Benchnotes Apr 2006

Benchnotes Apr 2006

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Municipality Stayed from Collecting Vehicle Taxes

An In re Jessamey, 330 B.R. 80 (Bankr. D. Mass. 2005), the issue was whether a local municipality, which was unable to collect motor vehicle excise taxes, violated the automatic stay. A municipality that certifies to the state the inability to collect such taxes essentially prevents the taxpayer from obtaining a renewal of a car license and a car registration. Bankruptcy Judge Robert Somma, addressing cross motions for summary judgment, refused to dismiss the action, finding that the debtor had at least stated a claim on which relief could be granted. The "clear purpose of the statute is the collection of past due excise taxes," which remains effective until, by further notice, the local tax collector discontinues it. As such, the court was persuaded that "when a municipality issues to the registrar a notice of nonpayment under that section, it institutes an 'action or proceeding' to recover a claim within the meaning of §362(a)(1); that the post-petition continuation of such an action or proceeding is a violation of §362(a)(1) and that the continued blocking of access to motor vehicle privileges is also a stayed 'act' under §326(a)(6)."

Adversary Proceeding Required in Secured Creditor's Attack on Lien Validity

In In re Anderson, 330 B.R. 180 (Bankr. S.D. Tex. 2005), Bankruptcy Judge Jeff Bohm held that an adversary proceeding is required if the secured creditor's objection attacks the validity of the lien. However, an objection pursuant to Rule 3007 will suffice if the objection is that the documentation attached to the proof of claim did not establish that the claim was, in fact, a secured claim.

Creditor Only Entitled to Attorney's Fees Necessary to Protect Interest

In In re Jemps Inc., 330 B.R. 258 (Bankr. D. Wyo. 2005), a debtor objected to the attorney's fees charged by an oversecured creditor. Bankruptcy Judge Peter J. McNiff turned to the issue of the "reasonableness" of the requested fees, noting that even where the rates were reasonable, "the creditor is only entitled to include services reasonably required to protect its interest in the loan. Overzealousness will not be compensated, even if the creditor approves of such action by its counsel." Services that were disallowed included those that were clerical in nature (downloading the docket from PACER), duplicative (performed by both bankruptcy and bank counsel) and incurred after lender knew its claim was protected by the value of the collateral.

Court Denies 18 Percent Default Interest Rate

In In re Holmes, 330 B.R. 317 (Bankr. M.D. Ga. 2005), Chief Bankruptcy Judge Robert F. Hershner Jr. addressed the issue of whether an oversecured creditor was entitled to 18 percent default interest, a pre-payment premium or interest on its attorneys' fees. The court allowed the default interest on the principal of the debt. The court found that the creditor had failed to offer any evidence that the prepayment premium was reasonable. As the promissory note did not provide for interest on attorneys fees, that request was denied.

Arguable Claim of Right Affirmed in Foreclosure Case

A recent decision from the Fifth Circuit should act as a check on unilateral action when a debtor asserts an interest in property. In In re Chesnut, 422 F.3d 298 (5th Cir. 2005), the question was whether a "creditor violates the stay if, without permission of the bankruptcy court, he forecloses on an asset to which the debtor has only an arguable claim of right." The court "answer[ed] in the affirmative." The case arose out of a foreclosure on property where the debtor's wife was named in the deed as the sole purchaser, although she was married to the debtor about three years prior to the acquisition of the property. The debtor asserted that the property was paid for with community funds and that Texas law created a rebuttable presumption that property purchased during a marriage was community property. The notice of the bankruptcy filing was given to the secured lender and reviewed by the lender's counsel. "The petition put [the lender] on notice that [the debtor] claimed that the property was community property under the protection of the automatic stay." However, the lender still proceeded with the foreclosure. Subsequently, the district court determined that the property was the wife's separate property. The lender argued that determination "must mean that the automatic stay did not bar the foreclosure." The Fifth Circuit noted that as of the foreclosure, it was not clear whether the property was or was not property of the bankruptcy estate. Relying on Sniadach v. Family Finance Corp. of Bay View, 395 U.S. 337 (1969), the Fifth Circuit held that retroactive classification of the property does not "shape the scope of the stay" and, under these facts, foreclosure on "arguable property" constituted a willful violation of the stay.

Miscellaneous

In re Metromedia Fiber Network Inc., 416 F.3d 136 (2d Cir. 2005) (court would not disturb order confirming plan, although bankruptcy court "without adequate inquiry into relevant factors" had approved nondebtor releases where appellants had failed to seek a stay of the order or to pursue an expedited appeal);

In re AB Liquidating Corp., 416 F.3d 961 (9th Cir. 2005) (landlord's security deposit, whether in the form of a cash deposit or third-party letter of credit, had to be applied against capped damages and not to gross contractual damages);

In re Process Property Corp., 327 B.R. 603 (Bankr. N.D. Tex. 2005) (bankruptcy court has discretion to set post-petition, pre-confirmation interest owed to oversecured taxing authorities at rate that was "equitably appropriate to circumstances of case," even though there is an applicable state statutory rate);

In re Cluxton, 327 B.R. 612 (BAP 6th Cir. 2005) (loan that financed purchase of mobile home that became part of real property under applicable law could not be stripped down under §1322(b)(2));

Cantor v. Perelman, 414 F.3d 430 (3rd Cir. 2005) (issue of material fact as to whether corporation was injured by restrictions imposed by controlling shareholders and directors on corporation's ability to engage in debt and equity financing in nonrecourse notes issued by affiliates of the shareholders and directors to the corporation precluded summary judgment on whether the directors breached their fiduciary duty);

In re Bogdan, 414 F.3d 507 (4th Cir. 2005) (trustee had standing pursuant to unconditional assignment by mortgage lenders of claims against debtor's alleged co-conspirators with no right to share in trustee's recovery except pro rata with other creditors, and doctrine of in pari delicto did not apply to prevent chapter 7 trustee, as unconditional assignee of claims of mortgage lenders, from pursuing such claims);

In re American Homepatient Inc., 414 F.3d 614 (6th Cir. 2005) (damages arising from breach of executory contract had to be determined as of time of deemed breach, which was immediately prior to date of filing of chapter 11 petition);

In re Worldcom Inc., 329 B.R. 10 (Bankr. S.D.N.Y. 2005) (§510 subordination provision applies to claims that an equity-holder did not sell stock because of a failure to timely disclose fraud);

Everett v. Friedman's Inc., 329 B.R. 40 (S.D. Miss. 2005) (rule of unanimity, which requires that all defendants join in a notice of removal, does not apply to removals under the bankruptcy removal statute in 28 U.S.C. §1452);

In re Troff, 329 B.R. 85 (D. Utah 2005) (court-ordered restitution obligation, imposed as part of state criminal sentence for arson, was excepted from discharge);

In re Thompson, 418 F.3d 362 (3d Cir. 2005) (criminal restitution payments ordered by state court are nondischarageable, even though state collected money for sole purpose of distribution to victim's of debtor's crimes in compensation for injuries);

In re Ktona, 329 B.R. 105 (Bankr. M.D. Fla. 2005) (attorney that deliberately files case in wrong district may be subject to Rule 9011 sanctions);

Arevalo v. Herman, 128 Fed. Appx. 952 (4th Cir. 2005) (parties who previously had control and discretion regarding an ERISA plan were no longer fiduciaries and thus not responsible for actions taken after control of plan assets transferred to chapter 7 trustee);

In re eToys Inc., 331 B.R. 176 (Bankr. D. Del. 2005) (plan exculpation clause does not protect counsel who failed to disclose actual conflicts of interest);

In re Heath, 331 B.R. 424 (9th Cir. BAP 2005) (credit card issuer may comply with Fed. R. Bankr. P. 3001(c) by attaching "some sort of summary" of the account);

In re Shaw, 330 B.R. 113 (Bankr. D. Vt. 2005) (chapter 7 trustee allowed commission based on principles of quantum meruit based on the net increase in distribution to creditors where conversion to chapter 13 was triggered by discovery of fraudulent conveyance);

In re Lisanti Foods Inc., 329 B.R. 491 (D. N.J. 2005) (Fed. R. Evid. 615, which gives a litigant the right to have witnesses excluded from the courtroom, applies to depositions); and

In re Joseph, 330 B.R. 87 (Bankr. D. Conn. 2005) (attorney that held charging lien against the proceeds of a pre-petition judgment in favor of the chapter 7 debtor could credit bid its claim at trustee's sale of the judgment).

Journal Date: 
Saturday, April 1, 2006