Collier Bankruptcy Case Update April-29-02

Collier Bankruptcy Case Update April-29-02

 


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 29, 2002

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

 

1st Cir.

§ 105(a) Debtors entitled to recover actual damages incurred in protecting discharge injunction rights.
In re Torres (Bankr. D.P.R.)

§ 362(h) Damage award for creditor's willful violation of the stay was affirmed on appeal.
Varela v. Ocasio (In re Ocasio) (B.A.P. 1st Cir.)


2d Cir.

§ 362(b)(4) EEOC was permitted to continue with discovery in its cause of action against the debtor.
EEOC v. Le Bar Bat, Inc. (S.D.N.Y.)

28 U.S.C. § 157(d) Withdrawal of reference held mandatory where adversary proceeding involved substantial and material consideration of federal patent law.
Singer Co. v. Groz-Beckert KG (In re Singer Co.) (S.D.N.Y.)


3d Cir.

§ 546(e) Fraudulent conveyance claims of the unsecured creditors' committee dismissed based on 'settlement payment' defense.
Official Committee of Unsecured Creditors of Hechinger Inv. Co. v. E. Fleet Retail Fin. Group
(In re Hechinger Inv. Co.)
(D. Del.)

§ 1129(a)(3) Debtors' chief executive officer's employment contract with creditor presented conflict of interest that precluded plan confirmation.
In re Coram Healthcare Corp. (Bankr. D. Del.)


4th Cir.

§ 506(d) Creditor's lien survived debtor's chapter 7 bankruptcy despite late filing of proofs of claim.
Hamlett v. Amsouth Bank (In re Hamlett) (Bankr. W.D. Va.)


5th Cir.

§ 522(b)(2)(A) Fifth Circuit found annuities exempt under state (Louisiana) law and reversed previous cases rulings to the contrary.
Canfield v. Orso (In re Orso) (5th Cir.)

Rule 2014(a) Order approving employment of debtor's counsel was vacated due to firm's failure to disclose potential adverse interest.
In re C Demo, Inc. (Bankr. E.D. Tex.)


7th Cir.

§ 105(a) Sanctions against creditors not appropriate where creditors' motions had basis in fact and law.
Liquidating Grantor's Trust of Proteva, Inc. v. Finova Capital Corp. (In re Proteva, Inc.) (Bankr. N.D. Ill.)

§ 505(a)(1) The liquidating agent was allowed to pursue an action to determine the tax liability of the debtor in possession.
Schroeder v. United States (In re Van Dyke) (Bankr. C.D. Ill.)

§ 523(a)(8) Bankruptcy court's order discharging debtor's student loan obligation was reversed and remanded for further evidence.
Wessels v. Educ. Credit Mgmt. Corp. (W.D. Wis.)


8th Cir.

§ 522(b)(2)(B) Order sustaining trustee's objection to debtor's claim of exemption was vacated because debtor had no ownership interest in property claimed exempt.
In re Caldwell (Bankr. W.D. Mo.)

§ 522(f) Bankruptcy court erred in not allowing debtors to avoid judicial lien in its entirety.
Kolich v. Antioch Laurel Veterinary Hosp. (In re Kolich) (B.A.P. 8th Cir.)

§ 523(a)(5) Debtor's obligation to pay marital debts was dischargeable.
Waltner v. Waltner (In re Waltner) (Bankr. W.D. Mo.)

§ 523(a)(8) Debtor's student loan debt was not discharged because he had the ability to make payments.
Block v. United States Dep't of Educ. (In re Block) (Bankr. W.D. Mo.)


9th Cir.

§ 553(a) Creditor could not offset fees awarded in arbitration against the purchase price of debtors' homestead.
In re Ter Bush (Bankr. S.D. Cal.)


10th Cir.

§ 510(b) Claim based on retention of a security subjected to same subordination as claims based on purchase or sale.
Allen v. Geneva Steel Co. (In re Geneva Steel Co.) (10th Cir.)


11th Cir.

§ 106(b) State agency's motion to dismiss debtor's undue hardship complaint was denied.
Stanley v. Student Loan Servs., Inc. (In re Stanley) (Bankr. N.D. Fla.)

§ 503(b)(1)(A) Trustee's objection to debtor's application for administrative expense claim was sustained.
In re Lickman (Bankr. M.D. Fla.)

§ 1325(b) Plan confirmation denied because nonmandatory contributions to retirement plan were not a reasonable or necessary expense.
In re Prout (Bankr. M.D. Fla.)


D.C. Cir.

§ 542(e) Bankruptcy court granted debtor hospital's motion to compel law firm that represented debtor prepetition in malpractice action to turn over files and documents.
In re Greater Southeast Cmty. Hosp. Found. (Bankr. D.C.)


Collier Bankruptcy Case Summaries

1st Cir.

Debtors entitled to recover actual damages incurred in protecting discharge injunction rights. Bankr. D.P.R. The debtors received a chapter 7 discharge that discharged, among other things, their 1985 tax liability to the IRS. Thereafter, the IRS reversed litigation codes for the debtors' tax accounts and inadvertently reactivated collection efforts for the discharged debt. The debtors brought an action against the IRS seeking damages for contempt based on the IRS's alleged violation of the discharge injunction. The debtors claimed that they were entitled to a fee award based on statutory, equitable and inherent contempt powers and/or the Equal Access to Justice Act ('EAJA'), 28 U.S.C. § 2412. The IRS conceded that its collection practices violated the discharge injunction, but moved for summary judgment and argued that the debtors were not entitled to the relief sought as a matter of law. Specifically, the IRS argued that the debtors were not entitled to damages for emotional distress or punitive damages, and that any award for attorneys fees and litigation costs had to be consistent with both the relevant provisions of EAJA and provisions of the Internal Revenue Code that required the debtors to exhaust administrative remedies and comply with applicable fee shifting statutes. The IRS agreed that it was liable for compensatory damages at the hearing on its summary judgment motion. The bankruptcy court held that the debtors could not recover attorneys fees and costs because of their failure to exhaust administrative remedies, but they could recover actual damages, including out-of-pocket expenses, transportation costs, loss of income and emotional damages, if any, that they incurred in protecting their discharge injunction rights. The court found that section 524 only provided injunctive relief and was not a provision outside of section 106 that authorized an award for damages. However, the court concluded that pursuant to section 105 and 106, it court could grant 'necessary or appropriate' monetary relief to the debtors, excluding punitive damages. The court agreed with the IRS that any damages awarded had to be consistent with the relevant provisions of the EAJA and the Internal Revenue Code.In re Torres, 2001 Bankr. LEXIS 1798, - B.R. - (Bankr. D.P.R. October 16, 2001) (Carlo, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:105.02

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Damage award for creditor's willful violation of the stay was affirmed on appeal. B.A.P. 1st Cir. The creditor appealed the decision of the bankruptcy court awarding the chapter 13 debtor actual and punitive damages totaling $10,000, plus attorney's fees and costs, for willfully violating the automatic stay. At the time he filed his petition, the debtor owed the creditor approximately $425 for the purchase of construction materials on credit from the creditor's hardware business. Over a year after the petition date, the creditor approached the debtor outside a friend's house and threatened to collect the debt through the use of bodily harm. The debtor claimed that he was humiliated and had to seek medical treatment for stress. The creditor admitted that he called the debtor irresponsible and lazy, but asserted that he never threatened the debtor with physical harm. The bankruptcy court found that the creditor willfully violated the automatic stay and awarded the debtor $1,000 in actual damages, $9,000 in punitive damages and $3,288 in attorney's fees. The B.A.P. affirmed, holding that the bankruptcy court's finding that the creditor willfully violated the automatic stay was not clearly erroneous and that the actual and punitive damages award was justified. The B.A.P. noted that the creditor not only violated the stay, he did so in a manner that was vulgar, demeaning and threatening. As the owner of a number of businesses that extended credit, the creditor exhibited a level of sophistication that weighed against a reduction of the punitive damage award. Varela v. Ocasio (In re Ocasio), 2002 Bankr. LEXIS 141, 272 B.R. 815 (B.A.P. 1st Cir. February 21, 2002) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised
3:362.11[3]

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2d Cir.

EEOC was permitted to continue with discovery in its cause of action against the debtor. S.D.N.Y. The Equal Employment Opportunity Commission ('EEOC') brought a motion to compel the chapter 11 debtor to comply with discovery requests. The EEOC's complaint, which was consolidated with a private cause of action brought by former employees of the debtor, alleged that the debtor had engaged in a pattern of sexual harassment and racial discrimination against former employees in violation of Title VII of the Civil Rights Act. The debtor asserted that its subsequent chapter 11 petition automatically stayed the motion to compel pursuant to section 362 because the EEOC was acting solely to aid the former employees in their private action. The EEOC argued that its continuation of the action was excepted from the stay because, as a government unit, it was acting within its regulatory powers to enforce and obtain compliance with the provisions of Title VII by seeking various forms of injunctive relief and monetary damages from the debtor. The district court granted the motion to compel, in part, holding that the EEOC qualified for the exception to the automatic stay under section 362(b)(4) to the extent that it continued to exercise its police and regulatory powers. The EEOC's policy of deterring unlawful discrimination was enforceable, and certain of the discovery requests were relevant to the injunctive relief it sought against the debtor. Before undertaking discovery on monetary damages, which could deplete the estate, the court required the parties to attempt to resolve the amount of any such damages in light of the resources available to the debtor (citing Collier on Bankruptcy, 15th Ed. Revised). EEOC v. Le Bar Bat, Inc., 2002 U.S. Dist. LEXIS 3226, 274 B.R. 66 (S.D.N.Y. February 25, 2002) (Sweet, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:362.05[5]

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Withdrawal of reference held mandatory where adversary proceeding involved substantial and material consideration of federal patent law. S.D.N.Y. A defendant in an adversary proceeding commenced by the reorganized chapter 11 debtors moved to withdraw the reference of the proceeding to the bankruptcy court. The central controversy in the adversary proceeding was whether a reorganized debtor owned an implied license in a sewing needle patent owned by the defendant, and, if so, whether that implied license was subject to a bankruptcy reorganization plan. The district court granted the defendant's motion and withdrew the matter from the bankruptcy court for adjudication in the district court. The court held that withdrawal was mandatory because resolution of the adversary proceeding required substantial and material consideration of domestic patent law, which is a federal statutory creation. The court noted that the patent law issues were central to the debtors' complaint, and that the related bankruptcy law issues depended upon the court's determination as to whether the debtors had a property interest in the patent. The court also rejected the debtors' claim that the defendant's motion to withdraw the reference was untimely, noting that no specific time limit exists for applications to withdraw a reference from bankruptcy court. Finally, the court found that the debtors would not suffer undue prejudice from litigating in the district court; rather, resulting efficiencies would accrue to their benefit. Singer Co. v. Groz-Beckert KG (In re Singer Co.), 2002 U.S. Dist. LEXIS 2629, - B.R. - (S.D.N.Y. February 15, 2002) (Pauley, D.J.).

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

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3d Cir.

Fraudulent conveyance claims of the unsecured creditors' committee dismissed based on 'settlement payment' defense. D. Del. Prior to 1997, the debtor owned and operated stores that sold products and services for home improvement, remodeling and maintenance. In the face of heavy losses, the debtor sought to find a buyer for its business. The debtor retained an investment firm that was able to find a bidder for the debtor's business. The bidder was also interested in acquiring another similar business and eventually decided to acquire the debtor and the other business under the framework of a leveraged buyout of the debtor. The leveraged buyout was accomplished as part of an integrated transaction that consisted of the debtor acquiring the other business, and the debtor receiving a series of temporary losses that were repaid through a permanent $600 million secured credit facility, the proceeds of which were used to cash out the debtor's shareholders and to pay significant transaction fees. By late 1998, the debtor was in a severe liquidity crisis and on June 11, 1999, the debtor filed for chapter 11 protection. The Official Committee of Unsecured Creditors then filed an adversary proceeding against certain of the debtor's former directors, controlling shareholders, lenders, and investors who financed the debtor's leveraged buyout. The adversary complaint encompassed claims for fraudulent conveyance, breach of fiduciary duty, unjust enrichment and equitable subordination based on the leveraged buyout transaction. The insiders and others who were defendants in the adversary proceeding did not dispute that the committee had pled a prima facie case for fraudulent transfer. Rather, they replied that the claim was barred because the leveraged buyout transaction constituted an unavoidable 'settlement payment' under section 546(e). After finding each of the arguments made by the committee unpersuasive in light of the Third Circuit's holding in Lowenschuss v. Resorts Int'l, Inc. (In re Resorts Int'l, Inc.), 181 F.3d 515 (3rd Cir. 1999), the bankruptcy court dismissed the committee's fraudulent transfer claims. Official Committee of Unsecured Creditors of Hechinger Inv. Co. v. E. Fleet Retail Fin. Group (In re Hechinger Inv. Co.), 2002 U.S. Dist. LEXIS 2960, 274 F. Supp.3d 71 (D. Del. February 20, 2002) (McKelvie, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:546.06

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Debtors' chief executive officer's employment contract with creditor presented conflict of interest that precluded plan confirmation. Bankr. D. Del. At the conclusion of the confirmation hearing on the chapter 11 corporate debtors' first reorganization plan, the bankruptcy court denied confirmation because it concluded that the debtors' chief executive officer and had a conflict of interest. The conflict arose because the CEO had a separate employment contract with one of the debtors' largest creditors. The debtors then hired an independent investigator who concluded that the conflict of interest did not result in any harm to the debtors. The debtors proposed a second amended plan, and the official equity security holders' committee objected to confirmation. The bankruptcy court denied confirmation of the second amended plan and held that the continuous conflict of interest by the debtors' CEO precluded the debtors from proposing a plan in good faith under section 1129(a)(3). The court rejected the debtors' argument that their plan had to be confirmed because the independent investigator concluded that the conflict of interest did not result in any harm to the debtors. The court explained that the debtor's CEO had a fiduciary duty to the estate, which included the duty of loyalty and an obligation to avoid any direct actual conflict of interest. The court concluded that the CEO's conflict of interest was a violation of his fiduciary duty to the debtors and the estate, and that it was so pervasive as to taint the debtors' restructuring of their debt, the debtors' negotiations towards a plan and even the debtors' restructuring of their operations. In re Coram Healthcare Corp., 2001 Bankr. LEXIS 1795, 271 B.R. 228 (Bankr. D. Del. December 21, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
7:1129.03[3]

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4th Cir.

Creditor's lien survived debtor's chapter 7 bankruptcy despite late filing of proofs of claim. Bankr. W.D. Va. The creditor filed several proofs of claim in the debtor's chapter 7 bankruptcy case. The proofs of claim were all for debts secured by valid deeds of trust. All of the claims were filed late and were subsequently disallowed by the court. The debtor then filed an adversary proceeding to avoid the creditor's liens under section 506(b), based on the fact that the creditor's claims had been disallowed. After a hearing, the bankruptcy court found that lien avoidance under section 506(d) would only be proper if the debtor owed no legally enforceable obligation to the creditor, such as where the evidence shows that the loan was never made or that the loan had been repaid or was usurious. Since the debtor had not shown that creditor's liens were not otherwise invalid, the bankruptcy court denied the debtor's motion, ruling that the lien avoidance mechanism of section 506(d) could not be used to avoid the creditor's liens merely because the creditor's proofs of claim were filed late. The court also noted that, although the debtor's bankruptcy extinguished the creditor's claims against the debtor personally, the bankruptcy had no effect on the creditor's claims against the debtor's property. Accordingly, the court allowed the creditor's claim as secured for purposes of allowing the creditor to proceed against the real property, but disallowed the claim for purposes of distribution because it was not timely filed. Hamlett v. Amsouth Bank (In re Hamlett), 2002 Bankr. LEXIS 135, - B.R. - (Bankr. W.D. Va. February 4, 2002) (Krumm, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:506.06[4]

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5th Cir

Fifth Circuit found annuities exempt under state (Louisiana) law and reversed previous cases rulings to the contrary. 5th Cir. The debtor suffered a serious brain injury in an automobile accident a few months after he and the creditor were married. The injury left him mildly mentally retarded, with an I.Q. of less than 70. The debtor and the creditor sued for damages resulting from the debtor's injuries. The litigation was settled in 1989 after the defendants agreed to make two payments each month for the longer of 30 years or the debtor's lifetime. One payment was for $1,180.00 and the other was for $850.00. To ensure that the debtor received the payments, annuity contracts were purchased. The debtor was named payee on both contracts, but the defendants' insurers retained ownership of the contracts. The debtor and the creditor divorced in 1991. As part of their divorce settlement, the debtor agreed to pay the creditor $1,250.00 per month from September 1990 to August 1993, and $1000.00 per month for the next eight months. On December 24, 1994, the debtor's mother, acting as curatrix of her interdicted son, filed a chapter 7 bankruptcy petition on his behalf. The annuity payments were listed as assets of the estate but were claimed exempt under Louisiana statutes. The creditor, who had filed a $53,494.92 claim in the debtor's bankruptcy for arrearages due under the divorce settlement, objected to the exemption of the annuity payments. Three years later, the bankruptcy court rendered an opinion denying the creditor's objection, and the district court affirmed. A divided three-judge panel reversed the district court, but the panel's majority judgment was then vacated when the Court of Appeals for the Fifth Circuit voted to rehear the case en banc. On rehearing, the Fifth Circuit reversed the panel majority and reinstated the bankruptcy court's recognition of the debtor's annuity contract proceeds as exempt. The court found that the plain language and legislative history of the Louisiana annuity exemption statute naturally lead to the conclusion that the proceeds from the debtor's structured settlement could be exempted under the debtor's bankruptcy. In so ruling, the court expressly overruled Young v. Adler (In re Young), 806 F.2d 1303 (5th 1987) and McGovern V. First National Bank of Jefferson Parish (In re McGovern), 918 F.2d 175 (5th Cir. 1990), as well as anything in Farm Credit Bank v. Guidry, 110 F.3d 1147 (5th Cir. 1997) that conflicts with the Fifth Circuit's opinion in this case. Canfield v. Orso (In re Orso), 2002 U.S. App. LEXIS 2872, - B.R. - (5th Cir. February 25, 2002) (Wiener and Dennis, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:522.10[4]

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Order approving employment of debtor's counsel was vacated due to firm's failure to disclose potential adverse interest. Bankr. E.D. Tex. The United States Trustee moved for reconsideration of an order approving the appointment of the chapter 11 debtor in possession's counsel. The firm's application and affidavit of disinterestedness failed to disclose that on the same date upon which the corporation filed its petition, the firm also filed a voluntary petition for relief under chapter 13 on behalf of the sole equity security holders of the debtor in possession. Counsel for the debtor argued that nondisclosure of the dual representation was excusable because there was no actual conflict between the two estates and that substitution of counsel would cause more damage to the reorganization effort than the damage caused by the lack of disclosure. The bankruptcy court granted the motion to reconsider and vacated the order approving employment, holding that as a result of the law firm's failure to comply with Rule 2014, it was disqualified from any further representation of the debtor in possession. The equity security holders constituted parties in interest with respect to the chapter 11 estate, and the firm's connections with them should have been disclosed from the outset of the case. It was irrelevant that counsel did not intend to hide its dual representation. In re C Demo, Inc., 2001 Bankr. LEXIS 1800, 273 B.R. 502 (Bankr. E.D. Tex. November 29, 2001) (Parker, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
9:2014; 3:327.04

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7th Cir.

Sanctions against creditors not appropriate where creditors' motions had basis in fact and law. Bankr. N.D. Ill. Creditor A filed a complaint against Creditor B seeking, in part, to avoid a security interest that Creditor B held in certain of the debtor's assets and to recover payments made to Creditor B during the preference period. The complaint also sought recovery against certain guarantors for Creditor B. After Creditor B filed a motion to dismiss Creditor A's complaint, Creditor B also filed for chapter 11 relief and the motion to dismiss Creditor A's complaint was stayed. On the same day that Creditor B filed its chapter 11 petition, the guarantors for Creditor B also filed a motion to dismiss Creditor A's complaint. Creditor B and the guarantors then filed motions to stay the dismissal motions. At a hearing on the stay motions, the parties discussed the fact that a confirmation hearing on Creditor B's reorganization plan was to occur within 10 days, and counsel for Creditor B suggested that a ruling on the fully-briefed dismissal motion be stayed until Creditor B's plan was confirmed. Counsel for Creditor A objected to the proposal and requested that it be given 30 days to respond to the stay motions, even though it was fully possible that the stay motions could become moot before the response deadline. In light of Creditor A's objection to the stay, the bankruptcy court entered an order providing that counsel for Creditor A had 30 days to respond to the stay motions. Creditor B's reorganization plan was confirmed as anticipated. No one associated with Creditor B's reorganization contacted counsel for Creditor A to inform Creditor A of the plan confirmation. Counsel for Creditor A also did not contact counsel for Creditor B after the scheduled confirmation hearing date. Instead, counsel for Creditor A filed a response to the stay motions on the final day allowed for the filing. Nearly three weeks later, at the next scheduled hearing on the stay motions, counsel for Creditor B and the guarantors withdrew their stay motions since the motions were moot in light of Creditor B's plan confirmation. Counsel for Creditor A subsequently filed a motion for section 105 sanctions against Creditor B and the guarantors, seeking to recover attorneys' fees and costs incurred in responding to the stay motions, which Creditor A argued had been filed with improper motives. Counsel for Creditor A also argued that Creditor B and the guarantors should have notified Creditor A of the confirmation of Creditor B's reorganization plan. The court denied Creditor A's motion for sanctions, finding that Creditor A had not satisfied its burden of proof because the stay motions had a reasonable basis in fact and law. Further, while there appeared to have been an unfortunate lack of communication regarding the conformation of Creditor B's plan of reorganization, the court found that the overall conduct of Creditor B and the guarantors and their counsel did not rise to the level of unreasonableness and vexatiousness necessary to establish sanctionable behavior. Liquidating Grantor's Trust of Proteva, Inc. v. Finova Capital Corp. (In re Proteva, Inc.), 2001 Bankr. LEXIS 1792, 271 B.R. 569 (Bankr. N.D. Ill. November 29, 2001) (Pierson-Sonderby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:105.01, 10:9011.04

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The liquidating agent was allowed to pursue an action to determine the tax liability of the debtor in possession. Bankr. C.D. Ill. The United States filed a motion to dismiss the complaint filed by the liquidating agent of the chapter 11 plan. The liquidating agent brought the adversary proceeding under section 505(a), seeking a judgment against the IRS for a deposit overpayment of taxes under the confirmed plan. The confirmation order set out the amount of the tax claim and provided that the IRS was to receive payments over a period of 72 months. Although a component of the claim was an estimated tax liability for a prepetition tax year, the subsequently-filed tax return showed no such tax liability. The United States contended that the liquidating agent did not have a right to file a refund action because only the estate could bring a refund action under 505(a), and upon confirmation of the plan, the estate ceased to exist. The bankruptcy court denied the United States' motion to dismiss, holding that section 505 was not restricted solely to claims brought by trustees. The legislative history indicated that section 505 was not intended to restrict the bankruptcy court jurisdiction to claims of trustees over property of the estate. The section authorized the court to rule on the merits of any tax claim involving an unpaid tax of the debtor or the estate. The liquidating agent was acting for the benefit of the estate and any recovery he made would inure to the benefit of the debtor's unsecured creditors under the confirmed plan. Schroeder v. United States (In re Van Dyke), 2002 Bankr. LEXIS 143, - B.R. - (Bankr. C.D. Ill. January 15, 2002) (Perkins, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:505.01, .LH

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Bankruptcy court's order discharging debtor's student loan obligation was reversed and remanded for further evidence. W.D. Wis. The creditor appealed the bankruptcy court's decision discharging the debtor's student loan obligation. The debtor, a single mother of two children, was employed as a licensed practical nurse and worked approximately 56 hours every two weeks. The debtor's housing was subsidized, and she qualified for a state medical program for underinsured residents. Although her monthly expenditures were modest, they exceeded her take-home pay and child support. The bankruptcy court speculated that the debtor might be able to increase her work week to 35 or 40 hours but that if she did so, she would incur additional expenses and lose public assistance. The bankruptcy court concluded that it would be an undue hardship on the debtor to make $100 loan payments each month for the next 10 years and discharged her obligation. The district court reversed and remanded the case, holding that the bankruptcy court erred in concluding on the record before it that the repayment of the student loan debt would cause the debtor undue hardship. The debtor's preference to spend more time with her children did not relieve her of the burden to show that she was entitled to a discharge of the student loan. The court noted that unless the debtor could show either that there was no work available in her area or that having to work full-time would not result in any net financial gain over the next 10 years, she would not succeed in proving her entitlement to the discharge of her student loan obligation. Wessels v. Educ. Credit Mgmt. Corp., 2002 U.S. Dist. LEXIS 3191, 271 B.R. 313 (W.D. Wis. January 9, 2002) (Crabb, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.14

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8th Cir.

Order sustaining trustee's objection to debtor's claim of exemption was vacated because debtor had no ownership interest in property claimed exempt. Bankr. W.D. Mo. The chapter 7 debtor moved to vacate an order sustaining the trustee's objection to her claim of exemption in an automobile. Before he married the debtor, the nondebtor spouse had purchased the car, which was titled in his and his former girlfriend's names. After ending his relationship with the co-owner of the vehicle, the nondebtor spouse became involved with the debtor and refinanced the vehicle in both his and the debtor's names. The debtor and nondebtor spouse's application for title was subsequently rejected, and no one took any further steps to get the title to the car transferred into the debtor and nondebtor spouse's names or to finalize perfection of the bank's lien. The debtor and her nondebtor spouse then married, and the debtor filed her petition a year later. The debtor listed the car as an asset of her estate, but claimed it exempt under section 522(b)(2)(B) because she allegedly owned it as a tenant by the entirety with her nondebtor spouse. Because the debtor failed to respond to the trustee's objection to exemption in the vehicle, the bankruptcy court sustained the objection. Upon reconsideration, the debtor amended her schedules to reflect that she had no ownership interest in the car. The bankruptcy court granted the debtor's motion to vacate the order sustaining the trustee's objection to exemption, holding that the trustee failed to show that the debtor had a legal or equitable ownership interest in the vehicle. Since the debtor and her nondebtor spouse were not married at the time they submitted the application to title the vehicle in both of their names, the debtor's interest in the car was not that of a tenant by the entirety. The vehicle was actually still titled in the names of the nondebtor spouse and his former girlfriend, leaving the debtor with no ownership interest to claim exempt. In re Caldwell, 2001 Bankr. LEXIS 1801, 271 B.R. 621 (Bankr. W.D. Mo. December 28, 2001) (Venters, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:522.04

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Bankruptcy court erred in not allowing debtors to avoid judicial lien in its entirety. B.A.P. 8th Cir. A chapter 7 debtor husband purchased a veterinary practice from a veterinary hospital prepetition. The debtor and his codebtor wife guaranteed payment of the veterinary practice's purchase price. The debtors also purchased a home prepetition, and obtained financing for the home purchase from a bank. The bank recorded a first deed of trust on the home, which it promptly perfected. The debtors fell behind in making payments on the veterinary practice loan, and the veterinary hospital obtained and recorded a judgment lien against the debtors. The judgment lien was a second priority lien on the debtors' home. Thereafter, the debtors obtained another loan from a second bank and gave the second bank a second deed of trust on their home. The second bank failed to discover the veterinary practice's judgment lien before it loaned funds to the debtors. In their chapter 7 case, the debtors moved to avoid the veterinary hospital's judgment lien under section 522(f). The debtors argued that since the total liens plus the amount of their exemption exceeded the value of the property by approximately $166,000, they should be entitled to avoid any judicial liens up to that amount, which included the full amount of the veterinary hospital's lien. The veterinary hospital objected, and claimed that since the two deeds of trust would absorb the full value of the home, its judicial lien did not impair the debtors' exemption. Alternatively, the veterinary hospital sought a determination that its lien was avoidable only to the extent of the $8,000 exemption allowed under state (Missouri) law. The bankruptcy court held that the debtors could avoid the veterinary hospital's lien, in part, even though the consensual liens on the property exceeded its value and the debtors had no equity in the property. Specifically, the court held that the veterinary hospital's lien impaired the debtors' exemption to the extent that it exceeded the amount reached by deducting from the value of the property the amount owed to the first bank and the debtors' $8,000 exemption, but not the amount owed to the second bank. The debtors appealed. The B.A.P. for the Eighth Circuit reversed. The B.A.P. held that the bankruptcy court erred as a matter of law in not allowing the debtors to avoid the veterinary hospital's lien in its entirety. The B.A.P. agreed with the debtors that the bankruptcy court failed to properly apply the congressionally-mandated bright line formula for determining how to calculate the extent to which a judicial lien impairs an exemption set forth in section 522(f)(2)(A). Application of the formula required that the entire judicial lien be avoided. Kolich v. Antioch Laurel Veterinary Hosp. (In re Kolich), 2002 Bankr. LEXIS 132, 273 B.R. 199 (B.A.P. 8th Cir. February 22, 2002) (Dreher, B.J.).

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

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Debtor's obligation to pay marital debts was dischargeable. Bankr. W.D. Mo. The former wife of the chapter 7 debtor filed an adversary proceeding to determine the dischargeability of certain obligations of the debtor. The divorce court divided the marital assets and liabilities equally between the parties, and the debtor was ordered to pay the debts related to a vehicle awarded to him and various credit card debts. Because his former wife was disabled, the divorce court divided the parties' combined monthly income equally and awarded monthly maintenance to the wife, as well. The former spouse contended that the marital debts assigned to the debtor were nondischargeable support obligations. The bankruptcy court granted judgment to the debtor, holding that the marital debts assigned to the debtor were not intended to be in the nature of alimony, maintenance or support, as provided in section 523(a)(5), and were dischargeable. The court considered the substance of the dissolution decree the relative financial circumstances of the parties at the time of the dissolution, and the degree to which the obligation would have enabled the recipient to maintain daily necessities. Waltner v. Waltner (In re Waltner), 2001 Bankr. LEXIS 1796, 271 B.R. 170 (Bankr. W.D. Mo. December 27, 2001) (Venters, B.J.).

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

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Debtor's student loan debt was not discharged because he had the ability to make payments. Bankr. W.D. Mo. The chapter 7 debtor filed a complaint to determine the dischargeability of his consolidated student loan debt under section 523(a)(8). The debtor, a healthy 32-year old with no dependents, had incurred the debt while obtaining two bachelors degrees and a masters of science degree in mathematics. He was employed as an assistant professor at a small college and worked part-time as a park ranger. Although the debtor testified that he could earn more at a larger university and had previously made more money outside the education field, he preferred teaching at smaller institutions. The bankruptcy court dismissed the complaint, holding that the debtor would not be subjected to any undue hardship if his student loan was not discharged. The court considered the totality of the circumstances, including the debtor's financial resources, his reasonable necessary living expenses and the circumstances surrounding the case. The debtor had voluntarily reduced his income and was capable of making a higher salary if he desired. Because the debtor had the skills and abilities to make substantial payment on the debt over the next 25 years, he failed to sustain his burden of proving undue hardship. Block v. United States Dep't of Educ. (In re Block), 2002 Bankr. LEXIS 148, 273 B.R. 600 (Bankr. W.D. Mo. February 13, 2002) (Venters, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.14

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9th Cir.

Creditor could not offset fees awarded in arbitration against the purchase price of debtors' homestead. Bankr. S.D. Cal. The creditor sought to offset damages consisting of his reasonable attorney's fees and related costs against the purchase price of the chapter 7 debtors' homestead. The debtors had entered into a prepetition written agreement with the creditor to purchase the property, and an escrow account was opened. Due to the debtor husband's failing health, the debtors decided not to go forward with the sale and the creditor filed suit in state (California) court. The arbitrator determined that the creditor was entitled to purchase the property and granted his request for specific performance, as well as an award for reasonable attorney's fees and related costs. Before the creditor could get the arbitration award confirmed, the debtors filed their petition. The bankruptcy court denied the creditor's request, holding that although the creditor had met all the requirements for setoff under section 553, he was not entitled to offset the debtors' debt against their homestead exemption. The creditor's obligation to pay the purchase price for the property and the debtors' obligation to pay the reasonable attorney's fees and other costs arising out of the arbitration award were in the 'same right.' Because the debts were also between the same individuals, and those individuals stood in the same capacity, the right to setoff was preserved under section 553. Nevertheless, the court noted that the state policy of protecting the interests of debtors in their homestead exemptions outweighed the creditor's right to setoff (citing Collier on Bankruptcy, 15th Ed. Revised). In re Ter Bush, 2002 Bankr. LEXIS 153, 273 B.R. 625 (Bankr. S.D. Cal. February 11, 2002) (Hargrove, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:553.03; 4:522.10

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10th Cir.

Claim based on retention of a security subjected to same subordination as claims based on purchase or sale. 10th Cir. The debtor filed a chapter 11 petition and listed debts that included two public bond issues. Under the terms of the debtor's proposed reorganization plan, all bondholders were grouped into a single class. Each member of the class was to receive common stock in the reorganized company. Under the proposed plan, classes subordinate to the bondholders were to receive nothing. The trustee for each of the two bond issues submitted proofs of claim for the bondholders. An investor holding notes from one of the bond issues filed a $500,000 proof of claim, alleging that the debtor committed fraud in not disclosing its growing financial difficulties and caused him to retain his debt securities. The debtor moved to disallow the investor's claim, arguing that the claim was redundant of the claim filed by the trustee on behalf of the bondholders. The investor objected, asserting that his claim was based on fraud, not upon his ownership of the bonds. The bankruptcy court ruled that, to the extent the investor's claim was based on his bonds, his claim was duplicative of the trustee's claim. The bankruptcy court further ruled that, to the extent that the investor's claim was based on fraud, his claim was subordinated under section 510(b) to the claims of the bondholders and the claims of general goods and services providers. The B.A.P. for the Tenth Circuit affirmed the bankruptcy court ruling and the debtor appealed to the circuit court. The Tenth Circuit affirmed the rulings of the lower courts, finding that for purposes of distribution priority, the language of section 510(b) regarding the subordination of claims 'arising from the purchase or sale' of a debtor's security also encompassed claims alleging fraud in the retention of a security. Allen v. Geneva Steel Co. (In re Geneva Steel Co.), 2002 U.S. App. LEXIS 3046, 281 B.R. 1173 (10th Cir. February 27, 2002) (Ebel, C.J.).

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

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11th Cir.

State agency's motion to dismiss debtor's undue hardship complaint was denied. Bankr. N.D. Fla. The state (Florida) department of education moved to dismiss the chapter 7 debtor's complaint for hardship discharge of her student loan debt. The department, an agency of the state, was the guarantor of the prepetition student loans and took an assignment of the loans postpetition. Because the state's manual on student loans required the original lender to file a claim after the debtor filed a dischargeability complaint for undue hardship, the assigning creditor filed two proofs of claim for the loans, which designated the department as the future correspondent for the claims. The department subsequently filed a notice of withdrawal of the claims and moved to dismiss the dischargeability action. The department argued that the Eleventh Amendment provided it with sovereign immunity to lawsuits and that it did not consent to be sued by the debtor. The department claimed that the filing of the proofs of claims by the predecessor lender was unauthorized and that its withdrawal of the proofs of claim caused its sovereign immunity to remain intact. The bankruptcy court denied the motion to dismiss, holding that the sovereign immunity afforded by the Eleventh Amendment was waived when the lender, acting pursuant to the instructions of the state, filed proofs of claim. The department could not restore is sovereign immunity by withdrawing its proofs of claim. Stanley v. Student Loan Servs., Inc. (In re Stanley), 2002 Bankr. LEXIS 137, 273 B.R. 907 (Bankr. N.D. Fla. February 13, 2002) (Killian, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:106.06

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Trustee's objection to debtor's application for administrative expense claim was sustained. Bankr. M.D. Fla. The chapter 7 debtor filed an application for administrative expenses she incurred while investigating and prosecuting claims against the executor of her aunt's probate estate. Although the debtor's aunt passed away less than two months after the debtor filed her petition, the debtor did not inform the trustee that she was a beneficiary under the will, and her case was closed. The debtor subsequently engaged counsel in the probate case to establish a bond, prevent the executor from taking money out of the probate estate and determine whether or not the executor dissipated monies belonging to her aunt before and after the aunt's death. The trustee moved to reopen the debtor's case and negotiated a sale of the estate's interest in the probate estate for $23,500, including all causes of action against the executor, which the trustee deemed valueless. The debtor asserted an administrative expense claim for legal expenses and disbursements she made to her counsel in the probate case, and the trustee objected. The bankruptcy court denied the debtor's application, holding that the services and costs for which the debtor sought an administrative expense claim provided no benefit to the estate. The court noted that it had not previously approved the attorney's employment and that the debtor's actions actually hindered the trustee's administration of the estate. The debtor failed to establish that her efforts in the probate case were necessary to recover monies for the benefit of the estate or to prevent dissipation of the estate assets. In addition, the claims against the executor were too speculative to establish a tangible concrete benefit to the estate as required by section 503(b)(1)(A) (citing Collier on Bankruptcy, 15th Ed. Revised). In re Lickman, 2002 Bankr. LEXIS 147, 273 B.R. 691 (Bankr. M.D. Fla. February 21, 2002) (Corcoran, III, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:503.06

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Plan confirmation denied because nonmandatory contributions to retirement plan were not a reasonable or necessary expense. Bankr. M.D. Fla. The chapter 13 trustee objected to confirmation of the joint husband and wife debtors' plan. Specifically, the trustee argued that the debtor husband's monthly 401(k) plan contribution was 'excessive' and not reasonably necessary pursuant to section 1325(b)(1)(B). If the plan was confirmed, the debtor husband planned to contribute $23,400 to his retirement account over the life of the plan, although the debtors planned to pay only $3,000 (or approximately 5 percent) of their unsecured claims under the plan. The bankruptcy court sustained the trustee's objection, and held that nonmandatory contributions made to a retirement plan are not a reasonable and necessary expense when a chapter 13 debtor is not paying 100 percent of relevant unsecured claims. Thus, the debtors' plan could not be confirmed because it did not provide for all disposable income to be applied to payments under the plan. The court noted that the result would be the same in this case even if the court had not decided to adopt a per se prohibition regarding nonmandatory pension plan contributions. The court explained that under the facts of this particular case, none of the proposed monthly contributions could be deemed reasonable and necessary for the debtors' maintenance and support.In re Prout, 2002 Bankr. LEXIS 124, 273 B.R. 673 (Bankr. M.D. Fla. January 2, 2002) (Proctor, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1325.08

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D.C. Cir.

Bankruptcy court granted debtor hospital's motion to compel law firm that represented debtor prepetition in malpractice action to turn over files and documents. Bankr. D.C. A debtor hospital moved to compel a law firm that represented it in a state court malpractice action to produce certain files and documents. The law firm represented the debtor in the malpractice action prepetition, and the debtor sought to compel turnover of the requested documents so that its new attorneys (selected by the debtor's insurer after the insurer agreed to provide a gratuitous defense) could use the documents to prepare a pretrial statement. The law firm opposed the turnover motion and asserted that it held a retaining lien against the documents. The bankruptcy court held that the exigency of the new attorneys' need to file a pretrial statement warranted requiring turnover of the files, including attorney work product documents, with compensation for the former counsel's retaining lien to be decided later. The court reasoned that since turnover might reduce attorney's fees that would otherwise be incurred in litigation of the malpractice case or enable the hospital to minimize any award in the case, the law firm was entitled to compensation for the value it imparted to the extent that it benefited the estate. The court also concluded that the law firm was entitled to a replacement lien against the debtor's residual interest in any funds held in trust for medical malpractice claimants, and a replacement lien on the debtor's right to any reimbursement of expenses from its insurer, if any such right existed with respect to the underlying malpractice claim. In re Greater Southeast Cmty. Hosp. Found., 2001 Bankr. LEXIS 1780, - B.R. - (Bankr. D.C. June 11, 2001) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:542.06

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