First Chicago Bank and Trust Company v. Leibowitz et al

Filing 31

MEMORANDUM Opinion and Order. Signed by the Honorable George M. Marovich on 9/14/2011.(psm, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

In re:
IFC CREDIT,
Debtor.

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Nos. 10 C 7475 & 10 C 7494
Judge George M. Marovich
Appeal from Bankruptcy
Case No. 09 B 27094

MEMORANDUM OPINION AND ORDER
Appellants Coactiv Capital Partners, Inc. (“Coactiv”) and First Chicago Bank and Trust
(“First Chicago”) filed separate appeals from one decision of the bankruptcy court to enjoin their
separate suits against Rudolph Trebels (“Trebels”) and Mark Langs (“Langs”). The Court has
consolidated the cases. For the reasons set forth below, the decision of the bankruptcy court is
affirmed.
I.

Background
After IFC Credit Corporation (“IFC”) filed a chapter 7 bankruptcy petition, Trustee

David P. Leibowitz (the “Trustee”) filed an adversary proceeding against Trebels and Langs.
Trebels founded IFC in 1988 and was the President and CEO until June 2009. Langs began
working at IFC in 2003 and served at Chief Financial Officer from March 2006 until June 2009.
After filing the adversary proceeding, the Trustee sought and obtained from the bankruptcy court
an order enjoining other litigation (four separate lawsuits) filed against Trebels and Langs.
Among the four lawsuits enjoined by the bankruptcy court are cases filed by appellants Coactiv
and First Chicago.
According to the allegations in the Trustee’s adversary complaint, IFC was a general
equipment lessor that leased healthcare, industrial and technological equipment to its customers.

The Trustee alleges that, while Trebels and Langs were at the helm of IFC, they caused IFC to
enter several misguided and/or fraudulent transactions and that they diverted IFC funds to pay
for personal expenses.
The first such transaction began in late 2003 and involved a company called
Norvergence. Norvergence planned to sell voice over internet protocol (“VOIP”)
telecommunications via its “Matrix Box.” Norvergence asked IFC to finance the Matrix Box
equipment for customers. IFC agreed.
Problems soon arose with the Norvergence transaction. By February 2004, customers
who were already being billed by IFC began reporting to IFC that Norvergence had not installed
their telephone service. When IFC’s Credit Committee (which was charged with using credit
underwriting standards to determine whether certain transactions were too risky for IFC to enter
or continue) investigated, it learned that the Federal Trade Commission had banned from the
telecommunications industry the brother of Norvergence’s President due to the fact that the
brother had “slammed” customers (i.e., converted their phone service to new carriers without
permission). Even as the delinquency rates on Norvergence accounts increased, Trebels caused
IFC to increase the number Matrix Boxes it financed. Ultimately, in June 2004, Norvergence
filed for bankruptcy protection, and IFC lost more than $15,000,000.00.
Another troubling transaction was IFC’s transaction with Wildwood Industries, Inc.
(“Wildwood”). In late 2007 or early 2008, IFC began considering a transaction in which it
would lease equipment to Wildwood. While conducting due diligence before the transaction,
IFC’s Credit Committee discovered several facts that suggested Wildwood was operating a
fraudulent scheme. The first was that Wildwood continually solicited financing. The second

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was that although Wildwood claimed to be one of the largest manufacturers in the
Bloomington/Normal area of Illinois, the interest rates it paid were unusual for a manufacturer of
its purported size. The third fact was that Wildwood had recorded multiple leases for single
pieces of equipment.
Despite the red flags, IFC proceeded with the Wildwood transaction, which turned out to
be a Ponzi scheme. Members of IFC’s Credit Committee warned Trebels and Langs of the red
flags they discovered while doing due diligence, but Trebels and Langs ignored the warnings. In
fact, Trebels and Langs decided the Wildwood transaction did not require the approval of the
Credit Committee, because Wildwood was a syndicated transaction (one for which IFC would
solicit external funding). Trebels and Langs directed IFC employees to solicit financial
institutions to finance the lease transactions for Wildwood. They were successful, and other
financial institutions, including First Chicago and Coactiv, financed the equipment leases. The
equipment, however, did not exist. Wildwood was a Ponzi scheme, and it filed a petition for
protection under the Bankruptcy Code. IFC was exposed to $5,000,000.00 in liability for breach
of contract with respect to the financial institutions it solicited to finance the Wildwood leases.
The Trustee also alleges that Trebels used IFC to enrich himself to IFC’s detriment. The
Trustee alleges that Trebels created an entity, R&L holdings, that leased office space to IFC at
above-market rates. According to the Trustee’s complaint, IFC used Arnstein & Lehr for various
legal matters, and Trebels used Arnstein & Lehr for personal matters. Trebels directed Arnstein
& Lehr to bill IFC for his personal legal work, and Trebels directed IFC to pay the bills. Trebels
also used IFC credit cards to pay for such personal expenses as club memberships, water sports,
event tickets, airline tickets for his wife and children, personal cable bills, restaurant meals,

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jewelry, golf equipment and charitable donations. IFC paid for most of those credit card
purchases. In addition, Trebels put his wife and two sons on IFC’s payroll for two years, during
which they performed little or no work.
Based on these allegations, the Trustee asserts claims against Trebels and Langs for
breach of fiduciary duty and unjust enrichment. The Trustee, however, is not the only entity to
have filed suit against Trebels and Langs. First Chicago and Coactiv also filed separate suits
against Trebels and Langs.
Coactiv filed suit in June 2010 against Trebels, Langs, Lee Trebels (“Mrs. Trebels”) and
IFC Capital Funding I, LLC (“IFC”). IFC is an entity apparently created to buy some of IFC’s
leases from IFC. Coactiv’s suit arose out of several transactions Coactiv entered into with IFC
and IFC-related entities.
The first relevant transaction between Coactiv and IFC occurred in 2007. Coactiv agreed
to purchase leases from IFC, and IFC agreed to service the leases. Separately, Coactiv loaned
$25,000,000.00 to IFCI so that IFCI could purchases leases from IFC. Under each of these
agreements, IFC was required to direct all of the relevant lease payments to a lockbox account
under Coactiv’s control and to provide Coactiv monthly reports about the lease payments.
According to Coactiv, IFC breached these and related agreements in a number of ways,
including by failing to report to Coactiv when leases went into default. By early 2009, IFC owed
Coactiv more than $2,000,000.00 under the agreements. Coactiv and IFC agreed to a payment
plan of $50,000.00 plus weekly payments of $25,000.00, for which Trebels signed a guaranty.
IFC made the payments from March 31, 2009 until June 10, 2009 and then stopped paying.

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Separately, in March 2008, Coactiv agreed to enter an agreement with IFC that involved
Wildwood. Specifically, Coactiv agreed to purchase IFC’s interest in rental payments owed to
IFC under a lease between IFC and Wildwood. IFC represented to Coactiv that IFC had good
title to the equipment and leases and that the equipment had been delivered to Wildwood. In
reality, Wildwood never received the equipment and was, in fact, a Ponzi scheme. Coactiv lost
$2,500,000.00.
Coactiv alleges Trebels used the funds that should have been directed to IFC for personal
expenses, including personal legal bills, club memberships and cars for his children. Coactiv
also alleges that Trebels used IFC funds that should have been directed to Coactiv to put his
children and wife on the IFC payroll, despite the fact that they performed no work.
Like Coactiv, First Chicago filed suit against Trebels and Langs. First Chicago also
named Mrs. Trebels as a defendant. First Chicago’s claims arise out of two schemes to defraud
First Chicago.
First, in or about December 2007, IFC borrowed $10,000,000.00 from First Chicago.
That loan was supposed to be used exclusively to purchase equipment that IFC was to lease to
third parties. Instead, Trebels and Langs had IFC cut checks (in amounts totaling more than
$3,000,000.00) to vendors–so that it would look like IFC was paying vendors–but IFC failed to
send the checks to the vendors. IFC was dishonest in other ways. The First Chicago loan
required IFC to send to First Chicago any amounts First Chicago received as early payoffs of
leases. Instead, IFC solicited customers to make discounted payments to terminate leases and
then kept the money rather than paying it to First Chicago. Another problem with respect to the

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loan was that Trebels and Langs, instead of keeping the leases in a separate, locked file, doublepledged the leases.
The second scheme First Chicago complains about in its complaint against Trebels and
Langs is the Wildwood scheme. In June 2008, First Chicago paid more than $2,850,000.00 to
purchase IFC’s title to and interest in rental payments owed to IFC under IFC’s lease with
Wildwood. Wildwood was a Ponzi scheme. Like the Trustee and Coactiv, First Chicago alleges
that Trebels and Langs knew or should have known that Wildwood was a Ponzi scheme.
First Chicago alleges that Trebels and Langs diverted funds belonging to First Chicago to
their personal benefit. Specifically, First Chicago claims that Trebels and Langs used First
Chicago’s money to pay for cars for their children, personal legal expenses and club
memberships. In addition, First Chicago claims that IFC used First Chicago’s money to put Mrs.
Trebels and the Trebels’ children on the IFC payroll, despite that fact that none actually
performed work.
After IFC filed for bankruptcy protection, the bankruptcy court issued an injunction
pursuant to its “related to” jurisdiction. When it enjoined Coactiv’s and First Chicago’s suits
against Trebels and Langs, the bankruptcy court noted that the injunction was necessitated by
“[t]he Bankruptcy Code’s core goals of pro rata distribution and orderly administration of a
bankruptcy estate.” (9/28/10 Order at 6). The bankruptcy court explained that there was
substantial overlap between the suits and that “[a]llowing the lawsuits to continue would
diminish the amount of funds payable to the bankruptcy estate for pro rata distribution to all
creditors.” Id.
Coactiv and First Chicago seek reversal of the bankruptcy court’s injunction.

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II.

Standard of review
The Court reviews the bankruptcy court’s determinations of law de novo and its

determinations of fact for clear error. In re Smith, 582 F.3d 767, 777 (7th Cir. 2009).
III.

Discussion
The parties assert that the Court has jurisdiction to review the order of the bankruptcy

court under 28 U.S.C. § 158(a), which grants the district courts jurisdiction to hear appeals “from
final judgments, orders, and decrees” of the bankruptcy court. 28 U.S.C. § 158(a). The Court is
not so sure. Although finality is interpreted more “liberally” under § 158 than it is under §1291,
the interlocutory orders that are considered final in this circuit are “those orders that ultimately
determine a creditor’s position in the bankruptcy proceeding, even though administration of the
debtor’s estate continues.” In re: Forty-Eight Insulations Inc., 115 F.3d 1294, 1299 (7th Cir.
1997). That is not the case here. Still, the Court need not determine whether the order in this
case could be considered a final order, because the Court is granted discretion to consider
appeals of interlocutory orders. 28 U.S.C. § 158(3); In re Teknek, LLC, Case No. 07 C 5229,
2007 WL 4557813 at *5 (N.D. Ill. Dec. 21, 2007) (agreeing to review preliminary injunction
order issued by bankruptcy court), aff’d 563 F.3d 639 (7th Cir. 2009). The Court will exercise
its discretion here.
A.

Bankruptcy is not void ab initio

As a threshold matter, First Chicago argues that the entire bankruptcy is void ab initio,
because the initial petition was not signed by an attorney. The parties agree that when IFC filed
its Chapter 7 bankruptcy petition on July 27, 2009, it was signed by IFC’s President, who is not

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an attorney. Although individuals can proceed pro se in bankruptcy, corporations may appear in
federal court only through a licensed attorney. Rowland v. California Men’s Colony, Unit II
Men’s Advisory Council, 506 U.S. 194, 201-202 (1993) (“It has been the law for the better part
of two centuries, for example, that a corporation may appear in the federal courts only through
licensed counsel.”). First Chicago called the problem to IFC’s attention, and, on July 28, 2009
(the day after IFC filed the original petition), IFC filed an amended petition that was signed by
an attorney.
When First Chicago sought to have the bankruptcy dismissed as void ab initio, the
bankruptcy court declined, reasoning that Rule 9011(a) of the Bankruptcy Rules allows a party
to correct the omission of a signature and that Rule 1009 provides a general right to amend.
This Court agrees. Bankruptcy Rule 1009 states that “[a] voluntary petition . . . may be
amended by the debtor as a matter of course at any time before the case is closed.” Accordingly,
IFC had a right to amend its petition to correct the signature error. Furthermore, Bankruptcy
Rule 9011(a) provides:
Every petition . . . shall be signed by at least one attorney of record in the
attorney’s individual name. . . . An unsigned paper shall be stricken unless
omission of the signature is corrected promptly after being called to the attention
of the attorney or party.
Bankruptcy Rule 9011(a). Thus, the plain language of the Rule allowed IFC to correct the
omission of the attorney signature when First Chicago pointed out the omission. In re IFC
Credit, Case No. 10 C 256, 2010 WL 1337412 at *3 (N.D. Ill. March 31, 2010) (“First Chicago
argues at length that a Chapter 7 bankruptcy petition filed by a corporate debtor proceeding pro
se is void ab initio regardless of what happens afterwards. . . . The problem with this argument
is that, as the bankruptcy court recognized, Fed.R.Bankr.P. 9011(a) and 1009(a) expressly
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authorize a debtor to promptly amend a technical deficiency in the verification of an initial
petition.”).
Federal District Courts have a similar rule (Fed.R.Civ.P. 11(a)) and regularly allow
parties time to find counsel to correct the omission of an attorney’s signature on a complaint.
Moorish Nat’l Republic v. City of Chi., Case No. 10-cv-1047, 2011 WL 2893024 at *3 (N.D. Ill.
July 19, 2011) (dismissing claims of pro se entities after having given those entities about nine
months to find counsel). Under Rule 11(a), unsigned pleadings, once corrected, are stricken only
if the moving party is severely prejudiced, which First Chicago does not claim to have been (nor
could it given that IFC would simply have filed a new bankruptcy petition instead of amending
the first one). United States v. Kasuboski, 834 F.2d 1345, 1348 (7th Cir. 1987); Operating
Engineers Local 139 Benefit Fund v. Rawson Plumbing, Inc., 130 F. Supp.2d 1022, 1024 (E.D.
Wis. 2001) (a court strikes pleadings under Rule 11(a) “only if the moving party has somehow
been severely prejudiced or misled by the defective papers.”).
The Court is unpersuaded by First Chicago’s state-law procedural argument. First
Chicago relies heavily on Illinois state-court precedents for the proposition that a complaint
signed by a layperson (instead of a lawyer) is void ab initio. This federal court, however, applies
federal procedural rules, not state-law procedural precedents. Christensen v. County of Boone,
483 F.3d 454, 465 (7th Cir. 2007) (“Yet this suit is in federal rather than state court, and each
sovereign may apply its own procedural rules in its own courts.” ). Those federal procedural
rules allowed IFC to correct the omission of the signature. Accordingly, the Court rejects First
Chicago’s threshold argument.

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B.

Legality of the injunction order

A bankruptcy court’s jurisdiction extends to “civil proceedings arising under title 11, or
arising in or related to cases under title 11.” 28 U.S.C. § 1334(b) (emphasis added). Although
“Congress did not delineate the scope of ‘related to’ jurisdiction, . . . its choice of words suggests
a grant of some breadth.” Celotex Corp. v. Edwards, 514 U.S. 300, 307-308 (1995).
A bankruptcy trustee “may temporarily block adjudication of claims that are not property
of the estate by petitioning the bankruptcy court to enjoin the other litigation, if it is sufficiently
‘related to’ her own work on behalf of the estate.” Fisher v. Apostolou, 155 F.3d 876, 882 (7th
Cir. 1998) (citing 18 U.S.C. § 1334(b)). This power to enjoin other litigation applies “beyond
claims by and against the debtor, to include ‘suits to which the debtor need not be a party but
which may affect the amount of property in the bankruptcy estate,’ or ‘the allocation of property
among creditors.’” Fisher, 155 F.3d at 882 (internal citations omitted). The question to be
considered is whether “the claims of the debtor . . . and the claims of the creditors . . . against
third parties are so closely related that allowing the creditors to convert the bankruptcy
proceeding into a race to the courthouse would derail the bankruptcy proceedings.” Fisher, 155
F.3d at 883.
Here, the Court concludes that the Trustee’s claims against third parties Trebels and
Langs are so closely related to Coactiv’s and First Chicago’s claims that allowing the creditors to
race to the courthouse would derail the bankruptcy proceedings. To be sure, the cases are not
identical. Coactiv and First Chicago name additional parties (both name Mrs. Trebels and
Coactiv names IFC) that are not named by the Trustee. In addition, Coactiv and First Chicago

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have some claims against Trebels and Langs that do not overlap with the Trustee’s claims.
Those claims arise out of loans Coactiv and First Chicago made to IFC.
The issue, though, is not whether the suits are identical but whether the suits are
“related.” 28 U.S.C. § 1334(b). The Court concludes that they are. In each of the three suits,
the plaintiff alleges that Trebels and Langs diverted funds belonging to plaintiff to pay for
Trebels’ legal bills, club memberships, cars and to put Trebels’ wife and children on the IFC
payroll. Thus, all three plaintiffs are trying to disgorge the same funds from Trebels and Langs.
In addition, each plaintiff asserts claims arising out of the Wildwood Ponzi scheme. Those
claims are related in that they allege the same wrongdoing by the same parties. The Court agrees
with the bankruptcy court’s conclusion that allowing Coactiv and First Chicago to pursue their
claims before the Trustee is allowed to pursue his would affect the amount of funds available for
pro rata distribution to all creditors.
IV.

Conclusion
For the reasons set forth above, the Court affirms the decision of the bankruptcy court.
ENTER:

George M. Marovich
United States District Judge
DATED: September 14, 2011

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