Collier Bankruptcy Case Update August-19-02
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 19, 2002
CASES IN THIS ISSUE
- 1st Cir.
§ 362 Former directors of debtor granted relief from stay to use insurance proceeds in defending adversary proceeding.
In re Cybermedia (Bankr. D. Mass.)
§ 523(a)(10) Amendment of schedules to include creditor in original chapter 7 case was not a determination of dischargeability binding in subsequent filing.
Osenkowski v. Moretti (In re Moretti) (Bankr. D.R.I.)
§ 541(c)(2) Debtor’s interest in ex-husband’s retirement plan was not property of the estate.
Ostrander v. Lalchandani (In re Lalchandani) (B.A.P. 1st Cir.)
§ 362(d) Relief from stay granted to allow parties to pursue preliminary injunction against debtors in copyright infringement action.
In re Deep (Bankr. N.D.N.Y.)
§ 365(d)(2) Decision to assume or reject contracts for transport of natural gas would be properly made two weeks after regulatory ruling on profitability.
In re Enron (Bankr. S.D.N.Y.)
§ 362 Case reopened for consideration of effect of lender creditor’s post-stay deficiency judgment.
CIT Small Bus. Lending Co. v. Zinchiak (In re Zinchiak) (Bankr. W.D. Pa.)
28 U.S.C. § 157(b)(5) Joint tortfeasors’ future claim for contribution against debtor not proper for transfer.
In re N. Am. Refractories Co. (Bankr. W.D. Pa.)
§ 365(d)(3) Rent, real estate taxes and fees accruing postpetition were priority administrative expenses.
In re Trak Auto Corp. (Bankr. E.D. Va.)
§ 502 Proof of claim to which there is no objection is deemed allowed despite being late and no motion for leave to file is necessary.
In re Guidry (Bankr. W.D. Va.)
§ 525(b) Bank’s failure to hire former chapter 11 debtor was not discrimination with respect to employment.
Stinson v. BB & T Inv. Servs. (In re Stinson) (Bankr. E.D. Va.)
28 U.S.C. § 1334(b) Debtor’s undisclosed state court litigation properly removed as related to bankruptcy.
Dixon v. First Family Fin. Servs. (Bankr. S.D. Miss.)
§ 507(a)(8)(A) Timely noticed IRS deficiencies were not discharged in chapter 7 proceeding.
Pilya v. Comm’r (In re Pilya) (Bankr. S.D. Ohio)
§ 510(a) Mortgage subordination agreement valid and enforceable under section 510(a) and state law.
Kobak v. Nat’l City Bank (In re Kobak) (Bankr. N.D. Ohio)
§ 523(a)(5) Debtor’s non-traditional obligations to ex-spouse pursuant to divorce decree were not support and were dischargeable. Phelps v. Cordia (In re Cordia) (Bankr. N.D. Ohio)
§ 365(e) Partnership agreement was an executory contract of which only financial interest was transferred in partner’s bankruptcy.
Sable v. Morgan Sangamon P’ship (Bankr. N.D. Ill.)
§ 727(a)(2)(A) Denial of discharge upheld due to direct and unrebutted evidence of debtor’s intent to defraud.
In re Kontrick (7th Cir.)
§ 522 Facts of case supported applying doctrine of marshalling to tax liens against homestead.
Ramette v. U.S. (In re Bame) (B.A.P. 8th Cir.)
§ 110(j)(1) Injunction against petition preparer was a core proceeding not triable to a jury but requiring proper notice to parties. Demos v. Brown (In re Graves) (B.A.P. 9th Cir.)
§ 707(b) Dismissal of petition not warranted absent evidence of substantial abuse.
Harris v. U.S. Tr. (In re Harris) (B.A.P. 9th Cir.)
§ 522(d)(10)(E) Debtor’s IRA exempted from discharge although not yet payable.
In re Burkette (Bankr. D.D.C.)
Collier Bankruptcy Case Summaries
Former directors of debtor granted relief from stay to use insurance proceeds in defending adversary proceeding. Bankr. D. Mass. PROCEDURAL POSTURE: The debtor filed a chapter 7 petition under the Bankruptcy Code. Plaintiff trustee brought an adversary action against defendants, two former company directors. One former director filed a motion for relief from the automatic stay to use the proceeds from the debtor’s insurance policy to pay the defense costs. The other director moved to join the first motion. The trustee objected to both motions. OVERVIEW: The former directors claimed that as former directors and/or officers of the debtor and as defendants of the trustee’s complaint, they had a contractual right to payment of defense costs and expenses related to the adversary proceeding and any loss resulting from the claims. The insurer was willing to pay the defense costs and expenses incurred, but had not done so because of the trustee’s opposition. The former directors claimed that policy proceeds were not property of the estate and the automatic stay was not applicable because the debtor did not have an interest in the proceeds. The court adopted the logic of the cases holding that directors and liability insurance proceeds were property of the estate. The court found that the insurance policy was of benefit to the estate since the estate was worth more with it than without. The court found that there was cause to lift the automatic stay because the former directors could have suffered substantial and irreparable harm if they were prevented from exercising their rights to legal defense payments. In re Cybermedia, 2002 Bankr. LEXIS 690, 280 B.R. 12 (Bankr. D. Mass. July 2, 2002) (Rosenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
Amendment of schedules to include creditor in original chapter 7 case was not a determination of dischargeability binding in subsequent filing. Bankr. D.R.I. PROCEDURAL POSTURE: In the debtor’s second chapter 7 case, filed more than six years after the first chapter 7, a creditor filed an adversary complaint to determine that her debt was non-dischargeable under 11 U.S.C. § 523(a)(10), arguing that the denial of the debtor’s motion seeking to include the creditor as a creditor in the prior proceeding was res judicata of the dischargeability of her claim in the second proceeding. OVERVIEW: After the first case had been closed, the debtor moved to reopen it to add certain creditors that had not been listed, including the creditor. The bankruptcy court reopened the case conditioned on the debtor paying the creditor’s state court legal fees and costs, which had been incurred while the creditor did not know of the bankruptcy. That order was affirmed on appeal, but the debtor never paid the fees and costs. In the second chapter 7, the court agreed with the debtor that the dischargeability of the creditor’s debt was not determined in the prior bankruptcy, nor was it ever adjudicated in any other court. Res judicata did not apply. It was not alleged that the debtor waived his discharge under 11 U.S.C. § 727(a)(10), or that he was denied a discharge in the prior bankruptcy - either of which was necessary to bring the adversary complaint under 11 U.S.C. § 523(a)(10). The creditor had a misconception that discharge was somehow related to the amendment of schedules. One had nothing to do with the other. In the prior proceeding, dischargeability was never argued. In the prior case, the late scheduling of the debt, if permitted, had no effect on their dischargeability. Osenkowski v. Moretti (In re Moretti), 2002 Bankr. LEXIS 687, 278 B.R. 300 (Bankr. D.R.I. May 22, 2002) (Votolato, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.16
Relief from stay granted to allow parties to pursue preliminary injunction against debtors in copyright infringement action. Bankr. N.D.N.Y. PROCEDURAL POSTURE: Three debtors were involved in a copyright infringement action with the movants. A debtor filed a chapter 13 petition before a trial status conference. Later the two corporate debtors filed chapter 11 petitions. The movants sought relief from the automatic stay under 11 U.S.C. § 362(d) to permit them to seek the issuance of a preliminary injunction in a pending multidistrict litigation ('MDL') in district court. OVERVIEW: The movants asked the court to consider four factors: (1) the harm to them; (2) the interests of judicial economy; (3) the existence of an alternative forum; and (4) the impact granting the motion would have on the debtors’ reorganization efforts. The court noted that the U.S. Court of Appeals for the Second Circuit had listed twelve factors to consider in whether to lift the automatic stay to allow litigation in another venue. The court found that the interests of judicial economy, and the expeditious and economical resolution of litigation and the balance of harms, weighed in favor of granting the movants’ motion. The court believed that having the MDL court decide the preliminary injunction motion as a matter of law would serve the interests of judicial economy and expedite the resolution of key litigation between the parties. The balance of harms factor also weighed in the movants’ favor. The issue of whether the debtors infringed on the movants’ copyrights would have to be decided by some court. In re Deep, 2002 Bankr. LEXIS 668, 279 B.R. 653 (Bankr. N.D.N.Y. June 18, 2002) (Littlefield, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Decision to assume or reject contracts for transport of natural gas would be properly made two weeks after regulatory ruling on profitability. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Creditor pipeline owner requested, under 11 U.S.C. § 365(d)(2), that the chapter 11 debtors be compelled to assume or reject executory contracts under which the creditor transported natural gas for or at the debtors’ direction. The creditor also moved for an administrative expense priority under 11 U.S.C. § 503(b)(1)(A) for claims based on the reservation of pipeline capacity. The debtors and the creditors’ committee objected. OVERVIEW: The bankruptcy involved thousands of executory contracts. The debtors were diligently reviewing all of the contracts and needed a reasonable time to decide whether to assume or reject the contracts. Whether or not the contracts were assumed or rejected, if there was a demand for the gas, some entity would utilize pipeline capacity. The contracts could be profitable depending on whether a regulatory agency extended its policy of allowing parties to release the capacity at a profit, a decision that would be made within a few months. Under 11 U.S.C. § 365(d)(2), assumption or rejection could be determined two weeks after that decision. The potential of a benefit to the debtors from the availability of capacity did not entitle the creditor to an administrative expense priority for its claim for periods when the debtors did not use the pipeline or release its capacity. Any claim against the debtors based on the release of pipeline capacity to a third party was only entitled to administrative priority under 11 U.S.C. § 503(b)(1)(A) to the extent that the debtors benefited by that use, but the creditor had received payment for the release of capacity from the third parties. In re Enron, 2002 Bankr. LEXIS 671, 279 B.R. 695 (Bankr. S.D.N.Y. June 28, 2002) (Gonzalez, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04
Case reopened for consideration of effect of lender creditor’s post-stay deficiency judgment. Bankr. W.D. Pa. PROCEDURAL POSTURE: Movant lender filed a motion to reopen a debtor’s bankruptcy in response to a complaint filed in state court by respondent mortgage holder, which had a third mortgage on debtor’s home. At the time the mortgage holder filed the complaint, the debtor received a discharge and the case was closed. In the complaint, the mortgage holder sought a determination that the lender had been paid in full and an order for the lender to satisfy its mortgage. OVERVIEW: The bankruptcy court found that the issues in the state court action involved the effect of the automatic stay during the duration of the bankruptcy case and an interpretation of the bankruptcy court’s orders granting partial and eventually complete relief from stay. During the bankruptcy case, a determination as to the grant of relief from stay as to debtor’s home was deferred. Prior to the granting of relief from stay to allow the lender (and the other lenders) to pursue the home, any action to pursue a deficiency judgment against debtor would have been viewed as an action to enforce the lender’s claim against the home, which the lender could not do. Resolution of the lender’s deficiency judgment claim would have had an affect on the value of the assets, which might have been available for the benefit of other creditors. The determination was therefore relevant to case administration. CIT Small Bus. Lending Co. v. Zinchiak (In re Zinchiak), 2002 Bankr. LEXIS 682, 280 B.R. 117 (Bankr. W.D. Pa. July 3, 2002) (Bentz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
Joint tortfeasors’ future claim for contribution against debtor not proper for transfer. Bankr. W.D. Pa. PROCEDURAL POSTURE: Asserting claims of contribution and indemnity against the debtors under Miss. Code Ann. § 85-5-7 (1999), two creditors involved in state court asbestos related actions filed motions to transfer the claims asserted against them to the United States District Court for the Western District of Pennsylvania pursuant to 28 U.S.C. §§ 157(b)(5), 1334. OVERVIEW: The creditors, as joint tortfeasors with the debtors, had no contribution claim, as Miss. Code Ann. § 85-5-7(6) (1999) provided for a such a right only as to other defendants in the action. The state court had severed the claims against the debtors. There had been no relief from the automatic stay to proceed with claims against the debtors. A future claim for contribution, if the creditors were held liable in the state court action, and if a contribution claim was established, was not a case or controversy subject to adjudication under 28 U.S.C. § 157(b)(5). Although indemnification claims gave rise to 'related to' jurisdiction under 28 U.S.C. § 1334, the creditors had no contractual right to indemnification. Speculation was not a 'conceivable effect' on the estates. The creditors’ remedy was to file a claim in the bankruptcy case. Although the debtors’ asbestos was allegedly involved, it was not the entire basis for the state actions. There were allegations of one creditor’s direct negligence. Whether the parties were entitled to non-contractual implied indemnity depended on the state court results and was not a basis for finding that they had a cognizable bankruptcy claim. In re N. Am. Refractories Co., 2002 Bankr. LEXIS 669, 280 B.R. 356 (Bankr. W.D. Pa. June 28, 2002) (Fitzgerald, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.02
Rent, real estate taxes and fees accruing postpetition were priority administrative expenses. Bankr. E.D. Va. PROCEDURAL POSTURE: Several creditors, shopping center landlords, sought payment of postpetition rent, taxes, and other fees as administrative expenses under 11 U.S.C. §§ 365(d)(3), 507(a). The debtor, the creditors’ committee, and some landlords disputed what method should be used to calculate the obligations. The debtor sought to assume and assign one lease; that landlord argued it would disrupt its tenant mix and violate other tenants’ exclusivity provisions. OVERVIEW: The accrual method was adopted to determine the debtor’s liability for all postpetition expenses. Anything accruing after the entry of the order for relief was a postpetition charge that was granted administrative priority under 11 U.S.C. §§ 365(d)(3), 507(a). The debtor’s obligations to pay real estate taxes and common area maintenance charges as 'additional rent' accrued on a daily basis. Under 11 U.S.C. § 365(d)(3), postpetition bills had to be prorated so that the debtor paid, as an administrative expense, only those charges which accrued during the postpetition, pre-rejection period. The landlords were entitled to other charges as allowed under the terms of their respective leases and those charges could include late fees, interest, attorney’s fees, and damages to the premises, without having to show that continued possession benefited the estate. All of the administrative claims would be paid according to the priority under 11 U.S.C. § 507(a); they were not entitled to superpriority status. Due to conflicting messages as to whether the debtor was withdrawing the motion to assume the one lease, that matter was reserved to allow that landlord to present evidence. In re Trak Auto Corp., 2002 Bankr. LEXIS 675, 277 B.R. 655 (Bankr. E.D. Va. March 4, 2002) (Adams, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04[f]
Proof of claim to which there is no objection is deemed allowed despite being late and no motion for leave to file is necessary. Bankr. W.D. Va. PROCEDURAL POSTURE: A creditor filed a motion for leave to file a late proof of claim for what it asserted was the correct amount of prepetition arrears. The chapter 13 debtors’ confirmed plan proposed to pay the arrears in a lesser amount. Neither the chapter 13 trustee nor the debtors objected to the motion under 11 U.S.C. § 502(b)(9). OVERVIEW: 11 U.S.C. § 502 provided that a proof of claim filed under 11 U.S.C. § 501 was deemed allowed, unless a party in interest objected. The creditor had not timely filed its claim within 90 days of the first meeting of creditors under Fed. R. Bankr. P. 3002. The court found that untimeliness could be asserted as a defense to tardily filed proofs of claim. The mere fact of tardiness did not appear to axiomatically render the proof of claim disallowed: a filed proof of claim was allowed until an objection was interposed and ruled on by the court under 11 U.S.C. § 502(b)(9). The court found that there was no justiciable issue to address. Nothing in the Bankruptcy Code prohibited the creditor from filing of a late proof of claim and no party had objected to the motion. The filed claim was allowed until an objection was raised, at which time the court would adjudicate the issue. In re Guidry, 2002 Bankr. LEXIS 659, – B.R. – (Bankr. W.D. Va. June 3, 2002) (Krumm, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.01
Bank’s failure to hire former chapter 11 debtor was not discrimination with respect to employment. Bankr. E.D. Va. PROCEDURAL POSTURE: Plaintiff, a chapter 7 debtor, alleged that defendant bank withheld an offer of employment solely because he had been a debtor under Title 11. The bank moved to dismiss the complaint for failure to state a claim. OVERVIEW: The debtor alleged that the bank’s refusal to extend an offer of employment was based solely on the fact that he had been a debtor under Title 11. The debtor contended that the bank’s decision with respect to the debtor’s employment was in violation on 11 U.S.C. § 525(b)(1). The bank argued that discriminatory hiring was not an event proscribed by section 525(b). Debtor admitted that section 525(b) did not explicitly outlaw discriminatory hiring, but argued that the prohibition in the statute against discriminating 'with respect to employment' was broad enough to cover the factual situation set forth in the debtor’s complaint. The bank further argued that since section 525(b) did not specifically include a refusal to hire in its anti-discrimination provision, there was no legal basis to support the complaint. The court concluded that section 525(b) prohibited discrimination with respect to employment, but this prohibition did not include hiring decisions. The court reasoned that it could not give the statute a meaning that harmed the text enacted by Congress and signed by the President. Stinson v. BB & T Inv. Servs. (In re Stinson), 2002 Bankr. LEXIS 662, – B.R. – (Bankr. E.D. Va. April 26, 2002) (Krumm, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:525.04
Debtor’s undisclosed state court litigation properly removed as related to bankruptcy. Bankr. S.D. Miss. PROCEDURAL POSTURE: Plaintiff borrowers sued defendants, lender and insurers, in state court, alleging that defendants overcharged them and failed to disclose to them pertinent information in regard to life and property insurance that was allegedly required as a condition of loans made by the lender. After defendants removed the case to federal district court, the borrowers moved to strike supplements of defendants to notice of removal, to remand, and to dismiss. OVERVIEW: Defendants removed on the basis that several borrowers were involved in bankruptcy proceedings. The borrowers voluntarily dismissed those borrowers. With their answer, defendants filed supplements to their notice of removal naming three additional borrowers involved in bankruptcy proceedings. The borrowers’ motion to voluntarily dismiss was with respect to those three borrowers, or alternatively to dismiss as to all of the borrowers. The court allowed the supplements, though filed after the 30-day period under 28 U.S.C. § 1446(b) had expired, as a clarification of the jurisdictional grounds for removal. The court found that the borrowers were equitably estopped from dismissing their claims, as the three borrowers involved in bankruptcy proceedings failed to perform their duty to disclose the instant litigation, and because the borrowers engaged in blatant forum shopping. The borrowers’ bankruptcy proceedings were likely to be reopened to administer the undisclosed assets, so that the state court suit was related to their bankruptcy estates, and the district court had subject matter jurisdiction under 28 U.S.C. § 1334(b) and (e). Further, the state case was a core proceeding. Dixon v. First Family Fin. Servs., 2002 U.S. Dist. LEXIS 10783, 276 B.R. 173 (Bankr. S.D. Miss. March 15, 2002) (Barbour, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01
Timely noticed IRS deficiencies were not discharged in chapter 7 proceeding. Bankr. S.D. Ohio PROCEDURAL POSTURE: Chapter 7 debtors reopened their bankruptcy and filed an adversary proceeding against the creditor United States to determine whether their federal income tax liabilities for 1995 and 1996 had been discharged under 11 U.S.C. § 523(a)(1)(A). The United States moved for summary judgment, arguing that the assessment was proper under I.R.C. §§ 6501, 6503(a), 6513. OVERVIEW: I.R.C. § 6501 limited an assessment to a period within three years after the return was filed unless before the expiration of the three years, there was an extension. I.R.C. § 6503(a) suspended the running of the statute of limitations while the Internal Revenue Service ('IRS') was prohibited from making an assessment and for 60 days thereafter. The notice of deficiency was mailed to each the debtors within three years of when the 1996 return was filed, and within three years of when the debtors consented in writing to the extension of time for an assessment for the 1995 tax year. The statute of limitations for making an assessment had not expired when the notice of deficiency was mailed. Once the notice of deficiency was mailed, I.R.C. § 6513 restricted the IRS from making an assessment for 90 days. The debtors filed a petition for redetermination during that 90-day period. The statute of limitations for the assessment of the additional taxes for 1995 and 1996 would not run until 60 days after the final decision by the tax court. The deficiencies remained assessable for purposes of 11 U.S.C. §§ 507(a)(8)(A), 523(a)(1)(A)(iii), and were not discharged by the order of discharge. Pilya v. Comm’r (In re Pilya), 2002 Bankr. LEXIS 666, – B.R. – (Bankr. S.D. Ohio May 6, 2002) (Sellers, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.10
Mortgage subordination agreement valid and enforceable under section 510(a) and state law. Bankr. N.D. Ohio PROCEDURAL POSTURE: Plaintiffs, the debtors, filed a petition for relief under the Bankruptcy Code. The debtors filed a complaint, pursuant to Fed. R. Bankr. P. 7001(2), against defendants, two banks, to determine the extent, priority, and amount of liens held against their property. The banks answered the complaint and each claimed that it held the first and best lien. The first bank filed for summary judgment, and the second bank filed a separate motion. OVERVIEW: The court concluded the agreement between the second bank and the debtors was a lien subordination. The second bank had demoted the priority of a lien. The debtors and the second bank executed a subordination agreement whereby the second bank agreed to subordinate its first priority lien to its third priority lien. The first bank’s secured interest held second priority when this subordination agreement was recorded. The court found that the subordination agreement was valid and enforceable pursuant to 11 U.S.C. § 510(a) and state law. The first bank was not a party and the agreement did not intend to subordinate any of the second bank’s interest to the first bank. The second bank’s lien became senior, displacing the first priority lien in an amount equal to the obligation secured by the second bank’s lien. The court found that the recording of the subordination agreement did not result in a positive or negative change to the first bank’s position, thereby leaving the first bank in the same position as it was prior to the recording of the agreement. Kobak v. Nat’l City Bank (In re Kobak), 2002 Bankr. LEXIS 684, 280 B.R. 164 (Bankr. N.D. Ohio June 28, 2002) (Kendig, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.03
Debtor’s non-traditional obligations to ex-spouse pursuant to divorce decree were not support and were dischargeable. Bankr. N.D. Ohio PROCEDURAL POSTURE: A creditor, the debtor’s ex-wife of debtor, filed an adversary proceeding seeking to have certain debts arising under the parties’ judgment of divorce deemed non-dischargeable pursuant to 11 U.S.C. § 523(a)(5), (15). The obligations included the divorce court’s order that the debtor hold the ex-wife harmless on one half of the marital debts and on vehicle debts, and a debt owed to the ex-wife for a violation of a state court order. OVERVIEW: The divorce decree listed the debts under division of assets and allocation of debt. Temporary spousal support, which was separately considered, had terminated. Only the debt from the violation of the court order was directly payable to the ex-wife, and it was not listed under the support section. The payments were not contingent on other life events. The obligations did not bear the traditional indicia of support and were dischargeable under 11 U.S.C. § 523(a)(5). The debtor and his new wife projected a monthly income of $4,000 during the winter months, and $4,399 in expenses, but the income projection was high, due to reduced work. The debtor’s records supported his testimony that he could not pay the debts. His expenses were reasonable. The debtor’s finances continued to decline and would not improve due to his age, job skills, and health. The ex-wife and her new husband had at least $1,000 of disposable monthly income and equity of $50,000. She had $15,000 of the debtor’s assets which she had not returned. The ex-wife and her new husband had a higher standard of living. Under 11 U.S.C. § 523(a)(15)(B), the benefit of a discharge outweighed the detriment to the ex-wife. Phelps v. Cordia (In re Cordia), 2001 Bankr. LEXIS 1930, 280 B.R. 138 (Bankr. N.D. Ohio December 21, 2001) (Kendig, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Partnership agreement was an executory contract of which only financial interest was transferred in partner’s bankruptcy. Bankr. N.D. Ill. PROCEDURAL POSTURE: Appellant, a trustee for a partnership’s pension fund, filed a petition for involuntary bankruptcy against defendant, a partnership, in which he had acquired an interest. The bankruptcy court dismissed the petition, holding that the trustee lacked standing to file an involuntary petition against the partnership under 11 U.S.C. § 303(b). The partner appealed the dismissal and the partnership cross-appealed the court’s denial of attorneys’ fees. OVERVIEW: The partnership was formed for the purpose of owning and managing a single piece of real property. The partnership agreement prohibited the admission of an additional or substitute partner without the written consent of all partners and also contained a partner bankruptcy provision. A partner declared bankruptcy and the trustee purchased the interest from the estate at a public auction. The trustee later attempted to file a petition for involuntary bankruptcy against the partnership. The bankruptcy court concluded that the partnership agreement was an executory contract that fell within the scope of 11 U.S.C. § 365(e)(2), and that the bankruptcy clause was valid and enforceable. The bankruptcy court held that the trustee was not a general partner. The district court found the issue under 11 U.S.C. § 365(e) to be not what was transferred to the bankruptcy estate, but what rights and interests could have be assigned by the estate to a third party. The partnership agreement required the consent of all the partners, as did Illinois law. The bankruptcy court was correct. All the trustee had for his acquisition was a financial interest in the partnership. Sable v. Morgan Sangamon P’ship, 2002 U.S. Dist. LEXIS 12042, 280 B.R. 217 (Bankr. N.D. Ill. June 28, 2002) (Bucklo, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.07
Denial of discharge upheld due to direct and unrebutted evidence of debtor’s intent to defraud. 7th Cir. PROCEDURAL POSTURE: Defendant debtor appealed from the judgment of the United States District Court for the Northern District of Illinois, Eastern Division, affirming the denial of the debtor’s discharge under 11 U.S.C. § 727(a)(2)(A) in plaintiff creditor’s underlying adversary proceeding following the debtor’s filing for bankruptcy liquidation. OVERVIEW: The debtor claimed that the creditor’s complaint was untimely, that the bankruptcy court incorrectly concluded that he had waived his objection to the timeliness of the creditor’s complaint because Fed. R. Bankr. P. 4004(a)’s time limit was jurisdictional and not subject to waiver, and that there was a genuine issue of material fact about his intent in transferring his paychecks to his wife in the year before bankruptcy. The court initially held that, although the creditor’s complaint was untimely, the debtor waived his objection to timelines because Fed. R. Bankr. P. 4004(a)’s time limit was subject to waiver and the debtor never contested the timeliness of the creditor’s allegations in his amended complaint. The court further held that there was no genuine issue of material fact about the debtor’s intent because there was direct and unrebutted evidence, from the debtor’s own words, of his intent, and that the bankruptcy court properly denied discharge to the debtor under 11 U.S.C. § 727(a)(2)(A). In re Kontrick, 2002 U.S. App. LEXIS 13596, – B.R. – (7th Cir. July 8, 2002) (Wood, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.02
Facts of case supported applying doctrine of marshalling to tax liens against homestead. B.A.P. 8th Cir. PROCEDURAL POSTURE: An involuntary chapter 7 bankruptcy petition was filed against the debtor. The case was converted to chapter 11 and reconverted. Appellee trustee filed an adversary action against appellants, federal and state taxing authorities, seeking an order requiring the taxing authorities to look first to the homestead to satisfy their liens. The taxing authorities appealed the order from the United States Bankruptcy Court for the District of Minnesota. OVERVIEW: The taxing authorities had filed tax liens against the homestead on account of the husband’s tax liabilities and filed proofs of claim against the debtor’s bankruptcy estate. As of the petition date the debtor owned no property to which the liens attached, and their claims were allowed as unsecured claims. The taxing authorities wanted to be paid from the estate funds. The trustee filed the action because if the taxing authorities participated in the distribution of the estate funds, the available funds for other creditors would be reduced. The appellate panel rejected the claim that the doctrine of marshaling should not be applied to governmental agencies engaged in the revenue collection. The panel declined to hold that the application of marshaling to governmental taxing authorities was per se prohibited. It concluded that marshaling must be evaluated on a case by case basis, regardless of whether a taxing authority was involved. The bankruptcy court carefully weighed the relevant factors and determined that requiring the taxing authorities to look first to the homestead for satisfaction of their liens prior to receiving a distribution from the bankruptcy estate was equitable. Ramette v. U.S. (In re Bame), 2002 Bankr. LEXIS 679, 279 B.R. 833 (B.A.P. 8th Cir. July 2, 2002) (Koger, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.01
Injunction against petition preparer was a core proceeding not triable to a jury but requiring proper notice to parties. B.A.P. 9th Cir. PROCEDURAL POSTURE: Appellant, a bankruptcy petition preparer, challenged denial of his motion by the United States Bankruptcy Court for the District of Arizona, which treated it as a motion to alter or amend under Fed. R. Civ. P. 59(e). OVERVIEW: The court was asked to harness the proper procedure for exercising authority under 11 U.S.C. § 110(j) to enjoin a bankruptcy petition preparer from preparing petitions. There were four issues. The first was whether an injunction action under 11 U.S.C. § 110(j) was a 'core proceeding;' the court held it was. The second issue was whether there was a right to trial by jury in an injunction action under 11 U.S.C. § 110(j). The court found no such constitutional or statutory right. The third issue was whether a section 110(j) injunction proceeding could be initiated by a court acting under 11 U.S.C. § 105(a). The court held that while an adversary proceeding was ordinarily required, section 105(a) did permit a bankruptcy judge to raise the issue, provided that the bankruptcy petition preparer received certain procedural protections. The fourth issue was if relief from the injunction should have been granted on due process grounds. Since there was no notice that an 11 U.S.C. § 110(j)(2)(B) permanent injunction might have resulted from a hearing, the ensuing injunction was a void judgment that, the bankruptcy court, inter alia, had a duty to vacate under Fed. R. Civ. P. 59(e), 60(b)(4). Demos v. Brown (In re Graves), 2002 Bankr. LEXIS 613, 279 B.R. 266 (B.A.P. 9th Cir. May 30, 2002) (Klein, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:101.00
Dismissal of petition not warranted absent evidence of substantial abuse. B.A.P. 9th Cir. PROCEDURAL POSTURE: Appellant bankruptcy debtors petitioned for chapter 7 relief in the form of discharge of unsecured nonpriority debt, but appellee United States Trustee asserted that the debtors stated expenses were unreasonable. The debtors appealed the order of the United States Bankruptcy Court for the Central District of California which granted the Trustee’s motion to dismiss the petition for substantial abuse under 11 U.S.C. § 707(b). OVERVIEW: The debtors contended that their expenses were reasonable and necessary for their maintenance and support, but the Trustee argued that the debtors could reduce their expenses sufficiently to fund a reasonable plan for repaying a substantial portion of their unsecured debt. The bankruptcy appellate panel held that dismissal of the petition for substantial abuse was not warranted since the Trustee failed to produce evidence concerning the unreasonableness of the debtors’ expenses sufficient to support a finding of ability to repay, or any evidence of bad faith. In the absence of such evidence, and in view of the section 707(b) presumption in favor of granting the debtors’ requested relief, the debtors were not required to justify their leases of expensive vehicles or explain their substantial credit card debt. Further, while a proper evidentiary showing might have supported a finding of substantial abuse, the bankruptcy court’s familiarity with the cost of living in area in question was not a substitute for such evidence in judging the reasonableness of the debtors’ lifestyle. Harris v. U.S. Tr. (In re Harris), 2002 Bankr. LEXIS 612, 279 B.R. 254 (B.A.P. 9th Cir. May 14, 2002) (Brandt, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:707.04
Debtor’s IRA exempted from discharge although not yet payable. Bankr. D.D.C. PROCEDURAL POSTURE: The debtor filed for relief under chapter 7 of the Bankruptcy Code. The trustee filed an objection to the debtor’s exemption claim of her individual retirement accounts ('IRAs'). OVERVIEW: The debtor claimed that with her pending retirement and uncertain financial condition, her IRAs were reasonably necessary for her support within the meaning of 11 U.S.C. § 522(d)(10)(E). The trustee challenged the exception because the debtor was not retired and because any payments under the IRAs were not reasonably necessary for her support. The court held that an IRA was a 'similar plan' within the meaning of section 522(d)(10)(E) and that that an IRA need not be presently payable for age-related purposes in order to be exempt. The court found that the retirement plans described in section 522(d)(10)(E) were plans which accumulated funds that were to be paid in the future. The statute placed no limitation on when the receipt of the retirement benefit had to occur. The court examined eleven factors to determine what was reasonably necessary for the debtor’s support. It found that the debtor’s advanced age was a significant factor to consider. Any reduction in the debtor’s retirement assets represented a serious threat to the debtor’s financial well-being during her retirement years and the IRAs were reasonably necessary for her support. In re Burkette, 2002 Bankr. LEXIS 677, 279 B.R. 388 (Bankr. D.D.C. April 24, 2002) (Teel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11