In re Arthur B. Adler & Assocs., Ltd.

588 B.R. 864

IN RE: ARTHUR B. ADLER AND ASSOCIATES, LTD., Debtor.

Case No. 17 BK 11697

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

Signed August 20, 2018

Entered August 22, 2018

Jeffrey Strange, Jeffrey Strange & Associates, Wilmette, IL, for Debtor.

David P. Leibowitz, Lakelaw, Chicago, IL, for Trustee.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON TRUSTEE'S MOTION FOR CIVIL CONTEMPT AND SANCTIONS [DKT. NO. 86]

Jack B. Schmetterer, United States Bankruptcy Judge

This matter came to be heard on the Motion for Civil Contempt and Motion for Sanctions of the Chapter 7 Trustee, David P. Leibowitz ("Trustee"). Trustee sought to hold Arthur B. Adler ("Adler"), the president of the Debtor, Arthur B. Adler and Associates, Ltd. ("Debtor"), in contempt for his violations of the automatic stay, 11 U.S.C. § 362, and for violations of this Court's September 8, 2017 Turnover Order [Dkt. No. 43].

Trial was held on July 9 and 10 on Trustee's Motion. Oral closing argument was heard, and the parties previously submitted proposed findings of fact and conclusions of law.

For the reasons stated below, it is found and held that Adler did willfully violate the automatic bankruptcy stay by his actions and a finding of civil contempt will be entered against him because of those violations.

The Court now makes and enters the following Findings of Fact and Conclusions of Law.

I. FINDINGS OF FACT

A. BACKGROUND INFORMATION

Debtor is an Illinois corporation, a law firm which was engaged in the business of retail debt collection. Debtor would collect debts against individuals and small businesses on behalf of its clients. Arthur B. Adler is the President of the Debtor corporation. His wife, Jacquelyn Adler, serves as the corporation's secretary. The Debtor corporation was engaged in the business of debt collection until the Chapter 7 petition filing date, April 13, 2017. At that time, Debtor was actively collecting hundreds of accounts for at least forty clients.

Prior to the petition date, a judgment debtor of one of Debtor's clients, Amy Gregory ("Gregory"), challenged Debtor's collection practices pursuant to the Fair Debt Collection Practices Act. That action was filed in the United States District Court for the Northern District of Illinois as Cas No. 12-CV-7351, titled Gregory v. Arthur B. Adler and Associates Ltd. After a jury trial, judgment was entered on April 7, 2016 in favor of the plaintiff, awarding damages of $1,000 for the FDCPA violation. The District Court entered an order on October 3, 2016 awarding Gregory attorneys' fees in the amount of $94,814.64 and costs of $643.30.

On November 16, 2016, Gregory issued a citation to discover assets against JPMorgan Chase Bank ("Chase"). Chase responded to that citation, indicating that it maintained $ 12,607.35 in a frozen checking account ending in 9319 and an additional 77.08 in the form of a check. The 9319 account was Debtor's Expense Account. The District Court entered an order on December 5, 2016 requiring Chase to turn over $12,684.43 in partial satisfaction of the judgment. On February 22, 2017, Gregory issued a citation to discover assets against the Debtor itself. The District Court held a hearing on the citation on March 17, 2017 and Debtor was given 21 days to respond. Debtor filed for bankruptcy protection one day before the status hearing set on the citation, on April 14, 2017.

Trustee filed the instant Motion for Contempt and Sanctions on March 19, 2018. Trustee accused Adler of directing funds properly belonging to the bankruptcy estate of the Debtor to his and his wife's personal bank accounts. Trustee asserts that as of the petition date, Debtor's schedule B showed only one of the existing nine IOLTA accounts ("IOLTA Client Fund Account # 2") at Chase held any money in it, $28,019.33. On September 8, 2017, this Court entered an order requiring Adler to turn over all funds in all of Debtor's accounts, including the IOLTA Client Fund Account # 2. On September 14, 2017, Adler delivered a check to Trustee in the amount of $206,073.74, purportedly representing all funds in IOLTA Client Fund Account # 2. Given that this was far more than the amount initially scheduled, Trustee moved to examine Debtor's banking records at Chase Bank. The Court granted Trustee's request to examine the Debtor corporation's records at Chase Bank, but denied without prejudice his request to examine the bank records of Adler and his wife.

On November 20, 2017 Adler caused a cashier's check in the amount of $26,811.31 to be issued by SunTrust Bank ("SunTrust"). Adler represented this amount to be funds he had collected from twenty separate accounts of his clients. He did not explain where these funds had originally been deposited, nor what the sources of funds for the cashier's check were. Due to this cashier's check and the information Trustee received in the corporate bank records of the Debtor obtained from Chase, the Court granted Trustee's request to examine the personal bank records of Adler and his wife at both Chase and SunTrust on January 23, 2018 [Dkt. No. 82]. Trustee filed the instant Motion based upon his review of the Debtor corporation, Adler, and his wife's bank records. The Court entered a scheduling order on the Motion requiring that Adler Respond by April 12, 2018 and setting a status hearing on April 19, 2018.

Adler filed his Response, titled "Arthur Adler's Answer to Motion for Contempt," on April 12, 2018 [Dkt. No. 97]. Adler argued that he had properly turned over the $206,073.74 pursuant to the September 14, 2017 Turnover Order. Adler explained that the additional $26,811.31 cashier's check which was delivered to Trustee represented payments from creditors which continued to arrive at the Debtor's address. Adler asserted that he sent several such checks to the Trustee: a January 3, 2018 check in the amount of $15,848.17, a January 19, 2018 check in the amount of $21,896.48, and a March 5, 2018 check in the amount of $ 12,930.18 were all sent to Trustee after the payments from creditors arrived at Debtor's address. Adler argued that he had not violated any part of the turnover order because the requirement to turnover "all checks from judgment debtors or third parties in possession of Debtor" was not explicitly prospective. That language in the order, Adler argued, was ambiguous as to his specific responsibilities for incoming funds and thus, he could not be held in civil contempt because he was not clearly and unequivocally notified of the allegedly sanctionable behavior.

Adler further argued that his actions were not a violation of the stay under 11 U.S.C. § 362(a) because the Trustee is not an "individual" who was injured by a willful violation of the stay pursuant to 11 U.S.C. § 362(k)(1). Adler argued that bankruptcy courts may no longer use their equitable powers pursuant to 11 U.S.C. § 305 to take any action which explicitly contravenes the mandate of the Bankruptcy Code. Law v. Siegel, 571 U.S. 415, 421, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). Adler asserted that this includes awarding damages to non-individual entities harmed by violations of the automatic stay.

Trustee filed his Reply on April 18, 2018 [Dkt. No. 98]. He argued that Adler had been informed in the Motion for Contempt of the portions of the Turnover Order that Trustee contended were violated. Due to the number of violations asserted, Trustee was, at the time his Motion was filed, unable to ascertain whether all the funds deposited in Adler's personal accounts were actually remitted. Moreover, Trustee argued that Adler's contention that the Turnover Order was not "explicitly prospective" is disingenuous and weak as an argument because the clear intention of the Order and the Code itself is that all property of the estate is turned over to the Trustee, an ongoing obligation of Debtor pursuant to 11 U.S.C. § 521(a)(4). Trustee asserts that he cannot even be sure that Adler did in fact turnover all funds in his possession.

Trustee also argued that Adler's assertion that he did not violate the automatic stay is even more specious. As Adler clearly deposited funds constituting property of the estate and property of his clients into his personal accounts, Trustee argued that he facially violated 11 U.S.C. § 362(a)(3) by taking possession of and exercising control over property of the estate. In fact, Trustee noted that Adler did not dispute that he acted in violation of the stay. Instead, Trustee states that Adler only attacked the 11 U.S.C. § 362(a) claim on the basis that as a non-"individual", Trustee cannot be compensated through damages because of the prohibition in 11 U.S.C. § 362(k)(1) and the Supreme Court's decision in Law v. Siegel . Trustee argues that Adler's reliance on Law v. Siegel is misplaced because that case did not establish conclusively that a Trustee could not recover damages pursuant to a bankruptcy court's equitable powers under 11 U.S.C. § 105. Rather, Law v. Siegel only held that a Trustee could not surcharge a debtor's homestead exemption for payment of an administrative expense. As such, argued Trustee, a bankruptcy court is within its discretion to award discretionary damages to a Trustee pursuant to 11 U.S.C. § 105.

At the hearing on April 19, 2018, the Court requested that Adler file a Supplemental Answer to Trustee's Motion, explicitly admitting or denying each of the factual allegations therein. Adler filed this Supplemental Answer on May 2, 2018 [Dkt. No. 106]. Adler denied that he had diverted property of the estate in contravention of the Turnover Order, denied each of the instances in which Trustee asserted that he had deposited client funds into his personal accounts without crediting his clients accounts or turning over money to the Trustee, and denied that he had violated the automatic stay.

The Court entered a Final Pre-Trial Order on May 4, 2018, setting trial only on the violation of the automatic stay and sanctions for July 9, 10, 12 and 23, 2018 at 1:30 p.m....