Paloian v. Byline Bank (In re Kowalski)

633 B.R. 822

IN RE: Robert M. KOWALSKI, Debtor.

Gus A. Paloian, not individually, but solely in his capacity as the duly appointed Trustee for the estate of Robert M. Kowalski, Plaintiff,

v.Byline Bank, Defendant.

Case No. 18 BK 09130

Adv. No. 19 AP 00626

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

Signed October 13, 2021

Attorney for Movant: M. Ryan Pinkston, Seyfarth Shaw, LLP.

Attorney for Respondent: Richard B. Polony, Hinshaw & Culbertson LLP, Chicago.

Trustee or Other Attorneys: Gus A. Paloian, Seyfarth Shaw, LLP, Chicago.

Amended Order Denying Motion to Set Trial for Adversary Proceeding (Adv. Dkt. 105)

Jacqueline P. Cox, United States Bankruptcy Judge

Plaintiff, Gus A. Paloian (the "Plaintiff"), not individually, but solely in his capacity as the duly appointed Chapter 7 Trustee for the estate of Debtor Robert M. Kowalski (the "Bankruptcy Estate") moved for an Order Setting a Trial Date. Before this adversary proceeding was filed, two witnesses, Robert Kowalski (the "Debtor") and Jan Kowalski, were indicted on criminal charges, including bankruptcy fraud and concealment of assets. Thereafter, the court continued this matter for status to November 16, 2021 because Jan Kowalski refused to testify when deposed in this adversary proceeding, invoking her Fifth Amendment privilege against self-incrimination.

In support of his Motion, the Trustee argues the Defendant should not be granted a stay of the adversary proceeding because it has not filed a motion for a stay. The Trustee also argues it is unnecessary for Jan Kowalski to testify because the court's prior findings and conclusions based on her testimony in a prior adversary proceeding are binding in this proceeding under the law of the case doctrine. Alternatively, the Trustee argues that the factors courts use to determine if a stay is appropriate weigh against a stay. In its response, the Defendant argues applying the law of the case doctrine here would be unjust because (1) it would prevent it from eliciting testimony from two key witnesses, the Debtor and Jan Kowalski, and (2) the Defendant was not a party to the prior adversary proceeding. Trustee v. Byline Bancorp., Inc. (In re Kowalski ), Ch. 7 Case No. 18-09130, Adv. No. 19-00626, Dkt. No. 107, pp. 1-2 (Bankr. N.D. Ill. Sept. 17, 2021) ("Adv. 19-626").

The Defendant also argues that here, the aforementioned factors weigh in favor of postponing the trial until the criminal proceedings conclude. Due to the posture of the criminal matter and the fact that the defendants in the criminal case are witnesses in the civil matter, the court orders that the Plaintiff's Motion for an Order Setting a Trial Date will be denied, and that the trial in this adversary proceeding will be stayed until the end of the criminal case.

Background

This Adversary Proceeding concerns Cashier's Checks, most of which were purchased pre-petition by the Debtor from the Defendant. During Robert M. Kowalski's Chapter 7 case, these checks were deposited into and funds were later withdrawn from an Interest on Lawyer Trust Account ("IOLTA Account") belonging to Jan Kowalski, the Debtor's sister and former attorney. Adv. 19-626, Byline's Statement of Contested Facts ¶¶ 1-3, 9-11, 14-25, Dkt. No. 63-1.

Previously, the Trustee filed a Motion for Turnover of Estate Funds (the "Turnover Motion") against the Debtor and Jan Kowalski, alleging the cash withdrawals were property of the estate that had been converted by them. In re Kowalski , Ch. 7 Case No. 18-09130, Dkt. No. 315, pp. 1, 3-11 (Bankr. N.D. Ill. Dec. 26, 2018) ("BK Case"). At the trial on the Turnover Motion, Jan Kowalski testified that the Debtor used the Cashier's Checks to pay her legal fees earned from Debtor and from entities the Debtor owned or controlled. Adv. 19-626, Byline's Statement of Contested Facts ¶ 5, Dkt. No. 63-1. On February 21, 2019, the court granted the Turnover Motion, finding that Jan Kowalski's testimony was not credible and that the disputed funds withdrawn from her IOLTA Account were property of the Debtor's bankruptcy case. BK Case, Case No. 18-09130, Dkt. No. 436 at p. 1.

The Trustee also filed an adversary proceeding against Jan Kowalski for turnover of the Cashier's Checks proceeds. Trustee v. Kowalski (In re Kowalski ), Ch. 7 Case No. 18-09130, Adv. No. 19-00066, Dkt. No. 1, ¶¶ 10-104 (Bankr. N.D. Ill. Feb. 4, 2019) ("Adv. 19-066"). On February 15, 2019, the court granted a Temporary Restraining Order and an Injunction to prevent Jan Kowalski from disposing of the disputed funds. Adv. 19-066, Dkt. No. 8 at pp. 1-5.

On March 10, 2019, the U.S. Attorney filed a criminal complaint against the Debtor, Jan Kowalski, and others, alleging that they concealed the property of the Bankruptcy Estate, obstructed the Trustee's and creditors’ efforts to obtain records or locate property of the estate, and filed false and fraudulent documents. Complaint ¶¶ 2-5, 18, 27, 35, 39, 41, United States v. Kowalski , No. 19 CR 00226 (ND. Ill. Mar. 10, 2019), ECF No. 1. On April 25, 2019, the Trustee filed this adversary proceeding against Defendant Byline alleging three counts: violation of the automatic stay, conversion, and turnover of property of the Estate. Adv. 19-626, Dkt. No. 1 ¶¶ 45-75.

The criminal case is ongoing. See United States v. Kowalski , No. 19 CR 00226-1, 2021 WL 4318074, at *2-4 (ND. Ill. Sept. 23, 2021) (denying Robert's motions to dismiss the indictment). The government's position is that during the bankruptcy case, Robert and Jan Kowalski concealed property of the Bankruptcy Estate from Robert's creditors and the Trustee, including approximately $360,000 in assets, filed documents containing false representations, and made false representations to the U.S. Bankruptcy Court. Complaint ¶¶ 4, 18 Kowalski , No. 19 CR 00226, ECF No. 1. Based on their handling of the Cashier's Checks at issue in this adversary proceeding, Robert and Jan Kowalski are also charged with conspiracy to embezzle bank funds and to falsify bank records as well as aiding and abetting the embezzlement of bank funds. See United States v. Kowalski , 2021 WL 4318074, at *2 (N.D. Ill. Sept. 23, 2021).

The court continued this matter for status to November 16, 2021 to discern the status of the criminal case.

Law of the Case Doctrine

The law of the case doctrine is a rule of practice under which after an issue has been litigated and decided once, that should be the end of the matter. See Analytical Eng'g, Inc. v. Baldwin Filters, Inc. , 425 F.3d 443, 454 (7th Cir. 2005) (quoting Creek v. Vill. of Westhaven , 144 F.3d 441, 445 (7th Cir. 1998) ). Under this rule, when the court decides an issue of law, the ruling will govern the same issues in subsequent stages of the case. See Redfield v. Cont'l Casualty Corp. , 818 F.2d 596, 605 (7th Cir. 1987). A court has discretion to apply the doctrine. See id.

A bankruptcy court may apply the doctrine across adversary proceedings within the same bankruptcy case. See In re Motors Liquidation Co. , 590 B.R. 39, 62 (S.D.N.Y. 2018), aff'd , 943 F.3d 125, 133 (2d Cir. 2019). However, some courts have decided not to apply the doctrine to a different adversary proceeding in the same bankruptcy case that involves different parties. See United States ex rel. Kemper Sec. Grp. v. Clark (In re Kazi ), 165 B.R. 246, 248 (Bankr. S.D. Ill. 1994) ("[t]he doctrine is not applicable where either different parties or issues are involved.") (citations omitted).

The Trustee argues it is not necessary for Jan Kowalski to testify, since the court's findings from her testimony in a prior adversary proceeding are binding in this proceeding. He argues the court should hold that under the law of the case doctrine, the Defendant is bound by the court's prior rulings that the Cashier's Checks were not from attorney's fees earned from the debtor, the Cashier's Checks were Property of the Bankruptcy Estate, and that Jan Kowalski was not a credible witness. Adv. 19-066, Dkt. No. 8 at pp. 2-5; Adv. 19-626, Dkt. No. 105, ¶¶ 28, 34-36.

The Defense argues applying the doctrine in this manner would be unjust, since it would prevent it from eliciting testimony from two key witnesses about the Cashier's Checks and because the Defendant was not a party to the prior proceeding. Adv. 19-626, Dkt. No. 107 at pp. 1-2.

Notably, Robert and Jan Kowalski are the principal witnesses to the transactions at issue. Adv. 19-626, Dkt. No. 107 at p. 9. Moreover, although a Byline Bank representative testified at the prior proceeding, the Defendant did not have the opportunity to question the Debtor or Jan Kowalski. Given the importance of these witnesses to their case, the Defendant should have the opportunity to elicit testimony from them. Since applying the law of the case doctrine would effectively deny the Defendants that opportunity, the court, in its discretion, declines to apply the doctrine herein.

Stay of the Adversary Proceeding

Courts have the inherent power to control their dockets while taking into account the "economy of time and effort" for the court, counsel, and litigants. See Landis v. N. Am. Co. , 299 U.S. 248, 254, 57 S.Ct. 163, 81 L.Ed. 153 (1936). This includes a court's discretionary power to stay civil proceedings, postpone civil discovery, or impose protective orders and conditions when the "interests of justice" so require. See United States v. Kordel , 397 U.S. 1, 12, n. 27, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970). Courts may stay a civil case to preserve a witness's Fifth Amendment privilege rights. See Eastwood v. United States , 2008 WL 5412857, at *1 (E.D. Tenn. Nov. 14, 2008) (citations omitted); Cf. Andover Data Servs. v. Statistical Tabulating Corp. , 876 F.2d 1080, 1080-82 (2d Cir. 1989) (stating that a witness may invoke their Fifth Amendment privilege whenever they reasonably believe their testimony could be used in a criminal proceeding).

Entering a stay in light of a parallel criminal proceeding is not constitutionally required; courts have discretion to issue...