Collier Bankruptcy Case Update April-16-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
April 16, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 105(a) Section 105(a) could not be utilized to subordinate creditor’s claim in violation of section 510(c).
Acropolis Enterprises, Inc. v. C.R. Amusements, LLC (In re C.R. Amusements, LLC) (Bankr. D.R.I.) 043001
§ 502(c) Post petition tax claim could not be estimated for purposes of final distribution.
In re Indian Motocycle Co.,Inc. (B.A.P. 1st Cir.) 043010
§ 522(b)(2)(A) Debtor was entitled to claim exemption in IRA.
In re DeCarolis (B.A.P. 1st Cir.) 043014
§ 105(a) Filing of the involuntary chapter 7 case was not in bad faith warranting sanctions.
In re Squillante (Bankr. D. Conn.) 043002
Rule 7056 Issue of whether contracts were sales or leases was question for trial.
In re APB Online, Inc. (Bankr. S.D.N.Y.) 043049
Rule 8009 Appeal was dismissed for lack of prosecution.
Futterman v. Zurich Capital Corp. (In re Futterman) (S.D.N.Y.) 043051
§ 363(b)(1) Sale of real property free and clear of liens was approved.
In re Grand Union Company (Bankr. D.N.J.) 043007
§ 363(m) Appeal of order authorizing debtor’s sale of commercial real property was statutorily moot.
Wal-Mart Real Estate Business Trust v. Bedford Square Associates, LP (In re Wal-Mart Real Estate Bus. Trust) (E.D. Pa.) 043008
§ 544(a)(1) Trustee could not pursue postpetition fraudulent transfers.
Blatstein v. Blatstein (E.D. Pa.) 043023
§ 506 Despite disagreement with district court, bankruptcy court held, on remand, that IRS had an allowed secured claim against debtor’s annuities.
In re McIver (Bankr. D. Md.) 043011
§ 548(a)(1)(B) Court of Appeals ruled that prepayment of mortgage was not an avoidable conveyance.
Shaia v. Meyer (In re Meyer) (4th Cir.) 043025
§ 108(b) Section 108(a) tolling period applied to administrative claim under the FTCA.
Cloud v. United States (S.D. Tex.) 043003
§ 523(a)(2)(A) Fifth Circuit articulates standards for dischargeability of credit card debt.
AT&T Universal Card Servs. v. Mercer (In re Mercer) (5th Cir.) 043017
§ 541(a) Insurance policy was property of the debtor’s estate protected under automatic stay.
Bullock v. Wuester (In re H.L. Stansell, Inc.) (E.D. La.) 043022
28 U.S.C. § 1334(c) District court exercised mandatory abstention from debtor’s suit against tobacco manufacturers.
Thomas v. R. J. Reynolds Tobacco Co. (S.D. Miss.) 043042
§ 1129 Motion for reconsideration of confirmation order denied.
In re Dow Corning Corp. (E.D. Mich.) 043031
Rule 9019 Upon reconsideration, compromise of litigation was approved as a reasonable exercise of the trustee’s judgment.
In re Dalen (Bankr. W.D. Mich.) 043055
§ 548(c) United States waived objections to sale of debtor’s beneficial interest in trust to wife.
United States v. Olsen (N.D. Ill.) 043027
§ 1322(b)(2) Bank was secured by other collateral even though it was without value.
In re Larios (Bankr. N.D. Ill.) 043037
§ 523(a)(8) Absent evidence of error, the student loan obligation was nondischargeable.
McCormick v. Diversified Collection Services, Inc. (In re McCormick) (B.A.P. 8th Cir.) 043019
§ 525(a) Section 525 did not preclude housing authority from terminating chapter 7 debtor’s benefits.
In re Smith (B.A.P. 8th Cir.) 043021
§ 523(a)(4) Loss of stock value was not a defalcation by ERISA fiduciaries.
Blyler v. Hemmeter (In re Hemmeter) (C.D. Cal.) 043018
§ 524(a)(1) Secured creditors subject to lien-stripping had unsecured claims for the full amount of their notes, despite previous chapter 7 discharge.
In re Mohammad (Bankr. C.D. Cal.) 043020
Collier Bankruptcy Case Summaries
Section 105(a) could not be utilized to subordinate creditor’s claim in violation of section 510(c). Bankr. D.R.I. In the context of other litigation, the debtor’s minority shareholders sued the majority shareholder which was also the primary secured creditor. The minority shareholders sought to subordinate the creditor’s claim on the basis that it had breached its fiduciary duties to the minority shareholders. Specifically, the shareholders alleged that the creditor deliberately sought the demise of the debtor amusement park in order to foreclose on the property and redevelop it. The bankruptcy court held that section 105(a) could not be utilized to expand the equitable subordination remedy of section 510(c). Under section 510(c), claims and interests may be subordinated to other claims or interests, but not to equity interests. The more specific provision, section 510(c), could not be expanded by the general power provided for in section 105(a).Acropolis Enterprises, Inc. v. C.R. Amusements, LLC (In re C.R. Amusements, LLC), 2001 Bankr. LEXIS 252, – B.R. – (Bankr. D.R.I. February 20, 2001) (Votolato, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.04, 105.05
Post petition tax claim could not be estimated for purposes of final distribution. B.A.P. 1st Cir.) Three chapter 7 cases were consolidated and a single chapter 7 trustee oversaw their administration. A related entity was placed in receivership through the district court. The trustee and receiver entered into an agreement, approved by the bankruptcy and district courts, for a sale of the assets of the bankruptcy estates. Disagreement arose, however as to the disposition of the sale proceeds, and, again, the trustee and receiver settled. The compromise included division of jurisdiction over issues remaining, including liability for federal taxes of the bankruptcy estates. The bankruptcy court approved a settlement which provided that the district court would be responsible for determining the federal tax liability. Accordingly, the trustee filed tax returns on behalf of the estate and requested a determination under section 505(b) of the Bankruptcy Code. Simultaneously, the receiver filed a motion in the district court requesting a determination that the bankruptcy estates owed no taxes. On December 22, the trustee requested approval of the final account on an emergency basis, asserting that the receiver would incur significant tax liability if the disbursements were not made before the end of the calendar year. The bankruptcy court approved the final account, directed that 1.2 million dollars to be held in escrow to satisfy any claims of the IRS, and suspended the automatic 10-day stay requirement so that the trustee could make immediate distributions. The IRS appealed and the bankruptcy appellate panel reversed, holding that the bankruptcy court erred in applying section 502(c) to estimate the estate’s postpetition tax liability. While there is authority for estimating prepetition tax liability, there is no authority which permits estimation of the estate’s postpetition administrative tax liability. Rather, the more specific provisions of section 505 governed the procedures for determining the estates’ tax liabilities (citing Collier on Bankruptcy, 15th Ed. Revised).In re Indian Motocycle Co.,Inc., 2001 Bankr. LEXIS 234, – B.R. – (B.A.P. 1st Cir.) March 13, 2001) (Vaughn, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.04
Debtor was entitled to claim exemption in IRA. B.A.P. 1st Cir. The chapter 7 debtor claimed his IRA exempt, and no party in interest objected to the claim of exemption. However, the trustee did not conclude the debtor’s section 341(a) meeting, but merely adjourned it to a date not set. It does not appear that, even as of the time the bankruptcy appellate panel opinion was issued, that the meeting had been concluded. When the debtor sought to avoid the bank’s lien on the IRA, the bank asserted that the statutory exemption applied only if the amount placed in the IRA was tax exempt, i.e., only to the extent of $2,000 per year. The bankruptcy court avoided the lien and the bankruptcy appellate panel affirmed, holding that the debtor’s IRA was properly claimed as exempt under state (New Hampshire) law. Under state law, the entire amount of any interest of a qualified retirement plan could properly be claimed exempt. The court declined to determine whether the account itself was properly qualified for tax purposes as that issue had not been raised below.In re DeCarolis, 2001 Bankr. LEXIS 235, – B.R. – (B.A.P. 1st Cir. March 15, 2001) (Hillman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
Filing of the involuntary chapter 7 case was not in bad faith warranting sanctions. Bankr. D. Conn. A bank sought information from the debtor regarding his assets, but received no cooperation. Accordingly, the bank filed an involuntary chapter 7 petition against the debtor. Debtor moved to dismiss and, due to a misunderstanding on the part of bank’s out of state attorneys, the debtor was the only party to present evidence at the hearing on the motion to dismiss. Based upon the debtor’s testimony, the bankruptcy court determined that the debt owed to the bank was subject to a bona fide dispute and dismissed the involuntary petition. The debtor requested sanctions against the bank and its attorneys pursuant to sections 303(i), 105(a) and Rule 9011. The bankruptcy court held that sanctions under section 105(a) were not justified in the absence of bad faith. The bank did not file the petition for purposes of harassment, delay or other improper purpose. The bank made reasonable inquiry into the debtor’s financial affairs, had a colorable argument to support the filing of involuntary petition, had reason to believe that assets were likely to be dissipated, and had no reason to anticipate the debtor’s assertion that the bank’s judgment was invalid.In re Squillante, 2001 Bankr. LEXIS 233, – B.R. – (Bankr. D. Conn. March 1, 2001) (Krechevsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.04
Issue of whether contracts were sales or leases was question for trial. Bankr. S.D.N.Y. The debtor entered into contracts labeled as leases of computer equipment and, after it filed the chapter 11 petition, retained the equipment for two months without payment. Accordingly, the lessor sought the unpaid rent a an administrative expense, filing a motion which the Court treated as a motion for summary judgment. The debtor and the unsecured creditor’s committee objected, asserting that the leases were sales contracts so that no postpetition rent was due. The bankruptcy court held that since U.C.C. 1-201(37) did not govern as a matter of law, the issue of the parties’ intent precluded summary judgment. Looking first to whether any of the presumptions under U.C.C. 1-201(37) applied, the court sought to determined that, from the evidence presented, it could not determine whether the payment at the end of the lease term, although sizeable in sum, was nominal. Looking then to the facts and circumstances, and analyzing the sixteen factors employed by the courts, the court similarly determined that the evidence was inconclusive. Although the factors, including, the facts that the debtor was required to pay all taxes and carried the risk of loss; that the lessor could file a U.C.C. financing statement and recover liquidated damages for default; that the aggregate rent exceeded the purchase price; and that the transaction was structured for the lessor to ensure a specific return, appeared to indicate a sale, the evidence was insufficient to grant summary judgment. Finally, the court rejected the lessor’s attempt to rely upon the later version of section 1-201(37) since the state (Connecticut) legislature and declined to adopt that revision.In re APB Online, Inc., 2001 Bankr. LEXIS 247, – B.R. – (Bankr. S.D.N.Y. March 22, 2001) (Bernstein, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7056
Appeal was dismissed for lack of prosecution. S.D.N.Y. Creditor obtained relief from stay to foreclose upon pieces of artwork held by the debtor. Debtor’s attorney filed a Notice of Appeal but indicated that he would not be the attorney for appellate purposes. The debtor refused to turnover the artwork until conclusion of the appeal. The record on appeal was transmitted and the parties given notice, but the debtor did not file his brief, prompting the creditor to file a motion to dismiss the appeal. The debtor responded by finally obtaining new counsel. Counsel responded to the motion but did not file a brief, indicating that he would await the ruling on the motion to dismiss before filing his brief. The district court held that the debtor’s appeal would be dismissed for failure to file the opening brief. Although he may not have received notice of transmission of the appeal, counsel later not only learned of the time to file the brief, opposing counsel urged him to do so. Despite the pendency of the motion to dismiss, the debtor failed to submit a proposed brief or even show any grounds upon which a meritorious brief would be based. The court concluded, from the record and the debtor’s actions, that the sole reason for failure to file the brief was to delay the final judgment of the court. The creditor was prejudiced by having to pay storage costs of some of the artwork, could not obtain other pieces, and was unable to receive its distribution pursuant to the plan. Accordingly, the appeal was dismissed.Futterman v. Zurich Capital Corp. (In re Futterman), 2001 U.S. Dist. LEXIS 3177, – B.R. – (S.D.N.Y. March 20, 2001) (Batts, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:8009.02
Sale of real property free and clear of liens was approved. Bankr. D.N.J. The debtor sought to sell real property not in the ordinary course of business to the New York University. NYU required that the sale be free and clear of liens and that all creditors and third parties be enjoined from pursing any liens and claims against the property. The bankruptcy court held that there were compelling circumstances which justified selling the property free and clear of liens. The purchase agreement constituted the highest and best bid for the property and the sale presented the best opportunity to realize the highest value and avoid potential decline and evaluation of the property.In re Grand Union Company, 2000 Bankr. LEXIS 1712, – B.R. – (Bankr. D.N.J. November 30, 2000) (Winfield, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.02
Appeal of order authorizing debtor’s sale of commercial real property was statutorily moot. E.D. Pa. The debtor entered postpetition agreements with two separate purchasers, the creditors, for the sale of commercial real property. The agreement with the first creditor was approved by the bankruptcy court. The second creditor appealed the order and, several months later, because the first transaction had not been consummated, the second creditor and the debtor entered an agreement for the sale of the property. Faced with competing agreements, the court ordered an auction. The second creditor made the highest offer and the sale was confirmed by the court. The first creditor appealed the sale order, arguing that the court had no jurisdiction because the appeal by the second creditor of the first order had divested the court of jurisdiction. The debtor and second creditor argued that the first creditor’s appeal was moot under section 363(m) because the property was sold to the second creditor, a good faith purchaser, and because the first creditor failed to obtain a stay of the sale.The district court affirmed, holding that, for the purposes of section 363(m), the prerequisites for statutory mootness were met. Specifically the court found that (1) the second creditor was a good faith purchaser because there was no evidence of collusion; (2) the first creditor failed to obtain a stay of the sale; and (3) the requested relief would upset the validity of the sale to the second creditor.The court also rejected the jurisdiction argument, holding that the bankruptcy court had at least colorable jurisdiction when it entered the sale order.Wal-Mart Real Estate Business Trust v. Bedford Square Associates, LP (In re Wal-Mart Real Estate Bus. Trust), 2001 U.S. Dist. LEXIS 2960, – B.R. – (E.D. Pa. March 20, 2001) (Robreno, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.11
Trustee could not pursue postpetition fraudulent transfers. E.D. Pa. In November 1992, a creditor obtained a confessed judgment in state court against the debtor for breach of a commercial lease. On December 19, 1996 the debtor filed a chapter 7 petition. The creditor commenced adversary proceedings alleging that the debtor fraudulently transferred his shares in certain corporations and a portion of his income to his spouse in order to avoid paying creditors. The chapter 7 trustee intervened in these proceedings. The bankruptcy court held that the debtor did not fraudulently transfer assets to his spouse because there had been no showing of actual intent. On appeal, the district court affirmed the refusal to set aside the debtor’s deposit of assets maintained in his spouse’s name. The Court of Appeals for the Third Circuit affirmed, but reversed the affirmation of the bankruptcy court’s rulings with respect to the income transfers, holding that the money the spouse received was earned income, and not dividends or equity distributions, and that the debtor had transferred this income with an actual intent to defraud his creditors. On remand, the bankruptcy court held that the debtor fraudulently transferred approximately $1.5 million from his estate to his spouse, but also held that the spouse was not an initial transferee and that judgment could enter only against the debtor. This appeal followed. The creditor and trustee argued that the bankruptcy court erred by only including fraudulent transfers made before the petition filing.The district court affirmed in part, holding that, pursuant to section 544(a), the trustee’s strong-arm power only applied to prepetition transfers. The court reasoned that because the trustee had no right of payment under state (Pennsylvania) fraudulent transfer law, the trustee had no claim for the purposes of section 544(a) and could not pursue the debtor’s postpetition transfers in the district court (citing Collier on Bankruptcy 15th Ed. Revised).Blatstein v. Blatstein, 2001 U.S. Dist. LEXIS 2952, – B.R. – (E.D. Pa. March 19, 2001) (Yohn, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Despite disagreement with district court, bankruptcy court held, on remand, that IRS had an allowed secured claim against debtor’s annuities. Bankr. D. Md. The chapter 13 debtor objected to the IRS’s assertion of a secured interest in annuities administered by the Teachers Insurance and Annuity Association/College Retirement Equities Fund. The bankruptcy court concluded that while the IRS’ tax lien could attach to the debtor’s annuity payments, the annuities themselves were not property of the estate. Accordingly, the bankruptcy court concluded that the IRS was not a 'secured' creditor within the meaning of section 506(a) by virtue of its tax lien against the debtor’s interest in the annuities. On appeal, the district court disagreed. The district court held that the restrictions on transfer contained in the annuity contracts were not applicable to the IRS’s federal tax liens, which were created by 26 U.S.C. section 6321. Therefore, the district court held that the restrictions were not 'enforceable under applicable nonbankruptcy law' within the meaning of section 541(c)(2), and the annuities were property of the estate with respect to the IRS. On remand, the bankruptcy court noted its respectful disagreement with the district court judge’s opinion, but adhered to the law of the case and held that the IRS had an allowed secured claim against the annuities to the extent of their value. The bankruptcy court noted recent contrary bankruptcy court decisions, and stated that, if it were writing on a clean slate, it would have adhered to the position that section 506(a) 'means what it says'; i.e., a secured claim arises from a lien upon property upon which the estate has an interest. In this case, the result would have been that the IRS would not have held secured claim against the debtor’s annuities.In re McIver, 2001 Bankr. LEXIS 250, – B.R. – (Bankr. D. Md. February 12, 2001) (Mannes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.02, .03
Court of Appeals ruled that prepayment of mortgage was not an avoidable conveyance. 4th Cir. After the debtor filed a chapter 7 petition, the trustee discovered that the debtor had used a substantial bequest to prepay and satisfy two mortgages secured by a residence owned with his spouse as tenants by the entirety. The debtor argued that the residence was exempt property and the trustee objected to the claim of exemption in an adversary proceeding. The trustee contended that the payment of the mortgage and the transfer of the debtor’s individual nonexempt cash bequest into an exempt interest in residential property constituted a voluntary and fraudulent conveyance under state (Virginia) law. The bankruptcy court held that when the debtor made the prepayments, two discrete transfers occurred simultaneously: a transfer to the mortgage creditors and also to the tenancy by the entirety as a result of the increased equity that occurred when the residence was freed of encumbrances. The court held that the second transfer was not supported by valuable consideration and avoided the prepayment as a voluntary conveyance. On appeal, the district court affirmed. This second appeal followed. The Court of Appeals for the Fourth Circuit vacated and remanded. The transfer of cash bequest to mortgage holders was consideration and deemed valuable in law. The Court of Appeals supported its determination with the finding that there had been a reasonably equivalent value in exchange for the transfer, pursuant to section 548(a)(1)(B). Shaia v. Meyer (In re Meyer), 2001 U.S. App. LEXIS 5109, – F.3d. – (4th Cir. March 28, 2001) (Widener, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.05
Section 108(a) tolling period applied to administrative claim under the FTCA. S.D. Tex. On January 12, 1996, the debtor was acquitted of various conspiracy, fraud and bribery charges based on prosecutorial misconduct. The debtor filed a petition in bankruptcy court in November 1997. In March 1999, the debtor filed an administrative claim based on the finding of prosecutorial misconduct with the Department of Justice. In March 2000, the United States filed a motion to dismiss the debtor’s complaint, alleging a failure to file the suit within the two year statute of limitations provided under the Federal Torts Claims Act. Specifically, the United States contended that the debtor had until approximately January 13, 1998 to file his administrative claim. The debtor argued that the petition filing in November 1997 tolled the statute of limitations for two years. The United States countered that, pursuant to section 108(b), the petition filing only tolled the statute of limitations for 60 days.The district court granted the United States’ motion, holding that section 108(b) applied. The court drew a distinction between section 108(a), which applies to commencement of actions and provides a two year tolling, and section 108(b), which applies to proofs of claim and provides for a 60 day tolling. The court concluded that the filing of the administrative claim was more in the nature of a proof of claim than an action, and that this lesser burden on FTCA claimants rendered application of the shorter tolling period appropriate. Cloud v. United States, 2000 U.S. Dist. LEXIS 20163,126 F. Supp. 2d 1012 (S.D. Tex. December 22, 2000) (Gilmore, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:108.03
Fifth Circuit articulates standards for dischargeability of credit card debt. 5th Cir. A credit card issuer appealed a district court judgment that affirmed a bankruptcy court’s decision that held that a debt from the chapter 7 debtor’s pre-approved credit card was dischargeable. Rehearing, en banc, was granted to determine the standards dischargeability of credit card debt under section 523(a)(2)(A). The United States Court of Appeals for the Fifth Circuit reversed and remanded the district court’s decision. The Court of Appeals held, as a matter of law, that for each credit card use, the debtor represented her intent to pay the loan. The court further held that if the debtor’s representation was knowingly false, she intended to deceive the card issuer; the card issuer actually relied on the debtor’s representation by authorizing the requested loan; and the card issuer’s loss was proximately caused by such reliance. The Court Of Appeals noted that any representations regarding her financial condition made by the debtor prior the issuance of the card were not actionable under section 523(a)(2)(A), and could not support the issuer’s actual reliance on subsequent card-use intent to pay representations. The court also acknowledged that cases such as the one before it that involved credit card use to finance gambling, with the claim of intent to pay with gambling winnings, presented a particularly difficult challenge for determining whether the debtor, at the time of card use, subjectively intended to pay. Finally, the court overruled Davison-Paxon Co. v. Caldwell, 115 F.2d 189 (5th Cir. 1940), cert. denied, 313 U.S. 564 (1941), which held that only debts obtained by 'actual overt false pretense or representation' and not those 'created by obtaining credit through concealment of insolvency and present inability to pay' were excepted from discharge.AT&T Universal Card Servs. v. Mercer (In re Mercer), 2001 U.S. App. LEXIS 4522, – F.3d – (5th Cir. March 23, 2001) (Barksdale, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Insurance policy was property of the debtor’s estate protected under automatic stay. E.D. La. Individual plaintiffs, who were injured when a truck collided with their car, brought a state court proceeding against the truck’s driver, who was driving on behalf of his employer. Also named as defendants in the state court proceeding were the employer and the employer’s insurer. The action proceeded against all three defendants in state (Louisiana) court, and continued against the non-debtor defendants (i.e., the driver and the insurer) after the employer filed a chapter 11 case in Florida. However, the non-debtor defendants were unable to satisfy discovery demands because key information sought was under the exclusive control of the employer/debtor, who was protected by the automatic stay. Eventually, the plaintiffs filed a motion to strike the defendant’s affirmative defenses for failure to comply with discovery. The state court granted the motion (after finding the driver 100 percent at fault), granted partial summary judgment in the plaintiffs’ favor, and scheduled a trial on the issue of damages. The defendants then removed the matter to federal district court in Louisiana, asserting that the litigation was 'related to' a bankruptcy matter. The defendants also asserted that the litigation was subject to the automatic stay. The district court held that the insurance policy was property of the debtor’s estate protected under the automatic stay, and the state court litigation was sufficiently 'related to' the Florida bankruptcy proceedings to sustain removal. The district court reserved judgment on the plaintiffs’ claim that the defendants’ removal was untimely pending the bankruptcy court’s imminent determination as to whether the automatic stay was intended to encompass the non-debtor defendants at the time it was issued.Bullock v. Wuester (In re H.L. Stansell, Inc.), 2001 U.S. Dist. LEXIS 3071, – B.R. – (E.D. La. March 9, 2001) (Berrigan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.10
District court exercised mandatory abstention from debtor’s suit against tobacco manufacturers. S.D. Miss. Prior to filing its petition in October 2000, the debtor became a plaintiff in a state court action filed against tobacco manufacturers. The debtor, an asbestos manufacturer, had long been subject to numerous asbestos injury lawsuits, and concluded that cigarette manufacturers were the true cause of the injuries for which the debtor had been paying settlements. On the day of the petition filing, the tobacco defendants removed the state court action to the district court. In response, the debtor filed a motion for mandatory or discretionary abstention. The defendants asserted that the proceeding was core, that it could have been brought in federal court absent bankruptcy jurisdiction, and that the proceeding could not be timely adjudicated in state court.The district court granted the motion, holding that all elements for mandatory abstention pursuant to section 1334(c)(2) had been met. Specifically the court found that (1) the motion was timely; (2) the suit was based on state law causes of action; and (3) the removed action was merely 'related to' the bankruptcy but did not arise in bankruptcy or under title 11.Thomas v. R. J. Reynolds Tobacco Co., 2001 U.S. Dist. LEXIS 3147, – F.3d. – (S.D. Miss. January 3, 2001) (Wingate, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05
Motion for reconsideration of confirmation order denied. E.D. Mich. Classes of claimants and others moved for reconsideration of a district court order that confirmed the debtors’ amended joint reorganization plan and affirmed, in part, and reversed, in part, bankruptcy court’s opinions related to its confirmation order. The movants’ apparent objections related to the plan’s language providing that a litigation facility would be the named defendant in place of the named debtor or its shareholders in certain litigation. The district court denied the reconsideration motion. The court held that the movants failed to demonstrate a palpable defect by which the court and the parties had been misled, and also failed to show that a different disposition of the case would result if the court were to rule in their favor. The court noted that both the court and the parties were on notice and were aware of express language in various documents under the plan and case management order that stated that the named defendant in certain litigation would be the litigation facility. The court also noted that although the movants had ample opportunity to review the documents and comment on the case management order, no specific arguments were raised before either the bankruptcy or district court regarding the language that the litigation facility would be the named defendant. The court also noted that the plan documents clearly provided that the claimants would have the opportunity to litigate their claims, and that, as the bankruptcy court found and the district court affirmed, the evidence was overwhelming that the funding of the litigation facility was more than sufficient to pay all personal injury claims resolved through litigation in full.In re Dow Corning Corp., 2001 U.S. Dist. LEXIS 3015, – B.R. – (E.D. Mich. February 5, 2001) (Hood, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1129.01
Upon reconsideration, compromise of litigation was approved as a reasonable exercise of the trustee’s judgment. Bankr. W.D. Mich. The debtor and a creditor which held a two million dollar judgment against him entered into an agreement under which, if the debtor made payment of approximately $400,000 by a date certain, the debt would be deemed satisfied. When he realized he would be unable to make the second installment on the required date, the debtor filed a chapter 13 petition, believing that section 108 would operate to extend the time by which payment had to be made. When the case converted to chapter 7, the trustee sought to treat the agreement as an executory contract and also moved for an order extending the time to do so. When the matter was called for hearing, the court had researched the issues and was prepared to rule in favor of the trustee. However, the trustee and the creditor announced that they had reached a compromise of the dispute. At the hearing on the trustee’s motion to approve the settlement, the court refused to approve the settlement because it had already determined, albeit unbeknownst to the parties, that it would rule in favor of the trustee. Upon the creditor’s motion to reconsider, the bankruptcy court held that in denying approval of the settlement, the court inappropriately substituted its own judgment for that of the trustee. Upon reconsideration of the appropriate standards, the settlement was approved. The court first concluded that court approval of a settlement was not a requirement of the Code and that the language of Rule 9019 was ambiguous and merely permissive. Rather than separately analyzing the usual factors, the court created a broader analytical framework, importing the analysis governing approval of consent decrees and the business judgment rule into the bankruptcy context. Applying this framework, the court found that: (1) the trustee complied with her fiduciary duty of obedience to the estate, i.e., none of the provisions were illegal or against public policy, and (2) the trustee complied with her duty of loyalty to the estate, i.e., was disinterested with respect to the subject matter. Upon these determinations, the business judgment rule created the presumption that the trustee also fulfilled her duty of care and, therefore, the burden shifted to the objecting party to demonstrate that the settlement was not reasonable. The court also examined the facts the trustee had available to her when the settlement was reached, and determined that the trustee made a rational decision which would be approved.In re Dalen, 2001 Bankr. LEXIS 255, – B.R. – (Bankr. W.D. Mich. March 12, 2001) (Hughes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9019
United States waived objections to sale of debtor’s beneficial interest in trust to wife. N.D. Ill. The United States brought an action against the chapter 11 debtor and his wife to reduce to judgment outstanding taxes, set aside an allegedly fraudulent conveyance made to the wife, or collect against the wife’s asserted beneficial interest in a trust. The wife asserted that her interest in the trust, which held title to certain realty, was purchased from the debtor’s bankruptcy estate over nine years prior to the pending proceeding. The United States argued that there was no evidence that the purchase took place and that the debtor transferred his interest to the wife as his nominee. The United States also claimed that there was no evidence that it received notice of the sale if the debtor’s interest in the trust or failed to object to the sale. The parties did not dispute that the United States failed to present its fraudulent conveyance argument or its nominee theory to the bankruptcy court or file any objections to the sale of the trust to the debtor’s wife. The district court granted the wife’s motion for summary judgment. The court found that the United States’ argument that there was no evidence that it was a creditor or that it did not receive notice of the sale in the bankruptcy proceedings lacked merit, and that where, as here, a creditor has notice of a sale but fails to object during the bankruptcy proceedings, the creditor’s arguments to invalidate the sale are waived. In response to the United States’ argument that the wife failed to demonstrate that it had notice, the court noted that the United States failed to set forth any evidence, in the form of a sworn affidavit or other document, that it did not have notice of the sale. Moreover, the court concluded that the United States’ nine year delay did not demonstrate the level of diligence and zeal that would warrant strict construction of the rule favoring the bona fide purchaser at a bankruptcy sale.United States v. Olsen, 2001 U.S. Dist. LEXIS 3094, – B.R. – (N.D. Ill. March 19, 2001) (Leinenweber, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.07
Bank was secured by other collateral even though it was without value. Bankr. N.D. Ill. The debtors obtained a loan to fund their new business venture. As security for the loan, the bank obtained a second mortgage on the debtors’ principal residence, the assets of the business, and the right to set off the debtors’ obligations against any accounts they maintained at the bank. The company filed a chapter 7 petition and the bank obtained relief from stay to seize and liquidate the company’s assets. The debtors also filed an individual chapter 13 petition. The bank objected to the chapter 13 plan which bifurcated the bank’s claim into secured and unsecured portions, but presented no evidence as to the existence or disposition of the collateral it may have obtained during the company’s chapter 7 case. The bankruptcy court held that the bank was secured by other collateral, even though the other security was 'valueless.' Examining the bank’s secured status at either the time the loan was made or the date the chapter 13 petition was filed, it appeared that the collateral may still have existed at either point in time. Since the bank did not explain whether the collateral had been liquidated and merely asserted that it was without value, it failed to carry its burden of demonstrating it was entitled to the protection of section 1322(b). Since a security interest still existed in the company’s assets, the debtors’ plan could modify the rights of the bank.In re Larios, 2001 Bankr. LEXIS 239, – B.R. – (Bankr. N.D. Ill. March 23, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.06[a][ii]
Absent evidence of error, the student loan obligation was nondischargeable. B.A.P. 8th Cir. The chapter 7 debtor appealed the bankruptcy court’s a determination that her student loan obligation was nondischargeable and the bankruptcy appellate panel affirmed, holding that the bankruptcy court did not err in determining that the student loan obligation was nondischargeable. Since the debtor failed to provide the appellate court with a transcript, there was no evidence that the bankruptcy court erred in its determination of nondischargeability.McCormick v. Diversified Collection Services, Inc. (In re McCormick), 2001 Bankr. LEXIS 240, – B.R. – (B.A.P. 8th Cir. March 23, 2001) (Kressel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Section 525 did not preclude housing authority from terminating chapter 7 debtor’s benefits. B.A.P. 8th Cir. The debtor lived in subsidized housing and was not obligated to pay rent based upon her statement that she had no income. When the housing authority learned, however, that she had income in a prior year, it issued a notice that it would terminate her benefits due to her misrepresentations. The housing authority offered her redemption: if she paid the rent, they would not terminate her benefits. Despite extensions of time to pay, she did not do so, prompting the housing authority to issue a notice that her benefits would terminate on a date certain. Two days before the termination date, the debtor filed a chapter 7 petition. The housing authority sought and obtained relief from stay to terminate the debtor’s benefits and the debtor appealed, asserting that the termination of her benefits would be a violation of the section 525(a) prohibition of discriminatory treatment. The housing authority later obtained a judgment that the debt was nondischargeable due to the debtor’s fraud. The bankruptcy appellate panel affirmed, holding that termination of the debtor’s subsidized housing benefits was not due solely to her status as a debtor and would not violate section 525(a). The fact that the housing authority gave the debtor the opportunity to reimburse it for the rent did not make her nonpayment the sole reason for the termination of her benefits and, thus, the bankruptcy court did not err in its implicit determination that her fraud was a reason for her termination. Even if the housing authority’s decision arose solely from her failure to pay the debt, it had the right to terminate her benefits since it was merely enforcing its contractual rights. Section 525 did not require the housing authority to reinstate her contract or automatically cure the debtor’s default with regard to the contract. However, the housing authority could not consider her failure to pay the obligation in determining whether to grant future applications for benefits.In re Smith, 2001 Bankr. LEXIS 241, – B.R. – (B.A.P. 8th Cir. March 23, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:525.02
Loss of stock value was not a defalcation by ERISA fiduciaries. C.D. Cal. Fiduciaries of a 401k plan of a publicly traded corporation were authorized to invest primarily in the company’s stock. The plan did so, holding one million shares valued at approximately $24 million in 1993. In 1996, the stock was sold for $1.40 per share. During the company’s chapter 11 case, participants of the plan filed a class action suit against the fiduciaries alleging breaches of their fiduciary duties in connection with the 401k plan. One of the fiduciaries filed a chapter 7 case and the class representatives objected to dischargeability, alleging a defalcation by a fiduciary pursuant to section 523(a)(4). The bankruptcy court granted the debtor’s motion to dismiss and the district court affirmed. The United States Court of Appeals for the Ninth Circuit affirmed, holding that although the debtor was a fiduciary within the meaning of section 523(a)(4), the loss of stock value of the fund he managed was not, as a matter of law, a defalcation. The debtor was a fiduciary by statute because, under federal law, the ERISA statute under which he managed the plan (1) defined the trust res, (2) identified the fund management duties, and (3) imposed certain obligations upon him prior to the alleged wrongdoing. However, defalcation requires misappropriate of funds or the failure to account for funds. In contrast, the decline in value of a stock in which the plans are specifically authorized to invest did not, as a matter of law, constitute a defalcation. Since no amendment would save the complaint from dismissal, the bankruptcy court order granting dismissal without leave to amend was proper.Blyler v. Hemmeter (In re Hemmeter), 2001 U.S. App. LEXIS 4559, – F.3d – (C.D. Cal. March 26, 2001) (Thomas, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Secured creditors subject to lien-stripping had unsecured claims for the full amount of their notes, despite previous chapter 7 discharge. Bankr. C.D. Cal. The debtors received a chapter 7 discharge in October 2000. In November 2000 the debtors filed a chapter 13 petition, scheduling a residence with a claimed fair market value of $145,000 and encumbered by three deeds of trust. The three creditors held secured claims of approximately $149,500, $74,000 and $43,000, respectively. The debtors filed a motion seeking to have the second and third liens stripped. The bankruptcy court ruled that the debtors were entitled to strip those liens, thereby valuing those secured claims as zero for chapter 13 purposes but subject to res judicata limitations, meaning that the reduction of the claim resulting from the previous discharge would have no effect until the chapter 13 plan was confirmed. But the court requested briefings on the question of whether the general unsecured claims of the lien-stripped junior creditors was (1) zero or (2) the entire balance owed to the creditor pursuant to the note. The debtor responded with the contentions that the junior secured creditors’ claims were reduced to zero and that these creditors had no unsecured claim at all because any unsecured claim was discharged in the chapter 7. The court held that the amount of the secured claims remained unaffected by the chapter 7 discharge. The court followed the United States Supreme Court ruling in Dewsnuup v. Timm, 502 U.S. 410, 116 L. Ed. 2d 903, 112 S. Ct. 773 (1992), which held that lien stripping was prohibited in chapter 7 and that liens passed through bankruptcy unaffected. The bankruptcy court thereby concluded that, even after a chapter 7 discharge, a secured debt was still secured by the full amount of the note, and that the junior lienholders had secured claims in the full amount owed pursuant to their notes. The result was that the lienholders had secured claims valued at zero but unsecured claims valued at the full amounts of the notes.In re Mohammad, 2001 Bankr. LEXIS 231, – B.R. – (Bankr. C.D. Cal. March 6, 2001) (March, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02