Lulay Law Offices v. Rafter

579 B.R. 827

LULAY LAW OFFICES, Plaintiff-Appellant,

v.Melissa Maryann RAFTER, Defendant-Appellee.

Case No. 17-cv-477

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

Signed September 29, 2017

Michael Brent Lulay, Lulay Law Offices, Naperville, IL, for Plaintiff-Appellant.

James P. Mullally, Konewko & Associates, Ltd., West Chicago, IL, for Defendant-Appellee.

MEMORANDUM OPINION AND ORDER

John Robert Blakey, United States District Judge

This bankruptcy appeal arises from a series of conflicting orders on the distribution of proceeds of a debtor's personal injury claim. Plaintiff-Appellant Lulay Law Offices (LLO), the firm that secured and currently possesses the proceeds, contends that the trustee of the bankruptcy estate abandoned the proceeds in the early stages of the bankruptcy process, rendering void any subsequent orders relating to that asset. [20] at 4.¹ Defendant-Appellee Melissa Maryann Rafter argues that the bankruptcy court exempted those proceeds, which entitles her to their possession, as reflected in the bankruptcy court's Turnover Order of January 6, 2017. [22] at 7, 9; Bankr. Dkt. 59. Rafter seeks enforcement of the Turnover Order, while LLO asks this Court to vacate any orders subsequent to the alleged abandonment. [20] at 8; [22] at 11.

As explained further below, this Court respectfully vacates those orders and remands this case to the bankruptcy court for further proceedings consistent with this opinion.

I. Background

Defendant-Appellee Rafter was involved in a car accident in September 2014 that resulted in a personal injury lawsuit, in which she was represented by Plaintiff-Appellant LLO under a contract signed that month. [20] at 2. LLO served notice of its attorney's lien for fees and costs on any proceeds from the suit in November 2014. Dkt. 20 App. 15. That statutory lien is authorized by the Illinois Attorneys Lien Act. 770 ILCS 5/1 et seq.

On July 28, 2016, Rafter filed for Chapter 7 bankruptcy. Bankr. Dkt. 1. The present record does not establish precisely when LLO negotiated a settlement on Rafter's personal injury claim, compare [22] at 3 with [20] at 2, but Rafter signed a settlement agreement on August 25, 2016, [20] App. 14, after she had filed for bankruptcy. The settlement was for $20,000, to be held in trust by LLO "until LLO is directed in writing by bankruptcy court how to distribute." Id. That $20,000 in proceeds from Rafter's personal injury claim ("the asset") is the subject of the present dispute. LLO remains in possession of the asset.

A. The Bankruptcy Process Begins

Once Rafter filed for bankruptcy in July 2016, a trustee for the bankruptcy estate was appointed and a meeting of creditors scheduled, pursuant to 11 U.S.C. § 701 and § 341. The meeting was scheduled for August 22, 2016. Bankr. Dkt. 8. Notice of the meeting was provided to Rafter's creditors, including LLO. Bankr. Dkt. 9 at 3. A meeting was held on August 22, and a Statement Adjourning Meeting of Creditors was entered on August 23, 2016, although that filing also noted "Meeting Continued on 9/12/2016." Bankr. Dkt. 14. No other record of a potential meeting on September 12 exists.

On August 24, the bankruptcy trustee filed a Report of No Distribution. Bankr. Dkt. 15. In the Report, the trustee certified that "there is no property available for distribution from the estate over and above that exempted by law"; that the bankruptcy estate had been "fully administered"; and requested that he be discharged from any further duties as trustee. Id. The Report listed the amount of exempt assets as $40,551.59. Id.

On August 28, Rafter filed her required schedules, listing her property, claims against her, and claims for exemption. Bankr. Dkt. 16. Schedule C lists the items that Rafter claimed as exempt from the demands of her creditors, including the asset at issue in this case, along with other personal property. Id. at 9. Of the asset's $20,000 in gross proceeds, Rafter claimed $17,665 as exempt under the Illinois exemption scheme.² Id. The total dollar amount claimed as exempt in Rafter's Schedule C was $60,551.59. Id. at 7–9. That number matches the trustee's certification of exempt assets if the $20,000 worth of proceeds is subtracted, indicating that the trustee either was not aware that Rafter was claiming part of the asset as exempt, or that the trustee believed he had already abandoned the asset. Id. at 9; Bankr. Dkt. 15.

On September 9, 2016, Rafter filed a motion to avoid liens on the asset under 11 U.S.C. § 552(f), and to determine disbursement of the asset. Bankr. Dkt. 18. On September 20, LLO filed a motion to approve disbursement of its fees and costs out of the asset, based upon its prior agreements with Rafter. Bankr. Dkt. 20. These filings set in motion the series of disputed orders now on review before this Court.

B. The Bankruptcy Court's Orders

On September 30, 2016, the bankruptcy court issued three orders relating to the asset, in response to both Rafter's motion to avoid liens and LLO's motion to approve distribution of the asset and to deny Rafter's motion to avoid liens. Bankr. Dkt. 18; Bankr. Dkt. 20.

Order 24 first purported to avoid three medical liens on the asset resulting from medical care received after the car accident, relieving Rafter from those obligations. Bankr. Dkt. 24. Second, the order allowed Rafter's claimed $17,665 exemption and instructed that "Debtor shall be paid the entire amount of her exemptions, the sum of $17,665." Id.

Order 25 granted LLO's motion to approve the disbursement of its fee and costs from the asset, totaling $7,267.98. Bankr. Dkt. 25. The bankruptcy court also indicated that it would not rule on the distribution of the remainder of the asset "because the trustee abandoned this asset." Id.

Order 26 reiterated the approval of Rafter's claimed exemption of $17,665, and stated that "medical liens" were avoided "to the extent they impair the exemption," while LLO's attorney's lien was addressed "by separate order." Bankr. Dkt. 26. Since Order 26 is dated September 30, the record remains unclear why this ostensibly redundant order issued.

It quickly became clear to the parties, however, that the disbursement granted to LLO under Order 25 and the distribution granted to Rafter by Order 24 were irreconcilable because $17,665 and $7,267.98 add up to more than $20,000. A flurry of motions followed, culminating in a hearing on December 16, 2016. Bankr. Dkt. 70. At that hearing, the bankruptcy court concluded that the bankruptcy trustee had abandoned the asset, which was therefore "no longer a part of the estate." Id. at 5. As such, the bankruptcy court also found that it lacked jurisdiction over the distribution of the asset, but concluded that it retained jurisdiction over any request for lien avoidance, including Rafter's earlier motion under § 522(f). Id. at 5, 6–7. Based upon this analysis, the bankruptcy court vacated Order 25—rescinding LLO's disbursement—but left in place Orders 24 and 26, affirming Rafter's exemption and the avoidance of the medical liens. Bankr. Dkt. 55.

After denying various challenges by LLO to this decision, the bankruptcy court issued an order on January 6, 2017, compelling LLO to turn over the exempted amount of $17,665 to Rafter, from the $20,000 still in its possession. Bankr. Dkt. 59. The bankruptcy court closed the case on January 16, 2017. Bankr. Dkt. 60. LLO appeals from the January 6 Turnover Order. Dkt. 1 at 1.

C. Summary of Bankruptcy Events

In short, the present record indicates that:

• On August 22, 2016, a properly noticed creditors' meeting was held, but no documentation of the specific events of that meeting appear in the record.

• On August 24, the trustee filed a No Distribution Report.

• On August 25, Rafter signed the settlement agreement with LLO.

• On August 29, Rafter's schedules were filed, claiming the asset as exempt property.

• On September 30, the bankruptcy court allowed Rafter's claimed $17,665 exemption on the asset and purported to avoid the medical liens attached to the asset.

• On January 6, 2017, the bankruptcy court ordered the turnover of $17,665 from LLO to Rafter.

• On January 16, the bankruptcy court closed the case. (It has since been reopened as a result of the parties subsequently filing additional motions.)

At the time of this appeal, Order 24, Order 26, and the January 6 Turnover Order all remain in effect.

II. Legal Standard

This Court has jurisdiction to hear appeals from the rulings of the bankruptcy court under 28 U.S.C. § 158(a). A turnover order is a final, appealable order when it terminates the relevant adversary proceeding. See Matter of Cash Currency Exchange, Inc. , 762 F.2d 542, 546 (7th Cir. 1985). On appeal, this Court reviews the bankruptcy court's legal findings de novo and its factual findings for clear error. In re Mississippi Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). Finally, the district courts have the "authority to remand to the bankruptcy court to clarify and make additional factual findings where appropriate." Dvorkin Holdings, LLC , 547 B.R. 880, 899 (N.D. Ill. 2016) (citing In re Sentinel Mgmt. Grp., Inc. , 728 F.3d 660 (7th Cir. 2013) ).

III. Analysis

Based upon the record, it appears that everyone involved in this case—the bankruptcy court, the trustee, and both parties on appeal—assumed that the bankruptcy trustee abandoned the asset at some early stage in the process. If true, under well-settled law, an effective abandonment would have terminated the bankruptcy court's subject matter jurisdiction over the asset, rendering void every subsequent order relating to it. The evidence in the record, however, fails to clearly establish whether the asset was properly abandoned, and if it was, on what date such abandonment occurred. Consequently, this case must be remanded to the bankruptcy court for further findings.

A. Relevant Bankruptcy Principles

When a debtor files for Chapter 7 bankruptcy, her personal property becomes part of the bankruptcy estate to be...