Benchnotes Dec/Jan 2006

Benchnotes Dec/Jan 2006

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Debtor Not Estopped from Pursuing Inadvertently Unscheduled Claim

In Best v. Kroger Co., 339 B.R. 180 (W.D. Tenn. 2006), a former chapter 13 debtor failed to schedule a pre-petition Title VII claim for sexual harassment and constructive discharge. The ex-employer moved to dismiss, alleging that the failure to disclose the causes of action judicially estopped her from pursuing the causes of action. The court held that when the bankruptcy court confirms a plan, it is accepting a position taken by a debtor as required by the judicial estoppel doctrine. However, judicial estoppel will not apply if the failure was inadvertent. The Sixth Circuit held in Browning v. Levy, 283 F.3d 761 (6th Cir. 2002), that a failure to disclose can be considered to be inadvertent where the debtor lacks knowledge of the factual basis of the undisclosed claim or where the debtor has no motive for concealment. The district court found that while the debtor could not have known the extent of the potential causes of action as of the petition date, she did know at least as early as the filing of the claims with the EEOC. As the EEOC filing occurred during the pendency of the bankruptcy case and given a debtor's duty to amend, the district court found that the debtor did not lack knowledge of the factual basis of the undisclosed claims. The debtor was more successful in asserting a lack of motivation for concealment. Five days prior to the closing of the case, the chapter 13 plan was consensually amended to provide for payment in full to all creditors. As "courts should use caution in applying judicial estoppel," the district court denied the motion to dismiss.

IRS Not Compelled to Process Offer-in-Compromise

In In re Uzialko, 339 B.R. 579 (Bankr. E.D. Pa. 2006), the debtors filed a chapter 13 plan and the IRS filed secured and priority claims totaling almost $290,000. The IRS then objected to confirmation of the plan alleging that it was underfunded and would pay less than half of what was owed. The debtors then filed a motion seeking to compel the IRS to consider an offer-in-compromise, challenging the IRS's processability criterion, which deems as nonprocessable any offer from a taxpayer in bankruptcy at the time the offer is submitted. Bankruptcy Judge Stephen Raslavich reviewed the few cases that have addressed the issue. In In re Mills, 240 B.R. 689 (Bankr. S.D. W.Va. 1999), the court held that the IRS policy violated §525(a) by denying taxpayers, based solely on their bankruptcy filing, the same opportunity accorded nonbankrupt taxpayers to attempt to negotiate a compromise of their tax obligations. In In re Macher, 2003 WL 23169807 (Bankr. W.D. Va. June 5, 2003), the court disagreed with Mills and held that the ability to submit an offer-in-compromise is not a "license, permit, charter, franchise or other similar grant made available by the government to its citizens." However, the Macher court held that the policy conflicts with the policies underlying the Bankruptcy Code in general and the reorganization provisions of chapter 11 in particular. Thus, the Macher court entered an order requiring the United States to process and consider the debtor's offer-in-compromise. In re Holmes, 298 B.R. 477 (Bankr. M.D. Ga. 2003), and In re Peterson, 321 B.R. 259 (Bankr. D. Neb. 2004), entered similar orders. An opposite view was taken in In re 1900 M Restaurant, 319 B.R. 302 (Bankr. D.C. 2005), in a case involving a corporate debtor where the court held that it didn't have authority to compel the IRS to consider offers-in-compromise. The court in 1900 M Restaurant then considered whether the court could use §105 to compel consideration of offers-in-compromise. Finding that the relief sought by the debtor was in the nature of a mandamus, the court found mandamus was not available since the IRS has no duty "to process an offer-in-compromise which its Revenue Procedure has specifically treated as nonprocessable when a bankruptcy case of the taxpayer is pending." Further, as mandamus is an extraordinary remedy, available only when other relief is inadequate, the plan confirmation process itself was grounds for denial of the relief requested. Judge Raslavich then adopted the reasoning and analysis of 1900 M Restaurant, finding "that requiring the IRS to negotiate with a debtor outside of the plan confirmation process does not further the provisions of the Code nor foster the ultimate goal of achieving a confirmed plan."

Proceeds of Post-Petition Insurance Policy Not Property of the Estate

In In re West, 343 B.R. 541 (Bankr. E.D. Va. 2006), a chapter 13 debtor purchased a post-petition insurance policy covering a vehicle that was owned pre-petition. The vehicle was destroyed, and the chapter 13 trustee asserted that the insurance proceeds remaining after payment in full of the motor vehicle lender's claim were an asset of the bankruptcy estate. Relying upon the "complicated" decision of In re Houska, 101 F.3d 358 (4th Cir. 1996), and rejecting the holding in In re Feher, 202 B.R. 966 (Bankr. S.D. Ill. 1996), Bankruptcy Judge David H. Adams held that the insurance proceeds were not proceeds of the vehicle but of the insurance policy. As the policy was purchased post-petition, the proceeds of the policy were not an asset of the bankruptcy estate.

Pre-Conversion Increase in Value Not Property of the Estate In In re Pruneskip, 343 B.R. 714 (Bankr. M.D. Fla. 2006), a chapter 13 debtor had motor vehicles that were fully encumbered as of the petition date. Pursuant to the terms of the chapter 13 plan, the debtor made payments on the vehicles and, as of the conversion to chapter 7, there allegedly was equity in the property. The chapter 7 trustee sought turnover of the value of the vehicles in excess of any nonexempt equity. Based on In re Nichols, 319 B.R. 854 (Bankr. S.D. Ohio 2006), and other decisions, Bankruptcy Judge Alexander L. Paskay denied the turnover, holding that property of the estate and the debtor's equity in the property of the estate is determined as of the date of the filing of the chapter 13 petition—not the date of conversion to chapter 7.

Payment by Credit Card Not a Transfer of an Interest of the Debtor

In In re Perry, 343 B.R. 685 (Bankr. D. Utah 2005), the debtor paid a pre-existing debt with a credit card within 90 days of the filing of the bankruptcy petition. The chapter 7 trustee sought to avoid the payment as either a preference or as a fraudulent conveyance and the creditor sought to dismiss the complaint for failing to state a cause of action upon which relief could be granted. In Begier v. IRS, 496 U.S. 53 (1990), the Supreme Court held that the phrase "interest of the debtor in property" coincides with the definition of property of the estate under §541. Bankruptcy Judge William T. Thurman held that the payment was merely a transfer from the credit card company to the creditor, and the debtor's estate was only implicated to the extent that the credit card company decreased the credit allowance under the debtor's credit card account." Since the payment was a transfer of mere credit and did not affect the amount of liquidity or property available for distribution by the estate's creditors, the payment was not a transfer of an interest of the debtor in property."


In re Eddy, 339 B.R. 8 (Bankr. D. Mass. 2006) (denial of debtor's discharge did not relieve debtor of duty to cooperate with chapter 7 trustee seeking to meet responsibility to expeditiously collect, liquidate and distribute nonexempt assets);

In re Profco Inc., 339 B.R. 614 (Bankr. S.D. Tex. 2005) (IRS's untimely filed chapter 7 priority claim was entitled to distribution prior to timely filed general unsecured claims);

In re Dick Cepek Inc., 339 B.R. 730 (9th Cir. B.A.P. 2006) (adequately disclosed valid pre-petition security retainer is not subject to disgorgement simply to achieve equal distribution among similar creditors);

In re CK Liquidation Corp., 343 B.R. 376 (D. Mass. 2006) (Lamie's "retainer exception" to general prohibition against use of estate assets to compensate chapter 11 debtor's counsel for post-conversion services is limited to flat fee retainers that are "unqualified pre-payment for services whereby counsel takes title of the retainer fee on the date of payment");

In re Worldcom Inc., 343 B.R. 486 (Bankr. S.D.N.Y. 2006) (when post-petition events alter the "executoriness" of a contract, court will look to the date the motion to assume or reject is made rather than the petition date in determining the executory nature of a contract);

In re General Creations Inc., 343 B.R. 548 (Bankr. W.D. Va. 2006) (term "year" as used in §546(a)(1)(A) refers to period that ran from the entry of the order of relief to the anniversary date occurring 12 months later, and that could be either 365 or 366 days depending on whether the year in question was a leap year); and

In re Canyon Systems Corp., 343 B.R. 615 (Bankr. S.D. Ohio 2006) (§544(b) strong-arm provision gives trustee power to avoid a transfer but not to pursue state law damages claims).

Journal Date: 
Friday, December 1, 2006