Collier Bankruptcy Case Update August-13-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
August 13, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 2d Cir.
ß 547(c)(2) Transferors failed to meet burden of proof.
Katz v. Leonard P. Drabkin Irrevocable Trust (In re Van Dyck) (Bankr. D. Conn.) 081027
ß 105(a) Bankruptcy court erred in enjoining telecommunications provider from terminating service to debtor.
MFS Telecom, Inc. v. Motorola, Inc. (In re Conxus Communications, Inc.) (D. Del.) 081001
ß 106(a) Eleventh Amendment barred dischargeability proceeding.
Askey v. Pennsylvania (In re Askey) (Bankr. W.D. Pa.) 081002
ß 362(b)(2) Former spouse was entitled to pursue contempt action.
Gunther v. Glabb (In re Glabb) (Bankr. W.D. Pa.) 081007
ß 1101(2) District court properly dismissed appeal from confirmation order as equitably moot.
Nordhoff Invs. v. Zenith Elecs. Corp. (3d Cir.) 081030
ß 523(a)(4) Court of Appeals affirmed district court’s decision that undisputed summary judgment evidence established debtor’s willful breach of fiduciary duty and defalcation.
Office of Thrift Supervision v. Felt (In re Felt) (5th Cir.) 081017
ß 541(a)(1) Insurance proceeds were property of the estate.
Equinox Oil Co. v. Antihill Constr. Co. (In re Equinox Oil Co.) (E.D. La.) 081024
ß 522(b)(2)(A) Tennessee debtors could claim exemption for uninsured motorist benefits in addition to personal bodily injury exemption.
In re Thompkins (Bankr. W.D. Tenn.) 081014
28 U.S.C. ß 1412 Change of venue was affirmed.
Jahraus v. Armbrust (In re Armbrust) (W.D. Ky.) 081041
ß 363(f) Lease was not extinguished by sale.
Precision Indus., Inc. v. Qualitech Steel SBQ, L.L.C. (In re Qualitech Steel Corp.) (S.D. Ind.) 081008
ß 502(a) Claim was determined by confirmed plan.
In re Duggins (Bankr. C.D. Ill.) 081011
ß 1322(c) Debtor could cure the arrearage of his mortgage despite foreclosure sale.
In re Spencer (Bankr. N.D. Ill.) 081031
28 U.S.C. ß 158(a) Court lacked jurisdiction over appeal.
In re Bond (7th Cir.) 081036
ß 329(a) Order of disgorgement was not abuse of discretion.
Schroeder v. Rouse (In re Redding) (B.A.P. 8th Cir.) 081003
ß 362(a)(6) Failure to reinstate driver’s license was not a violation of the stay.
Kimsey v. Suski (In re Kimsey) (Bankr. E.D. Ark.) 081006
ß 506 Trustee could not avoid lien asserted by bank against Arkansas debtor’s property.
Meeks v. First Bank of S. Ark. (In re Tracy’s Flowers and Gifts, Inc.) (Bankr. W.D. Ark.) 081012
ß 523(a)(6) Debt arising from gunshot wound held dischargeable.
Maxwell v. Price (In re Price) (Bankr. E.D. Ark.) 081020
ß 523(a)(8) Creditor’s collection costs were not approved.
Lester E. Cox Med. Ctrs. v. Penn (In re Penn) (Bankr. W.D. Mo.) 081021
ß 1322(c) Relief from stay was properly granted.
Montgomery v. Dennis Joslin Co. II, L.L.C. (In re Montgomery) (B.A.P. 8th Cir.) 081032
28 U.S.C. ß 1334(c) Abstention motion granted where state law issues predominated and individual defendants were entitled to jury trial.
Krigel’s, Inc. v. Ary Jewelers, L.L.C. (In re Krigel’s, Inc.) (Bankr. W.D. Mo.) 081040
ß 362(a)(1) Service of subpoena upon debtor did not violate the stay.
Groner v. Miller (In re Miller) (B.A.P. 9th Cir.) 081004
ß 362(a)(3) Motion for sanctions against the debtor did not violate the stay.
Groner v. Miller (In re Miller) (B.A.P. 9th Cir.) 081005
ß 523(a)(8) Partial discharge was allowable.
Saxman v. United States Department of Educ. (In re Saxman) (W.D. Wash.) 081022
ß 554(a) Debtor’s false schedules precluded technical abandonment of assets.
Spear v. Schafler (In re Schafler) (N.D. Cal.) 081029
28 U.S.C. ß 158(a) Bankruptcy court did not abuse discretion in imposing sanctions against adversary defendant.
Weinman v. Shaker Express, Inc. (In re W. Pac. Airlines, Inc.) (D. Colo.) 081037
ß 523(a)(5) Attorney’s fees were excepted from discharge.
Blackburn-Gardner v. Edwards (In re Edwards) (Bankr. M.D. Fla.) 081019
Collier Bankruptcy Case Summaries
Transferors failed to meet burden of proof. Bankr. D. Conn. The chapter 7 trustee filed adversary proceedings to avoid and recover preferential transfers from the debtor to insiders within the one-year period prior to the petition date. Two trusts, which had been established for the benefit of the debtor’s chief executive officer and his descendants, extended credit to the debtor in various forms, including general cash flow loans. The debtor made several repayments to the trusts within the year before it filed the petition. After the trustee established the elements of preferential transfers, the trusts asserted that the loan transfers were made according to ordinary business terms. The bankruptcy court granted judgment in favor of the trustee, holding that the trusts failed to meet their burden of proof on the ordinary course of business defense. The court received no evidence of general lending terms or practices in the debtor’s industry, or other relevant market group.Katz v. Leonard P. Drabkin Irrevocable Trust (In re Van Dyck), 2001 Bankr. LEXIS 685, 263 B.R. 167 (Bankr. D. Conn. June 13, 2001) (Dabrowski, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.04
Bankruptcy court erred in enjoining telecommunications provider from terminating service to debtor. D. Del. An entity that provided telecommunications services to the chapter 7 debtors, which were paging companies, appealed from a bankruptcy court order that enjoined it from terminating telecommunications services to the debtors’ estate. At the outset, the district court determined that the appeal was not moot. The court explained that while the injunction at issue had long since expired, the issue of the disbursement of funds that were to be applied against charges incurred by the debtors during the injunction’s duration remained. The parties were likely to contest this issue in a subsequent proceeding if it was not resolved. The district court then proceeded to the merits of the appeal and reversed. The court held that the bankruptcy court erred in utilizing section 105 to enjoin the appellant from exercising its rights to terminate telecommunications services to the debtors under section 366. The court explained that because the debtors defaulted postpetition, the appellant had the right under section 366 to terminate service to the debtors. The court concluded that the bankruptcy court did not apply section 105 appropriately when it restricted the appellant’s rights (even for a short period of time) and, at the same time, expanded the debtors’ rights beyond the protections afforded by section 366. The district court was not persuaded that 'exigent circumstances' cited by the bankruptcy in support of its reason for the injunction justified a departure from the Bankruptcy Code.MFS Telecom, Inc. v. Motorola, Inc. (In re Conxus Communications, Inc.), 2001 U.S. Dist. LEXIS 8144, 262 B.R. 893 (D. Del. June 4, 2001) (Farnan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.02
Eleventh Amendment barred dischargeability proceeding. Bankr. W.D. Pa. During a marital separation, the debtor wife received welfare assistance for herself and her children. Based upon this aid, the debtor husband became obligated to the state (Pennsylvania) department of welfare for child support. The debtors reconciled, filed a chapter 13 case, and, ultimately, converted to chapter 7. The debtors sought a determination that the welfare obligation was dischargeable and the state moved to dismiss for lack of subject matter jurisdiction. The bankruptcy court held that the state was immune from suit pursuant to the Eleventh Amendment because section 106(b) violated the U.S. Constitution by waiving the state’s sovereign immunity. Accordingly, the complaint was dismissed.Askey v. Pennsylvania (In re Askey), 2001 Bankr. LEXIS 699, 261 B.R. 160 (Bankr. W.D. Pa. February 14, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:106.02
Former spouse was entitled to pursue contempt action. Bankr. W.D. Pa. During the course of their divorce and child custody proceeding, the state court awarded attorney’s fees in favor of the debtor’s former spouse. When the debtor failed to pay the fees, the former spouse sought a declaration from the bankruptcy court that she could prosecute a state court motion for contempt against the debtor. She asserted that the legal fees owed to her were in the nature of support. She also stated her intention to garnish the debtor’s wages. Applying a totality of the circumstances test, the bankruptcy court held that since the former spouse sought to collect a prepetition support obligation and would only seek garnishment of the debtor’s wages, the proceeding was within the scope of the section 362(b)(2) exception to the automatic stay. Garnishment of the debtor’s wages would not affect property of the chapter 7 estate since any salary earned postpetition was not property of the estate.Gunther v. Glabb (In re Glabb), 2001 Bankr. LEXIS 698, 261 B.R. 170 (Bankr. W.D. Pa. March 5, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.05
District court properly dismissed appeal from confirmation order as equitably moot. 3d Cir. After the bankruptcy court conditionally confirmed the chapter 11 debtor’s plan, one of the debtor’s significant minority shareholders and an equity committee that represented the interests of other minority shareholders appealed to the district court. The district court dismissed the appeal as equitably moot, a judicially created doctrine. The minority shareholder and equity committee appealed. The United States Court of Appeals for the Third circuit affirmed. The court held that the district court accurately analyzed each of the five factors of the equitable mootness test (i.e., whether the reorganization plan was substantially consummated, whether a stay was obtained, whether the relief requested would affect the rights of the parties not before the court, whether the relief requested would affect the success of the plan and the public policy of affording finality to bankruptcy judgments), appropriately balanced the factors and did not abuse its discretion in concluding that the doctrine of equitable mootness should apply to the appellants’ claims. The Court of Appeals noted that the district court gave serious consideration to issues of fundamental fairness that the debtor may have abused, and was 'somewhat reluctant' to preclude appellate review of those issues. Nevertheless, and after considering the equitable mootness factors, the district court decided that dismissal of the appeal on equitable mootness grounds was appropriate.Nordhoff Invs. v. Zenith Elecs. Corp., 2001 U.S. App. LEXIS 13864, – F.3d – (3d Cir. June 21, 2001) (Nygaard, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1101(2).01
Court of Appeals affirmed district court’s decision that undisputed summary judgment evidence established debtor’s willful breach of fiduciary duty and defalcation. 5th Cir. A creditor filed an adversary complaint, seeking a determination that a debt arising from a federal district court judgment was nondischargeable under several subsections of section 523, including section 523(a)(4). After a federal district court declared a portion of the debt nondischargeable, the debtor appealed. The United States Court of Appeals for the Fifth Circuit reversed, and remanded. The district court was to consider any evidence that the debtor was denied the opportunity to present when that court granted summary judgment in favor of the creditor, sua sponte, and without giving 10 days’ notice. Following remand, the district court again entered a final judgment in the creditor’s favor and declared a portion of the debt nondischargeable. The debtor appealed and challenged the merits of the district court’s conclusion that based upon the undisputed summary judgment evidence, the debtor’s breaches of his fiduciary duties were willful and, thus, constituted defalcation under section 523(a)(4). The United States Court of Appeals for the Fifth Circuit affirmed. The court held that there was no genuine dispute that the evidence established the debtor’s 'willful' breach of the duty to the creditor, and given the debtor’s actual and imputed knowledge of his duty to make full and truthful disclosures in certain offering materials, the debtor’s misstatements and omissions demonstrated, at a very minimum, the recklessness required for a finding of defalcation under section 523(a)(4). The court also held that the law of the case doctrine precluded reconsideration of the issues of the debtor’s fiduciary status, his breach of his fiduciary duties or the creditor’s standing to pursue the action.Office of Thrift Supervision v. Felt (In re Felt), 2001 U.S. App. LEXIS 13801, – F.3d – (5th Cir. June 21, 2001) (DeMoss, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Insurance proceeds were property of the estate. E.D. La. The chapter 11 debtor appealed the bankruptcy court’s determination that insurance proceeds paid for the cleanup of an oil spill at one of the debtor’s wells were not property of the estate. The debtor was the beneficiary of an indemnification policy that had been procured to provide reimbursement for the cost of cleaning up contaminants. Numerous companies provided services and equipment to the debtor in response to the prepetition spill, with the expectation that they would have been paid by either the debtor or its insurer. The bankruptcy court concluded that the purpose of the cleanup insurance was to protect the third parties and, accordingly, the proceeds were payable directly to the remediation creditors. The district court reversed, holding that the proceeds of the indemnification policy were property of the estate. The court pointed out that the plain language of the policy stated that payment was to be made to the assured, the debtor.Equinox Oil Co. v. Antihill Constr. Co. (In re Equinox Oil Co.), 2001 U.S. Dist. LEXIS 8165, – B.R. – (E.D. La. June 11, 2001) (Berrigan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.10
Tennessee debtors could claim exemption for uninsured motorist benefits in addition to personal bodily injury exemption. Bankr. W.D. Tenn. The chapter 7 debtors filed a motion seeking to require the trustee to disburse to them, as exempt, proceeds from insurance paid as a result of a prebankruptcy automobile accident. The debtors claimed the proceeds as exempt pursuant to applicable provisions of the state (Tennessee) exemption statute. The trustee argued that the debtors could not claim an exemption in uninsured motorist benefits paid as a result of a personal injury under one provision of the state exemption statute (Tenn. Code Ann. ß 26-2-110) because those benefits exceeded a separate $7,500 maximum personal bodily injury exemption provided for in another provision of the state exemption statute (Tenn. Code Ann. ß 26-2-111(2)(B)) and a $15,000 cap contained in another provision (Tenn. Code Ann. ß 26-2-111(2)). The bankruptcy court overruled the trustee’s objection. The court reasoned that uninsured motorist coverage, contracted for by Tennessee residents, provided coverage for accidental injury to the beneficiaries of such policies, and that Tennessee authority considered such coverage to be accident insurance. The court then held that the accident insurance exemption allowed to Tennessee residents was in addition to the personal bodily injury exemption.In re Thompkins, 2001 Bankr. LEXIS 707, 263 B.R. 223 (Bankr. W.D. Tenn. June 13, 2001) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
Change of venue was affirmed. W.D. Ky. The debtors appealed the bankruptcy court order granting the creditors’ motion for change of venue and transferring their adversary proceeding against the debtors to a different district. The creditors and witnesses relevant to the claims were located in the transferred district, as were the debtors until shortly before they filed for bankruptcy. The actions that formed the basis of the creditors’ claims occurred in the transferred district and the subject of the adversary proceeding had previously been partially litigated in the transferred district. The district court affirmed, holding that the bankruptcy court correctly concluded that the adversary proceeding should be transferred. The court noted that while the debtors could be inconvenienced by having to litigate the proceeding in a different district, that burden was vastly outweighed by the factors favoring the transfer.Jahraus v. Armbrust (In re Armbrust), 2001 U.S. Dist. LEXIS 8222, – B.R. – (W.D. Ky. June 15, 2001) (Simpson, III, C.D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:4.04
Claim was determined by confirmed plan. Bankr. C.D. Ill. The chapter 13 debtors objected to the proof of claim filed by an undersecured creditor to the extent that the secured claim amount exceeded the amount provided by their confirmed plan. Three days prior to the confirmation hearing, the creditor had filed its proof of claim with the stated value of the collateral, a projection television, at a higher amount than the value stated in the debtors’ plan. The debtors did not object to the proof of claim prior to confirmation, and the plan was confirmed, without objection, by the creditor. The bankruptcy court sustained the debtors’ objection, holding that the creditor was bound by the plan’s valuation of the collateral, notwithstanding that the creditor filed a proof of claim stating a higher value before confirmation and no objection to the claim was filed before confirmation. The court determined that Congress accorded primacy to the confirmed plan, not to the proof of claim. The creditor received adequate notice that its rights would be modified by the plan, and valuation of the secured claim was properly determined through the plan confirmation process.In re Duggins, 2001 Bankr. LEXIS 684, 263 B.R. 233 (Bankr. C.D. Ill. June 12, 2001) (Perkins, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02
Debtor could cure the arrearage of his mortgage despite foreclosure sale. Bankr. N.D. Ill. Eleven days after his home was sold at a foreclosure sale and before the sale was confirmed, the debtor filed a chapter 11 petition in bankruptcy. The plan provided for a cure of the arrearage and continued payments on the mortgage. The mortgagee, purchaser of the residence at the foreclosure sale, sought relief from stay in order to have the sale of the residence confirmed by the state court. Following the majority view espoused in the district, the bankruptcy court held that the debtor had a right to cure the arrearage on the mortgage until the foreclosure sale was completed by entry of a state court order confirming the sale. The court rejected the minority view that the application of section 1322(c) was solely a matter of federal law. Rather, the statute referred to state law, which provides that a judicial foreclosure sale is not complete until confirmed by the state court. Moreover, that interpretation was in keeping with congressional intent to permit debtors to retain the use and benefit of their homes. Since the sale had not been confirmed by the state court at the time the chapter 13 petition was filed, the debtor was entitled to cure the arrearage and keep his residence.In re Spencer, 2001 Bankr. LEXIS 700, 263 B.R. 227 (Bankr. N.D. Ill. June 5, 2001) (Altenberger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.15
Court lacked jurisdiction over appeal. 7th Cir. The attorney for various chapter 13 debtors appealed the district court’s denial of her motion to reopen an appeal of the bankruptcy court’s denial of her request for fees in excess of the presumptive maximum. After the bankruptcy court limited the attorney’s fee award, the attorney appealed to the district court. The district court remanded the matter to the bankruptcy court for further explanation of its ruling. Due to the delayed response by the bankruptcy court, the attorney filed a motion to reopen appeal. Before the district court could address the merits of the motion to reopen the appeal, the bankruptcy court issued its additional findings. The district court then denied the motion to reopen the appeal as moot and directed the attorney to file another motion if she still wanted the appeal reopened. The attorney filed a second motion to reopen in the district court more than 10 days after the bankruptcy court entered its final order. The district court denied the second motion to reopen the appeal on its merits. The Court of Appeals for the Seventh Circuit vacated the district court’s decision denying the second motion to reopen the appeal, holding that because the attorney did not file a timely notice of appeal, the district court lacked jurisdiction to entertain the appeal. The matter was remanded with instructions to dismiss the motion for lack of jurisdiction.In re Bond, 2001 U.S. App. LEXIS 13740, 254 F.3d 669 (7th Cir. June 20, 2001) (Cudahy, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02; 10:8002.02; .03
Order of disgorgement was not abuse of discretion. B.A.P. 8th Cir. The attorney for the chapter 7 debtors appealed the order of the bankruptcy court directing him to disgorge a substantial portion of the fees he received for his costs and services to the estate. When the debtors filed a chapter 13 petition, the attorney filed a statement under Rule 2016(b) disclosing what the debtors had paid him. When the debtors converted to chapter 11, the attorney neglected to file an application for his employment; however, he received additional payments during the pendency of the case. The case subsequently converted to chapter 7, and the trustee sought an order directing disgorgement of the fees. The bankruptcy court found the fees to be reasonable in amount, but, based upon the failure to disclose the fee payments, ordered that the attorney disgorge the fees to the trustee. The bankruptcy court provided for payment of the fees on a subordinated, nonpriority basis. The B.A.P. affirmed, holding that the disgorgement of fees was an appropriate sanction for the attorney’s failure to comply with the disclosure requirements of section 329 and Rule 2016.Schroeder v. Rouse (In re Redding), 2001 Bankr. LEXIS 687, 263 B.R. 874 (B.A.P. 8th Cir. June 21, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:329.03; 9:2016.15
Failure to reinstate driver’s license was not a violation of the stay. Bankr. E.D. Ark. The debtor incurred numerous fines for traffic violations and, when he failed to pay them, the municipality obtained suspension of his state driver’s license. The debtor filed a chapter 13 petition and provided for payment of the fines through his chapter 13 plan. Despite the provision for payment, the state refused to reissue the driver’s license, prompting the debtor to file an adversary proceeding for contempt, asserting that the failure to reissue the license was a violation of the automatic stay and the antidiscrimination provision of section 525. The bankruptcy court held that since the driver’s license had been suspended prepetition, the state was not obligated to reissue the license upon the filing of the chapter 13 bankruptcy case. Since all of the acts by the debtor and the city were concluded prior to the filing of the petition, the city was entitled to continue to enforce its regulatory power. Likening the situation to cases in which the debtor is incarcerated prepetition, the court concluded that there was no requirement in the Bankruptcy Code, including section 362, that a governmental unit reinstate a privilege simply because the debtor later filed a bankruptcy case.Kimsey v. Suski (In re Kimsey), 2001 Bankr. LEXIS 657, 263 B.R. 244 (Bankr. E.D. Ark. June 11, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
Trustee could not avoid lien asserted by bank against Arkansas debtor’s property. Bankr. W.D. Ark. The chapter 7 trustee filed an adversary complaint to determine the priority, validity and extent of a lien asserted by a bank against the debtor’s accounts, inventory and equipment. The trustee alleged that the bank’s asserted security interest did not attach because no security agreement existed that expressly granted a security interest. The bank argued that under the 'composite document rule,' the specific language in the financing statement, promissory note and loan application provided for a security interest in the collateral. The bankruptcy court held that because the financing statement created or provided for a security interest in the debtor’s personal property, was signed by the debtor and contained a description of the collateral, it was a valid, enforceable security agreement under controlling state (Arkansas) law. The court noted that the Arkansas Supreme Court had not decided the issue of whether language actually conveying a security interest was necessary to create a security interest. However, the court determined that the Arkansas Supreme Court would adopt the 'broad view' and hold that any language asserting that specific personal property is encumbered as security for a debt creates or provides for a security interest under the Arkansas Code(citing Collier on Bankruptcy 15th Ed. Revised).Meeks v. First Bank of S. Ark. (In re Tracy’s Flowers and Gifts, Inc.), 2001 Bankr. LEXIS 710, 264 B.R. 1 (Bankr. W.D. Ark. June 12, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01
Debt arising from gunshot wound held dischargeable. Bankr. E.D. Ark. A claimant, who was shot by the chapter 7 debtor, filed an adversary proceeding seeking a determination that the debt that resulted from the gunshot wound was excepted from the debtor’s discharge under section 523(a)(6). The bankruptcy court held that because the claimant failed to establish by a preponderance of the evidence that the debtor’s act resulting in the injury was willful, the debt was dischargeable. The court noted that although the debtor entered a guilty plea to third-degree battery, an examination of the statute under which this plea was entered revealed that the debtor could have been admitting to either intentional, reckless or negligent conduct that caused the claimant’s injury. The court found that in this case, which involved the word of one party against the other, the undisputed circumstantial evidence of the debtor’s intent was insufficient to allow the court to draw an inference of willfulness.Maxwell v. Price (In re Price), 2001 Bankr. LEXIS 711, – B.R. – (Bankr. E.D. Ark. June 14, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
Creditor’s collection costs were not approved. Bankr. W.D. Mo. The creditor filed an adversary proceeding objecting to the discharge of a student loan and requesting a judgment for costs and expenses incurred in collecting the student loan. The chapter 7 debtor objected to an award of any expenses incurred, arguing that she never intended to discharge the student loan and should not have to pay the costs and expenses associated with the adversary proceeding. The bankruptcy court sustained the debtor’s objection, holding that since the filing of the complaint was not needed in order for the creditor to collect the student loan obligation that the debtor never disputed, never tried to discharge and continued to pay, the creditor’s request for its costs, expenses and attorney’s fees incurred in bringing the action was denied. The student loan debt was nondischargeable at the time the debtor filed for bankruptcy and remained nondischargeable until otherwise determined. Lester E. Cox Med. Ctrs. v. Penn (In re Penn), 2001 Bankr. LEXIS 686, 262 B.R. 788 (Bankr. W.D. Mo. May 24, 2001) (Federman, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Relief from stay was properly granted. B.A.P. 8th Cir. The chapter 13 debtor appealed a bankruptcy court order granting the secured creditor relief from the automatic stay to recover possession of real estate. After the creditor was the successful bidder at the sale of the debtor’s homestead and received a deed in its favor, the debtor filed a petition for relief. The creditor subsequently objected to confirmation of the debtor’s plan and filed a motion for relief from the automatic stay to commence an unlawful detainer proceeding against the debtor in state (Missouri) court. The bankruptcy court rejected the debtor’s argument that the property and her relationship with the creditor were subjected to the cure-and-reinstatement remedies, notwithstanding the foreclosure sale, and granted the creditor relief. The B.A.P. affirmed, holding that section 1322(c)(1) expressly prohibited the debtor from using the cure-and-reinstatement provision to unseat the secured creditor from its status after the foreclosure sale. With bankruptcy remedies unavailable to the debtor, the bankruptcy court did not err in granting the motion for relief.Montgomery v. Dennis Joslin Co. II, L.L.C. (In re Montgomery),2001 Bankr. LEXIS 673, 262 B.R. 772 (B.A.P. 8th Cir. June 15, 2001) (Kishel, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.15
Abstention motion granted where state law issues predominated and individual defendants were entitled to jury trial. Bankr. W.D. Mo. The chapter 11 debtor brought an adversary proceeding against individual defendants and a corporation, arising out of a dispute over a stock purchase agreement. The debtor’s complaint alleged various counts, including breach of contract, fraudulent misrepresentation and alleged violations of a bankruptcy court order that approved the debtor’s disclosure statement and confirmed the debtor’s plan. The defendants filed a motion requesting that the bankruptcy court abstain from further proceedings in the matter pursuant to 28 U.S.C. section 1334(c)(1). Primarily because state law issues predominated the action and at least two individual defendants were entitled to a jury trial, the bankruptcy court granted the abstention motion. The court concluded that abstention was no less efficient than taking the case to the district court, which was the only other alternative if the defendants continued to assert their right to a jury trial. The court also concluded that the matter would likely require the presence of nondebtor parties and that the defendants were not forum shopping. Finally, the court declined to resolve the issue of whether the proceeding was core or non-core (because the weight of the relevant factors tipped in favor of abstention), but stated that if called upon to decide the issue, it would find that the action was non-core because it was based on questions of state law.Krigel’s, Inc. v. Ary Jewelers, L.L.C. (In re Krigel’s, Inc.), 2001 Bankr. LEXIS 709, 263 B.R. 280 (Bankr. W.D. Mo. June 8, 2001) (Venters, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05
Service of subpoena upon debtor did not violate the stay. B.A.P. 9th Cir. Although the creditor’s suit against the debtor and her nondebtor husband for fraud was stayed during the pendency of the chapter 13 cases, the creditor continued the litigation against the nondebtor husband. In order to prosecute its case, the creditor required the testimony of the debtor and, accordingly, served a third-party subpoena upon the debtor. When the debtor thrice failed to respond, the creditor sought sanctions in the state court. In response, the debtor filed a motion for sanctions in the bankruptcy court alleging that the issuance of the subpoena and request for sanctions was a violation of the stay. The bankruptcy court determined that, despite the nature and purpose of the subpoena, the creditor violated the stay by serving the subpoena and, therefore, awarded sanctions. The B.A.P. reversed, holding that the creditor was entitled to serve the debtor with a third-party subpoena to pursue discovery against a nondebtor. The requests were framed as discovery pertaining only to the claims against the nondebtor husband and the creditor did not seek to prosecute its claim against the debtor. Accordingly, even though the information could ultimately be used against the debtor, the automatic stay did not preclude the creditor from obtaining discovery information from the debtor regarding litigation against the nondebtor defendant. Groner v. Miller (In re Miller), 2001 Bankr. LEXIS 672, 262 B.R. 499 (B.A.P. 9th Cir. May 29, 2001) (Montali, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[d]
Idaho debtors properly claimed homestead exemption for contiguous 13-acre property that was acquired as three separate parcels. Bankr. D. Idaho The chapter 7 trustee objected to the debtors’ claim of a homestead exemption under state (Idaho) law for 13 contiguous acres of property that the debtors acquired as three separate parcels. The trustee argued that the debtors’ parcels should be subdivided to allow the debtors a home in which to live but also preserve the remaining land for the benefit of the bankruptcy estate. The trustee was not specific as to what property should be severed from the homestead. However, the court presumed her argument to be either that the exemption should apply only to one acre upon which the debtors’ dwelling house actually sat or that the most recently acquired parcel should be excluded. The bankruptcy court overruled the trustee’s objection. The court noted that under the Idaho exemption statute, there is no limit to the size of a property that may be claimed exempt as a homestead, although the exemption is limited to the net value of the land and improvements up to a maximum of $50,000. Thus, the court held that without regard to when the debtors acquired the three parcels, the zoning requirements or the boundary lines for the individual parcels, the debtors properly claimed their property exempt under Idaho law. The court noted that the parcels were contiguous, that the debtors actually resided on the property and that they utilized the parcels as a single property.In re Zantman, 2001 Bankr. LEXIS 708, – B.R. – (Bankr. D. Idaho April 10, 2001) (Pappas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
Investors were perfected despite failure to obtain possession of security instruments. 9th Cir. The debtor real estate investor purchased residential mortgages, financing the purchases by borrowing from other investors and assigning the mortgages to the investors as security. The debtor, however, retained possession of all documents, including the security interests assigned to the investors. Upon the filing of the involuntary bankruptcy petition, the trustee sought to avoid security interests of the 132 investors on the grounds that, since they did not have possession of the security interests, no perfection was properly effected under state (California) law. Although a number of the investors failed to answer the complaint, some of the investors defended, asserting that a statutory exception to the possession requirement protected their security interests. The bankruptcy court held that the statutory exception applied and ruled in favor of the investors who had appeared in the proceeding. Despite holding in favor of the answering investors, the bankruptcy court entered judgment against the defaulting defendants. The district court reversed in part, concluding that the statutory exception did not apply but that the bankruptcy court properly entered default judgment against the defaulting parties. The Court of Appeals for the Ninth Circuit reversed, holding that the investors were not required to have possession of the security instruments because debtor was a broker who sold a promissory note, serviced the note and recorded the documents. The only element of the statutory exception at issue was whether the debtor 'sold' the notes within the meaning of the statute. Analyzing the statute and the legislative history, the Court of Appeals concluded that the use of the term 'sale' in the exception included assignment of the security interest because the state legislature adopted a more expansive definition of sale, rather than the conventional meaning of 'sale.' The court also rejected the trustee’s assertion that a constructive trust theory should apply.Neilson v. Chang (In re First T.D. & Inv., Inc.), 2001 U.S. App. LEXIS 13582, 253 F.3d 520 (9th Cir. June 19, 2001) (Paez, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Bankruptcy court did not abuse discretion in imposing sanctions against adversary defendant. D. Colo. The defendant in an adversary proceeding brought by the chapter 7 trustee appealed from a bankruptcy court order that imposed sanctions against it. The single issue on appeal was whether the bankruptcy judge abused his discretion in imposing sanctions. The court explained that to constitute an abuse of discretion, a ruling must be arbitrary, capricious or whimsical. The court also stated that an abuse of discretion may occur when the trial judge fails to articulate a reason for his decision and one is left to guess because the reasoning is not apparent from the record. Applying the foregoing standards, the district court concluded that the clear justification for the trial judge’s rulings eliminated even a suggestion of abuse of discretion, affirmed the bankruptcy court’s decision and entered judgment in the trustee’s favor for costs and attorney’s fees expended on the defendant’s frivolous appeal. The court noted, among other things, that the defendant refused or failed entirely to comply with the court’s scheduling order, failed to respond to the trustee’s motion in limine, failed to produce documents relevant to the evidence it sought to introduce at trial and offered testimony in its offer of proof that was indisputably hearsay. The court also noted that the facts recited by the defendant in its opening brief were misleading and incomplete, that the defendant failed to file a reply brief despite a court order to do so and that the defendant’s failures in this regard were 'entirely consistent with [its] insouciant disregard of rules and orders throughout the litigation.'Weinman v. Shaker Express, Inc. (In re W. Pac. Airlines, Inc.), 2001 U.S. Dist. LEXIS 8102, 263 B.R. 345 (D. Colo. June 7, 2001) (Kane, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02
Attorney’s fees were excepted from discharge. Bankr. M.D. Fla. The attorney that represented the chapter 7 debtor’s former wife filed a complaint to determine the dischargeability of attorney’s fees awarded to her in the parties’ divorce proceedings. The state (Florida) court ordered the debtor to pay his former wife permanent monthly alimony payments, as well as child support. The state court compared the parties’ incomes and, finding that there was a need for and an ability to pay attorney’s fees, ordered the debtor to pay the attorney’s fees and costs. The bankruptcy court awarded judgment to the attorney, holding that the award of attorney’s fees was in the nature of support and was nondischargeable pursuant to section 523(a)(5). The attorney’s fees were awarded based on the need of the former wife and the debtor’s ability to pay. The court further noted that the fees were awarded in conjunction with alimony and child support.Blackburn-Gardner v. Edwards (In re Edwards), 2001 Bankr. LEXIS 705, 261 B.R. 523 (Bankr. M.D. Fla. April 19, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11