Administrative Hearing Sufficient to Find "Willful and Malicious"

In n re Jones, 300 B.R. 133 (1st Cir. BAP 2003), the issue was whether the bankruptcy court should have given collateral estoppel effect to damages awarded by the Massachusetts Commission Against Discrimination (MCAD). Prior to the filing of the bankruptcy case, MCAD found that the individual debtor had committed sexual harassment in violation of the applicable Massachusetts laws. The court held that the determination of whether the debtor willfully injured the employee was necessary to the MCAD determination that sexual harassment existed. The court distinguished In re Nolan, 220 B.R. 727 (Bankr. D.C. 1998), noting that the debtor in Nolan was not the individual who engaged in the discriminatory treatment. The court also distinguished In re Tompkins, 290 B.R. 194 (Bankr. W.D.N.Y. 2003); since no pre-petition judgment on the merits had been entered in Tomkins, it was appropriate for the lower court to rely on the MCAD determination as evidence in support of the motion for summary judgment. The panel then went on to examine the content of the administrative decision pursuant to requirements set forth in §523(a)(6), noting that in order to prevail on a complaint to except the debt from discharge, it must be caused by a debtor's "willful and malicious injury." A creditor must prove that (1) the debtor caused the injury, (2) the debtor's actions were malicious and (3) the debtor's actions were willful. Applying the standards set forth in Kawaauhau v. Geiger, 523 U.S. 57 (1998), the panel held that the MCAD determination was a finding of willful and malicious conduct sufficient to operate as a basis for non-dischargeability under §523(a)(6) and that there was sufficient evidence that the debtor intended actions of a deliberate and intentional nature and intended to cause harm or injury to creditor. The court also noted that the while there was no malice requirement under the sexual harassment statute, "malice is inherent in finding that the [debtor] was liable for sexual harassment. The [debtor] unjustifiably disregarded the [creditor's] right to be free from sexual harassment by engaging in behavior that created an abusive working environment."

Spendthrift Trust Included in Bankruptcy Estate

In re Britton, 300 B.R. 155 (Bankr. D. Tenn. 2003), involved a declaratory judgment action to determine whether income from a trust and/or the trust remainder were assets of the bankruptcy estate pursuant to §541(a). Bankruptcy Judge Robert L. Krechevsky held that a trust that gave the trustees sole discretion to make periodic distributions of income and/or principal in such amounts as they deemed advisable for support, maintenance and/or education of the beneficiaries, was a valid spendthrift trust under Connecticut law. Thus, the trust income was not included in the property of the chapter 7 estate. However, the court also held that while the spendthrift trust language was sufficient to prevent the chapter 7 debtor/beneficiary's income from being included as the property of the estate, where the trust remainder was payable to the debtor on his mother's death if he survived her, that remainder interest was included in the bankruptcy estate.

Zoning Ordinance Exemption and the Stay

In In re Chaffee Aggregates Inc., 300 B.R. 170 (Bankr. W.D.N.Y. 2003), a debtor operated a gravel pit pursuant to an exemption under a local authority's zoning ordinance. However, the ordinance provided that the exemption would lapse if the gravel pit ceased operating for over a year. Bankruptcy Judge Carl L. Bucki considered the chapter 7 trustee's request for declaratory judgment that the automatic stay had tolled the one-year period specified under a local authority's zoning ordinance on the debtor's right to seek a determination that §362 prohibited enforcement of the zoning ordinance and the consequences of the lapse in nonconforming use. The court noted that the arguments of both parties "overlooked the fundamental nature of the automatic stay as a stay of proceedings and not a determination of ultimate right." The court then noted that the town's substantive rights were preserved under 28 U.S.C. §959(b), which, in essence, provides that a trustee is bound to the same zoning requirements that would apply to any other owner of real property. Thus, if the zoning law prohibits mining activities after a one-year lapse outside of bankruptcy, it will similarly prohibit such activities if a lapse occurs during the pendency of a bankruptcy case. The court noted that the township had not violated the stay since its only conduct was to communicate to the trustee the township's position that the gravel pit no longer qualified as a permitted use. The court further noted that no "municipal activity has caused the lapse of more than a year from removal of the last load of gravel. We witness not a violation of the automatic stay, but a self-effectuating lapse of a non-confirming use. Pursuant to 28 U.S.C. §959(b), the trustee must now comply with the zoning ordinance, including any mining prohibitions that [are] now effected by the lapse of prior right."

Permanent Injunction Against Non-debtors Invalid

In In re Artra Group Inc., 300 B.R. 699 (Bankr. N.D. Ill. 2003), Bankruptcy Judge Pamela F. Hollis was asked to approve a proposed settlement reached by the official committee. An objection was filed to the release and injunction language contained in the settlement, with a creditor arguing that it was improper to enjoin the objecting party from pursuit of claims that it held directly against the non-debtors and/or to release non-debtor. The court found that the scope of the permanent injunction referred to in the settlement agreement was "breathtaking" as the committee proposed to bind any entity that might have any sort of claim whatsoever against the debtor, its insiders or subsidiaries, if such claim is in any way connected with the settling party or its subsidiaries. The court noted that the requested injunction raised serious jurisdictional concerns, including a prohibition against litigation over which the court had no jurisdiction. The court also noted that restraining orders of permanent relief claims of non-debtors against non-debtors are controversial and, at least in the Seventh Circuit, have only been approved in the context of considering a reorganization plan. See, e.g., In re Specialty Equipment Cos., 3 F.3d 1043, 1045-46 (7th Cir. 1993). The court noted that most commentators agreed that the bankruptcy court lacks the power to enjoin one non-debtor from suing another non-debtor especially when the enjoined party objects or does not consent. While some courts permit such an injunction if it is limited to the property of the estate‹e.g., if the complaining creditors' claims were derivative of injuries to debtor or the estate, here the court refused to approve the terms of the injunction, holding that unless the injunction was waived as a condition to the settlement, the settlement agreement would be "null and void."

Filing by Oregon LLC Chapter 11 Found "Properly Authorized"

In In re Avalon Hotel Partners LLC, 302 B.R. 377 (Bankr. D. Ore. 2003), Bankruptcy Judge Randall L. Dunn considered a motion to dismiss a chapter 11 case filed by an LLC on the grounds that the bankruptcy filing was not properly authorized. The court noted that LLCs are hybrid business entities with attributes of both corporations and partnerships. LLCs provide their equity members with the liability shield of corporations while giving them the benefit of partnership tax treatment. The bankruptcy case was commenced following the adoption of resolution by the LLC's manager, without member approval. Under the operating agreement for the LLC, "major decisions" required the approval of members holding "an excess of 75 percent of the ownership interests." Although the list of major decisions did not include bankruptcy filings, the list was nonexclusive. The court found that a decision to file for bankruptcy protection is a decision outside the ordinary course of business, even for an entity that was in dissolution. Thus, the court found that the filing of the bankruptcy petition by the manager without member approval was not authorized either by Oregon law or the operating agreement itself. The court noted that it would have granted the motion to dismiss except that the bankruptcy filing was subsequently authorized by a consent resolution approved by an excess of 75 percent of the members of the ownership interest. The court noted that when an Oregon LLC is in dissolution, the Oregon statute authorized ratification after the fact of LLC decisions that otherwise "would not be binding." The court found that ratification to approve a bankruptcy filing is not inconsistent with the requirements of the Bankruptcy Code and, as the consent resolution was approved by sufficient membership interest within 10 days from the date of the bankruptcy filing, the court found that the bankruptcy filing was properly authorized.

Miscellaneous

• In re Allan, 300 B.R. 105 (Bankr. D.C. 2003) (chapter 13 is not intended to be used as a vehicle to suspend debtors' mortgage payments to allow debtor/mortgagor to pursue sale or refinancing of obligations on principle residence);
• In re Admetric Biochem Inc., 300 B.R. 141 (Bankr. D. Mass. 2003) (relying on Port Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994), the court refused to approve a settlement that was conditioned upon the vacature of a prior adverse decision);
• In re Ravsky, 300 B.R. 152 (Bankr. D. Conn. 2003) (marital privilege available under Connecticut law is unavailable in a proposed 2004 examination as it is centered upon federal bankruptcy law even if the testimony might be available at subsequent proceedings controlled by state law);
• In re AJ Contracting Co. Inc., 300 B.R. 182 (Bankr. S.D.N.Y. 2003) (district attorney's office was not protected by the 11th Amendment in action seeking recovery of accelerated payments on debt incurred as part of plea agreement that allegedly reduced the non-debtor's principal's exposure on guaranty executed in connection with the plea agreement concluding criminal proceedings against the principal and the corporation); and
• In re Communications Dynamics Inc., 300 B.R. 220 (Bankr. D. Del. 2003) (unlike right of setoff, because it is in the nature of a defense to sums owed by creditor, right of recoupment is not subordinate to lender's security interest in debtor's accounts receivable).