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.

August 11, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Bankruptcy court properly authorized debtor to reimburse union for costs and professional fees to allow union to fully participate in negotiations necessary to successful reorganization. S.D.N.Y. PROCEDURAL POSTURE: Appellant trustee appealed from the judgment of the bankruptcy court, which authorized the debtor to reimburse appellee union for certain professional fees and expenses. OVERVIEW: The debtor filed a chapter 11 bankruptcy, and continued to operate its business as a debtor in possession. The debtor sought authority to reimburse the union for certain costs and expenses, and the trustee objected. The bankruptcy court granted the authority for reimbursement, but only up to $1.4 million. The trustee appealed, arguing that 11 U.S.C. §§ 503(b)(3)(D) and (b)(4) precluded the bankruptcy court from authorizing reimbursement by the debtor under 11 U.S.C. § 363(b) of the union’s professional fees. The request to use the debtor’s funds under 11 U.S.C. § 363(b) was allowed because the debtor showed a good business reason for the transaction. Payment of the fees was necessary for the union to participate fully in negotiations to modify the collective bargaining agreements, and these modifications were vital to a successful reorganization of the debtor. Therefore, 11 U.S.C. §§ 503(b)(3)(D) and (b)(4) did not preclude reliance on 11 U.S.C. § 363(b) to authorize the debtor in possession to reimburse the union’s professional fees. The payment of the union’s fees was in the best interests of the debtor and all parties in interest. United States Trustee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.), 2003 U.S. Dist. LEXIS 12909, — B.R. — (S.D.N.Y. July 23, 2003) (Mukasey, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.02 [back to top]

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Debtor granted authority to amend purchase agreement that formed basis for plan and to grant releases as exercises of appropriate business judgment. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Debtor and subsidiaries (debtors) filed chapter 11 petitions that were jointly administered. In a contested matter, debtors’ plan was confirmed but not effective and debtors moved, pursuant to 11 U.S.C. § 363(b) and 1121, for: (1) authority to amend a purchase agreement; (2) for authority to grant releases; and (3) for an extension of exclusivity. OVERVIEW: Debtors sought: (1) an order that authorized them to enter into an amendment to the purchase agreement that formed the basis for their confirmed chapter 11 plan; (2) court authority to enter into mutual releases; and (3) to extend the exclusive period for filing a reorganization plan. The first and second prongs of debtors’ motion presented issues under I.R.C. § 363(b) of whether debtors exercised appropriate business judgment in: (1) the attempt to seek authority to execute the amendment; and (2) the proposal to exchange the mutual releases. The court found that debtors exercised the requisite business judgment and that the amendment and releases consequently should be approved. The third issue called for the court’s application of the 11 U.S.C. § 1121 doctrine. The court found that debtors showed: (1) the requisite good cause for an exclusivity extension; (2) that they gave the court no reason to believe that they abused their exclusivity rights; and (3) that, as a consequence, the requested extension of exclusivity should also be granted. In re Global Crossing, Ltd., 2003 Bankr. LEXIS 834, — B.R. — (Bankr. S.D.N.Y. July 24, 2003) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.02 [back to top]

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Creditor could not recover attorneys’ fees related to lien claims found to be invalid. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Following the debtors’ bankruptcy petitions, a creditor asserted lien claims under Tex. Const. art. XVI, § 37, and, Tex. Bus. & Com. Code § 7.209, resulting from prepetition services performed by the creditor, for which the creditor was not paid. The creditor also requested that it be awarded its reasonable postpetition attorneys’ fees pursuant to 11 U.S.C. § 506(b). OVERVIEW: The creditor asserted that it was entitled to a fractionation and product treatment lien pursuant to Tex. Const. art. XVI, § 37 (liens of mechanics, artisans, and materialmen). However, the court found that the creditor was not a mechanic, artisan, or materialman as such terms were usually or ordinarily understood or as they were used in Tex. Const. art. XVI, § 37. Having failed to secure its right to payment for prepetition services through negotiation during the contractual process, the creditor was not able to stretch the meaning of Tex. Const. art. XVI, § 37 so as to transform itself into a class of worker protected therein. Therefore, the fractionation and product treatment lien claim was invalid. Since the court held that the claim was not a valid lien, the creditor did not hold a secured claim and was therefore not entitled to attorneys’ fees under 11 U.S.C. § 506(b) for that claim. Since fees, costs, and charges were not allowable under section 506(b) in the absence of a contractual entitlement, and given that the claimed liens were not created pursuant to agreements between the parties, postpetition attorneys’ fees were unavailable to the creditor under section 506(b). In re Enron Corp., 2003 Bankr. LEXIS 772, 295 B.R. 190 (Bankr. S.D.N.Y. July 15, 2003) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04 [back to top]

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Committee of unsecured creditors could only pursue legal action belonging to the debtor itself and could not bring action against third party accountant on behalf of creditors. S.D.N.Y. PROCEDURAL POSTURE: The debtor corporation filed a bankruptcy petition. Plaintiff committee of unsecured creditors initiated a suit against the directors and officers, and the current adversary proceeding against defendant accountant. The district court held that the adversary proceeding was not a core proceeding under the bankruptcy code and thus granted the accountant’s motion to withdraw the reference from the bankruptcy court. The accountant moved to dismiss. OVERVIEW: In the complaint, the committee asserted that the due diligence performed by the accountant in conjunction with the corporation’s acquisition and the accountant’s subsequent audits of the corporation’s financial statements were deficient for failing to detect the reporting errors. The court found that the committee standing in the shoes of the bankrupt corporation had no standing generally to sue third parties such as the accountant on behalf of the estate’s creditors, but could only assert claims held by the bankrupt corporation itself. Because the directors and officers’ fraud would be imputed to the corporation, the committee suing on the corporation’s behalf stood in the place of the very parties who were alleged to have participated in defrauding the investors, the corporation’s directors and officers. Hence, the claims that the accountant assisted the corporation’s directors and officers in wrongdoing belonged to the creditors qua creditors, and could not be asserted by the corporation, the committee of unsecured creditors, or anyone else standing in the shoes of the debtor corporation. Thus, the committee lacked standing to bring the lawsuit. Complete Mgmt., Inc. v. Arthur Anderson, LLP (In re Complete Mgmt., Inc.), 2003 U.S. Dist. LEXIS 12977, — B.R. — (S.D.N.Y. July 22, 2003) (Buchwald, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1103.01 [back to top]

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Debtor estopped from bringing breach of contract action which was not properly disclosed in plan or disclosure statement. 3d Cir. PROCEDURAL POSTURE: Plaintiff chapter 11 debtor appealed an order of the District Court for the Middle District of Pennsylvania, which affirmed the bankruptcy court’s dismissal of the debtor’s suit against defendant company for breach of contract and related causes of action. OVERVIEW: The circuit court agreed with the district court’s conclusion that the bankruptcy court correctly relied on judicial estoppel in dismissing all counts of the complaint. Each claim in the debtor’s complaint was related to and arose from the company’s termination of the debtor’s franchise agreement. The primary claim was the violation of the automatic stay contained in Count I. All other claims against the company rested on that violation. When the debtor filed its amended disclosure statement, it knew about each of the claims it has now included in this action. However, the amended reorganization plan and amended disclosure statement merely referenced the debtor’s position that certain dealer agreements were part of the bankruptcy estate and the ongoing state proceedings wherein the debtor was attempting to undo the company’s termination of them. The bankruptcy court had found that the debtor limited the reference to the claims to conceal the claims from creditors in the hope of retaining any recovery for itself. The amended disclosure was little more than boilerplate and was inadequate to provide the level of notice required. The debtor’s creditors were harmed. Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 2003 U.S. App. LEXIS 14965, — F.3d — (3d Cir. July 28, 2003) (McKee, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1125.03 [back to top]

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Mortgage creditor’s claim for attorneys’ fees limited to the amount collectible under applicable state law. Bankr. D.N.J. PROCEDURAL POSTURE: Debtor filed a chapter 13 petition. Creditor filed a proof of claim related to the mortgage on debtor’s house. Debtor moved to modify creditor’s proof of claim, and creditor cross-moved to amend its proof of claim. OVERVIEW: The court found that the creditor was only entitled to attorneys’ fees to the extent that they were supported by both the mortgage agreement and nonbankruptcy law regarding foreclosures. Here, the express language of the debtor’s mortgage only permitted the collection of fees in the foreclosure proceeding. The creditor did not sue on the note, it foreclosed. Work done in a bankruptcy proceeding did not amount to post-judgment collection efforts. The bankruptcy court found that New Jersey courts were unlikely to rule that a mortgagee could recover additional attorneys’ fees beyond the amount allowed in the foreclosure judgment. Under 11 U.S.C. § 1322(e), the creditor was not entitled to the additional fees in order to cure its arrears under applicable nonbankruptcy law. In New Jersey, the laws governing attorneys’ fees and foreclosure actions limited the amount of fees recoverable from a mortgagor to the amount derived from a formula. Because state law limited attorneys’ fees to the amount set forth in the foreclosure judgment, the creditor could not include additional fees in its proof of claim. In re Hatala, 2003 Bankr. LEXIS 747, 295 B.R. 62 (Bankr. D.N.J. July 11, 2003) (Lyons, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.18 [back to top]

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Debtor estopped from challenging nondischargeability of prepetition state court judgment in venture capital dispute. Bankr. D.S.C. PROCEDURAL POSTURE: Plaintiff moved for summary judgment to bar the debtor from asserting that a debt was dischargeable. With debtor thus estopped, plaintiff asked the court to grant its motion under Fed. R. Bankr. P. 7056 and declare that the debt was excepted from discharge pursuant to 11 U.S.C. § 523(a)(2), 523(a)(4). OVERVIEW: The debt arose from the parties’ prior federal litigation related to a venture capital dispute where judgment was entered. Plaintiff urged the court to apply res judicata, collateral estoppel, or judicial estoppel to bar the debtor from asserting that the debt arising from the prior litigation was dischargeable. Based upon Felson’s principles limiting the blanket application of res judicata to prepetition cases addressing the issue of dischargeability and because of other provisions of the order, the court denied this aspect of plaintiff’s motion. Next, it concluded that the parties clearly intended the Oklahoma judgment to have preclusive effect as to the dischargeability of the amount owed under the judgment. Furthermore, the issue of dischargeability was a necessary part of the Oklahoma litigation. All elements of federal collateral estoppel were satisfied. Accordingly, the court applied the principle and granted plaintiff’s motion. It also applied judicial estoppel to bar the debtor from asserting that the underlying facts supporting the Oklahoma judgment were insufficient to establish that the debt was excepted from discharge under 11 U.S.C. § 523(a)(2), (a)(4). Shadow Factory Films, Ltd. v. Swilley (In re Swilley), 2003 Bankr. LEXIS 489, — B.R. — (Bankr. D.S.C. April 17, 2003) (Waites, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.01 [back to top]

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Debtors’ amended plan confirmed on the condition that specific provisions be included for payment in full and monthly accounting to objecting creditor. Bankr. N.D. Tex. PROCEDURAL POSTURE: The court considered confirmation of the debtors’ first amended chapter 11 plan, as modified by the modification to plan filed by the debtors. OVERVIEW: The debtors contended that the modified plan satisfied the requirements of 11 U.S.C. § 1129(b) and requested confirmation of the plan. The creditor argued that the payment scheme in the plan failed to cover the entire amount of his claim, including the joint and several liability shared with the debtors’ business, and that the absolute priority rule required that the debtors provide, as a backstop in the event the business did not satisfy the joint and several liability, for full payment of the joint and several liability. The sum of $642,601, recognized under the plan, included the entirety of the joint and several liability. The creditor objected that the plan contained no mechanism to keep him apprised of the status of the proposed escrow payments. This was a valid objection. The court was satisfied that the plan presented an acceptable, and confirmable, solution to the difficult issues raised by the judgment. In re Hettler, 2003 Bankr. LEXIS 830, — B.R. — (Bankr. N.D. Tex. July 25, 2003) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1129.04 [back to top]

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Plan payment of interest at market rate, rather than rate creditor might receive if payment was invested, would pay creditor present value of claim. Bankr. N.D. Tex. PROCEDURAL POSTURE: The court considered for confirmation the debtor’s modified chapter 11 plan. The court afforded the debtor the opportunity to modify the plan to address the plan’s single deficiency, which was its treatment of one creditor’s claim. The plan as modified relied on the cram down provisions of section 1129(b) for confirmation. The creditor objected to confirmation of the plan as modified. OVERVIEW: The present value requirement in 11 U.S.C. § 1129(b)(2)(B)(i) necessitated the payment of interest when the debtor proposed to pay a claim over a period of time. It was the rate of interest that was directly at issue. The court found that the Briscoe and Lambert cases controlled the issues, and that the proper rate was the rate the debtor would have had to pay were it to borrow money equal to the creditor’s claim on the open market, with terms identical to the plan’s treatment of the claim. The debtor’s expert testified that the debtor would have paid 6 percent interest were it to obtain a loan on the open market with terms identical to the pl