Collier Bankruptcy Case Update April-26-01
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.
March 26, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 362(a)(1) Continuation of sale did not warrant sanctions.
In re Pond (Bankr. D. Mass.) 034013§ 362(a)(7) Automatic stay prohibited setoff of postpetition debt.
United States of America v. Fleet National Bank (In re Calorie Express Co.) (D. Mass.) 034014§ 507(a)(8) Debtor’s inaccurate tax estimate that invalidated filing extension did not also cause tax debt to fall outside three year period.
Kimball v. United States (In re Kimball) (Bankr. D. Mass.) 034027
3d Cir.
§ 105(a) Motion for preliminary injunction was denied.
Sabratek Corp. v. LaSalle Bank, N.A. (In re Sabratek Corp.) (Bankr. D. Del.) 034001§ 365(d)(10) Letter of credit proceeds fully satisfied postpetition rent claim, rendering moot an administrative expense claim.
In re Hechinger Inv. Co. of Delaware (Bankr. D. Del.) 034018§ 503(b)(1)(A) Additional consideration due under agreement for sale of business gave rise to prepetition claim and not administrative expense.
In re APF Co. (Bankr. D. Del.) 034023§ 510(a) Allegations in debtor’s complaint withstood contractual subordination count, but more definite statement was required. Montgomery Ward Holding Corp. v. Schoeberl (In re Montgomery Ward Holding Corp.) (Bankr. D. Del.) 034029
4th Cir.
§ 365(c) Purchaser under hog partnership agreement could not compel debtor to reject executory contract.
In re Neuhoff Farms, Inc. (Bankr. E.D.N.C.) 034017§ 365(d)(10) In converted case, equipment lessor was entitled to administrative claim for postpetition rent during postpetition preconversion period.
In re Eastern Agri-Systems, Inc. (Bankr. E.D.N.C.) 034019§ 523(a)(2)(A) Creditor met burden of establishing debtor’s fraud and violations of state consumer protection statute for nondischargeability purposes.
Fowler v. Garey (In re Garey) (Bankr. E.D. Va.) 034035
5th Cir.
§ 330(a)(1) Court applied community rate in determining reasonable compensation to trustee’s special counsel.
In re El Paso Refinery, L.P. (Bankr. W.D. Tex.) 034007§ 365(a) Lease deemed rejected on chapter 11 filing date.
In re O’Neil Theaters, Inc. (Bankr. E.D. La.) 034015Rule 7062 Creditor not entitled to stay as of right upon posting of bond during appeal of contested matter.
In re West Delta Oil Co. (E.D. La.) 034073
6th Cir.
§ 109(g) Debtor was ineligible for chapter 13 relief.
In re Pike (Bankr. S.D. Ohio) 034003§ 506(a) Value of vehicle was determined for redemption.
In re Ballard (Bankr. W.D. Tenn.) 034024§ 523(a)(2)(A) Creditor failed to establish false pretenses or actual fraud.
Alside Supply Center v. Kromar (In re Kromar) (Bankr. N.D. Ohio) 034036§ 541(a)(1) Issue of whether inventory and receivables were estate property required further discovery, but debtor held at least some equitable interest that supported court’s entry of interim order.
In re LTV Steel Co. (Bankr. N.D. Ohio) 034040
7th Cir.
§ 105(a) Court rejected creditor’s attempt to circumvent Rule 9011 safe harbor requirements by seeking relief under section 105. In re McNichols (Bankr. N.D. Ill.) 034002
§ 506(a) State liquor license was not subject to liens.
VanKirk v. Boyer (In re Barnes) (N.D. Ind.) 034025§ 547(b)(5) Trustee’s motion for summary judgment denied for failure to allege or establish that transfers allowed transferee to receive more than it would have in a chapter 7 distribution.
Kapila v. Acme Portable Machines, Inc. (In re I.M. Import & Export, Inc.) (Bankr. N.D. Ill.) 034043§ 1103(b) Neither attorney-client privilege nor imputed disqualification precluded employment of accounting firm.
In re Doctors Hospital of Hyde Park, Inc. (N.D. Ill.) 034051
8th Cir.
§ 523(a)(5) Former wife failed to satisfy burden of proving that debtor/former husband’s obligations were in the nature of maintenance or support.
Kennard v. Kennard (In re Kennard) (Bankr. W.D. Mo.) 034038§ 727(a)(2) Chapter 7 trustee failed to meet burden in establishing debtor’s fraudulent intent.
Jacoway v. Mathis (In re Mathis) (Bankr. W.D. Ark.) 034049§ Rule 523(a)(15) Secured creditor whose future advances were not noted on certificate of title did not have a properly perfected lien.
Lumley v. Lumley (In re Lumley) (Bankr. W.D. Mo.) 034060§ Rule 544(a)(1) Secured creditor whose future advances were not noted on certificate of title did not have a properly perfected lien.
In re Merrill (Bankr. W.D. Mo.) 034061
9th Cir.
§ 305(a) Bankruptcy court abstained from hearing debtor’s dispute with IRS and dismissed petition.
In re Guenther (Bankr. D. Or.) 034004§ 365(f)(1) Court of Appeals affirmed invalidation of change in ownership provision as unenforceable anti-assignment clause. Crow Winthrop Dev. Ltd. Partnership v. Jamboree LLC (In re Crow Winthrop Operating Partnership) (9th Cir.) 034020
28 U.S.C. § 157(b) Proceeding on counterclaim was core proceeding in which court could enter judgment.
Marshall v. Marshall (In re Marshall) (Bankr. C.D. Cal.) 034063Rule 2016(b) Attorney’s request for fees reduced by 20 percent for failure to comply with disclosure requirements.
In re Combe Farms, Inc. (Bankr. D. Idaho) 034068
Collier Bankruptcy Case Summaries
1st Cir.
Continuation of sale did not warrant sanctions. Bankr. D. Mass. The chapter 11 debtor requested the imposition of sanctions against a creditor for violating the automatic stay by continuing a foreclosure sale without authority of the court. A foreclosure sale had been pending at the time the debtor filed its case and the creditor continued the sale three times postpetition. The creditor asserted that continuation of the sale was not a stay violation and even if it were, it was not a willful violation. The bankruptcy court denied the request for sanctions, holding that a single continuation of a foreclosure sale following the filing of a petition was not a violation of the automatic stay if, before the continued sales date, the creditor filed an appropriate motion for relief from stay. The court noted that there should not be an absolute rule allowing continuances of foreclosure sales in all circumstances, however. Given the obscurity of the rule, the court did not impose sanctions on the creditor.In re Pond, 2001 Bankr. LEXIS 173, – B.R. – (Bankr. D. Mass. January 18, 2001) (Hillman, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3], .11
Automatic stay prohibited setoff of postpetition debt. D. Mass. In 1995 the debtor, a shipping company, filed a chapter 11 petition. Thereafter the debtor obtained permission from the bankruptcy court to borrow funds from a lender in order to continue operation as a debtor in possession. The IRS filed a series of claims detailing the debtor’s liability for postpetition taxes. The debtor was owed money for an overpayment to the General Services Administration (GSA), but until June 1996 the IRS’s claims made no mention of setoff. At that time the IRS directed the GSA to freeze any payments to the debtor, indicating that the tax division would seek permission to effectuate an offset. The debtor filed a motion, arguing that the IRS’s actions violated the automatic stay. The bankruptcy court ordered that the frozen payments be released. At the court’s suggestion, the IRS then filed a motion for relief from the automatic stay, which was denied on the basis that the IRS had waived any right of setoff. This appeal followed. The IRS argued that the bankruptcy court lacked jurisdiction over postpetition setoff claims, since such claims were not subject to the stay, and that the court erred in determining that the IRS waived its setoff rights. The district court affirmed, holding that the section 362(a)(7) prohibition against setoffs of prepetition claims in extended to postpetition setoff claims by way of section 362(a)(3). The court reasoned that almost any attempt to enforce either a prepetition or postpetition claim could be considered an act to obtain control over estate property, and that the legislative history and existing case law all suggested that setoffs of postpetition debts were subject to the same limitations as setoffs of prepetition debts (citing Collier on Bankruptcy, 15th Ed.).United States of America v. Fleet National Bank (In re Calorie Express Co.), 2000 U.S. Dist. LEXIS 19950, – B.R. – (D. Mass. October 31, 2000) (Gertner, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[9]
Debtor’s inaccurate tax estimate that invalidated filing extension did not also cause tax debt to fall outside three year period. Bankr. D. Mass. .Prior to filing his chapter 11 case, the debtor filed a request for an extension of the deadline to file his 1995 tax returns. On the extension form, the debtor indicated that no tax was due; however, the eventual tax due was approximately $42,000. After filing his chapter 11 petition, the debtor filed a complaint for declaratory relief seeking a determination that his 1995 income tax liability was dischargeable under section 523(a)(1)(A). Specifically, the debtor argued that because his inaccurate estimate rendered the extension invalid, the 1995 taxes fell outside of the section 507(a)(8)(A)(i) three year time period. The IRS moved to dismiss the debtor’s complaint on the grounds that the extension was valid. The bankruptcy court granted the IRS’s motion to dismiss, finding that the debtor could prove no set of facts in support of his dischargeability claim. The court held that it would be inequitable to allow a taxpayer to estimate a tax liability in order to obtain an extension and then claim that the estimate was wrong for the self-serving purpose of discharging a liability.Kimball v. United States (In re Kimball), 2001 Bankr. LEXIS 164, – B.R. – (Bankr. D. Mass. January 18, 2001) (Hillman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.10
3rd Cir.
Motion for preliminary injunction was denied. Bankr. D. Del. The chapter 11 affiliated debtors procured a letter of credit from the bank so that they could enter into an agreement with a third-party seller to purchase the latter’s subsidiary. After the debtors filed bankruptcy, the seller initiated a lawsuit against the bank in state (Illinois) court in which it sought payment under the letter of credit. The debtors moved for a preliminary injunction to enjoin the seller from continuing its action against the bank. The bankruptcy court denied the debtors’ motion for a preliminary injunction, holding that permitting the draw on the letter of credit would not have an adverse impact on the estate. The court noted that the suit involved non-debtors and no property of the estate. Even if the seller were successful, the claims against the estate would not be impacted because the bank would merely be substituted as a holder of the claim.Sabratek Corp. v. LaSalle Bank, N.A. (In re Sabratek Corp.), 2000 Bankr. LEXIS 1686, – B.R. – (Bankr. D. Del. November 16, 2000) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.02, .03
Letter of credit proceeds fully satisfied postpetition rent claim, rendering moot an administrative expense claim. Bankr. D. Del. In 1998 the debtor entered into an agreement in which an entity provided the debtor with leased computer equipment. That agreement was subsequently assigned by the entity to the creditor. The lease required the debtor to make monthly payments of $33,380 for an initial term of 36 months. The debtor posted a $600,000 standby letter of credit in favor of the creditor. In June 1999 the debtor and its affiliates filed chapter 11 petitions. As of the filing, the debtor was current on its obligations under the lease, but inadvertently failed to make postpetition rent payments. The creditor drew on the letter of credit for the full amount after representing that the debtor was in default and that it applied the letter of credit proceeds to the present value of its resultant claim for damages in the amount of $706,163.34. The debtor asserted that the creditor did not give any notice of default or intent to accelerate. The creditor stated that it sent the debtor a letter of nonpayment. In October 1999 the creditor filed a motion asserting a claim for the balance due after application of the letter of credit proceeds, and a claim for an administrative expense for postpetition use of the equipment. The debtor rejected the lease effective January 2000 and, in response to the creditor’s motion, argued that the letter of credit proceeds paid the postpetition rent claim in full, leaving the creditor with only a general unsecured claim for the balance due on the lease damages claim. The creditor argued that the debtor was in default under the lease in July 1999, and that both the failure to pay monthly rent and the petition filing were acts of default. The bankruptcy court denied the creditor’s motion. The court determined that section 365(d)(10) invalidated a contractual default based on a lessee’s insolvency or petition filing, and that the creditor was essentially in violation of the automatic stay by accelerating the lease in September 1999. The court concluded that the administrative rent claim was paid in full because the letter of credit proceeds satisfied the postpetition rent claim, which was the only claim to which the creditor could have applied those proceeds in September 1999. In re Hechinger Inv. Co. of Delaware, 2001 Bankr. LEXIS 148, – B.R. – (Bankr. D. Del. January 29, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04[6][a]
Additional consideration due under agreement for sale of business gave rise to prepetition claim and not administrative expense. Bankr. D. Del. Chapter 11 claimants requested administrative expense payment of approximately $1 million that was due to them as 'additional consideration' under two agreements that governed the prepetition sale of their business to the debtors. The claimants’ characterized the additional consideration as incentive compensation for services they rendered postpetition. The bankruptcy court denied the claimants’ request, and held that the additional consideration was not a bonus provision earned postpetition, as the claimants asserted, but a deferred payment arrangement for the prepetition acquisition of the claimants’ business that gave rise to a prepetition claim. The court’s decision was based upon its reading of the unambiguous terms of one of parties’ agreements.In re APF Co., 2001 Bankr. LEXIS 157, – B.R. – (Bankr. D. Del. February 5, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.06
Allegations in debtor’s complaint withstood contractual subordination count, but more definite statement was required. Bankr. D. Del. A creditor filed a $1,430,000.00 proof of claim in the chapter 11 debtor’s case based on a promissory note the debtor issued as partial payment for redeemed stock. The debtor filed an adversary complaint requesting contractual, statutory and equitable subordination of the debtor’s claim under sections 510(a), (b) and (c) of the Bankruptcy Code, based on the note’s origin as payment for equity and the creditor’s status as a former shareholder. The creditor sought dismissal of the debtor’s complaint, or in the alternative, a more definite statement. The bankruptcy court granted the defendant’s motion to dismiss the count for statutory subordination under section 510(b), and granted the creditor’s motion for a more definite statement on the remaining two counts. The court held, among other things, that the allegations contained in the complaint were sufficient to withstand dismissal of the count requesting contractual subordination, but that the debtor needed to amend its complaint to identify which contractual provisions and correlating facts allegedly triggered subordination.Montgomery Ward Holding Corp. v. Schoeberl (In re Montgomery Ward Holding Corp.), 2001 Bankr. LEXIS 158, – B.R. – (Bankr. D. Del. January 16, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.03
4th Cir.
Purchaser under hog partnership agreement could not compel debtor to reject executory contract. Bankr. E.D.N.C. The debtor filed a chapter 11 petition in October 1999. Since the filing, the debtor continued operating under an executory contract with the creditor, originally executed in 1995, under which the debtor supplied the creditor with market hogs. Subsequent to the petition filing, the creditor renewed the contract pursuant to its original terms, extending the agreement by way of letter for an additional five year term. Contrary to that position, however, the creditor filed a motion seeking an order requiring the debtor to reject the executory contract, lift the automatic stay, and pay an administrative expense. The underlying reason the creditor sought to force the rejection is the hypothetical deficit ledger amount accumulated under the agreement. As previously ruled by the bankruptcy court, that deficit amount, in excess of $5 million, was a contingent liability that might never materialize to an actual claim. The creditor asserted two arguments upon which it asked the court to rule that the hog partnership agreement was an executory contract that could neither be assigned nor assumed by the debtor: (1) the agreement was a contract to extend financial accommodations to the debtor, within the meaning of section 365(c)(2) and could not be assumed, and (2) the debtor could not assign the contract without the creditor’s consent. The court denied the creditor’s motion, holding that a hypothetical deficit ledger amount did not fall within the ambit of a financial accommodation within the narrow restrictions imposed by section 365(c)(2). The court went on to conclude that no applicable law barred the debtor from assuming the contract (citing Collier on Bankruptcy 15th Ed. Revised). In re Neuhoff Farms, Inc., 2000 Bankr. LEXIS 1683, – B.R. – (Bankr. E.D.N.C. April 26, 2000) (Leonard, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.06
In converted case, equipment lessor was entitled to administrative claim for postpetition rent during postpetition preconversion period. Bankr. E.D.N.C. In a case that was converted from chapter 11 to chapter 7, the trustee objected to an equipment lessor’s proof of claim to the extent that the lessor asserted an administrative expense claim for lease payments that were due between filing of the chapter 11 case and its conversion to chapter 7. The trustee argued primarily that because the leased equipment was never used by the chapter 11 debtor, the postpetition lease payments could not form the basis of a priority claim in the converted case (because they would not be afforded priority under section 503(b)). Thus, the trustee argued, the lessor’s claim arose solely under section 365(d)(10), and the literal language of section 348(d), which characterizes claims that arise after the entry of an order for relief but before conversion, operated to change the character of the claim and required that it be treated as a prepetition unsecured claim. The trustee also argued that the fact that the debtor gained no benefit from the lease was an equitable consideration that could be used under section 365(d)(10) to deny administrative status to the postpetition lease payments. The bankruptcy court rejected the trustee’s arguments, and held that the lessor was entitled to an administrative claim under section 365(d)(10) for postpetition rent in the amount requested. The court reasoned that acceptance of the trustee’s primary argument would render section 365(d)(10) a nullity in converted cases. The court also concluded that section 365(d)(10) is independent of section 503(b)(1), and does not requires a showing that lease expenses were actual and necessary expenses of the estate (citing on Bankruptcy 15th Ed. Revised).In re Eastern Agri-Systems, Inc., 2000 Bankr. LEXIS 1681, – B.R. – (Bankr. E.D.N.C. October 30, 2000) (Leonard, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04[6][c]
Creditor met burden of establishing debtor’s fraud and violations of state consumer protection statute for nondischargeability purposes. Bankr. E.D. Va. A creditor obtained a prepetition judgment against the debtor in state court representing treble compensatory damages for the debtor’s willful violation of the state’s (Virginia’s) Consumer Protection Act, together with interest, costs and attorney’s fees. After the debtor commenced his chapter 7 case, the creditor sought a determination that the judgment debt was nondischargeable under section 523(a)(2)(A). The bankruptcy court found that the creditor met his burden of establishing, by a preponderance of the evidence, the debtor’s fraud and the two violations of the Virginia Consumer Protection Act for dischargeability purposes. The court held that all damages, including reasonable attorney’s fees as provided by statute, were non- dischargeable. The court noted that in order to prevail, the creditor had to prove that the debtor made a representation; that the debtor knew the representation was false at the time the representation was made; that the debtor made the false representation with the intention of deceiving the creditor; that the creditor justifiably relied on the representation; and that the creditor sustained the alleged loss and damage as the proximate result of the false representation. In this case, the court found that the creditor was entitled to rely, without further investigation, on statements regarding the repair of the debtor’s son’s automobile made by the debtor, who represented himself as an automobile mechanic. The court noted that the debtor’s statements appeared on their face to be true, that there were no circumstances that indicated that the statements were false or fraudulent, and that the creditor discovered that the statements were false only after he had parted with his money. Fowler v. Garey (In re Garey), 2000 Bankr. LEXIS 1674, – B.R. – (Bankr. E.D. Va. September 29, 2000) (Mayer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
5th Cir.
Court applied community rate in determining reasonable compensation to trustee’s special counsel. Bankr. W.D. Tex. In 1994 the chapter 7 trustee retained a law firm as special counsel. The firm eventually represented the trustee and the estate primarily in four matters: (1) the sale of a subsidiary company of the estate and various appurtenant settlements; (2) defense of various environmental matters; (3) federal, state and local tax matters; and (4) served in administrative matters and handled litigation. In sum, the firm handled six adversary proceedings, three appeals, and 20 contested matters and effectuated the reduction of an IRS claim by $23 million. The firm then applied to the bankruptcy court for a compensation increase. The fee examiner and trustee did not object to the application of the lodestar formula, but rather the standard to be used to arrive at the lodestar. The firm argued that the decisive standard was the community rate, which it asserted was $250 per hour, while the opposing parties argued that the controlling factor should be the firm’s standard hourly rate for nonbankruptcy clients during the pendency of the action, or $195 to $200 per hour. The bankruptcy court held that community standard applied, and that the firm had met its burden of proof with respect to establishing the community standard rates charged by attorneys of like or similar experience.In re El Paso Refinery, L.P., 2000 Bankr. LEXIS 1676, – B.R. – (Bankr. W.D. Tex. November 29, 2000) (Clark, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.04[2],[3]
Lease deemed rejected on chapter 11 filing date. Bankr. E.D. La. The chapter 11 debtor filed a motion seeking to reject a theater lease. The debtor moved to reject the lease retroactively as of the date that the theater was closed. The landlord argued that the date of rejection should be the hearing date. The bankruptcy court concluded first that it had the power to authorize a retroactive rejection of a nonresidential lease to a date prior to the court’s approval of the lease rejection. Under the facts and circumstances presented, the court then held that the lease was rejected retroactive to the date that the debtor filed its petition for chapter 11 relief. The court found that retroactive rejection was warranted in this case because the debtor closed the theater prepetition with the landlord’s knowledge after rental negotiations failed. The next day, the landlord padlocked the leased premises, and exercised full dominion and control over the property. The court refused to the rejection date the date that the theater was closed, however, because that date was before the petition filing date. The court emphasized that in most cases, a lease would be considered rejected as of the date of entry of the order approving the rejection, and only in exceptional circumstances, such as those presented here, would a retroactive date be adopted.In re O’Neil Theaters, Inc., 2000 Bankr. LEXIS 1685, – B.R. – (Bankr. E.D. La. November 13, 2000) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.03
Creditor not entitled to stay as of right upon posting of bond during appeal of contested matter. E.D. La. The creditor filed a motion in bankruptcy court seeking to stay the court’s order instructing the clerk to withdraw the funds previously deposited into court by or on behalf of the creditor. The creditor appealed that ruling and sought a stay of execution pending appeal. The court denied the motion, holding that the creditor had failed to establish the necessary elements for a stay. The creditor then filed a motion for a stay in the district court, arguing that it was entitled to a stay as of right upon posting of a supersedeas bond. The court denied the motion, holding that the creditor was not entitled to a stay as of right upon a bond posting. The court reasoned that, pursuant to Rule 7062, a stay as of right was only applicable to adversary proceedings, and that there was no authority entitling the creditor a stay as of right pending the appeal of a contested matter. The court noted that an appeal in bankruptcy as of right was typically limited to appeals from money judgments or one transferring an interest in property (citing Collier on Bankruptcy, 15th Ed.).In re West Delta Oil Co., 2001 U.S. Dist. LEXIS 2183, – B.R. – (E.D. La. February 15, 2001) (Barbier, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7062.03, .06
6th Cir.
Debtor was ineligible for chapter 13 relief. Bankr. S.D. Ohio The creditor holding a secured claim in the chapter 13 debtor’s automobile filed a motion to dismiss the debtor’s case under section 109(g). The debtor had filed four previous chapter 13 cases after the creditor had repossessed her vehicle and each case had been dismissed for failure to pay the trustee. The debtor argued that section 109(g) did not bar her eligibility for relief because the prior dismissal order did not expressly state that the dismissal resulted from a willful failure to abide by a court order. The bankruptcy court granted the motion to dismiss, holding that based upon the debtor’s history of serial filings, the dismissal of the prior case resulted from the debtor’s willful failure to abide by court orders or appear before the court in proper prosecution of her case. The court noted that a finding of willfulness could be found either at the time of dismissal or in a subsequent case.In re Pike, 2001 Bankr. LEXIS 169, – B.R. – (Bankr. S.D. Ohio February 8, 2001) (Hoffman, Jr., B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.08
Value of vehicle was determined for redemption. Bankr. W.D. Tenn. The chapter 7 debtor filed a motion to redeem collateral from the creditor holding a lien on the debtor’s vehicle. The parties disagreed on the appropriate valuation standard for determining the creditor’s allowed secured claim under section 506 for purposes of redemption under section 722. The bankruptcy court granted the debtor’s motion, holding that in the context of a redemption, the appropriate valuation standard was the liquidation or wholesale value of the vehicle. The court noted that the determination of value was based on the proposed use and disposition of the collateral. Unlike a chapter 13 cramdown, there was no distinction between the economic consequences to the creditor between surrender and redemption in chapter 7.In re Ballard, 2001 Bankr. LEXIS 172, – B.R. – (Bankr. W.D. Tenn. February 26, 2001) (Boswell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03[4]
Creditor failed to establish false pretenses or actual fraud. Bankr. N.D. Ohio In 1995 the debtor and his father incorporated a home improvement business. In 1996 they sought an extension of credit from the creditor to the corporation. To that end, the debtor and his father completed an application which requested five credit references. The corporation submitted the names of five suppliers when in fact it had only purchased supplies from two of those listed. The submitted application also indicated that it provided both company and personal financial information, which included cash on hand, equipment, and equity in residential real estate. The application did not request information designating which assets were personal, so none was provided. Finally, the application required signatures of guarantors, and four were provided, one of which was inauthentic. Upon receipt of these documents, credit was extended, and the creditor continued a pattern of loan transactions with the corporation. In April 1996, the debtor’s father withdrew from the corporation. He notified the creditor that he wished to revoke his guaranty but did not disclose that it was primarily his personal real estate and cash that were previously listed as collateral. The corporation then began to default on payments, and credit privileges were terminated, leaving the balance owed as approximately $45,000. Thereafter, in June 2000, the debtor filed a chapter 7 petition. The creditor filed an adversary proceeding seeking a declaration that the corporation’s debt was nondischargeable, arguing that the debtor deliberately presented false information in the credit application, that the creditor relied on the information and was damaged by that reliance. To support its contention, the creditor asserted that (1) there was no trade relationship with three of the five references; (2) the nondisclosure that the assets listed belonged predominantly to the debtor’s father, who subsequently withdrew from the corporation; (3) the invalid signature of one guarantor; and (4) the noncompliance with contractual language requiring notification of material changes in financial condition or ownership.The bankruptcy court held that the debtor failed to meet its burden under section 523(a)(2)(A). Specifically, the court found that (1) the listing of references without an actual trade relationship did not constitute a misrepresentation, since the application did not indicate that such a relationship was required; (2) the debtor’s intent to deceive was not established, since any information provided was not deceitful and no evidence suggested that the debtor was aware of the forged signature; (3) no justifiable reliance was proven, since the creditor did not check the references and had no policy of doing so. Alside Supply Center v. Kromar (In re Kromar), 2001 Bankr. LEXIS 142, – B.R. – (Bankr. N.D. Ohio February 21, 2001) (Baxter, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1]
Issue of whether inventory and receivables were estate property required further discovery, but debtor held at least some equitable interest that supported court’s entry of interim order. Bankr. N.D. Ohio A creditor brought an emergency motion seeking to modify an interim bankruptcy court order that allowed the chapter 11 debtor and debtor-in-possession in 48 jointly administered cases to use cash assets that the creditor claimed to be cash collateral in which it held an interest. The court overruled the creditor’s motion. Among other things, the court rejected the creditor’s argument that the receivables that constituted its collateral were not property of debtor’s estate and that the court therefore lacked jurisdiction to enter the interim order. The court held that determination of this issue required further discovery, but that, in any event, the debtor held at least some equitable interest in the inventory and receivables sufficient to support the entry of the interim cash collateral order. Finally, the court held that granting the creditor relief from the interim cash collateral order would be highly inequitable on the facts presented, and that the creditor’s interest in the cash collateral was adequately protected by an equity cushion and by the other terms of the interim order.In re LTV Steel Co., 2001 Bankr. LEXIS 131, – B.R. – (Bankr. N.D. Ohio February 5, 2001) (Bodoh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9024.01
7th Cir.
Court rejected creditor’s attempt to circumvent Rule 9011 safe harbor requirements by seeking relief under section 105. Bankr. N.D. Ill. After the chapter 13 debtor’s case was dismissed, with prejudice, a creditor moved for sanctions against the chapter 13 debtor and her counsel pursuant to Rule 9011. The creditor alleged that the debtor filed and prosecuted her bankruptcy case in bad faith and for the sole purpose of avoiding payment of a judgment entered in favor of the creditor. According to the creditor, the debtor repeatedly filed false and misleading schedules, and four unconfirmable, discriminatory chapter 13 plans, which were not proposed in good faith. The debtor argued that each version of the plan she proposed was supported by existing law, that her schedules were prepared in conformity with existing law and/or based upon a good faith understanding of what the existing law required, and that any prior bankruptcy court ruling that the debtor and/or the her counsel acted in bad faith was contrary to the evidence. The bankruptcy court denied the creditor’s motion for sanctions because it violated the safe-harbor provision contained in Rule 9011(c)(1)(A). The court also rejected the creditor’s attempt to 'end-run the safe-harbor requirements of Rule 9011' by invoking section 105(a) as an alternative. The court noted that the debtor sought relief under section 105(a) for the first time in its reply to the debtor’s response to its sanctions motion, and held that this request was 'too little, too late.'In re McNichols, 2001 Bankr. LEXIS 167, – B.R. – (Bankr. N.D. Ill. January 11, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.05
State liquor license was not subject to liens. N.D. Ind. Employee’s judgment of foreclosure provided generally for foreclosure upon all assets of the employer corporation. In addition, individual lenders recorded documents claiming a security interest in the same corporation’s liquor license. The corporation subsequently transferred its liquor license to two individuals who became debtors in chapter 7 cases. The employee and the lenders sought determinations that they held valid security interests in the liquor license. The bankruptcy court held that neither the lenders nor the employee were secured. The district court affirmed, holding that although the license was property of the estate, the lien interest did not attach to the state issued liquor license.Under state (Indiana) law, a security interest in a liquor license may not be perfected and is not enforceable against the state Alcoholic Beverage Commission. Thus, the estate took the license free and clear of any security interests.VanKirk v. Boyer (In re Barnes), 2001 U.S. Dist. LEXIS 2080, – B.R. – (N.D. Ind. February 2, 2001) (Lee, C.D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03[1], [5]
Trustee’s motion for summary judgment denied for failure to allege or establish that transfers allowed transferee to receive more than it would have in a chapter 7 distribution. Bankr. N.D. Ill. The chapter 7 trustee filed an adversary proceeding seeking to avoid several transfers made by the debtor as preferential transfers under section 547(b). The parties cross-moved for summary judgment. The bankruptcy court denied both summary judgment motions. The court held, among other things, that the trustee was not entitled to summary judgment on her section 547(b) claim because she failed to allege, let alone demonstrate, the fifth element necessary to establish a preferential transfer. The court explained that in order to prevail on her motion, the trustee had to allege and show prima facie proof that the creditor received more than it would have received if the case were a chapter 7 liquidation case, the transfers had not been made, and the creditor received payments on the debts to the extent provided by the provisions of the Code (citing Collier on Bankruptcy 15th Ed. Revised).Kapila v. Acme Portable Machines, Inc. (In re I.M. Import & Export, Inc.), 2001 Bankr. LEXIS 166, – B.R. – (Bankr. N.D. Ill. February 27, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03[7]
Neither attorney-client privilege nor imputed disqualification precluded employment of accounting firm. N.D. Ill. The unsecured creditors’ committee sought to employ an accounting firm to assist in investigating claims against third parties, including a doctor. The doctor objected to the application on the basis that a new, junior employee at the firm had previously been employed at a firm which did work for the doctor and that the junior employee had had access to attorney- client privileged information. The employee indicated that he had disclosed no confidences and had merely assisted in preparing the doctor’s personal income tax returns. The bankruptcy court granted the application to employ the firm, concluding that there was no imputed disqualification, the attorney-client privilege did not apply and that the firm had established an ethical wall to preclude transmission of confidential information. Upon the doctor’s appeal, the district court affirmed, holding that the accounting firm was not disqualified even though a junior employee may have received attorney-client information in the context of other employment. The junior employee had not disclosed any information and the firm had established a ethical wall by instructing the employee and other members of the firm not to disclose confidential information regarding the doctor. Moreover, while the attorney-client privilege could apply to nonattorneys, the doctor failed to show that the information was disclosed for the purpose of obtaining a legal opinion. Accordingly, as a factual matter, the privilege was inapplicable.In re Doctors Hospital of Hyde Park, Inc., 2001 U.S. Dist. LEXIS 2051, – B.R. – (N.D. Ill. February 22, 2001) (Andersen, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1103.03[4], 3:327.06, 327.04[7]
8th Cir.
Former wife failed to satisfy burden of proving that debtor/former husband’s obligations were in the nature of maintenance or support. Bankr. W.D. Mo. The chapter 7 debtor’s former wife filed an adversary proceeding objecting to the discharge of certain marital debts. The debts at issue included a mortgage debt, joint credit card debt, and a property settlement debt. The bankruptcy court found, among other things, that the debts were not excepted from discharge under section 523(a)(5) because the former wife failed to satisfy her burden of establishing that the divorce decree, which expressly referred to a division of marital property, created a debt in the nature of maintenance or support. The court based its conclusion, in part, on the former wife’s own testimony, including her statement that she believed that the assignment of the mortgage debt to the debtor was part of a property division.Kennard v. Kennard (In re Kennard), 2001 Bankr. LEXIS 143, – B.R. – (Bankr. W.D. Mo. January 29, 2001) (Federman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Chapter 7 trustee failed to meet burden in establishing debtor’s fraudulent intent. Bankr. W.D. Ark. The debtor bought a retail tire and repair shop and continued to pay rent to the landlord on whose property the business was situated. Thereafter, in 1998, the debtor entered into a contract of sale with the landlord to purchase approximately two acres of commercial real estate, including all buildings on the property, for $450,000. The contract required a $5,000 down payment at contract and $45,000 in cash to be paid at closing, the balance of the purchase price to be paid in monthly installments. The debtor eventually testified that he paid the landlord the $5,000 down and had a cashier’s check dated August 29, 1998 in the amount of $29,000 payable to the landlord. The debtor also testified that he withdrew $20,500 from his personal account and paid the landlord $20,000 of that sum. In addition, the debtor’s business purchased a cashier’s check payable to a bank in the amount of $33,500 dated August 27, 1998. Thereafter, in April 1999, the debtor filed a chapter 7 petition. The chapter 7 trustee reviewed the petition, schedules and statement of affairs, and stated that those documents failed to disclose the real estate purchase, the two cashier’s checks, and the bank withdrawal by the debtor. The trustee filed an adversary proceeding alleging that the debtor concealed or transferred property of the estate within one year prepetition with the intent to hinder, delay or defraud creditors, and requested that the petition be dismissed pursuant to section 727(a)(2)(A). The bankruptcy court held that the trustee had not met her burden of proof under section 727(a)(2)(A) because the requisite element of intent had not been proven. The court found that the transactions could not be deemed made with fraudulent intent, since the debtor had not demonstrated a pattern of fraudulent conduct and because the transactions were effectuated with consideration given.Jacoway v. Mathis (In re Mathis), 2000 Bankr. LEXIS 1673, – B.R. – (Bankr. W.D. Ark. November 15, 2000) (Fussell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.02[3]
Secured creditor whose future advances were not noted on certificate of title did not have a properly perfected lien. Bankr. W.D. Mo. The debtor and former spouse were divorced pursuant to a separation agreement that provided for the debtor to hold the spouse harmless on a debt jointly owed. The debtor made no payments toward the debt, and the creditor pursued collection against the spouse. After the debtor filed a chapter 7 petition in 2000, the spouse filed an adversary proceeding objecting to the discharge of the debt pursuant to section 523(a)(15). The bankruptcy court employed a balance of harms test and held that the hold harmless obligation was nondischargeable. The court found that the debtor had the ability to pay the debt and failed to prove any benefit to him of discharging the debt other than having an additional $195 per month in disposable income. In contrast, the spouse had no disposable income, was the custodial parent of the parties’ children, and was forced regularly to borrow money. The court concluded that the benefit to the debtor of a discharge was outweighed by the detriment to the spouse. Lumley v. Lumley (In re Lumley), 2001 Bankr. LEXIS 141, – B.R. – (Bankr. W.D. Mo. February 8, 2001) (Federman, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.21
Secured creditor whose future advances were not noted on certificate of title did not have a properly perfected lien. Bankr. W.D. Mo. The creditor extended a loan to the debtors for the purchase of a truck. After having its lien noted on the certificate of title, the creditor made two additional loans to the debtors, both of which were at least partially secured by the same vehicle. The security agreement stated that the loan was subject to future advances, but that provision was not noted on the certificate of title. The debtors filed a chapter 7 petition in 2000, stating an intention to retain the vehicle and indicating that the creditor had a lien on the vehicle in the amount of $14, 870. The debtor’s schedules valued the vehicle at $14,000. After the debtors received a discharge, the debtors surrendered the truck to the creditor, but the chapter 7 trustee never abandoned the estate’s interest. The creditor filed a motion to compel the trustee to abandon the estate’s interest in the truck, and the trustee responded with a motion to compel turnover of the truck, arguing that the creditor was not properly perfected. The bankruptcy court held that the creditor did not have a properly perfected lien. The court found applied state (Missouri) law in determining that a lien extended to future advances only if that information was noted on the certificate of title, or if a new filing was made as to the later advance. The court concluded that the creditor had failed to meet either requirement and granted the trustee’s motion for turnover pursuant to section 544(a)(1).In re Merrill, 2001 Bankr. LEXIS 151, – B.R. – (Bankr. W.D. Mo. February 13, 2001) (Federman, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
9th Cir.
Bankruptcy court abstained from hearing debtor’s dispute with IRS and dismissed petition. Bankr. D. Or. The IRS filed motions to abstain, to dismiss and for relief from the automatic stay, and also filed an objection to confirmation of the debtor’s proposed chapter 13 plan. The bankruptcy court dismissed the chapter 13 pursuant to section 305(a). The court reasoned that the matter was essentially a two party dispute capable of resolution outside bankruptcy, that there was no legitimate purpose to the filing, and concluded that the parties’ interests would be best served if the court abstained from hearing the matter.In re Guenther, 2000 Bankr. LEXIS 1671, – B.R. – (Bankr. D. Or. December 29, 2000) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:305.02[2][b]
Court of Appeals affirmed invalidation of change in ownership provision as unenforceable anti-assignment clause. 9th Cir. In settlement of certain litigation, the debtor and a third party entered into a prepetition agreement regarding the management of common areas and parking on property in which both parties held an interest. The agreement allowed an affiliate of the debtor to manage the common areas and parking in exchange for a substantial monthly payment to the third party. Under a 'change in ownership' provision contained in the agreement, however, the common area management and parking provisions would terminate if the debtor no longer maintained an ownership interest in the property. After the debtor commenced its bankruptcy case, the bankruptcy court approved the transfer of its debtor’s interest in the parcel. Thereafter, the third party attempted to enforce the change in ownership provision contained in the agreement, and void the agreed upon parking and management provisions. The transferee of the debtor’s interest in the parcel, as the assignee of the debtor’s interest in the agreement, filed a motion asking the bankruptcy court to determine the validity of the change in ownership provision. The bankruptcy court invalidated the change in ownership provision as an unenforceable anti- assignment clause, and the district court affirmed. The United States Court of Appeals for the Ninth Circuit affirmed, and held that the bankruptcy court did not err in invalidating the provision as an unenforceable anti-assignment clause under section 365(f). The court agreed with the bankruptcy court’s practical conclusion that the settlement agreement, when read in conjunction with the terms of a related agreement between the parties, led to the conclusion that the rights under the settlement agreement were interwoven with the debtor’s ownership interest. The court also concluded that the bankruptcy court had sufficient evidence before it to determine the validity of the change in ownership provision.Crow Winthrop Dev. Ltd. Partnership v. Jamboree LLC (In re Crow Winthrop Operating Partnership), 2001 U.S. App. LEXIS 2918, – B.R. – (9th Cir. March 1, 2001) (Per curiam).
Collier on Bankruptcy, 15th Ed. Revised 3:365.08
Proceeding on counterclaim was core proceeding in which court could enter judgment. Bankr. C.D. Cal. A creditor who commenced an adversary proceeding in the debtor’s case objected to the bankruptcy court’s jurisdiction over a counterclaim asserted against him. The bankruptcy court had previously held that the counterclaim in the adversary proceeding was, in substance, also a counterclaim to the creditor’s claim filed in the debtor’s case, pursuant to which he voluntarily submitted to the bankruptcy court’s jurisdiction. The court held that the proceeding was a core proceeding, and the bankruptcy court was empowered to enter its own judgment on the counterclaim. The court also concluded, however, that the debtor failed to establish an entitlement to injunctive relief in support of her money judgment.Marshall v. Marshall (In re Marshall), 2000 Bankr. LEXIS 1682, – B.R. – (Bankr. C.D. Cal. December 29, 2000) (Bufford, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.02
Attorney’s request for fees reduced by 20 percent for failure to comply with disclosure requirements. Bankr. D. Idaho After the debtor’s chapter 12 petition was dismissed, the debtor sought to retain the same attorney for a second chapter 12 filing. But at the time of the dismissal, the debtor still owed the attorney approximately $24,000 in fees. The debtor and attorney reached an agreement whereby part of the outstanding fees were waived, with the balance to be secured by a cash payment and a promissory note secured by a deed of trust on real property. After the second chapter 12 petition was filed and a plan confirmed, the attorney filed a fee application. The bankruptcy court found that the attorney had failed to comply with statutory disclosure requirements. Specifically the court found that the attorney had filed neither a timely disclosure statement pursuant to Rule 2016(b), nor a Rule 2014(a) statement disclosing of all the attorney’s connections with the debtor, both of which delayed a proper examination of the parties’ relationships until the conclusion of the case. This omission was the basis of the court’s reduction of the requested fees by 20 percent (citing Collier on Bankruptcy, 15th Ed.)In re Combe Farms, Inc., 2001 Bankr. LEXIS 179, – B.R. – (Bankr. D. Idaho January 3, 2001) (Pappas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:2016.15