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Benchnotes Dec/Jan 2002

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Escrow Deposits for Damages

In In re New Breed Realty Enterprises Inc., 278 B.R. 314 (Bankr. E.D.N.Y. 2002), Bankruptcy Judge Carla E. Craig addressed the issue for a motion for relief from stay to permit delivery of a deposit in escrow as payment for damages resulting from the failure of the debtor to close a sale for the purchase of shares of a corporation. The motion also sought permission to sell the shares to another party. The court found the relevant facts were not in dispute: (1) the contract related to the sale of shares of all of the issued and outstanding stock of a non-debtor entity of such entity; (2) the entity was the sole owner of a parcel of residential real estate located in New York; (3) the pre-petition contract allowed for purchase price by the debtor of $6 million, with a $300,000 deposit; (4) the contract had a "time being of the essence" provision providing that the seller was entitled to the entire deposit held in escrow as liquidated damages should the debtor fail to close on or before Aug. 1, 2001; and (5) the day before the closing deadline, the debtor filed for protection under chapter 11. By the time the motion for relief was heard, the 60-day statutory grace period under 11 U.S.C. §108(d) had expired, but the debtor argued that the court had the authority to extend the debtor's performance period beyond such 60-day statutory period. The debtor also argued that regardless of the "time is of the essence" clause in the agreement, §365(d)(2) allows the debtor-in-possession to assume an executory contract at any time prior to confirmation of a plan. The debtor therefore argued that it retained its interest in the shares as well as its interest in the $300,000 deposit held in escrow. The court held that as the time to tender the deposit and close the sale was extended only for 60 days pursuant to §108(b), and as that period had expired, §108(b) provides no assistance to the debtor unless the court granted an extension of time beyond the 60-day statutory period. Without holding that it had the authority to extend the cure period, the court held that the debtor had not shown that such an extension had been granted. Further, the debtor had not made a timely motion for extension of the statutory grace period, nor had the debtor alleged that there was any wrongdoing or other circumstance that would justify such an extension of time. Therefore the relevant inquiry was whether the debtor is barred from assuming the agreement where the debtor is in default of a non-monetary obligation. The court held that the debtor's failure to close the sale on or before the time-of-the-essence closing date including any extension of date provided by the §108(b) statutory grace period, constituted a non-monetary default that could not be cured because it was "an historical fact." The court then held that as a result of this inquiry, the debtor was barred from assuming the agreement by §365(b)(1), as the debtor was in default of a non-monetary obligation that by definition was incapable of being cured. The court held that where a default is non-monetary and is not curable, the debtor is precluded from assuming an executory contract if the default was material or if the default caused "substantial economic detriment." Relying on In re Joshua Slocum Ltd., 922 F.2d 1081 (3rd Cir. 1990), interpreting New York law, the court held that a party's failure to perform by the closing date specified in the contract does not constitute a material breach unless the other party has effectively declared time to be of the essence. Where there is such a declaration, each party must tender performance unless the time for performance is extended by mutual agreement. The court held that if the debtor was permitted to assume the agreement under §365, "the debtor would be circumventing the effect of a material provision that bears to the fundamental right to remain in or end a contractual relationship." As a result, the court held that the debtor did not have the right to assume the agreement under §365(d)(1)(2) because it could not cure as required by §365(d)(1).

Simultaneous Chapter 7/13 Cases

In In re Strohscher, 278 B.R. 432 (Bankr. N.D. Ohio 2002), Bankruptcy Judge Richard L. Speer addressed the issue of a debtor attempting to maintain a chapter 7 and a chapter 13 case simultaneously. After an extensive review of authorities, the court applied that the underlying principle that a debtor may only file a subsequent bankruptcy case after first receiving a discharge in the initial case is one that will be applied. However, the court also held that an exception could be created if the debtor "can demonstrate exceptional and unique circumstances which would necessitate the granting of extraordinary relief." The court pointed to an example that fits within the exception: In re Strause, 97 B.R. 22 (Bankr. S.D. Cal. 1989), in which the debtor's discharge was unduly delayed as a result of an error on the part of the clerk of the court.

Creditor Must Give Notice to Be "Known Creditor"

In In re Eagle-Picher Industries Inc., 278 B.R. 437 (Bankr. S.D. Ohio 2002), Bankruptcy Judge Burton Perman addressed the claims of a pre-confirmation creditor who asserted, inter alia, breach of contract, common-law contribution and indemnification. The court found the debtor satisfied its burden of showing that it had mailed notice of the hearing on confirmation of its proposed plan. The court also held that any pre-confirmation administrative expense was also discharged as a result of confirmation and the failure of the creditor to file an administrative claim. Perhaps most important, the court held that the debtor's mere knowledge of the existence of the creditor was insufficient to make that creditor a "known creditor" who must be given actual notice of actions in the bankruptcy case. Rather, in order to become a "known creditor," it must be shown that the creditor's claim and not just the identity was known to the debtor.

Unauthorized Withdrawal of Funds

In In re Delisle, 281 B.R. 457 (Bankr. D. Mass. 2002), Bankruptcy Judge Joel B. Rosenthal held that a debt arising out of a debtor's unauthorized withdrawal of funds from a joint account would be excepted from discharge. The court held that under Massachusetts law, all parties to a joint account have the legal right to withdraw all or part of the funds; however, this legal right to withdraw pertains only to rights of parties vis-a-vis the bank, and does not prevent parties from entering into a separate agreement. The court noted that the determination of the extent of interest in the joint accounts is dependent primarily on the parties' intentions, which is a question of fact that may be established by oral evidence. In this case, there was credible evidence that the plaintiff and the debtor had an agreement that the funds in the account were to be used by the 24-year-old debtor/defendant for her personal use and for the 80-year-old plaintiff's care if his health deteriorates, and that in either event, prior to withdrawing such funds, the debtor was required to obtain the plaintiff's permission. The court noted that "no reasonable person would believe that an 80-year-old man, with potentially failing health, would grant a gift of tens of thousands of dollars to someone he had known for less than 30 days." The court also noted that the fact that the debtor withdrew $45,000 from the joint account and transferred the entire amount into a personal account led him to the conclusion that the debtor was attempting to conceal the transfer of the funds from the plaintiff.

Miscellaneous

Journal Date: 
Sunday, December 1, 2002

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