Lee et al v. Vang et al

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF WISCONSIN
In re:
Mai L. Vang and Ue Yang,
Debtors.
Case No. 24-24067-rmb
Chapter 7
Long Lee, et al.,
Plaintiffs,
v.
Mai L. Vang and Ue Yang,
Defendants.
Adversary No. 24-2153-rmb
DECISION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT
AND PLAINTIFFS’ MOTION FOR LEAVE TO AMEND
Plaintiffs Long Lee, Miana Lee, Unlimited Wealth, LLC, David Blong, and
Mee Lee (the “Lee Parties”) are victims of Kay Yang, who ran a fraudulent
investment scheme in Wisconsin. The Lee Parties say that Yang used some of the
funds they invested with her to make below-market mortgage loans to several third
parties, including to debtor-defendants Mai L. Vang and Ue Yang (the “Debtors”).
The Lee Parties obtained an order in state court determining that the Debtors’
mortgage loan from Yang’s company and several other such loans were fraudulent
transfers under chapter 242 of the Wisconsin Statutes. They now seek to have the
resulting debt declared nondischargeable under 11 U.S.C. § 523(a)(2)(A). The
parties filed cross motions for summary judgment on the nondischargeability claim
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and a claim requesting a declaration as to the Debtors’ homestead exemption. The
Lee Parties also filed a motion to amend their complaint to add another claim for a
declaration related to the mortgaged property. The Debtors’ motion for summary
judgment as to the Lee Parties’ claim for a declaration that the Debtors cannot
claim a homestead exemption in bankruptcy is granted and that claim is dismissed
with prejudice. As to the remaining issues, neither party sustained their burden on
summary judgment, and material factual disputes remain. The Lee Parties also
have not shown that their late amendment should be allowed because the
amendment would prejudice the Debtors, and it is futile in any event.
BACKGROUND
Lee Parties’ Investment with Kay Yang
The Lee Parties invested with a company called AK Equity Group, LLC
owned by Kay Yang. Yang solicited funds from investors and asked them to wire
funds to a bank account at Capital One Bank. The Lee Parties deposited a total of
$1,770,000 into the Capital One account between January 25, 2019 and May 30,
2019, believing that they were investing with Yang and AK Equity. (Miana Lee
Decl., ECF 27, ¶¶ 3-4.) AK Equity purported to pool and trade investor funds
through various offshore brokerage accounts. (Halloin Decl. Ex. 1, ECF 26-1, at 6-
8.) It also purported to engage in foreign currency exchange trading. (Id. at 7.)
Yang was investigated by the Wisconsin Department of Financial
Institutions (WDFI) for selling unlicensed securities. On July 13, 2020, WDFI
entered a Final Order by Consent to Cease and Desist, Revoking Exemptions, and
Imposing Disgorgement, Restitution, and Civil Penalties. (Halloin Decl. Ex. 1, ECF
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24-1.) The order required Yang and AK Equity Group to pay restitution in the
amount of $16,950,776.78 to over 40 investors, including the Lee Parties. (Id. at 9.)
Yang was criminally indicted for her conduct. See United States v. Yang, Case No.
2:25-cr-00097-bhl-scd-1, ECF 1 (E.D. Wis. May 20, 2025).
In 2021, the Lee Parties sued Yang in Wisconsin state court to enforce the
restitution ordered by WDFI. (Halloin Decl. Ex. 5, ECF 26-5.) The state court
entered judgments against Yang in the total amount of $2,443,101.94. (Id. at 2.)
Debtors’ Purchase of the Property
The Lee Parties assert that Yang used money from other investors in the
Capital One account to provide a “loan” to the Debtors, who are Yang’s sister-in-law
and brother-in-law, in connection with their purchase of residential real property
located at 3722 South 18th Street in Sheboygan, Wisconsin (the “Property”). The
loan was given through another Yang company called C&K Associates LLC. On
November 26, 2018, Yang transferred $225,000 from the account at Capital One
containing the funds from the Lee Parties and other investors to an account in the
name of C&K Associates at Associated Bank. (Halloin Decl. Ex. 15, ECF 26-15, at
2.) On November 29, 2018, Yang directed that $223,190.65 be wired from the C&K
Associates account at Associated Bank to the title company responsible for closing
the sale of the Property. (Halloin Decl. Ex. 16, ECF 26-16.)
The Debtors’ purchase of the Property closed on November 30, 2018. The
Debtors provided $1,000 in earnest money before the closing, and they needed
$223,190.65 in cash to close the transaction. (Halloin Decl. Ex. 17, ECF 26-17.)
This entire amount was provided through a loan from C&K Associates. In
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exchange, the Debtors signed a promissory note and granted a mortgage on the
Property to C&K Associates. (Halloin Decl. Ex. 18, ECF 26-18; Ex. 19, ECF 24-19.)
The note has a fixed interest rate of 2% and a 30-year term. (Halloin Decl. Ex. 19,
ECF 24-19, at 2.)
State Court Litigation
On May 24, 2022, the Lee Parties filed a complaint in the Circuit Court for
Ozaukee County, Wisconsin, Case No. 2022-CV-162, against Yang, the Debtors, and
several other persons that the Lee Parties allege similarly purchased properties
using funds that originated from the Capital One account. (Halloin Decl. Ex. 6,
ECF 26-6.) The Lee Parties alleged that the defendants were liable as transferees
of avoidable transfers under chapter 242 of the Wisconsin statutes. (Id., ¶¶ 24-25.)
They requested judgment under Wis. Stat. § 242.04 and attachment of the Property
pursuant to Wis. Stat. § 242.07. (Id. at 11-12.)
On September 9, 2022, the state court entered an Order for Default
Judgment and Judgment and Writ of Attachment Against Mai L Vang and Ue Yang
determining that judgment should be entered against the Debtors, jointly and
severally, in the total amount of $2,374,290.16. (Halloin Decl. Ex. 8, ECF 26-8.)1
The Lee Parties did not submit evidence that the judgment was docketed pursuant
1 The state court may have entered an amended order determining that the total debt is
$2,445,564.41. A copy of an amended order was attached to a separate complaint the Lee Parties
later filed in state court against the Debtors but it is not otherwise in the summary judgment record.
(See Halloin Decl. Ex. 21, ECF 26-21, at 21 (Ex. B).)
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to Wis. Stat. § 806.10, though a judgment against Mai L. Vang is listed on the state
court docket. (See Halloin Decl. Ex. 9, ECF 26-9.)2
The state court’s September 9, 2022 order also declared that “[e]ffective
immediately, the [Property] is attached by a lien in favor of [the Lee Parties] in the
amount of $2,374,290.16.” (Halloin Decl. Ex. 8, ECF 26-8, at 4.) The order states,
“This attachment may be filed with the appropriate Register of Deeds.” (Id.) The
Lee Parties did not present any evidence that they recorded the order with the
Register of Deeds for Sheboygan County, Wisconsin, where the Property is located.
Nor does it appear that the Lee Parties followed the requirements of chapter 811 of
the Wisconsin Statutes to have a writ of attachment issued to the sheriff or to have
the sheriff seize the Property. The Lee Parties did, however, docket the money
judgment in Sheboygan County. (Halloin Decl. Ex. 35, ECF 26-35.)
The Debtors did not appeal the state court’s September 9, 2022 order in Case
No. 2022-CV-162.
The Lee Parties separately sued C&K Associates in Ozaukee County,
Wisconsin Circuit Court, Case No. 2023-CV-37. (Halloin Decl. Ex. 10, ECF 26-10.)
They say one purpose of the lawsuit was to secure the records that were supposed to
be maintained for the loan from C&K Associates to the Debtors. (Pls’ Proposed
Findings of Fact, ECF 25, at ¶¶ 40-41.) On June 27, 2023, the state court entered a
Default Judgment and Order to Compel Against Defendant C&K Associates, LLC.
2 The Lee Parties allege in their complaint that “[t]he judgment has been docketed by the judgment
clerks in Ozaukee County and Sheboygan County and is an enforceable and secured judgment lien.”
(Compl., ECF 1, ¶ 19.) The Debtors denied this allegation. (Answer to Compl., ECF 4, ¶ 19.)
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(Halloin Decl. Ex. 11, ECF 26-11.) The order provides, “Any promissory notes made
to C&K Associates, LLC, and mortgages received by it, are ordered assigned to the
[Lee Parties], including, without limitation, any promissory notes or mortgages
relating to . . .” the Property. (Id. at 3.) The order required all makers of any
promissory notes to remit future payments to the Lee Parties. The parties do not
appear to dispute that the Debtors are now required to pay the Lee Parties under
the note and mortgage or that the Debtors are now in default because they have not
made payments on the note and mortgage since 2022.
The same day they sued C&K Associates, the Lee Parties commenced another
case in Sheboygan County, Wisconsin Circuit Court against the Debtors and C&K
Associates, Case No. 2023-CV-54. (Halloin Decl. Ex. 21, ECF 26-21.) Their
complaint alleges that they have a lien on the Property pursuant to Wis. Stat.
§ 806.153 and requests execution on the Property pursuant to Wis. Stat. § 815.05(2).
(Id. at 9.) The Lee Parties also requested that title to the Property be transferred to
them pursuant to Wis. Stat. § 816.08. (Id.)
It is unclear what transpired in the nearly 17 months after the filing of the
complaint, but on June 19, 2024, the Lee Parties filed a Motion to Execute Against
Property. (Halloin Decl. Ex. 24, ECF 26-24.) They requested that the state court
“issue an order immediately transferring title of the [Property] to the [Lee Parties]
pursuant to the Court’s authority under Wisconsin Statutes section 816.08[.]” (Id.
3 A lien arises under Wis. Stat. § 806.15 only for judgments “properly entered in the judgment and
lien docket.” Wis. Stat. § 806.15(1).
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at 4-5.) The Debtors objected to execution against the Property and to the
transferring of title to the Property based on their homestead exemption under Wis.
Stat. § 815.20. (Halloin Decl. Ex. 26, ECF 26-26.)
The state court held a hearing on the motion on August 2, 2024. (Halloin
Decl. Ex. 27, ECF 26-27.) During the hearing, the state court rejected the Debtors’
claimed homestead exemption and ordered that a writ of execution and a writ of
assistance be issued. (Id. at 17-21.) The state court may have issued a writ of
assistance on August 2, 2024. (See Compl., ECF 1, ¶ 23; Ex. D, ECF 1-4.) The
document attached to the complaint is not in the summary judgment record, and
the Debtors claimed to lack knowledge regarding the document in their answer.
(See Answer ¶ 23, ECF 4.) No writ of execution was issued.4
Procedural History
The Debtors filed a voluntary chapter 7 petition on August 3, 2024, Case No.
24-24067. The Court entered an Order of Discharge on November 13, 2024.
The Lee Parties timely filed this adversary proceeding on November 8, 2024.
Their complaint does not include any labeled claims. However, they allege that the
Debtors owe them a debt of $2,445,564.41, and they request that the Court declare
that:
4 “Levy of execution on real property is made by endorsing on the execution a description of the
property on which the levy was made, and recording the execution, so endorsed, in the office of the
register of deeds.” Wis. Stat. § 815.195. A writ of assistance, in contrast, puts the owner of property
into possession of the property through assistance from the sheriff; the writ does not itself create the
ownership interest. Jay E. Grenig, Wis. Pl. & Pr. Forms § 42:10 Enforcement of Judgments: Writs of
Assistance (5th ed. June 2025 update) (citing Stanley v. Sullivan, 71 Wis. 585, 37 N.W. 801 (1888)
(discussing nature of writ)).
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(a) the Defendants are not entitled to receive a discharge of their
debt under 11 U.S.C. section 523(b) [sic], (b) the Defendants are
not entitled to the protection of Wisconsin’s homestead
exemption, and (c) that the Plaintiffs’ judgment is not
dischargeable under Bankruptcy Rule 7001(6), as well as for any
taxable attorneys’ fees and costs incurred in this matter.
(Id. at 7.) The Court has assumed that the Lee Parties intended to refer to 11
U.S.C. § 523(a)(2)(A). (See id., ¶ 36.) The first and third requests appear to seek
the same relief—a declaration of nondischargeability.
The Lee Parties filed a motion for summary judgment requesting that the
Court order three forms of declaratory relief. (ECF 24.) They ask the Court to
declare that the Lee Parties are secured creditors and that the Debtors must
therefore make an election under 11 U.S.C. § 521, that the debt owed by the
Debtors is not dischargeable, and that the Debtors cannot claim a homestead
exemption in the Property under Wisconsin law. (Id. at 23.)
The Court noted that the Lee Parties’ complaint did not seek a declaration
that they are secured creditors and that the Lee Parties’ objection to the Debtors’
homestead exemption appeared to be untimely under Federal Rule of Bankruptcy
Procedure 4003. (ECF 30 at 1-2.) The Court allowed the Lee Parties to file a
supplemental brief addressing the Court’s authority to award the requested relief.
(Id. at 2.) The Lee Parties then filed a motion for leave to amend their adversary
complaint. (ECF 32.) The proposed amended complaint includes three separate
claims—one for a declaration that the Lee Parties are secured creditors and that the
Debtors must comply with 11 U.S.C. § 521, one for a declaration that the Debtors
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cannot claim a homestead exemption under Wisconsin law, and one for a
declaration of nondischargeability. (ECF 32-1.)
The Debtors filed their own motion for summary judgment, arguing that the
Lee Parties cannot submit evidence sufficient to support the elements of
nondischargeability and that the Debtors are entitled to claim a homestead
exemption. (ECF 29, 34.) The Debtors also objected to the Lee Parties’ motion for
leave to amend the adversary complaint. (ECF 44.)
JURISDICTION
The Court has jurisdiction over this adversary proceeding pursuant to 28
U.S.C. § 1334 and the order of reference from the district court pursuant to 28
U.S.C. § 157(a). See 84-1 Order of Reference (E.D. Wis. July 10, 1984) (available at
https://www.wieb.uscourts.gov/general-orders) (last visited March 30, 2026).
Determination of the dischargeability of a debt and allowance or disallowance of
exemptions are core proceedings under 28 U.S.C. § 157(b)(2)(I). To the extent
resolution of the pending motions requires consideration of issues impacted by the
Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462 (2011), the parties
have consented to this Court’s final adjudication of these issues by their silence. See
Fed. R. Bankr. P. 7008, 7012; see also Wellness Int’l Network, Ltd. v. Sharif, 575
U.S. 665, 683 (2015) (“Nothing in the Constitution requires that consent to
adjudication by a bankruptcy court be express.”).
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DISCUSSION
I. 	The Lee Parties’ Motion for Leave to Amend
In their summary judgment motion the Lee Parties’ request that the Court
declare that the Lee Parties are secured creditors and that Debtors “must make an
election under 11 U.S.C. § 521.” (ECF 24 at 23.) The adversary complaint does not
seek this relief. (See Compl., ECF 1, at 7.) They now seek leave to amend their
complaint—after the discovery deadline—to add a new claim seeking this relief, to
add allegations related to the two pending claims, and to reformat the claims. (ECF
32, 32-1.)
The Lee Parties’ motion is governed by Federal Rule of Civil Procedure 15,
made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7015.
The rule provides that leave of court is required for a party to amend its pleading at
this point in the proceeding, and it directs that “[t]he court should freely give leave
when justice so requires.” Fed. R. Civ. P. 15(a)(2).
“Although the rule reflects a liberal attitude towards the amendment of
pleadings, courts in their sound discretion may deny a proposed amendment if the
moving party has unduly delayed in filing the motion, if the opposing party would
suffer undue prejudice, or if the pleading is futile.” Campania Mgmt. Co. v. Rooks,
Pitts & Poust, 290 F.3d 843, 848-49 (7th Cir. 2002). The Lee Parties’ proposed
amendment would unduly prejudice the Debtors, and it is futile in any event.
A. 	Amendment Would Prejudice the Debtors.
“Prejudice to the nonmoving party caused by undue delay is a particularly
important consideration when assessing a motion under Rule 15(a)(2).” Allen v.
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Brown Advisory, LLC, 41 F.4th 843, 853 (7th Cir. 2022). “[P]rejudice is more likely
when an amendment comes late in the litigation and will drive the proceedings in a
new direction” or “require significant discovery on new issues.” Id.; see also Perrian
v. O’Grady, 958 F.2d 192, 195 (7th Cir. 1992) (“Eleventh hour additions are bound
to produce delays that burden not only the parties to the litigation but also the
judicial system and other litigants.”) (cleaned up). A court has broad discretion to
deny a plaintiff leave to amend to add new claims near or after the deadline to
complete discovery. Hukic v. Aurora Loan Servs., 588 F.3d 420, 432 (7th Cir. 2009)
(affirming denial of motion for leave to amend filed three days before the close of
fact discovery); Rodriguez v. City of Green Bay, No. 20-C-1819, 2022 WL 823948, at
*1 (E.D. Wis. Mar. 18, 2022) (striking amended complaint filed after the close of
discovery and one day before summary judgment motions were due).
The Lee Parties’ motion for leave to amend their complaint was filed after the
close of discovery and after the deadline to file motions for summary judgment. At
all times during discovery and in preparing to file a motion for summary judgment,
the pending claims related to the Debtors’ homestead exemption and the Lee
Parties’ request for a declaration of nondischargeability with respect to the money
judgment entered by the state court in Case No. 2022-CV-162. The Debtors were
not put on notice that they would need to defend against a claim related to security
interests in the Property.
The Lee Parties offer no explanation for their failure to include the new
claims in their original pleading. See Sanders v. Venture Stores, Inc., 56 F.3d 771,
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775 (7th Cir. 1995) (affirming denial of leave to amend after close of discovery and
summary judgment briefing where plaintiffs “offered no explanation whatsoever for
the delay”). Instead, they say that the dispute as to whether the Lee Parties are
secured creditors “is closely intertwined with [the Lee Parties’] original objection to
discharge” and that “the Court will necessarily need to make a finding regarding
what type of creditor [the Lee Parties] are” as part of the nondischargeability claim.
(ECF 33 at 5-6.) The Lee Parties do not explain this assertion.
A claim under § 523(a)(2)(A) requires the Court to determine only whether
the debt at issue is nondischargeable. Whether the debt is secured is an entirely
different matter. Liens pass through bankruptcy unaffected, regardless of whether
the underlying personal liability is discharged. In re Pajian, 785 F.3d 1161, 1163
(7th Cir. 2015) (“[A] secured creditor who fails to [file a proof of claim] can still
enforce its lien through a foreclosure action, even after the debtor receives a
discharge.”); In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995) (noting the presumption
that “liens pass through bankruptcy unaffected”). This includes judicial liens,
which survive bankruptcy unaffected to the extent they do not impair a debtor’s
homestead exemption. In re Morosetti, No. 25-20897-GLT, 2026 WL 432259, at *3
(Bankr. W.D. Pa. Feb. 13, 2026) (“Only the portion of a judicial lien that interferes
with the debtor’s exemption is avoidable. Any portion that does not impair the
exemption survives unaffected.”) (citing East Cambridge Savings Bank v. Silveira
(ln re Silveira), 141 F.3d 34, 36-38 (1st Cir. 1998), and Tedeschi v. Falvo (In re
Falvo), 227 B.R. 662, 666 (6th Cir. B.A.P. 1998)); see also In re Littig, No. 19-70152,
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2019 WL 3268792, at *3 (Bankr. C.D. Ill. July 19, 2019) (“There is no fair reading of
the statute [11 U.S.C. § 522(f)] that would support avoiding a judicial lien beyond
the amount necessary to protect a debtor’s exemption.”).
The parties mention 11 U.S.C. § 522(f) in their briefing. (ECF 42 at 3; ECF
48 at 9-10.) That section allows a debtor to “avoid the fixing of a lien on an interest
of the debtor in property to the extent that such lien impairs an exemption” if the
lien is a judicial lien. 11 U.S.C. § 522(f)(1)(A). Debtors may exercise this right to
avoid a judicial lien regardless of whether the underlying debt is nondischargeable.
In re Hulvey, 102 B.R. 703, 704 (Bankr. C.D. Ill. 1988) (“The Plaintiffs contend,
however, that the Defendant should not be allowed to avoid the lien because this
debt is nondischargeable. This Court does not agree.”); see also In re Ash, 166 B.R.
202, 204 (Bankr. D. Conn. 1994) (“A substantial number of courts considering this
issue agree that a debtor’s avoidance power is not conditioned upon whether the
underlying debt is dischargeable[.]”) (collecting cases). The Debtors have not
brought a motion to exercise their rights under § 522(f). Unless and until they do,
they should not have to defend a claim regarding the Lee Parties’ secured status.
It may be that the Lee Parties think their secured status is relevant to their
pending claim for a declaration that the Debtors cannot claim a homestead
exemption in the Property. Perhaps they are right. But, as explained herein, the
Court is granting summary judgment to the Debtors on this claim because it is
untimely. If the only reason to consider the secured status of the Lee Parties’ claim
is in relation to the Debtors’ homestead exemption, then the Debtors would be
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prejudiced by having to defend against that claim if there is no remaining claim
regarding the homestead exemption.
Upon disposition of the parties’ cross motions for summary judgment, this
case will be ready to proceed to trial. If the Court allows the amendment, discovery
may need to be reopened5, and the parties could file another round of summary
judgment motions on the added claim.6 The Debtors and the public have an
interest in a speedy resolution of this case. Perrian, 958 F.2d at 195 (“The burden
to the judicial system can justify a denial of a motion to amend even if the
amendment would cause no hardship at all to the opposing party” because a late
amendment “defeat[s] the public’s interest in speedy resolution of legal disputes.”)
(internal quotation marks omitted). The Debtors will be prejudiced by the late
amendment, so the Court will deny leave to amend.
B. 	The Amendment Would Be Futile.
It is appropriate to deny a plaintiff leave to amend a complaint where the
amendment would be futile. Moore v. State of Ind., 999 F.2d 1125, 1128 (7th Cir.
1993) (“[T]he court should not allow the plaintiff to amend his complaint when to do
so would be futile.”). “[A]n amendment may be futile when it fails to state a valid
5 The Lee Parties say that they do not want additional discovery (see Pls’ Combined Reply Brief, ECF
48, at 23), but the Debtors may want additional discovery regarding the scope of the Lee Parties’
alleged security interest before the Court were to make a binding declaration.
6 The Lee Parties seem to suggest that the Court should permit them to amend their complaint and
then grant summary judgment in their favor on the added claim without allowing the Debtors to file
a responsive motion or pleading or to conduct discovery on the new claim. The Lee Parties offer no
legal authority for the Court’s ability to grant immediate summary judgment in that fashion. See In
re KJK Const. Co., 414 B.R. 416, 426 (Bankr. N.D. Ill. 2009) (noting that if a motion for summary
judgment is made before an answer to the complaint is filed, courts are reluctant to grant summary
judgment unless it is very clear that an answer will not raise any significant issues of fact).
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theory of liability . . . or could not withstand a motion to dismiss.” Bower v. Jones,
978 F.2d 1004, 1008 (7th Cir. 1992).
In their proposed new claim, the Lee Parties ask the Court to declare that
they have a security interest in the Property and that the Debtors are required to
make an election with respect to the secured claim under 11 U.S.C. § 521(a). The
Court lacks jurisdiction to make a declaration as to the first part, and the Court
cannot provide any relief to the Lee Parties on the second part. Therefore, the
amendment would be futile.
As to their request for a declaration that they have a security interest in the
Property, the Lee Parties have two theories. The first is that they are secured
based on the “writ of attachment” issued by the Ozaukee County Circuit Court and
docketed in Sheboygan County. (Pls’ Mot. for Summ. J., ECF 24, at 13-14.) The
problem with this theory is that no writ of attachment was ever issued, at least not
based on the allegations in the amended complaint or the information in the
summary judgment record. Section 242.07(1)(b) of the Wisconsin Statutes provides
that a creditor seeking relief under chapter 242 may obtain, among other remedies,
“[a]n attachment or other provisional remedy against the asset transferred or other
property of the transferee if available under chs. 810 to 813 or other applicable law.”
Neither the state court order nor the Lee Parties’ submissions in this court identify
any applicable law other than chapter 811. Therefore, the Court has assumed that
the Lee Parties were required to follow the procedures in chapter 811 of the
Wisconsin Statutes in seeking to enforce the attachment ordered by the state court.
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The Lee Parties do not allege in their proposed amended complaint that a state
court ever actually issued a writ of attachment to the Sheriff of Sheboygan County
consistent with chapter 811 of the Wisconsin Statutes, and no such writ was
attached to the amended complaint or included with the summary judgment record.
See Wis. Stat. § 811.02 (a writ of attachment “shall be directed to the sheriff of some
county in which the property of the defendant is supposed to be, and shall require
the sheriff to attach all the property of the defendant within the county or so much
thereof as may be sufficient to satisfy the plaintiff’s demand, together with costs
and expenses”). Nor do the Lee Parties allege that they filed the order or otherwise
recorded a lien with the Register of Deeds for Sheboygan County consistent with the
order. The Lee Parties do, however, allege that they docketed the Ozaukee County
money judgment with Sheboygan County, which may have given them a judgment
lien on the Property. See Wis. Stat. §§ 806.10, 806.13, 806.15. The Court need not
decide the nature and scope of that lien because the Lee Parties have all the relief
they need on their second theory.
The Lee Parties’ second theory is that they are secured by virtue of the
mortgage that the Debtors granted to C&K Associates. (Pls’ Mot. for Summ. J.,
ECF 24, at 15.) In Case No. 2023-CV-37, the Ozaukee County Circuit Court ordered
that “[a]ny promissory notes made to C&K Associates, LLC, and mortgages received
by it, are ordered assigned to the [Lee Parties], including, without limitation, any
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promissory notes relating to . . .” the Property. (Halloin Decl. Ex. 11, ECF 26-11.)7
The Debtors agree that the mortgage granted to C&K Associates is “legitimate,”
that they want to pay the mortgage, and that they have attempted to pay the Lee
Parties pursuant to their payment obligations under the mortgage. (Witkowski
Decl. Ex. 5, ECF 35-5, ¶¶ 16-17, 19-20; Witkowski Decl. Ex. 6, ECF 35-6, ¶¶ 16-17,
19-20.)
Thus, the Debtors agree that the Lee Parties have a security interest in the
Property. There is no live dispute between the parties to adjudicate through a
request for declaratory relief. See Powell v. McCormack, 395 U.S. 486, 517-18
(1969) (“The availability of declaratory relief depends on whether there is a live
dispute between the parties[.]”). For the same reason, the Court does not have
subject matter jurisdiction to adjudicate the Lee Parties’ alternative request that
the Court declare that their liens pass through bankruptcy unaffected. (See
Proposed Am. Compl., ECF 32-1 at 15.)8
7 It is unclear whether the Lee Parties were required to record the order to assign the mortgage,
which they do not appear to have done. “[U]nder the doctrine of equitable assignment a mortgage is
automatically transferred by operation of law when the note is transferred.” Dow Fam., LLC v. PHH
Mortg. Corp., 2014 WI 56, ¶ 40, 354 Wis. 2d 796, 815, 848 N.W.2d 728, 737. If the note to C&K was
transferred to the Lee Parties, then an assignment or other interest need not be recorded. See id.,
¶ 47 (“[A] mortgage automatically passes by operation of law upon the assignment of a mortgage
note[.]”). It may be that the order was sufficient to assign the note so that the mortgage followed the
note, but that is not a matter for this Court to decide.
8 The Lee Parties also complain that the Debtors’ schedules include C&K Associates as the secured
creditor for the mortgage, rather than the Lee Parties. (See Pls’ Resp. to Defs’ Mot. for Summ. J.,
ECF 39 at 10-11.) The Lee Parties do not explain how this harms them or what relief that entitles
them to. The Debtors acknowledged the mortgage debt, and they did schedule the Lee Parties as
creditors.
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The Lee Parties also want the Court to require that the Debtors make an
election under 11 U.S.C. § 521(a). That section requires a chapter 7 debtor to file a
statement of intention within 30 days after the petition date with respect to debts
that are secured by property of the estate electing to reaffirm, redeem, or surrender
the property, and to perform that intention within 30 days after the first date set for
the meeting of creditors under § 341(a). 11 U.S.C. § 521(a)(2); see also In re
Edwards, 901 F.2d 1383, 1387 (7th Cir. 1990) (“[Section 521] requires a debtor to
choose between the reaffirmation, redemption or surrender of property abandoned
from the estate or exempted from discharge.”).
The Debtors’ Statement of Intention did not include an election for the C&K
Associates mortgage on the Property (see Case No. 24-24067, ECF 1, at 46), and
they say they have no objection to a declaration that they are required to make an
election (Defs’ Resp. to Pls’ Mot. for Summ. J., ECF 42, at 3). The Court could,
perhaps, require the Debtors to file an untimely statement of intention under
§ 521(a), but to what end? Such a declaration would not afford any relief to the
parties because the Court cannot require the debtors to perform any stated
intention.
The Debtors can no longer enter into an enforceable reaffirmation agreement
because an order of discharge was already entered in the main bankruptcy case.
See 11 U.S.C. § 524(c)(1) (providing that a reaffirmation agreement is enforceable
only if “such agreement was made before the granting of the discharge”). That
leaves redemption or surrender. The Court cannot require the debtors to redeem
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the Property by paying the Lee Parties; redemption must be voluntary and is
subject to the Debtors’ ability to pay. See 11 U.S.C. § 722. Redemption may not be
available to the Debtors at this point in any event. Redemption requires that the
debt be dischargeable (the Lee Parties claim their debt is not dischargeable) and
that the property at issue is exempted (the Lee Parties claim it is not) or that the
property is no longer property of the estate (the Property is still in the estate). Nor
can the Court compel the Debtors to surrender the Property, at least not in a way
that would offer relief to the Lee Parties. At this point, the Property is still part of
the bankruptcy estate and will be until the case is closed or the trustee or a party in
interest files an appropriate notice or motion. See 11 U.S.C. § 554; Fed. R. Bankr.
P. 6007. Once the Property is no longer part of the bankruptcy estate, the Lee
Parties will need to follow state law to obtain possession of the Property.
For personal property, the consequence of a debtor’s failure to file a timely
statement of intention under § 521(a) or to perform that intention timely is to
remove the property from the bankruptcy estate and grant relief from the § 362(a)
stay by operation of law. See 11 U.S.C. § 362(h). Congress provided no such
mechanism for real property. So a secured creditor with respect to real property
must seek relief from the § 362(a) stay and abandonment under § 554 to enforce its
lien. The Lee Parties do not explain why they need an untimely election under
§ 521(a) before they can take such action to enforce the mortgage.
Because it is untimely and seeks relief the Court cannot grant, the Court will
deny the Lee Parties’ motion for leave to amend the complaint.
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II. 	Motions for Summary Judgment
Summary judgment is appropriate if the pleadings and affidavits on file show
there is no genuine dispute as to any material fact and the moving party can
establish it is entitled to judgment as a matter of law. See Fed. R. Bankr. P. 7056;
Fed. R. Civ. P. 56. An issue of material fact is a question that must be answered to
determine the rights of the parties under substantive law and that can properly be
resolved only “by a finder of fact because [it] may reasonably be resolved in favor of
either party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). The
movant may meet his burden by showing “that there is an absence of evidence to
support the nonmoving party’s case.” Celotex Corp. v. Catrett, 477 U.S. 317, 325
(1986). “If the movant has failed to make this initial showing, the court is obligated
to deny the motion.” Hotel 71 Mezz Lender LLC v. Nat’l Ret. Fund, 778 F.3d 593,
601 (7th Cir. 2015) (citations omitted). If the moving party meets his burden, the
burden shifts to the nonmoving party to show there is a genuine issue of material
fact. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87
(1986). “The evidence of the non-movant is to be believed, and all justifiable
inferences are to be drawn in his favor.” Anderson, 477 U.S. at 255.
A. 	Declaration as to Homestead Exemption
The Lee Parties’ complaint includes a request that the Court declare that
“the Defendants are not entitled to the protection of Wisconsin’s homestead
exemption.” (Compl., ECF 1, at 7.) Both parties now seek summary judgment on
that claim. The Court will grant summary judgment to the Debtors on the Lee
Parties’ affirmative claim for a declaration because the claim is untimely.
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In the main bankruptcy case, the Debtors claimed a homestead exemption in
the Property in the amount of $140,000 pursuant to Wis. Stat. § 815.20. Case No.
24-24067, ECF 1 at 16. Though Wisconsin law allows each debtor to claim up to
$75,000 for a homestead exemption, allowing married couples like the Debtors to
claim up to $150,000, it appears that the exemption claimed by the Debtors is the
difference between the balance on the mortgage to C&K Associates and the value of
the Property.
Pursuant to Bankruptcy Rule 4003, “a party in interest may file an objection
to a claimed exemption within 30 days after . . . the conclusion of the § 341 meeting
of creditors.” Fed. R. Bankr. P. 4003(b)(1).9 The court may extend the time to file
an objection, but only if the party in interest files a motion before the time to object
expires. Id. Failure to file a written objection to a debtor’s claimed exemption, or a
motion to extend the deadline, is fatal to an untimely objection. In re Kazi, 985 F.2d
318, 322 (7th Cir. 1993) (“[O]nce the 30-day period to object expires, a debtor’s
claimed exemption cannot be challenged regardless whether it has a basis in law.”).
This is so even where the party in interest initially believes the property in which
the exemption is claimed is not part of the bankruptcy estate. Id.
The chapter 7 trustee concluded the meeting of creditors on September 9,
2024 and filed a report of no distribution on September 11, 2024. Case No. 24-
9 The rule extends this deadline if the debtor files a supplement to the list of exemptions or an
amendment to other schedules that is relevant to exemption at issue. See Fed. R. Bankr. P.
4003(b)(1); see also In re Kazi, 985 F.2d 318, 323 (7th Cir. 1993) (agreeing that “the objection may go
only to those exemptions affected by [the amended schedules]” and that “[t]he filing of an amended
schedule does not reopen the time to object to the original exemptions”). The Debtors did not file any
amendments to their list of exemptions or supplements to their schedules.
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24067, ECF 7, 13. Pursuant to Bankruptcy Rule 4003(b), the deadline for the Lee
Parties to object to the Debtors’ claimed homestead exemption was October 9, 2024.
The Lee Parties did not file their adversary complaint until November 8, 2024, well
after the deadline.10 Their claim for affirmative relief is untimely, and the Court
will grant summary judgment to the Debtors dismissing that claim.11
In an attempt to save their claim for a declaration as to the Debtors’
homestead exemption, the Lee Parties say they are merely responding to the
Debtors’ invocation of the exemption as an affirmative defense to the Lee Parties’
nondischargeability claim. (See ECF 33 at 6-7 (citing ECF 4 at 7).) “An affirmative
defense limits or excuses a defendant’s liability even if the plaintiff establishes a
prima facie case.” Bell v. Taylor, 827 F.3d 699, 704-05 (7th Cir. 2016) (internal
quotation marks omitted). A plaintiff does not have an affirmative claim against a
defendant based on an affirmative defense, so that does not save the Lee Parties’
claim for a declaration denying the Debtors’ homestead exemption.
To the extent the Lee Parties seek summary judgment as to an affirmative
defense (as opposed to an affirmative claim for a declaration), the Court will deny
that motion. In their answer to the complaint, the Debtors included an affirmative
10 Moreover, it is not clear that an objection to a claim of exemption can even be brought in an
adversary proceeding. See Cardservice Int’l, Inc. v. Inman (In re Inman), 260 B.R. 233, 241 (Bankr.
M.D. Fla. 2000) (“Such an objection [to the debtor’s exemptions in household property] should have
been brought in the main case, not in this Proceeding.”).
11 The Lee Parties repeatedly complain that the Debtors filed bankruptcy one day after the state
court in Sheboygan County held that the Debtors could not invoke the homestead exemption in
response to the Lee Parties’ enforcement efforts against the Property. (ECF 24 at 20-21, ECF 33 at
7; ECF 39 at 9-10; ECF 48 at 9-12.) If the Lee Parties wanted to enforce that ruling to preclude the
Debtors from claiming a homestead exemption in this case, they should have filed a timely objection
to the exemption. They did not.
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defense that the Lee Parties’ “request for relief fails because the Debtor/Defendants’
home is their homestead, with equity at or below $150,000 and therefore exempt
and out of reach of creditors.” (ECF 4, ¶ 47.) Because the Lee Parties did not plead
separate claims for relief in their adversary complaint, it is impossible to tell
whether this affirmative defense was invoked in response to the Lee Parties’
request for a declaration of nondischargeability under § 523(a)(2)(A) or in response
to the request for a declaration related to the Debtors’ homestead exemption. In
any event, the Lee Parties’ motion for summary judgment does not specifically
request that the Court grant summary judgment precluding the Debtors from
raising the affirmative defense in paragraph 47 of their answer (or any other
affirmative defense). (See generally ECF 24.) None of the Debtors’ briefs mention
an affirmative defense, either, suggesting that they did not understand the Lee
Parties to be seeking summary judgment on their affirmative defense. (See
generally ECF 34, 39, 50.) Therefore, the Court will deny summary judgment
because the Debtors did not have sufficient notice of the Lee Parties’ motion on this
issue.
The Debtors are cautioned that they may raise at trial only affirmative
defenses that limit or excuse their liability as to nondischargeability under
§ 523(a)(2)(A) if the Lee Parties establish a prima facie case. Under Wisconsin law,
the holder of a money judgment (which the Lee Parties purport to be) may enforce
that judgment through execution on a debtor’s property. See Wis. Stat. ch. 815.
Certain property is exempt from execution by a creditor, including $75,000 in a
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debtor’s homestead. Wis. Stat. § 815.20. The Lee Parties’ ability to enforce their
judgment through execution on the Property does not seem to be relevant to
whether the debt claimed by the Lee Parties is nondischargeable under
§ 523(a)(2)(A). The Debtors’ homestead exemption may affect the property that the
Lee Parties can look to for satisfaction of their claim12, but that is a matter separate
from whether the debt itself is nondischargeable.
B. 	Nondischargeability Under § 523(a)(2)(A)
The Lee Parties seek a declaration that a debt owed to them is excepted from
the Debtors’ discharge under 11 U.S.C. § 523(a)(2)(A). That section excepts debts
“obtained by . . . false pretenses, a false representation, or actual fraud . . . .” 11
U.S.C. § 523(a)(2)(A). The creditor must prove each element of a
nondischargeability claim by a preponderance of the evidence. Grogan v. Garner,
498 U.S. 279, 291 (1991). “[E]xceptions to discharge are to be [construed] strictly
against a creditor and liberally in favor of the debtor.” Goldberg Securities, Inc. v.
Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir. 1992).
The term “actual fraud” as used in § 523(a)(2)(A) “denotes any fraud that
involves moral turpitude or intentional wrong.” Husky Int’l Elecs., Inc. v. Ritz, 578
U.S. 355, 360 (2016) (cleaned up); see also In re McGill, No. 22-21547-GMH, 2023
WL 7136151, at *6 (Bankr. E.D. Wis. Oct. 30, 2023) (“The essence of any claim
under § 523(a)(2)(A) is that the debtor, whether by word or deed, somehow cheated
12 A declaration of nondischargeability under § 523(a)(2)(A) does not affect the parties’ rights with
respect to any judgment lien the Lee Parties may have. Pajian, 785 F.3d at 1163. The lien survives
bankruptcy unaffected to the extent it is not avoided, and the Debtors may still exercise their rights
under § 522(f) in the main case to seek avoidance of any judgment lien. Ash, 166 B.R. at 204.
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the creditor, which requires some type of ‘moral turpitude’ or ‘intent to deceive’ on
the part of the debtor, rather than simply not abiding by his promises.”) (cleaned
up). Thus, “actual fraud” includes debts incurred through “fraudulent conveyance
schemes, even when those schemes do not involve a false representation.” Husky,
578 U.S. at 366. “[T]he recipient of the transfer—who, with the requisite intent,
also commits fraud—can obtain assets by his or her participation in the fraud. If
that recipient later files for bankruptcy, any debts traceable to the fraudulent
conveyance will be nondischargeable under § 523(a)(2)(A).” Id. at 365 (cleaned up).
A bankruptcy debtor can be liable as a transferee of fraudulently conveyed
property where the debtor participated in a scheme to hide an asset from the
creditor. See McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir. 2000). In
McClellan, the creditor sold his ice-making machinery to the debtor’s brother for
$200,000, payable to the creditor in installments. Id. at 892. The brother defaulted,
and the creditor commenced litigation to seek return of the machinery and
collection of the remaining balance of the debt. Id. The debtor’s brother “sold” the
machinery to the debtor for $10. Id. The debtor then sold the machinery for
$160,000 and refused to disclose where the sale proceeds went. Id. The Seventh
Circuit held that the debtor’s liability for fraudulent conveyance could be rendered
nondischargeable if the debtor participated in the fraud and had intent to assist her
brother in transferring assets to evade the creditor. Id. at 893-94. The court noted
that a transfer that is merely constructively fraudulent, where the debtor did not
have knowledge of or intent to participate in a fraudulent scheme to hinder the
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creditor, may be dischargeable. Id. at 894 (“The fraud exception to the
dischargeability of debts in bankruptcy does not reach constructive frauds, only
actual ones[.]”).
The record includes some evidence of the Debtors’ intent, but there are
genuine issues of material fact precluding summary judgment.
1. 	The State Court Order Does Not Establish Intent to Defraud.
To prevail on their nondischargeability claim, the Lee Parties must prove
that the Debtors are liable for an actual fraudulent transfer, as opposed to a
constructive fraudulent transfer. The Lee Parties rely heavily on the September 9,
2022 order entered in Ozaukee County Case No. 2022-CV-162. (Halloin Decl. Ex. 8,
ECF 26-8.) They say, for example, that “[t]he Wisconsin Circuit Court already
entered a final order that [the Debtors] were liable for the damages caused by Kay
Yang’s fraud.” (Pls’ Combined Reply Brief, ECF 48, at 21.) The order cannot bear
the weight the Lee Parties place on it.
In the September 9 order, the state court stated that “[t]his matter relates to
fraudulent transfers from Defendant debtor Kay Yang to the other named
Defendants in this action.” (Halloin Decl. Ex. 8, ECF 26-8, at 2.) The court found
the Debtors to be in default and concluded that “[t]he allegations of the Complaint
are deemed admitted.” (Id. at 4.) The court then entered judgment against the
Debtors in the amount of $2,374,290.16. (Id.) The Court’s order does not
specifically state the basis of the Debtors’ liability, other than a reference to
fraudulent transfers.
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Even assuming we can look to the Lee Parties’ state court complaint to
determine the source of the Debtors’ liability, that does not help the Lee Parties. As
relevant here, the Lee Parties alleged: “Plaintiffs believe that these transfers [to
Debtors for purchase of the Property] were done with an intent to hinder, delay or
defraud the Plaintiffs’ efforts to collect a present or future judgment against Ms.
Yang.” (Halloin Decl. Ex. 6, ECF 26-6, ¶ 23.) They also allege that, “Plaintiffs
believe each of the above transfers to be a violation of Wisconsin Statutes Chapter
242.” (Id. ¶ 25.) The Lee Parties “request[ed] judgment under Wisconsin Statutes
sections 242.04 and 242.07.” (Id. at 12.) The September 9 order provides that these
allegations were deemed admitted by the Debtors. The most that the Debtors
admitted was that the Lee Parties believe the transfer to them was done with intent
to hinder, delay or defraud the Lee Parties; the Debtors did not admit the existence
of any intent to hinder, delay or defraud.
Moreover, the complaint alleged that the transfer was a violation of chapter
242 of the Wisconsin Statutes and requested relief under section 242.04. That
section includes two distinct causes of action: section 242.04(1)(a) relates to actual
fraudulent transfers as to present or future creditors, and section 242.04(1)(b)
relates to constructive fraudulent transfers as to present or future creditors. Wis.
Stat. § 242.04(1). The Lee Parties did not include a specific request for relief under
either subsection, and the state court did not grant relief under either subsection.
So the Debtors’ liability for fraudulent transfer under the September 9 order could
be based on constructive fraudulent transfer or actual fraudulent transfer. If the
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former, their debt to the Lee Parties is dischargeable under McClellan. 217 F.3d at
894 (“The fraud exception to the dischargeability of debts in bankruptcy does not
reach constructive frauds, only actual ones[.]”). The Lee Parties cannot rely solely
on the state court order to establish fraudulent intent. They must prove here that
the transfer was an actual fraudulent transfer.
2. 	There Are Material Factual Disputes Regarding Intent.
The key element of a nondischargeability claim for actual fraud is the
scienter requirement: the plaintiff must prove fraudulent intent. See Husky, 578
U.S. at 360 (“[A]nything that counts as ‘fraud’ and is done with wrongful intent is
‘actual fraud.’”). Wrongful intent can be, but rarely is, proven with direct evidence.
Intent can also be proven through circumstantial evidence. State statutes usually
include a list of “badges of fraud” that can be helpful in determining whether a
fraudulent transfer is actually fraudulent, as opposed to constructively fraudulent,
and federal courts considering whether intent is proven for purposes of a claim
under § 523(a)(2)(A) often look to these badges of fraud. See, e.g., In re Wigley, 15
F.4th 1208, 1212 n.4 (8th Cir. 2021) (“We reject Barbara’s argument that the
bankruptcy court erred in considering the badges of fraud set forth in Minn. Stat.
§ 513.44(b).”); In re Kedia, 607 B.R. 101, 110 (Bankr. E.D.N.Y. 2019) (“Actual fraud
can be shown by the presence of multiple ‘badges of fraud[.]’”) (internal quotation
marks omitted).
As with the intent element in other causes of action, intent under
§ 523(a)(2)(A) is a question of fact rarely appropriate for disposition on summary
judgment. See, e.g., Staren v. Am. Nat. Bank & Tr. Co. of Chicago, 529 F.2d 1257,
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1261 (7th Cir. 1976) (“[Q]uestions of motivation or intent are particularly
inappropriate for summary judgment.”); In re Salgado, 588 B.R. 209, 214 (Bankr.
N.D. Ill. 2018) (“Summary judgment will almost never be available when fraudulent
intent is a part of the cause of action. This is because intent is a factual issue that is
ordinarily a subjective inquiry, making the Debtor’s testimony and credibility
germane to this determination.”). Summary judgment in favor of the creditor is
appropriate only in “exceptional” cases where a debtor’s denial of knowledge is
“utterly implausible in light of conceded or irrefutable evidence that no rational
person could believe it.” In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998). This is not
one of those exceptional cases.
Before moving on to the evidence on intent, the Court pauses to note an issue
of law that was not well-briefed by the parties, which is whose intent is relevant
when determining whether a debt for an actual fraudulent transfer is
nondischargeable under § 523(a)(2)(A). The Supreme Court in Husky and the
Seventh Circuit in McClellan held that a debt based on a fraudulent transfer can be
declared nondischargeable if the debtor as transferee had knowledge of and intent
to participate in the fraudulent transfer. Husky, 578 U.S. at 365 (noting that a
transferor does not “obtain” debts by fraudulent conveyance, but that “the recipient
of the transfer—who, with the requisite intent, also commits fraud—can ‘obtain’
assets ‘by’ his or her participation in the fraud”); McClellan, 217 F.3d at 894 (“[I]f
though the debtor’s brother intended to thwart McClellan and was thus committing
actual fraud, his sister was innocent—if she had no intention of hindering any
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creditor—the debt that McClellan is seeking to collect from her would not have been
obtained by her by actual fraud.”). A more recent Supreme Court case holds that a
debt can be nondischargeable even where the debtor herself did not have fraudulent
intent, but that case did not involve a fraudulent transfer. See Bartenwerfer v.
Buckley, 598 U.S. 69 (2023).
In Bartenwerfer, a husband and wife remodeled and sold a house as business
partners. 598 U.S. at 72. The husband did most of the work during the process,
and the wife was largely uninvolved. Id. After the sale, the buyer discovered
several undisclosed defects. Id. The buyer sued the couple in state court, alleging
various claims for breach of contract, negligence, and nondisclosure, and the court
entered judgment against both of them. Id. at 72-73.
The couple filed bankruptcy, and the buyer sought to have the judgment debt
declared nondischargeable under 11 U.S.C. § 523(a)(2)(A). Id. at 73. At issue in the
case was whether § 523(a)(2)(A) excepts from discharge only debts for fraud
committed by the debtor herself, as the wife argued, or whether the statute also
excepts debts for money obtained by fraud, even if the debtor was not the fraudster,
as argued by the buyer. The Supreme Court agreed with the buyer. Id. at 74-79.
The Court held that, “[w]ritten in the passive voice, § 523(a)(2)(A) turns on how the
money was obtained, not who committed fraud to obtain it.” Id. at 72. Because the
money owed to the buyer was obtained by fraud (i.e., the husband’s fraud), the debt
owed by the wife was nondischargeable under § 523(a)(2)(A) because she was liable
for the same debt under state law. Id.
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The Lee Parties point to Bartenwerfer in support of an argument that they
need not prove the Debtors’ intent, and that it is sufficient for them to prove Kay
Yang’s intent to defraud the Lee Parties. (See Pls’ Combined Reply Brief, ECF 48,
at 21 (“[B]ecause the judgment [in Case No. 2022-CV-162] arises from funds
obtained by Kay Yang’s fraud and then passed to/used by [the Debtors], it is a debt
for money obtained by fraud.”).) But the Lee Parties do not allege that the Debtors
are liable for Kay Yang’s initial fraud. Rather, the Lee Parties allege that the
Debtors are liable for a debt for money obtained through a fraudulent transfer
under chapter 242 of the Wisconsin Statutes, an entirely separate, statutory cause
of action distinct from Yang’s debt to the Lee Parties for fraud.13 (See Halloin Decl.
Ex. 8, ECF 26-8.)
The focus, then, is on the allegedly fraudulent transfer to the Debtors, not on
Yang’s underlying fraud in causing the Lee Parties to part with their money
initially. In Husky, the Supreme Court emphasized that the basis for the
transferor’s underlying debt to the creditor is not relevant to nondischargeability
based on a fraudulent transfer. 578 U.S. at 365 (rejecting dissent’s view that a
claim under § 523(a)(2)(A) must “result from fraud at the inception of a credit
transaction”) (emphasis added); see also McClellan, 217 F.3d at 894 (“[T]he law of
fraudulent conveyance is merely a method of facilitating the collection of a previous
13 Wisconsin’s fraudulent transfer law in chapter 242 is a creditor-protection statute. Badger State
Bank v. Taylor, 2004 WI 128, ¶ 41, 276 Wis. 2d 312, 330, 688 N.W.2d 439, 448. It provides remedies
to creditors so they are not deprived of assets that would otherwise be available to satisfy debts when
the debtor becomes insolvent or is about to become insolvent. Id. ¶ 42.
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debt that need not itself have been created by a fraud.”) (emphasis added).
Thus Bartenwerfer does not help the Lee Parties in the way they think, because
proof of Yang’s intent to defraud the Lee Parties by causing them to part with their
money between January and May 2019 is different from her intent to hinder, delay
or defraud her future creditors when she transferred money to the Debtors to
purchase the Property in November 2018.
There is an outstanding question as to whether Kay Yang’s intent is relevant
to the dischargeability of the Debtors’ liability for an actual fraudulent transfer, or
whether only the Debtors’ intent matters. The majority opinion in Bartenwerfer
suggests that it may not. 598 U.S. at 72 (“Written in the passive voice,
§ 523(a)(2)(A) turns on how the money was obtained, not who committed fraud to
obtain it.”). The concurrence suggests that liability may be limited to debtors who
have a partnership or agency relationship with the person who committed the
fraud. Id. at 84 (Sotomayor, J., concurring) (“The Court here does not confront a
situation involving fraud by a person bearing no agency or partnership relationship
to the debtor.”). At least one court has held that Bartenwerfer does not extend to
innocent transferees of fraudulent transfers even if the transferor had fraudulent
intent. See In re Vulaj, 651 B.R. 310, 315 (Bankr. S.D. Cal. 2023). The Lee Parties’
discussion of Bartenwerfer does not address the issue of the innocent transferee14
14 A hypothetical with less complex facts than this case highlights the issue. Suppose P (the primary
debtor) owes a debt to C (the creditor) for $100,000. In an attempt to shield assets from C, P
transfers $10,000 to D (the debtor) in the form of a gift and without consideration. D is unaware of
C’s claim against P or that the $10,000 could have or should have been used to pay C. D is
nevertheless liable as a transferee under Wis. Stat. § 242.04(1)(a) because she received an actual
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(their discussion focuses on their incorrect argument that the Debtors are liable for
Yang’s underlying fraud), and the Debtors had no opportunity to discuss
Bartenwerfer’s applicability here because the Lee Parties did not cite the case until
their reply brief.
The Court need not decide the issue at this juncture because the summary
judgment record does not include sufficient facts for the Court to conclude that this
could be a case of a fraudster transferor and innocent transferee. The Lee Parties
make no argument and present no facts that Yang (or A&K Equity or C&K
Associates) had an intent to hinder, delay, or defraud her creditors when she
transferred funds to the Debtors to purchase the Property.
The innocent transferee legal issue may not matter if the Lee Parties can
present sufficient evidence to prove that the Debtors had an intent to defraud. But
the Lee Parties’ briefs are high on rhetoric and short on facts in this regard. The
Lee Parties rely primarily on the circumstances and terms of the mortgage loan the
Debtors received from C&K Associates. (ECF 24 at 18.) First, the Lee Parties
assert that the Debtors did not fill out a loan application or go through any sort of
credit check or underwriting process. This fact is not undisputed; the Debtors deny
that they did not fill out “traditional loan documents.” (See Defs’ Resp. to Pls’
PFOF, ECF 43, ¶ 68.) Second, the Debtors provided only the $1,000 escrow
fraudulent transfer, and a state court enters judgment in favor of C and against D under Wis. Stat.
§ 242.08(2). D already spent the money she received from P and does not have $10,000 to pay the
judgment. D files bankruptcy. Is D’s debt to C nondischargeable under § 523(a)(2)(A) if C can prove
that D obtained the $10,000 through P’s actual fraudulent transfer, even if D lacked any intent to
defraud C? That question may not necessarily be answered by Bartenwerfer.
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payment to purchase the Property, and C&K Associates did not require them to
tender a further down payment for the mortgage loan, which is unusual for a typical
mortgage loan transaction. (See Halloin Decl. Ex. 17, ECF 26-17.) Third, the loan
had a 2% interest rate, which was well below the market rate at the time. (Defs’
Resp. to Pls’ PFOF, ECF 43, ¶¶ 66-67.) Fourth, the Debtors made irregular
payments and eventually stopped making payments, yet no foreclosure action or
other collection action was initiated against them. The Debtors dispute that this
gave them knowledge of Yang’s fraud; they say they made payments as directed by
Yang. (Defs’ Resp. to Pls’ PFOF, ECF 43, ¶¶ 70-75.)15 Fifth, the Lee Parties say
that “[t]he financer of the purchase was not a licensed or registered vendor,” citing
facts related to A&K Equity, not C&K Associates. (Pls’ Mot. for Summ. J., ECF 24,
at 18 (citing Pls’ PFOF, ECF 25, ¶¶ 9-10).) Presumably, the Lee Parties rely on the
transfer of funds from the A&K Equity account at Capital One to the C&K
Associates account. (See Halloin Decl. Ex. 15, ECF 26-15.) The Debtors say they
don’t know anything about that. (Defs’ Resp. to Pls’ PFOF, ECF 43, ¶ 61.)
For their part, the Debtors say that they were not investors in Yang’s
fraudulent investment scheme. They say they were made aware that Yang was
operating C&K Associates and could provide a mortgage loan, “regardless of
15 This fact may not support a finding of fraudulent intent because the events happened after the
Debtors received the allegedly fraudulent transfer from Yang’s company. To be nondischargeable
under § 523(a)(2)(A), the money must have been “obtained by” fraud, meaning that relevant intent is
at the time of the transfer. In re Neumann, 13 B.R. 128, 130 (Bankr. E.D. Wis. 1981) (“In order to
prevail under s 523(a)(2)(A) the plaintiff must show that the [statute’s] elements [including “an
intent to deceive”] existed at the time that the property/money was obtained[.]”). Facts that could
have or should have alerted the Debtors to Yang’s fraud that occurred after the Debtors already
received the money may not bear on their intent in receiving the money months or years earlier.
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familial relations.” (Witkowski Decl. Ex. 5, ECF 35-5, ¶ 3; Witkowski Decl. Ex. 6,
ECF 35-6, ¶ 3.) They did not know how Yang and C&K Associates operated the
business, and they believed the mortgage loan was legitimate. (Witkowski Decl. Ex.
5, ECF 35-5, ¶¶ 4, 6-14; Witkowski Decl. Ex. 6, ECF 35-6, ¶¶ 4, 6-14.)
Whether the Debtors acted with fraudulent intent sufficient to prevent
discharge under § 523(a)(2)(A) is a question of fact. The Lee Parties assert that “[i]t
defies logic that the [Debtors] did not suspect something was amiss.” (ECF 24 at
18.) A suspicion that something was amiss is not the same thing as an intent to
defraud. The Lee Parties identified some badges of fraud, but not all are
undisputed. While those facts could ultimately support a finding of intent, they do
not necessarily lead to a finding of intent. The Debtors presented their own
affidavits essentially averring that they were good faith recipients of the funds. The
statements in the Debtors’ affidavits that they lacked knowledge of Yang’s
fraudulent transfer scheme and intent to participate are not “utterly implausible.”
The Court cannot conclude that there are no undisputed issues of material fact such
that summary judgment is appropriate for either party with respect to the Debtors’
intent.
Finally, there are unresolved questions of fact regarding the amount of the
debt that may be declared nondischargeable. The Court can declare a debt
nondischargeable only “to the extent [the money was] obtained by . . . false
pretenses, a false representation, or actual fraud[.]” 11 U.S.C. § 523(a)(2)(A)
(emphasis added). This means that “[n]ondischargeability therefore is limited to
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that portion of the debt directly attributable to fraudulent acts.” In re Christensen,
No. 04 A 3646, 2005 WL 1941231, at *5 (Bankr. N.D. Ill. Aug. 12, 2005); see also
Ojeda v. Goldberg, 599 F.3d 712, 720 (7th Cir. 2010) (“Because the statute provides
that an extension is non-dischargeable ‘to the extent’ that it is obtained by a false
representation, the question for us is what portion of the forbearance is directly
attributable to the false representation.”) (citing Christensen with approval); In re
Poulos, 636 B.R. 535, 541 (Bankr. N.D. Ill. 2022) (“[I]f the debtor misapplies only a
portion of a loan, the amount of the loan not used in the required manner is
nondischargeable.”).
The Debtors received only $223,190.65 from Yang through C&K Associates.
The Court cannot declare the entire debt (i.e., the $2,374,290.16 in the state court’s
September 8, 2022 order) to be nondischargeable if such a declaration is not
supported by the evidence.16
CONCLUSION
The Lee Parties’ motion for leave to amend the adversary complaint is
prejudicially late and is futile. The Lee Parties’ claim for a declaration as to the
Debtors’ claimed homestead exemption is untimely, and the Court will grant
summary judgment in favor of the Debtors. With respect to the Lee Parties’
16 The Lee Parties cannot rely solely on the state court’s determination that the Debtors’ liability is
joint and several with the other transferees identified in the complaint in Case No. 2022-CV-162. It
is unclear why the Debtors, as transferees, would have liability under Wisconsin law for funds
received by other transferees. The state court’s determination on joint and several liability may be
preclusive under a doctrine such as claim preclusion, issue preclusion, the Rooker-Feldman doctrine,
or another legal theory. However, even if the Debtors are liable outside of bankruptcy for the entire
amount, only the amount that was “obtained by” fraud can be declared to be nondischargeable.
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nondischargeability claim under 11 U.S.C. § 523(a)(2)(A), there are disputed
questions of fact as to the intent element and the amount of money allegedly
obtained by fraud.
Accordingly, IT IS HEREBY ORDERED:
1. 	The Lee Parties’ motion for leave to amend the complaint (ECF 32) is
DENIED.
2. 	The Debtors’ motion for summary judgment as to the Lee Parties’
claim for a declaration that the Debtors cannot claim a homestead exemption in
bankruptcy is GRANTED and that claim is dismissed with prejudice.
3. 	The motions for summary judgment filed by the Lee Parties and the
Debtors with respect to the Lee Parties’ claim for declaration of nondischargeability
under 11 U.S.C. § 523(a)(2)(A) are DENIED.
Dated: March 31, 2026
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