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 21, 2003

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

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3d Cir.

§ 348(f)(1)(B) Valuation of debtor’s residence under chapter 7 applied after conversion to chapter 13.
In re Slack (Bankr. D.N.J.)

§ 362(d)(1) Union granted relief from stay to proceed against auto which secured not only an auto loan but all other loans granted to debtor employee.
In re Watson (Bankr. D.N.J.)

§ 365 Right of first refusal was an executory contract subject to assumption or rejection by debtor.
In re Kellstrom Indus., Inc. (Bankr. D. Del.)

§ 502(b)(6) Bankruptcy filed primarily to cap damages of creditor landlord was filed in good faith.
Solow v. PPI Enters. (In re PPI Enters.) (3d Cir.)

Collier Bankruptcy Case Summaries

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Relief from stay granted to allow debtor’s major shareholder and former employees to make defense cost claims against directors and officers insurance policy. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In two related bankruptcies, movants, one debtor’s major shareholder and his family members, and two former employees, sought relief from stay under 11 U.S.C. § 362(d)(1), to make defense costs claims against a directors and officers policy and to sue the insurers if necessary. The insurers sought relief from stay to join the debtors in a declaratory judgment action on the policies. One debtor sought to enjoin the insurers’ declaratory action. OVERVIEW: The one debtor’s estate was worth more with the policies than without them due to entity coverage. The other debtor’s estate was worth more with the policies due to entity coverage and the need to secure independent directors. Thus, the policies and their proceeds were property of the estate under 11 U.S.C. § 541(a)(1). Movants were indicted on criminal securities charges. Uncontrolled access to the policies could impair the one debtor’s interests by depriving it of entity coverage. The other debtor needed coverage to reorganize. The director and officers had conflicting coverage claims. The insurers were authorized to advance defense costs to directors and officers, but only up to $300,000 to preserve the bulk of the proceeds, without prejudice to further requests, and without prejudice to other parties’ rights to later litigate whether, and to what extent, the remaining proceeds would be allocated, and to address whether an insured was advanced more than his rightful share. “Unusual circumstances” required that 11 U.S.C. § 362 applied, even without 11 U.S.C. § 105(a). The declaratory judgment action was stayed, to be reconsidered after the criminal proceedings. Adelphia Communs. Corp. v. Associated Elec. & Gas Ins. Servs. (In re Adelphia Communs. Corp.), 2002 Bankr. LEXIS 1532, 285 B.R. 580 (Bankr. S.D.N.Y. November 15, 2002) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07 [back to top]

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Debtor could not claim homestead exemption in property conveyed to former husband by quitclaim deed. Bankr. D. Conn. PROCEDURAL POSTURE: In bankruptcy proceedings, movant chapter 7 trustee objected to debtor’s claim of a homestead exemption under applicable Connecticut law in respect of her former marital residence located in Connecticut (property). OVERVIEW: Debtor claimed a homestead exemption in her former home that she shared with her former spouse. The trustee objected to debtor’s claim of homestead exemption under Connecticut law in respect of the equitable distribution rights to the property, which arose from a property settlement agreement with her former spouse, on the grounds that the property did not fit the definition of homestead under Conn. Gen. Stat. § 52-352a. The court held that debtor had no interest in the property for purposes of the exemption. Specifically, a quitclaim deed had already been executed, delivered and recorded as of the petition date. That was significant because the quitclaim deed conveyed to the former husband all the right, title, interest, claim and demand whatsoever as debtor had or ought to have in or to the property. It was uncontested that debtor did not have record title to the property as of the petition date. Further, it was also uncontested that debtor did not have a mortgage in respect of the property to secure the obligation. Finally, the proceeds of a voluntary sale of the homestead were not exempt. In re Kujan, 2002 Bankr. LEXIS 1417, 286 B.R. 216 (Bankr. D. Conn. December 11, 2002) (Weil, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.02 [back to top]

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Debtors’ pre-filing consumer actions against lenders and banks were neither core proceedings nor related to bankruptcy and not proper for removal to bankruptcy court. N.D.N.Y. PROCEDURAL POSTURE: Plaintiff consumers filed an action against defendants, a lender, several banks, and others, alleging violations of the Truth in Lending Act, 15 U.S.C. § 1601-77, the Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681t, and the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692o. After they filed a subsequent action seeking bankruptcy protection, the consumers filed a motion to transfer their action to bankruptcy court. OVERVIEW: Several consumers filed an action against a lender, several banks, and other parties, alleging violations of the Truth in Lending Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act. While their action was pending, the consumers filed for bankruptcy protection, and they moved to have their action transferred to the bankruptcy court. The federal district court held that: (1) the consumers’ action was not transferable under 28 U.S.C. § 157 because it was not a core proceeding under the Bankruptcy Code; (2) the consumers’ action was not related to the consumers’ bankruptcy action and was not a compulsory counterclaim in that action, and it was not transferable for either of those reasons; and (3) given the consumers’ history of abusing the legal system, it was appropriate and necessary to bar the consumers from filing future actions that were based on or related to a prior claim they made that a hospital, the hospital’s employees, and the hospital’s insurance carriers conspired to steal a $32 million insurance trust fund in order to defeat the consumers’ claim for medical malpractice. Fernicola v. GMAC, 2002 U.S. Dist. LEXIS 25164, — B.R. — (N.D.N.Y. December 12, 2002) (Hurd, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02 [back to top]

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Evidence provided by objecting debtor was insufficient to overcome presumption of validity of proof of claim. Bankr. D. Conn. PROCEDURAL POSTURE: A debtor filed a chapter 7 petition. A creditor filed an unsecured proof of claim and the debtor objected. The creditor filed an amendment to the proof of claim and the debtor objected. OVERVIEW: The debtor claimed that the creditor failed to meet the required burden of proof and that the debtor’s evidence overcame any presumption of validity of the creditor’s proof of claim. The debtor also asserted that a meeting of the minds existed as to the deficiency following the sale of the debtor’s property and that the creditor should be obligated to accept the debtor’s note. The court examined the evidence and rejected the debtor’s position. The court found that the creditor met the burden of proof for the original claim, but found that the creditor was not entitled to the amendment to the proof of claim submitted. The court concluded that it would be inequitable to allow an amendment, whether at trial or post-hearing, two years after the original filing of the proof of claim. Vanegas v. Windsor Fed. S&L Ass’n (In re Vanegas), 2003 Bankr. LEXIS 235, 290 B.R. 190 (Bankr. D. Conn. March 5, 2003) (Krechevsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:3001.09

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Valuation of debtor’s residence under chapter 7 applied after conversion to chapter 13. Bankr. D.N.J. PROCEDURAL POSTURE: In a case converted from chapter 13, a creditor objected to the chapter 7 trustee’s motion to abandon the debtors’ residence under 11 U.S.C. § 554(a), claiming that since the chapter 13 plan had not provided for payments on one tax lien, that claim was disallowed and the lien unenforceable, and that the balance on a second tax lien should have been reduced by payments to have been made under the plan, and objecting to the trustee’s valuation. OVERVIEW: According to the chapter 13 final report, the tax liens were as stated by the chapter 7 trustee. The tax liens and the debtors’ exemptions exceeded the home’s value. There was no evidence suggesting that the chapter 7 trustee’s submissions were not produced in good faith, upon a reasonable basis or within her scope of authority. Even though the court made no specific finding of value when the chapter 13 plan was confirmed, there was an implicit finding that the scheduled value, $43,000, was proper since the plan treated unsecured creditors as well as they would have in a chapter 7. Under 11 U.S.C. § 348(f)(1)(B) upon conversion, the same value had to be used. Under 11 U.S.C. § 348(f)(1)(B), allowed secured claims in the chapter 13 applied in the chapter 7, reduced to the extent paid under the plan. The proofs of claim submitted by the two tax lien claimants included postpetition interest for the 60 months of the proposed chapter 13 plan, and the balance due on the final report included some unearned interest. But, reducing the tax liens for unearned interest was not enough to alter the decision to abandon. There was no duplication in payment of subsequent taxes. In re Slack, 2003 Bankr. LEXIS 233, 290 B.R. 282 (Bankr. D.N.J. March 26, 2003) (Lyons, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:348.07[3] [back to top]

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Union granted relief from stay to proceed against auto which secured not only an auto loan but all other loans granted to debtor employee. Bankr. D.N.J. PROCEDURAL POSTURE: In bankruptcy proceedings, creditor employee union claimed that debtor’s car, which secured a car loan by the union, also secured other loans made by the union to the creditor. Debtor moved to reduce the secured claim held by the union. The union moved for relief from the automatic stay. OVERVIEW: The union claimed that debtor’s car collateralized not only the car loan, but also debtor’s outstanding debt to the union on otherwise unsecured advances, taken both before and after the car loan. The court held that the loan agreements with the union stated that property given as security under a loan, or any other loan, may secure all amounts you debtor owed the union now and in the future. Further, the open-end plan operated by the union satisfied all three elements for loans under 12 C.F.R. § 226.2(a)(20): (1) the plan contemplated future transactions (which in fact occurred); (2) a finance charge was imposed on each advance; and (3) the plan utilized a reusable credit line. Moreover, the loan application, addendum, and vouchers utilized by the union satisfied the disclosures requirements established under federal law. Specifically, the addendum given by the union to debtor with the loan agreement provided information to debtor about finance charges, when charges accrued, the annual percentage rate, and how finance charges were determined. Finally, the car loan voucher executed by the parties clearly provided for such cross-collateralization of the various loans. In re Watson, 2002 Bankr. LEXIS 1419, 286 B.R. 594 (Bankr. D.N.J. October 30, 2002) (Wizmur, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3] [back to top]

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Right of first refusal was an executory contract subject to assumption or rejection by debtor. Bankr. D. Del. PROCEDURAL POSTURE: The debtors filed a motion for an order authorizing the debtors to reject certain leases and unexpired executory contracts. One contracting party objected, asserting that it held a right of first refusal to purchase the property and that the contract was not an executory contract subject to rejection by the debtors under 11 U.S.C. § 365. OVERVIEW: A review of the right of first refusal confirmed the executory nature of the contract. The debtors were obligated to give notice to the objecting party of any offer to purchase and the price, and to sell the property to the objecting party if it matched the offer. The objecting party was required to exercise or waive the right of first refusal within 30 days of the notice. Like the majority of the courts, the bankruptcy court held that the right of first refusal granted to the objecting party was an executory contract which could be rejected by the debtors under section 365. Of course, the rejection of the right of first refusal did not preclude the objecting party from making an offer to purchase the property or, if the debtors sought to sell the property in the bankruptcy case, to submit a counteroffer. In re Kellstrom Indus., Inc., 2002 Bankr. LEXIS 1530, 286 B.R. 833 (Bankr. D. Del. November 5, 2002) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01

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Bankruptcy filed primarily to cap damages of creditor landlord was filed in good faith. 3d Cir. PROCEDURAL POSTURE: Appellant landlord moved to dismiss appellee debtor’s bankruptcy filing for bad faith. The United States District Court for the District of Delaware affirmed the bankruptcy court’s findings that the landlord’s claim was subject to the statutory cap of 11 U.S.C. § 502(b)(6), the claim was reduced by application of a letter of credit, the bankruptcy was filed in good faith, and the landlord was an unimpaired creditor. The landlord appealed. OVERVIEW: The landlord leased office space to the debtor. The debtor’s indirect corporate parent guaranteed the lease obligations, and a bank issued a stand-by letter of credit on behalf of the debtor. The debtor defaulted on the lease, and the landlord drew on the letter of credit. The debtor filed for chapter 11 bankruptcy, seeking to limit the landlord’s lease termination damages under 11 U.S.C. § 502(b)(6). The appellate court determined that the landlord’s claim was not impaired under 11 U.S.C. § 1124(1), because section 502(b)(6), not the plan, was the only source of limitation on the landlord’s rights. The appellate court also determined that the landlord’s claim was reduced by the amount the landlord drew from the letter of credit because the parties intended the letter of credit to operate as a security deposit. Finally, the debtor’s bankruptcy filing satisfied the good faith requirement where the primary purpose of the petition was to cap the landlord’s claim pursuant to section 502(b)(6). Solow v. PPI Enters. (In re PPI Enters.), 2003 U.S. App. LEXIS 5937, — F.3d — (3d Cir. March 28, 2003) (Scirica, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[7] [back to top]

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Landlord’s right of first refusal in debtor tenant’s interest in lease was binding on the trustee. Bankr. M.D.N.C. PROCEDURAL POSTURE: The trustee filed a motion for approval of the assumption, assignment, and sale of the debtors’ interests under a lease of a store to a bidder. The landlord objected, arguing that it had a right of first refusal under the lease and that it had submitted a higher bid. The trustee argued that the right of first refusal in the lease was not binding on the trustee pursuant to 11 U.S.C. § 365(f). OVERVIEW: 11 U.S.C. § 365(f)(1) did not render any right of first refusal unenforceable. The landlord’s right of first refusal was not within the scope of 11 U.S.C. § 365(f). It had no chilling effect on the sale procedure. The bidder was unaware of the terms of each lease upon which he placed a bid. The landlord was unaware of the amount of competing bids, and its bid was $51,000 more than that of the bidder. The landlord bargained for the first right of refusal to protect the value of its surrounding properties and to maintain compliance with its lease on another store. The right was part of the lease’s compensation package, absent which the landlord would not receive the full benefit of its bargain and the trustee could not give adequate assurance of future performance under 11 U.S.C. § 365(b)(1)(C). The right would not be excised. The landlord merely had the right to match or better the best offer the trustee obtained. The bidder’s expectations had not risen to a level that would preclude denying approval of the sale. While the bid submitted by the bidder was originally part of an all or nothing bid on several stores, the bid was not withdrawn as to the other stores. In re E-Z Serve Convenience Stores, Inc., 2003 Bankr. LEXIS 234, 289 B.R. 45 (Bankr. M.D.N.C. February 24, 2003) (Carruthers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.08 [back to top]

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Charges made to credit card with actual knowledge of inability to repay were fraudulent and nondischargeable. Bankr. W.D. Va. PROCEDURAL POSTURE: An adversary proceeding was brought to help determine the dischargeability of debt arising from debtors’ credit card purchases pursuant to 11 U.S.C. § 523(a)(2)(A). The issue raised by creditor was whether debtor possessed fraudulent intent when she made certain purchases on a credit card issued by creditor. Creditor also sought an award of attorneys’ fees in the sum of $500. OVERVIEW: The court held by a preponderance of the evidence that by June 18, 2001, the due date for debtor’s June payment, debtor knew that she would not be making a payment on that account for that month. Debtor also knew that she was not going to be able to pay further charges. On and after that date debtor personally made charges on the account totaling $661. The court further held, however, that she did not make the charges in question with a positive intent not to repay the charges. The court did not doubt that if debtor had won the lottery or otherwise had unexpected good fortune, she would have gladly and promptly paid creditor. Nonetheless, because she had the actual knowledge that she would not be able to repay the charges, the charges were fraudulent under 11 U.S.C. § 523(a)(2)(A) and, therefore, nondischargeable. Furthermore, there was no statutory or contractual basis for an award of attorneys’ fees. First N. Am. Nat’l Bank v. Widner (In re Widner), 2002 Bankr. LEXIS 1402, 285 B.R. 913 (Bankr. W.D. Va. November 6, 2002) (Stone, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08 [back to top]

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Bankruptcy court erred in reducing attorney’s actual fees when it had previously approved a one-third contingency fee. 5th Cir. PROCEDURAL POSTURE: The United States District Court, Northern District of Mississippi, entered a judgment that affirmed a bankruptcy court’s ruling that reduced appellant attorney’s fee after the bankruptcy court approved a one-third contingency fee for the attorney to pursue a disputed claim for the bankrupt’s estate and determined after the attorney was successful that the attorney fee award under the contingency fee was too high. The attorney appealed. OVERVIEW: An attorney sought a bankruptcy court’s approval of a fee arrangement to pursue an action on behalf of a bankruptcy estate, which arose from a divorce and remarriage of appellees, a debtor and the debtor’s husband. The attorney’s application stated she was willing to work on a one-third contingency basis. The bankruptcy court found litigation was highly likely and approved the fee arrangement. Recovery of the fee was predicated on an actual suit being filed following the filing of a demand letter. The attorney did not receive a response to her demand letter. She sued and soon moved for summary judgment. A court granted judgment against the debtor’s husband. He immediately tendered full payment to the court. The attorney applied for one-third of the recovered judgment as attorney’s fees. The bankruptcy court felt the fee would be too high and reduced it. Eventually, the trial court affirmed. After the attorney appealed, the appellate court found that the bankruptcy court’s attorney’s fee determination was an abuse of discretion because there did not exist intervening circumstances that the bankruptcy court was incapable of anticipating at the time it approved the compensation plan. Daniels v. Barron (In re Barron), 2003 U.S. App. LEXIS 6440, — F.3d — (5th Cir. April 4, 2003) (Jolly, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.01 [back to top]

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Legal malpractice judgment involving misrepresentation and misappropriation of settlement funds was nondischargeable. Bankr. S.D. Ohio PROCEDURAL POSTURE: A creditor filed an adversary proceeding to block the discharge of legal fees owed to her by a chapter 7 debtor under 11 U.S.C. §§ 523(a)(2)(A) and (4). In the alternative, the creditor sought to deny the discharge of all scheduled debt under 11 U.S.C. § 727(a)(2)(A), (3) and (5). OVERVIEW: After the creditor obtained judgment for the debtor in a legal malpractice case, the debtor hired other counsel to handle the appeal. The debtor signed a fee agreement under which any settlement proceeds were to be used to pay attorneys’ fees she owed the creditor. The debtor settled the case, lied to the creditor about the amount of the settlement, and transferred settlement proceeds in a series of complicated transactions involving her husband and four financial institutions. After the creditor obtained judgment against the debtor in state court, the debtor filed bankruptcy. The court held that the creditor proved the debt to her was nondischargeable under 11 U.S.C. § 523(a)(2)(A): (1) the debtor lied about the amount and disposition of the settlement and fraudulently concealed and dissipated settlement proceeds; (2) the creditor justifiably relied on the debtor’s misrepresentations; (3) this reliance proximately caused her injury. The creditor also established the applicability of 11 U.S.C. § 727(a)(3) and (5): the debtor could not account for settlement funds of $100,000 and failed to keep adequate records of her complicated bank transactions involving these funds. Miller v. Bauer (In re Bauer), 2003 Bankr. LEXIS 249, — B.R. — (Bankr. S.D. Ohio March 30, 2003) (Caldwell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1] [back to top]

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Confirmation of chapter 11 plan did not discharge student loans as plan did not establish undue hardship nor had debtor filed the appropriate adversary proceeding. M.D. Tenn. PROCEDURAL POSTURE: The bankruptcy court ruled in favor of appellees, a university and a guarantee corporation, and held that confirmation and successful completion of the debtor’s chapter 11 plan did not discharge his student loans as the plain language of 11 U.S.C. § 523(a)(8) mandated that student loans were nondischargeable unless their repayment caused an undue hardship on the debtor. The debtor appealed. OVERVIEW: The sole issue before the court was whether the debtor was entitled to a discharge of his student loan debt. The debtor asserted that the bankruptcy court erred in finding his student loan debts nondischargeable. The debtor raised three contentions: (1) the debt should have been discharged because appellees had notice of the proposed plan treatment and failed to object; (2) confirmation of the plan rendered the plan res judicata and freed from future challenges by creditors; and (3) collection of the debt was barred by laches. Confirmation of the debtor’s plan did not discharge his student loans. Because the debtor’s plan contained no provision explicitly suggesting that the plan itself constituted a finding of undue hardship or discharged the student loan debt, and the debtor did not file an adversary proceeding pursuant to Fed. R. Bankr. P. 7001(6), confirmation of the plan did not discharge the debtor’s student loan debt. Further, the plan did not afford appellees due process and appellees were not barred by laches from collecting on the student loan debt. The plan had no res judicata effect with respect to appellees. Kaufman v. Case W. Reserve Univ. (In re Kaufman), 2002 U.S. Dist. LEXIS 23903, — B.R. — (M.D. Tenn. November 14, 2002) (Echols, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Discharge denied where debtor attorney could not account for settlement funds misappropriated from client. Bankr. S.D. Ohio PROCEDURAL POSTURE: A creditor filed an adversary proceeding to block the discharge of legal fees owed to her by a chapter 7 debtor under 11 U.S.C. §§ 523(a)(2)(A) and (4). In the alternative, the creditor sought to deny the discharge of all scheduled debt under 11 U.S.C. §§ 727(a)(2)(A), (3) and (5). OVERVIEW: After the creditor obtained judgment for the debtor in a legal malpractice case, the debtor hired other counsel to handle the appeal. The debtor signed a fee agreement under which any settlement proceeds were to be used to pay attorney’s fees she owed the creditor. The debtor settled the case, lied to the creditor about the amount of the settlement, and transferred settlement proceeds in a series of complicated transactions involving her husband and four financial institutions. After the creditor obtained judgment against the debtor in state court, the debtor filed bankruptcy. The court held that the creditor proved the debt to her was nondischargeable under 11 U.S.C. § 523(a)(2)(A): (1) the debtor lied about the amount and disposition of the settlement and fraudulently concealed and dissipated settlement proceeds; (2) the creditor justifiably relied on the debtor’s misrepresentations; (3) this reliance proximately caused her injury. The creditor also established the applicability of 11 U.S.C. § 727(a)(3) and (5): the debtor could not account for settlement funds of $100,000 and failed to keep adequate records of her complicated bank transactions involving these funds. Miller v. Bauer (In re Bauer), 2003 Bankr. LEXIS 249, — B.R. — (Bankr. S.D. Ohio March 30, 2003) (Caldwell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.03 [back to top]

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