Collier Bankruptcy Case Update August-20-01

Collier Bankruptcy Case Update August-20-01

 

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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 20, 2001

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

  • 1st Cir.

    § 523(a)(8) Partial judgment was awarded to debtor.
    Coutts v. Mass. Higher Educ. Corp. (In re Coutts)
    (Bankr. D. Mass.)

    28 U.S.C. § 158(d) Court of Appeals affirmed B.A.P.’s decision that the town’s purported notice of imminent foreclosure violated automatic stay.
    Kane v. Town of Harpswell (In re Kane)
    (1st Cir.)


    2d Cir.

    Rule 8002(a) Creditor was precluded from challenging trustee’s authority.
    Silverman v. Tracar, S.A. (In re Am. Preferred Prescription, Inc.)
    (2d Cir.)


    3d Cir.

    § 362(d) Limited relief was granted.
    Hous. Auth. of Pittsburgh v. Gilmore (In re Gilmore)
    (Bankr. W.D. Pa.)

    § 363(d) Confirmation of modified plan no longer bound mortgagee because debtor could only use, sell or lease property to extent not inconsistent with stay relief.
    In re Miano
    (Bankr. D.N.J.)

    § 523(a)(5) Obligations were excepted from discharge.
    Stahl v. Stahl (In re Stahl)
    (Bankr. W.D. Pa.)

    § 1327(a) Mortgagee was not bound by debtor’s confirmed plan after debtor defaulted and mortgagee obtained relief from stay.
    In re Miano
    (Bankr. D.N.J.)

    Rule 9011(b) Motion was brought before wrong court.
    Clapper v. Sommers (In re Sommers)
    (Bankr. W.D. Pa.)


    4th Cir.

    § 362(a) Wage garnishment did not constitute violation of automatic stay.
    Partridge v. Meyer, Goergen & Marrs, P.C. (In re Partridge)
    (Bankr. E.D. Va.)

    § 523(a)(2)(A) Credit card debts excepted from debtors’ chapter 7 discharge.
    Citibank (S.D.), N.A. v. Hale (In re Hale)
    (Bankr. E.D. Va.)


    5th Cir.

    28 U.S.C. § 157(d) Motion to withdraw the reference was denied.
    In re Babcock & Wilcox Co.
    (E.D. La.)


    6th Cir.

    § 110(i)(1) Petition preparer engaged in the unauthorized practice of law.
    In re Moffett
    (Bankr. W.D. Ky.)

    § 362(h) Punitive damages were partially purged.
    In re Colosimo
    (Bankr. N.D. Ohio)

    Rule 9019 Court was not empowered to refuse enforcement of arbitration clause.
    In re Transp. Assocs.
    (Bankr. W.D. Ky.)


    7th Cir.

    § 362(d) Order granting mortgagee relief from stay affirmed because debtor could not cure mortgage default after foreclosure sale was conducted.
    In re Babington
    (N.D. Ill.)

    § 1322(c) Chapter 13 debtor had right to cure delinquent maintenance assessments until condominium residence was sold at foreclosure sale.
    In re Jefferson
    (Bankr. N.D. Ill.)


    8th Cir.

    § 553(a) Creditor could not assert setoff when IRS had existing liens in excess of amount claimed.
    Superpumper, Inc. v. Nerland Oil, Inc. (In re Nerland Oil, Inc.)
    (D.N.D.)


    9th Cir.

    § 362(a) Debtor’s parents did not violate automatic stay by failing to voluntarily remove lis pendens.
    Crumrine v. Blum (In re Crumrine)
    (Bankr. N.D. Cal.)

    Rule 7054(b) Creditor whose claim was held to be partially nondischargeable was considered a prevailing party for the purpose of awarding costs.
    Jenkins v. Sroufe (In re Sroufe)
    (Bankr. D. Idaho)


    10th Cir.

    § 506(d) Failure of creditor’s lien to be noted on new title after vehicle was moved to a new state did not affect validity of security interest.
    In re Trotter
    (Bankr. D. Kan.)

    § 727(a)(2) Debtor’s prepetition assignment of lawsuit was held not to constitute intent to defraud creditor.
    Cadle Co. v. Stewart (In re Stewart)
    (B.A.P. 10th Cir.)


    11th Cir.

    § 503(b)(1)(A) Fine was not allowed as administrative expense.
    In re Chris-Marine U.S.A., Inc.
    (Bankr. M.D. Fla.)

    § 506(a) Debtors could not bifurcate IRS’s secured claim.
    In re Thomas
    (Bankr. M.D. Fla.)

    § 523(a)(1) Federal income tax liability falling due within three years of petition filing was excepted from discharge.
    Mess v. United States (In re Mess)
    (Bankr. M.D. Fla.)

    § 524 Tax liability was discharged.
    Clifton v. United States (In re Clifton)
    (Bankr. M.D. Fla.)

    § 1325(a)(3) District court affirmed order that denied confirmation, dismissed case and refused to allow debtor to amend plan based on lack of good faith.
    Hatem v. Kennedy (In re Hatem)
    (S.D. Ala.)

    Rule 7055 Entry of default could not be set aside because of lack of meritorious defense.
    Cielinski v. Kitchen (In re Tires & Terms of Columbus, Inc.)
    (Bankr. M.D. Ga.)

    Rule 9019(a) Court approved compromise of damage claim over debtors’ objection.
    In re Degenaars
    (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st Cir.

Partial judgment was awarded to debtor. Bankr. D. Mass. The chapter 7 debtor filed a complaint seeking to have four educational loans declared dischargeable. The debtor graduated with a master’s degree and worked as a clinical social worker. She lived with her mother and had experienced a spinal cord injury that limited the number of hours she could work and required ongoing medication. The bankruptcy court rendered partial judgment to the debtor, holding that because the debtor had an ability to pay some of her loan obligations, but that it would cause her undue hardship to pay all of her student loans collectively, only one of her four loans was nondischargeable. The court applied the undue hardship test to each individual student loan and considered the debtor’s financial resources, her necessary living expenses and her medical condition. The debtor had the ability to make payment on the first student loan she entered into with the creditor but did not have the financial where-with-all to repay the remaining three loans.Coutts v. Mass. Higher Educ. Corp. (In re Coutts), 2001 Bankr. LEXIS 714, 263 B.R. 394 (Bankr. D. Mass. June 15, 2001) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14

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Court of Appeals affirmed B.A.P.’s decision that the town’s purported notice of imminent foreclosure violated automatic stay. 1st Cir. Prior to seeking bankruptcy relief, the debtors entered into an installment sale contract to purchase certain real property that was subject to a town’s tax lien. The debtors agreed to a payment schedule for past due taxes and made the required payments up until the filing of their chapter 7 petition. Thereafter, and in the wake of the debtors’ chapter 7 discharge, the town advised the debtors to resume payments or face eviction. The town then foreclosed the tax lien and brought an eviction action against the debtors in (Maine) state court. The debtors filed a chapter 13 petition, and the town filed a motion to lift the stay as to the eviction action. The bankruptcy court granted the motion, finding that the debtors had no equity in the property because, among other things, they failed to assume the installment sales contract in their chapter 7 case. The debtors appealed, and the First Circuit B.A.P. reversed. The B.A.P. held, among other things, that the installment sales contract effectively transferred the equity interest in the property to the debtors under state (Maine) law, left almost nothing more to do on the seller’s side and was, therefore, a non-executory contract that did not have to be assumed or rejected. The United States Court of Appeals for the First Circuit affirmed the B.A.P.’s decision that the town’s purported notice of imminent foreclosure violated the automatic stay and was ineffective to cut off the debtor’s equity. The court rejected the town’s primary assertion that under the issue preclusion doctrine, the B.A.P. was bound by earlier determinations by other courts that the debtors lacked an equity interest in the property. The court found that the question of whether the debtors acquired and retained an equity interest in the property was actually litigated and determined only once, by the bankruptcy court. Although there were multiple later adoptions of this ruling (in state and bankruptcy court proceedings), these adoptions were based on issue preclusion and not litigation on the merits. Moreover, the debtors took a proper and timely appeal from the 'actually litigated' ruling to the B.A.P., which set the ruling aside. The court also rejected the town’s attempt to attack the merits of the B.A.P.’s decision because it was advanced for the first time in the debtors’ reply brief.Kane v. Town of Harpswell (In re Kane), 2001 U.S. App. LEXIS 13929, 254 F.3d 325 (1st Cir. June 22, 2001) (Boudin, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02[4]

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2d Cir.

Creditor was precluded from challenging trustee’s authority. 2d Cir. The chapter 11 trustee appealed an order of the district court reversing an order of the bankruptcy court that had denied the creditor’s motion to vacate the postconfirmation appointment of the trustee. The trustee was appointed postconfirmation to review the debtor’s books and records after it was discovered that the debtor’s affiliate was fraudulently diverting assets from its own chapter 11 plan to the debtor. In light of the rampant fraud and diversion of assets between the two companies, the trustee’s powers were subsequently enlarged to that of a full operating trustee. Eleven months later, a creditor whose claims were expunged as fraudulent filed a motion to remove the trustee, which was denied by the bankruptcy court. The district court reversed, ruling that the bankruptcy court lacked jurisdiction to appoint the trustee after the confirmation of the debtor’s reorganization plan. The Court of Appeals for the Second Circuit reversed and remanded the judgment of the district court, holding that because the creditor failed to challenge the appointment of the trustee by timely appealing the order giving him full trustee powers, it was precluded from challenging his authority. The court noted that if the challenge to the trustee’s authority could be made long after his appointment, the validity of the trustee’s actions would be placed in doubt, causing serious interference with the orderly consummation of the confirmed plan (citing Collier on Bankruptcy, 15th Ed. Revised).Silverman v. Tracar, S.A. (In re Am. Preferred Prescription, Inc.), 2001 U.S. App. LEXIS 14340, 255 F.3d 87 (2d Cir. June 28, 2001) (Newman, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:8002.02

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3d Cir.

Confirmation of modified plan no longer bound mortgagee because debtor could only use, sell or lease property to extent not inconsistent with stay relief. Bankr. D.N.J. The chapter 13 debtor’s residential mortgagee held a foreclosure judgment in the amount of approximately $130,000 against real property owned by the debtor and his wife, who was a debtor in a separate chapter 13 case. Pursuant to a modified confirmation order, the debtor was required to make payments outside the plan directly to the mortgagee in an amount totaling $97,800. The debtor made no payments under the confirmation order, however, and the mortgagee moved for and obtained relief from the automatic stay. The property was subsequently sold and a portion of the proceeds was paid to the mortgagee. The parties agreed that a remaining portion of the proceeds would be held in escrow. The bankruptcy court in the wife’s chapter 13 case ordered that her share of the proceeds be paid to the mortgagee. Thereafter, the debtor moved to enforce his modified chapter 13 plan. The bankruptcy court denied the motion based on sections 362(d) and 363(d), and the debtor moved for reconsideration. Because the court raised the significance of section 363(d) sua sponte, it granted reconsideration of the denial of the debtor’s motion to enforce the plan. On reconsideration, the court held that confirmation of the modified plan no longer bound the mortgagee because section 363(d) provides that the trustee, and, therefore, the debtor, may only use, sell or lease property to the extent not inconsistent with stay relief under section 362(d).The court explained that although a debtor and his creditors are bound by a confirmed plan, if the debtor subsequently defaults on payments inside or outside the plan, a creditor may obtain relief from the automatic stay and no longer be bound by the plan.In re Miano, 2001 Bankr. LEXIS 694, 261 B.R. 391 (Bankr. D.N.J. April 25, 2001) (Stripp, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.04

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Obligations were excepted from discharge. Bankr. W.D. Pa. The chapter 7 debtor’s former wife filed an adversary proceeding seeking a determination that the debtor’s obligations to pay the mortgage on their former marital residence and to pay the loan for her vehicle were excepted from discharge. During the marriage, the wife worked primarily as a homemaker and a bookkeeper for the debtor’s business, for which she received no salary. Because of disparities in the parties’ income, the state (Pennsylvania) court had awarded the marital residence and the vehicle to the former wife and ordered that the debtor hold his former wife harmless on the respective liabilities. The bankruptcy court rendered judgment to the former wife, holding that the obligations were excluded from discharge under section 523(a)(5) because they were intended to provide maintenance and support of the former wife and the parties’ children. The bankruptcy court considered the state court’s intent when the latter issued its order, as well as the circumstances of the parties when the obligations were first imposed.Stahl v. Stahl (In re Stahl), 2001 Bankr. LEXIS 703, 261 B.R. 164 (Bankr. W.D. Pa. March 5, 2001) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.11

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Trustee’s fraudulent transfer action barred by section 546(e). Bankr. W.D. Pa. Pursuant to his section 544 'strong arm' powers, the chapter 7 trustee filed an adversary complaint against two defendants to recover alleged losses sustained by the debtor, who was in the business of buying and selling securities, as a result of their purchase of securities from the defendants. The defendants moved for summary judgment and argued, among other things, that section 546(e) applied and barred the trustee from using section 544(b) to assert claims against them. According to the defendants, transfers made by the debtor when it purchased the above securities from them were prepetition settlement payments made by or to various stockbrokers, financial institutions and/or securities clearing agencies. The bankruptcy court granted one defendant’s summary judgment motion, in part, but denied the other in its entirety. The court agreed that section 546(e) applied to the transactions at issue and would bar the trustee from utilizing section 544(b) to avoid alleged fraudulent transfers. Thus, the court granted summary judgment to one defendant on the trustee’s fraudulent transfer claim, but not on other asserted claims for money had and received, unjust enrichment and conversion. The court denied summary judgment to the other defendant based on its conclusion that a reasonable finder of fact could easily have found that no settlement payment was made by or to any stockbroker, securities clearing agency or financial institution.Walsh v. Toledo Hosp. (In re Fin. Mgmt. Sciences), 2001 Bankr. LEXIS 695, 261 B.R. 150 (Bankr. W.D. Pa. February 2, 2001) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:546.06

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Debtors not entitled to jury trial in adversary proceeding brought against mortgagee. Bankr. W.D. Pa. The chapter 7 debtors demanded a jury trial on each of five counts of their adversary complaint against a mortgagee. The first three counts of the debtors’ complaint sought monetary damages, rescision of loan agreements underlying two mortgages held by the mortgagee, satisfaction of the mortgages and an injunction prohibiting the mortgagee from bringing any foreclosure proceedings. The last two counts of the complaint sought monetary damages only. The bankruptcy court held, based on circumstances specific to this case, that the debtors were not entitled to a jury trial. The court found that there was a 'close connection' between the debtors’ adversary action and the mortgagee’s claims, and that the mortgagee’s claims and liens would vanish if the debtors prevailed on their claims. The court characterized the debtors’ adversary action as an attempt to re-adjust the parties’ debtor/creditor relationship, and concluded that the debtors’ adversary action was integrally related to the bankruptcy and claims allowance process. Thus, the debtors were not entitled to a jury trial even though their claims, if viewed in isolation outside of their bankruptcy case, were at least partially legal in nature. The court also refused to hold that the debtors’ right to a jury trial remained inviolate because the mortgagee did not file a proof of claim. The court noted that when the debtors filed their case, the mortgagee had no reason to suspect the pending challenge to its supposedly undisputed claims and liens. Moreover, the mortgagee was directed by the clerk of the bankruptcy court not to file a proof of claim unless and until told to do so.Heater v. Household Realty Corp. (In re Heater), 2001 Bankr. LEXIS 691, 261 B.R. 145 (Bankr. W.D. Pa. February 2, 2001) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.08

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Court approved settlement agreement but did not grant bar order against non-party claimants. Bankr. W.D. Pa. Involuntary chapter 7 petitions were filed against the debtors in July 1998. The debtors and other parties were involved with a securities broker-dealer that was engaged in various tainted securities transactions. A class action was commenced against the broker in state (Pennsylvania) court, alleging that it had executed securities trades at unfair prices and had dissipated the assets of one of the debtors. The class claimed an interest in those assets. Eventually the chapter 7 trustee reached a settlement agreement, under which the broker agreed to pay $600,000 to the trustee, who was to distribute settlement proceeds to creditors. The trustee then filed a motion requesting approval of the settlement and an order barring any third party from asserting claims against the broker in connection with the tainted transactions. Various parties who were defendants in adversary proceedings commenced by the trustee and who were not parties to the settlement, but who would still be subject to the proposed bar order, objected to the inclusion of the bar order in the agreement. The bankruptcy court granted approval, holding that the interest of estate creditors was better served by the settlement. The court based its ruling on various criteria: (1) it was not certain that the trustee would prevail in any action against the broker, (2) even were the trustee to prevail, it was not clear that the broker had sufficient assets to satisfy a judgment, and (3) the estates would likely incur considerable expense if the litigation led to trial. The court concluded that the interest of estate creditors was better served by the settlement. But the court did not approve the bar order, determining that it was too prejudicial to the non-settling parties, who would be prevented from asserting claims, for instance, for unjust enrichment, fraudulent conveyance, or preference, and who would receive no consideration in return for the prohibition against asserting such claims.Walsh v. Hefren-Tillotson, Inc. (In re Devon Capital Mgmt.), 2001 Bankr. LEXIS 732, 261 B.R. 619 (Bankr. W.D. Pa. March 22, 2001) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9019.02

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4th Cir.

Wage garnishment did not constitute violation of automatic stay. Bankr. E.D. Va. A creditor obtained a prepetition state court judgment against the chapter 7 joint debtors and caused a garnishment summons to be issued for execution on the judgment. The garnishment summons was served on the debtor wife’s employer. The return date on the garnishment summons (i.e., the date for the debtors to appear in state court and object to the garnishment) was the day after the debtors filed their chapter 7 petition. The summons instructed the garnishee to garnish the wife’s wages on a bi-monthly basis and deliver payments to the state court. Instead, the creditor received payments directly from the garnishee over a five-week period up until the day before the debtors’ bankruptcy filing. After the debtors’ chapter 7 case was commenced, they brought an adversary proceeding to recover the garnished wages. The bankruptcy court denied the debtors’ motion without prejudice to debtors’ pursuit of a preference action. The court held that the creditor obtained a valid lien under state (Virginia) law on the debtors’ wages, and the wage garnishment pursuant to this lien did not constitute a postpetition violation of the automatic stay, notwithstanding the postpetition return date on the garnishment summons. The court rejected the debtor’s argument that although prepetition collection activities do not violate the automatic stay, the garnishment summons in this case, which held a return date after the date of debtors’ bankruptcy, constituted a postpetition garnishment.Partridge v. Meyer, Goergen & Marrs, P.C. (In re Partridge), 2001 Bankr. LEXIS 735, 263 B.R. 755 (Bankr. E.D. Va. March 27, 2001) (Tice, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03

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Credit card debts excepted from debtors’ chapter 7 discharge. Bankr. E.D. Va. A consolidated trial was held in adversary proceedings filed by credit card issuing banks seeking a determination that the chapter 7 debtors’ credit card purchases were excepted from discharge under section 523(a)(2)(A). The parties stipulated both the amount of damages and that the banks relied upon the debtors’ implied representations that they intended to pay for their purchases. The issues for determination at trial were whether the debtors made misrepresentations or committed other fraud, whether the debtors knew, at the time, that their conduct was fraudulent, and whether the debtors acted with the intent and purpose of deceiving or defrauding the creditors. The court held that because debtors offered virtually nothing to refute the banks’ evidence that their financial circumstances presented a situation of hopeless inability to pay, of which they must have been aware, the credit card charges at issue were excepted from discharge under section 523(a)(2)(A). The court applied a 'good faith' or 'reasonable person' approach to the intent issue and found that the debtors were hopelessly insolvent and unable to furnish any rational basis to support their stated intent to pay their debts. The court also noted that the debtors incurred the charges at issue just after consulting with their bankruptcy attorney.Citibank (S.D.), N.A. v. Hale (In re Hale), 2001 Bankr. LEXIS 730, – B.R. – (Bankr. E.D. Va. March 26, 2001) (Tice, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08

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5th Cir.

Motion to withdraw the reference was denied. E.D. La. The asbestos claimants committee moved to withdraw the reference of an adversary proceeding in which it was allowed to intervene as the plaintiff. The committee demanded a jury trial on its complaint seeking, on behalf of the estate, to annul allegedly fraudulent transfers from the chapter 11 debtor to its parent company and subsidiaries. The district court denied the committee’s motion, holding that because Seventh Amendment jury trial rights were not implicated by the adversary proceeding, withdrawal of the reference was not warranted. The court noted that the committee had submitted to the equity jurisdiction of the bankruptcy court and that the claim was integral to the restructuring of the debtor-creditor relations (citing Collier on Bankruptcy, 15th Ed.).In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 9660, – B.R. – (E.D. La. June 25, 2001) (Vance, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04[1][b]

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6th Cir.

Petition preparer engaged in the unauthorized practice of law. Bankr. W.D. Ky. An individual advertised her services as a paralegal and as a preparer of chapter 7 petitions. The preparer held an associate’s degree as a paralegal and had worked in two law offices preparing petitions. The preparer signed petitions as a non-attorney preparer, provided her address and social security number, properly disclosed her acceptance from the debtors of a $150 fee for her services and accepted the court filing fee from the debtors prior to preparing the petitions. Although the service contract stated that the preparer was not an attorney and could not offer legal advice, the preparer nonetheless advised debtors about exemptions and codebtorship, and testified that she used her own expertise and knowledge to fill out exemptions on schedule C. The bankruptcy court sua sponte consolidated these three chapter 7 cases to determine whether the preparer had violated various subsections of section 110. The bankruptcy court held that the preparer had engaged in the unauthorized practice of law because her actions constituted a fraudulent, unfair or deceptive act within the context of section 110(i)(1). The court reasoned that the preparer had given legal advice and prepared documents where the work required a consideration of the legal effect of facts and conditions by a trained legal mind. The court also held that the preparer violated (1) section 110(f)(1) by advertising herself as a paralegal, since that provision prohibited a non-attorney petition preparer from using the word 'legal' in any advertisement and (2) section 110(g)(1), which prevented her from accepting court costs from the debtors, since her duty was to type the petitions and return them to the debtors for filing. The court concluded by enjoining further such practices on the preparer’s part, fining her $100 and certifying the matter to the district court for further proceedings pursuant to section 110. In re Moffett, 2001 Bankr. LEXIS 743, 263 B.R. 805 (Bankr. W.D. Ky. May 11, 2001) (Roberts, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:110.05, .06, .07, .10

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Punitive damages were partially purged. Bankr. N.D. Ohio The bankruptcy court entered a provisional judgment ordering a creditor to pay punitive damages for its violation of the automatic stay, of which a portion would be purged by the filing of a detailed explanation as to action taken to prevent further violations of the stay and discharge injunction. The creditor filed its report, acknowledging that its current procedures for billing patients who had filed bankruptcy were insufficient. The creditor stated that it would manually examine the records of all patients for whom it received petition notices on and would verify that all systems used to bill patients had notification of the bankruptcy. The bankruptcy court purged a portion of the punitive damage award, holding that the creditor implemented satisfactory procedures to avoid future violations of the automatic stay and discharge injunction.In re Colosimo, 2001 Bankr. LEXIS 713, 263 B.R. 221 (Bankr. N.D. Ohio June 12, 2001) (Shea-Stonum, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.11

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Court was not empowered to refuse enforcement of arbitration clause. Bankr. W.D. Ky. The debtor and the creditor entered into a contract for insurance coverage of the debtor’s losses from employees’ injuries. The contract contained an indemnity agreement that provided for mandatory arbitration of any disputes. After the debtor filed a chapter 7 petition, the creditor filed a proof of claim and also moved to enforce the arbitration clause. The trustee objected to a proof of claim filed by the creditor and further argued that the bankruptcy court should exercise its discretion and deny arbitration. The court noted the requirement that it carefully determine whether any underlying purpose of the Code would be adversely affected by enforcing the arbitration clause, and acknowledged that if actions derived exclusively from the Code, such as preference or fraudulent conveyance, the court was empowered to exercise its discretion to deny arbitration. However, the court held that the enforcement of the arbitration clause in this matter did not result in any conflict with the Code and that, because no such conflict existed, the court was without discretion to refuse to enforce arbitration. The court also rejected the trustee’s arguments that the creditor waived arbitration by filing a proof of claim or by delaying in its motion to enforce arbitration. The court did not refer the trustee’s equitable subordination claim under section 510(c) because it arose under the Code, and withheld determination of that claim pending the arbitrators’ final decision.In re Transp. Assocs., 2001 Bankr. LEXIS 741, 263 B.R. 531 (Bankr. W.D. Ky. May 1, 2001) (Stosberg, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9019.05

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7th Cir.

Order granting mortgagee relief from stay affirmed because debtor could not cure mortgage default after foreclosure sale was conducted. N.D. Ill. Before filing his chapter 13 petition, the debtor failed to make required payments on a note secured by a mortgage on his residence. The mortgagee foreclosed in an action brought in state (Illinois) court and was the highest bidder at the resulting foreclosure sale. After the foreclosure sale, but before a judicial hearing to confirm that sale, the debtor filed his chapter 13 case. The mortgagee moved for relief from the automatic stay, and the bankruptcy court granted the motion. The debtor moved to vacate the bankruptcy court’s order, and appealed the order after his motion to vacate was denied. The district court affirmed. The court held that a debtor cannot cure a default on a residential mortgage after the foreclosure sale has been conducted, even if he files for bankruptcy before the sale is judicially confirmed.In re Babington, 2000 U.S. Dist. LEXIS 20840, – B.R. – (N.D. Ill. December 12, 2000) (Andersen, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07

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Chapter 13 debtor had right to cure delinquent maintenance assessments until condominium residence was sold at foreclosure sale. Bankr. N.D. Ill. Prior to filing his chapter 13 case, the debtor failed to pay approximately $2,600 in maintenance assessments to a condominium association. The association brought a state court action for possession against the debtor and obtained judgments for possession and for the unpaid assessments. The enforcement of the judgments was stayed for 60 days, during which time the debtor filed his chapter 13 case. The debtor listed the association as a secured creditor, and his chapter 13 plan proposed to pay the delinquent assessments to the association, in full, over a 36-month period. The association sought relief from the automatic stay to proceed with its state court eviction action. The debtor argued that because his chapter 13 petition was filed before the state court order for possession took effect, he had the right to cure the arrears through his chapter 13 plan. The bankruptcy court denied the association’s motion for relief from the stay and held that by filing his chapter 13 petition, the debtor procured the right to cure the delinquent assessments until such time as his residence was sold at a foreclosure sale. The court explained that although the association had the right to foreclose its lien under the state (Illinois) Condominium Act, it had not pursued that remedy. The court found that the debtor proposed to cure the defaults within a reasonable time through his chapter 13 plan and concluded that he was entitled to retain possession of his personal residence.In re Jefferson, 2001 Bankr. LEXIS 701, 263 B.R. 231 (Bankr. N.D. Ill. June 5, 2001) (Altenberger, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.15

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8th Cir.

Creditor could not assert setoff when IRS had existing liens in excess of amount claimed. D.N.D. The IRS made several assessments for unpaid taxes against the debtor between August 1993 and September 1999, resulting in tax liens. The assessments and liens totaled approximately $1.6 million, about $556,000 of which arose in 1993 and 1994. The IRS did not file any public notice of its liens until September 1998. Meanwhile, in June 1995, the debtor sold a gas station to the creditor, who executed a promissory note in favor of the debtor for $350,000, securing it with a second mortgage on the property. Under the note, the creditor was to make quarterly payments, with the balance due in 2000 or when the station was sold. Additionally, the debtor was to act as the conduit through which the creditor submitted its credit card receivables. But the debtor fell behind in remitting the monies to the creditor, and by 1996 the debtor owed the creditor approximately $349,000 while, at this time, the creditor owed the debtor approximately $360,000. After the debtor filed its chapter 7 petition, the creditor and the IRS filed cross motions for summary judgment in bankruptcy court, the creditor to enforce a setoff and the IRS to prevent it. The court ruled for the IRS, and this appeal followed. The district court affirmed, holding that when the creditor sought to set off its debts, the IRS had tax liens in place exceeding the amount the creditor sought to set off. The court concluded that by 1994, the IRS had assessed the delinquent taxes, which created a tax lien in favor of the IRS on the date of assessment and continued until it was paid or became unenforceable. The district court agreed with the bankruptcy court’s recognition that the creditor’s efforts to obtain a setoff were subject to the rules governing the priority of federal tax liens (citing Collier on Bankruptcy, 15th Ed.).Superpumper, Inc. v. Nerland Oil, Inc. (In re Nerland Oil, Inc.), 2001 U.S. Dist. LEXIS 8073, – B.R. – (D.N.D. June 13, 2001) (Webb, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.03

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9th Cir.

Debtor’s parents did not violate automatic stay by failing to voluntarily remove lis pendens. Bankr. N.D. Cal. The parents of a debtor wife brought a prepetition state court action against the wife and her husband and recorded a lis pendens against the debtors’ home. The parents alleged the debtors wrongfully took funds from them and used the funds to purchase a home. In a decision that was not final when the debtors’ chapter 7 case was filed, the state court ruled that although the home had not been purchased with the parents’ money, $32,000 in mortgage payments had been made with their money. Despite full notice and actual knowledge of the debtors’ chapter 7 case, its conversion to chapter 13 and confirmation of a plan, the parents took no action to contest the plan until after it was too late to set it aside. The debtors then brought an adversary proceeding against the parents, alleging, among other things, that the parents’ failure to voluntarily remove the lis pendens was a continuing violation of the automatic stay. The bankruptcy court held that the parents did not violate the automatic stay by failing to voluntarily remove the lis pendens. The court reasoned that the recording of a lis pendens is a one-time notice and not a continuing act, and the fact that it may have postpetition effect does not make it a postpetition act.Crumrine v. Blum (In re Crumrine), 2001 Bankr. LEXIS 734, 261 B.R. 669 (Bankr. N.D. Cal. March 22, 2001) (Jaroslovsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03

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Creditor whose claim was held to be partially nondischargeable was considered a prevailing party for the purpose of awarding costs. Bankr. D. Idaho The creditor filed suit against the debtors in state (Idaho) court to collect an unpaid account for the debtors’ purchase of building materials. The state court entered a default judgment against the debtors along with interest and attorney’s fees. After the debtors filed a chapter 7 petition, the creditor filed an adversary proceeding seeking a determination that the judgment was nondischargeable. The bankruptcy court held that a portion of the judgment was excepted from discharge. The creditor then filed a petition seeking costs and attorney’s fees. The bankruptcy court applied state law and granted the petition for attorney’s fees in part. The court then considered the creditor’s entitlement to costs, and found that, for the purposes of Rule 7054(b), the creditor could be considered a prevailing party even though only a portion of the state court judgment was determined to be nondischargeable.The court granted the creditor $150 for filing fees.Jenkins v. Sroufe (In re Sroufe), 2001 Bankr. LEXIS 612, 261 B.R. 35 (Bankr. D. Idaho March 16, 2001) (Pappas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7054.05

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10th Cir.

Failure of creditor’s lien to be noted on new title after vehicle was moved to a new state did not affect validity of security interest. Bankr. D. Kan. The debtor purchased a vehicle, a trailer, in Oklahoma, where she titled the vehicle, although she resided in Kansas and immediately took the vehicle there. The lien held by the secured creditor was noted on the Oklahoma title, and the debtor never titled, registered or licensed the vehicle in Kansas. After the debtor filed a chapter 7 petition, the trustee argued that the creditor did not have a perfected security interest in the vehicle because it was fraudulently registered and titled in Oklahoma and that the security interest had not been perfected by notation of the lien on the Kansas title. The bankruptcy court determined that (1) Oklahoma law applied, since the vehicle was titled in that state and that, (2) under applicable law, the creditor’s security interest was properly perfected in Oklahoma and did not lapse. The court reasoned that it was not incumbent upon the creditor to title the vehicle in Kansas to preserve its security interest, since the only person who could apply for a new title was the debtor. The debtor’s failure to do so in no way affected the creditor’s security interest.In re Trotter, 2001 Bankr. LEXIS 744, 264 B.R. 216 (Bankr. D. Kan. June 15, 2001) (Robinson, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.06

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11th Cir.

Fine was not allowed as administrative expense. Bankr. M.D. Fla. The United States filed a motion for allowance of an administrative expense. A per diem contempt judgment had been entered against the chapter 11 debtor prepetition after it failed to produce documents requested by the IRS relating to transactions between the debtor and its parent company’s other subsidiaries. The debtor’s proposed plan of reorganization provided for payment of the judgment at eight percent interest over 67 months as a general unsecured claim. The United States argued that the amount of the per diem fine accruing postpetition should have been treated as an administrative expense, because to do otherwise allowed the debtor to flaunt the orders of the district court that imposed the judgment. The bankruptcy court denied the motion, holding that the per diem fine accruing postpetition would not be treated as a section 503(b) administrative expense because it was not a cost ordinarily incident to the postpetition management or operation of the debtor’s business. The court recognized that although certain regulatory penalties could be considered administrative expenses, the fine stemmed from a prepetition discovery violation, not from postpetition noncompliance with an industry regulation.In re Chris-Marine U.S.A., Inc., 2001 Bankr. LEXIS 774, 262 B.R. 126 (Bankr. M.D. Fla. May 7, 2001) (Funk, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06[3][c]

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Debtors could not bifurcate IRS’s secured claim. Bankr. M.D. Fla. After the IRS filed a wholly secured claim, the chapter 7 debtors filed an objection to the claim, arguing that the claim should be bifurcated into secured and unsecured portions pursuant to section 506(a). The debtors also filed a motion to value the claim, seeking to assign to the secured portion the value of $64,000, representing the equity in the debtors’ homestead upon which the IRS lien rested. The IRS argued that the bifurcation of its claim and the assignment of a dollar value to the bifurcated portions of its claim would impermissibly 'strip down' its lien to a premature, judicially determined value. The bankruptcy court overruled the debtors’ objections. The court held that chapter 7 debtors could not use an objection to a claim, combined with a motion to value, in order to 'strip down' a secured creditor’s lien to the value of collateral. The court reasoned that the bifurcation of an allowed claim would then essentially invalidate the lien securing the claim to the extent that the claim exceeded the determined secured valuation. If the collateral subsequently appreciated, the debtor could keep such appreciation upon a post-bankruptcy sale, resulting in a windfall. The court concluded that such a result would be at odds with the principle that liens should pass through bankruptcy unaffected.In re Thomas, 2001 Bankr. LEXIS 611, 260 B.R. 884 (Bankr. M.D. Fla. April 3, 2001) (Funk, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.03[4]

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Federal income tax liability falling due within three years of petition filing was excepted from discharge. Bankr. M.D. Fla. The debtor filed an adversary proceeding to determine the dischargeability of his federal income tax liabilities for the years 1993 through 1997, inclusive. The bankruptcy court held that the assessed income tax liability for the years 1993 through 1996 was dischargeable pursuant to section 523(a)(1), but that the tax liability for the year 1997 was excepted from discharge by operation of section 523(a)(1)(A) because the due date of the return for that tax year was within the three-year window period of the date of the petition filing. The court also held that any tax liens with respect to assessed liabilities for the years 1993 through 1996 would remain in full force and effect as to the debtor’s property or rights to property.Mess v. United States (In re Mess), 2001 Bankr. LEXIS 613, – B.R. – (Bankr. M.D. Fla. March 27, 2001) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.07[2]

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Tax liability was discharged. Bankr. M.D. Fla. The chapter 7 debtors filed a motion to reopen their adversary proceeding against the United States and to discharge their federal income tax liability for two separate tax years. The debtors had previously entered into an agreement whereby they agreed to pay the United States a sum in full settlement of all income taxes owed for various tax years. The settlement amount was payable in monthly installments and the parties agreed to discharge the debtors’ tax liability for all but the final two tax years, subject to further discharge upon the debtors’ full compliance. At the hearing, the debtors tendered to the United States payment in full of all remaining sums due under the settlement agreement. The bankruptcy court granted the debtors’ motion, holding that because the debtors complied in full with the settlement agreement, their federal income tax liability was discharged pursuant to section 524.Clifton v. United States (In re Clifton), 2001 Bankr. LEXIS 683, – B.R. – (Bankr. M.D. Fla. May 14, 2001) (Briskman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524

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District court affirmed order that denied confirmation, dismissed case and refused to allow debtor to amend plan based on lack of good faith. S.D. Ala. The chapter 13 debtor appealed a bankruptcy court order that held that the debtor failed to file her case in good faith. The bankruptcy court denied confirmation of the debtor’s plan, dismissed her chapter 13 case and refused to allow her to amend her plan. The district court affirmed. The court held that considering the totality of the circumstances (i.e., the debtor’s motivations in seeking chapter 13 relief, her ability to pay her debts in full, her lack of effort in putting forth a proper and feasible plan, the insubstantiality of the repayment to her unsecured creditors, the degree of inaccuracy of the plan’s statements of assets and debts and the misleading nature of those inaccuracies), the bankruptcy court’s finding that the debtor filed her chapter 13 petition and plan in bad faith was not clearly erroneous. The court noted various factors for consideration in determining a debtor’s good faith (i.e., the amount of the debtor’s income from all sources; the living expenses of the debtor and his dependents; the amount of attorney’s fees; the probable or expected duration of the debtor’s chapter 13 plan; the motivations of the debtor and his sincerity in seeking chapter 13 relief; the debtor’s degree of effort; the debtor’s ability to earn and the likelihood of fluctuation in his earnings; special circumstances (such as inordinate medical expenses); the frequency with which the debtor has sought bankruptcy relief; the circumstances under which the debtor has contracted his debts and has demonstrated bona fides, or lack of same, in dealings with his creditors; the burden that the plan’s administration would place on the trustee). The court also cited the following additional factors for consideration: the substantiality of the repayment to the unsecured creditors; consideration of the type of debt to be discharged and whether such debt would be nondischargeable under chapter 7; and the accuracy of the plan’s statements of debts and expenses and whether any inaccuracies are an attempt to mislead the court.Hatem v. Kennedy (In re Hatem), 2001 U.S. Dist. LEXIS 8734, – B.R. – (S.D. Ala. June 7, 2001) (Butler, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.04

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Entry of default could not be set aside because of lack of meritorious defense. Bankr. M.D. Ga. In 1999, a state (Georgia) court entered a judgment of $104,500 against the debtor after neither the debtor nor its attorney appeared in the action. After the debtor filed a chapter 11 petition, subsequently converted to chapter 7, the trustee commenced an adversary proceeding asserting a claim of legal malpractice against the attorney. The summons and complaint were sent by certified mail to the attorney’s office. It developed that during the time of delivery, the attorney was absent from his office. The attorney had sent the bankruptcy court a letter indicating that his temporary address would be the medical center where he was undergoing treatment, but such notice was never sent to the trustee. After the attorney failed to answer the complaint or to appear at a pretrial conference, the court ordered the entry of a default judgment. Shortly thereafter, the attorney filed a motion for reconsideration of the default judgment. The court, for the purposes of setting aside the entry of default pursuant to Rule 7055(c), made the determination that in all likelihood the attorney had not received the summons and complaint so that his excuse for default was plausible. The court also found that the attorney had acted within a reasonable time to vacate the default. But the court denied the motion for lack of good cause, determining that the attorney (1) failed to present any evidence of a meritorious defense to the action and that (2) such failure created a threat of prejudice to the debtor because no factual basis of a defense was presented. Cielinski v. Kitchen (In re Tires & Terms of Columbus, Inc.), 2000 Bankr. LEXIS 1831, 262 B.R. 885 (Bankr. M.D. Ga. October 4, 2000) (LANEY, III, B.J.).

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Court approved compromise of damage claim over debtors’ objection. Bankr. M.D. Fla. The chapter 7 trustee filed a notice of his intent to compromise and settle a damage claim that arose out of a prepetition sexual harassment lawsuit filed by the debtor wife against her former employer. The debtors filed an objection to the proposed compromise. The bankruptcy court concluded that the debtors had standing to challenge approval of the compromise, since it would provide for a refund to the debtors after full payment to all creditors. The court then held that the compromise was fair and equitable and should be approved. The court determined that the trustee presented sufficient evidence to show, by a preponderance of the evidence, that success on the merits of the damage claim was not substantially probable, that there would be significant difficulties in collecting any eventual jury award, that future litigation of the damages action would be complex, costly and inconvenient, and that the paramount interests of creditors would be best served by the proposed compromise.In re Degenaars, 2001 Bankr. LEXIS 693, 261 B.R. 316 (Bankr. M.D. Fla. April 12, 2001) (Funk, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9019.02

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