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McGarry & McGarry, LLC v. Bankruptcy Management Solutions, Inc.

United States Court of Appeals, Seventh Circuit

September 5, 2019

McGarry & McGarry, LLC, Plaintiff-Appellant,
Bankruptcy Management Solutions, Inc., Defendant-Appellee.

          Argued November 7, 2018

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 17 CV 5779 - Joan H. Lefkow, Judge.

          Before Rovner, Sykes, and Barrett, Circuit Judges.


         McGarry & McGarry, LLC, a creditor in a closed Chapter 7 bankruptcy case, tried three times to bring a price-fixing claim against Bankruptcy Management Solutions, Inc. ("BMS"), the trustee's software-services provider. In the first suit, McGarry alleged claims under the Sherman Act and the Illinois Antitrust Act. Because McGarry is not a direct purchaser of bankruptcy software services, the district court dismissed the Sherman Act claim, see Ill. Brick Co. v. Illinois, 431 U.S. 720 (1977), and relinquished jurisdiction over the state-law claim.

         McGarry tried a different tack and moved to reopen the bankruptcy proceedings. The bankruptcy court denied that request because the case had been closed for more than three years. Undeterred, McGarry filed a new lawsuit in state court alleging a stand-alone claim under the Illinois Antitrust Act. The state statute has an "Illinois Brick repealer" provision that permits indirect purchasers to sue. BMS removed the case to federal court and moved to dismiss. The district judge granted the motion because McGarry is not even an indirect purchaser of bankruptcy software services; it does not purchase these services at all. McGarry appealed.

         We affirm. McGarry is a one-time creditor in a closed Chapter 7 bankruptcy case. It does not participate in the market for bankruptcy software services in any way that would make it a proper plaintiff to bring an antitrust claim against a firm that provides those services to bankruptcy trustees.

         I. Background

         A Chapter 7 bankruptcy petition creates a bankruptcy estate, which becomes the temporary legal owner of the debtor's property. 11 U.S.C. § 541(a). When a petition is filed, the Executive Office of the U.S. Trustee (a division of the U.S. Department of Justice) appoints a trustee to administer the estate. The trustee collects and liquidates nonexempt estate assets to maximize the return to creditors. The trustee also files periodic reports with the bankruptcy court and the U.S. Trustee. Id. § 704.

         The reports are prepared on special software, and trustees typically use one of three providers to supply these services. BMS is the largest supplier of bankruptcy software services. The complaint alleges that BMS has a market share of approximately 50% as measured by the total number of bankruptcy trustees in the country. Epiq Systems and TrusteSolutions have 35% and 15%, respectively. A trustee normally does not use more than one software-services provider at any one time.

         For many years BMS partnered with banks to jointly deliver services to the estate. Under this model BMS directed the trustee to deposit the estate's funds into a partner bank, and in return the trustee received integrated case-management and banking services. The bank earned money from the deposit and paid interest to the estate and a fee to BMS. This business model relied on the existence of a "spread" between the interest the bank could charge its borrowers and the interest it paid to its depositors. The model worked well as long as interest rates remained high enough to support the bank's flexibility to work within the spread, allowing all parties to prosper.

         But the model collapsed with the economic downturn in 2008. Interest rates declined precipitously from more than 4% in late 2007 to near 0% one year later, so the spread evaporated. BMS had to adapt to a new reality. It soon designed a different business model: it would sell its software services in combination with banking services (as it had in the past), but the bank would charge a set percentage of the estate's funds as a fee for the combined services and pay a portion of that fee to BMS. For this new model to work, however, BMS had to overcome two obstacles. First, it needed its competitors to also adopt the new arrangement. The complaint alleges that sometime before 2011 BMS approached Epiq Systems and TrusteSolutions and proposed the new billing model. Both agreed to implement a similar system.

         Second, BMS needed the Executive Office of the U.S. Trustee to suspend its rule prohibiting trustees from using estate funds to pay bank fees. All three providers asked the Executive Office to do so. In April 2011 the agency suspended the rule. All three providers then changed their billing model. Now the standard agreement requires the estate to pay a combined fee for software and banking services based on a percentage of the funds in its bank account.

         In May 2011 Integrated Genomics, Inc., a software developer specializing in genome analysis, filed a Chapter 7 petition in the U.S. Bankruptcy Court for the Northern District of Illinois. The U.S. Trustee appointed Eugene Crane as trustee. Crane contracted with BMS for software services and deposited the estate's funds with Rabobank, BMS's partner bank. Crane also ...

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