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Benchnotes Dec/Jan 1997

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Matter of National Gypsum Co., 118 F.3d 1056 (5th Cir. 1997), affirmed the bankruptcy court's refusal to stay a declaratory judgment action pending reference to arbitration as inherently interlocutory in nature. It also held that such an order was appealable under the Federal Arbitration Act, 9 U.S.C.A. §16(a)(1)(A). The court followed In re Statewide Realty Co., 159 B.R. 719, 722 (Bankr. D. N.J. 1993) in its interpretation of the Third Circuit opinion in Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 885 F.2d 1149 (3rd Cir. 1989), holding that the question of whether a bankruptcy court should order arbitration of a core bankruptcy issue pursuant to a contractual arbitration clause is determined by the underlying nature of the proceeding, including whether the proceeding exclusively is derivative of the provisions of the Bankruptcy Code and, if so, whether arbitration of the proceeding in question would conflict with the purposes of the Code. In so holding, the court also held that the bankruptcy court's discretion is not governed solely by whether the proceeding is core or non-core. "...As did the Third Circuit in Hays, we believe that non- enforcement of an otherwise applicable arbitration provision turns on the underlying nature of the proceeding, i.e., whether the proceeding derives exclusively from the provisions of the Bankruptcy Code and, if so, whether arbitration of the proceeding would conflict with the purposes of the Code...We think that, at least where the cause of action at issue is not derivative of the pre-petition legal or equitable rights possessed by a debtor but rather is derived entirely from the federal rights conferred by the Bankruptcy Code, a bankruptcy court retains significant discretion to assess whether arbitration would be consistent with the purpose of the Code, including the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders." In this case, the order at issue was the order confirming the plan of reorganization.

Tax Avoidance Under §523(a)(1)(C)

In In re Fegeley, 118 F.3d 979 (3rd Cir. 1997), the Third Circuit joined the majority of circuits and held that in order to prevail on a claim of willful tax avoidance under 11 U.S.C. §523(a)(1)(C), the government must establish that: (1) The debtor had a duty to file income tax returns; (2) the debtor knew he had such a duty; and (3) the debtor voluntarily and intentionally violated that duty.

Notice of Motion to Abate Tax Penalties

In In re Laughlin, 210 B.R. 659 (1st Cir. Bankr. 1997), the trustee's motion to abate federal tax penalties assessed on account of the bankruptcy estate's tardily filed 1993 returns and late paid 1993 taxes was mailed to the Internal Revenue Service's (IRS) local special procedures staff in compliance with the local bankruptcy rule. However, the trustee did not serve the U.S. Attorney for the district and the Attorney General in Washington in accordance with Federal Rule of Bankruptcy Procedure 9014 and 7004(b)(4) and (5). The court held the motion to be a "contested matter" requiring service in complete compliance with Rules 9014 and 7004(b) of the Federal Rules of Bankruptcy Procedure.

IRS Sovereign Immunity Defense

In In re Milto, 210 B.R. 687 (Bankr. D. Md. 1997), the court denied the IRS' sovereign immunity defense to a motion by the chapter 13 debtor to hold it in contempt for intentional violation of the automatic stay. The IRS had unwittingly garnished the debtor's accounts post-petition. However, upon being notified by the debtor's counsel, the IRS refused to return the levied funds. This refusal in the face of a clear violation of 11 U.S.C. §362(a) warranted, in the court's opinion, an assessment of all consequential damages suffered by the debtor, including attorneys' fees and costs. "Under the authority of 11 U.S.C. §362(h), and further under the Internal Revenue Service Code as discussed in Grewe v. United States (In re Grewe), 4 F.3d 299 (4th Cir. 1993), the IRS is responsible for all of the consequential damages including attorneys' fees as identified above."

Reasonable Reliance Under §523

In In re Etto, 210 B.R. 734 (Bankr. N.D. Ohio 1997), the court followed the Sixth Circuit's opinion in Longo v. McLaren (In re McLaren), 3 F.3d 958 (6th Cir. 1993), as modified by the Supreme Court's opinion in Field v. Mans, 116 S.Ct. 437 (1995), and held that the mere use of a credit card by the debtor was not an implied representation regarding her ability or intent to repay the debt. The Longo court had held that, in order to except a debt from discharge under §523(a)(2)(A), "the creditor must prove that the debtor obtained money through a material misrepresentation that at the time the debtor knew was false or made with gross recklessness as to its truth. The creditor must also prove the debtor's intent to deceive. Moreover, the creditor must prove that it reasonably relied on the false representation and that its reliance was the proximate cause of the loss." The Supreme Court in Field held that the proper standard is not "reasonable reliance but the less demanding one of justifiable reliance on the representation." Thus, where the debtor had received an unsolicited "pre-approved" credit card and proceeded to use it, and where the evidence showed the debtor intended to repay the debt in installments over time, the court observed that "[I]t appears that plaintiff had little concern as to defendant's ability or intent to repay debts and, therefore, accepted the risk of nonpayment...Because debtors rarely will openly disclose any indication of deceitful conduct, proving deceptive intent is likely the most difficult aspect of establishing a successful case under 11 U.S.C. §523(a)(2)(A)."

Successor Liability

In In re Schwinn Bicycle Co., 210 B.R. 747 (Bankr. N.D. Ill. 1997), the court declined to give the purchaser of the chapter 11 debtor's assets injunctive relief against an accident victim who sued the purchaser for product liability claims on a successor liability theory in state court three years after confirmation of the debtor's plan. The injuries allegedly occurred in January 1995 and involved equipment manufactured or sold by the debtor prior to the filing of the bankruptcy case. The sale of the assets occurred in January 1993 and the debtor's liquidating plan was confirmed January 1994. The court held that the injured party thus did not have a contingent or unmatured "claim" against the debtor on the date the plan was confirmed. Thus, the injured party was not subject to the provisions of the debtor's confirmed plan enjoining personal injury claimants. Further, the order of sale under 11 U.S.C. §363(f) "free and clear" did not protect the buyer of the assets from current or future product liability; it only protected the purchased assets from lien claims against those assets.

Bankruptcy and Admiralty

In O'Hara Corp. v. F/B Northstar, 212 B.R. 1 (D. Me. 1997) Chief District Judge Hornby explored the "intersection between bankruptcy and admiralty when a debtor's bankruptcy petition has interrupted pending admiralty proceedings in the same district court." Prior to the filing of the bankruptcy petition, an in rem admiralty proceeding had been initiated to enforce a maritime lien for repairs and equipment provided by the plaintiff to the vessel. Subsequent thereto, the owner of the vessel initiated a chapter 7 liquidation. The plaintiff in the admiralty action initially sought to have the reference withdrawn. However, the court found that there was no cause for mandatory withdrawal, particularly where the vessel owner admitted that the plaintiff's lien was uncontested. Further, following Adams v. S/V Tenatious, 203 B.R. 297 (D. Alaska 1996) the court found there was no grounds for permissible withdrawal where "any consideration of admiralty law would be routine." The plaintiff also sought relief from the district court to allow it to proceed to enforce its lien through a sale of the assets. The court found that §362(a) does apply to admiralty actions, even in a chapter 7 liquidation, noting that the district court's jurisdiction over the vessel in the admiralty claims is concurrent with the bankruptcy arm of the court's jurisdiction.

Miscellaneous

  • Matter of M.A. Baheth Const. Co., Inc., 118 F.3d 1082 (5th Cir. 1987) (Appeal dismissed for failure of appellant to file statement of issues and failure to designate the record on appeal pursuant to F.R.A.P. Rule 6(b)(2)(ii));
  • In re Massey, 210 B.R. 693 (Bankr. D. Md. 1997). (chapter 13 debtor could not acquire return of the vehicle repossessed pre-petition without providing adequate protection to the creditor).
Journal Date: 
Monday, December 1, 1997

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