Benchnotes Oct 1997

Benchnotes Oct 1997

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Employee Insurance Coverage

In In re Wright, District Judge Platt addressed the issue of a debtor who had failed to provide insurance coverage for employees. Prior to the filing of the bankruptcy case, the debtor had withheld insurance premium payments from the employee's salary each month but failed to pay the insurance premiums. The court found that cancellation of the insurance policy deprived the employee and his wife of medical insurance, and that the debtor ignored several suspension notices for late payment, several warnings of cancellation and two temporary suspensions of insurance. Further, the employer never notified the employee of the notices until the insurance was actually canceled. The court found that the failure to pay the insurance premiums was conversion of another's property, which was a willful and malicious injury within the meaning of the discharge exception found in 11 U.S.C. §523(a)(6). Further, the amount of the debt that was not discharged was not the insurance premiums but the medical expenses incurred by the former employee.

"Disinheriting" the Trustee

In In re McGuire, 209 B.R. 580 (Bankr. D. Mass. 1997), the chapter 7 trustee brought an adversary proceeding against the executor of the probate estate of the debtor's mother. In his complaint, the trustee sought a determination that the codicil to the mother's will, which she executed after the commencement of the debtor's bankruptcy case to effectively disinherit the debtor, was void as against federal public policy. In essence, the codicil disinherited the trustee as it provided for debtor's disinheritance if the mother should die within 180 days of the commencement of debtor's bankruptcy case. The district court held that, under governing Massachusetts law, the chapter 7 debtor had no more of an expectancy of inheriting from his mother under the will that had been in effect at the time of his chapter 7 filing. He had no property interest in his mother's estate of the kind that would be included in his bankruptcy case. Therefore, the mother could revoke her will at any time without implicating any provisions of the Bankruptcy Code or any federal policies. Thus, the codicil was found to be valid and the trustee was "disinherited."

Enforcement of an Oral Settlement Agreement

In In re Or-Grow Inc., 209 B.R. 386 (Bankr. E.D. Va. 1997), Bankruptcy Judge Douglas O. Tice Jr. addressed issues relating to enforcement of an oral settlement agreement. Noting that the Court of Appeals in Alexander v. Industries of the Blind Inc., 901 F.2d 40 (4th Cir. 1990), had ruled that such an agreement must be enforced by the trial court, Judge Tice went on to evaluate the standards used in a motion to compel enforcement. The court noted that in the first instance, he was to discern the terms of the agreement by fully considering the testimony of the witnesses and by resolving any conflicting testimony. The party seeking to enforce a term of the oral compromise bears the burden of proving that the settlement included the particular term in question. After the court ascertained the terms of the agreement, there was an attempt to evade the terms of the order by arguing coercement. The court noted that the emotional stress to which the parties testified was "consistent with the stress which, in this court's experience, most persons undergo when strained financial circumstances require them to make distasteful accommodations with their creditors." As a result, Judge Tice found that there was no sufficient evidence of coercion or misconduct and the oral agreement would be enforced as incorporated in a previous order.

The Stay and Discharge

In re Gordon, 209 B.R. 414 (Bankr. N.D. Miss. 1997), is illustrative of some of the issues that debtors encounter in attempting to obtain damages for alleged violations of the automatic stay and/or the bankruptcy discharge. In this case, the debtor's complaint asserted the common law torts of intentional infliction of emotional distress and negligent infliction of emotional distress and slander as well as violation of the automatic stay. The action was originally filed in district court, but, after a determination that the cause of action was essentially under §362(h), the case was transferred to David W. Houston, III, U.S. Bankruptcy Judge. The preliminary question was the plaintiff/debtor's entitlement to a jury trial. The court reviewed a number of decisions relating to the right to a jury trial and determined that the plaintiff's causes of action fit within the "expanded definition of public rights as set forth in the Granfinanciera decision." The next issue was whether the plaintiff could invoke the attorney/client privilege as to certain communications she had with her bankruptcy counsel, who was not the attorney in the adversary proceeding. The issue was whether there had been an implied or anticipatory waiver as a result of the filing of the adversary proceeding seeking substantial actual and punitive damages where the plaintiff had conferred with her bankruptcy attorney after receiving the alleged telephonic threats and correspondence from the defendant. The court held that in order to find an implied waiver privilege by virtue of putting a matter in dispute, certain factors had been suggested as necessary: 1) the party asserting the privilege must do so by some affirmative act, such as filing suit or raising a defense; 2) through the affirmative act, the party asserting the privilege must put the protected information at issue by making it relevant to the case; and 3) application of the privilege would deny the parties seeking that discovery access to information vital to that party's defense. Judge Houston noted that other courts also had looked at issues such as an intention to use the privileged material as a "sword" that would compel full disclosure on the grounds of fairness. Under these circumstances, the court found that the plaintiff could not ask for damages and at the same time assert the attorney/client privilege to defeat the possibility of damage mitigation. Thus, the plaintiff was found to have waived the attorney/client privilege in this limited area.

Disclosure of Financial Records

In Peterson v. Scott, 209 B.R. 451 (N.D. Ill. 1997), District Judge Gottschall addressed the issue of the shifting burdens in a complaint objecting to discharge for failure to preserve adequate financial records. The court noted that the sufficiency of the debtor's financial records, for debtor discharge purposes, is determined on a case-by-case basis in light of the size and complexity of the debtor's business, although complete disclosure is required in all cases in order for the debtor to receive the discharge. A creditor objecting to the debtor's discharge based on the alleged inadequacy of financial records must initially show that the debtor failed to maintain adequate records and this failure makes it impossible to ascertain debtor's financial condition or transactions. Once a party objecting to debtor's discharge has satisfied the initial burden of showing that the records are absolutely inadequate, the burden of proof shifts to the debtor to justify the inadequacy or lack of records. The test for whether the debtor has adequately justified an alleged adequacy or lack of financial records is an objective one, which focuses on whether others in like circumstances ordinarily would keep such financial records. The court has broad discretion determining whether financial records produced by the debtor are sufficient or whether the debtor may be denied discharge based on a failure to keep or preserve adequate financial records. In this case, the court found that when the debtors presented unrebutted testimony, all transactions were recorded in accordance with generally accepted accounting principals, with some supervision by certified public accountants from outside accounting firms and where the trustee did not demonstrate that there was a lack of a paper trail, the trustee was found not to have met his burden and the discharge was granted.


  • In re Stroudsburg Dyeing & Finishing Co., 209 B.R. 648 (Bankr. M.D. Pa. 1997), (while imposing a number of specific but reasonable standards for a chapter 11 debtor's attorney to hurdle, the bankruptcy court holds that the attorney for the chapter 11 debtor could be compensated for services performed after the appointment of a chapter 11 trustee);
  • In re Scroggins, 209 B.R. 727 (Bankr. D. Ariz. 1997), (court holds that the withholding of the high school transcripts of the debtors' minor daughter in an attempt to collect the pre-petition debt incurred by the debtors for their daughter's education costs is a violation of the automatic stay, relying upon In re Dembek, 64 B.R. 745 (Bankr. N.D. Ohio 1986));
  • In re Hardy, 209 B.R. 371 (Bankr. E.D. Va. 1997), (bankruptcy anti-discrimination statute does not prohibit all discrimination based on the debtor's bankruptcy, but only discrimination against debtor/employees);
  • In re Avalon Software Inc., 209 B.R. 517 (Bankr. D. Az. 1997), (excellent discussion of various issues relating to security interests in assets of software business and proceeds from such business; see "Code to Code" on page 8); and
  • In re Ambanc La Mesa Limited Partnership, 115 F.3d 650 (9th Cir. 1997), (single asset apartment case found to violate the absolute priority rule).
Journal Date: 
Wednesday, October 1, 1997