Collier Bankruptcy Case Update April-2-01
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 2, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 362(d) Relief from stay was granted.
In re Ledis (Bankr. D. Mass.) 041011§ 548(a)(1)(B) Judgment was entered for transferees.
Burdick v. Lee (D. Mass.) 04103728 U.S.C. § 158(d) Court of Appeals could not consider trustee’s argument on appeal because he never secured district court judgment.
Brandt v. Wand Partners (1st Cir.) 041050
2d Cir.
§ 158(a) Appeals from bankruptcy court order confirming plan and denying related relief dismissed as moot.
BNP Paribas v. National Restaurants Mgmt., Inc. (S.D.N.Y.) 041006§ 323(b) Notice and hearing were not required for lawsuit.
Pereira v. Cogan (S.D.N.Y.) 041007§ 524 Attorneys who included a deficiency plea in foreclosure complaint did not violate the stay.
Buffington v. Schuman & Schuman, P.C. (N.D.N.Y.) 041030§ 727(a)(3) Debtor’s lack of invoices resulted in denial of discharge.
Novak v. Blonder (In re Blonder) (Bankr. D. Conn.) 041041
3d Cir.
§ 362(a) IRS’s attempt to file in tax court a motion seeking entry of decision consistent with a bankruptcy court order did not violate automatic stay.
Lucabaugh v. Internal Revenue Service (In re Lucabaugh) (E.D. Pa.) 041009§ 362(d) Bank granted relief from stay to enforce rights as secured creditor with perfected interest in annuities.
U.S. Bank v. Custom Coals Laurel (In re Custom Coals Laurel) (Bankr. W.D. Pa.) 041012§ 523(a)(1) Tax liability was found nondischargeable.
United States v. Summers (In re Summers) (Bankr. E.D. Pa.) 041023Rule 7065 Creditor having possession of debtor’s fabric inventory was restrained by preliminary injunction.
Carroll v. Unicom AP Chemical Corporation (In re MGL Corp.) (Bankr. E.D. Pa.) 041056
4th Cir.
§ 522(f) Judicial lien was avoided in full.
In re Freeman (Bankr. D.S.C.) 041022
5th Cir.
§ 105(a) District court affirmed bankruptcy court’s imposition of sanctions against attorney.
Harvey Greenfield v. First city Bancorporation of Texas (In re First City Bancorporation of Texas) (N.D. Tex.) 041001
6th Cir.
§ 106(a) Dischargeability complaint was dismissed.
Dodson v. Tennessee Student Assistance Corp. (In re Dodson) (Bankr. E.D. Tenn.) 041003§ 522(d)(10) Court of Appeals allowed exemption of IRA.
Dettmann v. Brucher (In re Brucher) (6th Cir.) 041020§ 523(a)(6) Debt was found dischargeable.
Aristocrat Lakewood Nursing Home v. Dryja (In re Dryja) (Bankr. N.D. Ohio) 041027
7th Cir.
§ 109(e) Legal malpractice claim was properly included in determining debtor’s eligibility for chapter 13 relief.
In re Waller (N.D. Ill.) 041004§ 363(b)(1) Trustee was not authorized to sell settlement agreement.
Grochocinski v. Crossman (In re Crossman) (Bankr. N.D. Ill.) 041016§ 1329(a) Debtor could not modify plan postconfirmation to provide for surrender of vehicle securing creditor’s claim and payment of deficiency as unsecured claim.
General Motors Acceptance Corp. v. Smith (In re Smith) (Bankr. S.D. Ill.) 041047
8th Cir.
§ 363(j) Section 363(j) did not confer priority to former spouse’s claim as co-owner over IRS’s lien.
Thomas v. United States of America (In re Doncheff) (Bankr. E.D. Ark.) 041017§ 522(d)(10) Debtor could claim exemption for annuity purchased with inherited asset.
Andersen v. Ries (In re Andersen) (B.A.P. 8th Cir.) 041021§ 523(a)(8) Complaint was dismissed without prejudice.
Scholl v. Nebraska Student Loan Program (In re Scholl) (Bankr. N.D. Iowa) 041029§ 548(c) Dismissal of trustee’s complaint to recover fraudulent transfer reversed because bankruptcy court erred in finding that casino/transferee acted in good faith.
Meeks v. Red River Entertainment of Shreveport (In re Armstrong) (E.D. Ark.) 041038§ 1129(a)(11) Drop dead provision did not render the chapter 11 plan feasible.
Danny Thomas Properties I I Limited Partnership v. Beal Bank, S.S.B. (In re Danny Thomas Properties I I Limited Partnership) (Ct. App. 8th Cir.) 041043
9th Cir.
§ 329 Attorney’s conflicting roles of postpetition creditor and counselor did not warrant reduction in fees.
In re Sanchez (Ct. App. 9th Cir.) 041008§ 362(a)(1) Wage garnishment, although a violation of the stay, was not willful.
In re Venegas (Bankr. D. Idaho) 041010§ 507 Bankruptcy court determined priority between secured creditors who both held purchase money security interests.
Fleet Capital Corp. v. Sutherland Presses (In re Enterprise Indus.) (Bankr. N.D. Cal.) 041018§ 525(b) Section 525(b) provided no remedy to those who were not or had not been debtors.
Leonard v. St. Rose Dominican Hospital (In re Majewski) (D. Nev.) 041031§ 546(a) Trustee’s complaint was time barred.
Murphy v. Wray (In re Wray) (Bankr. D. Idaho) 041034
Collier Bankruptcy Case Summaries
1st Cir.
Relief from stay was granted. Bankr. D. Mass. The chapter 13 debtor’s ex-wife moved for relief from the automatic stay in order to pursue her collateral. The wife had been awarded a judgment allowing a secured claim collateralized by the debtor’s veterinary equipment. The value of the collateral was significantly less than the amount of the claim and the debtor never made post petition payments to his wife to mitigate her unsecured status. The bankruptcy court granted the debtor’s ex-wife’s motion for summary judgment, holding that the ex-wife was entitled to relief as a matter of law because she established that her security interest in the collateral was not adequately protected. The security interest did not extend to post petition collateral. The claim exceeded the value of the collateral and the debtor had not offered some other form of adequate protection.In re Ledis, 2001 Bankr. LEXIS 216, – B.R. – (Bankr. D. Mass. March 8, 2001) (Rosenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3]
Judgment was entered for transferees. D. Mass. The chapter 7 trustee filed an adversary proceeding against two companies controlled by the debtors’ employees, alleging that the debtor corporations made fraudulent transfers to the companies within one year prior to the petition date. As evidence, the trustee offered a summary of schedules which showed an excess of liabilities over assets for the debtors as of the petition date. The trustee also offered an SEC form which stated the debtors’ assets consisted, in part, of capital leases to which they had no title. The district court entered judgment for the transferees, holding that the trustee failed to prove that the debtors were insolvent on the date of the transfers as required by section 548(a)(1)(B)(ii). The court noted that the schedules and statements of financial affairs filed with the petition did not constitute prima facie evidence of insolvency as of the date of the alleged fraudulent transfers. There was no basis for discounting the capital leases as assets, as well, because the Code did not exclude such non-salable assets for the purpose of defining insolvency.Burdick v. Lee, 2001 U.S. Dist. LEXIS 2416, – F.Supp.2d – (D. Mass. January 11, 2001) (Gorton, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.05
Court of Appeals could not consider trustee’s argument on appeal because he never secured district court judgment. 1st Cir. The trustee filed an adversary proceeding in bankruptcy court against various parties involved in the leveraged buyout/merger of the chapter 7 corporate debtor. The adversary complaint included claims for fraudulent transfers, breach of fiduciary duty, accounting malpractice, and negligence, and ultimately claimed around $300 million in damages. The bankruptcy judge oversaw the matter until a trial of those claims that required a jury trial was conducted in the district court. The trustee lost on every claim tried to the jury and appealed on numerous issues, including whether the bankruptcy court erred in dismissing certain fraudulent transfer claims and whether the bankruptcy court erred in granting summary judgment in favor of a number of defendants on the trustee’s unjust enrichment claims. The United States Court of Appeals for the First Circuit affirmed the district court’s decision. First, the court held that the issue of whether the bankruptcy court erred in refusing to collapse the leveraged buyout, upon which the trustee’s fraudulent claims were based, was not properly before the court. The court explained that its authority was limited to review of judgments by the district court, and noted that the trustee never secured a district court judgment resolving any of the fraudulent transfer claims. The court also held that even if the district court erred in its reason for affirming the bankruptcy court’s dismissal of the unjust enrichment claims, the error was harmless. Finally, the court affirmed the lower courts’ ruling that there was no breach of any fiduciary duty, which the trustee failed to rebut.Brandt v. Wand Partners, 2001 U.S. App. LEXIS 3117, – B.R. – (1st Cir. March 2, 2001) (Boudin, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02[4]
2nd Cir.
Appeals from bankruptcy court order confirming plan and denying related relief dismissed as moot. S.D.N.Y. A general unsecured creditor with an outstanding judgment in excess of $5 million against the chapter 11 debtors appealed from bankruptcy court orders that confirmed the debtors’ plan and denied the creditor’s motion to disqualify a third party from voting on the plan as an unsecured creditor. The creditor claimed that the bankruptcy court erred by releasing claims of creditors without their consent, by classifying certain of the third party’s claims with claims of other unsecured creditors, and by failing to maximize distributions to creditors. The debtors moved to dismiss the appeal as moot because their plan had been substantially consummated. The third party did not contest the claim that the plan had been substantially consummated. Thus, as the district court noted, there was a rebuttable presumption that it was inequitable or impractical to grant relief which would give way upon proof by the creditor of the following five elements: the court could still provide effective relief; granting relief would not affect the re-emergence of the debtor as a revitalized corporate entity; granting relief would not unravel the transactions that formed the basis of the plan of reorganization; the parties that might be adversely affected by a grant of relief received notice and an opportunity to be heard; and, the entity seeking relief diligently pursued a stay of execution of the plan throughout the proceedings. The court held that the creditor failed to rebut the presumption that it would be would be inequitable to grant relief at this juncture because of both the debtors’ and other creditors’ reliance upon the substantial consummation of the plan. Specifically, the court found that to the extent that the creditor sought to overturn the entire plan, the debtors’ re-emergence would be adversely affected, the requested relief would unravel intricate transactions, and the creditor failed to diligently pursue a stay.BNP Paribas v. National Restaurants Mgmt., Inc., 2001 U.S. Dist. LEXIS 2261, – B.R. – (S.D.N.Y. March 7, 2001) (Cote, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02[2]
Notice and hearing were not required for lawsuit. S.D.N.Y. The chapter 7 debtor’s former directors moved to dismiss the complaint filed by the trustee for lack of notice pursuant to section 363. The trustee sued the directors for multiple breaches of fiduciary duty for allegedly subordinating the interests of the debtor and its creditors to the personal interests of the chief executive officer. According to the directors, the trustee was required to comply with section 363(b)(1) because the cause of action was a form of property of the debtor’s estate, and the trustee’s decision to prosecute the action constituted a use other than in the ordinary course of business. The trustee argued that, pursuant to section 323(b) and Rule 6009, notice and a hearing were not required in order to initiate the suit. The district court denied the motion to dismiss, holding that because the trustee’s pursuit of the litigation was an ordinary use of estate property, the notice and hearing requirement of section 363 was not required. The court noted that section 323(b), Rule 6009, case law and legislative history recognized the trustee’s authority to commence litigation on behalf of the estate without court approval (citing Collier on Bankruptcy, 15th Ed. Revised).Pereira v. Cogan, (In re Frace Int’l Holdings, Inc.)2001 U.S. Dist. LEXIS 2461, – B.R. – (S.D.N.Y. March 8, 2001) (Sweet, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:323.03[2]
Attorneys who included a deficiency plea in foreclosure complaint did not violate the stay. N.D.N.Y. In November 1999, the debtor commenced a chapter 13 case which was converted to chapter 7 in February 2000. One of the scheduled debts was a residential mortgage held by the creditor, who was represented by debt collection attorneys for the purpose of collecting the debtor’s obligation through foreclosure. In July 2000 the attorneys sent a default notice to the debtor, specifically informing him that foreclosure would be commenced. Following the debtor’s failure to cure the default, the attorneys instituted a foreclosure action in state (New York) court. The debtor then commenced the present proceeding in district court, alleging violations of the FDCPA and of section 524 by seeking to recover a discharged debt. The attorneys moved for summary judgment, contending that their actions did not violate either the FDCPA or section 524. The court held that the creditor did not violate either the FDCPA or the Code. Specifically the court rejected the debtor’s argument that section 524 had been violated by improperly using a deficiency plea in their foreclosure complaint. The court found that the attorneys had obtained an order vacating the stay and showed that the inclusion of the deficiency plea was inadvertent. The court also rejected the contention that actual knowledge of the chapter 7 discharge should be imputed to the attorneys.Buffington v. Schuman & Schuman, P.C., 2001 U.S. Dist. LEXIS 2267, – B.R. – (N.D.N.Y. February 21, 2001) (Munson, S.D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02
Debtor’s lack of invoices resulted in denial of discharge. Bankr. D. Conn. The chapter 7 trustee filed a complaint requesting that the debtor be denied a discharge under section 727(a)(3) for his failure to keep adequate business records. The debtor, both individually and through several corporate entities, was engaged in the business of buying and selling high-end antiques and collectibles. The trustee successfully avoided the debtor’s prepetition transfers of assets to one of his corporations and the auctions of the assets netted the estate only a fraction of what the debtor had stated they were worth. The trustee asserted that the debtor possessed insufficient records to support any valuation or identification of the assets. The debtor submitted invoices for only 60 percent of the antiques taken from his residence. The bankruptcy court denied the discharge, holding that the debtor failed to keep or preserve sufficient records to enable the trustee to determine the value and location of assets transferred to the debtor’s corporation or owned by the debtor. The debtor neither rebutted the trustee’s claim of inadequate records nor justified their absence.Novak v. Blonder (In re Blonder), 2001 Bankr. LEXIS 189, – B.R. – (Bankr. D. Conn. February 15, 2001) (Krechevsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.03
3rd Cir.
IRS’s attempt to file in tax court a motion seeking entry of decision consistent with a bankruptcy court order did not violate automatic stay. E.D. Pa. In April 1992 the debtor filed a petition in United States Tax Court protesting an income tax deficiency proposed by the IRS for the 1988 tax year. In September 1997 the debtor filed a chapter 13 petition and objected to the proof of claim filed by the IRS for 1988 income taxes. In July 1998 the bankruptcy court allowed the proof of claim and fixed the debtor’s tax liability. In August 1998 the IRS sent a motion for entry of decision to the tax court, requesting the court to enter a decision consistent with the bankruptcy court’s order. Because the tax court case had been automatically stayed by the chapter 13 filing, that court did not accept the motion. Nonetheless, the debtor filed an adversary proceeding in bankruptcy court seeking damages against the IRS and its attorney, arguing that the attempt to file the tax court motion had violated the automatic stay. The IRS filed a motion to dismiss, which was granted in April 1999. The court found that the complaint failed to state a claim upon which relief could be granted since no violation of the stay occurred and since the debtor did not allege that he suffered damages. The debtor then filed a second adversary proceeding essentially identical to the first. The IRS filed a motion to dismiss, which was granted. The court held that the second action against the attorney was barred by res judicata, that the automatic stay was not violated, and that the debtor failed to allege damages. This appeal followed. The district court affirmed, holding that no violation of the automatic stay had occurred because the motion had not been filed in tax court and no judicial action took place which could have violated the stay. The court went on to state that, even assuming that the motion had been filed, there was no evidence of willful violation of the stay. The court also affirmed the finding that the debtor failed to demonstrate any injury resulting from the alleged violation.Lucabaugh v. Internal Revenue Service (In re Lucabaugh), 2000 U.S. Dist. LEXIS 19993, – B.R. – (E.D. Pa. December 18, 2000) (Newcomer, S.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3]
Bank granted relief from stay to enforce rights as secured creditor with perfected interest in annuities. Bankr. W.D. Pa. A bank moved for relief from the automatic stay under section 362(d)(2) to enforce its rights as a secured creditor with a perfected interest in annuities held by the assignee of the debtor’s interest in the annuities. The assignee and other parties asserting interests in the annuities contested the bank’s asserted interest. They argued, among other things, that an annuity is not a general intangible and the bank’s interest could not be perfected under the Uniform Commercial Code by filing a financing statement; that the annuities were either insurance policies which are not subject to the UCC or instruments; that the bank’s interest was not perfected because including the annuities in the term general intangibles in the financing statement was not a sufficient description of the property; and, that a financing statement filed by the bank after the debtor’s name changed was seriously misleading and caused the bank’s interest to be unperfected. The bankruptcy court rejected all of the arguments, granted the motion and held that the annuities were general intangibles, the bank was properly perfected, the bank was first in time and right with respect to the competing interests in the annuities, and the assignment did not defeat the bank’s rights. The court also held that based on the evidence of record, including the bank’s uncontested allegations that because the case was a liquidating chapter 11 the annuities were not necessary for reorganization and that the debtor had no equity in the annuities, the bank was entitled to relief from the stay. However, the court also granted leave to any party in interest to file a motion for reconsideration within ten days if granting relief from the stay to the bank would result in a default as to bonds issued to the state (Pennsylvania) Department of Environmental Protection by the assignee. (citing Collier on Bankruptcy 15th Ed. Revised).U.S. Bank v. Custom Coals Laurel (In re Custom Coals Laurel), 2001 Bankr. LEXIS 181, – B.R. – (Bankr. W.D. Pa. February 13, 2001) (Fitzgerald, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Tax liability was found nondischargeable. Bankr. E.D. Pa. The IRS filed a complaint seeking a determination that the tax liability owed by the chapter 7 debtor was nondischargeable. The debtor filed tax returns for various years, however he excluded the income he caused to be transferred to an overseas corporation that he controlled. After pleading guilty to conspiracy to impair the lawful functions of the IRS, he agreed to amend his previous returns and make reasonable efforts to satisfy his liability as a condition of probation. Although the debtor amended his returns, he continued to defeat the collection efforts of the IRS by transferring substantial assets to family members and offshore accounts. The debtor argued that he never thought he was guilty in the original plea, but plead guilty to avoid jail time. The bankruptcy court granted summary judgment for the IRS, holding that the debtor willfully attempted to evade or defeat his taxes within the meaning of section 523(a)(1)(C). The court considered the debtor’s conduct, as well as his mental state, when it concluded that his actions were voluntary, conscious and intentional.United States v. Summers (In re Summers), 2001 Bankr. LEXIS 209, – B.R. – (Bankr. E.D. Pa. January 11, 2001) (Cosetti, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07[4]
Creditor having possession of debtor’s fabric inventory was restrained by preliminary injunction. Bankr. E.D. Pa. The debtors, an apparel manufacturer, a fabric company and a retail store, filed a chapter 11 petition in January 2000. The creditor was a purchaser of fabric inventory from the debtor. An officer and shareholder of the creditor was also a former employee of the debtor, possibly at the time the transaction in issue occurred. The chapter 11 trustees filed a motion seeking entry of a preliminary injunction restraining the creditor and the officer from further use, possession, consumption and misappropriation of the fabric inventory. The trustees argued that the transfers were fraudulent and subject to turnover. The creditor argued that it acquired the inventory by way of a legitimate sale, and paid for it not in cash but by the satisfaction of an outstanding indebtedness owed to it by the debtor. The bankruptcy court granted the trustees’ motion, holding that the elements of Rule 7065 were satisfied to the extent of warranting the injunction. The court found that: (1) there was a likelihood of the trustees’ succeeding on the merits, since the evidence suggested that the inventory had been converted without reasonably equivalent value or conveyed with the intent to defraud creditors; (2) there was the risk of irreparable harm to the estates, since the pattern of behavior suggested that the trustees might be unable to collect money damages from the creditor; (3) the harm of transferring proceeds to the trustees’ escrow account was less than the potential harm to the estates were the creditor to retain the funds; and, (4) public interest favored the granting of the injunction. Carroll v. Unicom AP Chemical Corporation (In re MGL Corp.), 2001 Bankr. LEXIS 186, – B.R. – (Bankr. E.D. Pa. February 5, 2001) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7065.02
4th Cir.
Judicial lien was avoided in full. Bankr. D.S.C. The chapter 13 debtor moved to avoid the creditors’ judicial lien in its entirety on the ground that it impaired the homestead exemption in her interest in the residence she co-owned with her husband. The debtor argued that because the sum of the lien, the amounts of all other unavoidable liens and the exemption exceeded the amount of the interest that she had in the property, the lien impaired the exemption and was avoidable. The creditor claimed that in order for the lien to impair the exemption, the debtor must have equity in the residence without taking into account the judicial lien. Because the encumbrances on the property without the lien exceeded the fair market value of the property, the creditor argued that section 522(f)(1)(A) did not apply because there was no exemption which could be impaired. The bankruptcy court granted the debtor’s motion, holding that the debtor was entitled to avoid the fixing of the judicial lien in full even though she did not have any equity in her residence. The court noted that the result was the same whether the full value of the property or the debtor’s half interest in it was considered.In re Freeman, 2001 Bankr. LEXIS 217, – B.R. – (Bankr. D.S.C. January 10, 2001) (Waites, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.11[3]
5th Cir.
District court affirmed bankruptcy court’s imposition of sanctions against attorney. N.D. Tex. A $20 million settlement was reached by parties to a securities class action proceeding, but nullified when the defendant was taken over by federal regulators and filed its chapter 11 case. An attorney that represented a class of claimants in the class action proceeding pursued his clients’ claims in bankruptcy court. In connection with this representation, sanctions were imposed upon the attorney by the bankruptcy court. The attorney appealed, and, on remand, the bankruptcy court imposed sanctions in the amount of $25,000 based upon comments the attorney made in filings or other communications with parties, their counsel or third parties that denigrated participants in the chapter 11 case and other parties, accused them of illegal or unethical behavior without a basis in fact, and threatened participants. The district court affirmed the sanctions imposed. The court concluded that the bankruptcy court exercised considerable restraint before deciding to impose sanctions and in determining the appropriate sanctions, and did not abuse its discretion. The district court noted that although the bankruptcy judge made several attempts to curb the attorney’s behavior by the imposition of lesser sanctions, including oral and written admonitions and warnings, the lesser sanctions did not succeed. Rather, the attorney continued his pattern of contumacious conduct. The district court concluded that the bankruptcy court did not err in concluding that the conduct justified the sanctions imposed.Harvey Greenfield v. First city Bancorporation of Texas (In re First City Bancorporation of Texas), 2001 U.S. Dist. LEXIS 2250, – B.R. – (N.D. Tex. February 28, 2001) (Lindsay, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2105.01:
6th Cir.
Dischargeability complaint was dismissed. Bankr. E.D. Tenn. The chapter 7 debtor filed an adversary proceeding seeking a determination that his student loan debt was dischargeable under section 523(a)(8). The creditor, a governmental nonprofit corporation created to administer the state’s (Tennessee) student assistance programs, moved to dismiss the complaint for lack of jurisdiction. The creditor argued that the action was barred by the Eleventh Amendment. The bankruptcy court granted the motion to dismiss, holding that the abrogation of state sovereign immunity in section 106 was unconstitutional. The court followed Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S. Ct. 1114 (1996), and further concluded that the Fourteenth Amendment did not grant Congress the power to terminate state immunity via section 106.Dodson v. Tennessee Student Assistance Corp. (In re Dodson), 2001 Bankr. LEXIS 213, – B.R. – (Bankr. E.D. Tenn. February 27, 2001) (Stair, Jr., B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:106.02, .03
Court of Appeals allowed exemption of IRA. 6th Cir. The debtor filed a chapter 7 petition, scheduling an IRA valued at $7,900. The trustee conceded that the majority of the fund was exempt under section 522(d)(5) but argued that the debtor could not use section 522(d)(10)(E) to exempt the balance. The bankruptcy court disallowed the exemption and the district court reversed. This appeal by the trustee followed. The trustee argued that the IRA did not fall within the meaning of section 522(d)(10)(E) and its language that allowed exemption for a right of payment on account of age under a plan or contract similar to those expressly enumerated in the provision. The Court of Appeals for the Sixth Circuit affirmed, holding that IRAs qualified for exemption under section 522(d)(10). The Court of Appeals reasoned that the provision contained no language that restricted its benefit solely to payments made on account of age, thereby rendering the early withdrawal option irrelevant. The Court of Appeals also found that the provision precluded plans from being exempted if they failed to qualify under certain IRC sections, including section 408. Because that section deals exclusively with IRAs, the Court of Appeals concluded that if IRAs were never to be exempted, the section 522(d)(10)(E)(iii) reference to IRC section 408 would have been pointless. Dettmann v. Brucher (In re Brucher), 2001 U.S. App. LEXIS 3456, – F.3d. – (6th Cir. March 8, 2001) (Nelson, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10][a]
Debt was found dischargeable. Bankr. N.D. Ohio The creditor, a nursing home, filed an adversary proceeding against the chapter 7 debtor seeking to have a state (Ohio) court stipulated judgment debt declared nondischargeable under section 523(a)(6). The creditor had sued the debtor’s aunt, an elderly resident of the home, due to arrearage in her account. Immediately preceding the creditor’s trial against the aunt, the debtor prepared three separate checks payable to herself that were signed by her aunt and drawn on her aunt’s account, nearly depleting the account. The bankruptcy court rendered judgment in favor of the debtor, holding that the creditor did not meet its burden with regard to the elements of section 523(a)(6). The creditor did not establish that the debtor caused an injury to it or that the debtor knew that her acceptance of the money would adversely affect the creditor.Aristocrat Lakewood Nursing Home v. Dryja (In re Dryja), 2001 Bankr. LEXIS 197, – B.R. – (Bankr. N.D. Ohio February 26, 2001) (Baxter, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
7th Cir.
Legal malpractice claim was properly included in determining debtor’s eligibility for chapter 13 relief. N.D. Ill. Prior to his chapter 13 petition, the debtor/attorney procured $450,000 of a judgment that his client was entitled to under her divorce decree. The debtor never tendered half of the amount recovered to his client, and the client filed a legal malpractice action against him in state court and, after the debtor’s chapter 13 petition, a claim for $225,000. Thereafter, the trustee moved to dismiss the chapter 13 case on the grounds that unsecured debts exceeded the statutory limit for qualification as a chapter 13 debtor. The bankruptcy court granted the motion and held that the malpractice claim and another claim pending against the debtor in state court had to be included in computing the debtor’s noncontingent, liquidated debts. The debtor appealed. The district court affirmed. The court held that the malpractice claim, which was sufficient in amount to cause the debtor’s unsecured debts to exceed the statutory limit for qualification as a chapter 13 debtor, was a noncontingent, liquidated, unsecured debt and was properly included in determining the debtor’s eligibility for chapter 13 relief. The court noted that while tort claims are generally not liquidated because the amount owed cannot be ascertained prior to disposition of the lawsuit, this is not true where the amount can be easily determined. The court also noted that tort claims are usually noncontingent because all of the events upon which the litigation is based already have occurred.In re Waller, 2001 U.S. Dist. LEXIS 2057, – B.R. – (N.D. Ill. February 26, 2001) (Castillo, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.06
Trustee was not authorized to sell settlement agreement. Bankr. N.D. Ill. The chapter 7 trustee filed an adversary proceeding against the debtor and the insurance company, seeking to assign the debtor’s and the estate’s rights in a settlement agreement and annuity free and clear of all liens. The debtor had previously settled her claims arising out of the death of her husband for a lump sum cash payment and monthly payments for 20 years. The trustee moved for summary judgment, arguing that even though the settlement agreement and state (Illinois) law restricted the debtor’s right to transfer the payments, section 363 and section 541(a)(1) permitted him to sell and assign the right to receive those payments. The bankruptcy court denied the motion for summary judgment, holding that the trustee’s attempt to assign the debtor’s structured settlement payments was barred by the settlement agreement and state law. The court noted that section 363(b)(1) merely gave the trustee the authority to dispose of property if the debtor would have the same right under state law, which she did not.Grochocinski v. Crossman (In re Crossman), 2001 Bankr. LEXIS 205, – B.R. – (Bankr. N.D. Ill. March 8, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.02
Debtor could not modify plan postconfirmation to provide for surrender of vehicle securing creditor’s claim and payment of deficiency as unsecured claim. Bankr. S.D. Ill. After the chapter 13 debtor’s nondebtor husband died unexpectedly and she became unable, without his income, to make monthly plan payments and meet basic living expenses, the debtor sought to modify her confirmed chapter 13 plan. The debtor sought to surrender a vehicle securing a creditor’s claim and pay the deficiency following the sale of the vehicle as an unsecured claim. The creditor objected, and asserted that the debtor’s confirmed plan, which treated its claim as fully secured, was res judicata and that the modification provisions of section 1329(a) did not allow the debtor to reclassify its claim as unsecured. The creditor argued that the debtor had to pay the balance of its claim as secured despite her surrender of the vehicle. Noting the Seventh Circuit Court of Appeals’ precise reading of section 1329(a) in the case of In re Witkowski, the bankruptcy court held that the debtor was precluded from modifying her plan to reclassify a secured claim as unsecured following the surrender of the collateral postconfirmation. The court concluded that, contrary to the debtor’s assertion, it lacked discretion to approve a modification that fell outside the limits of section 1329(a). The court explained that although the Seventh Circuit in Witkowski noted the Bankruptcy Code’s permissive language and observed that modification under section 1329(a) is discretionary, such discretion must be exercised in the context of the limits imposed by sections 1329(a)(1), (2), and (3).General Motors Acceptance Corp. v. Smith (In re Smith), 2001 Bankr. LEXIS 210, – B.R. – (Bankr. S.D. Ill. March 6, 2001) (Meyers, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1329.04
8th Cir.
Section 363(j) did not confer priority to former spouse’s claim as co-owner over IRS’s lien. Bankr. E.D. Ark. The debtor filed a chapter 7 petition in March 1998. During its pendency, he and his spouse obtained a divorce. The chapter 7 trustee sold three parcels of real property that were jointly owned by the debtor and the former, nondebtor spouse, and against both of whom a federal tax lien had been recorded in February 1998. The chapter 7 trustee commenced an adversary proceeding requesting a determination of the extent and priority of liens, and direction as to disbursement of the remaining funds in the estate. There were no other liens superior to those of the IRS. The spouse argued that section 363(j) mandated that she be paid her share of the sale proceeds before any other interest was satisfied. The IRS moved for summary judgment. The bankruptcy court ruled that the IRS was entitled to disbursement of its secured claim and granted the motion. The court found that although section 363(j) entitled the spouse to disbursement of her interest in the proceeds, the IRS’s lien interest attached to all property and rights of property held by her, thereby rendering the interest of the IRS superior to that of the former spouse.Thomas v. United States of America (In re Doncheff), 2001 Bankr. LEXIS 185, – B.R. – (Bankr. E.D. Ark. January 29, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.08[8]
Debtor could claim exemption for annuity purchased with inherited asset. B.A.P. 8th Cir. The chapter 7 debtors appealed a bankruptcy court decision that sustained the trustee’s objection to their claimed exemption for an annuity pursuant to section 522(d)(10). The bankruptcy court concluded that under Eighth Circuit precedent established in Eilbert v. Pelican (In re Eilbert), the debtors could not claim an exemption for the annuity, which was purchased by the debtor/wife with an inherited asset. The Eighth Circuit B.A.P. reversed and held that the debtor wife’s right to receive the payments was a pension plan, annuity, or similar plan on account of her age which she was entitled to claim exempt pursuant to section 522(d)(10)(E). The court noted that the debtor/wife purchased the annuity in order to be able to meet her basic living needs in her retirement years, the annuity was intended to be a wage substitute, the debtor/wife exercised no control over the assets, and that the debtor/wife had only the right to receive payments over the entire course of the remainder of her life. The court concluded that the court’s decision in Eilbert v. Pelican (In re Eilbert),; 162 F.3d 523 (8th Cir. 1998) did not compel the conclusion that the annuity was outside the bounds of section 522(d)(10)(E).Andersen v. Ries (In re Andersen), 2001 Bankr. LEXIS 211, – B.R. – (B.A.P. 8th Cir. March 13, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10]
Complaint was dismissed without prejudice. Bankr. N.D. Iowa The chapter 7 debtor filed an adversary proceeding seeking to have his student loan debt declared dischargeable under the undue hardship exception. The debtor withdrew from a program for hotel and restaurant management after concluding that the school had misrepresented its accredited status. The school allegedly informed the debtor that the student loan money would be returned since he had completed less than one-third of the term. The tuition was never refunded to the lender. The bankruptcy court dismissed the complaint without prejudice, holding that the debtor was required to exhaust all rights provided to him under the Higher Education Act prior to a determination of undue hardship under section 523(a)(8). The Act provided for a discharge of the liability on the loan if the debtor was able to prove the school improperly failed to refund the loan money to the lender.Scholl v. Nebraska Student Loan Program (In re Scholl), 2001 Bankr. LEXIS 214, – B.R. – (Bankr. N.D. Iowa January 31, 2001) (Kilburg, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Dismissal of trustee’s complaint to recover fraudulent transfer reversed because bankruptcy court erred in finding that casino/transferee acted in good faith. E.D. Ark. The chapter 7 trustee appealed a bankruptcy court decision that dismissed his complaint to avoid and recover as fraudulent the debtor’s transfer of $357.000 to a casino. The transfer was made within one year of the filing of the debtor’s involuntary chapter 7 petition to pay gambling debts. The district court reversed. The court held that the bankruptcy court clearly erred in finding that the casino acted in good faith in its dealings with debtor and did not have reason to know of the debtor’s financial difficulties and insolvency. The court noted that the transferee has the responsibility and burden of establishing good faith under section 548(c), and found that in this case, the casino failed to establish good faith under the objective standard of section 548(c). The court found that the casino did not engage in a diligent inquiry regarding the debtor’s assets, liabilities and income before extending credit to debtor, but instead engaged in a hasty and meaningless inquiry pertaining to, essentially, the debtor’s obligations to gambling entities. The court concluded that the casino possessed sufficient knowledge to place it on inquiry notice of debtor’s possible insolvency; thus, it was not entitled to the good faith defense of section 548(c) (citing Collier on Bankruptcy 15th Ed. Revised).Meeks v. Red River Entertainment of Shreveport (In re Armstrong), 2001 U.S. Dist. LEXIS 2574, – B.R. – (E.D. Ark. February 28, 2001) (Howard, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.07
Drop dead provision did not render the chapter 11 plan feasible. Ct. App. 8th Cir. Apartment complexes filed chapter 11 petitions in order to avoid foreclosure. The chapter 11 plans proposed to pay the mortgage in installments for ten years with a balloon payment for the balance. The plans contained strict compliance or drop dead provisions which provided for consent to foreclosure upon default. The debtors asserted that the strict compliance provisions rendered the plans feasible as a matter of law because the provisions effectively provided for liquidation in the event of default. The bankruptcy court sustained the mortgagee’s objection to confirmation on the basis that the plan was not feasible. The district court affirmed and the Court of Appeals for the Eighth Circuit affirmed, holding that the chapter 11 plans were not feasible even though they contained strict compliance provisions. The strict compliance provisions were not the equivalent of a liquidation because they did not contemplate the end of the debtor’s existence, but, rather, merely permitted foreclosure of the primary asset. In any event, mere inclusion of such a provision did not render the plans feasible as a matter of law. Second, the bankruptcy court did not err in concluding that the debtor’s projections were sheer speculation and that the debtors would operate at a significant loss throughout the life of the proposed plan, problems which would not be rectified by the strict compliance provisions (citing Collier on Bankruptcy, 15th Ed. Revised).Danny Thomas Properties I I Limited Partnership v. Beal Bank, S.S.B. (In re Danny Thomas Properties I I Limited Partnership), 2001 U.S. App. LEXIS 3329, – F.3d – (Ct. App. 8th Cir. March 5, 2001) (Arnold, Morris, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1129.03[11]
9th Cir.
Attorney’s conflicting roles of postpetition creditor and counselor did not warrant reduction in fees. Ct. App. 9th Cir. The chapter 7 debtor agreed to pay her attorney $900 in monthly installments to begin after the chapter 7 case was filed for services rendered before and after the filing of the case. Three years after the case was closed, the debtor obtained an order reopening the case and filed a motion for contempt against the attorney, asserting violations of the stay and discharge injunction. The debtor also asserted that the attorney’s conduct as both lawyer and creditor created a conflict of interest which precluded him from retaining any of the fees. The bankruptcy court held that the fees were unreasonable in amount but that the attorney did not violate the stay. The district court affirmed and the Court of Appeals for the Ninth Circuit affirmed, holding that circuit precedent and policy overrode concerns of the conflict of interest. Ninth Circuit precedent upheld an attorney’s claim for postpetition services based on the need for chapter 7 debtors to have access to legal services which overrode the concern that the dual roles of the attorney created a conflict of interest. Accordingly, reduction of the fees on that basis was not warranted.In re Sanchez, 2001 U.S. App. LEXIS 3351, – F.3d – (9th Cir. March 5, 2001) (Schroeder, C.C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:329.04[1][b]
Wage garnishment, although a violation of the stay, was not willful. Bankr. D. Idaho Personal injury victim obtained a judgment against the debtor and had the sheriff serve a garnishment upon the debtor’s employer. When the debtor filed his chapter 7 case, he failed to schedule or otherwise give notice to the victim or the sheriff. Accordingly, the victim obtained funds through the garnishment proceedings during and after the pendency of the chapter 7 case. In addition, the sheriff retained his costs. The debtor moved for an order of contempt, asserting that the sheriff and the victim violated both the automatic stay and discharge injunction. The victim defended on the basis that she was never notified of the filing of the chapter 7 case. The bankruptcy court held that although the wage garnishment was a violation of the stay, neither the victim nor the sheriff acted willfully. Since a violation of the stay occurred, the collection efforts were void and the victim was required to return the sums received after the filing of the petition. However, judgment was not entered against the sheriff because service of process had not been properly made upon him.In re Venegas, 2001 Bankr. LEXIS 178, – B.R. – (Bankr. D. Idaho January 3, 2001) (Pappas, C.J.). Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3]
Bankruptcy court determined priority between secured creditors who both held purchase money security interests. Bankr. N.D. Cal. The parties cross-moved for summary judgment in an adversary proceeding brought by one secured creditor against another to determine priority of security interests in the chapter 11 debtor’s collateral. It was undisputed that the defendant/creditor held a purchase money security interest in the collateral. In order to determine which creditor acquired first priority position, the bankruptcy court had to decide whether the plaintiff acquired a superior purchase money security interest in the collateral under state (California) law. The bankruptcy court held that the plaintiff payment of a second installment on behalf of the chapter 11 debtor with respect to the collateral enabled the plaintiff to acquire rights in the collateral. As such, the plaintiff held a purchase money security interest in the collateral which, since perfected before the defendant’s interest, took priority over the defendant’s purchase money security interest under California law.Fleet Capital Corp. v. Sutherland Presses (In re Enterprise Indus.), 2001 Bankr. LEXIS 182, – B.R. – (Bankr. N.D. Cal. January 4, 2001) (Grube, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.01
Section 525(b) provided no remedy to those who were not or had not been debtors. D. Nev. The trustee appealed a bankruptcy court order that granted the defendant’s motion to dismiss the trustee’s complaint. The issue on appeal was whether an individual enjoyed the protections of section 525(b) prior to the filing of bankruptcy. The district court affirmed the bankruptcy court’s order, and held that section 525(b) did not provide a remedy to those who were not or had not been debtors. The court expressly adopted the reasoning set forth by the United States District Court for the Southern District of Florida when it considered this issue in Kanouse v. Gunster, Yoakley & Stewart, P.A. (In re Kanouse). Leonard v. St. Rose Dominican Hospital (In re Majewski), 2001 U.S. Dist. LEXIS 2216, – B.R. – (D. Nev. February 21, 2001) (Pro, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:525.04
Trustee’s complaint was time barred. Bankr. D. Idaho The debtor filed a chapter 13 petition and nearly three years later converted to chapter 7. The chapter 7 trustee subsequently filed an adversary proceeding against the debtor’s father seeking to avoid the father’s unrecorded life estate in the debtor’s real property under section 544(a). The father moved for summary judgment based upon the statute of limitations. The bankruptcy court granted the motion for summary judgment, holding that the two year statute of limitations in section 546(a)(1)(A) precluded the trustee’s avoidance action. The court rejected the trustee’s arguments that she was entitled to a new two year window for avoidance actions or that the court had the power to equitably toll the bar date.Murphy v. Wray (In re Wray), 2001 Bankr. LEXIS 192, – B.R. – (Bankr. D. Idaho February 9, 2001) (Myers, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:546.02