Benchnotes Dec/Jan 1998

Benchnotes Dec/Jan 1998

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Classifying Co-signed Consumer Debt

In In re Chacon, 223 B.R. 917 (Bankr. W.D. Tex. 1998) Chief Bankruptcy Judge Larry E. Kelly addressed the issue of whether, and if so, under what circumstances a chapter 13 debtor may separately classify co-signed consumer debt. The court held that such co-signed consumer debt may be separately classified if there is not unfair discrimination vis-a-vis other unsecured creditors. The factors to consider in determining whether a debtor is unfairly classifying unsecured claims are as follows: 1) the discrimination must have a reasonable basis; 2) the debtor cannot carry out a plan without such discrimination; 3) the discrimination is proposed in good faith; and 4) the degree of discrimination is directly related to the basis of rationale for the discrimination. With regard to the last element, the court restated it as "does the basis for the discrimination demand that this degree of differential treatment be imposed." The court also noted that In re Husted, 142 B.R. 72 (Bankr. W.D. N.Y. 1992) added two additional elements: (1) whether there is a meaningful payment to class discriminated against and (2) the difference between what the creditors discriminated against would receive as the plan is proposed and the amount they would receive if there was no separate classification. Judge Kelly found that the debtor had failed to carry its burden of proof and denied confirmation of the chapter 13 plan. In In re Markham, 224 B.R. 599 (Bankr. W.D. Ky. 1998), Bankruptcy Judge J. Wendell Roberts cited the holdings that have allowed debtors to pay a co-signed claim at a higher percentage than other cases, but held that a chapter 13 plan may not separately classify co-signed obligations and in order to pay such claims at a lower rate.

Separate Classification of Deficiency Claim

In In re WBA Associate Ltd., 224 B.R. 40 (Bankr. E.D. Mich. 1998), the debtor attempted to separately classify the deficiency claim of the first mortgage on its residential apartment from the unsecured deficiency claims held by the Michigan State Housing Development Authority, which held a second mortgage on the project. The debtor argued separate classification was supported by both In re U.S. Truck Co., 800 F.2d 581 (6th Cir. 1986) and In re Briscoe Enters. Ltd. II, 994 F.2d 1160 (5th Cir. 1993). U.S. Truck recognized separate classification where the creditor had a "different stake in the future viability of the reorganized company." Briscoe permitted separate classification where the relationship with the separately classified creditor was "essential to the continued operation of this housing complex" and that creditor's "non-creditor interest relating to the urban housing its contribution of rental assistance." Bankruptcy Judge Walter Shapero held that Briscoe, U.S. Truck and other similar cases "seem to require a relationship which is both sufficiently independent of the debtor/creditor relationship arising out of the claim and the terms of the payment of that claim so as to permit one to conclude that the play-out of that non-creditor aspect of the relationship will likely play a significant role in the viability of success of the reorganization effort." The court found that under the facts of this case, such a relationship is a "mere possibility" and much too "iffy" or "remote" so as to raise to the level of the required ongoing non-creditor interest, and refused to confirm the plan.

Full Disclosure

In In re Tripp, 224 B.R. 95 (Bankr. N.D. Iowa 1998) Bankruptcy Judge Paul J. Kilburg addressed the issue of whether discharge may be denied for failure to disclose an asset in a chapter 7 case even though the trustee could not have disposed of that asset, even if it had been disclosed and the creditors would not have benefited financially. The trustee had filed an adversary proceeding seeking denial of discharge under §727(a)(2)(A) due to the alleged concealment and under §727(a)(4)(A) for an alleged failure to disclose. The court held that the Code requires nothing less than a full and complete disclosure of any and all apparent interests of any kind, regardless of whether there is any specific monetary harm resulting from the false oath, as it is not for the debtors to determine whether the assets or transactions should be disclosed. After reviewing relevant case authority, the court found that the failure to disclose 14 to 15 pounds of marijuana with a street value of approximately $900 per ounce was sufficient grounds for denial of discharge.

§523(a)(17) Dischargeability Exception

In re Tuttle, 224 B.R. 606 (Bankr. W. D. Mich. 1998), involved the dischargeability exception of the relatively new §523(a)(17). The issue before Chief Bankruptcy Judge James D. Gregg was whether the exception applied to attorney's fees and costs imposed in this case pursuant to the Michigan offer of judgment statute or was the exception limited to fees, costs and expenses related to cases filed by prisoners pursuant to 28 U.S.C. §1950(b). Noting that the only other reported decision was South Bend Community School Corp. v. Eggleston, 215 B.R. 1012 (N.D. Ind. 1997), the court undertook a review of the §523(a)(17) applying traditional roles of statutory construction, as the statute is "not clearly drafted." The court held that the bankruptcy exceptions are to be construed narrowly and limited the exception to in forma pauperis proceedings and other similar actions brought by prisoners.


  • In re Howard Furniture Inc., 222 B.R. 795 (Bankr. N.D. Miss. 1998) (11 U.S.C. §724(b) permits a chapter 7 trustee to subordinate a pre-petition tax lien to the payment of enumerated priority claims when insufficient funds exist with which to pay administrative and priority claims, citing In re Dowco Petroleum Inc. 137 B.R. 207 (Bankr. E.D. Tex. 1992));
  • In re Detrano, 222 B.R. 685 (Bankr. E.D.N.Y. 1998) (The bankruptcy court refused to enforce pre-petition settlement agreement which provided that obligations under the agreement would be non-dischargeable in bankruptcy as the settlement agreement which was a contract and the clause regarding non-dischargeability was unenforceable against federal bankruptcy policy);
  • In re LaBRUM & Doak L.L.P., 222 B.R. 749 (Bankr. E.D. Pa. 1998) (Chapter 11 debtor partnership's adversary proceeding seeking a declaratory judgment to approve proposed allocation of the tax recapture liabilities among its existing and former partners is a core matter);
  • In re Litton, 222 B.R. 788 (Bankr. W.D. Va. 1998) (Chapter 11 plan has not been substantially consummated where the debtor, which had suffered substantial change in circumstances, had made one payment to the secured lender under the plan but had not made any other payments to other secured, unsecured or priority creditors and which had not transferred all or substantially all of the property proposed to be transferred by the original plan could modify plan);
  • In re The Apollo Group, 224 B.R. 48 (Bankr. E.D. Mich. 1998) (Counsel for the debtor out of possession is not subject to court approval and estate might be obligated to pay for services which benefit the bankruptcy estate as actual and necessary costs or expense of preserving the estate);
  • In re Sansom, 224 B.R. 49 (Bankr. M.D. Tenn. 1998) (Reasonable reliance is not established when the creditor allows an extension of credit simultaneously with receipt of financial data);
  • In re Schmitz, 224 B.R. 149 (Bankr. D. Mont. 1998) (Knowing failure to disclose current married name on bankruptcy schedules is material falsehood sufficient to deny debtor's discharge); and
  • In re Haase, 224 B.R. 673 (Bankr. C.D. Ill. 1998) (Offsetting against the debtor's account after bank discussed debtor's possible financial difficulties precluded finding that the resulting payment was in the ordinary course of business).

Journal Date: 
Tuesday, December 1, 1998