Collier Bankruptcy Case Update April-19-01

Collier Bankruptcy Case Update April-19-01

 

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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.

March 19, 2001

CASES IN THIS ISSUE
(scroll down to read the full summary)

  • 1st Cir.

    § 362(d) Motion for relief based upon change in law was denied.
    In re Crowley
    (Bankr. D. Vt.)

    § 727 Proposed settlement of discharge action was rejected.
    Wolinsky v. Maynard (In re Maynard)
    (Bankr. D. Vt.)


    2d Cir.

    § 304(b) Foreign debtor who sought bankruptcy court’s injunction against arbitration outside Bermuda could not then seek discovery order from the court.
    In re Petition of the Bd. Of Dirs. of Hopewell Int’l Ins.
    (Bankr. S.D.N.Y.)

    § 362(a) Debtors’ motion to stay proceedings denied where potential adverse judgment against individual defendants would not be against debtors.
    Fonda Group, Inc. v. Lewison
    (D. Vt.)


    3d Cir.

    § 502(b) Claim was disallowed in full.
    In re United Cos. Fin. Corp.
    (Bankr. D. Del.)

    § 502(e)(1) Debtor’s objection to claim was sustained.
    In re Pinnacle Brands, Inc.
    (Bankr. D. Del.)

    § 503(b)(4) Committee member’s application for legal fees was denied.
    In re Worldwide Direct, Inc.
    (Bankr. D. Del.)

    § 507(a)(8) Postpetition tax claim was not provided for in plan.
    In re Wilkoff
    (Bankr. E.D. Pa.)

    § 510(b) Objection to claim was sustained.
    In re International Wireless Communs. Holdings
    (Bankr. D. Del.)


    4th Cir.

    § 507(a)(8) Chapter 7 debtor’s corporate tax obligations, incurred during the pendency of her chapter 13 case, were entitled to priority status.
    In re Rainey
    (Bankr. W.D. Va.)

    28 U.S.C. § 157(d) Withdrawal of reference would delay conclusion of litigation.
    Keystone Oncology, LLC v. Cohen (In re Equimed, Inc.)
    (D. Md.)


    5th Cir.

    § 101(5) Preconfirmation payment of claim was allowed as necessary.
    In re Equalnet Communs. Corp.
    (Bankr. S.D. Tex.)

    § 541(a)(1) Debtor’s right to distributions was property and, therefore, property of the estate.
    Johnson v. Cottonport Bank
    (W.D. La.)


    6th Cir.

    § 502(b) Unsecured student loan creditors claims for collection costs were allowed.
    Kentucky Higher Education Assistance Authority v. Fears (In re Fears)
    (W.D. Ky.)

    § 510(c) Confirmation of plan precluded equitable subordination claim.
    First Bank, Upper Michigan v. North Country Bank & Trust (In re Superior Used Cars, Inc.)
    (Bankr. W.D. Mich.)


    7th Cir.

    § 101(12) Unpaid insurance premiums were 'debt.'
    Green v. LifeUSA Ins. Co.
    (N.D. Ill.)


    8th Cir.

    § 502(d) Competing creditors could not gain priority by seeking avoidance of other liens pursuant to section 502(d).
    Rice v. United States of America (In re Odom Antennas, Inc.)
    (Bankr. W.D. Ark.)

    § 522(f) Lien obtained as a result of foreclosure action was an avoidable, judicial lien.
    Taylor v. Taylor (In re Taylor)
    (Bankr. W.D. Ark.)

    Rule 7055 Debtor who failed to respond to adversary proceeding demonstrated excusable neglect.
    Lovell v. McArthur (In re McArthur)
    (Bankr. W.D. Ark.)


    9th Cir.

    § 541(c) Postpetition use of property did not bring funds into estate.
    Cisneros v. Kim (In re Kim)
    (B.A.P. 9th Cir.)


    10th Cir.

    § 362(a)(1) Bankruptcy court’s jurisdiction to enter stay extended to litigation against debtor’s employee.
    Turman v. Ameritruck Refrigerated Transport, Inc.
    (D. Kan.)

    § 362(a)(3) Cancellation of FCC license was not stayed by the filing of the chapter 11 case.
    United States v. Kansas Personal Communications Services, Ltd. (In re)
    (D. Kan.)

    § 523(a)(5) $75,000 marital obligation was in the nature of support.
    Polishuk v. Polishuk
    (N.D. Okla.)


    11th Cir.

    § 303(i) Denial of attorney’s fees was affirmed on appeal.
    In re Scrap Metal Buyers of Tampa, Inc.
    (M.D. Fla.)

    § 522(f) Lien avoidance proceeding was remanded to district court.
    Weed v. Washington (In re Washington)
    (M.D. Fla.)

    § 523(a)(2)(A) Credit card purchases for luxury items immediately preceding petition filing supported finding of actual fraud.
    American Express Travel Related Services Company, Inc. v. Prieto (In re Prieto)
    (Bankr. S.D. Fla.)

    § 707(a) Cause existed for dismissal of chapter 7 filed by debtor who had been found in contempt of district court disgorgement orders.
    In re Bilzerian
    (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st Cir.

Motion for relief based upon change in law was denied. Bankr. D. Vt. The creditors holding a first mortgage on the chapter 13 debtor’s commercial property filed a motion for relief from the automatic stay. The debtor’s confirmed plan provided for retention of the property and payment to the creditors. The creditors had not previously sought relief from the stay or appealed the confirmation order. The creditors alleged that an intervening change in the applicable law entitled them to postconfirmation relief from the stay. At the time the confirmation order was entered, the law provided that a debtor’s equity of redemption was tolled indefinitely by the stay upon the filing of a petition, and the stay effectively mooted the 60 day extension period under section 108(b). Subsequently, the district court determined in an unrelated case that the stay was superceded by section 108(b), thereby requiring debtors to exercise their right of redemption within 60 days from the date of filing a petition or lose forever all interest in the subject property. The bankruptcy court denied the motion for relief, holding thatthe postconfirmation change in the law regarding relief from the automatic stay did not ipso facto require modification of the previously unchallenged chapter 13 plan. The creditors failed to present other evidence sufficient to establish the criteria for relief from the automatic stay.In re Crowley, 2000 Bankr. LEXIS 1680, – B.R. – (Bankr. D. Vt. December 8, 2000) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07

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Proposed settlement of discharge action was rejected. Bankr. D. Vt. The chapter 7 trustee filed a motion to approve a settlement between himself and the debtors. The trustee had filed a complaint objecting to the debtors’ discharge, alleging that the debtors knowingly made false statements in their schedules. The trustee requested that the bankruptcy court approve a settlement whereby the debtors would pay a sum to the trustee for distribution to creditors in exchange for the withdrawal of his objection to their discharge. The bankruptcy court denied the motion to approve the settlement, holding that neither the Code nor the Rules authorized the trustee to seek funds from the debtors in exchange for giving up an objection to discharge founded upon the debtors’ misconduct. The court noted that if the debtors were entitled to a discharge, any demand for payment would have been improper and the complaint should have been dismissed; if the debtors were not entitled to a discharge, the objection to discharge action should have proceeded.Wolinsky v. Maynard (In re Maynard), 2001 Bankr. LEXIS 140, – B.R. – (Bankr. D. Vt. February 9, 2001) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727

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2nd Cir.

Foreign debtor who sought bankruptcy court’s injunction against arbitration outside Bermuda could not then seek discovery order from the court. Bankr. S.D.N.Y. The debtor’s representatives, acting as scheme administrators of a foreign debtor, commenced a proceeding under section 304 seeking an injunction preventing various creditors from commencing any arbitration or judicial proceedings or enforcing any arbital awards against the debtor not permitted by its foreign (Bermuda) scheme of arrangement. The creditors objected, arguing that the enforcement of the foreign scheme would require them to arbitrate its claims in Bermuda under Bermuda law rather than in the United States. The bankruptcy court sustained the section 304 petition, and the creditors appealed. Meanwhile, the debtor’s representatives filed a motion seeking the production of documents and witnesses by one of the creditors in connection with the arbitration pending in Bermuda. The creditors objected, arguing that the pendency of the appeal divested the court of jurisdiction and that the requested disclosure was outside the scope of section 304 because its purpose was to provide discovery in a discrete action. The creditors also argued that the debtor’s representatives should not be able to access broad discovery procedures in the United States since the very purpose of the section 304 petition was to enjoin proceedings outside Bermuda. The court denied the discovery motion, based on several factors: (1) a weak nexus between the requested discovery and core jurisdiction pursuant to section 304(b); (2) respect for the foreign proceeding; (3) the policy against court intervention in arbitration proceedings; (4) the unfairness of permitting the debtor to change its position and access rights not afforded to the creditors; and, (5) the existence of other forms of recourse. In re Petition of the Bd. Of Dirs. of Hopewell Int’l Ins., 2001 Bankr. LEXIS 114, – B.R. – (Bankr. S.D.N.Y. February 9, 2001) (Gropper, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:304.07

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Debtors’ motion to stay proceedings denied where potential adverse judgment against individual defendants would not be against debtors. D. Vt. The plaintiff brought a prepetition district court action against two [no chapter] debtor entities on a note, security agreement and guaranty issued in connection with the debtors’ purchase of paper can manufacturing equipment from the plaintiff. The district court entered judgment in favor of the plaintiff, but several issues were raised post-judgment. Thereafter, the debtors filed their bankruptcy case and moved for a stay of the district court proceedings under section 362(a). The plaintiff moved to substitute certain individual defendants in lieu of the defendant entities. The district court denied the debtors’ motion for a stay under section 362(a) because there was no assertion that a judgment against the individual defendants would, in effect, be a judgment against the debtors. The court also concluded, however, that it would be unfair to add the individuals as defendants to this action since judgment had already been entered and they would be liable for the full amount of the judgment without ever having had the opportunity to defend against the charges. Therefore, the court vacated its judgment, and ordered the plaintiff to commence a new proceeding, substituting the individuals as defendants. After the filing of the individuals’ answers, the parties were directed to proceed with discovery, and ultimately, if necessary, a new trial.Fonda Group, Inc. v. Lewison, 2001 U.S. Dist. LEXIS 1682, – B.R. – (D. Vt. February 1, 2001) (Sessions, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01

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3rd Cir.

Claim was disallowed in full. Bankr. D. Del. The chapter 11 affiliated debtors objected to the proof of claim filed by a former borrower, asserting that no amount was due on the claim. The claimant had borrowed money from one of the debtors and provided the latter with a mortgage on her home. After the claimant defaulted on the mortgage, a foreclosure sale and eviction was completed. The claimant asserted that the loan had been reduced pursuant to her own chapter 13 filings, the debtors had acted in bad faith by foreclosing and evicting her, and the debtors failed to credit all payments made against the loan. The bankruptcy court disallowed the claim, holding that the claimant failed to present any legal or factual basis to sustain her claim.The claimant’s own chapter 13 filings did not affect the total amount due the debtors and the debtors did not act in bad faith in rejecting her offers and selling the property to a third party.In re United Cos. Fin. Corp., 2001 Bankr. LEXIS 147, – B.R. – (Bankr. D. Del. February 1, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03

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Debtor’s objection to claim was sustained. Bankr. D. Del. The chapter 11 debtor purchased from one of the claimant’s subsidiaries the rights under a license agreement to manufacture and sell baseball cards. The license agreement required the claimant to guarantee all payments due by the licensee. Under the asset purchase agreement, the debtor agreed to indemnify the claimant if the claimant were required to pay on the license guarantee. The claimant subsequently sold its interest in the subsidiary to a third party and, as part of its sale, agreed to indemnify the purchaser for claims which could arise in connection with the sale of the license agreement. After the debtor became delinquent in its payment obligations under the license agreement, the licensor sued the third party purchaser for the balance due. The claimant asserted an administrative claim, arguing that if the licensor’s lawsuit was successful, it would be obligated to reimburse the purchaser under its indemnification agreement. The bankruptcy court disallowed the claim under section 502(e)(1)(B), holding that the claim was contingent, the claim was for reimbursement or contribution and the claimant was co-liable with the debtor with respect to the claim. The court noted that if the licensor’s lawsuit against the purchaser were successful and the claimant satisfied the judgment, the claim would no longer be contingent and the claimant could file a motion to reconsider its claim.In re Pinnacle Brands, Inc., 2001 Bankr. LEXIS 146, – B.R. – (Bankr. D. Del. February 6, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.06[2]

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Committee member’s application for legal fees was denied. Bankr. D. Del. A member of the chapter 11 official unsecured creditors’ committee filed an application for reimbursement and payment of its attorney’s fees and disbursement of expenses incurred as a member of the committee. The member chose to be represented on the committee by its outside counsel and asserted that the services performed by its counsel were activities properly performed by committees and its members. The affiliated debtors and the United States Trustee objected to the application. The bankruptcy court denied the application, holding that the committee member failed to establish that the services rendered by its counsel were necessary for it to perform its duties as a committee member. The court noted that fees and expenses incurred prior to formation of the committee were not reimbursable under section 503(b)(4). Additionally counsel’s attendance at committee meetings and the review of pleadings was unnecessary duplication of effort.In re Worldwide Direct, Inc., 2001 Bankr. LEXIS 152, – B.R. – (Bankr. D. Del. February 14, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.10, .11

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Postpetition tax claim was not provided for in plan. Bankr. E.D. Pa. The IRS moved for relief from the automatic stay to collect postpetition income and selfemployment taxes from the chapter 13 debtors. The debtors, who filed for bankruptcy in November, objected to the motion, asserting that at least 75 percent of the taxes constituted prepetition rather than postpetition taxes. The debtors claimed the IRS was bound by the terms of the plan which provided for full payment of its claim because it did not object to confirmation of the plan. The IRS argued that the plan did not preclude it from collecting on the debtors’ debt under non- bankruptcy laws because its claim was not entitled to priority under section 507(a)(8)(A). The bankruptcy court granted the motion for relief in part, holding that because the debtors’ federal income taxes did not become payable until the end of the tax year, which was after the debtors filed their petition, section 507(a)(8)(A)(i) was not applicable to the IRS’s claim. The automatic stay did not bar the IRS from commencing an action against the debtors to recover its claim (citing Collier on Bankruptcy, 15th Ed. Revised).In re Wilkoff, 2001 Bankr. LEXIS 124, – B.R. – (Bankr. E.D. Pa. January 24, 2001) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10[2]

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Objection to claim was sustained. Bankr. D. Del. The reorganized debtors, holding companies which owned interests in operating companies, sought to subordinate a claim under section 510(b). One of the related debtors entered into a share purchase agreement prepetition with the claimant, whereby the claimant transferred shares of a company to the debtor in exchange for funds and shares of one of the debtors. Pursuant to a supplement to the agreement, the debtor was to consummate an initial public offering of its stock within 18 months or issue additional shares to the claimant. Prior to the IPO deadline, the debtors instead filed their chapter 11 petitions and the claimant filed a claim for the amount it was entitled to receive under the share purchase agreement supplement. The bankruptcy court sustained the debtors’ objection, holding that because the claim was one for damages arising from the purchase of stock of the debtor, it was subordinated to the claims of creditors pursuant to section 510(b). The court rejected the claimant’s arguments that its claim did not arise from the purchase or sale of the debtor’s stock or that subordination was inapplicable to its postpetition breach of contract claim.In re International Wireless Communs. Holdings, 2001 Bankr. LEXIS 145, – B.R. – (Bankr. D. Del. January 23, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.04

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4th Cir.

Chapter 7 debtor’s corporate tax obligations, incurred during the pendency of her chapter 13 case, were entitled to priority status. Bankr. W.D. Va. Chapter 7 debtor was personally liable under state (Virginia) law for unpaid state sales tax incurred by her corporation during the pendency of her chapter 13 case and after conversion of the case to chapter 7. The state tax commissioner filed proofs of claim in the chapter 7 proceeding, claiming the debts as administrative expenses and asserting a belief that they were not entitled to the eighth priority under section 507. The chapter 7 trustee objected to the proofs of claim on the grounds that, although entitled to priority under section 507, the claims were not administrative expenses. The bankruptcy court held that the tax obligations accruing during the chapter 13 case were entitled to priority status because they were required to be treated as prepetition claims. Under section 348(d), the obligations incurred during the chapter 13 case were deemed prepetition claims upon conversion. As such they were entitled to the eighth priority granted by section 507. The court also noted that section 1305 did not apply because the commissioner did not file a proof of claim until after the case was converted to chapter 7 (citing Collier on Bankruptcy, 15th Ed. Revised).In re Rainey, 2001 Bankr. LEXIS 105, – B.R. – (Bankr. W.D. Va. January 30, 2001) (Stone, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10[4]

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Withdrawal of reference would delay conclusion of litigation. D. Md. Chapter 7 trustee initiated litigation against 89 defendants and the district court withdrew reference of the proceeding. Subsequently, a sublessee of the debtor filed a proceeding before the bankruptcy court requesting a determination that its sublease was valid. The trustee sought withdrawal of the reference in order to have the two proceedings consolidated for trial, asserting that common legal and factual existed in the two proceedings. The district court held that neither mandatory nor permissive withdrawal of reference was warranted. Mandatory withdrawal of reference was not implicated because the sublessee’s action was a core matter traditionally within the province of the bankruptcy court. Permissive withdrawal was not warranted because discovery was well under way in the bankruptcy court, the matter was scheduled for a simple half-day trial to be held within a few months, and the narrow issues pleaded in the complaint were not sufficiently related to justify embroiling the sublessee in the complex litigation pending in the district court. In effect, withdrawal would not promote judicial economy.Keystone Oncology, LLC v. Cohen (In re Equimed, Inc.), 2001 U.S. Dist. LEXIS 1660, – B.R. – (D. Md. February 12, 2001) (Harvey, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04[1], [2]

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5th Cir.

Preconfirmation payment of claim was allowed as necessary. Bankr. S.D. Tex. The related chapter 11 debtors in possession moved for authority to pay an independent contractor prepetition compensation and expenses. The debtors requested payment of the claim prior to confirmation of the plan. The bankruptcy court granted the request, holding that payment of the contractor’s prepetition claim was necessary to preserve the debtors’ ongoing business operations. The contract employee was necessary to the estate and her claim tantamount to a priority wage claim. The court noted that the payment of prepetition claims prior to confirmation of the plan was generally prohibited. However impact of the failure to allow payment would have been devastating to the proposed reorganization.In re Equalnet Communs. Corp., 2001 Bankr. LEXIS 125, – B.R. – (Bankr. S.D. Tex. February 7, 2001) (Greendyke, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.05

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Debtor’s right to distributions was property and, therefore, property of the estate. W.D. La. The chapter 7 debtor, as a member of an Indian tribe, was entitled to an established monthly payment from the profits of a gambling casino operated by the tribe. At some point in the past, the debtor had granted a security interest in the income stream to the bank. When the debtor filed a chapter 7 petition, the bank moved for relief from stay in order to continue collecting the obligation from the tribal distributions. The debtor objected the motion, asserting that the funds were not property and that section 552 voided the banks claim to the payments. The bankruptcy court granted relief from the stay and the district court affirmed, holding that the chapter 7 debtor’s rights in the income stream was property and, therefore, property of the estate. Under state (Louisiana) law the debtor’s right to intangible property, including an interest in future income, is a property right. The fact that the payments would terminate upon his death and could not be devised did not obviate his rights in the property.Johnson v. Cottonport Bank, 2000 U.S. Dist. LEXIS 19850, – B.R. – (W.D. La. December 28, 2000) (Little, Jr., C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.04

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6th Cir.

Unsecured student loan creditors claims for collection costs were allowed. W.D. Ky. Chapter 13 debtors’ unsecured student loan creditors filed proofs of claim which included not only the principal loan obligation, but also 'collection costs' calculated as a percentage of the principal and interest due on the loans. The debtors objected to the inclusion of the collection costs in the claim and the bankruptcy court sustained that objection. The district court reversed, holding that the unsecured claims for collection costs were required to be allowed. Under section 101, a 'claim' may include charges for costs and fees and that claim may be set forth in a proof of claim filed pursuant to section 501(a). If the debtor objects, the court must allow the claim absent one of the circumstances listed in section 502(b), none of which applied. Section 506(b) merely provides the standards for determining the extent to which the claims, including costs, may be secured and does not require disallowance of fees and costs simply because they are unsecured.Kentucky Higher Education Assistance Authority v. Fears (In re Fears), 2001 U.S. Dist. LEXIS 1651, – B.R. – (W.D. Ky. February 6, 2001) (Simpson, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[1]

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Confirmation of plan precluded equitable subordination claim. Bankr. W.D. Mich. The secured creditor sought equitable subordination of the postpetition lender’s claims. After the creditor loaned the debtor money and properly perfected its security interest in the debtor’s inventory, the debtor obtained a loan from another lender. The second lender held perfected liens on the debtor’s real estate and specific items of inventory acquired postpetition. After the plan was confirmed, the prepetition creditor requested that the postpetition lender’s claims be equitably subordinated under section 510(c). The bankruptcy court granted the postpetition lender’s motion for summary judgment, holding that the prepetition creditor was barred from seeking equitable subordination of the postpetition lender’s claims because it failed to raise the issue before confirmation and voted to accept the plan. Since the plan did not explicitly reserve the claim for equitable subordination, the claim was precluded by the res judicata effect of section 1141(a).First Bank, Upper Michigan v. North Country Bank & Trust (In re Superior Used Cars, Inc.), 2001 Bankr. LEXIS 135, – B.R. – (Bankr. W.D. Mich. February 9, 2001) (Gregg, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.05

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7th Cir.

Unpaid insurance premiums were 'debt.' N.D. Ill. The debtor appealed the bankruptcy court’s ruling granting his insurance carrier’s motion for summary judgment requesting rescission or rejection of his policy and rider. The insurance company had filed an adversary proceeding requested that the unpaid premiums owed it be declared nondischargeable and the policy and rider rescinded or rejected due to the debtor’s material misrepresentations on his application. The debtor argued that the bankruptcy court did not have jurisdiction to determine the validity of the policy or the rider because they were not debts. The district court affirmed, holding that the bankruptcy court had jurisdiction to determine the validity of the policy and rider because the unpaid insurance premiums constituted 'debt' since they were contingent liabilities. All of the debtor’s legal obligations were appropriately dealt with by the bankruptcy court.Green v. LifeUSA Ins. Co., 2001 U.S. Dist. LEXIS 1921, – B.R. – (N.D. Ill. February 14, 2001) (Gettleman, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.12

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8th Cir.

Competing creditors could not gain priority by seeking avoidance of other liens pursuant to section 502(d). Bankr. W.D. Ark. An involuntary chapter 7 petition was filed against the debtor in 1998. Thereafter the trustee filed an adversary proceeding to determine the nature, validity, extent and priority of liens, in order to distribute certain remaining proceeds from the sale of the debtor’s real property. Two creditors objected to liens of the IRS and of another claimant, arguing that the trustee could have but failed to avoid the IRS liens for noncompensatory prepetition tax penalties and the other claimant’s punitive damages claim. The bankruptcy court held that section 502(d) required the disputable claims to be avoidable, and concluded that they were not, since there was no judicial order requiring the turnover of the alleged voidable transfers and because section 502(d) did not afford affirmative relief of any kind. The court also held that the creditors’ position failed because they sought to proceed in the trustee’s shoes to effectuate an avoidance, a power to which only the trustee was entitled (citing Collier on Bankruptcy 15th Ed. Revised). Rice v. United States of America (In re Odom Antennas, Inc.), 2001 Bankr. LEXIS 117, – B.R. – (Bankr. W.D. Ark. January 25, 2001) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.05[1]

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Lien obtained as a result of foreclosure action was an avoidable, judicial lien. Bankr. W.D. Ark. The debtor and her former spouse were owners of residential real property. In order to effectuate the construction of a house on the property, the debtor and former spouse were assisted with a $14,000 loan from the spouse’s parents. The spouse signed the promissory note but the debtor did not. Subsequently the debtor was divorced, and the spouse’s parents commenced a foreclosure action, finally receiving a judgment against the debtor and spouse. The debtor then filed a chapter 7 petition, listing the homestead as exempt under state (Arkansas) law, and sought to avoid the lien on the property as one that impaired her exemption. The bankruptcy court ruled that the debtor was entitled to avoid the lien since it impaired her exemption. The court held that, for the purposes of lien avoidance under section 522(f), three conditions had to be met: (1) the lien must be a judicial lien; (2) must fix on an interest of the debtor in property; and, (3) must impair an exemption. The court concluded that all conditions were met. The court rejected the creditors’ argument that 522(f) did not apply because their lien was an equitable and not a judicial lien, stating that the lien became a judicial lien when the state court judgment against the debtor was filed with the clerk. Taylor v. Taylor (In re Taylor), 2001 Bankr. LEXIS 121, – B.R. – (Bankr. W.D. Ark. January 2, 2001) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11

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033049 Debtor who failed to respond to adversary proceeding demonstrated excusable neglect. Bankr. W.D. Ark. After the debtor filed a chapter 7 petition, the creditor filed an adversary seeking a declaration that an obligation owed to him, in the amount of $24,000, was nondischargeable pursuant to section 523(a)(15). The cover sheet filled out by the creditor’s attorney indicated an incorrect zip code in the address at which the debtor’s attorney was allegedly served with the complaint, but which was taken directly from the mistyped address on the petition itself. The debtor did not respond to the complaint, and thereafter the creditor filed a motion seeking entry of a default judgment. The debtor’s attorney alleged that the complaint was never received, and consequently argued that failure to respond was the result of excusable neglect. The bankruptcy court held that, for the purposes of Rule 7055, a determination of excusable neglect must be made based on a range of factors, and denied the creditor’s motion. The court found that several factors weighed in the debtor’s favor: (1) the creditor’s claim was substantial; (2) the creditor did not pursue a default judgment for over three months; (3) the creditable testimony that the complaint had not been received; and, (4) the incorrect address set forth on the petition. Lovell v. McArthur (In re McArthur), 2001 Bankr. LEXIS 122, – B.R. – (Bankr. W.D. Ark. January 5, 2001) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7055.02

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9th Cir.

Postpetition use of property did not bring funds into estate. B.A.P. 9th Cir. The chapter 7 trustee appealed an order of the bankruptcy court overruling his objections to the debtor’s claim of exemption in funds held in a retirement plan. One week after the debtor filed his petition, he became eligible for retirement from his employer. Shortly thereafter, he retired and received a lump sum payment from the employer’s retirement plan, a portion of which he rolled over into an individual retirement account. The trustee argued that the funds were property of the estate because they were removed from the spendthrift trust after the petition date and placed into an IRA. The bankruptcy court found that because the funds were contained in a spendthrift trust as of the petition date, a portion of the funds were not property of the estate and the remaining funds were fully exempt. The B.A.P. affirmed, holding that the postpetition rollover of the retirement funds into the IRA did not transform the funds into property of the estate. As of the petition date, the debtor did not exercise control of the retirement plan and did not have access to the plan’s benefits until retirement.Cisneros v. Kim (In re Kim), 2000 Bankr. LEXIS 1679, – B.R. – (B.A.P. 9th Cir. December 6, 2000) (Montali, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.24

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10th Cir.

Bankruptcy court’s jurisdiction to enter stay extended to litigation against debtor’s employee. D. Kan. An individual plaintiff and her insurer brought an action in federal district court against the debtor/defendant asserting wrongful death, property damage, and loss of profits arising out of an automobile accident. The accident involved two vehicles. One vehicle was driven by the plaintiff’s spouse and the defendant’s employee, who was also named as a defendant in the district court proceeding, drove the other. The debtor/defendant moved for summary judgment on the claims against its employee, arguing that the proceeding was barred by the state’s (Kansas’) two year statute of limitations. The plaintiffs conceded that they filed their claims beyond the two year period, but argued that the statute of limitations was tolled by virtue of the debtor/defendant’s bankruptcy petition and a subsequent stay order entered by the bankruptcy court. The bankruptcy court denied the defendants’ motion for summary judgment on the plaintiffs’ claims against its employee. The court held that the bankruptcy court’s jurisdiction to enter a stay extended to litigation against the employee, thereby tolling the statute of limitations period during which the plaintiffs could file their complaint against him. The court noted that there was not dispute in this case the employer was liable for the employee’s actions under the doctrine of respondeat superior. Thus, the bankruptcy court was confronted with an unusual situation warranting the imposition of the stay to against a nonbankrupt party since a judgment against the employee would, for all practical purposes, be a judgment against the debtor.Turman v. Ameritruck Refrigerated Transport, Inc., 2001 U.S. Dist. LEXIS 1744, – B.R. – (D. Kan. February 6, 2001) (Lungstrum, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3]

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Cancellation of FCC license was not stayed by the filing of the chapter 11 case. D. Kan. Chapter 11 debtor received licenses for a special wireless telecommunications service and elected to pay for the licenses in installments, signing promissory notes and security agreements. When the debtor was unable to timely make its payments, the agreements were restructured, with a specific provision that upon debtor’s failure to pay installments by dates certain, the licenses would be automatically cancelled. The debtor’s payments were not timely made, but before the grace period under the contract expired, an involuntary chapter 7 petition was filed against the debtor. The case was converted to chapter 11 and the debtor filed schedules listing the licenses as property of the estate. The FCC argued that the licenses were automatically cancelled when the grace period expired and requested an order compelling an amendment of the schedules. Specifically, the FCC asserted that the stay did not apply because the FCC was not required to take any 'act' to cancel the licenses. The bankruptcy court held that since cancellation only occurred after the FCC declared a default, an act existed for purposes of the automatic stay. Giving deference to the agency’s interpretation of its regulations, the district court reversed, holding that the automatic cancellation of the licenses was not stayed by section 362. Rather, the regulations were truly 'automatic' and the FCC was not required to take any action for the license to be terminated. Since the regulations mandated automatic cancellation, and the FCC interpreted the regulations to require no affirmative act on its part, section 362 did not preclude the termination of the license. To conclude otherwise would render the regulations meaningless.United States v. Kansas Personal Communications Services, Ltd. (In re), 2000 U.S. Dist. LEXIS 19824, – B.R. – (D. Kan. December 18, 2000) (Lungstrum, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[5]

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$75,000 marital obligation was in the nature of support. N.D. Okla. Debtor filed a chapter 7 petition and a divorce action. After a lengthy trial, the state (Oklahoma) court issued a divorce decree requiring the debtor to (1) hold his spouse harmless from $30,000 in credit card debt he incurred after purloining her credit card; and (2) pay his spouse’s attorney’s fees in the amount of nearly $45,000. The state court specifically characterized the obligations as being in the nature of support and opined that the debt was nondischargeable. After trial of the spouse’s objection to dischargeability of the debt pursuant to section 523(a)(5), the bankruptcy court held that the obligations were in the nature of support and, therefore, not dischargeable in the chapter 7 case. On appeal, the district court referred the matter to a magistrate. Adopting the magistrate’s report and recommendation, 2000 U.S. Dist. Lexis 19856 (Sept. 20, 2000), The district court affirmed, holding that the bankruptcy court did not clearly err in concluding that the obligations were in the nature of support. Applying a two-part test, the court concluded that state court clearly intended both obligations to be in the nature of support. Second, viewing the function of the obligation at the time of the divorce, the obligations were substantively in the nature of support. Although the spouse’s income was greater than the debtor’s, she was responsible for supporting the parties’ minor child and adult child attending college. Moreover, the debtor had significantly overstated his expenses to both the state and bankruptcy courts so that paying the obligation was within his means. Finally, although the debtor asserted that he did not have the ability to pay, that fact, while relevant to an action under section 523(a)(15), was not relevant to the section 523(a)(5) matter before the Court.Polishuk v. Polishuk, 2000 U.S. Dist. LEXIS 19855, – B.R. – (N.D. Okla. October 17, 2000) (Cook, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.11

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11th Cir.

Denial of attorney’s fees was affirmed on appeal. M.D. Fla. The alleged debtor appealed an order of the bankruptcy court denying its motion for attorney’s fees and costs following dismissal of an involuntary petition against it. The alleged debtor argued that the court employed an incorrect legal standard in order to determine that an award of attorney’s fees and costs was not warranted. The court held that when the involuntary petition was dismissed, regardless of the existence of bad faith, the alleged debtor’s motion for attorney’s fees and costs under section 303(i)(1) raised a rebuttable presumption that fees and costs were authorized. The petitioning creditors then bore the burden to produce some evidence, under the totality of the circumstances, that factors existed which overcame the presumption, and supported the disallowance of fees. The bankruptcy court concluded that attorney’s fees and costs were not warranted because the petitioning creditors’ decision to file was justifiable under the circumstances. The district court affirmed, holding that the petitioning creditors discharged their duty to show that attorney’s fees and costs were not warranted under the totality of the circumstances. The district court adopted the rebuttable presumption scheme set forth by the bankruptcy court.In re Scrap Metal Buyers of Tampa, Inc., 2000 U.S. Dist. LEXIS 19917, – B.R. – (M.D. Fla. August 21, 2000) (Young, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.15[4]

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Lien avoidance proceeding was remanded to district court. M.D. Fla. The chapter 7 debtor appealed the district court’s order reversing the bankruptcy court’s ruling that allowed the debtor to avoid her attorney’s lien on her homestead property. Pursuant to a retainer agreement with her attorney, the attorney was given a lien on all of the debtor’s property, regardless of homestead. The assets awarded to the debtor in the divorce proceeding included the marital home and the divorce court granted the attorney’s motion for a 'charging lien' against all of the debtor’s assets. The district court assumed that the attorney’s lien against the debtor’s homestead was a valid attorney’s charging lien under state (Florida) law, and held that the lien did not constitute a 'judicial lien' for purposes of section 522(f)(1) because it arose in advance of the judicial proceedings and related back to the date that the legal services commenced. On appeal, the debtor argued that the lien was not a valid charging lien under state law and was created solely by the judgment of the state divorce court. The Court of Appeals for the Eleventh Circuit affirmed in part and vacated in part the district court’s order, holding that to the extent the lien was a valid attorney’s charging lien under state law, the lien was not a 'judicial lien,' and was not avoidable as allegedly impairing the debtor’s homestead exemption rights. The matter was remanded for a determination as to whether the lien was in fact a valid charging lien under state law.Weed v. Washington (In re Washington), 2001 U.S. App. LEXIS 2862, – F.3d – (M.D. Fla. February 28, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11

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Credit card purchases for luxury items immediately preceding petition filing supported finding of actual fraud. Bankr. S.D. Fla. The debtor filed a chapter 7 petition on March 27, 2000. Prior to that date, the debtor incurred charges on a credit card in the approximate amount of $3750 over the two month period from December 17, 1999 to February 17, 2000 and made no payment to defray that debt. The creditor sought a determination that this debt was nondischargeable as a result of actual fraud, arguing that 79 percent of the disputed charges represented purchases of lawn equipment, and clothing and accessories, along with frequent restaurant dining. The creditor also offered evidence that these charges resulted in a change of the debtor’s spending pattern in that, prior to January 2000, the debtor averaged $300 to $400 in monthly charges, while the disputed period averaged monthly charges of $923. The bankruptcy court held that the debtor lacked the intent to repay, thereby entitling the creditor to a determination of nondischargeability under section 523(a)(2)(A). The court took into account several factors, including (1) the proximity of the charges in relation to the petition filing; (2) excessive use of credit for nonessential items; (3) the debtor’s income and expenses; (4) multiple charges on single days; (5) the lack of prospective employment; (6) change in spending habits; and, (7) the use of creditor for luxury purchases. American Express Travel Related Services Company, Inc. v. Prieto (In re Prieto), 2001 Bankr. LEXIS 118, – B.R. – (Bankr. S.D. Fla. January 30, 2001) (Mixon, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08

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Cause existed for dismissal of chapter 7 filed by debtor who had been found in contempt of district court disgorgement orders. Bankr. M.D. Fla. The debtor filed a chapter 7 petition on January 2, 2001. At the time of filing, the debtor was a defendant in an action commenced by the Securities and Exchange Commission (SEC) which sought enforcement of a disgorgement judgment in excess of $60 million. That enforcement action was commenced in 1989 and soon thereafter the debtor was convicted of securities laws violations, sentenced to prison, and fined. Subsequently the district court found the debtor liable for securities fraud, and the debtor filed an earlier chapter 7 petition in 1991. The SEC and other creditors obtained judgments of nondischargeability in the earlier chapter 7 case, and between 1994 and 1999 the debtor transferred his substantial assets into a complex ownership structure of offshore trusts and family owned companies and partnerships. By 2000, the debtor was found by the district court to be in contempt of the disgorgement orders, and a receiver was appointed for the purpose of marshaling assets of the debtor and of related entities. After the debtor filed this second chapter 7 petition, the SEC and the receiver filed a motion seeking dismissal pursuant to section 707(a). The bankruptcy court dismissed the petition. As a preliminary issue, the court determined that the findings of the district court in support of its contempt order were to be given collateral estoppel effect. The court then went on to find thata majority of the debtor’s scheduled debts represented debts already deemed nondischargeable, that the debtor had no intention of turning over any assets for the benefit of creditors, and that the debtor filed the case as a no asset case despite the clear indication of his substantial assets, all leading to the conclusion that cause existed for dismissal under section 707(a). In re Bilzerian, 2001 Bankr. LEXIS 120, – B.R. – (Bankr. M.D. Fla. February 16, 2001) (Williamson, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.03[3]

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