Collier Bankruptcy Case Update April-22-02
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 22, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 523(a)(7) District court erred in ruling that state
forfeited its rights by not commencing adversary proceeding.
Whitehouse v. LaRoche (1st Cir.)
28 U.S.C. § 157(b) Bankruptcy court lacked jurisdiction to hear insurance matter.
Gray v. Exec. Risk Indem., Inc. (In re Molten Metal Tech., Inc.) (Bankr. D. Mass.)
§ 552(b)(1) Unsecured, cross-collateralized creditor was
entitled to insurance proceeds from collateral.
In re Tower Air, Inc. (Bankr. D. Del.)
28 U.S.C. § 1334(b) Bankruptcy court denied vendor's motion to retransfer adversary proceeding to the district court from where it came.
N. Apparels, Inc. v. PNC Bank, N.A. (In re Forman Enters.) (Bankr. W.D. Pa.)
§ 327(a) Law firm could not be employed to perform trustee's
In re Computer Learning Ctrs., Inc. (Bankr. E.D. Va.)
§ 523(a)(8) Bankruptcy court's determination of undue hardship was upheld on appeal.
Educ. Resources Inst. v. Ekenasi (In re Ekenasi) (S.D. W. Va.)
§ 544(b)(1) Trustee not able to use strong-arm powers as
debtor was not insolvent at time of transfers.
Official Asbestos Claimants' Comm. v. Babcock & Wilcox Co.
(In re Babcock & Wilcox Co.) (Bankr. E.D. La.)
§ 109(e) Chapter 7 trustee had standing to object to debtors'
eligibility for chapter 13 relief.
In re Pisczek (Bankr. E.D. Mich.)
§ 704(1) Trustee was not allowed to collect money not owed to the estate.
Stevenson v. J.C. Bradford & Co. (In re Cannon) (6th Cir.)
§ 521(2) Debtors' failure to timely state intention to redeem
and perform that intention within 45 days did not result in loss of
right to redeem.
In re Rodgers (Bankr. C.D. Ill.)
§ 727(a)(5) Debtor's discharge denied due to failure to account for prepetition asset depletion.
First Commer. Fin. Group v. Hermanson (In re Hermanson) (Bankr. N.D. Ill.)
§ 524(a)(2) Creditor's notice regarding voluntary payments
did not violate the discharge injunction.
Ramirez v. GMAC (In re Ramirez) (Bankr. C.D. Cal.)
§ 1325(a)(5) On automobile finance company's objections to confirmation, court valued automobile and calculated rate of interest and adequate protection payments.
In re Marquez (Bankr. D. Ariz.)
Rule 8006(a) Debtors' appeal dismissed for failure to comply with
Webber v. Williamson (In re Thousand Adventures of Kan., Inc.) (D. Kan.)
§ 362(h) Sale of debtors' property, in violation of the automatic stay, was void.
Venn v. Bazzel (In re Lambert) (Bankr. N.D. Fla.)
§ 523(a)(2)(B) Creditor's reliance on debtor's false financial statement was unreasonable under the circumstances.
Midwest Bank & Trust Co. v. Baratta (In re Baratta) (Bankr. M.D. Fla.)
§ 523(a)(8) Bankruptcy court's decision allowing partial discharge of student loans reversed.
Ill. Student Assistance Comm'n v. Cox (In re Cox) (N.D. Ga.)
§ 541(c) Debtor's Keogh plan was property of the estate.
In re Sutton (Bankr. M.D. Fla.)
§ 1330(a) Creditor failed to demonstrate fraudulent intent in proceeding to obtain revocation of confirmation.
Dep't of Revenue v. Randolph (In re Randolph) (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries1st Cir.
District court erred in ruling that state forfeited
its rights by not commencing adversary proceeding. 1st Cir.
The state (Rhode Island) appealed the holding of the district court that
the former chapter 7 debtor's obligations to the state, for its costs in
remediating water contamination on the debtor's property and for related
civil penalties, were expunged by the debtor's subsequent discharge.
Before an involuntary petition was filed against him, the debtor was
found by the district court to have violated various environmental laws.
The debtor and the state negotiated a postpetition settlement of the
remedial damages, whereby the debtor agreed to reimburse the state for
any shortfall amount between the cost of a new waste water treatment
facility and the amount received by the property's former owners.
Pursuant to the parties' consent decree, the debtor promised to submit a
motion to reaffirm the obligation and agreed that in the event of a
default, the amount would become a nondischargeable civil penalty under
section 523(a)(7). Because the debtor submitted his motion to reaffirm
the obligation more than two years after receiving a discharge, the
bankruptcy court rejected the motion as untimely. The state then moved
the district court for a judicial declaration that the debtor had
breached the agreement, thereby rendering himself liable for the
shortfall amount. The district court entered judgment for the debtor and
determined that the state's failure to commence an adversary proceeding
to obtain a bankruptcy court ruling that the indebtedness was
nondischargeable resulted in the discharge of the amount contemplated by
the consent decree. The Court of Appeals for the First Circuit vacated
the judgment, holding that because the district court possessed
concurrent jurisdiction over the section 523(a)(7) dischargeability
issue when it approved the consent decree, the debtor's subsequent
discharge did not relieve him of liability for the civil penalty.
The exception to discharge was not one that required adjudication by the
bankruptcy court under section 523(c)(1), and the state was free to
invoke the jurisdiction of any appropriate forum either before or after
the bankruptcy case was closed (citing Collier on Bankruptcy, 15th
Ed. Revised). Whitehouse v. LaRoche, 2002 U.S. App. LEXIS
716, 277 F.3d 568 (1st Cir. January 17, 2002) (Cyr, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.13, .26; 9:4007
Bankruptcy court lacked jurisdiction to hear
insurance matter. Bankr. D. Mass. The chapter 11 trustee
filed a motion for partial summary judgment, seeking a determination as
to whether the trustee was a different entity from the chapter 11 debtor
for purposes of the 'insured-versus-insured' exclusion in certain
insurance policies covering claims against the debtor's officers and
directors. Specifically, the debtor's insurers declined to provide
coverage for claims brought by the trustee against certain of the
debtor's officers and directors, on the basis that the debtor and the
trustee stood in parity and, therefore, the trustee's actions against
the directors and officers of the debtor companies were not covered
under the policies. Before the court could determine the coverage issue,
it first addressed whether it had jurisdiction pursuant to 28 U.S.C.
§ 157. Since the insurers had not consented to the bankruptcy court
entering final orders and judgment in the case, the bankruptcy court
determined that the proceeding was a 'core' proceeding only if it was
integral to the basic function of the bankruptcy court had historically
been entrusted to the bankruptcy court, and had not been reserved
exclusively for Article III courts. The court then found that the
insurance coverage issue in controversy was not integral to the
bankruptcy process. The bankruptcy court then found that the
insurance matter at issue was merely ancillary to the debtor's
bankruptcy. Further, although it would affect the amount of funds
available for distribution, the trustee's litigation of the matter would
not otherwise affect the debtor's bankruptcy case or its relationships
with its creditors. Additionally, the insurance matter did not arise
under the Code and was governed by state law. Thus, in accordance with
28 U.S.C. § 157(c)(1), the court heard the matter and submitted
proposed conclusions of law to the district court for entry of final
judgment after de novo review. Gray v. Exec. Risk Indem., Inc. (In
re Molten Metal Tech., Inc.), 2002 Bankr. LEXIS 112, 271 B.R. 711
(Bankr. D. Mass. January 3, 2002) (Kenner, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.02
Unsecured, cross-collateralized creditor was entitled to insurance
proceeds from collateral. Bankr. D. Del. The
undersecured creditor objected to the chapter 7 trustee's motion to
approve a compromise with the insurance company, asserting that it was
entitled to the insurance proceeds. The creditor had loaned funds to the
debtor to purchase an airplane and four jet engines, and was granted a
cross-collateralized security interest in each item, as well as all
insurance proceeds derived from the collateral. One of the engines was
damaged and later repaired by the debtor prepetition. Although much of
the collateral, including the engine, was turned over to the creditor
postpetition, the trustee successfully sought payment from the insurer
to cover the damage to the engine. The trustee argued that even if the
creditor was entitled to the proceeds pursuant to state (Arizona) law
and the security agreement, the equities of the case warranted the court
to order otherwise. The bankruptcy court rendered judgment in favor of
the creditor, holding that the trustee failed to meet any of the
prerequisites for application of the equity exception of section
552(b). Application of the exception was generally limited to cases
in which the lender was oversecured and would obtain a windfall from
collateral that appreciated in value as a result of the trustee's or
debtor's use of other assets of the estate. The court noted that while
the creditor could receive a net enhancement from the one jet engine, it
was grossly undersecured and had suffered serious losses from the
liquidation of the rest of the collateral securing its loans. In
re Tower Air, Inc., 2002 Bankr. LEXIS 102, - B.R. - (Bankr. D. Del.
February 11, 2002) (Newsome, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:552.02
Bankruptcy court denied vendor's motion to retransfer adversary proceeding to the district court from where it came. Bankr. W.D. Pa. The vendor moved to transfer venue of an adversary proceeding to the district court in New Jersey, which previously had transferred venue of the action to the bankruptcy court in Pennsylvania, where the debtor's chapter 11 case was pending. The vendor had commenced an action against the secured lender in state (New Jersey) court for wrongfully dishonoring a letter of credit payable to the vendor for apparel the debtor had purchased from it. The case was removed to the district court, which granted a motion by the lender to transfer the case to the bankruptcy court. The New Jersey district court concluded that the case was related to the bankruptcy case and that the vendor had not sufficiently demonstrated that a change in venue would create any significant inconvenience. The vendor neither sought reconsideration of the decision nor appealed it, but instead brought the motion to retransfer the action back to the New Jersey district court after the debtor's case converted to chapter 7. The vendor contended that the court lacked jurisdiction because the impact on the debtor's estate of a monetary judgment against the lender would not be substantial since the debtor's resulting obligation to indemnify the lender would be dischargeable. The bankruptcy court denied the motion to transfer venue, holding that the bankruptcy court had jurisdiction over the adversary proceeding because resolution of the dispute between the vendor and the secured lender could affect the debtor's liabilities or administration of the estate. A monetary judgment in favor of the vendor could conceivably affect the amount of the debtor's assets that would be available for distribution to creditors other than the secured lender. Because the New Jersey district court had previously determined where venue was proper, the doctrine of the law of the case further precluded retransfer of the adversary proceeding. N. Apparels, Inc. v. PNC Bank, N.A. (In re Forman Enters.), 2002 Bankr. LEXIS 28, 271 B.R. 483 (Bankr. W.D. Pa. January 9, 2002) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01, 4.04
Law firm could not be employed to perform trustee's duties.
Bankr. E.D. Va. The debtor, which owned and operated more than 25
computer training schools throughout the country, had more than 9,000
students and employed more than 1,600 people. After the debtor filed for
bankruptcy, the chapter 7 trustee was appointed to liquidate the
debtor's assets. In order to obtain as much money for the estate as
possible, the trustee sought to sell the schools as a going concern. In
connection with preparing for the sales, the trustee was authorized to
retain five law firms to represent the estate. The trustee then sought
to employ a sixth law firm to assist with identifying potential
insurance recoveries. The application was properly noticed and no
objections to the law firm's employment were filed. Despite the lack of
objection, the bankruptcy court set the application for hearing, noting
that the application failed to identify the specific nature and scope of
the proposed representation. The application also failed to identify the
basis for the contingent fee provision and explain why the proposed
hourly rate exceeded that commonly charged in the local legal community.
After a hearing on the matter, the bankruptcy court denied the
trustee's application for employment of insurance counsel, finding that
the application sought to retain counsel to perform the trustee's
administrative duties. In re Computer Learning Ctrs.,
Inc., 2001 Bankr. LEXIS 1776, 272 B.R. 897 (Bankr. E.D. Va. December
18, 2001) (Mayer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:327.02
Bankruptcy court's determination of undue hardship
was upheld on appeal. S.D. W. Va. The creditor appealed
an order of the bankruptcy court granting the chapter 13 debtor an undue
hardship discharge of his student loan obligations. The debtor was a
50-year-old emigrant from Nigeria with significant medical conditions.
Although he maintained employment at a reasonable salary, he had
accruing child support obligations for three of his children and was the
sole supporter for six of his children. He attempted to buy the least
expensive food, shopped for clothing at thrift stores and negotiated
regularly with his landlord to accept partial rent payments. The
creditor argued that the bankruptcy court improperly applied the undue
hardship test. According to the creditor, the bankruptcy court
incorrectly concluded that the debtor maximized his income and minimized
his expenses, and failed to consider a partial, rather than a complete,
discharge. The district court affirmed the bankruptcy court's order,
holding that there was ample basis in the record to conclude that a
complete discharge of the debtor's student loan debts was warranted
under section 523(a)(8). The debtor's circumstances and dire
financial straits plainly supported the bankruptcy court's conclusions
that repaying the loans would cause an undue hardship on the debtor and
his dependents (citing Collier on Bankruptcy, 15th Ed. Revised).
Educ. Resources Inst. v. Ekenasi (In re Ekenasi), 2002
U.S. Dist. LEXIS 421, 271 B.R. 256 (S.D. W. Va. January 7, 2002) (Haden,
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Trustee not able to use strong-arm powers as debtor was not
insolvent at time of transfers. Bankr. E.D. La. For many
decades before and through the mid-1970s, the debtor designed,
constructed and installed asbestos-insulate boilers at over 12,000
different sites. Beginning in the early 1980s, the debtor began to face
thousands of personal injury complaints brought by individuals who
suffered from asbestos-related diseases. After significant evaluation,
the debtor developed a settlement strategy for the asbestos claims that
emphasized settlement rather than litigation. Under the policy, the
debtor made substantial payouts in litigation settlements. Settlement
funds originally came from insurance coverage and then from excess
insurance coverage. Eventually, the debtor was paying the settlements
out of pocket. In 1996, the corporate enterprise that the debtor
belonged to formulated and implemented a significant restructuring
program. The restructuring program called for the debtor to distribute
all of the shares of three of its operating subsidiaries to the debtor's
sole shareholder, which was an inside corporation, as of July 1, 1998.
It also called for the debtor to transfer to the shareholder a
$313,000,000 note receivable owed to the debtor by the shareholder and a
dormant shell corporation that held a $102,600,000 note receivable that
was also from the shareholder. Once effectuated, the transfers
extinguished both debts owed by the shareholder. On February 22, 2000,
the debtor, along with three affiliated companies, filed for chapter 11
relief. The bankruptcy filing was necessitated by the increasing costs
of settling the asbestos-related litigation. After the debtor filed an
adversary proceeding related to the asbestos litigation, the asbestos
claimant creditors filed a motion to intervene as party-plaintiffs, and
other motions to realign the parties. The creditors' motion was granted
and the creditors were allowed to enter as plaintiffs against the
debtor. The creditors then sought to avoid the 1998 restructuring
transfers on the basis that the transfers reduced the debtor's book
value by approximately $622,000,000 or nearly 80 percent (from
$791,000,000 to $169,200,000). The issue of whether the transfers were
voidable came down to whether the debtor was insolvent on July 1, 1998,
when the transfers were made to the insider shareholder. Under state
(Louisiana) law, the debtor was insolvent if the total of its
liabilities exceeded the total of its fairly appraised assets on the
date the transfers were made. The court heard significant testimony from
the debtor and the creditors regarding the estimation and valuation of
future litigation. After crediting the testimony of the debtor's
expert witness, the bankruptcy court found that the debtor was not
insolvent on the day that the transfers were made. The court also
noted that, without the use of hindsight, the estimates used by the
debtor in determining the cost of future litigation did not appear so
low or unreasonable for the court to conclude that the debtor knew, or
should have known, that it was insolvent on the date of the transfers.
Official Asbestos Claimants' Comm. v. Babcock & Wilcox Co. (In
re Babcock & Wilcox Co.), 2002 Bankr. LEXIS 103, 274 B.R. 230
(Bankr. E.D. La. February 8, 2002) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.09
Chapter 7 trustee had standing to object to debtors' eligibility
for chapter 13 relief. Bankr. E.D. Mich. Approximately
three months after they filed for chapter 7 relief, the debtors filed a
'notice of conversion of chapter 7 case to chapter 13 case.' The
bankruptcy court entered the 'notice of conversion of case from chapter
7 to chapter 13' and ordered the debtor to file a supplemental matrix
and plan. The debtors complied with the court's order. Two weeks later,
the chapter 7 trustee filed a motion to reconvert the debtors' case from
chapter 13 to chapter 7. The trustee asserted, among other things, that
the debtors were ineligible for chapter 13 because they had unsecured
debt in excess of the prescribed limits of section 109(e). The debtors
objected to the motion and challenged the trustee's standing to seek
conversion. The debtors also claimed that they were eligible for relief
in chapter 13 based on an amended schedule that listed a primarily
unsecured claim originally valued at $290,000 as a contingent claim with
a value of $0. The bankruptcy court held that the debtors' original
'notice of conversion' was actually a motion that the court never ruled
on; thus, the case remained a chapter 7 case and the trustee had
standing to challenge the debtors' chapter 13 eligibility. The court
also found that the existing record did not permit it to make necessary
findings regarding the $290,000 debt that the debtors' revalued and
reclassified, and scheduled a hearing to establish a fuller
record.In re Pisczek, 2001 Bankr. LEXIS 1781, 269 B.R. 641
(Bankr. E.D. Mich. May 22, 2001) (Spector, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.06
Trustee was not allowed to collect money not owed to
the estate. 6th Cir. The chapter 7 trustee appealed the
district court's dismissal of its noncore adversary proceeding initiated
against the debtor's commodities broker. The trustee had filed suit
against the broker, alleging violations of federal commodities laws,
breach of fiduciary duties, fraud and violations of state (Tennessee)
consumer protection laws. The debtor, a real estate attorney,
misappropriated funds in his client escrow accounts to cover losses
sustained while trading commodity futures. The bankruptcy court made
proposed findings of fact and conclusions of law recommending that the
district court enter judgment in favor of the trustee. The district
court sustained the broker's objection that the trustee lacked standing
to bring the noncore proceeding, because the debtor could not have
brought suit against it. The Court of Appeals for the Sixth Circuit
affirmed the district court, holding that because the cause of action
belonged solely to the clients the debtor defrauded, and not the general
creditors of the estate, the trustee had no standing to pursue the claim
against the debtor's broker. The lawsuit against the broker could
only recover misappropriated trust property for the debtor's clients,
who were the beneficiaries of the express trust who lost their money
upon the collapse of his schemes. The action brought by the trustee
against the broker could not bring property into the estate for the
benefit of all creditors, and was appropriately dismissed.
Stevenson v. J.C. Bradford & Co. (In re Cannon), 2002 U.S.
App. LEXIS 747, 277 F.3d 838 (6th Cir. January 18, 2002) (Batchelder,
Collier on Bankruptcy, 15th Ed. Revised 6:704.02
Debtors' failure to timely state intention to redeem and perform
that intention within 45 days did not result in loss of right to
redeem. Bankr. C.D. Ill. In a case that was converted from
chapter 13 to chapter 7, a secured creditor objected to the debtors'
motion to redeem a vehicle. The creditor argued that the proposed
redemption was untimely because it was filed more than 45 days after the
debtors' statement of intention. The creditor also argued that if
redemption was allowed, the redemption price should be determined by the
vehicle's current value rather than the balance remaining to be paid on
the secured claim allowed in the chapter 13 plan. The bankruptcy court
allowed the debtors to redeem the vehicle, and also determined the
amount that needed to be paid. The court held, among other things, that
a failure by a debtor to timely state an intention, and to redeem and
perform that intention within the 45-day period mandated by section
521(2)(B), does not result in loss of the right to redeem. The court
noted that in the past, it had allowed redemption debtors who promptly
filed motions to redeem in response to creditors' motions for relief
from the automatic stay. Any potential prejudice to secured creditors
(i.e., depreciation of collateral caused by debtors' delay) was
addressed by adjusting the valuation date or by awarding adequate
protection to the creditors. As to the amount of the claim, the court
held that the debtor had to pay only the remaining chapter 13 claim
balance, regardless of the collateral's current value, for purposes of
redemption under section 722. In re Rodgers, 2002
Bankr. LEXIS 120, 273 B.R. 186 (Bankr. C.D. Ill. February 7, 2002)
Collier on Bankruptcy, 15th Ed. Revised 4:521.10
Debtor's discharge denied due to failure to account
for prepetition asset depletion. Bankr. N.D. Ill. In December
1992, the debtor had a net worth exceeding $4,000,000, and in August
1993, he was the first- or second-largest shareholder in 13 companies.
At other times during 1993, the debtor estimated that his personal net
worth was between $8,500,000 and $9,500,000. When the debtor filed for
bankruptcy in May 1998, he reported a negative net worth of
approximately $4,300,000. His schedules showed an ownership interest in
two companies and his interest in each was valued at zero. The creditor
filed an adversary proceeding objecting to the debtor's discharge, based
on section 727(a)(3) and (a)(5). Specifically, the creditor argued that
the debtor was not entitled to a discharge because he failed to produce
evidence regarding the disappearance of substantial prepetition assets.
The creditor established that the debtor formerly owned substantial,
identifiable assets that were not available for distribution to
creditors. It then became the debtor's burden to establish a
satisfactory explanation for the asset reduction. The debtor testified
that his assets disappeared because his shares in two corporations
became valueless. However, the debtor failed to explain what happened to
his other equity interests or his valuable personal property. After
finding the debtor's explanation incomplete and unsatisfactory in light
of the commercial nature of the transactions at issue, the bankruptcy
court denied the debtor's discharge under section 727(a)(5). In
deciding the issue, the bankruptcy court noted that, although a debtor's
explanation regarding the depletion of assets need not be comprehensive,
it must be supported by at least some documentation and that the
documentation must be sufficient to eliminate the need for the court to
speculate as to what happened to the assets. First Commer. Fin.
Group v. Hermanson (In re Hermanson), 2002 Bankr. LEXIS 113, 273
B.R. 538 (Bankr. N.D. Ill. January 14, 2002) (Barliant, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.08
Creditor's notice regarding voluntary payments did not violate the
discharge injunction. Bankr. C.D. Cal. The chapter 7 debtors
stated an intent to reaffirm the obligation on their vehicle but did not
enter into a reaffirmation agreement. After the discharge was entered,
the lender resumed sending billing statements for the vehicle and the
debtors paid all of these bills, ultimately paying the contract amount
for the car. Thereafter, the debtor husband filed a class action suit
seeking a determination that the lender's actions were, among other
wrongs, a violation of the discharge injunction. The bankruptcy court
held that the billing statements entitled 'Transaction Summaries of
Voluntary Payments Made' did not violate the discharge injunction
because they did not harass or threaten the debtor. The statements
did not assert that the debtor was personally liable on the obligation
and amounted to a courtesy that merely advised the debtor of what
amounts had to be paid to keep the vehicle. Moreover, the debtor's
understanding of his obligations was derived from statements made by his
bankruptcy attorney, not from any statements made by the
lender.Ramirez v. GMAC (In re Ramirez), 2002 Bankr. LEXIS 117,
273 B.R. 620 (Bankr. C.D. Cal. January 28, 2002) (Donovan, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02
On automobile finance company's objections to
confirmation, court valued automobile and calculated rate of interest
and adequate protection payments. Bankr. D. Ariz. An
automobile finance company objected to confirmation of the debtors'
chapter 13 plan on the grounds that the debtors' valuation of the
security (an automobile), the proposed interest payment on the finance
company's secured claim and the proposed adequate protection payments
were inadequate. Specifically, the finance company argued that the
debtor's plan should have valued its collateral on a retail basis, that
the plan should have provided for payment of interest at the contract
rate to ensure that the finance company received the present value of
its secured claim and that the plan should have provided for adequate
protection payments in the same amount as the debtors' regular monthly
car payments. The bankruptcy court overruled the finance company's
objections in part, and determined the value of the automobile,
calculated the applicable rate of interest and determined the amount of
adequate protection payments. The court held, among other things,
that a vehicle's replacement value should be determined by using the
average of the retail and wholesale value of the vehicle as the starting
point, and adjusting that value up or down based upon the actual
features and condition of the vehicle. The court used a 'formula
approach' to determine the appropriate rate of interest on the finance
company's claim, by applying the regional average interest rate for
conventional used car loans for a 36-month term as a base and adding an
appropriate risk premium. Finally, the court concluded that as an
undersecured creditor, the amount of the finance company's adequate
protection payments was limited to the depreciation of the value of its
collateral. The court noted that in its district, payments of 1 percent
of a vehicle's value were routinely paid by chapter 13 debtors to
compensate automobile creditors for depreciation. Since the finance
company presented no evidence to demonstrate that the collateral's rate
of depreciation was the same as the amount of the debtors' regular
monthly payment, the court adopted the 1 percent of the vehicle's
replacement value per month as the amount of the adequate protection
payments. In re Marquez, 2001 Bankr. LEXIS 1790, 270 B.R. 761
(Bankr. D. Ariz. October 23, 2001) (Hollowell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.06
Debtors' appeal dismissed for failure to comply with appellate
procedure. D. Kan. After the debtors' filed for chapter 7
relief, the trustee filed a motion for an order authorizing the sale of
certain real and personal property belonging to the debtors. The debtors
were served with the motion and, in response, filed a motion to quash.
After a hearing on the matter, the bankruptcy court entered its order
granting the motion on November 2, 2001. The debtors appealed, but
failed to submit any of the documentation required under Rule 8006. On
December 12, 2001, the bankruptcy court filed a certificate of
noncompliance with the district court, notifying the district court that
the debtors had not filed a designation of record and statement of
issues. The district court then issued an order requiring the debtors to
show cause in writing on or before January 3, 2002 why their appeal
should not be dismissed for lack of prosecution. On January 3, 2002, the
debtors filed another motion to quash, which renewed their objection to
the sale but did not include any designation of the record for appeal.
The district court granted the trustee's motion to dismiss the appeal
based on the debtors' failure to timely designate the record, timely
respond to the trustee's motion to dismiss or reasonably explain the
reason for their noncompliance. The court also found that the
debtors' appeal lacked substance, and alternatively affirmed the
bankruptcy court's order authorizing the sale of the debtors' property
on the grounds and basis provided in the bankruptcy court's decision.
Webber v. Williamson (In re Thousand Adventures of Kan.,
Inc.), 2002 U.S. Dist. LEXIS 2386, - B.R. - (D. Kan. January 15,
2002) (Crow, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:8006.03, .07-.09
Sale of debtors' property, in violation of the automatic stay, was
void. Bankr. N.D. Fla. The chapter 7 trustee moved for
summary judgment on his complaint seeking to avoid a tax deed issued by
the county clerk as a violation of the automatic stay. The debtors
failed to pay taxes on nonhomestead real estate, and the county tax
collector sold a certificate for the delinquent taxes prepetition. The
county clerk subsequently sold the property to a third party while the
debtors' case was pending. The tax collector argued that the debtors'
failure to pay taxes and the county's prepetition sale of the tax
certificate set in motion a chain of events required by state (Florida)
statute, that culminated in the postpetition clerical function of
selling the property via the issuance of a tax deed. She contended that
the final act of the issuance of the deed and the exchange of money were
ministerial acts that the county officials were required to take, but
were not affirmative steps taken to affect a postpetition transfer of
property. The bankruptcy court granted judgment to the trustee, holding
that the postpetition tax sale was a direct violation of the
automatic stay and, therefore, was null and void. The debtors had
retained a vested ownership in the property, making the land property of
the estate. The trustee's action to avoid the transfer of the property
was denied as moot, since there was no transfer for the trustee to
avoid. Venn v. Bazzel (In re Lambert), 2002 Bankr. LEXIS 100,
273 B.R. 663 (Bankr. N.D. Fla. January 9, 2002) (Killian, Jr.,
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
Creditor's reliance on debtor's false financial
statement was unreasonable under the circumstances. Bankr. M.D.
Fla. The creditor filed an adversary proceeding, seeking a
determination that the chapter 7 debtor's obligation to it was
nondischargeable pursuant to section 523(a)(2)(B). The debtor executed a
promissory note in favor of the creditor for a business line of credit,
and a second note a year later to pay the previous loan, which had
matured. In support of his initial loan application, the debtor provided
a financial statement to the creditor that indicated that he owned real
property, when in fact he had transferred his interest in the properties
to his wife approximately two years earlier. The debtor's law firm was
also a tenant of a building owned by the creditor, and at the time the
debtor provided his financial statement, the firm owed the creditor
substantial back rent, for which the debtor had executed an additional
promissory note. The creditor did not take any steps to verify that the
information contained in the statement was correct before lending the
debtor the funds. The bankruptcy court entered judgment in favor of the
debtor, holding that because the creditor failed to establish that
its reliance on the false written financial statement was reasonable,
the debt was dischargeable under section 523(a)(2)(B). The court
noted that red flags obligated the creditor to require some proof that
the debtor had a cognizable interest in the real property listed on his
financial statement, either through a title search or by some
documentation. From the beginning, the relationship between the parties
gave a clear picture to the creditor that the debtor was in financial
trouble, delinquent on his firm's rent, and could not satisfy any series
of promissory notes. Midwest Bank & Trust Co. v. Baratta (In
re Baratta), 2001 Bankr. LEXIS 1764, 272 B.R. 501 (Bankr. M.D. Fla.
November 15, 2001) (Paskay, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08[d]
Bankruptcy court's decision allowing partial
discharge of student loans reversed. N.D. Ga. The debtor, an
attorney licensed to practice in Georgia and Michigan, filed an
adversary complaint seeking to discharge $114,000 in student loans he
accrued while obtaining his J.D. and L.L.M. After being unable to find a
law job that suited him, the debtor had formed his own law practice but
was unable to simultaneously satisfy his student loan repayment
obligations and maintain his law practice. The debtor then went to work
for his brother's landscaping company, earning $24,000 per year, and
began winding down his law practice. After a hearing on the debtor's
dischargeability complaint, the bankruptcy court found that the debtor
was unable to maintain a minimal standard of living given the totality
of his circumstances, and that he had made a good faith effort to repay
his student loans. However, the court found that the debtor's current
inability to repay his student loans was unlikely to be a permanent
condition. Thus, the bankruptcy court found that the debtor had failed
to satisfy the third prong of the 'undue hardship' test. Nonetheless, in
light of the magnitude of the debtor's student loans and his history,
expenses and potential, the bankruptcy court reduced the debtor's
student loan indebtedness to $50,000. The creditors on the student loans
appealed, arguing that the debtor was not entitled to a discharge of a
portion of his student loans because he had failed to satisfy the 'undue
hardship' standard, and section 523(a)(8) does not allow for a partial
discharge of student loan indebtedness. The district court agreed
with the creditors and reversed the bankruptcy court's ruling. The
district court also noted that the 'all or nothing' approach related to
discharges of student loans was supported by the clear and unambiguous
language of section 523(a)(8). Further, the district court believed that
the use of section 105(a) to support a partial discharge would be
inappropriate because it would permit student loan dischargeability upon
a lesser showing than is required under section 523(a)(8) and, thus,
would conflict with the specific mandate of that section. Ill.
Student Assistance Comm'n v. Cox (In re Cox), 2002 U.S. Dist.
LEXIS 2313, 273 B.R. 719 (N.D. Ga. January 9, 2002) (O'Kelley, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Debtor's Keogh plan was property of the estate.
Bankr. M.D. Fla. The chapter 7 trustee objected to the debtor's
claimed exemption in his Keogh retirement plan. The debtor was the sole
owner and operator of his real estate firm, and was the only participant
in his Keogh plan, the only administrator of the plan, the sole
beneficiary of the plan and was not an employee. Because the debtor was
66 years old, he was entitled to payment under the plan. The trustee
asserted that the plan assets were not excluded from the estate pursuant
to section 541(c)(2) and could not be claimed exempt. The bankruptcy
court granted summary judgment for the trustee, holding that the
debtor's interest in the Keogh plan was not excluded from his estate by
virtue of section 541(c)(2). In order for the plan to have been
excluded from the estate, it could not inure to the benefit of the
employer. The court further found that the plan was not exempt under
section 522(d)(10)(E) because the plan was established by an insider
that employed the debtor, payment was on account of age and the plan did
not qualify under applicable provisions of the Internal Revenue Code.
In re Sutton, 2002 Bankr. LEXIS 90, 272 B.R. 802 (Bankr. M.D.
Fla. January 23, 2002) (Paskay, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.24
Creditor failed to demonstrate fraudulent intent in
proceeding to obtain revocation of confirmation. Bankr. M.D.
Fla. The chapter 13 plan proposed to pay a priority claim, in full,
outside the plan and the priority creditor objected, asserting only that
the debtor 'failed to provide for all priority claims as required.' When
the creditor failed to appear at the hearing, the court confirmed the
plan. The creditor then sought to revoke the order of confirmation and
the bankruptcy court held that although the debtor falsely implied
that the creditor consented to the plan treatment, the creditor failed
to demonstrate a fraudulent intent sufficient to require revocation of
the chapter 13 order of confirmation. By providing for payment
outside the plan, the debtor falsely implied that the creditor agreed to
this treatment. However, the court rejected the creditor's arguments
that fraudulent intent could be inferred from the fact that the debtor
had experienced bankruptcy counsel and that the debtor had notice of the
defect by virtue of the creditor's rather oblique objection (citing
Collier on Bankruptcy, 15th Ed. Revised). Dep't of Revenue
v. Randolph (In re Randolph), 2002 Bankr. LEXIS 121, 273 B.R.
914 (Bankr. M.D. Fla. January 23, 2002) (Proctor, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1330.01