Benchnotes Feb 1998
Balloon Payments and Plan Feasibility
In In re Fantasia, 211 B.R. 420 (Bankr. 1st Cir. 1997), the court addressed the issue of a chapter 13 plan which provided for "a balloon payment of the balance remaining at the end of the 60-month plan" on a commercial property in which there was admittedly no equity. The bankruptcy court had confirmed the chapter 13 plan without an evidentiary hearing. The Bankruptcy Appellate Panel (BAP) noted that the "inclusion of a balloon payment is not dispositive of a plan’s feasibility. Confirmation of such a plan is suspect however, unless some proof is offered to show that the funds will be available at the time the balloon payment is due." The court also held that, if a timely objection is filed, debtors have the burden to show that they will have the funds available to meet the balloon payment. As there was no evidentiary hearing, the BAP found that the debtors had not met their burden to show that the plan was feasible and remanded the plan for further consideration.
"Ability to Pay" Under §707(b)
In In re Carlton, 211 B.R. 468 (Bankr. W.D.N.Y. 1997), Bankruptcy Judge John C. Ninfo II applied §707(b) to two cases and undertook an analysis of §707(b) including the statutory and case law, analysis by certain commentators and, perhaps of most interest, his view of the arena of consumer bankruptcy in 1997, including, without limitation, increasing numbers of consumer bankruptcies at a time when traditional economic indicators show the overall economy to be more "stable and healthy than it has been for a long time." Judge Ninfo then adopted the blended approach utilized in In re Ontiberos, 198 B.R. 284 (C.D. Ill. 1996). He held that the "ability to pay" equates to the ability to pay: (1) all priority and unsecured debt in a chapter 13 case in a plan of from one to five years in duration, or over a reasonable period of time in a chapter 11 case, while properly providing for any secured debt; (2) all priority debt and a significant percentage of unsecured debt through such a chapter 13 or chapter 11 plan; or (3) a significant dollar amount, irrespective of percentage, to unsecured creditors through such a chapter 13 or chapter 11 plan. If, after such analysis, the court determines that the debtor has an "ability to pay," it will then utilize a "totality of circumstances" test to determine whether any facts exist that may mitigate against the debtor’s "ability to pay," or constitute aggravating factors to show the debtor’s bad faith or dishonesty, or that the debtor is not truly needy. The court then listed a non-exclusive "list of 15 factors, which the court believes will likely be an expanding list if additional substantial abuse motions are brought before it for decision." The court then concluded that the cases for both families should be dismissed pursuant to §707(b).
Deposition of Assistant U.S. Trustee
In In re Travelstead, 212 B.R. 505 (Bankr. D. Md. 1997), Bankruptcy Judge E. Stephen Derby addressed a debtor’s motion to compel the deposition of an Assistant U.S. Trustee. In this case, the U.S. Trustee was the movant on a motion to convert or to appoint a trustee. The signature line on the motion reflected the U.S. Trustee and was signed by the Assistant U.S. Trustee who was noticed for deposition. The court noted that the Assistant U.S. Trustee was appearing in two capacities, as counsel for the U.S. Trustee and as an Assistant U.S. Trustee who was the representative of the U.S. Trustee in the court. The U.S. Trustee took the position that all information in the Assistant U.S. Trustee’s possession was fact or opinion work product and thereby privileged and thus, pursuant to 28 C.F.R. §16.23-16.27, declined to authorize the Assistant U.S. Trustee to give deposition testimony. The court held that, while some of the requests for testimony might be privileged, not all of it would require the Assistant U.S. Trustee to reveal attorney-work product. "The U.S. Trustee may not evade discovery of non-privileged facts based on an agency decision not to authorize deposition testimony where the U.S. Trustee is a party." Thus, the court ordered the Assistant U.S. Trustee "either to answer questions or to assert a privilege in the manner prescribed by Federal Rules of Civil Procedure 26(b)(5), made applicable by Bankruptcy Rule 7026..."
Pre-petition Attorney’s Fees
In In re Keaton, 212 B.R. 587 (E.D. Tenn. 1997), District Judge Collier addressed an appeal of a bankruptcy court’s decision to allow an undersecured creditor to collect attorney’s fees incurred after the debtors filed a chapter 13 petition. The court initially addressed the issue of whether the attorney’s fees were a post-petition claim or a pre-petition claim under §502. The court found that it is undisputed that the creditor was entitled to attorney’s fees under an agreement with the debtor. Relying upon In re Martin, 761 F.2d 1163 (6th Cir. 1985), the court held that by virtue of the contract, the creditor had a pre-petition right to collect attorney’s fees, albeit an unmatured contingent right that was contingent upon the creditor actually incurring attorney’s fees in collecting the debt. The court then addressed the issue of whether the pre-petition claim for attorney’s fees was barred by §506(b) due to the undersecured nature of the claim. The court noted that unlike matured interest, which is specifically disallowed in §502(b)(2), there is no general rule disallowing attorney’s fees. "Instead, a natural reading of §502(b)(1) specifically allows claims for attorney fees that are contingent or unmatured." However, in In re Southeast Banking Corp., 212 B.R. 682 (S.D. Fla. 1997), District Judge Moreno addressed unsecured senior debenture holders’ claims for payment of pre-petition interest, compound interest and re-imbursement of attorney’s fees and costs from distributions otherwise payable to junior debenture holders in a chapter 7. The court held that under the Bankruptcy Code, the award of attorney’s fees and costs is restricted by §§502 and 506(b), which limit attorney’s fees and costs pre-petition to the extent that the claim was oversecured.
Receiver’s Pre-petition Counsel
In In re 400 Madison Ave. Ltd. Partnership, 213 B.R. 888 (Bankr. S.D.N.Y. 1997), a chapter 11 petition was filed after the appointment of a receiver. However, pursuant to an agreement between the debtor and the secured creditor approved by the bankruptcy court, the receiver was left in possession of the property. The receiver filed an application to continue retention of his pre-petition counsel, and the U.S. Trustee objected, asserting that they were not disinterested because they were owed fees for pre-petition services. The bankruptcy court, citing 11 U.S.C. §543(c)(1), held that it was required to protect the persons to whom the custodian is indebted, including providing for payment of all of the receiver’s unpaid bills. This was held to include those of counsel subject only to a determination of reasonableness of those fees, pursuant to §543(c). Further, since a pre-petition retention order already was in place governing the receivership, it was not necessary for the receiver to file a new application.
Truth in Lending Act Liability
In In re Hill, 213 B.R. 934 (Bankr. D. Md. 1996), the bankruptcy court held that a creditor must strictly comply with the provisions of the Truth in Lending Act such that even technical violations may result in a lender’s liability. Thus, the court found that it should have been disclosed that the finance charge included a $2,000 broker’s fee, regardless of whether the lender actually retained part of the broker’s fee, especially under circumstances where the lender benefited from the broker’s services in bringing the loan to the lender. As the fee was included as part of the amount financed rather than as a finance charge, the consumer/debtor was entitled to avoid any liability for the finance charges, as well as any security interest.
In Kunkel v. Sprague Nat. Bank, 128 F.3d 636 (8th Cir. 1997), the court was faced with competing claims of first priority security interests in the same cattle asserted by a feed lot and a bank. The bank perfected its security interest by filing a Kansas Uniform Commercial Code (UCC) financing statement, covering inventory, farm products, equipment and accounts receivable presently owned or thereafter acquired. Subsequent to the bank’s loan agreements and financing statements, the feed lot operator, which also was in the business of financing and selling cattle, sold cattle to the debtors. In each transaction the debtor executed a loan agreement and promissory note in favor of the feed lot and a security agreement granting a purchase money security interest in the cattle, which were identified by lot number. However, the feed lot did not file a UCC-1, instead perfecting its security interest by taking possession of the cattle pursuant to feed lot agreements. The feed lot agreements stated that the cattle belonged to the debtors and acknowledged that the debtors had delivered the cattle to the feed lot where they were to remain for care and feeding, although the debtors never had physical possession of the cattle. The feed lot and loan agreements further authorized the operator to sell the cattle in its own name for slaughter and to receive direct payment from the packing house, deducting all feeding and purchase expenses from the sale proceeds, thereafter remitting the balance to the debtors. The agreements recited that the debtors bore all risk as to profit or loss generated by the feeding and selling of the cattle, and that the operator needed the debtors’ authority to sell the cattle, and that the debtors would determine at what price the cattle would be sold. The debtors subsequently filed a chapter 11 case, after which the cattle in question were sold for slaughter. Approximately $550,000 of sale proceeds remained after deducting the amounts owed for the care and feeding of the cattle. The court held that the feed lot operator could attain a superpriority status under Kansas’ version of the UCC as the holder of a purchase money security interest in the debtors’ cattle, even though it protected its interest by possession rather than by the filing of a financing statement, and even though the feed lot, as seller, did not provide notification to the bank after the cattle were sold and slaughtered and litigation concerning the parties’ relative rights in the proceeds had commenced.
• In re S.S. Retail Stores Corp., 211 B.R. 699 (Bankr. 9th Cir. 1997), (attorney who was assistant secretary on debtor’s board of directors was not "disinterested person;" however, his disqualification was not attributable to his entire law firm);
• In re Meinhart, 211 B.R. 750 (Bankr. D. Colo. 1997), (for-profit educational lender could not invoke discharge exception for student loans);
• In re Beaton, 211 B.R. 755 (Bankr. N.D. Ala. 1997), (the filing by a chapter 7 trustee of a "no-asset" final report does not result in abandonment of property that may be accomplished only pursuant to §554 after notice to all creditors or upon the closing of the bankruptcy estate);
• In re Dinova, 212 B.R. 437 (Bankr. 2d. 1997), (chapter 7 case may not be dismissed under §707(a) without serving a notice of motion with appropriate supporting papers on all parties in interest and a finding of "cause" even if dismissal is sought for debtor’s failure to attend §341 meeting);
• In re George Transfer Inc., 212 B.R. 475 (Bankr. D. Md. 1997), (claim of governmental unit filed within a 180-day period provided by §502(b)(9) is timely despite court-ordered bar date establishing shorter period for filing governmental claims);
• In re Manuel, 212 B.R. 517 (Bankr. E.D. Va. 1997), (automatic stay violated where pre-petition garnishment proceedings was not dismissed after debtor filed chapter 13 petition as garnishor had affirmative obligation not to continue stay violation).