N. Neville Reid v. Wolf (In re Wolf)

Decision Date30 September 2022
Docket Number18 C 07952,18 C 07953,19 C 01978,19 C 08154,19 C 08299,Bankr. 14 B 27066,s. 18 C 07952,19 C 01978, 19 C 08154, 19 C 08299,Bankr. No. 14 B 27066
CourtU.S. District Court — Northern District of Illinois
PartiesIn re MICHAEL WOLF, Debtor. v. MICHAEL WOLF, SCOTT WOLF, et al., Defendants-Appellants. N. NEVILLE REID, not individually, but solely in his capacity as Trustee of the bankruptcy estate of Michael A. Wolf, et al., Plaintiffs-Appellees,
MEMORANDUM OPINION AND ORDER

John J. Tharp, Jr. United States District Judge.

This is a bankruptcy appeal concerning the debtor's pre-petition transfer of assets. Michael Wolf owned and published a commercial trade magazine for many years before he and his wife, Elizabeth Wolf, separated. In anticipation of divorce Michael conveyed the publication to his son, Scott Wolf through the conduit of various sham corporations.[1] After Elizabeth filed for divorce, Michael filed Chapter 7 bankruptcy. Neville Reid was appointed as Trustee to oversee the bankruptcy estate.

Michael's bankruptcy case centered on the Trustee's attempt to avoid three fraudulent transfers of assets related to Michael's publishing business. Amid labyrinthine adversarial proceedings, the bankruptcy court sanctioned Michael and Scott with default and, for reasons explained in a comprehensive and careful opinion, issued a final default judgment against them for the value of Michael's business.

Michael and Scott now appeal a litany of the bankruptcy court's rulings. They challenge the bankruptcy court's designation of certain shareholder interests as vested within Michael's bankruptcy estate-a ruling based primarily on how Michael's divorce judgment divided his marital property. They also challenge the use of Illinois law to pierce the veil of one of Michael's corporations; the sufficiency of the Trustee's complaint; the denial of Michael's discharge; the dismissal of their third-party complaint against the Trustee; and the bankruptcy court's refusal to award Michael and Scott costs. This Court concludes that the bankruptcy court ruled correctly in all ways except one. Because that error is harmless, the judgment is affirmed.

I. PROCEDURAL POSTURE

Given the lens through which the facts in this case are viewed, it is important to establish the procedural posture at the outset.

This Court sits in review of the bankruptcy court's final default judgment pursuant to 28 U.S.C. § 158(a). The bankruptcy court's conclusions of law are reviewed de novo and its findings of fact are reviewed for clear error. Stamat v. Neary, 635 F.3d 974, 979 (7th Cir. 2011). The bankruptcy court's proposed findings of fact and conclusions of law are reviewed de novo. 28 U.S.C. § 157(c)(1).

Here, the bankruptcy court below entered default against all defendants. “Upon default, the well-pleaded allegations of a complaint relating to liability are taken as true.” Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1323 (7th Cir. 1983). The defendants, however, do not appeal any entry of default, see part III; therefore, they waive their challenge to the bankruptcy court's findings of fact. Cf. In re Sharma, No. CC-12-1302- MkTaMo, 2013 WL 1987351, at *9 (B.A.P. 9th Cir. May 14, 2013), aff'd, 607 Fed.Appx. 713 (9th Cir. 2015) (on appeal of a default judgment, the issue becomes “whether the facts alleged in the Complaint, and deemed true upon . . . default, support the bankruptcy court's determination”). The bankruptcy court sourced its facts, as this Court does here, from the well-pled allegations within the Trustee's operative complaint. See First Am. Compl., In re Wolf, No. 16-ap-00066 (Bankr. N.D.Ill. May 31, 2016), ECF No. 95 (“FAC”). Winnowed of inconsequential detail, those facts are as follows.

II. BACKGROUND

Michael and Elizabeth Wolf married in 1975 and in the ensuing decades Michael published a successful trade publication for the commercial furniture industry entitled Monday Morning Quarterback (MMQB). The publication was nominally owned and distributed by ZigZag Corp., although Michael was Zig-Zag Corp.'s sole owner and used Zig-Zag Corp. to pay his and his family's personal creditors. Then in 2011, Michael and Elizabeth separated.

Following separation from his wife and in anticipation of his impending divorce, Michael began making moves to shield MMQB assets and proceeds from his existing and prospective creditors-most prominently, Elizabeth. First, in 2012, Michael transferred the MMQB business from Zig-Zag Corp. to a shell company he created called ZZC, Inc. (“Transfer No. 1). According to ZZC, Inc.'s 2012 tax return, Michael wholly owned ZZC, Inc. At some point after 2012, however, Michael transferred 51% of the stock in ZZC, Inc. to his adult son, Scott Wolf (Transfer No. 2). Between December 2013 and July 2014, Michael also personally gave ZZC, Inc. a total of $234,396 to satisfy a promissory note-debt the Trustee characterizes as illusory. Finally, in January 2014, Scott (as the controlling shareholder of ZZC, Inc.) transferred the MMQB business yet again to another token entity called MMQB, Inc. (“Transfer No. 3).

Scott was the sole owner of MMQB, Inc. and he, much like his father with Zig-Zag Corp., disregarded corporate formalities and used MMQB, Inc. to furtively siphon MMQB proceeds into his and his father's hands. No consideration was given and no written agreement was used for any of the three transfers just described.

About a month prior to Transfer No. 3, Elizabeth petitioned for divorce. In due course, the Circuit Court of Lake County, Illinois, awarded Elizabeth temporary maintenance. For that purpose, the Circuit Court ordered Michael to sell his custom Aston Martin luxury automobile and surrender the proceeds. Michael then “sold” the vehicle for less than its market value to yet another sham entity wholly owned by Scott (Ma Cherie LLC)-who, in turn, allowed Michael to retain possession of the car. When Michael refused to relinquish even these proceeds, he was held in contempt and sentenced to fourteen days in jail. Mercifully, the Circuit Court allotted him fourteen days to purge the contempt. Instead of purging, however, on July 23, 2014, Michael filed a Chapter 7 bankruptcy petition to stay his contempt proceeding.[2] The stay also precluded the Circuit Court from dividing Michael and Elizabeth's marital property. Yet soon thereafter, the bankruptcy court modified the stay to permit the Circuit Court “to determine the appropriate allocation of marital property, including any property of the bankruptcy estate . . . .” Order 2, In re Wolf, No. 14-bk-27066 (Bankr. N.D.Ill. Nov. 19, 2014), ECF No. 53.

The chart below provides a graphic summary of the transfers at the core of this appeal:

Overview of Property Interests and Transfers[3]

(Image Omitted)

Meanwhile in bankruptcy court, the Trustee initiated an adversarial proceeding against Michael and Scott to avoid Transfers Nos. 1-3 and recover to the estate the value of the MMQB business. Initially, to accord with Local Bankruptcy Rule 7020-1, the bankruptcy court ordered this adversarial proceeding split into seven different proceedings.[4] Shortly after the Trustee complied, the bankruptcy court reevaluated Rule 7020-1's import, determined that separate proceedings were not necessary, and granted the Trustee leave to file an amended complaint reconsolidating the seven proceedings. Before the Trustee refiled, however, Michael filed his own third-party complaint in five of the proceedings, prompting the bankruptcy court to vacate its consolidation order. Michael's second adult son, Peter, joined this complaint; his interests are discussed in part IV.E below.

Michael's third-party complaint, in the view of the bankruptcy court, was nothing more than an “attempt[] to stop the Adversary litigation and create more expense, all to frustrate the Trustee into halting the marshaling of that assets belonging to the Debtor's estate.” Dismissal Order 2, In re Wolf, No. 16-ap-00066 (Bankr. N.D.Ill.Dec. 16, 2016), ECF No. 407. In substance, it was a 374-page, 108-count “rambling narrative” brought against thirty-eight individuals and law firms, including the Trustee, the Trustee's counsel, and every member of the counsel's law firm. Id. The complaint's “length, redundancy and irrelevant nature” made it “nearly impossible to follow or analyze,” and therefore, the bankruptcy court dismissed it for failure to comply with Federal Rule of Civil Procedure 8(a)'s short, plain statement requirement. Id. at 3. Because the bankruptcy court also held that Michael's complaint, even if stated succinctly, could not state judicial actions in light of Barton v. Barbour, 104 U.S. 126 (1881), and other statutory impediments, the dismissal was issued with prejudice. Id. at 4; see generally Matter of Linton, 136 F.3d 544, 545 (7th Cir. 1998) (explaining that a bankruptcy trustee, under the Barton doctrine, cannot be sued without leave of the court that appointed him).

During the contentious discovery period that followed, Michael repeatedly refused to comply with the bankruptcy court's discovery orders; and so, the bankruptcy court entered default against him. For similar reasons, the same sanction befell Scott. Zig-Zag Corp., ZZC, Inc., and MMQB, Inc. all failed to defend, so they too were held in default.

An entry of default only establishes liability, it does not itself determine a plaintiff's right to relief. VLM Food Trading Int'l, Inc. v. Ill. Trading Co., 811 F.3d 247, 255 (7th Cir. 2016). For a default judgment to enter against a defendant in default, it is still left to the plaintiff to establish an entitlement to relief. Id. As noted previously, for this purpose, “the well-pleaded allegations of a complaint relating to liability are taken as true.” Id. (quoting Dundee, 722 F.2d at...

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