Benchnotes Nov 2000

Benchnotes Nov 2000

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Charitable Institution as Estate

In In re Windstead Memorial Hosp., 249 B.R. 588 (Bankr. D. Conn. 2000), the court dealt with the estate of a hospital that was a charitable institution. The attorney general was charged with representing the interests of the public and the intended beneficiaries under a Connecticut statute. The attorney general entered the case and laid claim to certain funds. The issues involved are not unique to Connecticut law as many states have similar provisions. The attorney general contended that the hospital's interest in the gifts was restricted to their use for charitable purposes. The hospital's cessation of operations pre-petition made the use of those funds for charitable purposes impossible as a matter of law; therefore, the funds were not property of the estate. In an excellent review of the issues involved, the bankruptcy court held that the funds vested in the hospital pre-petition when the donors (individually) die, and therefore were included in "property of the estate" and subject only to the restriction that those funds be applied to payment of debts incurred for the hospital's general charitable purposes while it was still operating. Likewise, the court held that those testamentary gifts that were left to the hospital by testators who died less than 180 days post-petition would be included as property of the estate (gifts received within 180 days of the filing of the case). Gifts received more than 180 days post-petition would not be included in property of the estate.

"Incomplete" Gifts Not Exempt

In order for a gift to be a gift, it must be a completed gift. In In re De La Rosa, (Bankr. W.D. Mo. 2000), the bankruptcy court held that certain savings bonds were property of the debtors' estate. The savings bonds had been purchased by a grandmother for the benefit of debtors' minor children. However, the bonds were payable solely to the debtors. Likewise, the bonds were never deposited into a custodial account or accounts in accordance with the provisions of the Missouri Uniform Transfer to Minors Act. Therefore, the "gifts" to the minors were never completed and the bonds were includable in the debtors' chapter 7 estate.

Anti-modification Protection

In In re Bartee, 212 F.3d 277 (5th Cir. 2000), the Fifth Circuit adopted the conclusion of the Third Circuit in In re McDonald, 205 F.3d 606, 612 (3rd Cir. 2000), in the context of a chapter 13 plan. The debtor can opt for a valuation of the principal assets pursuant to 11 U.S.C. §506(a). If that valuation reveals that the junior lien on the property is totally unsecured, the junior lienholder may not invoke the anti-modification protection of 11 U.S.C. §1322(b)(2).

Avoidance Action as Abuse of Trustee's Discretion

In re Bean, 251 B.R. 196 (E.D.N.Y. 2000), involved an adversary proceeding brought by a chapter 7 trustee. Immediately prior to the filing of a chapter 11 case, the debtor had contracted to sell his home for $165,000. On the day that the case was converted to chapter 7, the sale closed. With the proceeds of the sale, the debtor satisfied two mortgages, paid a broker's commission, paid city and state transfer taxes and turned over net proceeds of almost $60,000 to the chapter 7 trustee. Nevertheless, the trustee subsequently commenced the action pursuant to §550(a) seeking to recover the property as an unauthorized post-petition transfer under §549(a), and the motion was granted by the bankruptcy court. At oral argument on appeal, counsel for the trustee conceded that the purchase price was the fair market value of the property and that if the trustee had sold the property, he would not have realized more than the approximately $60,000 in net proceeds, which the chapter 7 debtor had turned over. When the court inquired of trustee's counsel as the reason for bringing the action "since there did not seem to appear to be any damage to the estate," counsel stated that it was "unquestionably punitive." In that regard, he stated that he believed it was the trustee's duty "to enforce the Code as a policeman." The purchasers argued that they were entitled to the "good-faith exception" of §549(c); however, this argument is unsuccessful because their attorney was in possession of a title report, which reflected the bankruptcy of the debtor. The court then considered the issue of whether a trustee was "duty bound to bring this avoidance action." The court addressed the general principles concerning a trustee's duty, noting that §§549(a) and 550(a) have an underlying collective purpose "to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred." The court then held that a trustee's duty to act in the best interest of the estate does not include an obligation to punish debtors or others for punishment's sake as that is "the purpose of the criminal law." Having analyzed the various general principles, the court found that the case at hand "represents a textbook example of purposeless litigation by a trustee." The district court rejected the trustee's argument that he was to enforce the Code as a "policeman," noting that the trustee's duty was to "use good common sense in the exercise of an appropriate discretion." As the only purpose served by the avoidance action was to punish the purchasers, it was a "gross abuse of the trustee's discretion to pursue an avoidance action which could not possibly financially benefit the estate since as the single-satisfaction rules, any monetary recovery would be limited to pre-petition equity in the property which the trustee had already received."

Automatic Stay Violation Not Appealable

When the bankruptcy court found state regulators violated the automatic stay, the regulators moved for leave to appeal. The district court in In re War Eagle Const. Co. Inc., 249 B.R. 686 (S.D. W.Va. 2000), held that the bankruptcy court's order finding the violation of the automatic stay but deferring any assessment of damages until a later date was not a "final order" that could be appealed. The district court refused to grant leave to appeal.


  • In re Moss, 249 B.R. 411 (Bankr. N.D. Tex. 2000) (alleged debtor's purported fraudulent transfers, failure to comply with turnover orders and inability to explain loss of significant sums of money constitute "special circumstances" justifying departure from the three-creditor requirement for an involuntary petition);
  • In re Brown, 249 B.R. 525 (Bankr. W.D. Mo. 2000) (the age of a debtor is a relevant circumstance to be considered by a court in making an undue-hardship determination when the student loan lender proposes a repayment schedule that far exceeds the average working life);
  • In re Bond, 249 B.R. 891 (C.D. Ill. 2000) (attorneys' time sheets are evidence of time actually spent but are not evidence of the reasonableness of time expended in connection with request for award of attorneys' fees);
  • Jones v. Chemetron Corp., 212 F.3d 199 (3rd Cir. 2000), (court held that the confirmed chapter 11 plan did not have the effect of barring the future claim of a plaintiff born more than two years after the confirmation where that plan did not make any provision for such future claimants);
  • Haden v. Pelofsky, 212 F.3d 466 (8th Cir. 2000) (chapter 12 plan may provide for direct payments to creditors and thus avoid chapter 12 trustee's fees if all other statutory requirements for confirmation are met, including plan feasibility);
  • In re Personal Communications Network Inc., 249 B.R. 233 (Bankr. E.D.N.Y. 2000) (FCC licenses that had been canceled automatically prior to the licensee's chapter 11 bankruptcy filing were not includable as "property of the estate" and the bankruptcy court was without jurisdiction to review the FCC decision that the licenses had been automatically revoked based on the debtor's non-payment of certain promissory notes);
  • In re Feiler, 218 F.3d 948 (9th Cir. 2000) (a debtor's election to waive carry-back of net operating losses and thereby relinquish the right to a tax refund is a transfer of property that can be avoided as a fraudulent transfer. The court holds that an IRC §172(b)(3) irrevocable election is avoidable by the bankruptcy trustee when the other requirements for fraudulent transfer under 11 U.S.C. §548 have been satisfied);
  • In re Madison, 249 B.R. 751 (Bankr. N.D. Ill. 2000) (secured creditor had standing to file adversary proceeding for willful violation of the automatic stay);
  • In re Weinstein, 251 B.R. 174 (Bankr. 1st Cir. 2000) (post-petition interest on bankruptcy estate's federal income tax liability is entitled to fifth priority under §726(a)(5), not first priority expense under §503(b) or 726(a)(1));
  • Leary v. Warnaco Inc., 251 B.R. 656 (S.D.N.Y. 2000) (§525(b) prohibits discrimination with respect to all aspects of employment, including hiring, firing and material changes in job conditions);
  • In re Pettit, 217 F.3d 1072 (9th Cir. 2000) (contingent interest that the debtors possessed in registry funds that they deposited with the court as judgment security was extinguished when an adverse judgment was entered against them or, in the alternative, was extinguished when the district court signed an order directing the registry funds be paid to opposing parties, which was a mere ministerial act not stayed by the automatic stay);
  • In re Taylor, 252 B.R. 201 (Bankr. N.D. Ala. 2000) (debtor who was rejected for a student loan simply because she had filed bankruptcy before is entitled to $12,000 in emotional distress damage for violation of §525(c)); and
  • In re Quality Botanical Ingredients Inc., 249 B.R. 619 (Bankr. D. N.J. 2000) (a meeting held by the U.S. Trustee in a chapter 11 case for the purpose of investigating claims and forming a committee in the chapter 11 case is a "judicial proceeding" sufficient to invoke the qualified or absolute privilege against an action for libel or slander).
Journal Date: 
Wednesday, November 1, 2000