In re Miszkowicz

• Decision Date: 24 July 2014
• Docket Number: Bankruptcy No. 11 B 40844.,Adversary No. 13 A 00927.
• Citation: 513 B.R. 553
• Parties: In re Steven MISZKOWICZ and Connie Gipple, Debtors. Philip V. Martino, not individually, but solely as Chapter 7 trustee, Plaintiff, v. Eugenia Marie Miszkowicz, an individual, Mark Miszkowicz, an individual, and Miszkowicz Investments Limited Partnership, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

513 B.R. 553

In re Steven MISZKOWICZ and Connie Gipple, Debtors.Philip V. Martino, not individually, but solely as Chapter 7 trustee, Plaintiff,

v.Eugenia Marie Miszkowicz, an individual, Mark Miszkowicz, an individual, and Miszkowicz Investments Limited Partnership, Defendants.

Bankruptcy No. 11 B 40844.

Adversary No. 13 A 00927.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Signed July 24, 2014.

Sarah Baker, Quarles & Brady LLP, Chicago, IL, for Plaintiff.

Joshua D. Greene, Davis & Greene Law, LLC, Lisle, IL, for Defendants.

Amended Memorandum Opinion

JACQUELINE P. COX, Bankruptcy Judge.

This matter is before the Court for ruling on Plaintiff's Adversary Proceeding against Defendants Eugenia Miszkowicz, Mark Miszkowicz and Miszkowicz Investments Limited Partnership (“Defendants”) for avoidance and recovery of $101,787 in transfers. For the reasons noted herein, Judgment will be entered in favor of the Plaintiff.

I. Jurisdiction and Procedure

The Court has jurisdiction to hear this matter under 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter involves a core proceeding under 28 U.S.C. § 157(b)(2)(F): an action to avoid and recover alleged preferential transfers. In Stern v. Marshall, the United States Supreme Court recognized certain constitutional limitations on a bankruptcy court's authority to enter final orders. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2620, 180 L.Ed.2d 475 (2011). Bankruptcy judges are precluded from entering final orders on state law claims that are not resolved in the process of ruling on a creditor's proof of claim. However, the claim at issue herein is not a counterclaim, nor is it one premised on state law. Rather, it involves an express bankruptcy provision, 11 U.S.C. § 547(b), which allows a trustee to avoid certain payments made by a debtor on the eve of bankruptcy. See, e.g., Shurn v. Gilbert (In re Gulf Coast Glass & Erection Co., Inc.), 484 B.R. 685, 692 (Bankr.S.D.Texas 2013) (noting that preferential transfer claims are available only under bankruptcy law); KHI Liquidation Trust v. Wisenbaker Builder Servs., Inc. (In re Kimball Hill, Inc.), 480 B.R. 894, 905 (Bankr.N.D.Ill.2012) (bankruptcy court may enter final orders on preference claims regardless of whether a proof of claim had been filed because the proceeding “stems from the bankruptcy itself.”); Reid v. Presbitero ( In re First Choice Drywall, Inc.), 2012 WL 4471570, at **2–3 (Bankr.N.D.Ill.2012) (After Stern, bankruptcy courts have constitutional authority to determine preference actions). See also West v. Freedom Medical, Inc. (In re Apex Long Term Acute Care ), 465 B.R. 452, 463 (Bankr.S.D.Texas 2011), where the Court explained:

The cause of action for preferential transfers is established by the Bankruptcy Code. The provision for recovering preferences is integrally bound up in the overall scheme for ensuring equitable distribution among creditors. Preferential transfers are payments for legitimate debts. Preferences are avoidable precisely because they enable some creditors to receive more than their fair distribution under the Bankruptcy Code. The entire purpose of the cause of action, then, is to enforce the Bankruptcy Code's equality of distribution. In this respect, preferential transfer actions are fundamentally different from fraudulent transfer actions, although the two causes of action superficially resemble.

Accordingly, the Court determines that it has the constitutional and statutory authority to enter a judgment order on Plaintiff's preference claims under 11 U.S.C. § 547(b).

II. DiscussionA. Facts and Background

The following facts are drawn from evidence heard at a June 19, 2014 trial, the parties' pleadings and this Court's June 16, 2014 Order Finding Material Facts Not in Dispute. ( See Adversary Proceeding 13–927, dkt. no. 42.)

On October 7, 2011, (the “Petition Date”) Steven Miszkowicz (the “Debtor”) and his wife Connie Gipple (together, the “Debtors”) filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. Philip V. Martino, the duly appointed Chapter 7 Trustee for the Debtors' bankruptcy estate, is the Plaintiff herein.

Defendant Eugenia Marie Miszkowicz, the mother of Debtor Steven Miszkowicz, is an insider of the Debtors pursuant to 11 U.S.C. § 101(31)(A). (Stipulated Facts, ¶ 6, dkt. no. 34 “Stipulated Facts.”)

Defendant Mark Miszkowicz, the brother of Debtor Steven Miszkowicz, is an insider of the Debtors pursuant to 11 U.S.C. § 101(31)(A)(i). (Stipulated Facts, ¶ 9.)

During the one-year insider preference period preceding the Petition Date (October 7, 2010 through October 7, 2011, the “Preference Period”), Debtor Steven Miszkowicz owned a limited partnership interest in Defendant Miszkowicz Investments Limited Partnership (“MILP”), an Arizona limited partnership and was one of its general partners. (Stipulated Facts, ¶ 15.)

Because Debtor Steven Miszkowicz was its general partner, MILP was an insider of the Debtors pursuant to 11 U.S.C. § 101(31)(A)(ii). (Stipulated Facts, ¶ 5.)

During the Preference Period, Defendants Eugenia Miszkowicz and Mark Miszkowicz were general partners of Defendant MILP. (Stipulated Facts, ¶¶ 7, 10.)

1. The Loans

Between 1984 and 2011, Defendants Eugenia Miszkowicz and Mark Miszkowicz made a series of loans (“Loan,” and collectively, “Loans”) to Debtor Steven Miszkowicz, totaling at least $100,000. (Stipulated Facts, ¶¶ 18–19) At least $65,000 of the Loans were made to the Debtor by his mother Eugenia Miszkowicz (Stipulated Facts, ¶ 20.); at least $35,000 were made to the Debtor by his brother Mark Miszkowicz. (Stipulated Facts, ¶ 2 1.)

Only the Loan made on March 11, 1997 (“March Loan”) was documented by a promissory note (“Note”). (Stipulated Facts, ¶ 23.)

On January 8, 2011, Debtor Steven Miszkowicz wrote to his brother, Defendant Mark Miszkowicz, requesting advances of $5,000 per month for three months. (Pl. Trial Ex. 27; Stipulated Facts, ¶ 25.) In the letter, Debtor requested that Defendant Mark Miszkowicz advance the funds with Debtor's MILP capital account as collateral. (Stipulated Facts, ¶ 26.)

Even though advances were requested, between January 10, 2011 and March 28, 2011, Defendant Mark Miszkowicz initiated wire transfers from his personal bank accounttotaling $35,000 to the Debtor to fund certain of the Loans, which the Answer refers to as “Undocumented Loan Transfers.” (Answer, ¶ 49, dkt. no. 16.)

On March 25, 2011, Defendants Eugenia and Mark Miszkowicz set off the outstanding Loans against Debtor's capital account, which at the time had a balance of $101,787, to repay the Loans made to him by his brother and mother (the “Loan Transfers”). As a result, Debtor's MILP capital account was reduced to $0.00.¹ (Stipulated Facts, ¶¶ 44, 53; Answer ¶¶ 49, 58, 68, dkt. no. 16.)

On March 25, 2011, Debtor Steven Miszkowicz executed an “Assignment of Limited Partnership Interest” which transferred 75% of his interest in MILP to Defendant Eugenia Marie Miszkowicz and the remaining 25% to Defendant Mark Miszkowicz (the “Assignment Transfers” and together with Loan Transfers, the “Transfers”). (Pl. Trial Ex. 24.) According to disclosures made in MILP's 2010 federal tax return, the value of 75% of his capital account at the time of the Assignment Transfers was $76,340.25; the value of 25% of his capital account at the time of the Assignment Transfers was $25,446.75. (Stipulated Facts, ¶¶ 43, 44.)

2. The Adversary Proceeding

On July 1, 2013, the Plaintiff initiated an Adversary Proceeding (the “Complaint”) against the Defendants for avoidance and recovery of fraudulent and preferential transfers. In Plaintiff's first and second claims for relief, the Plaintiff seeks recovery on alternative preferential transfer theories: (1) that the Defendants received a preferential transfer when they set off the balance due them on the Loans against the value of Debtor's membership interest in MILP and (2) that the Defendants received a preferential transfer when they effectuated assignments of Debtor's membership interest in Miszkowicz Investments Limited Partnership (“MILP”).

Defendants assert as an affirmative defense the ordinary course defense allowed under 11 U.S.C. § 547(c)(2). In support, they argue that the Transfers are not avoidable because they were not loans, but advances made from the MILP capital account in accordance with the MILP Partnership Agreement. To that end, the Defendants argue that to the extent that debts were incurred, they were incurred by Defendants Mark and Eugenia Miszkowicz “loaning” money to the Debtor on behalf of MILP. (Def. Tr. Brief, p. 5, dkt. no. 32.) The evidence shows that the Loans were made from funds in the personal bank accounts of Eugenia and Mark Miszkowicz. There are no documents evidencing indirect transfers from them on behalf of the partnership.

The Defendants also assert that the Loans were secured by Debtor's MILP capital account, and thus, were properly set off against the value of Debtor's MILP capital account, in accordance with the terms of the MILP Partnership Agreement (“Partnership Agreement”). This position has no support in the evidence of record. No security interests in the borrower's MILP capital account have been perfected.

In Plaintiff's third and fourth claims for relief, he alleges that the Transfers at issue are avoidable fraudulent transfers under 11 U.S.C. §§ 548(a)(1)(A), 548(a)(1)(B) and under 740 ILCS 160/5(a)(1) and 160/8 of the Illinois Uniform Fraudulent Transfer Act. However, these claims were not pursued by the Plaintiff as the fraudulent transfer theories were not addressed in his final pre-trial brief or at trial.

B. Analysis of Section 547(b)(4)(B) Claim

11 U.S.C. § 547(b) provides that, subject to certain exceptions, the trustee may avoid any transfer of an interest of the debtor in property:

(1) to or for the benefit of a creditor;

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