The debtor, a personal injury law firm owned and operated by two member managers, voluntarily filed for Chapter 11 Subchapter V bankruptcy, in which the creditor potentially had a secured claim of $2.4 million. The debt was marked as disputed but was scheduled by the debtor as secured by “inventory, chattel paper, accounts, equipment, general intangibles and fixtures.” In August 2022, the debtor revised its operating agreement, adding a new member manager who paid $2.4 million for a 1/3 ownership interest, financing the purchase with a loan from the creditor and personally guaranteeing the loan. In March 2024, the new member manager pled guilty to federal felony charges of bank fraud. Subsequently, the debtor terminated the new member manager’s employment and terminated him as a member. The debtor then defaulted on the loan. The creditor attempted to collect the debt by sending notices to attorneys representing defendants in cases in which the debtor represented plaintiffs. The notices informed the attorneys that the debtor had assigned its accounts and general intangibles to the creditor and instructed the attorneys to send any current or future payments owed to the debtor directly to the creditor. In October 2024, the creditor sent a letter to the debtor threatening to contact its clients directly. In response, the debtor wrote a letter to the creditor, pointing out potential problems with the creditor’s conduct. Therefore, the creditor filed a lawsuit seeking a declaratory judgment that it was entitled to contact the debtor’s clients directly. Ten hours later, the creditor also filed a temporary restraining order (TRO) against the debtor and issued subpoenas to attorneys involved in cases in which the debtor represented plaintiffs. To stop the creditor from continuing, the debtor filed for Chapter 11 bankruptcy. The debtor claimed the creditor, by attempting to recover on its security interests, had interfered with the debtor’s ability to represent its clients; therefore, it filed a seven-count adversary proceeding complaint against the creditor. The first three counts challenged the creditor’s claims and requested determinations of the amount, priority, validity, and any asserted secured status. Count IV was for “Libel and other Tortious Conduct.” Count V sought equitable subordination of the creditor’s claims due to the alleged misconduct. Count VI and VII sought declaratory judgments on the existence and validity of the creditor’s claims and the value of the collateral securing those claims as of the petition date. The creditors then filed a motion for summary judgment.
In LPB MHC, LLC v. Farmers State Bank of Alto Pass (In re LPB MHC, LLC), Nos. 24-40450, 25-04001, 2025 WL 1778767, 2025 Bankr. LEXIS 1527 (Bankr. S.D. Ill. June 26, 2025) (unpublished opinion), the court denied the creditor’s motion for summary judgment. The creditor failed to establish that there were no genuine issues of material fact in dispute, nor did the creditor establish an entitlement to a judgment as a matter of law. The court emphasized that an important material disputed fact existed: whether two representatives of the debtor, the original two member managers of the firm, had actually signed the commercial security agreement. The creditor relied on an affidavit from its bank president, who claimed that the two representatives signed the agreement. However, one of the debtor’s representatives testified that he did not recall signing the agreement and would not have signed it because he believed doing so would have been improper under the codes of ethics. The court concluded this was one of several unanswered relevant factual questions. Nevertheless, the creditor still argued that because it had a security interest in the debtor’s accounts, it could take any collection actions without regard to other laws. The court rejected this argument and held that Illinois law governing contracts, the Illinois Rules of Professional Conduct, and Illinois settlement law, still govern the transaction because taking a security interest in a law firm’s accounts receivable or general intangibles “is a much more nuanced transaction” than typical liens. Under the rules of professional conduct, the creditor’s demand to the debtor to turn over certain documents could not be completed because some information in the documents was subject to privilege. Under Illinois settlement law, when the creditor issued notices to the debtor’s clients, the creditor could not do so for the purpose of intimidation, without any legitimate belief that payment would be forthcoming. Additionally, the creditor’s attorneys could not interfere with the representation of the debtor’s clients. Finally, the court analyzed Illinois law, which provides that there is an implied duty of good faith and fair dealing in every contract. The court held that the creditor had violated the implied duty by sending notices intended to intimidate the debtor. Although the creditor had relied on the security agreement, which allowed these notices, the agreement was not an absolute defense. The court also criticized the debtor by “throwing all allegations into every count” and concluded that “the complaint as a whole is seriously lacking.” The creditor, in its response for summary judgment, had used case law that was not precedent, and due to other procedural rules, the court did not grant the motion. The list of alleged wrongful conduct by the creditor in Count V was both sufficient to state a claim and sufficient to avoid summary judgment. Therefore, the court denied the creditor’s motion for summary judgment.
By Andrew Fielden [email protected]
Edited by Olivia Lewis [email protected]
Edited By Callighan Ard [email protected]
Edited By Hayden Mariott [email protected]