Horace Fox v. Julia Hathaway , 929 F.3d 803 ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17-2354
IN RE:
CHICAGO MANAGEMENT CONSULTING GROUP, INC.,
Debtor.
HORACE FOX, as Chapter 7 Trustee for
the Estate of Chicago Management
Consulting Group, Inc.,
Plaintiff-Appellee,
v.
JULIA HATHAWAY,
Defendant-Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 15 C 8917 — Jorge L. Alonso, Judge.
____________________
ARGUED SEPTEMBER 28, 2018 — DECIDED JULY 10, 2019
____________________
Before RIPPLE, SYKES, and SCUDDER, Circuit Judges.
SYKES, Circuit Judge. Frank Novak tragically took his own
life in February 2012. He left his company, Chicago
2 No. 17-2354
Management Consulting Group, Inc., to his close friend
Debra Comess. She was not in a position to manage the
struggling firm, so she initiated bankruptcy proceedings
almost immediately after Novak’s death.
The Chapter 7 Trustee discovered numerous transfers
from Chicago Management Consulting Group’s coffers to
Comess and Julia Hathaway—another Novak companion
who ran a small yoga studio. Believing the transfers to be
fraudulent under the Bankruptcy Code, the Trustee sought
to reclaim their value for the Estate. After a bench trial, the
bankruptcy judge ruled that the transfers to Comess and
Hathaway were voidable on grounds of actual and
constructive fraud and imposed sanctions on Hathaway for
discovery lapses. The district court affirmed.
Comess settled her case; this appeal concerns the trans-
fers to Hathaway. She launches several arguments. First, she
contends that the bankruptcy judge committed clear error by
ignoring one of the Trustee’s trial exhibits when evaluating
the company’s financial health. Second, she challenges the
bankruptcy judge’s finding that the company did not receive
reasonably equivalent value in return for its transfers. Third,
she argues that the company did not have “creditors” under
the Illinois Uniform Fraudulent Transfer Act (“IUFTA” or
“the Act”) at the time of the transfers. Finally, Hathaway
vigorously disputes the sanctions ruling.
We affirm. As a preliminary matter, Hathaway failed to
comply with multiple rules of appellate procedure. On the
merits, our review of a bankruptcy court’s factual findings is
constrained; we reverse only for clear error. Not one of
Hathaway’s arguments meets this high bar. The bankruptcy
judge was amply justified when he concluded that the
No. 17-2354 3
company was insolvent, the transfers to Hathaway were
gratuitous, and the company had creditors under the Act.
And we see no reason to disturb the imposition of discovery
sanctions.
I. Background
Novak was the sole shareholder of Chicago Management
Consulting Group, an information-technology consulting
firm he started in 1997. His primary client was BP America.
By 2008 the company’s solvency was questionable. In
February 2012 Novak committed suicide, leaving his com-
pany to his good friend Debra Comess. She was not
equipped to run the firm, so she initiated bankruptcy pro-
ceedings, filing a voluntary Chapter 7 petition in the North-
ern District of Illinois on May 2, 2012.
For four years prior to the bankruptcy filing, Comess and
Julia Hathaway, another close friend of Novak’s, had re-
ceived significant payments from the company, though they
were not employees. Hathaway alone received $45,400.81
between 2008 and 2012. Hathaway runs a small yoga studio,
and her email correspondence with Novak during this
period suggests that the payments were personal, not pro-
fessional. The emails document Hathaway’s repeated re-
quests for gifts and payments and Novak’s expressions of
affection for her and willing acquiescence in her requests.
Trustee Horace Fox brought an avoidance action target-
ing the transfers to Comess and Hathaway. He later moved
for sanctions against Hathaway alleging dilatory behavior
during discovery.
The bankruptcy judge determined that the women had
indeed received money from Chicago Management Consult-
4 No. 17-2354
ing Group and that Novak typically failed to record the
transactions. The judge also found that the company was
insolvent at the time of the transfers, relying on an account-
ing expert’s report introduced by the Trustee. The judge
rejected Hathaway’s argument that a list of gross receivables
proffered by the Trustee refuted the expert’s conclusion.
Moving on, the judge ruled that the company did not re-
ceive reasonably equivalent value in exchange for its trans-
fers to Hathaway. He based this finding on evidence of
Novak’s close personal relationship with her, his habit of
paying for her personal expenses on demand, the lack of
evidence that Hathaway performed any work for the com-
pany, the irregularity and vagueness of her apparently
hastily prepared invoices, and the inconsistency of those
invoices with the company’s bank records.
The judge concluded that the transfers were voidable as
actually and constructively fraudulent under 11 U.S.C. § 548and the IUFTA. The latter applied via § 544(b)(1) of the Code
because the Trustee had established that the consulting firm
had “at least one [unsecured] creditor” at the time of the
conveyances—the Internal Revenue Service—and that an
unpaid credit-card company counted as another.
The judge took a cautious approach to the Trustee’s mo-
tion for discovery sanctions. He declined to impose sanc-
tions for Hathaway’s failure to respond to interrogatories
and produce tax returns. And although Hathaway was slow
to turn over certain emails despite multiple discovery or-
ders, the judge was satisfied that she had generally complied
and that much of the delay was caused by her email service
provider. Finally, the judge considered a set of emails that
Hathaway unquestionably possessed but failed to produce.
No. 17-2354 5
He found that those emails were improperly omitted but
that they contained no relevant information. In the end, the
judge determined that sanctions were appropriate only to
the extent that Hathaway’s delay and failure to comply with
court orders caused the Trustee to expend additional time
and resources litigating the recurring discovery disputes. He
ordered “payment of the [T]rustee’s attorney fees and
expenses reasonably incurred in pursuing the discovery
matters.” The judge later entered judgment against
Hathaway for the fraudulent conveyances in the amount of
$45,400.81 and imposed $11,187.25 in discovery sanctions.
Hathaway appealed to the district court under 28 U.S.C.
§ 158(a)(1). The district judge affirmed across the board. He
discerned no clear error in the bankruptcy judge’s finding
that Chicago Management Consulting Group was insolvent.
He was unimpressed by Hathaway’s attempts to contradict
the finding that the company had not received value for its
transfers. Nor did he see fit to question the bankruptcy
court’s identification of unsecured creditors for § 544(b)
purposes. On the issue of discovery sanctions, he deferred to
the bankruptcy judge’s broad discretion and found no
reason to set aside the award.
II. Discussion
Hathaway’s appeal repeats the arguments she raised in
district court. We note at the outset that she did not ap-
proach this appeal with the seriousness our rules demand.
She failed to provide an adequate record to facilitate our
review. Because she claims that several of the bankruptcy
court’s factual findings were unsupported by the evidence, it
was her responsibility to “include in the record a transcript
of all evidence relevant to that finding or conclusion.” FED.
6 No. 17-2354
R. APP. P. 10(b)(2); see also FED. R. BANKR. P. 8009(b)(5).
Relevant evidence “generally … include[s] a complete
transcript of the trial along with the exhibits properly admit-
ted into evidence.” LaFollette v. Savage, 63 F.3d 540, 544 (7th
Cir. 1995).
The most glaring omission is the expert report upon
which the bankruptcy court based its insolvency ruling. That
report, compiled by Trustee’s expert Lois West, was not
delivered to us until after oral argument.1 Frustratingly,
Hathaway has been on notice of this deficiency since the
district judge noted the absence of the West report from the
record. Comess v. Fox (In re Chi. Mgmt. Consulting Grp., Inc.),
569 B.R. 722, 728 n.7 (N.D. Ill. 2017). So we’re left to interpret
a portion of the West report’s raw data reproduced in
Hathaway’s appellate brief. Finally, Hathaway’s appendix is
incomplete under our circuit rules. It includes only the
district judge’s opinion, not the bankruptcy judge’s opinion.
See 7TH CIR. R. 30(b)(2).
These serious errors could justify dismissal. See Tapley v.
Chambers, 840 F.3d 370, 375 (7th Cir. 2016) (explaining that
we may dismiss an appeal when the appellant has “ample
opportunity to correct” a deficiency in the record and fails to
do so); see also Urso v. United States, 72 F.3d 59, 61 (7th Cir.
1995) (“[We] decline[] to entertain [an] appeal[] when the
appellant does not file a required appendix.”). We neverthe-
less choose to reach the merits, where Hathaway fares no
better.
1Following oral argument, Hathaway moved to supplement the record
with a copy of the West report. We denied that motion.
No. 17-2354 7
A. Insolvency Analysis
We apply “de novo review for the bankruptcy court’s con-
clusions of law and clear error review for its findings of
fact.” First Weber Grp., Inc. v. Horsfall, 738 F.3d 767, 776 (7th
Cir. 2013). Demonstrating clear error is no mean feat. “When
there are two permissible views of the evidence, the …
choice between them cannot be clearly erroneous.” Dexia
Crédit Local v. Rogan, 629 F.3d 612, 628 (7th Cir. 2010). We
will not reverse the court’s factual findings without a “defi-
nite and firm conviction” that it erred. Unsecured Creditors
Comm. of Sparrer Sausage Co. v. Jason’s Foods, Inc., 826 F.3d
388, 393 (7th Cir. 2016).
The Trustee’s fraudulent-transfer claims rest on 11 U.S.C.
§ 548 and the IUFTA, 740 ILL. COMP. STAT. 160/5 (2010). Each
statute has actual- and constructive-fraud provisions. Actual
fraud under § 548 can be proven by circumstantial evidence,
including the size of the transfer in relation to the debtor’s
assets. Frierdich v. Mottaz (In re Frierdich), 294 F.3d 864, 869–
70 (7th Cir. 2002). The IUFTA considers insolvency to be a
“badge” of actual fraud. § 160/5(b)(9). Under the construc-
tive-fraud component of § 548, a trustee can avoid any
transfer for which the debtor “received less than a reasona-
bly equivalent value in exchange for such transfer or obliga-
tion[] and was insolvent on the date that such transfer was
made or such obligation was incurred.” § 548(a)(1)(B); accord
§ 160/5. Thus, whether Chicago Management Consulting
Group was insolvent when Novak transferred funds to
Hathaway was a crucial issue for the bankruptcy court.
Under federal and state fraudulent-transfer law, a debtor
is insolvent if it has “a balance sheet on which liabilities
exceed assets.” See Baldi v. Samuel Son & Co., Ltd., 548 F.3d
8 No. 17-2354
579, 581 (7th Cir. 2008); Grochocinski v. Zeigler (In re Zeigler),
320 B.R. 362, 379 (Bankr. N.D. Ill. 2005); see also 11 U.S.C.
§ 101(32)(A) (defining “insolvent”); 740 ILL. COMP. STAT.
160/3(a) (same). If a willing buyer would not purchase the
debtor’s combined assets and liabilities, the debtor is insol-
vent. Covey v. Commercial Nat’l Bank of Peoria, 960 F.2d 657,
660 (7th Cir. 1992). A trustee doesn’t need to show insolven-
cy on the precise day of the transfer. If he can demonstrate
that the debtor was insolvent at points before and after the
transfer, it’s up to the transferee to rebut the presumption of
insolvency in between. Baldi, 548 F.3d at 581.
Relying on the West report, the bankruptcy judge found
that the company was insolvent during the relevant period.
Lois West, a trained accountant, analyzed records kept by
Novak using QuickBooks accounting software. According to
the judge, the data clearly showed that the company’s
liabilities exceeded its assets when the transfers were made.
As we’ve noted, Hathaway included only a partial reproduc-
tion of the report in her appellate submission. Even based on
her version of events, West calculated a negative valuation
for the company at every six-month interval between
June 30, 2008, and December 31, 2011. Thus, so long as the
bankruptcy judge accepted the veracity of the QuickBooks
data and the reliability of West’s methods, a finding of
insolvency was inevitable.
Hathaway argues that the judge committed clear error
when he chose to credit the West report rather than Trustee
Exhibit 32. That document is simply a list of dollar figures
labeled “Receivables from BP According to deposits and
wire transfers to Acct xx 7854.” Its attractiveness to
Hathaway is obvious: Exhibit 32 shows over $2.6 million in
No. 17-2354 9
accounts receivable over the crucial 2008–2012 period.
Seizing the chance to cast doubt on the West report,
Hathaway adds the receivables from Exhibit 32, subtracts
liabilities, and proclaims that the company was in the black.
Exhibit 32 is not the panacea Hathaway makes it out to
be. As the judge explained, its figures don’t rebut West’s
topline finding of insolvency. Indeed, the receivables listed
in Exhibit 32 are wholly consistent with West’s conclusion.
When the company’s contractors performed work for BP,
they generated accounts payable to themselves in addition to
accounts receivable for the company. So a significant portion
of the incoming cash from BP was offset by the company’s
obligations to its contractors. Because the West report con-
sidered “all three accounting categories—accounts receiva-
ble, cash, and accounts payable,” it offered the most
complete picture of the company’s solvency. Even account-
ing for outstanding receivables generated by company
contractors, the firm’s liabilities exceeded its net asset value.
Hathaway asks us to add gross receivables to the West
report’s asset figures to generate a new valuation for the
company. But only net receivables are relevant. Hathaway
advanced these same arguments in the bankruptcy and
district courts, to no avail. She offers nothing new to support
her position. In sum, she hasn’t come close to showing clear
error.
B. Reasonably Equivalent Value
Hathaway also challenges the bankruptcy judge’s finding
that the company did not receive reasonably equivalent
value for its transfers. Under both § 548 and the IUFTA, a
debtor’s failure to receive value is a necessary element of
10 No. 17-2354
constructive fraud. Leibowitz v. Parkway Bank & Tr. Co. (In re
Image Worldwide, Ltd.), 139 F.3d 574, 577 (7th Cir. 1998)
(explaining that cases applying the no-value requirement of
§ 548 can be used to evaluate the same question under the
Act). Courts consider “the fair market value of what was
transferred and received, whether the transaction took place
at arm’s length, and the good faith of the transferee.” Smith
v. SIPI, LLC (In re Smith), 811 F.3d 228, 240 (7th Cir. 2016).
Whether value was given is a question of fact reviewed only
for clear error. In re Image Worldwide, 139 F.3d at 576.
Hathaway argues that she provided labor value com-
mensurate with the money she received from the firm. She
cites her education, work experience, and one line of the trial
transcript in which she mentions consulting work she did for
the company. She also directs our attention to a set of self-
prepared invoices, which she claims provide the requisite
documentation of her work. But as the courts below ob-
served, her invoices are strikingly brief and inconsistent.
And they conflict with Hathaway’s own testimony, in which
she stated that she billed the company by recording out-of-
pocket expenses, hours worked, and her hourly rate. The
invoices offer vague descriptors like “Workshop Prepara-
tion” and “Management Consulting” but make no attempt at
itemization. Nor do they match the company’s bank records.
The invoices are simply not compelling. It’s clear why the
bankruptcy court placed so little stock in them.
The bankruptcy judge cited plenty of evidence beyond
the invoices to support his conclusion that the transfers were
gratuitous. Novak evidently had no qualms about spending
considerable sums on Hathaway with no obvious connection
to professional services. To illustrate: On October 13, 2009,
No. 17-2354 11
Hathaway demanded reimbursement for $119.10 in personal
cosmetic expenses. “I adore you,” Novak replied. About
three weeks later, a check for that precise amount was paid
by the company to Hathaway. This exchange was no outlier;
Novak satisfied repeated requests for personal gifts from
flowers to perfume. He even outfitted her yoga studio with
mats and other equipment.
Hathaway acknowledges the pattern of gratuitous
spending but argues that she always viewed those expendi-
tures as gifts from Novak personally, not from the company.
But Hathaway’s description of her state of mind, while not
entirely irrelevant, doesn’t impeach the judge’s conclusion
nearly enough to show clear error.
Hathaway invites us to reinterpret the evidence present-
ed at trial, crediting her version of events over the judge’s.
But even if Hathaway’s story is one of “two permissible
views of the evidence”—which we doubt—that is insuffi-
cient to show clear error. Dexia Crédit Local, 629 F.3d at 628.
C. Creditors under the IUFTA
Under 11 U.S.C. § 544(b)(1), trustees can utilize state
fraudulent-conveyance statutes in bankruptcy proceedings.
Section 544(b) enables a trustee to step into the shoes of an
unsecured creditor who existed at the time of the transfer
and vindicate that creditor’s state-law rights. The trustee can
“avoid any transaction of the debtor that would be voidable
by any actual unsecured creditor under state law. The
trustee need not identify the creditor, so long as the unse-
cured creditor exists.” In re Image Worldwide, 139 F.3d at 576–
77 (citation omitted). The bankruptcy judge found that
Chicago Management Consulting Group owed money to the
12 No. 17-2354
IRS and was carrying credit-card debt at the time of the
transfers.
Hathaway points to no evidence contradicting those find-
ings. She doesn’t even challenge the existence of the compa-
ny’s tax obligation or credit-card debt, arguing instead that
those obligations were “nominal” and not “due and paya-
ble.” And if Hathaway wished to challenge the judge’s legal
conclusion that these creditors and their claims qualified
under § 544(b) and triggered the IUFTA, she waived that
argument by failing to develop it. LINC Fin. Corp. v.
Onwuteaka, 129 F.3d 917, 921 (7th Cir. 1997) (“[F]ailure to cite
authorities in support of a particular argument constitutes a
waiver of the issue.”).
D. Discovery Sanctions
We review a bankruptcy court’s imposition of discovery
sanctions for abuse of discretion. Golant v. Levy (In re Golant),
239 F.3d 931, 937 (7th Cir. 2001). We cannot substitute our
own judgment, nor do we require the judge to choose the
least severe sanction. Id. Instead, we ask whether a “reason-
able jurist, apprised of all the circumstances, would have
chosen [the sanction] as proportionate to the infraction.”
Salgado v. Gen. Motors Corp., 150 F.3d 735, 740 (7th Cir. 1998).
Hathaway devotes most of her brief to an attack on the
judge’s sanctions order. She claims the Trustee was unable to
show prejudice stemming from her actions and that oppos-
ing counsel inflated the hours they allegedly spent handling
discovery disputes. She says she ultimately complied with
all discovery orders and blames Google for email production
delays. And she even intimates that the Trustee should be
sanctioned for his attorneys’ conduct.
No. 17-2354 13
The judge did not abuse his discretion. The fees that were
awarded are reasonably related to the Trustee’s efforts to
litigate discovery. Although the judge was eventually con-
vinced that the gaps and delays in Hathaway’s email pro-
duction hadn’t obscured crucial information, the time spent
litigating those matters burdened both the Trustee and the
court. Acting within his broad discretion, the judge conclud-
ed that Hathaway should pay the legal bills incurred by the
Trustee while fighting those discovery battles. And he
attached an itemized breakdown of the fees he awarded—
and did not award. He even cut in half the fees claimed by
one of the Trustee’s attorneys, citing “unnecessary time.”
Discovery sanctions are upheld “so long as [they] could be
considered reasonable.” Collins v. Illinois, 554 F.3d 693, 696
(7th Cir. 2009). These were reasonable sanctions.
E. Rule 38 Sanctions
The Trustee argues that Hathaway should be sanctioned
under Rule 38 of the Federal Rules of Appellate Procedure
for filing a frivolous appeal. But a request for Rule 38 sanc-
tions must be made by separate motion. Berkson v. Gulevsky
(In re Gulevsky), 362 F.3d 961, 964 (7th Cir. 2004). The Trustee
merely requests sanctions in a section of his appellate brief.
As we’ve explained before, a “brief-borne request is not a
separately filed motion.” McDonough v. Royal Caribbean
Cruises, Ltd., 48 F.3d 256, 258 (7th Cir. 1995). We therefore
decline to address the issue.
AFFIRMED