Benchnotes Feb 2002

Benchnotes Feb 2002

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Contractual Indemnity Clauses

In Agassi vs. Planet Hollywood Intern. Inc., 269 B.R. 543 (Bankr. D. Del. 2001), the court held that proofs of claim seeking damages for breach of rejected executory contracts were sufficient on the surface to include claims for attorneys' fees under the contractual indemnity clauses. Further, the successful objections to the debtors' motion to assume the contracts in question, which included requests for relief from stay to enforce contractual termination rights, including a right to attorneys' fees, was sufficient to qualify as informal proofs of claim. The court then addressed the substance of the request and held that attorneys' fees are not independently recoverable under the Bankruptcy Code. Thus, since the attorneys' fees were incurred in successfully opposing the debtors' motion to assume the contracts, a matter peculiar to federal bankruptcy law, the creditors were not entitled to an award of such attorneys' fees under the clause in the personal service agreements granting the creditors a right to reasonable attorneys' fees arising from or in any way related to the debtors' breach of such contracts, absent evidence of any bad faith or harassment by the debtors in having sought to assume these contracts.

Income Tax Refund Ownership

In In re First Central Financial Corp., 269 B.R. 481 (Bankr. E.D.N.Y. 2001), the bankruptcy court dealt with a dispute between the liquidator of an insurance company (a subsidiary of the debtor) and the chapter 11 trustee of the debtor involving their competing claims to a federal income tax. The court held that it had core jurisdiction over the dispute as being akin to a turnover proceeding and, as such, a matter that concerned the administration of the estate under 28 U.S.C. §157(b)(2)(A), (E) and (O). After deciding the jurisdictional issue, the court then turned to the question of who owned the refund. "It is necessary to examine whether the debtor owns the property absolutely, conditionally or merely through some lesser relationship, such as a bailment, agency or consignment, whereby the goods actually belong save for the debtor's right to possession, completely to another." The debtor and its subsidiary functioned within the framework of a tax allocation agreement. Under state corporation law, parties are free to allocate among themselves ultimate tax liability by virtue of a tax allocation agreement. Thus, the tax allocation agreement between the debtor and its subsidiary governed their obligations, as among themselves, for payment of federal income taxes and, more importantly, provided for the allocation of tax refunds received by the taxpaying group. The first issue considered by the court then was whether the subsidiary insurance company was entitled to the entire amount of the tax refund under the tax allocation agreement since all of the income in question pursuant to which the losses provided shelter had been generated by the subsidiary insurance company.

Analyzing the question under state law of New York and under the tax allocation agreement, the court concluded that under the terms of that agreement the subsidiary insurance company was not entitled to receive from the debtor/trustee the entire amount of the tax refund but only an amount "equal to the amount of the tax refund that FCIC (the subsidiary insurance company) would have received from the IRS if its taxes had been calculated on a stand-alone basis." The court then concluded that the insurance company's receiver would have been entitled to receive an amount less than the total amount of the tax refund received by the debtor/trustee from the IRS. Next, the court had to determine whether the subsidiary insurance company is a "trust beneficiary" or an unsecured creditor with respect to the amounts due to it under the tax allocation agreement. The court concluded that the tax allocation agreement did not create a trust and further concluded that the remedy of the imposition of constructive trust was not available under these particular facts and circumstances. As a result, the subsidiary insurance company had a claim as an unsecured creditor in the bankruptcy case with respect to any portion of the funds that the insurance company liquidator could prove up, subject to further objection.

Government Class 5 Priority Claims

In In re Gordon Sel-Way Inc., 270 F.3d 280 (6th Cir. 2001), the court addressed the debtor's attempt to compel the turnover of a tax refund against which the government claimed a right of setoff. The government filed pre-petition claims against the debtor for the debtor's failure to pay tax penalties. These claims became part of the Class 5 priority claims under the confirmed plan. After confirmation, the debtor filed a claim objection, successfully seeking, inter alia, subordination of the government's claim. After the bankruptcy court's initial subordination of the government's tax penalty claims, the debtor quickly distributed its liquidated assets to other Class 5 creditors without setting aside any assets to pay the government in the event that the subordination decision was later overturned, creating a situation in which the government clearly could be treated differently than other Class 5 creditors. The first issue was the question of sovereign immunity. The court held that under 11 U.S.C. §§106(a), (b) and (c) and 505, the government had waived its sovereign immunity with respect to proceedings properly under §505(b). Next, the court found that pursuant to §157(b)(1), this was a core proceeding since the resolution of the dispute clearly affected the adjustment of the debtor-creditor relationship. Further, the court found that under 11 U.S.C. §1142 and the provisions of the debtor's confirmed chapter 11 plan, the bankruptcy court had post-confirmation jurisdiction of the dispute. Finally, the court held that the prerequisites for establishing a setoff claim were established where the debtor had failed to protect the government's Class 5 unsecured claim.

Sale Partnership Interest

In In re Morgan Sangamon Partnership, 269 B.R. 652 (Bankr. N.D. Ill. 2001), the court held that an individual chapter 7 debtor's interest in the debtor partnership could not be assumed and assigned sufficient to convey to the purchaser the standing of partner with the authority to file an involuntary petition against the partnership. Under applicable state partnership law, the other partners did not have to accept the new partner or substitute the new partner without their consent, and thus, the purported sale by the individual debtor's chapter 7 trustee of that debtor's partnership interest gave the purchaser only an economic interest in the partnership; it did not give him a "partner" with the authority of a partner.


Journal Date: 
Friday, February 1, 2002