:
Fed. R. Civ. P. 59 -- New Trials

Key Terms:
Breach of Contract
Expectation Interest
First Right of Refusal
Lost Profits
Mitigate Damages

Case Summary:
The Debtor’s son-in-law, Ronald Vogt, had been managing VATW, a satellite operation of Monroe Ag-Tech (“Monroe”). Monroe advanced operating funds on a monthly basis to VATW, including an amount designated as Mr. Vogt’s salary. Badger State Bank (“Badger”) permitted VATW to pay Mr. Vogt from accounts in which Badger had a security interest. In early 2001, VATW began having financial difficulties. Monroe stopped advancing operating funds and Mr. Vogt stopped receiving his salary. By August 2001, VATW was insolvent and owed Mr. Vogt a substantial amount of unpaid salary. VATW closed its doors to the public and surrendered its assets to Badger. However, the assets were insufficient to satisfy VATW’s debt.

At the time VATW was closing, Mr. Vogt issued three checks in the amount of $29,000 drawn on VATW’s account to the Debtor to repay money lent to him. The parties agreed that the amount owed to Mr. Vogt was more than $29,000.

In January 2002, Badger sued the Debtor in Circuit Court seeking to recover the transfers as fraudulent under state law. The Debtor was unable to bear the costs associated with defending herself and filed for Chapter 13 protection. Her schedules did not include assets under her husband’s exclusive control.

Badger presented an elaborate objection to confirmation of Debtor’s Chapter 13 plan. Badger claimed to be a creditor of the Debtor by virtue of her having received a fraudulent transfer of property from a company at a time when that company was indebted to Badger. Badger had no other claims against Debtor. If Badger were entitled to recover the transferred property from the Debtor, complicated issues would arise as to whether the Debtor’s plan was in the creditors’ best interest.

The Debtor denied that a fraudulent transfer occurred and that Badger had a claim against her estate. She argued that neither she nor her creditors had any rights to property under her husband’s exclusive control pursuant to a marital property agreement that she and her husband signed in 1995. Badger claimed that the marital property agreement was too vague to be enforced.

It was determined that Badger’s standing to object to the plan depended upon the Debtor’s receipt of a fraudulent transfer. Badger’s transfer was not fraudulent and the Debtor was not obligated to Badger and Badger did not have standing to object to her plan. Thus, Badger’s objection based on the marital property agreement was not explored.

Statute/Rule References:
Wis. Stat. § 242 -- Fraudulent Conveyance

Key Terms:
Fraudulent Transfer

Case Summary:
The Debtor-Defendant owned and operated a business known at Faval, Inc. In late 1999, Faval was struggling financially. The Plaintiff owned and operated a restaurant and two rental buildings and maintained steady employment. Plaintiff had known the Debtor-Defendant for over 40 years. In January 2000 Debtor-Defendant and Plaintiff met to discuss the Faval business, culminating in a payment made to Debtor-Defendant with a promise for more money in the future. In the period January 2000 through May 2001 Plaintiff gave Debtor-Defendant in excess of $810,000 through loans, lines of credit, checks and cash to use in Faval. The parties agreed that Debtor-Defendant would make payments when due on Plaintiff’s bank loans and begin to pay plaintiff for his personal loans once Faval became profitable.

During this time, and unknown to Plaintiff, Debtor-Defendant adopted a number of unusual bookkeeping methods that made tracking Faval’s finances virtually impossible. Debtor-defendant did not keep a general ledger and generally relied on her memory instead of books and records. Debtor-Defendant is unable to explain how loans were disbursed and even admitted to losing track of large loans made by other investors. Debtor-Defendant also frequently dealt with cash in an effort to avoid a Wisconsin Department of Revenue levy for unpaid income taxes.

In January 2001 plaintiff gave Debtor-Defendant his employer’s credit card number so she could purchase approximately $3,000 worth of materials from a supplier that would only accept a credit card. Debtor-Defendant continued to use the credit card to purchase other supplies, incurring over $6,800 in charges.

In the spring of 2001 Debtor-Defendant contacted one of the banks with whom Plaintiff took out a loan for Faval’s benefit and requested that the address be changed from Plaintiff’s home address to Debtor-Defendant’s business address in an effort to save Plaintiff the hassle of being notified when Debtor-Defendant was late in making payment. Debtor-Defendant did not inform plaintiff of the request, instead, the bank contacted him seeking his authorization.

The Plaintiff became concerned about Debtor-Defendant’s management of Faval and sought the assistance of his personal accountant to examine the Faval records. The accountant was unable to trace funds beyond their initial payment and sought bank records from Debtor-Defendant. Those records were not provided. A disturbing pattern of misappropriation and uncertainty as to the proper allocation of Faval funds was discovered. Debtor-Defendant did not provide sufficient information to explain the many discrepancies.

In August 2001 plaintiff’s attorney demanded that Debtor-Defendant repay his client $120,000 of the personal loans by the end of the month. Debtor-Defendant failed to do so. In October 2001 plaintiff then changed the locks on the building. In response, Debtor-Defendant ceased operations of Faval.

In February 2002 Debtor-Defendant filed for Chapter 7 protection. At her first meeting of creditors Debtor-Defendant asserted her Fifth Amendment privilege as to her personal and business financial statements, dates on which she incurred debts to certain creditors, and the use to which she put those funds.

Plaintiff filed an adversary complaint arguing that the court should draw a negative inference from Debtor-Defendant’s use of the Fifth Amendment privilege and that the debt to him was non-dischargeable under 11 U.S.C. §§ 523(a)(2), (4), and (6). He also argued that Debtor-Defendant’s behavior warranted the denial of her discharge. In total he sought recovery of $657,700 of funds loaned to Debtor-Defendant.

The Court granted Debtor’s discharge before hearing plaintiff’s adversary proceeding. In the vast majority of cases, parties plead adequately in adversary proceedings and the clerk of court’s staff can determine whether a claim has been filed under § 727. If none has, the clerk follows the standard procedure of granting a debtor’s discharge 60 days after their first meeting of creditors as to all debts that are not the subject of a pending adversary proceeding brought under § 523. Plaintiff’s complaint alleged grounds for relief under § 523, not § 727. Thus, on August 19, 2002, following its standard procedure and without evaluating the substance of plaintiff’s claims, the court issued debtor-defendant’s discharge as to all debts not subject to a pending adversary proceeding. At trial it was then determined that the pleadings should be constructively amended to include the § 727 objections and that debtor-defendant should not have received her discharge.

Debtor-Defendant’s discharge was revoked and denied pursuant to §§ 727(a)(2), (3), and (5). A money judgment in the amount of $657,700 was entered in favor of Plaintiff.

Statute/Rule References:
11 U.S.C. § 105 -- Power of Court
11 U.S.C. § 523(a) -- Exceptions to Discharge
11 U.S.C. § 727 -- Discharge

Key Terms:
Fifth Amendment
Non-Dischargeable Debt
Revocation of Discharge