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Benchnotes May 2001

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In In re Home America TV-Appliance Audio Inc., 232 F.3d 1046 (9th Cir. 2000), the chapter 7 debtor's parent corporation previously claimed for itself the chapter 7 debtor's net operating losses on a consolidated return. On cross-motions for summary judgment, the Ninth Circuit held that the success of the chapter 7 trustee in the case depended on the trustee's ability to utilize §549(d) to avoid, as an unauthorized post-petition transfer, the election by the debtor's parent to waive the right to carry back the debtor's net operating losses. Thus, the case was not governed exclusively by federal statutes of limitations on tax refund claims, but was further limited by §549(d). The court held that the trustee's adversary proceeding against the Internal Revenue Service (IRS) was governed by the two-year statute of limitations for avoidance claims under the Bankruptcy Code. Further, the trustee failed to show that she relied on the IRS's letter stating that the tax refund claim had been accepted for filing, while not indicating whether the tax refund claim would be approved or denied. Thus, the IRS was not prevented from asserting the statute of limitations under §549(d) under principles of equitable estoppel.

Student Loan Discharge Denied

In the case of In re Woods, 233 F.3d 324 (5th Cir. 2000), the chapter 13 debtor completed his chapter 13 plan and received a general discharge. His plan called for the complete repayment to the holder of non-priority unsecured claims, including a student loan debt to United Student Aid Funds Inc. (USAF). His general discharge was granted pursuant to 11 U.S.C. §1328(a). The debtor then sought a declaratory judgment that the USAF debt had been discharged. The district court denied the debtor's motion, ruling that the debtor was liable for the debt, including all post-petition interest, costs and attorney's fees. Observing that §1328(a) specifically exempts educational loans made through a governmentally funded program (§523(a)(8)) from discharge, the Fifth Circuit adopted the opinion of the district court.

Forum Selection Clause

In In re McCrary & Dunlap Const. Co., 256 B.R. 264 (Bankr. M.D. Tenn. 2000), the bankruptcy court considered a forum selection clause in the context of the debtor's adversary proceeding attempting to collect on an alleged account receivable under a contract with the general contractor on a project in which the debtor had been involved. The general contractor was not a creditor or otherwise involved in the debtor's bankruptcy case. Observing that the debtor did not allege fraud or overreaching in the bargaining for a forum selection clause in the contract in question, and following the Supreme Court's ruling in M/S Bremen v. Zapata Offshore Co., 92 S.Ct. 1907 (1972) that forum selection clauses are "prima facie valid and should be enforced unless enforcement is shown by the resisting party to be 'unreasonable' under the circumstances," the court held that the suit to collect the pre-petition account receivable was non-core. The court concluded that where the case is non-core, then the bankruptcy policies favoring centralization of disputes in the bankruptcy case is not strong enough to abandon the forum selection clause contained in the contract. Therefore, the defendant's motion to dismiss for improper venue was granted.

Under State Partnership Law, Debt from Fraud Non-dischargeable

Can the innocent partners discharge the partnership's and their own liability to the defrauded person where one of the partners committed fraud? This is the question pondered by the Fifth Circuit in In re M.M. Winkler & Associates, 239 F.3d 746 (5th Cir. 2001). The partnership filed bankruptcy. A defrauded client filed suit in state court, and the innocent partners admitted to the vicarious liability imposed on them by state law. An unopposed motion for summary judgment in the state court suit was granted and judgment entered imposing joint and several liability against the partnership and the individual partners. The innocent partners filed chapter 7, and the defrauded client sought to prevent them from discharging the debt because it arose from fraud. The bankruptcy court applied a three-part test to determine dischargeability under 11 U.S.C. §523(a)(2)(A), (4) and (6), including "whether the innocent partners received a benefit from the fraud." The bankruptcy court found the debt to be dischargeable, finding that the defrauded client had not proved that the guilty partner acted in the ordinary course of business of the partnership. Further, the defrauded client failed to prove that the innocent partners received a benefit from the fraud. On appeal, the Fifth Circuit held that 11 U.S.C. §523(a)(2)(A) bars the innocent partners from discharging the debt even if they did not benefit monetarily from the fraud, holding that the express language of the statute includes no "receipt of benefit" requirement. "The statute focuses on the character of the debt, not the culpability of the debtor or whether the debtor benefited from the fraud..." Thus, the plain meaning of the statute is that debtors cannot discharge any debts that arise from fraud so long as they are liable to the creditor for the fraud." Relying on Strang v. Bradner, 5 S.Ct. 1038 (1885), "Confronted with this precise question, we hold that §523(a)(2)(A) prevents an innocent debtor from discharging liability for the fraud of his partners, regardless whether he receives a monetary benefit." We conclude that if a debt arises from fraud and the debtor is liable for that debt under state partnership law, the debt is non-dischargeable under §523(a)(2)(A). Receipt of benefits and the ordinary course of business are irrelevant to this inquiry as matters of federal law.

Creditors' Meeting Designees Defined by Court

In the case of In re Muy Bueno Corp., 257 B.R. 843 (Bankr. W.D. Tex. 2001), the court considered the question of what individual should be the person to appear at a §341 meeting. The court may require (designate) any or all of the officers of a debtor corporation, members of its board of directors or trustee or of a similar controlling body, a controlling stockholder or member, or any other person in control of the debtor to appear at the meeting of creditors required under 11 U.S.C. §341(a). 11 U.S.C. §343(a) indicates that the debtor shall appear and submit to examination under oath at the meeting of creditors under §341(a) of this title. In reading the Code together with Rule 9001(5), the bankruptcy court concluded that the court may, under the provisions of Rule 9001(5), require the presence of a particular individual person as the debtor's representative at the §341 meeting. The rule provides that whenever any act is required to be performed by a debtor, or when it is necessary to compel the attendance of a debtor for examination, and the debtor is not a natural person, then, under those circumstances, if "designated by the court, any or all of its officers, members of its board of directors or trustees or of a similar controlling body, a controlling stockholder or member, or any other person in control" will be that person or individual.

Miscellaneous

Journal Date: 
Tuesday, May 1, 2001

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