Collier Bankruptcy Case Update April-29-02
- West's
Bankruptcy Newsletter
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
April 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
ABI Members, click here to get the full opinion.
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]
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]
ABI Members, click here to get the full opinion.
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]
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
ABI Members, click here to get the full opinion.
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]
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]
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]
ABI Members, click here to get the full opinion.
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
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
ABI Members, click here to get the full opinion.
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
ABI Members, click here to get the full opinion.
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
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
ABI Members, click here to get the full opinion.
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
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
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
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
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