Benchnotes Nov 2002

Benchnotes Nov 2002

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Gap Period Loan Payments

In In re Bankvest Capital Corp., 276 B.R. 12 (Bankr. D. Mass. 2002), the committee sought to recover post-petition loan payments the debtor had made to the lender during the gap period. The lender filed a proof of claim alleging that as of the petition date, the debtor owed the lender in excess of $15 million plus pre-petition interest calculated at default rates and collection costs. In its proof of claim, the lender listed the value of the collateral securing the loan as "undetermined." During the gap period, the lender had received and applied in excess of $2 million when it knew of the bankruptcy. Thereafter, the lender conditionally transferred "all right, title and interest" in its claim. The sale documents indicate that all claims "whether known or unknown" against the borrower also transferred. After confirmation, the committee, the debtor and the lender continued "their battle over the post-petition payments." The lender's claim that the plan did not preserve the avoidance action under §549 was rejected by the court. The court also noted that once the lender sold its claim, it lacked standing to object to the plan based on the treatment of those claims, and therefore it could not have been "lulled into believing that no adversary was to be commenced" or that it was somehow "duped into withdrawing its objection to confirmation." However, the court found that since the lender knew it had a potential claim, while too attenuated to give it standing as a creditor, it was a party in interest and could have objected to the confirmation order. Bankruptcy Judge Joel B. Rosenthal then found that the lender had violated the automatic stay by applying the post-petition payments, and that payments taken in violation of the automatic stay are void. The court also noted that the return of the post-petition payments would also need to be accompanied by interest in order to make the debtor whole. The court noted that once a transfer is void under §549, the party whose transfer is avoided gets a claim under §502(h). The lender asserted that its secured claim would be resurrected. The committee responded that it would be only an unsecured claim, but the court noted that both were incorrect. Having transferred its claim, the lender was held to not have the right to any claim. The court noted that although the lender would have had a claim secured by post-petition payments under §502(h), it sold the right to such a claim when it sold "all claims, whether known or unknown, related to the claim and all proceeds derived from any claims." Thus, the court held that the lender must turn over the post-petition payments plus interest, but has no claim against the estate because such claim was sold.

Amended Admissions Are at Court's Discretion

In In re Blount, 276 B.R. 119 (Bankr. N.D. Miss. 2000), Bankruptcy Judge David W. Houston III held that the court has considerable discretion in deciding whether to allow a party to withdraw or amend deemed admissions. However, discretion must be exercised with a balancing of a two-part test, which requires determination that (1) presentation of merits will be subserved by allowing withdrawal or amendment, and (2) the party that obtained the admissions must not be prejudiced in presentation of its case by the withdrawal.

Amendments to Notice of Removal

In In re Dixon v. First Family Financial Services, 276 B.R. 173 (S.D. Miss. 2002), District Judge Barbour addressed a situation where actions commenced against insurers were removed to federal court based on the debtors' bankruptcy filings. The debtors/ plaintiffs moved to voluntarily dismiss their claims. The district court held that the debtors/plaintiffs had failed to disclose state law causes of action, and thus were equitably and judiciously estopped from pursuing their claims outside bankruptcy. Therefore, the court could exercise core jurisdiction over the proceedings. Preliminarily to that ruling, the court noted that the action had been removed pursuant to 28 U.S.C. §§1331, 1334 and 1452 on the grounds that certain plaintiffs had filed for bankruptcy. The court also noted that a defendant may freely amend the notice of removal within the 30-day period prescribed by §1446(b), but the ability to amend the removal petition after the 30-day time limit extends only to amendments to correct technical details. For example, it is not permissible to remedy a flawed removal petition by adding a new basis for federal jurisdiction. If a defendant seeks to amend a notice of removal after expiration of the 30-day time period, it may do so only to clarify the jurisdictional grounds. In this case, the court held that until a motion to remand is decided, a defendant is free to supplement its notice of removal in order to clarify the jurisdictional grounds for removal. Further, as defendants timely alleged bankruptcy as a jurisdictional ground for removal, supplementing the notice of removal to add the names of other plaintiffs allegedly involved in bankruptcy cases is not a prohibitive addition of new jurisdictional grounds, but rather a permissible clarification of an existing jurisdictional ground for which leave of court is not required.

Attorney Fees Not Authorized Upon Conversion to Ch. 7

In In re Equipment Services Inc., 290 F.3d 739 (4th Cir. 2002), the court addressed an issue of first impression in the Fourth Circuit dealing with the ability of a debtor's counsel to be paid for services rendered after conversion to chapter 7. The debtor's counsel had filed an application seeking approval of attorney's fees in the amount of $2,325.00, $1,000.00 of which, was earned during the chapter 7 case. The U.S. Trustee objected to any award of fees to the extent they included compensation for services rendered after the case was converted to chapter 7, arguing that §330(a) makes no provision for counsel of a chapter 7 debtor to be compensated by the estate. The bankruptcy court agreed with the trustee and held that the debtor's attorney is not authorized to be paid from the bankruptcy estate for services rendered after the case was converted. However, the bankruptcy court held that the pre-petition retainer was property of the bankruptcy estate to the extent that it exceeded the total fees allowed to debtor's counsel for all services, including services rendered after conversion to chapter 7. As such, the chapter 7 fees could be paid from the retainer. The appeals court held that §330(a) does not permit payment to counsel for a chapter 7 debtor from assets of the estate under any circumstance. Recognizing that the circuits are split, the court held that the 1994 version of §330(a) clearly omits the prior authorization of compensation to the debtor's attorney from a chapter 7 estate, agreeing with In re Pro-Snax Distributors Inc., 157 F.3rd 414 (5th Cir. 1998). Further, the court held that the pre-petition retainer, as an asset of the bankruptcy estate, may not be used for payment of fees incurred during the post-conversion chapter 7 period.

Customer Can Recoup "Single Transaction" from Debtor

In General Motors Corp. v. Perry Gas Companies Inc., 279 B.R. 824 (S.D. Tex. 2002), District Judge Hughes addressed an appeal by a customer who asserted a right of recoupment from sums owing to the debtor for natural gas that it had actually provided under a supply agreement against "cover costs," including plant downtime the customer incurred when the debtor informed the customer that they would no longer be delivering gas. The court noted that the claim on account of the gas supplied and customer's claim for costs of cover arose out of the identical gas contract, although the claims arose at different times. The court held that this contract was a single transaction and therefore the customer could recoup the cost of cover from the account debt that it owed to the debtor.


  • In re Enron Corp., 274 B.R. 327 (Bankr. S.D.N.Y. 2002) (in considering a motion for transfer of venue, after the court finds the venue appropriate, a movant must show by preponderance of the evidence that a transfer of venue would be either in the interest of justice or more convenient for the parties);
  • In re Anderson, 275 B.R. 264 (Bankr. W.D. Ky. 2002) ("earmarking" doctrine is not a defense to a preference action where the debtor used one credit card to pay off another credit card, since the debtor decided which creditor would be paid);
  • In re Rousey, 275 B.R. 307 (Bankr. W.D. Ark. 2002) (debtor's right to payment from IRA is not entitled to an exemption under §522(d)(10)(E), since the debtor was entitled to withdraw the proceeds from the IRAs at any time subject to a 10 percent withdrawal penalty);
  • In re Murphy, 282 F.3d 868 (5th Cir. 2002) (proper focus in determining whether a federally guaranteed student loan debt is non-dischargeable is the determination of the purpose of a loan, not the debtor's use of the loan funds);
  • In re Cunningham, 278 B.R. 290 (Bankr. M.D. Ga. 2002) (abstention was appropriate in a no-asset chapter 7 case where the debtor sought a determination by the bankruptcy court of debtor's state tax liability);
  • In re Foreman, 278 B.R. 92 (D. Md. 2002) (even though the bankruptcy court's written order denying the debtor's motion for stay pending appeal had not been entered when the debtor's eviction occurred, the eviction rendered the debtor's appeal moot);
  • In re Coleman Enterprises Inc., 275 B.R. 533 (Bankr. 8th Cir. 2002) (small business election is void ab initio where debtor's aggregate non-contingent liquidated secured and unsecured debts exceeded the statutory $2 million ceiling);
  • In re Envisionet Computer Services Inc., 276 B.R. 1 (D. Maine 2002) (party seeking withdrawal of the reference bears the burden of demonstrating cause for withdrawal);
  • In re Hechinger Inv. Co. of Delaware Inc., 276 B.R. 43 (D. Del. 2002) (§505(a) specifically grants the bankruptcy court authority to determine the amount or legality of any tax, and there is no requirement that the debtor must exhaust available state law revenues as a precondition for obtaining the ruling on such liability including a determination that sales of real property in a plan confirmation were exempt from state transfer and recording taxes);
  • In re Billingsley, 276 B.R. 48 (Bankr. D. N.J. 2002) (where student loan is non-dischargeable, a private educational institution does not violate the automatic stay by withholding the transcript of a student/debtor who has defaulted on the non-dischargeable loan);
  • In re Asousa Partnership, 276 B.R. 55 (Bankr. E.D. Pa. 2002) (counterclaims that could affect allowance or disallowance of proof of claim are part of the claims' allowance process and subject to the equitable jurisdiction of the bankruptcy court);
  • In re Chari, 276 B.R. 206 (Bankr. S.D. Ohio 2002) (allegation that recipients of a transfer was the employee/bookkeeper of the debtor with knowledge of the inner workings of the business, survived a motion to dismiss on the grounds that the recipient was not an insider as defined in §101(31));
  • In re Barclay, 276 B.R. 276 (Bankr. N.D. Ala. 2001) (chapter 13 debtor can modify confirmed plan to provide for surrender of motor vehicle to creditor which surrender would be treated as a one-time, lump-sum payment on the secured claim but surrender would not be in full satisfaction of the secured claim and the deficiency that remained would be paid as if it were a secured claim);
  • In re The Home Restaurants Inc., 285 F.3rd 111 (1st Cir. 2002) (where the court has jurisdiction over the subject matter and the parties, and the complaint states a specific, cognizable claim for relief, and that the defendant had "fair notice" and opportunity to object, the court has discretion to order a default judgment without a hearing of any kind, although the court may choose to hold the hearing to establish the truth of averments in the complaint);
  • In re National/Northway Ltd., 279 B.R. 17 (Bankr. D. Mass.) (the fact that the creditor had security interest in property owned by non-debtors is not a legitimate basis for separate classification);
  • In re Salter, 279 B.R. 278 (9th Cir. Bankr. 2002) (Bankruptcy Appellant Panels are authorized by All Writs Act to issue writs of mandamus);
  • In re Estate of Blackwell ex rel I.G. Services, 279 B.R. 818 (Bankr. W.D. Tex. 2002) (party that demanded jury trial and refused to consent to having it conducted by a bankruptcy court must take additional step of moving for withdrawal of the reference or potentially wave the right to a jury trial); and
  • In re Mitchell, 279 B.R. 839 (9th Cir. Bankr. 2002) (foreclosure sale conducted in violation of the automatic stay was void and could not be validated by post-petition recording of deed, and the statutory exception under §549(c) could not be invoked by one who purchased debtor's property in good faith at foreclosure sale conducted in violation of the automatic stay).
Journal Date: 
Friday, November 1, 2002