Collier Bankruptcy Case Update April-8-02
- 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 8, 2002
CASES IN THIS ISSUE
(scroll down to read the full
summary)
1st Cir.
§ 507(a)(1) Bankruptcy court's denial of administrative
priority status to defendants' claim for costs was reversed.
Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.)
(B.A.P. 1st Cir.)
§ 541(a)(1) Legal malpractice claims against debtor's bankruptcy
attorneys were property of debtor's estate.
Tomaiolo v. Rodolakis (In re Tomaiolo) (D. Mass.)
2d Cir.
§ 507(a)(1) Bankruptcy court's denial of administrative
priority status to defendants' claim for costs was reversed.
Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.)
(B.A.P. 1st Cir.)
§ 541(a)(1) Legal malpractice claims against debtor's bankruptcy
attorneys were property of debtor's estate.
Tomaiolo v. Rodolakis (In re Tomaiolo) (D. Mass.)
3d Cir.
§ 105(a) Bankruptcy court denied adversary defendant's motion
to disqualify debtors' counsel.
Kaiser Group Int'l, Inc. v. Nova Hut (In re Kaiser Group Int'l,
Inc.) (Bankr. D. Del.)
§ 502(c) Debtors entitled to summary judgment to estimate the
creditor's claim at zero.
In re Genesis Health Ventures, Inc. (Bankr. D. Del.)
4th Cir.
§ 362(b) Debtor was required to respond to discovery in a
civil contempt matter.
America Online, Inc. v. CN Productions, Inc. (E.D. Va.)
5th Cir.
28 U.S.C. § 157(e) Bankruptcy court denied jury demand in
adversary proceeding brought by debtors to assume and assign
noncompetition agreement.
Sentry Operating Co. v. Billings (In re Sentry Operating Co.)
(Bankr. S.D. Tex.)
6th Cir.
§ 506(d) Debtors not allowed to use section 506(d) to avoid
creditor's unsecured lien on debtors' residence.
Bessette v. Bank One (In re Bessette) (Bankr. E.D. Mich.)
§ 1141(a) 'Collateral attack doctrine' precluded state court
litigation after confirmation.
Pratt v. Ventas, Inc. (W.D. Ky.)
Rule 9024 Bankruptcy court denied mortgagee's motion for relief from
default judgment obtained by trustee.
Wilson v. Cassidy (In re Cassidy) (Bankr. N.D. Ohio)
7th Cir.
§ 106(a) Court struck debtor's claim for determination of
dischargeability of state tax debt after finding section 106(a)
unconstitutional.
Claxton v. United States (In re Claxton) (Bankr. N.D. Ill.)
§ 330(a)(3) Attorney's request for additional compensation was
granted in part.
In re Fry (Bankr. C.D. Ill.)
8th Cir.
§ 541(a)(6) Court of Appeals affirmed decision that real
estate commissions paid to debtor after her bankruptcy filing belonged
to her bankruptcy estate.
Parsons v. Union Planters Bank (In re Parsons) (8th Cir.)
9th Cir.
§ 522(b)(2)(A) Under state (Nevada) exemption statute, joint
husband and wife debtors could each claim exemption for up to $4,500
worth of equity in same vehicle.
In re Longmore (Bankr. D. Nev.)
11th Cir.
§ 362(d) Contractor entitled to relief from
automatic stay to complete foreclosure proceeding.
In re Madden (Bankr. M.D. Fla.)
§ 503(b) Claim based on utility refund obtained by creditor on
debtor's behalf not entitled to treatment as administrative
expense.
In re Moltech Power System, Inc. (Bankr. N.D. Fla.)
§ 523(a)(5) Debtor's obligation to pay legal fees to former
wife's attorney held nondischargeable.
Drewell v. Smith (In re Smith) (Bankr. N.D. Fla.)
D.C. Cir.
§ 362(d) Contractor entitled to relief from
automatic stay to complete foreclosure proceeding.
In re Madden (Bankr. M.D. Fla.)
§ 503(b) Claim based on utility refund obtained by creditor on
debtor's behalf not entitled to treatment as administrative
expense.
In re Moltech Power System, Inc. (Bankr. N.D. Fla.)
§ 523(a)(5) Debtor's obligation to pay legal fees to former
wife's attorney held nondischargeable.
Drewell v. Smith (In re Smith) (Bankr. N.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.Bankruptcy court's denial of administrative
priority status to defendants' claim for costs was reversed.
B.A.P. 1st Cir. Defendants in an action commenced by the chapter
7 trustee appealed the bankruptcy court's determination that costs
awarded to them by the district court were not entitled to
administrative priority. The trustee had sued the defendants, alleging
that a prepetition leveraged buyout of the debtor was a fraudulent
transaction. The defendants prevailed against the trustee after a jury
trial, and the district court awarded costs pursuant to Fed. R. Civ. P.
54(d). The bankruptcy court denied the defendants' request that the
costs be recognized as administrative expenses and ruled that the
defendants' entitlements were general, unsecured claims. The B.A.P.
reversed, holding that the defendants' claims for costs were entitled
to administrative priority under the express, unambiguous terms of
section 507(a)(1). The B.A.P. rejected the trustee's argument that
the word 'and' in section 507(a)(1) must be read to require that any
such assessment be accompanied by, or bound up with, a section 503(b)
claim. As charges assessed against the estate, the defendants' claims
for costs assessed by the district court after their successful defense
of the trustee's action fit the statute precisely. Hicks, Muse
& Co. v. Brandt (In re Healthco Int'l, Inc.), 2002 Bankr. LEXIS
81, 272 B.R. 510 (B.A.P. 1st Cir. February 1, 2002) (Haines,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised4:507.03
Legal malpractice claims against debtor's bankruptcy attorneys
were property of debtor's estate. D. Mass. The chapter 11
debtor appealed from two related bankruptcy court decisions. The first
decision held that the debtor's state court legal malpractice claims
belonged to the bankruptcy estate and ordered the debtor to turnover
control of the malpractice action to the trustee. The second decision
refused to stay the turnover order pending the debtor's appeal for lack
of likelihood of success of the appeal. The district court affirmed. The
court held that the legal malpractice claims were part of the
debtor's bankruptcy estate because events that led up to the claims
occurred before the debtor's chapter 11 filing and because the resulting
harm affected his estate as well as the debtor separately. The
district court concluded that the debtor was or should have been aware
that his attorneys were acting negligently before his bankruptcy filing,
and that the bankruptcy judge correctly found that the malpractice
claims had a substantial connection to events that occurred before the
debtor filed for bankruptcy. The court also determined that even if the
debtor's malpractice claim had not 'accrued' under state (Massachusetts)
law at the time of his filing, his claims were sufficiently in existence
at the time of filing to have become part of his estate. Tomaiolo
v. Rodolakis (In re Tomaiolo), 2002 U.S. Dist. LEXIS 2038, 280 B.R.
1185 (D. Mass. February 6, 2002) (O'Toole, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.08
2d Cir.
Creditor allowed to dismiss section 727 claim in exchange for
debtor's consenting to creditor's section 523 nondischargeability
claim. Bankr. S.D.N.Y. Prior to the debtor filing for
bankruptcy, the debtor sued his then wife for divorce. A judgment of
divorce was entered, establishing the parties' financial rights and
obligations in connection with their divorce. A year later, the debtor
filed for chapter 7 relief. The debtor's former spouse, who was a
creditor in the debtor's bankruptcy, then filed an adversary proceeding
seeking to deny dischargeability of her claims against the debtor under
section 523(a) and seeking to deny the debtor's discharge under section
727(a). The trustee also commenced an adversary proceeding objecting to
the debtor's discharge. After the debtor and creditor reached a
settlement, the creditor filed a motion seeking entry of a final order
and judgment providing that the creditor's claims against the debtor
would be nondischargeable under various subsections of section 523(a)
and that the creditor's objection to the debtor's discharge under
section 727(a) would be dismissed with prejudice. The trustee objected
to the settlement on the grounds that it was improper for the creditor
to use the threat of denial of discharge under section 727(a) in order
to extract a favorable settlement of the creditor's claims under section
523(a). After a hearing on the matter, the bankruptcy court found that
any per se prohibition on compromise of section 727(a) actions was
entirely inconsistent with Rule 7041. The court also found that such a
position was inconsistent with the time-honored judicial policy that
favors consensual dispute resolution and the right that a plaintiff has
to decline to continue prosecuting a claim. However, the court also
noted that, pursuant to Rule 7041, before any settlement connected with
the dismissal or withdrawal of section 727(a) claim can be approved, the
court must be satisfied that the action is not a sham effort by the
creditor to receive payment solely for himself on account of a section
727(a) claim that is representative in nature. The court then
approved the parties' settlement even though the creditor was agreeing
to dismiss her section 727(a) claims as a quid pro quo for the debtor
agreeing to the nondischargeability of the creditor's claims. The
court reasoned that the trustee's timely-commenced adversary proceeding
objecting to the debtor's discharge stood as adequate protection for the
interests of the other creditors. Hass v. Hass (In re Hass),
2002 Bankr. LEXIS 65, 273 B.R. 45 (Bankr. S.D.N.Y. January 24, 2002)
(Hardin, Jr., B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7041.02
3d Cir.
Bankruptcy court denied adversary defendant's motion to disqualify
debtors' counsel. Bankr. D. Del. Prior to its
representation of the chapter 11 debtors, a law firm maintained an
attorney-client relationship with an entity that was later named as a
defendant in an adversary proceeding filed by the debtors. Specifically,
the law firm had previously provided a draft memorandum to the adversary
defendant on the issue of the creation of an information barrier for the
defendant's equity desk. Sometime thereafter, the debtors approached the
law firm regarding legal representation for disputes with a third party.
The law firm learned that the adversary defendant had guaranteed a loan
to the third party, and that the adversary defendant had filed a proof
of claim in the debtors' chapter 11 case. Recognizing the potential
conflict, the law firm terminated its representation of the adversary
defendant before agreeing to represent the debtors. The adversary
defendant moved to disqualify the law firm based on an alleged conflict
of interest. The bankruptcy court denied the defendant's motion to
disqualify the law firm. The court found no potential for the
exchange of the adversary defendant's confidences and secrets in
relation to the adversary proceeding. Moreover, the court concluded that
the adversary defendant waived any conflict that may have existed when
it requested a 'Chinese Wall,' and the law firm established the wall
without any further objection from the defendant. The court also found
that the adversary defendant's delay in filing its motion to disqualify
was not justified. Kaiser Group Int'l, Inc. v. Nova Hut (In re
Kaiser Group Int'l, Inc.), 2002 Bankr. LEXIS 96, 272 B.R. 846
(Bankr. D. Del. January 2, 2002) (Katz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised2:105.01
ABI Members, click here to get the full opinion.
Debtors entitled to summary judgment to estimate the
creditor's claim at zero. Bankr. D. Del. The debtors,
who were pharmaceutical providers, supplied pharmacy services to nursing
home residents. To ascertain whether appropriate credits were being
afforded to the nursing home residents, the administrators at one
nursing home inquired about the manner in which the debtors afforded
credits for drugs returned to the Medicaid program. The debtors informed
the administrators that no credit was being given to Medicaid patients
for the return of unused pharmaceuticals. Following the nursing home's
termination of its relationship with the debtors, the nursing home
administrators conducted an audit that revealed that the debtors had not
properly credited returned pharmaceuticals to Medicare, private pay and
private insurance programs. The nursing home then filed a qui tam action
under the False Claims Act, based on the premise that the debtors and
their predecessor knowingly failed to credit Medicaid for unused
pharmaceuticals that were returned to, and later resold by, the debtors.
The United States declined to intervene in the qui tam action, and the
nursing home elected to continue the action. After the debtors filed for
chapter 11 relief, the nursing home, as a creditor, filed a proof of
claim in the amount of $324 million in the debtors' bankruptcies. The
bankruptcy court entered an order confirming the debtors' plan of
reorganization, which scheduled the creditor's claim as a general
unsecured claim. The debtors then moved to have the creditor's claim
estimated under section 502(c) to fix the amount of the allowed claim
and to permit payment of allowed claims in accordance with the confirmed
plan. The debtors also moved for summary judgment to estimate the claim
at zero, arguing that neither federal nor New Jersey Medicaid agencies
had promulgated any regulation or reimbursement policy relating to the
return of unused medications that could be used by the creditor to
support its False Claims Act complaint. After a review of the
statutory, regulatory and policy framework of the Medicaid program and
the factual record presented by the creditor, the court concluded that
the debtors were correct in their argument and that summary judgment was
warranted in favor of the debtors. In re Genesis Health
Ventures, Inc., 2002 Bankr. LEXIS 74, 272 B.R. 558 (Bankr. D. Del.
January 24, 2002) (Wizmur, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.04
4th Cir.
Debtor was required to respond to discovery in a civil contempt
matter. E.D. Va. AOL, an internet access provider, obtained
an injunction and damages against entities for delivering unsolicited
junk mail to its customers. In the course of a subsequent contempt
proceeding, it obtained the names of third parties who were conspiring
with the defendants and sought discovery from them. After a motion to
compel the discovery was filed against the conspirators, one of the
individuals filed a chapter 7 petition. Despite the imposition of the
automatic stay, the magistrate judge required the debtor to respond to
discovery in the contempt action. Upon the debtor's appeal, the district
court held that although no formal contempt order had been entered,
the proceeding was instituted to uphold the dignity of the court so that
the automatic stay did not apply. Even though the automatic stay
precluded continuance of the action for damages, since the information
sought in discovery related solely to the contempt issues, the automatic
stay did not prevent AOL from prosecuting its motion to compel
discovery. America Online, Inc. v. CN Productions, Inc., 2002
U.S. Dist. LEXIS 1607, 272 F. Supp. 879 (E.D. Va. January 31, 2002)
(Ellis, D.J.).
Collier on Bankruptcy, 15th Ed. Revised
3:362.05[2]
5th Cir
Bankruptcy court denied jury demand in adversary proceeding
brought by debtors to assume and assign noncompetition
agreement. Bankr. S.D. Tex. Before filing its chapter 11
petition, the debtors purchased two funeral homes. In connection with
the purchase, the debtors executed a promissory note and the sellers
signed a 'goodwill' or noncompetition agreement. Thereafter, the
debtors' chapter 11 case was commenced, and the bankruptcy court
confirmed a plan that provided for payment of part of the note and
discharge of its remainder. Notwithstanding the discharge of part of the
note, the debtors filed an adversary proceeding against the sellers and
sought to assume and assign the noncompetition agreement. The sellers
demanded a jury trial, and the debtors objected. The debtors also moved
for partial summary judgment. The bankruptcy court struck the
sellers' jury trial demand. The court also denied the debtors' motion
for partial summary judgment because of a factual issue as to whether
one of the sellers was a 'stockholder' against whom the agreement could
be enforced. On the jury trial issue, the court surveyed applicable
case law and found that for reasons of efficiency, a bankruptcy court
may hear motions to assume contracts and try related adversary
proceedings simultaneously, as long as the two issues are treated as
conceptually separate proceedings. The court also found that in such
cases, the contract issues may be decided by the bankruptcy court
without a jury if, and to the extent that, the creditor has filed a
proof of claim and all contract issues must be decided in order to allow
or to disallow the proof of claim. In this case, the sellers had filed
proofs of claim, and a determination as to the enforceability of the
noncompetition agreement was necessary to determine the allowance or
disallowance of their claims. In addition, the matter was brought as an
adversary proceeding, which obviated the concern that the contract
issues not be tried in a summary proceeding brought to assume or to
reject an executory contract. Sentry Operating Co. v. Billings (In
re Sentry Operating Co.), 2002 Bankr. LEXIS 83, 273 B.R. 515 (Bankr.
S.D. Tex. February 1, 2002) (Steen, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.08
6th Cir.
Debtors not allowed to use section 506(d) to avoid creditor's
unsecured lien on debtors' residence. Bankr. E.D. Mich. The
debtors filed a voluntary petition for relief under chapter 7. On their
schedules, the debtors indicated that they were the fee simple owners of
residential real estate with a current market value of $55,000. The
debtors claimed a $16,495.87 exemption in this property pursuant to
section 522(d)(1). The debtors' schedules also indicated that the
creditor, a bank, held two recorded mortgages on the property and that
there was a balance owing of $58,504.13 on the first mortgage and
$14,399.15 on the second mortgage. The debtors then filed an adversary
complaint seeking to avoid the creditor's second mortgage on the
property, arguing that the court must first deduct from the value of the
property the amount of the debtors' claimed homestead exemption, and
next the amount owing on the first and second mortgages. The debtors
further argued that, because there was no collateral securing the
creditor's second mortgage, the mortgage was void pursuant to section
506(d). The creditor filed a motion to dismiss the debtors' complaint
for failure to state a claim, contending that the creditor's allowed
secured claims could not be avoided under section 506(d) and, therefore,
the creditor's liens were unaffected by the debtors' claimed exemption.
After a hearing on the creditor's motion, the bankruptcy court found
that section 522(d)(1) expressly states that the dollar amount of a
debtors' claimed exemption is to be applied only to the value of the
debtor's interest in the property, that is the debtors' equity in the
property. The court then found that, even assuming that the
creditor's second mortgage was wholly unsecured, the court must grant
the creditor's motion to dismiss because the debtors could not use
section 506(d) to avoid a consensual wholly unsecured junior
mortgage. Bessette v. Bank One (In re Bessette), 2001
Bankr. LEXIS 1822, 269 B.R. 644 (Bankr. E.D. Mich. October 30, 2001)
(Spector, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.06
ABI Members, click here to get the full opinion.
'Collateral attack doctrine' precluded state court
litigation after confirmation. W.D. Ky. During the pendency
of various state court actions, the defendant company filed a chapter 11
petition. The confirmed chapter 11 plan provided for discharge of the
obligations, an injunction against continuance of the actions and
releases of liability for related entities and individuals. The state
court plaintiffs took no action in the chapter 11 case other than filing
proofs of claim and, instead, filed an action in another district
alleging that the debtor engaged in fraudulent acts with regard to the
bankruptcy case and that the bankruptcy court lacked jurisdiction to
confirm the plan, which provided for releases of nondebtors. Upon the
debtor's motion to enforce the automatic stay within the context of the
district court litigation, the district court held that the creditors
were barred from collaterally attacking the confirmation order.
Rather than circumventing the process established by statute, the
creditors were required to make their assertions before the bankruptcy
court and, thereafter, through the appellate process. The district court
specifically declined to rule on whether the bankruptcy court had
jurisdiction to confirm a plan which provided for releases of
nondebtors. Pratt v. Ventas, Inc., 2002 U.S. Dist.
LEXIS 1670, 273 B.R. 108 (W.D. Ky. February 1, 2002) (Heyburn,
C.D.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1141.02
ABI Members, click here to get the full opinion.
Bankruptcy court denied mortgagee's motion for relief
from default judgment obtained by trustee. Bankr. N.D. Ohio
The chapter 7 trustee brought an adversary proceeding against the
debtors' mortgagee. The adversary complaint alleged that the mortgagee's
recorded mortgage, which was listed in the debtors' schedules as a
secured claim, was invalid because it was not executed in accordance
with applicable state (Ohio) law. The mortgagee failed to plead or
otherwise respond to the adversary complaint, and the trustee moved for
and obtained a default judgment against the mortgagee. The mortgagee
then filed a motion requesting that the court set aside the default
judgment pursuant to Rule 9024. The mortgagee's motion explained that
approximately two months before the trustee's alleged service of the
summons and complaint by mail to its post office box address, the
mortgagee transferred the servicing rights and responsibilities for all
its loans to a third party. The mortgagee also noted that approximately
one month before the trustee's alleged service, it requested that the
post office forward all mail deliverable to its post office box address
to the third party. Finally, in an affidavit attached to the mortgagee's
motion, the mortgagee's director of office services stated that to the
best of her knowledge, the mortgagee never received a copy of the
complaint or any other documents related to the adversary proceeding.
The bankruptcy court denied the mortgagee's motion for relief from the
default judgment. The court held that the mortgagee failed to carry
its burden of demonstrating that its failure to respond to the trustee's
complaint was the product of mistake, inadvertence or excusable neglect,
and that, even if the mortgagee were able to provide facts sufficient to
establish mistake, inadvertence, surprise or excusable neglect, it had
not made a plausible argument that it had a meritorious defense. The
court explained that the mortgagee's mere assertion that its failure to
file a timely answer was due to 'mistake, inadvertence, surprise, or
excusable neglect' caused by a change in a routine business arrangement,
without any elucidation, did not warrant relief. Wilson v. Cassidy
(In re Cassidy), 2002 Bankr. LEXIS 84, 273 B.R. 531 (Bankr. N.D.
Ohio February 5, 2002) (Shea-Stonum, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9024.01
7th Cir.
Court struck debtor's claim for determination of dischargeability
of state tax debt after finding section 106(a) unconstitutional.
Bankr. N.D. Ill. The debtor filed for chapter 7 relief and
scheduled $30,000 in back taxes owed to the state of Illinois and
$300,000 in back taxes owed to the United States. The state of Illinois
filed no claim in the bankruptcy and did not willingly participate in
the bankruptcy proceedings in any way. The debtor received a general
discharge and the bankruptcy case was closed. A month later, the debtor
filed a motion to reopen the case for the purpose of filing an action to
declare dischargeability of the back taxes. The motion to reopen was
granted and the debtor then filed an adversary complaint. Count I of the
complaint asserted dischargeability of the taxes owed to the United
States, and Count II of the complaint asserted dischargeability of the
taxes owed to the state of Illinois. The state of Illinois then moved to
dismiss Count II on the ground that it had sovereign immunity under the
Eleventh Amendment of the United States Constitution from defending the
suit in the bankruptcy court. In responsive briefs, the debtor argued
that, under the Bankruptcy Clause of the Constitution, Illinois and all
other states originally ceded their immunity in the area of bankruptcy
law to the federal government. He also argued that congress effectively
abrogated all state immunity under 11 U.S.C. § 106(a). In reviewing
the current state of the law, the bankruptcy court noted that the
Supreme Court has not dealt directly with the issue of sovereign
immunity in bankruptcy. However, the court noted that most lower court
opinions issued since Seminole Tribe of Florida v. Florida, 517 U.S. 44
(1996) have held section 106(a) unconstitutional because Congress failed
to act pursuant to a valid exercise of power since it used the authority
of Article I rather than the authority of section 5 of the Fourteenth
Amendment. After finding that the debtor's suit as pleaded in Count
II was inconsistent with Supreme Court precedent regarding sovereign
immunity, the court struck Count II without prejudice. The court
then noted that the debtor had the option, if he wished and was able, to
amend his complaint and plead to meet the requirements of Ex Parte
Young, 209 U.S. 123 (1908), and seek equitable relief to enjoin the
appropriate state official for the state of Illinois from engaging in
conduct (tax collection) that would violate the debtor's discharge under
federal law. Claxton v. United States (In re Claxton), 2002
Bankr. LEXIS 71, 273 B.R. 174 (Bankr. N.D. Ill. January 30, 2002)
(Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
2:106.02-.05
ABI Members, click here to get the full opinion.
Attorney's request for additional compensation was
granted in part. Bankr. C.D. Ill. The attorney for several
chapter 13 debtors filed a motion for additional fees beyond the local
review level of $1,000 for each case. The attorney provided itemized
lists of each activity, a description of the nature and substance of the
work performed and the time spent on the work. The bankruptcy court
granted the attorney's motion, in part, and denied the motion, in part,
holding that the debtors' attorney was entitled to receive additional
compensation only for necessary services performed within a reasonable
time and for a reasonable rate. The court noted that reasonable time
spent on an activity did not necessarily include all time actually
expended. The court did not award compensation for time spent on purely
clerical functions, which were already included in the attorney's
overhead costs. Certain of the attorney's time entries lumped services
together, as well, making it impossible for the court to determine the
reasonableness of the time claimed. In re Fry, 2001
Bankr. LEXIS 1739, 271 B.R. 596 (Bankr. C.D. Ill. December 27, 2001)
(Fines, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.04
ABI Members, click here to get the full opinion.
8th Cir.
Court of Appeals affirmed decision that real estate commissions
paid to debtor after her bankruptcy filing belonged to her bankruptcy
estate. 8th Cir. The debtor appealed from an order of the
B.A.P. for the Eighth Circuit that affirmed the bankruptcy court's
decision that real estate commissions paid to her after her bankruptcy
filing belonged to her bankruptcy estate. The Court of Appeals for the
Eighth Circuit affirmed. The court held that the bankruptcy court
correctly determined that the commissions were earned prepetition under
applicable state (Missouri) law; thus, they were property of the
debtor's estate. The court also held that contrary to the debtor's
assertions, the debtor's postpetition services did not render the
commissions excludable from her bankruptcy estate under section
541(a)(6). The court found that the debtor failed to present
evidence to establish that the real estate contract terms were altered
by postpetition events so as to alter her protectable interest in
receiving the commissions. The court also rejected the debtor's argument
that the commissions were not subject to garnishment under state law
because they had not actually been paid when she filed her chapter 7
case. Finally, the court held that the bankruptcy court did not err in
allowing an exemption for 9.7 percent of the commissions as compensation
for the debtor's postpetition personal services. The court found that
the debtor failed to provide evidence to show that a different
percentage was appropriate. Parsons v. Union Planters Bank (In re
Parsons), 2002 U.S. App. LEXIS 2176, 280 F.3d 1185 (8th Cir.
February 11, 2002) (McMillian, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.17
9th Cir.
Under state (Nevada) exemption statute, joint husband and wife
debtors could each claim exemption for up to $4,500 worth of equity in
same vehicle. Bankr. D. Nev. The chapter 7 trustee objected
to the joint husband and wife debtors' claimed exemptions in a motor
vehicle. Each debtor claimed an exemption in the same vehicle under the
state (Nevada) exemption statute in the amount of $4,500. The trustee
objected to the claimed exemptions and argued that exemptions may not be
aggregated in the same vehicle. The trustee also argued that the
debtors' intention to retain a second vehicle counted as one exemption
despite the fact that the vehicle was overencumbered. The bankruptcy
court overruled the trustee's objection. The court held that the
plain language of the applicable exemption statute (Nev. Rev. Stat.
§ 21.090(1)(f)) permitted each debtor to exempt up to $4,500 worth
of equity in a single motor vehicle, and the overencumbered second
vehicle did not 'count as one exemption,' as urged by the trustee.
The court found that nothing in the applicable exemption statute
prevented a married couple from stacking their motor vehicle exemptions
in the same vehicle. The court also concluded that the trustee's
argument that the debtors' intention to retain the second vehicle meant
it should be counted as one exemption was flawed based on the plain
language of the applicable exemption statute. The court explained that
the statute, which provided for an exemption in one vehicle if the
judgment debtor's equity in the vehicle did not exceed $4,500, extended
to a debtor's equity interest in the vehicle, and not to the vehicle
itself. In re Longmore, 2001 Bankr. LEXIS 1749, 273 B.R. 633
(Bankr. D. Nev. May 17, 2001) (Riegle, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
ABI Members, click here to get the full opinion.
11th Cir.
Contractor entitled to relief from automatic stay to complete
foreclosure proceeding. Bankr. M.D. Fla. A contractor entered
into a prepetition contract with the debtor for the construction of her
home. The contractor recorded a 'notice of commencement' in the county
public records. By virtue of applicable state (Florida) law, the
contractor was in privity with the debtor, and had a lien against the
home to secure any monies that were due and owing it for labor, services
and materials it required and furnished to build the home. The
contractor fully performed its contract, the home was built, and the
debtor failed to pay the full amount due under the contract. The
contractor then recorded its lien, which caused it to be perfected under
state law. In addition, by operation of law, the lien related back to
the filing of the notice of commencement, and took priority over a
mortgage that was recorded after the notice of commencement was filed.
The contractor commenced a state court foreclosure action to satisfy its
lien and obtained a final judgment, although the state court reserved
judgment to conduct a subsequent hearing to determine costs and
attorneys' fees. Before such a hearing could be held, the debtor filed
her chapter 13 case. The contractor moved for relief from the automatic
stay in order to complete the foreclosure action. The bankruptcy court
held that the contractor was entitled to relief from the stay and
would be granted such relief unless the debtor furnished adequate
protection within 20 days of the court's order. The court concluded
that it was not necessary for the contractor to have recorded a
certified copy of the final judgment entered by the state court in the
foreclosure action to establish the validity of its secured status, and
rejected the debtor's argument that state law (Fla. Stat. §
713.21(5)) provided to the contrary. In re Madden, 2001 Bankr.
LEXIS 1750, - B.R. - (Bankr. M.D. Fla. August 10, 2001) (Paskay,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
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Debtors entitled to summary judgment to estimate the
creditor's claim at zero. Bankr. D. Del. The debtors, who
were pharmaceutical providers, supplied pharmacy services to nursing
home residents. To ascertain whether appropriate credits were being
afforded to the nursing home residents, the administrators at one
nursing home inquired about the manner in which the debtors afforded
credits for drugs returned to the Medicaid program. The debtors informed
the administrators that no credit was being given to Medicaid patients
for the return of unused pharmaceuticals. Following the nursing home's
termination of its relationship with the debtors, the nursing home
administrators conducted an audit that revealed that the debtors had not
properly credited returned pharmaceuticals to Medicare, private pay and
private insurance programs. The nursing home then filed a qui tam action
under the False Claims Act, based on the premise that the debtors and
their predecessor knowingly failed to credit Medicaid for unused
pharmaceuticals that were returned to, and later resold by, the debtors.
The United States declined to intervene in the qui tam action, and the
nursing home elected to continue the action. After the debtors filed for
chapter 11 relief, the nursing home, as a creditor, filed a proof of
claim in the amount of $324 million in the debtors' bankruptcies. The
bankruptcy court entered an order confirming the debtors' plan of
reorganization, which scheduled the creditor's claim as a general
unsecured claim. The debtors then moved to have the creditor's claim
estimated under section 502(c) to fix the amount of the allowed claim
and to permit payment of allowed claims in accordance with the confirmed
plan. The debtors also moved for summary judgment to estimate the claim
at zero, arguing that neither federal nor New Jersey Medicaid agencies
had promulgated any regulation or reimbursement policy relating to the
return of unused medications that could be used by the creditor to
support its False Claims Act complaint. After a review of the
statutory, regulatory and policy framework of the Medicaid program and
the factual record presented by the creditor, the court concluded that
the debtors were correct in their argument and that summary judgment was
warranted in favor of the debtors. In re Genesis Health
Ventures, Inc., 2002 Bankr. LEXIS 74, 272 B.R. 558 (Bankr. D. Del.
January 24, 2002) (Wizmur, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.04
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Debtor's obligation to pay legal fees to former
wife's attorney held nondischargeable. Bankr. N.D. Fla. The
debtor and his former wife obtained a divorce before the debtor filed
his chapter 7 petition. The final judgment of dissolution in the divorce
action required that the debtor pay 75 percent of his ex-wife's
attorney's fees. After the debtor commenced his chapter 7 case, his
former wife's attorney filed an adversary proceeding in his bankruptcy
case seeking a determination that the debt for legal fees owed by the
debtor to the attorney was nondischargeable under section 523(a)(5). The
bankruptcy court held that the state court's holding that the former
wife was entitled to attorney's fees constituted a showing of her need
for support and rendered the fee award nondischargeable in
bankruptcy. The court noted that the dischargeability of fee awards
is a matter of federal law, but state law provides guidance in
determining whether the awards may be considered in the nature of
'support.' The court further noted that under state (Florida) law, a
former spouse is entitled to an award of attorney fees based on relative
need and ability to pay; thus, an award of attorney's fees in Florida
may be characterized as support for the former spouse. Drewell v.
Smith (In re Smith), 2002 Bankr. LEXIS 101, 273 B.R. 669 (Bankr.
N.D. Fla. January 10, 2002) (Killian, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
D.C. Cir.
Chapter 13 trustee's distributions to unsecured creditors' were
made before it was 'practicable' and contravened section 1326(a)(2).
Bankr. D.C. Cir. The chapter 13 debtors' bankruptcy schedules
reflected governmental claims that were small enough to allow the
trustee to make distributions to unsecured creditors without falling
short of amounts necessary to eventually pay the governmental claims.
The trustee commenced plan payments to general unsecured creditors prior
to the expiration of the governmental claims bar date. Faced with the
subsequent filing of unexpectedly large governmental claims entitled to
payment under the plan, the trustee moved to modify the debtors' plan
postconfirmation. The proposed modification increased plan payments in
order to ensure sufficient funds to pay allowed secured and priority
claims in full and brought the pro rata distribution paid on
governmental entities' general unsecured claims to the same percentage
as already paid on nongovernmental entities' general unsecured claims.
The bankruptcy court denied the trustee's motion to modify the plan. The
court held that the distributions were made by the trustee before it
was 'practicable' to do so in contravention of section 1326(a)(2), and
the appropriate remedy was for the trustee to recover excess payments
made on general unsecured claims, not to amend the plan. The court
explained that in choosing to make distributions, the trustee assumed
the risk that governmental claimants' secured and priority claims might
prove to be so large as to render the distributions made on the
nongovernmental general unsecured claims prejudicial. The court also
stated that it would be appropriate, on motion of an affected creditor,
to consider requiring the trustee to reimburse the estate if she was
unable to recover the distributions made in error. In re
Wilson, 2001 Bankr. LEXIS 1785, - B.R. - (Bankr. D.C. Cir. December
6, 2001) (Teel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
8:1326.02[2]
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