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 18, 2003

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

Collier Bankruptcy Case Summaries

Debtors under Mexico’s Business Reorganization Act granted preliminary injunction against New York creditors. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Mexican bankruptcy debtors, a company and its subsidiary, contemplated funding their reorganization plan with the proceeds of a bond offering. A group of creditors sought to enforce their New York judgments against the bond proceeds. Petitioner, the debtors’ foreign representative, commenced an ancillary case under 11 U.S.C. § 304 and moved for a preliminary injunction against the New York creditors. OVERVIEW: Mexican creditors initiated involuntary bankruptcy proceedings against the debtors in Mexico. Under Mexican law, the New York creditors’ judgment liens were ranked as unsecured claims. To fund the debtors’ reorganization plan, a trust was created and the trust raised proceeds through the sale of bonds to be paid off with toll road collections. Pursuant to the plan, the bond proceeds, which belonged to the trust and not the debtors, would be used to pay administrative expenses of the bond offering and to pay the debtors’ creditors. The court determined that the debtors were entitled to a preliminary injunction against the New York creditors under 11 U.S.C. § 304(b). The bond proceeds were “involved in” the Mexican bankruptcy case under 11 U.S.C. § 304(b). Also, the debtors were likely to succeed on the merits under 11 U.S.C. § 304(c), regarding deference to the Mexican bankruptcy proceeding, despite the treatment of the New York creditors as unsecured creditors. In addition, the New York creditors failed to show that they would be adversely affected by the absence of a “best interests” test under Mexican law. The debtors also demonstrated irreparable harm. In re Avila, 2003 Bankr. LEXIS 866, — B.R. — (Bankr. S.D.N.Y. July 31, 2003) (Bernstein, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:304.01 [back to top]

ABI Members, click here to get the full opinion.

Attorneys’ fee application granted in reduced amount because of failure to promptly file necessary foreign administration proceedings. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Debtor’s counsel and financial advisor applied for fees and expenses in connection with debtor’s chapter 11 case. OVERVIEW: Counsel sought $757,080 in fees and $121,179.70 in out-of-pocket expenses. The advisor sought $43,225.81 in fees and $52,916.57 in expenses. The joint administrators argued the fees should be reduced or denied based on the professionals’ role in debtor’s original decision not to file English administration proceedings. They also argued there should be no compensation for services performed after January 28, 2003, the date secured creditors with interests in two of debtor’s vessels obtained ex parte provisional liquidation orders for certain debtors in the English court. They finally argued that the professionals should not be compensated for litigation against those creditors to enforce the automatic stay. The court found counsel had an independent obligation to start the automatic stay litigation, whether based on a fiduciary duty to the estate and creditors, or because failing to do so would have breached the requirement that it be disinterested. The conduct of such litigation was reasonable. The court concluded, however, that counsel should bear a portion of the cost of confusion and disruption caused by not originally filing English administration proceedings. In re Cenargo Int’l, PLC, 2003 Bankr. LEXIS 819, 294 B.R. 571 (Bankr. S.D.N.Y. June 27, 2003) (Dain, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.01 [back to top]

ABI Members, click here to get the full opinion.

Tax foreclosure on property inherited by debtor violated stay and was void. Bankr. W.D.N.Y. PROCEDURAL POSTURE: After defendant city commenced an in rem proceeding to foreclose on property plaintiff debtor inherited from her mother, she filed a chapter 13 petition. The city refused to honor the automatic stay, foreclosed on the property, and sold it to defendant purported purchasers. The debtor sought an ex parte preliminary injunction and filed an adversary proceeding against the city and purchasers. The purchasers sought relief from stay. OVERVIEW: The debtor’s mother’s will left everything except certain dishes to the debtor, and appointed her to serve as executrix. As the debtor failed to pay property taxes on what had been her mother’s home, in which she resided after her mother died, the city commenced foreclosure. The debtor then filed a chapter 13 petition and paid the back taxes (but not current taxes) under the plan. After the plan was completed, the city again filed a foreclosure action, and the debtor again filed chapter 13. The city claimed it did not have to honor the automatic stay because the debtor never had the property titled in her own name. The foreclosure sale purchasers sought to evict the debtor from the property. The court held that the automatic bankruptcy stay applied to both the eviction action and the underlying foreclosure proceedings. The debtor possessed legal and equitable interests in the property that derived both from her status as executrix and from her rights as an heir of her mother’s estate. As an act to obtain possession of that property, the foreclosure was stayed under 11 U.S.C. § 362(a)(3), the foreclosure sale was void, and the purchasers lacked good title to the property. Burg v. City of Buffalo (In re Burg), 2003 Bankr. LEXIS 822, — B.R. — (Bankr. W.D.N.Y. July 11, 2003) (Bucki, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[5] [back to top]

ABI Members, click here to get the full opinion.

Court granted creditor’s motion for relief from automatic stay to pursue state court action against the debtor. Bankr. E.D. Pa. PROCEDURAL POSTURE: Debtor filed a chapter 7 petition. Creditor moved for relief from the automatic stay, pursuant to 11 U.S.C. § 362, to pursue a state court action against debtor. Chapter 7 trustee objected to the motion. OVERVIEW: The court found that in all of the cases that addressed relief from the automatic stay under 11 U.S.C. § 362(d)(1) to allow the commencement or continuation of nonbankruptcy litigation, the overriding consideration was whether a debtor’s estate or a debtor would be prejudiced if the litigation was permitted in another forum. Absent a showing of prejudice, relief was generally granted. The court found that trustee failed to provide authority for the proposition that debtor had an “economic interest” in the hotel improvements that precluded creditor from the exercise of its rights under the Hawaii’s Mechanic’s and Materialman’s Lien Law, Haw. Rev. Stat. § 507-41 et seq. The court found that filing a notice of lien would not violate 11 U.S.C. § 362(a)(4); thus, the exception of 11 U.S.C. § 362(b)(3) that allowed certain liens to be perfected postpetition to the extent the trustee’s rights and powers were subject to perfection under 11 U.S.C. § 546(b) was not relevant. Creditor showed adequate cause for the court to grant relief from the automatic stay. In re Ware Window Co., 2003 Bankr. LEXIS 885, — B.R. — (Bankr. E.D. Pa. July 28, 2003) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3] [back to top]

ABI Members, click here to get the full opinion.

Despite labels in settlement agreement, debtor’s obligations to former spouse were maintenance and not dischargeable. Bankr. W.D. Pa. PROCEDURAL POSTURE: Defendant debtor filed a voluntary chapter 7 petition. Plaintiff creditor filed three adversary complaints to determine the dischargeability of debts, all of which arose from a marital separation and property settlement agreement between the parties. The creditor asserted that these marital debts were nondischargeable under 11 U.S.C. § 523(a)(5) and (15). OVERVIEW: The debtor sought to discharge his obligations to his former spouse related to: (1) car payments; (2) credit card obligations; and (3) monthly alimony. The debtor asserted that these obligations were not alimony or support and arose from an equitable distribution of property, which was dischargeable. The former spouse claimed that all of the obligations at issue were intended to provide for support and were nondischargeable under 11 U.S.C. § 523(a)(5). She asserted that if any of the obligations were not in the nature of alimony or support, then the obligations were not dischargeable under 11 U.S.C. § 523(a)(15) as a settlement. The court found that the agreement allowed the debtor to maintain his business interests and continue to earn a significant income. All of the payments required under the agreement were structured and designed as payments in the nature of alimony, maintenance, or support for purposes of the Bankruptcy Code, despite the labels given the various obligations in the agreement. These obligations were not dischargeable under 11 U.S.C. § 523(a)(5) and the court did not apply 11 U.S.C. § 523(a)(15). Gunn v. Froncillo (In re Froncillo), 2003 Bankr. LEXIS 888, — B.R. — (Bankr. W.D. Pa. August 1, 2003) (Bentz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.11 [back to top]

ABI Members, click here to get the full opinion.

Postconfirmation debt allowed as general unsecured prepetition claim upon conversion from chapter 11 to chapter 7. Bankr. N.D. Tex. PROCEDURAL POSTURE: Debtor filed a chapter 11 petition that was converted to chapter 7 when debtor could not implement the chapter 11 plan. Creditor filed a proof of claim and debtor objected. OVERVIEW: Bankruptcy court found that 11 U.S.C. §§ 501, 502 and Fed. R. Bankr. P. 3001 provided that a party correctly filing a proof of claim was deemed to have established a prima facie case against the debtor’s assets. The claimant prevailed unless a party who objected to the proof of claim produced evidence to rebut the claim. The creditor’s proof of claim as a secured claim was prima facie valid, unless debtor produced evidence to rebut the presumption. The court found that the notes in issue were executed after the entry of the order that confirmed the chapter 11 plan and the notes did not show administrative expenses under 11 U.S.C. § 503(b). The notes did not evidence loans to a debtor in possession under 11 U.S.C. § 364 where they were executed postconfirmation. The claim based on the extension note was deemed a prepetition claim. The automatic stay typically did not apply to post confirmation obligations. The promissory note and the extension note were executed postconfirmation. Conversion resulted in the obligations deemed as prepetition claims. Under these circumstances, the court found that these notes should not be voided. In re O’Connor, 2003 Bankr. LEXIS 816, — B.R. — (Bankr. N.D. Tex. July 10, 2003) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:348.05 [back to top]

ABI Members, click here to get the full opinion.

Liquidating trustee had standing to bring avoidance actions as successor to chapter 11 trustee. Bankr. E.D. Tex. PROCEDURAL POSTURE: Several days after confirmation of a liquidating plan, but before the plan’s effective date, the liquidating trustee filed avoidance actions against numerous defendants, including several of the debtor’s insiders. Two groups of defendants moved to dismiss the complaint, arguing that the trustee lacked standing and was not the real party in interest under Fed. R. Civ. P. 17, and that the complaint was untimely under 11 U.S.C. § 546(a)(1)(A). OVERVIEW: Because no governmental action was involved, standing was not in issue. The parties had agreed to numerous extensions of time to answer the complaint, but the issue of capacity was not raised. Thus, defendants waived their right to object under Fed. R. Civ. P. 17 notwithstanding the reservation of rights in the numerous agreed orders. Equity and judicial estoppel prevented negotiating the extensions and potential settlement, acknowledging the trustee’s authority to do so, then asserting a Rule 17 objection as a defense a year into the proceeding. Any lack of capacity was cured on the effective date of the plan and through filing an amended complaint, once the trustee became qualified under the plan and confirmation order. And, the trustee was an indispensable party under Fed. R. Civ. P. 19. The liquidating trustee was the successor to the chapter 11 trustee. Dismissal under Fed. R. Civ. P. 17 would have resulted in a forfeiture of the cause of action. The filing of the amended complaint, which ratified the earlier filing, related back to the date of the filing of the original complaint under Fed. R. Civ. P. 15(c), and thus, the action was timely under 11 U.S.C. § 546(a)(1)(A). Reynolds v. Feldman (In re Unger & Assocs., Inc.), 2003 Bankr. LEXIS 568, 292 B.R. 545 (Bankr. E.D. Tex. March 18, 2003) (Sharp, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:546.02[c] [back to top]

ABI Members, click here to get the full opinion.

Discharge denied because of debtor’s prepetition and postpetition attempts to conceal assets. Bankr. E.D. Tex. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition after a failed chapter 13 attempt. Plaintiff debtor filed an objection to the debtor’s discharge, which started an adversary proceeding under 11 U.S.C. §§ 727(a)(2), (a)(4)(A). The creditor filed a summary judgment motion, which was denied. The creditor moved to amend the record and for reconsideration of the summary judgment motion. OVERVIEW: The creditor alleged that a discharge in bankruptcy should be denied, pursuant to 11 U.S.C. §§ 727(a)(2), (a)(4)(A), to the debtor on the grounds that the debtor engaged in both prepetition and postpetition attempts to conceal his assets. The creditor’s amendment was sought not to add new evidence but to conform the evidence already filed in the record for the creditor’s summary judgment reconsideration. The court concluded that the debtor defaulted in response to the creditor’s motion to amend. The court found that the debtor submitted false statements. The court found that given the: (1) transfers; (2) the admissions; (3) the debtor’s errors or misinformation in his sworn bankruptcy schedules; and (4) the debtor’s two defaults in answering pleadings, the creditor had carried his burden by a preponderance of the evidence, pursuant to Fed. R. Bankr. P. 4005, that the debtor dishonestly prepared his schedules. The court held that the debtor transferred or concealed assets with the intent to hinder or defraud creditors, particularly the creditor, in addition to the chapter 7 trustee and the court. The debtor was not entitled to a discharge. Melancon v. Jones (In re Jones), 2003 Bankr. LEXIS 576, 292 B.R. 555 (Bankr. E.D. Tex. March 28, 2003) (Sharp, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.01 [back to top]

ABI Members, click here to get the full opinion.

Debtor could not claim state exemption for personal injury settlement that had not been properly disclosed. Bankr. S.D. Ohio PROCEDURAL POSTURE: The trustee in bankruptcy filed an objection to the debtor’s claimed exemption in an amount received for a personal injury settlement, on the grounds that the debtor failed to initially disclose the personal injury settlement, in addition to failing to disclose other assets. The debtor sought to claim an exemption to the personal injury proceeds pursuant to Ohio Rev. Code § 2329.66(A)(12)(c). OVERVIEW: Some five months before the debtor filed her petition for bankruptcy relief under chapter 7 of the U.S. Bankruptcy Code, the debtor slipped and fell in a store parking lot. The personal injury claimed settled, and the debtor did not list the proceeds from the settlement as part of her estate as required by 11 U.S.C. § 521(1). When the trustee sought to turnover the assets from the personal injury lawsuit, along with other undisclosed assets, the debtor asserted that she should be able to claim a $5,000 exemption from the personal injury proceeds under Ohio Rev. Code § 2329.66(a)(12)(C). The court held that the trustee had met his burden of proving that the debtor’s non-disclosure of the personal injury claim was in bad faith and that the exemption should not apply. The debtor made no effort to report the claim as part of her estate, and the trustee only learned of it through a telephone conversation when the debtor was discussing other assets that had not been reported as part of the estate. The debtor’s conduct showed bad faith and an attempt to conceal, and the debtor should not be allowed to claim the exemption on her claim that the non-disclosure was inadvertence. In re Robinson, 2003 Bankr. LEXIS 591, 292 B.R. 599 (Bankr. S.D. Ohio March 31, 2003) (Hoffman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:521.03 [back to top]

ABI Members, click here to get the full opinion.

Plan confirmation denied because of failure to include income and expenses of non-filing spouse. Bankr. N.D. Ill. PROCEDURAL POSTURE: Debtor moved to confirm her chapter 13 plan. The debtor’s spouse did not join in the bankruptcy filing. The chapter 13 trustee objected to confirmation because the plan: (1) provided for payment for a joint income tax debt; (2) did not include the non-filing spouse’s income and expenses; (3) did not pledge all of the debtor’s disposable income; and (4) did not provide for an increase after full payment on a car loan. OVERVIEW: The debtor properly included the joint unsecured tax debt in the plan pursuant to 11 U.S.C. § 1322(a)(2) because this was an unsecured priority claim under 11 U.S.C. § 507(a)(8) and the plan was required to provide for full payment of this debt. The fact that the non-filing spouse would benefit at the expense of other unsecured creditors was not a legal basis to deny confirmation. The debtor’s plan did not meet the disposable income requirements of 11 U.S.C. § 1325(b)(1)(B) because it failed to include the income and expenses of the non-filing spouse. The debtor and her spouse leased a 1996 Porsche 911, which the trustee claimed was not “reasonably necessary.” However, only the non-filing spouse drove the Porsche, and to have required the couple to surrender the vehicle would not have benefited creditors. The bankruptcy court required the debtor to change her plan to provide for an increase in payments once the loan on her vehicle was paid in full. Finally, payment for a whole life insurance policy on the non-filing spouse was not necessary because there was already a term life insurance policy on him that would have provided adequate coverage in the event of his death. In re Williamson, 2003 Bankr. LEXIS 814, — B.R. — (Bankr. N.D. Ill. July 16, 2003) (Schmetterer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.08[4] [back to top]

ABI Members, click here to get the full opinion