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Benchnotes Sep 2004

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Discharge of Student Loan Does Not Implicate 11th Amendment

InTennessee Student Assistant Corporation v. Hood, 124 S.Ct. 1905 (May 17, 2004), the Supreme Court concluded that the exercise by a bankruptcy court of its in rem jurisdiction over a discharge dispute involving a state-held student loan does not infringe upon the state's sovereignty. Further, the court held specifically that the adversary proceeding initiated by the debtor seeking a hardship discharge determination is not a suit against the state and that the application of the Bankruptcy Rules regarding service of summons and complaint on the state does not render the adversary suit one against the state for Eleventh Amendment purposes.

National Interest Rate "Plus" Appropriate for Cramdown Loan

In Till v. SCS Credit Corp., 124 S.Ct. 1951 (May 17, 2004), the Supreme Court concluded that the "formula approach" that requires adjustment of the national prime interest rate based on a risk of non-payment is the appropriate method for determining the adequate rate of interest on a cramdown loan in a chapter 13 plan. The court concluded that the "formula approach" has none of the defects of the "coerced loan," the "presumptive contract rate" or the "cost of funds" approaches, and that all three of these approaches should be rejected "since they are complicated, impose significant evidentiary costs and aim to make each individual creditor whole rather than to insure that a debtor's payments have the required present value." Under the formula approach, the court looks to the national prime rate and then makes an adjustment to that prime rate to account for the greater non-payment risk that bankrupt debtors typically pose.

Bidder Objects to Debtor's Reallocation of Deposits

In re Clark Retail Enterprises Inc., 308 B.R. 869 (Bankr. N.D. Ill. 2004), involved a bidder who successfully bid on some but not all stores sold by the debtor. The bidder objected to the debtor's reallocation of deposits that the bidder had made in connection with bids that were not accepted. The court held that the reallocation was not permitted under the sale procedures and that the debtor had no enforceable claim for the additional sums that the objecting bidder was required to pay to meet its obligations.

Tax Overpayments Are Property of the Estate

In In re Nichols, 309 B.R. 41 (Bankr. D. Ariz. 2004), prior to filing its chapter 7 petition, the debtor made an election to apply any tax overpayments (refunds) to future tax liabilities. These "future tax liabilities" would be post-petition liabilities. The court held that the election was irrevocable, but that by making these elections, the debtor taxpayers received credits that either would reduce their future tax liabilities or, if there were no future tax liabilities, would result in refunds. The court held that these credits were property of the estate and that the value of those credits had to be turned over to the trustee. The court declined to follow United States v. Pritchard (In re Block), 141 B.R. 609 (N.D. Tex. 1992), and Grant v. United States (In re Simmons), 124 B.R. 606 (Bankr. M.D. Fla. 1991), and followed the "binding precedent for this court" found in United States v. Sims (In re Feiler), 218 F.3d 948 (9th Cir. 2000).

Employer Stock Option Plan Proceeds Property of the Estate

In In re Carlton, 309 B.R. 67 (Bankr. S.D. Fla. 2004), the chapter 7 debtor was a participant in his employer company's stock option plan. In addition to salary, the debtor also received stock options pursuant to the plan. The plan provided that "the grant of options to any particular employee under the plan is neither in lieu of salary nor based on an employee's performance or management control in the company. Rather, the plan is offered by the company as an incentive in addition to salary to attract and retain employees by encouraging stock ownership in the company." At the date of the filing of the bankruptcy case, the debtor owned rights to purchase 10,000 shares of common stock under the stock option plan. Of these shares, 2,600 had become exercisable, but the debtor had neither exercised the accrued options nor purchased any shares. The court observed that the case law on the treatment of stock options in bankruptcy is limited. However, the court cited the following cases that hold that the debtor's employee stock options awarded pre-petition constitute assets that become property of the estate upon the filing of the case, even if the debtor only becomes entitled to actually exercise the options post-petition. Allen v. Levey (In re Allen), 226 B.R. 857 (Bankr. N.D. Ill. 1998); In re Lawton, 261 B.R. 774 (Bankr. M.D. Fla. 2001); and In re Dibiase, 270 B.R. 673 (Bankr. W.D. Tex. 2001). The court noted that it found no contrary cases. Based on these cases, the court held that stock options that had accrued and were exercisable by the debtor pre-petition belonged, in their entirety, to the estate, and that the entire value of any proceeds realized post-petition by virtue of the debtor's exercise of options and sale of stock had to be turned over to the trustee by the debtors. Further, the court held that it did not have to attempt to allocate what portion of the options was attributable to the debtor's pre-petition work and what was attributable to the debtor's post-petition work.

Foreclosed Property Subject to Automatic Stay

In In re Cueva, 371 F.3d 232 (5th Cir. 2004), there was a foreclosure sale of property owned by the debtor that was part of the debtor's bankruptcy case. Therefore, the property was subject to the automatic stay pursuant to 11 U.S.C. §362. The purchaser purchased a one-half interest in the property at a foreclosure sale and subsequently purchased the other one-half interest. The property in question was subject to a lien, and the debtor defaulted on his note on the property. The lienholder obtained an order for foreclosure. The debtor then filed for bankruptcy protecton. The debtor's attorney faxed notice of the bankruptcy filing to the lienholders some three to four hours prior to the foreclosure. Thus, the lienholders were charged with notice of the filing of the bankruptcy some three to four hours prior to the foreclosure. Lienholders' attorneys did not notify the substitute trustee of the fact of the bankruptcy filing, and the foreclosure sale went forward as noticed. The purchaser and another party, purchaser two, agreed that they each would purchase an undivided one-half interest in the property. They were the successful bidders at the foreclosure sale. Thereafter, the purchaser learned of the debtor's pre-sale bankruptcy filing, but purchased purchaser two's one-half interest after having learned of it. The purchaser then brought an adversary proceeding in bankruptcy court seeking a declaration from the court and relief from the automatic stay to the effect that his and purchaser two's post-bankruptcy purchase of the real property at the foreclosure sale was valid and not voided by the automatic stay. The Fifth Circuit holds that actions to enforce any lien against property of the estate are invalid whether or not a creditor acts with knowledge of the stay. 11 U.S.C. §362(a)(4) and In re Calder, 907 F.2d 953, 956 (10th Cir. 1990), cited with approval in In re Jones, 63 F.3d 411, 412 n. 3 (5th Cir. 1995). The court then observed that pursuant to §362(d), the bankruptcy courts, under certain conditions, may grant relief from stay by "terminating, annulling, modifying or conditioning such stay." 11 U.S.C. §362(d). The Fifth Circuit pointed out that §362 provides no exception for bona fide purchasers. Because §362 does not prohibit a debtor from disposing of property belonging to the bankruptcy estate, §549 provides additional protection to the estate for post-petition transactions neither subject to §362(a) nor authorized by the court." Cueva at 236. Further, §549(c) gives to a "bona fide purchaser" a defense to a trustee's avoidance powers under §549(a). After some discussion, the court holds that §549(c) "is not an exception to the automatic stay imposed by §362...." Cueva at 238. The court discusses with approval In re Pierce, 272 B.R. 198 (Bankr. S.D. Tex. 2001), and an unpublished order of the district court affirming the bankruptcy court's decision that a foreclosure in violation of the automatic stay is invalid unless the stay is retroactively annulled, and that §549 is inapplicable to acts taken in violation of the stay.


  • In re Twin City Power Equipment Inc., 308 B.R. 898 (Bankr. C.D. Ill. 2004) (debtor's "dealer agreement" with the manufacturer also included the manufacturer's agreement to finance the debtor's acquisition of sufficient inventory of the manufacturer's products so that the debtor would be able to operate as an authorized dealer. This constituted a "financial accommodation" agreement that was integral to the dealer agreement. Thus, the agreement was not assumable by the debtor in that it was in the nature of a "financial accommodation agreement." See 11 U.S.C. §365(c)(2));
  • In re Artra Group Inc., 308 B.R. 858 (Bankr. N.D. Ill. 2003) (litigation had been brought pre-petition between the debtor and its insurers. Post-petition, the debtor sought to employ an expert witness with regard to such litigation. The litigation concerned the debtor's entitlement to certain insurance proceeds. The court found that the "expert witness" was not a person who appeared to have any discretion or autonomy with respect to the administration of the debtor's estate. The court found that the proposed expert witness was not a "professional person" whose employment had to be approved by the court);
  • In re Gutierrez, 309 B.R. 488 (Bankr. W.D. Tex. 2004) (the court holds that an attorney with a claim for unpaid attorney's fees allowed by court order in a prior chapter 13 case was not barred from representing the debtor in the new chapter 13 case. The court overruled the objection to the attorney's claim in the new chapter 13 case);
  • In re Porrazzo, 307 B.R. 345 (Bankr. D. Conn. 2004) (suggestion that a minimal standard of living necessitates that a debtor rely solely on reasonably convenient public transportation "is a non sequitur");
  • In re Braught, 307 B.R. 399 (Bankr. S.D.N.Y. 2004) (failure to take affirmative action to vacate judgment signed by state court judge post-petition was a "willful" violation of the stay creating liability for actual damages and attorney's fees);
  • In re Valley Historic Ltd. Partnership, 307 B.R. 508 (Bankr. E.D. Va. 2003) (discussion of allowance of "reasonable" attorney's fees claimed by indenture trustee);
  • In re Takeout Taxi Holdings Inc., 307 B.R. 525 (Bankr. E.D. Va. 2004) (mailing of notice of hearing on motion seeking approval of sale of assets does not cure failure to serve motion itself);
  • In re Adams, 307 B.R. 549 (Bankr. N.D. Tex. 2004) (addresses issues related to "cure" of defects of requirements for home-equity loan);
  • In re Mulder, 307 B.R. 637 (Bankr. N.D. Ill. 2004) (complaint that asserted that the debtor had "willfully and maliciously" breached contract was sufficient to state claim to except resulting debt from discharge);
  • In re Joelson, 307 B.R. 689 (Bankr. 10th Cir. 2004) (oral misrepresentations as to ability to generate income are statements of financial condition, but misrepresentations concerning ownership of assets and identity of debtor were not statements of financial condition that had to be in writing);
  • In re Fonke, 310 B.R. 809 (Bankr. S.D. Tex. 2004) (a chapter 13 debtor does not have an absolute right of dismissal where there is pending before the court a motion to convert the case or where there are allegations of fraud or bad faith); and
  • Shared Network Users Group v. Worldcom Tech., 309 B.R. 446 (Bankr. E.D. Pa. 2004) (28 U.S.C. §1452 governs removal of actions once a bankruptcy petition is filed. The separate time limits contained in §1452 govern; the 30-day rule under 28 U.S.C. §1446 does not govern. A counterclaim by the debtor may be included in the removal where the notice of removal includes the entire state court action to be removed).
Journal Date: 
Wednesday, September 1, 2004

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