In In re Ogalin, 303 B.R. 552 (Bankr. D. Conn. 2004), the debtor knowingly acquiesced in a scheme by his wife to divert assets away from the claims of their creditors. The diversion was accomplished by placing assets, including the family home, in the name of their 20-year-old daughter. Apart from the transfers, the debtor attempted to hide his actual wages from the family-owned business. Each of these two separate claims was sufficient to warrant a denial of the debtor's discharge. As Chief Bankruptcy Judge Albert S. Dabrowski noted, even though the transfers were made outside of a one-year reach-back period of "fraudulent transfer," the transfers were coupled with the retention of attributes of beneficial ownership continuing into the one-year reach-back period. As a result, doctrine of "continuing concealment" permitted avoidance of transfers outside of the one-year period.

False Representation by Debtor's Associate = Nondischargeable Debt

In re Zaffron, 303 B.R. 563 (Bankr. E.D.N.Y. 2004), involved an action seeking a determination that a debt under 11 U.S.C. §523(a)(2)(A) for debts or money obtained by "false pretenses, false representation or actual fraud" was not dischargeable. Bankruptcy Judge Dorothy Eisenberg held that the fraud must be the basis for the agreement to provide money, property or services to the debtor, and later misrepresentations are irrelevant. In Zaffron, an associate of the debtor made the false representations in the debtor's presence to a lessor while acting within the scope of his employment and/or apparent authority as vice president of the debtor's company. The debtor did not correct the false statements. The court found that the lessor's reliance on the associate's statements was justified and the expenses related to construction work performed pursuant to the leases negotiated by the associate and the debtor was nondischargeable.

Merger Agreement Deemed Executory Contract

In In re Philip Services (Delaware) Inc., 303 B.R. 574 (D. Del. 2003), the chapter 11 debtors unsuccessfully brought an adversary proceeding seeking to recover allegedly preferential payments made pursuant to a pre-petition merger agreement. One issue was whether two documents (the merger agreement and a related promissory note) were to be treated as separate agreements. The bankruptcy court concluded that the merger agreement, which effectuated a merger of debtor and the other corporation, was inseparable from the promissory note issued to the shareholders of the acquired corporation as consideration for the merger. Further, the bankruptcy court concluded that the two documents constituted a single executory contract that was assumed by the debtor by operation of law under 11 U.S.C. §365 pursuant to the bankruptcy court's confirmation order and thus could not be the source of a post-petition avoidance action. On appeal, the district court found that the bankruptcy court had correctly concluded that the merger agreement and the promissory note were integrally related and inseparable, and thus were to be considered as one agreement. The district court also affirmed the bankruptcy court's holding that the agreement was an executory contract that remained to be performed by both parties under the merger agreement.

NLRB's "Willful and Malicious Injury"Action Judged Not Appropriate

In In re Gordon, 303 B.R. 645 (Bankr. D. Colo. 2003), the National Labor Relations Board (NLRB) brought an action under 11 U.S.C. §523(a)(6) alleging "willful and malicious injury" and seeking preclusive collateral estoppel effect of a default judgment holding that the debtor was an alleged alter ego and thus liable for the unfair labor practices of his corporation. However, in order to establish preclusion, Bankruptcy Judge Howard R. Tallman noted that the evidence must establish that (1) the issue previously decided is identical with the one presented in the action in question; (2) the prior action has been finally adjudicated on the merits; (3) the party against whom the doctrine is invoked was a party, or in privity with a party, to the prior adjudication; and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issues in the prior action. While there was no dispute that the debtor was the same party and that the prior action was fully and finally adjudicated on the merits, the question before the court was whether a "deliberate and willful" intent to terminate a union worker and to defeat the NLRB equated to a "willful and malicious injury" to the creditor. The court concluded that there was a fact issue as to whether the economic injury suffered by the former employees of the debtor's business entities was intentionally inflicted by the debtor. Thus, preclusive effect of the NLRB's judgment was not appropriate, reserving for the court the question of willful and intentional infliction of damage.

Decision of District Court Not to Abstain Not Reviewable

Beightol v. UBS Paine Weber Inc., 354 F.3d 187 (2nd Cir. 2004), involved virtually identical suits in state court alleging that the defendants committed fraud in connection with the plaintiffs' purchase of Global Crossing Ltd. securities. The defendants removed the cases to the Southern District of Mississippi on grounds that 28 U.S.C. §1334(b) provided federal jurisdiction over the suits because they were "related to" the Global Crossing bankruptcy case. The cases were then transferred to the Southern District of New York and subsequently consolidated with other securities fraud suits. At that point, the plaintiffs moved for mandatory abstention pursuant to 28 U.S.C. §1334(c)(2) and sought to have the suits remanded to the Mississippi state court; the request was interpreted by the district court as invoking 28 U.S.C. §1452(b), allowing the court to remand the case removed under §1334 on "any equitable ground." The district court denied the plaintiffs' motions, holding that it had jurisdiction over the suits pursuant to §1334(b), that abstention was not required under §1334(c)(2) and that remand under §1452 was not warranted. On appeal, the Second Circuit observed that 11 U.S.C. §1334(d) unambiguously indicates that a decision not to abstain under §1334(c)(2) is reviewable only if it falls within the appellate jurisdiction conferred by 28 U.S.C. §§158, 1291 or 1292. "The provision is structured as a prohibition on all appeals of abstention decisions made under §1334." The court observed that the order declining to abstain was not a final decision, that the challenged order merely determined where the case would be adjudicated and that it did not resolve any of the substantive issues raised in the lawsuit. Further, the court determined that it did not have jurisdiction to review the district court's denial of remand under §1452(b).

Fannie Mae Entitled to Pursue Breach of Contract Claim

In In re Homeowners Mortgage and Equity Inc., 354 F.3d 372 (5th Cir. 2003), the Federal National Mortgage Association (Fannie Mae) unilaterally terminated a debtor's mortgage selling and servicing contract, asserting a breach of warranty relating to loans purchased by Fannie Mae under the servicing contract. The bankruptcy trustee sued Fannie Mae alleging breach of contract and tort, in addition to three bankruptcy claims for fraudulent transfer, turnover and equitable subordination. Fannie Mae filed a proof of claim for the amounts that it alleged were due under the warranty, purchase and indemnity provisions of the contract. The debtor's president acknowledged, inter alia, that some of the loans were made to non-existent borrowers. The bankruptcy court held that while the trustee was entitled to recover $4.8 million under the contract, Fannie Mae had a claim for in excess of $21.5 million under the repurchase obligations of the contract, resulting in a net of about $14 million owed to Fannie Mae. On appeal, the Fifth Circuit affirmed, holding that Fannie Mae was entitled to seek to enforce its rights under the warranty provisions as those claims were based on responsibilities or liabilities of the lenders that existed before the termination of the contract. Included in the award to Fannie Mae was an award for future damages for those claims that the court found were "likely to be both in breach of a warranty and in default."

Colombian Airline Permitted to File in U.S.

In In re Aerovias Nacionales de Colombia S.A., 303 B.R. 1 (Bankr. S.D.N.Y. 2003), the debtors, an airline holding company, a wholly owned subsidiary and its agent in the United States, filed chapter 11 cases, although they were organized under the laws of Colombia and had only 28 employees in the United States while having more than 4,000 employees in Colombia. The debtors flew from two hubs located in Bogotá to Miami and New York, as well as to numerous other locations in Colombia and other countries in Central and South America. Creditors filed motions to dismiss both of the related chapter 11 cases on the grounds that the court should not hear the case involving an enterprise that has not filed the case in its "home court" and whose business arguably is centered overseas with the number of foreign creditors outnumbering its domestic creditors. The bankruptcy court found that the airline company is eligible to be a debtor under the Bankruptcy Code and refused to dismiss the case or require that the debtors file for relief under the Colombian counterpart to chapter 11 and to commence an ancillary proceeding in the United States.

Miscellaneous

• In re Horsehead Industries Inc., 300 B.R. 573 (Bankr. S.D.N.Y. 2003) (union's insistence that proposed purchaser participate in negotiations resulted in a rejection without good cause and formed the foundation for debtor's right to reject the union contract pursuant to §1113);
• In re Deliciuz, 300 B.R. 669 (Bankr. E.D. Mich. 2003) (an employer's ability to recoup overpayment of disability benefits to chapter 11 debtor/employee from any future disability benefits could be exercised without regard to the stay and was not affected by bankruptcy discharge, but contractual right to recover overpayment of benefits by deducting them from wages was in the nature of contractual right of setoff, the exercise of which by employer through post-petition garnishment was violation of the discharge injunction);
• In re Flooring America Inc., 302 B.R. 394 (Bankr. N.D. Ga. 2003) (affidavit presented by trustee, in which individuals stated that assets of the debtor's estate were insufficient to pay debtor's unsecured creditors a 100 percent dividend, satisfied the trustee's burden of establishing the preferential effect of a transfer);
• In re Friedman, 300 B.R. 149 (Bankr. D. Mass. 2003) (bankruptcy courts have jurisdiction to enter money judgments in dischargeability proceedings);
• In re Sterling Optical Corp., 302 B.R. 792 (Bankr. S.D.N.Y. 2003) (neither waiver of right to distribution on account of previously filed proof of claim, withdrawal of proof of claim or closing of the bankruptcy case can affect bankruptcy court's jurisdiction, once it attaches);
• In re Global Tissue L.L.C., 302 B.R. 808 (Bankr. D. Del. 2003) (as chapter 11 debtor and supplier to which allegedly preferential payments were made were both in the same industry, supplier did not need to present evidence beyond the party's own dealings in order to show the challenged payments were made according to ordinary terms); and
• In re Bourque, 303 B.R. 548 (Bankr. D. Mass. 2003) (mere adversity is not sufficient to obtain a student loan debt discharge on the basis of undue hardship; there must be additional unique circumstances).