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Benchnotes Nov 2006

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Interim Trustee Has Standing to Object to Vote on Replacement Trustee

In In re Amherst Technologies LLC, 335 B.R. 502 (Bankr. D. N.H. 2006), an election was held to provide for a permanent chapter 7 trustee. An hour before the scheduled election, the interim trustee filed an objection to a claim, arguing that it should be disallowed in its entirety as the claimant allegedly received a preferential transfer from the debtor. The creditor, through its attorney, cast the deciding vote to retain a different trustee and replace the interim trustee. At the hearing on the disputed election, the parties agreed that the dispositive issue was whether the creditor was eligible to vote pursuant to the terms of §702(a). Section 702(a)(2) disqualifies a creditor who holds "an interest materially adverse" to the interests of other unsecured creditors from voting for a chapter 7 trustee. Bankruptcy Judge J. Michael Deasy held that "the materiality of an alleged preferential transfer for purposes of §702 should be based on the dollar amount of the alleged preference without regard to the creditor's unsecured claim." In this case, the alleged preference could have been as much as $4.2 million in an estate with total claims of approximately $22 million. "Such a preference is material under any definition of the term." The court then noted that the mere existence of an objection is not sufficient to disqualify the creditor's claim from participation in the selection of the permanent chapter 7 trustee. The objection cannot be frivolous and must be supported by more than "mere suspicion." In this case, the objection was based on a detailed oral description of the due diligence and analysis by qualified accountants employed by the interim trustee and not on a hunch that a creditor that engaged in numerous large transactions with the debtors within 90 days before the petition date must have received some preferential transfers. Finally, the court held that an interim trustee "is in an unique position to determine if a particular creditor is not qualified to vote under §702" and has standing to object to a creditor's qualifications to vote for a permanent chapter 7 trustee.

§547(a)(2) Applies to Payments by Check

In In re Pro Page Partners LLC, 151 Fed. Appx. 366 (6th Cir. 2005), a trustee sought to recover payments made to a 30 percent owner of the debtor, and the owner asserted a new value defense related to payments made by check to the debtor and to the Tennessee Department of Revenue. The trustee argued that (a) §547(a)(2) required that "money" be in the form of goods, services or new credit, and (b) a part-owner's contributions to capital "flunk the test of §547(c)(4)(B) on the ground that any such contribution increases the part-owner's percentage share in the enterprise." On appeal, both arguments were rejected, with the court finding that there was no evidence that capital contributions increase the contributor's share of the pie and holding that the phrase "in goods, services or new credit" modified only "money's worth" and not "money."

Requirements for Introduction of Electronic Records

In In re Vee Vinhnee, 336 B.R. 437 (9th Cir. B.A.P. 2005), a creditor objected to the dischargeability of credit card obligations. The creditor unsuccessfully moved for introduction of its computer-generated monthly billing statements. On appeal, the court held that the basic elements in Fed. R. Evid. 803(6) for introduction of business records of a regularly conducted activity applies to records maintained electronically. Such records must be (a) made at or near the time by or from information transmitted by a person with knowledge; (b) made pursuant to a regular practice of the business activity; (c) kept in the course of regularly conducted business activity; and (d) the source, method or circumstances of preparation must not indicate a lack of trustworthiness. However, with electronic records there is the additional focus on the circumstances of the preservation of the record during the time it is in the file, so as to assure that the document being proffered is the same as the document that was originally created. Thus, the testimony must include the procedures under which the file is maintained including custody, access and procedures for assuring that the records in the files are not tampered with. Evidence should include identification of the particular computer equipment and programs used, the policies and procedures for use of the equipment, database and programs, how access to the pertinent database is controlled and how access to the specific program is controlled, how changes in the database are logged or recorded as well as the structure and implementation of backup systems and audit procedures for assuring the continuing integrity of the database.

Agent's Liability Is Nondischargeable

In In re Quinlivan, 434 F.3d 314 (5th Cir. 2005), a law firm objected to the discharge of a claim for legal services. The firm alleged that the president of one of the clients had made numerous representations in order to induce the firm into a pre-petition contingent-fee agreement. The debtor was the vice president of one of the clients. Suit was filed on behalf of the debtor/vice president, the president and two companies. The firm withdrew after testimony at a hearing seeking a TRO led the court to find that the president and vice president had come into court "with unclean hands." Pursuant to the terms of the employment agreement, the law firm asserted that it was entitled to be paid fees on an hourly basis. The bankruptcy court denied the objection to dischargeability of the claim, finding that the debtor made no fraudulent representations to the law firm. On appeal, the law firm did not challenge the finding that the debtor did not commit fraud, but challenged the court's failure to find the debtor responsible for the president's allegedly fraudulent representations. Relying upon In re M.M. Winkler, 239 F.3d 746 (5th Cir. 2001), and In re Luce, 960 F.2d 1277 (5th Cir. 1992), the court held that nondischargeable fraud can be imputed to the debtor if the debtor was liable as an agent under state law.

Miscellaneous

• In re McBrearty, 335 B.R. 513 (Bankr. E.D.N.Y. 2005) (while some administrative claimants may qualify as "parties in interest" for calculating fee to a chapter 7 trustee, payments to trustee's own professionals do not qualify);

In re Arter & Hadden L.L.P., 335 B.R. 666 (Bankr. N.D. Ohio 2005) (protection of estate's interest in proceeds of directors' and officers' liability policy requires that payment of attorney fees be subject to court approval upon application by the officers and directors);

In re J & D Sciences Inc., 335 B.R. 791 (Bankr. M.D. Fla. 2006) (for fraudulent conveyance purposes, as a matter of law, a transfer or assignment of a patent is not perfected until it is recorded with the U.S. Patent & Trademark Office);

In re SubMicron Systems Corp., 432 F.3d 448 (3rd Cir. 2006) (credit bid is not limited to the economic value of underlying collateral).

In re Belton, 337 B.R. 471 (Bankr. W.D.N.Y. 2006) (failure to include costs of collection in proof of claim did not prevent such collection costs from being included as part of the educational loan debt excepted from discharge);

French v. Frey, 337 B.R. 616 (N.D. Ohio 2005) (state law subrogation rights mandated that proceeds from civil suit are not assets of the estate up to the amount of pre-petition medical expenses paid by insurer);

In re Ramba Inc., 437 F.3d 457 (5th Cir. 2006) (where transferred property is fully encumbered, debtor has only bare legal title and thus no interest in the property at time of the transfer and the transfer cannot be avoided);

Official Committee of Unsecured Creditors of PSA Inc. v. Edwards, 437 F.3d 1145 (11th Cir. 2006) (bankruptcy trustee was barred by doctrine of in pari delicto from recovering on RICO claim against entities that allegedly assisted debtor in massive Ponzi scheme);

In re Skinner, 336 B.R. 316 (Bankr. N.D. Ohio 2005) (bankruptcy court does not have authority to permit search of nondebtor's residence for property of the estate);

In re UAL Corp., 336 B.R. 370 (Bankr. N.D. Ill. 2006) (bankruptcy court lacked jurisdiction to determine tax consequences of proposed chapter 11 plan and could not issue declaratory judgment that property to be distributed to employees did not qualify as "wages" subject to federal taxes);

In re Farmland Indus. Inc., 336 B.R. 415 (Bankr. W.D. Mo. 2005) (§505(a) (2)(B) prohibits bankruptcy court from determining any right of the estate to tax refund until 120 days after trustee "properly" requests refund that mandates conformity with the pertinent taxing authority's mechanism for seeking a refund);

DeWitt v. Daley, 336 B.R. 552 (S.D. Fla. 2006) (debtor was not a necessary party and stay did not apply to Fair Labor Standards Act claim against manager, with alleged operational control over the debtor, who was jointly and severally liable with debtor); and

City & County of San Francisco v. PG&E Corp., 433 F.3d 1115 (9th Cir. 2006) (governmental entities' claims against debtor seeking restitution to their parties were "police or regulatory power actions" exempt from removal).

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Wednesday, November 1, 2006

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