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In re Chicago Management Consulting Group, Inc.

United States Court of Appeals, Seventh Circuit

July 10, 2019

In re: Chicago Management Consulting Group, Inc., Debtor.
v.
Julia Hathaway, Defendant-Appellant. Horace Fox, as Chapter 7 Trustee for the Estate of Chicago Management Consulting Group, Inc., Plaintiff-Appellee,

          Argued September 28, 2018

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 C 8917 - Jorge L. Alonso, Judge.

          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 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 transfers 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 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 company to his good friend Debra Comess. She was not equipped to run the firm, so she initiated bankruptcy proceedings, filing a voluntary Chapter 7 petition in the Northern 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 received 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 professional. The emails document Hathaway's repeated requests 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 targeting 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- 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 accounting 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 receive reasonably equivalent value in exchange for its transfers 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 company, the irregularity and vagueness of her ...


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