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 25, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

  Bankruptcy code provisions preclude claims under Fair Debt Collection Practices Act when claims were based upon violations of bankruptcy stay. E.D.N.Y. PROCEDURAL POSTURE: Plaintiff consumer filed an action against defendant collection agency alleging violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., because the collection agency attempted to collect a debt that had been discharged in bankruptcy. The collection agency filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). OVERVIEW: The consumer had entered into a loan agreement for the purchase of a car, and became delinquent in the car payments. When the consumer filed for bankruptcy relief, the debt was discharged. Despite the discharge of the debt, the collection agency sent a letter to the consumer attempting to collect upon the discharged debt. The consumer asserted in her complaint that she was entitled to statutory damages and attorney’s fees under 15 U.S.C. §§ 1692k(a)(2)(A), (3) of the FDCPA. The court held that the consumer was precluded from recovering damages and attorney’s fees under the FDCPA because the consumer’s remedy needed to be asserted under the Bankruptcy Code. Specifically the consumer could seek a motion for contempt under 11 U.S.C. § 105(a) for the collection agency’s violation of the automatic stay imposed under 11 U.S.C. § 524(a)(2). The court held that these provisions of the Bankruptcy Code precluded claims under the FDCPA when those claims were based upon violations of the bankruptcy stay. Necci v. Universal Fid. Corp., 2003 U.S. Dist. LEXIS 13798, — B.R. — (E.D.N.Y. August 4, 2003) (Wexler, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2] [back to top]

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Wage garnishment was not avoidable as a preferential transfer since under state law garnishments were not transfers of property of the debtor. Bankr. D. Conn. PROCEDURAL POSTURE: After debtor’s chapter 11 bankruptcy case was converted to a chapter 7 case, plaintiff trustee brought an adversary proceeding against defendant debtor’s employer pursuant to 11 U.S.C. §§ 547 and 550, seeking to avoid and recover alleged preferential transfers made to the employer pursuant to a wage garnishment. The employer moved for summary judgment. OVERVIEW: The employer argued that under Connecticut law, the garnishments were not transfers of property of the debtor. The bankruptcy court concluded that state law governed whether the debtor had any interest in the garnishment because a federal definition of “transfer” and the fact that federal law governed the timing of a given transfer did not answer the question of what and/or whose property interests were being transferred via the garnishment. Since the Connecticut Supreme Court had not opined on the question of whether funds paid by a debtor’s employer to a creditor of the debtor pursuant to a wage execution constituted transferred of the debtor’s property, the bankruptcy court looked to judicial precedent interpreting nearly identical New York law. Under that precedent, the garnishment was not a transfer of an interest of the debtor in property given that Connecticut law described a duly served and perfected wage execution as a continuing levy and provided for employer liability in the event of non-compliance with the wage execution. Since the garnishments were not transfers of an interest of the debtor in property, they were not avoidable as preferential under 11 U.S.C. § 547. Mangan v. Hong Kong Shanghai Banking Corp. (In re Flanagan), 2003 Bankr. LEXIS 917, — B.R. — (Bankr. D. Conn. August 5, 2003) (Dabrowski, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.01 [back to top]

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Bankruptcy court’s approval of debtor’s disclosure statement was not an appealable interlocutory order. S.D.N.Y. PROCEDURAL POSTURE: Creditor moved to appeal the order of the Bankruptcy Court for the Southern District of New York approving debtor’s disclosure statement and procedures for voting on its joint plan of reorganization. The debtor and an unsecured creditors’ committee opposed the appeal. OVERVIEW: The creditor said Fed. R. Bankr. P. 8002(c)(1)’s amendments abrogated the rule that approvals of disclosure statements were interlocutory. The district court held the amendments showed no intent to supercede the rule. The time to appeal the disclosure statement’s approval ran from the confirmation order. Resolving a consolidation issue at the confirmation hearing could change or render moot alleged disclosure statement inadequacies. Approving the voting procedure, based on the claims classification in the debtor’s reorganization plan, was interlocutory, as the classification was not final. The collateral order exception to the final judgment rule did not apply, as the creditor’s appeal would not conclusively determine the disclosure statement’s adequacy. The bankruptcy court’s order was not a reviewable interlocutory order under 28 U.S.C. § 1292(b) as: (1) approval of the disclosure statement did not involve a pure legal question; (2) there was no genuine doubt that 11 U.S.C. §§ 1122(a) and 1125 governed, respectively, claims classification and the disclosure statement’s adequacy; and (3) an immediate appeal would not materially advance the litigation’s termination.In re WorldCom, Inc., 2003 U.S. Dist. LEXIS 11160, — B.R. — (S.D.N.Y. June 30, 2003) (Baer, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1125.01 [back to top]

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District court refused to withdraw reference to bankruptcy court of creditor’s claim that debtor filed bankruptcy in bad faith. S.D.N.Y. PROCEDURAL POSTURE: In debtor corporation’s chapter 11 bankruptcy proceeding, movant creditor sought, by order to show cause pursuant to 28 U.S.C. § 157(d), to withdraw the reference for the debtor’s bankruptcy proceeding and to dismiss that proceeding, alleging that the proceeding was conducted in bad faith. OVERVIEW: The creditor’s judgment against the debtor was for damages for breach of implied warranties by shipping defective fiber optic cable to the creditor and for intentional misrepresentations and omissions regarding the defective cable. The judgment precipitated the debtor’s bankruptcy filing. The creditor contended that the proceeding was a sham--a bad faith tactic to avoid the creditor’s judgment. The court applied a seven-factor test, concluding that withdrawal of the reference was not appropriate. The creditor implicitly conceded that the factors weighed in favor of denying withdrawal since it failed to explain how and why withdrawal was appropriate when measured against the factors. The bankruptcy court was better positioned to determine the legitimacy and the future course of the debtor’s bankruptcy. The bankruptcy court was no less able than the district court judge to consider the debtor’s alleged bad-faith conduct in the litigation before the judge leading to the creditor’s judgment. Many of the facts supporting the bad faith allegation occurred in the bankruptcy court. Several facts regarding bad faith involved issues within the bankruptcy court’s special expertise. In re Remee Prods. Corp., 2003 U.S. Dist. LEXIS 11116, — B.R. — (S.D.N.Y. June 30, 2003) (Baer, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04 [back to top]

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Debtor who defaulted on payment of purchase price for photo lab business was entitled to discharge in absence of fraud or deliberate or intentional injury. Bankr. W.D. Pa. PROCEDURAL POSTURE: Plaintiffs, sellers of a photo lab business, brought an adversary action against debtor purchaser, asserting that the debt owed to them for the balance of the purchase price was excepted from discharge under 11 U.S.C. §§ 523(a)(2), (a)(4) or (a)(6), or alternatively that the debtor should be denied a general discharge under 11 U.S.C. § 727(a)(2). OVERVIEW: The sellers and the debtor executed an asset purchase and sale agreement whereby debtor agreed to purchase all of the assets of the business for $115,000. Debtor paid $30,000 of the purchase price at the closing, and executed a promissory note in favor of plaintiffs for the balance. After making a few payments the debtor defaulted. The evidence showed that the debtor called the sellers and advised them he was closing the business, but the sellers did nothing to repossess the business property, and the business’s landlord used self-help to take possession of the property. The court found that the sellers could not prevail under any of the relevant sections, because there had been no fraudulent misrepresentation, the debtor was not a fiduciary, and there was no deliberate or intentional injury; and the debtor was entitled to a general discharge, as there had been no act of transfer or concealment to defraud or hinder the creditors. Heer v. Scott (In re Scott), 2003 Bankr. LEXIS 589, 294 B.R. 620 (Bankr. W.D. Pa. June 16, 2003) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.02 [back to top]

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Prepetition debt omitted from bankruptcy filing was deemed discharged despite debtor’s omission and denial of motion to reopen proceeding. E.D. Va. PROCEDURAL POSTURE: Pursuant to 28 U.S.C. § 158(a), creditor appealed from a decision of the Bankruptcy Court for the Eastern District of Virginia denying debtor’s motion to reopen his chapter 7 case, and declaring that creditor’s judgment against debtor was discharged. OVERVIEW: Debtor petitioned for chapter 7 bankruptcy relief and obtained a discharge in 1997. He did not list his debt to creditor on the bankruptcy petition. Several years later, creditor obtained a judgment against debtor in state court. The judgment was based on a breach of contract, but not on creditor’s claim of fraud. Later still, debtor moved to reopen his chapter 7 proceeding in order to list the debt. He claimed that his initial failure to list the debt had been due to forgetfulness and inadvertence. Creditor objected, alleging debtor intentionally omitted creditor from the bankruptcy schedules. Debtor’s intent, however, was irrelevant. Debtor’s bankruptcy was a “no assets” bankruptcy. The debt to creditor arose prepetition and was not nondischargeable pursuant to 11 U.S.C. § 523. Thus, it was dischargeable and, thus, was discharged pursuant to 11 U.S.C. § 727(b) even though it was not listed in debtor’s bankruptcy filings, and debtor’s motion to reopen was futile. Horizon Aviation of Va., Inc. v. Alexander (In re Horizon Aviation of Va., Inc.), 2003 U.S. Dist. LEXIS 13841, — B.R. — (E.D. Va. August 4, 2003) (Smith, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.13 [back to top]

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Bankruptcy court declined to abstain from hearing dispute over enforceability of involuntary debtor’s lease. Bankr. N.D. Tex. PROCEDURAL POSTURE: Plaintiff bankruptcy trustee sued defendant trust in which it sought a declaration with regard to the debtor’s rights and enforceability of a lease agreement. The trust moved to abstain and dismiss the action. OVERVIEW: The trust had filed a previous lawsuit in a state court located in a different district in which it sought a declaration that a lease agreement between the debtor and the trust’s predecessor in interest was in default and was terminated and that another company succeeded to all of the rights, title and interests in the agreement. The creditors of the debtor forced it into an involuntary bankruptcy action and the trustee removed the trust’s state court action to federal court in another district. The court found that the issues presented in the trustee’s action were core because the debtor’s bankruptcy case could not proceed until the issues were resolved. Therefore, the trust failed to carry its burden on the mandatory abstention test because the proceeding was related to the bankruptcy. Furthermore, there was currently no alternate forum in which the parties could resolve their dispute. Finally, the court believed itself capable of providing a fair and impartial hearing on the present suit, and that none of the parties would be unduly prejudiced should these matters proceed in that court. Brown v. Shepherd (In re Lorax Corp.), 2003 Bankr. LEXIS 676, 295 B.R. 83 (Bankr. N.D. Tex. June 26, 2003) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05[1] [back to top]

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Trustee could not be compelled to sell debtor’s half of property interest to nondebtor joint owner who was entitled only to right of first refusal. Bankr. S.D. Ohio PROCEDURAL POSTURE: Plaintiff was a joint owner of real property with the debtor. In a prior order, the bankruptcy court allowed the chapter 7 trustee to sell the real property. The joint owner subsequently filed a motion to compel the trustee to sell the debtor’s one-half interest to him pursuant to 11 U.S.C. § 363. OVERVIEW: The joint owner relied on 11 U.S.C. § 363(i), which protected co-owners and spouses with dower rights by granting such owners a right of first refusal at the price at which the sale was to be consummated. However, this subsection only gave a right of first refusal, not an automatic right to purchase the one-half interest at any time as suggested by the joint owner. The bankruptcy court concluded that there was no basis to require the trustee to sell to the joint owner the one-half interest in the real property. The bankruptcy court further concluded that no basis existed to determine the purchase price for the joint owner because he did not invoke the right of first refusal pursuant to 11 U.S.C. § 363(i). Daneman v. Eden (In re Eden), 2003 Bankr. LEXIS 655, — B.R. — (Bankr. S.D. Ohio May 13, 2003) (Calhoun, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.08[7] [back to top]

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Time limit for filing complaint was a statute of limitation subject to equitable tolling defense. 6th Cir. PROCEDURAL POSTURE: Appellant creditor sought to file an objection in appellee debtor’s bankruptcy discharge proceeding. The bankruptcy court allowed the objection and excepted the creditor’s claim from discharge. On appeal by the debtor, the Bankruptcy Appellate Panel of the Sixth Circuit (bankruptcy appellate panel) reversed. The creditor appealed. OVERVIEW: The creditor claimed that, although his complaint objecting to discharge was untimely, the filing deadlines were subject to equitable tolling. The court held that the bankruptcy appellate panel erred in reversing the bankruptcy court’s order granting the creditor an extension to file his complaint objecting to discharge under Fed. R. Bankr. P. 4004(a) because the time limits in Fed. R. Bankr. P. 4007(c) were not jurisdictional, rather Fed. R. Bankr. P. 4007(c) was a statute of limitation, or simply a deadline, generally subject to the defenses of waiver, estoppel, and equitable tolling. The court further held that the bankruptcy court did not err in its conclusion that the creditor was diligent in seeking to enforce his rights and that the debtor’s delay in producing certain documents requested by the creditor under Fed. R. Bankr. P. 2004 contributed to the creditor’s failure to timely file his complaint, and that, although the creditor could have filed his motion for an extension within the time decreed by Fed. R. Bankr. P. 4007(c), he filed that motion only three days out of rule, and the debtor suffered no prejudice from the extension. Nardei v. Maughan (In re Maughan), 2003 U.S. App. LEXIS 16656, — F.3d — (6th Cir. August 14, 2003) (Batchelder, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:4007.04 [back to top]

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