Benchnotes Apr 1999

Benchnotes Apr 1999

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Recoupment vs. Set-off

n re Wiener, 228 B.R. 647 (Bankr. N.D. Ohio 1998), provides a good summary of the differences between recoupment and set-off and their uses in the bankruptcy context. One shareholder in a closely held corporation (who had filed his own bankruptcy) brought an adversary proceeding against a second shareholder in that shareholder's chapter 7 case, seeking to except a claim from discharge. The claim arose out of an award entered in an arbitration in connection with the dissolution of the closely held corporation. After reviewing the law of set-off and recoupment, Bankruptcy Judge Richard L. Speer held that, as the debtor would be able to eliminate the debt, there would be no debt to except from discharge.

Contractors and §547

In re Trans-End Technology Inc., 228 B.R. 181 (Bankr. N.D. Ohio 1998), reviews the interplay between 11 U.S.C. §547 and state statutes enacted in an attempt to protect property owners and subcontractors from fraud in the construction industry. These statutes generally attempt to create a trust in favor of the beneficiaries of the statutory trust, the subcontractors and materialmen of a contractor. The trustee inventively argued that because the trust was created within the preference period, that creation in and of itself was a preferential transfer subject to avoidance under 11 U.S.C. §547(b). Bankruptcy Judge James A. Williams relied upon Selby v. Ford Motor Co., 590 F.2d 642 (6th Cir. 1979) and the more recent opinion in Huizinga v. United States, 68 F.3d 139, 145 (6th Cir. 1995), which held that a debtor contractor does not have a sufficient beneficial interest in the funds under the Trust Fund Act to render those funds property of the estate. Thus, since the effect of the statute is to prevent the funds from becoming property of the estate, the court concluded that there was no transfer of any property belonging to the debtor.

Removal from a State Court

In In re Lawson, 228 B.R. 195 (Bankr. E.D. Tenn. 1998), Bankruptcy Judge Richard Stair was faced with the question of what timetable to apply to an attempted removal of a state court action to bankruptcy court after entry of a discharge order. Rule 9027 of the Federal Rules of Bankruptcy Procedure governs the removal of civil actions pending in non-bankruptcy courts to the bankruptcy courts and provides a specific timetable for removal. The question in Lawson is whether the discharge order constituted "an order terminating a stay...under §362 of the Code." Finding no reported cases on this point, the court noted that §362(c)(2) provides that the automatic stay remains in effect until the discharge is granted or denied; since the discharge had been granted, the court held that the automatic stay had been terminated. Thus, the timetable in Rule 9027(a)(2)(B) was triggered and a 30-day time limit for the filing of a notice of removal of the state court action began. As a result, the removal was not timely and the state court action was allowed to proceed.

Fraudulent Post-petition Transfers

In In re Centennial Textiles Inc., 227 B.R. 606 (Bankr. S.D.N.Y. 1998), the chapter 7 trustee in a converted chapter 11 case alleged that there was a fraudulent scheme between one creditor and the debtor's president to repay a portion of the pre-petition claims by use of fraudulently inflated post-petition invoices. Bankruptcy Judge Stuart M. Bernstein held that the transfers would be treated as unauthorized post-petition transfers and placed the burden of proof on the creditor as the party asserting the validity of the transfers. Relying upon 11 U.S.C. §549(a), the trustee was able to avoid the transfers and recover the value of those transfers from the creditor as the initial transferee.

Denial of Discharge

In In re Goodman, 227 B.R. 626 (Bankr. E.D. Pa. 1998), a chapter 7 trustee sought a denial of discharge under §727(a)(3) since the debtors admitted that they had thrown away certain documents relating to a former business. Bankruptcy Judge David A. Scholl found, in essence, "no harm, no foul" since the remaining records were sufficient to permit the trustee to perform any necessary payment analysis.

Sovereign Immunity

In In re Chen, 227 B.R. 614 (Bankr. D. N.J. 1998), the state filed an adversary proceeding to determine dischargeability of an alleged debt for unemployment compensation received when the debtor was working part-time. The issue of sovereign immunity was raised on appeal. The decision contains an extensive discussion of sovereign immunity, when and under what circumstances it can be raised and its effectiveness at various stages of any litigation. Citing Sosna v. Iowa, 95 S.Ct. 553 (1975), District Judge Orlofsky noted that a state may raise the defense of sovereign immunity for the first time on appeal but, citing Petty v. Tennessee-Missouri Bridge Com'n, 79 S.Ct. 785 (1959) and Wisconsin Dep't of Corrections v. Schacht, 118 S.Ct. 2047 (1998), also noted that a state may also waive its sovereign immunity at its pleasure by a general appearance in litigation. The court found that, by having commenced the litigation in the bankruptcy court with the filing of an adversary complaint, the state waived its sovereign immunity.

Exemption for Annuity

In In re Alexander, 227 B.R. 658 (Bankr. N.D. Tex. 1998), Bankruptcy Judge John C. Akard considered the debtors' claim of exemption of the proceeds of a settlement that they had received as a result of the deaths of two of their children. The settlement was entered into by way of a structured settlement and was paid in the form of an annuity. The debtors claimed the exemption for the annuity under the Texas Insurance Code, V.A.T.S. Insurance Code, art. 21.22, which exempts "[A]ll money or benefits of any be paid or rendered to the insured or any beneficiary under any policy of insurance or annuity contract issued by a life, health or accident insurance company..." The court held that Texas Insurance Code does not limit the term "annuity," does not restrict the source of funds used to purchase the annuity and does not look to the underlying purpose of the annuity. Thus, in recognition of the strong policy in Texas favoring exemptions, the court concluded that the debtors were entitled to claim the proceeds of the annuity as exempt.

Withdrawal Liability Under Multi-employer Pension Plan

In CPT Holdings v. Industrial & Allied Employers Union, 162 F.3d 405 (6th Cir. 1998), the Sixth Circuit addressed questions surrounding withdrawal liability under a multi-employer pension plan where there was a confirmed chapter 11 plan. While the debtor was in payment default, it did not withdraw from the multi-employer plan until some 18 months after confirmation. There has also been a foreclosure by the debtor's senior creditor and the entry of a final decree closing the debtor's estate. The court held that, if the plan had a "claim" for withdrawal liability at confirmation of the debtor's plan, then that claim was discharged and the senior creditor would be subject to withdrawal liability solely based upon its post-confirmation contribution history. After a full review of ERISA as amended by the Multi-employer Pension Plan Amendments Act, the Sixth Circuit concluded that under the facts of this case, "withdrawal liability is not a 'claim' prior to confirmation. Although the Bankruptcy Code defines 'claim' broadly, the relevant non-bankruptcy law must be examined to see whether a right to payment, even a contingent right, exists...Withdrawal liability is based on an employer's share of unfunded vested benefits at withdrawal, not on failure to make required contributions. As a result, there can be no pre-withdrawal breach of ERISA giving rise to a 'right to payment' by a plan."


Journal Date: 
Thursday, April 1, 1999