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 4, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Debtor not entitled to undue hardship discharge of student loan debt where income and expenses would allow debtor to repay while maintaining minimal standard of living. S.D.N.Y. PROCEDURAL POSTURE: Pro se appellant debtor filed a petition for relief under chapter 13. She filed adversary proceedings against defendants, various state and federal agencies, seeking a determination that her student loans were dischargeable under 11 U.S.C.S. § 523, or were otherwise eligible for loan forgiveness. She appealed a decision of the bankruptcy court denying her request. OVERVIEW: The bankruptcy court correctly held that the debtor would not suffer undue hardship from the repayment of her student loans. The debtor did not satisfy the first prong of the Brunner test because the undisputed facts established that her income and expenses allowed her to make loan repayments while maintaining a minimal standard of living. The bankruptcy court properly concluded, based on undisputed facts, that the debtor’s Stafford Loans could not be forgiven pursuant to the Stafford Program or the Demonstration Program. Collectively, the forgiveness programs applied to borrowers who were without any outstanding Stafford Loans prior to 1989. The debtor argued that her student loans were subject to deferment under the Federal Family Education Loan (“FFEL”) Program and were improperly placed in default. However, it was undisputed that the debtor had an outstanding debt from the Stafford Loans she received in 1981, and, therefore, she was ineligible for deferment under the FFEL Program. The bankruptcy court also correctly held that the institutional loans could not be discharged under the terms of the promissory notes. Williams v. New York State Higher Educ. Serv. Corp. (In re Williams), 2003 U.S. Dist. LEXIS 9187, — B.R. — (S.D.N.Y. June 2, 2003) (Scheindlin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Securities action against underwriters with whom debtor had an indemnification agreement, in which debtor was not a party, remanded as not related to debtor’s bankruptcy. E.D. Pa. PROCEDURAL POSTURE: Plaintiff union pension trust sued defendant underwriters in state court pursuant to 15 U.S.C. §§ 77k and 771(a)(2), seeking money damages for the devaluation of a company’s bonds they had underwritten. The underwriters removed the case pursuant to 28 U.S.C. § 1452(a). The trust moved to remand the action. The underwriters requested a transfer to another judicial district that had several securities actions involving the company’s bankruptcy. OVERVIEW: The issue was whether the trust’s securities action related to the bankruptcy of the company, a non-party, with whom the underwriters had an indemnification agreement. The court found that the trust was not suing the company and the resolution of the pending lawsuit would not have increased or decreased the size of the company’s bankruptcy estate. Moreover, the action did not effect the administration of the company’s bankruptcy. Thus, any indemnification claim asserted by the underwriters against the company had not yet accrued and would have required another lawsuit before it could have had an impact on the company’s bankruptcy. Therefore, the trust’s claims against the underwriters were not related to the company’s bankruptcy proceedings for purposes of jurisdiction under 28 U.S.C. § 1334(b). Steel Workers Pension Trust v. Citigroup, Inc., 2003 U.S. Dist. LEXIS 12392, — B.R. — (E.D. Pa. July 17, 2003) (Savage, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.07[1] [back to top]

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Affiliates of debtor, whose operating expenses were paid by debtor, were required to disclose all disbursements and to pay quarterly fees based on operating expenses. Bankr. D. Del. PROCEDURAL POSTURE: Bankruptcy debtors, a parent company and its affiliates, continued their prepetition practice of depositing funds in the company’s account from which operating expenses of all debtors would be paid. The United States Trustee (“UST”) moved to compel the debtors to amend their monthly operating reports to reflect the disbursements of each debtor and to pay delinquent quarterly fees required by 28 U.S.C.S. § 1930(a)(6). OVERVIEW: The company paid the maximum quarterly fee under section 1930(a)(6) based on its disbursements, and the debtors contended that the affiliates were only required to pay the minimum quarterly fee since they made no disbursements. The UST asserted that the affiliates were required to pay fees based on their operating expenses, even though the company actually paid the expenses. Debtors argued that their accounting system was tacitly approved by the UST without any attempt to collect the allegedly delinquent fees, and thus the trustee was equitably estopped from pursuing additional fees. The bankruptcy court first held that no equitable estoppel was shown since the UST’s statements of fees due were based on disbursements reported by the debtors, and the UST’s failure to assert that additional fees were owed did not amount to affirmative misconduct sufficient to work an estoppel against the government. Further, the company’s use of the cash receipts of the operating affiliates to pay their operating expenses constituted disbursements of the affiliates under § 1930(a)(6), regardless of the company’s actual payment of the expenses, and thus the affiliates owed additional quarterly fees. In re Charter Behavioral Health Sys., LLC, 2003 Bankr. LEXIS 559, 292 B.R. 36 (Bankr. D. Del. April 8, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:6.29 [back to top]

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Bankruptcy court erred in rejecting judicial estoppel defense to previously undisclosed debtor discrimination claim. N.D. Tex. PROCEDURAL POSTURE: Defendant-employer, a securities dealer, appealed from an order of a bankruptcy court which awarded plaintiff, a terminated employee, damages under 11 U.S.C. § 525(b) and Texas libel law after finding that the securities dealer had terminated his employment solely because he had filed for chapter 7 bankruptcy and had given false reasons for discharging the employee. OVERVIEW: The employee was terminated by the securities dealer after failing to pay back advances against commissions owed to the securities dealer and two previous employers and then declaring for chapter 7 bankruptcy. The bankruptcy court had rejected securities dealer’s judicial estoppel defense to the employee’s section 525(b) cause of action and found that the employee had no objectively-ascertainable motive to conceal the section 525(b) claim because, as a matter of law, it was not property of the chapter 7 estate and need not have been disclosed. Upon review, the district court found that the bankruptcy court abused its discretion in rejecting the judicial estoppel defense by determining that disclosure of the section 525(b) claim was unnecessary, and held that an assessment of the employee’s motive not to disclose his section 525(b) claim on remand had to include subjective considerations. Finally, the district court affirmed the bankruptcy court’s decision that the securities dealer libeled the employee because the reasons the securities dealer had provided for the employee’s dismissal (namely that he was not fired for seeking chapter 7 bankruptcy protection) were not truthful. Wakefield v. SWS Sec., Inc. (In re Wakefield), 2003 U.S. Dist. LEXIS 8861, 293 B.R. 372 (N.D. Tex. May 27, 2003) (Fitzwater, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:525.01 [back to top]

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Stay lifted to allow creditor to pursue equitable interest in property conveyed by state court judgment for specific performance. Bankr. N.D. Ohio PROCEDURAL POSTURE: A judgment creditor moved for an order requiring the debtor in possession to execute a sales contract for real property held in constructive trust, and sought relief from the automatic stay of 11 U.S.C. § 362(a), injunctive relief and findings of fact regarding the status of real property. The debtor objected, arguing that the disposition of the real property could be properly handled through its chapter 11 bankruptcy. OVERVIEW: The state court judgment of specific performance ordered the debtor to convey the property to the creditor, and was in addition to damages. The government assistance obtained by the creditor to develop the property was unique to the property which was platted on to the creditor’s specifications. The specific performance ordered could not be compensated by monetary damages. The creditor’s right to specific performance was not a claim under 11 U.S.C. § 101(5)(B), and was not a debt that could be discharged in bankruptcy. The state court order clearly conveyed all equitable interest in the property to the creditor, thus, it was appropriate to recognize a constructive trust, which did not impair the bankruptcy priority scheme. The debtor’s estate, under 11 U.S.C. § 541(d), gained no equitable interest in the property. Relieving the automatic stay would not hamper any proposed plan of reorganization and would not be detrimental to other creditors. The court would not order the debtor to transfer the property or execute a purchase agreement. The debtor retained a legal interest in the property and thus, the estate would obtain the benefit of any proceeds received from the transfer. In re Indian River Estates, Inc., 2003 Bankr. LEXIS 480, 293 B.R. 429 (Bankr. N.D. Ohio March 17, 2003) (Speer, B.J.).

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

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Debt was nondischargeable as debtor’s misrepresentations to creditor regarding ability to pay for services were not excused by death of spouse. Bankr. N.D. Ohio PROCEDURAL POSTURE: Plaintiff creditor filed a complaint to determine the dischargeability of a debt against defendant debtor pursuant to 11 U.S.C. § 523(a)(2)(A) alleging that the debts arose from the debtor’s fraudulent actions. The creditor’s allegation of fraud stemmed from the debtor’s failure to pay for certain screen printing services that the creditor performed on a large number of sweatshirts. OVERVIEW: Just two days after the creditor issued her invoice, the debtor received funds from a third party necessary to pay the creditor. This timing of events indicated that the debtor did not intend to actually repay the debt. Whenever contacted by the creditor, the debtor blatantly misrepresented the truth by stating that he had not yet received payment from the third party. In his defense, the debtor claimed that the death of his wife during the transaction caused him to lose focus. The bankruptcy court, while sympathetic, found the argument without merit. The death of the debtor’s wife was very unexpected. Thus, while the business transaction between the parties was taking place, there was no reason for the debtor to have suspected that his wife was suffering from a terminal illness. The alleged emotional strain the debtor was experiencing did not prevent him from conducting his business transaction and ensuring himself a generous profit for his efforts. Finally, the creditor justifiably relied upon the debtor’s representations — the third party was an institution which would have presumably had the funds to pay and the debtor never informed the creditor that he was in bankruptcy. Binger v. Bloomfield (In re Bloomfield), 2003 Bankr. LEXIS 476, 293 B.R. 148 (Bankr. N.D. Ohio January 15, 2003) (Speer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:523.08[1] [back to top]

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Bankruptcy court erred in dismissing trustee’s request to recharacterize debt owed to investor as equity. N.D. Ill. PROCEDURAL POSTURE: Appellant chapter 7 trustee sought the recharacterization of a debt owed to appellee investor as equity. The trustee’s other claims dealt with the investor’s rights under 11 U.S.C. §§ 506(c) and 552(b). The Bankruptcy Court for the Northern District of Illinois granted the investor’s motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and the trustee appealed. OVERVIEW: The investor was the direct or beneficial owner of 100 percent of the debtor. In the transaction at issue, the investor purchased a 100 percent participation interest in a loan that a bank gave the debtor. The bankruptcy court dismissed the trustee’s attempt to recharacterize the debt because it determined that there was no basis in bankruptcy law to recharacterize a debt as equity. The district court disagreed and held that the bankruptcy court had the authority to recharacterize the debt as equity, and that the trustee need not have alleged that the investor had a claim against the debtor. As to the trustee’s remaining claims, the bankruptcy court correctly found that the trustee failed to allege that the investor entered into any security agreement directly with the debtor as required under 11 U.S.C. § 552(b). The district court further determined that if the bankruptcy court were to find that the recharacterization was appropriate, then the investor, as an equity holder, would have had no rights under 11 U.S.C. § 506. Even without the recharacterization, the investor could not assert a right to payment against the debtor, and thus had no rights under 11 U.S.C. § 506. Moglia v. Quantum Indus. Partners, LDC (In re Outboard Marine Corp.), 2003 U.S. Dist. LEXIS 12564, — B.R. — (N.D. Ill. July 21, 2003) (Leinenweber, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.06 [back to top]

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Attorney’s fee reduced due to insufficient detail in time itemization, excessive hourly rate and minimal results obtained. Bankr. C.D. Ill. PROCEDURAL POSTURE: A debtor filed a chapter 11 bankruptcy case. The case was converted to a chapter 7 case, upon motion of the trustee, after the debtor failed to comply with the requirements of a chapter 11 case. The debtor’s attorney filed a statement of attorney fees. OVERVIEW: The debtor’s counsel sought approval of fees in the amount of $23,620. The trustee objected to this fee application, and recommended that the fee be reduced to $13,620. The debtor’s counsel did not respond to the trustee’s objections. Once a question was raised about the reasonableness of an attorney’s fee pursuant to 11 U.S.C. § 329, it was the attorney seeking compensation that had the burden of establishing that the fee was reasonable. A thorough review of the time itemization attached to the attorney’s statement of attorney fees revealed numerous problems beyond those matters raised in the trustee’s objection. The time itemization provided very little in the way of detail, especially in light of the fact that virtually nothing was accomplished during the period of time that the debtor’s case proceeded under chapter 11. The court found that the rate of $200 per hour was unreasonable in light of the minimal results obtained, and that that rate was in excess of the customary rate for like services in the area. Thus, it was necessary to further reduce the fee request beyond the reduction suggested by the trustee. In re Duby, 2003 Bankr. LEXIS 482, — B.R. — (Bankr. C.D. Ill. May 13, 2003) (Fines, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.01 [back to top]

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Homestead exemption was not impaired by judicial lien that attached only to equity in excess of exemption pursuant to state law. Bankr. C.D. Ill. PROCEDURAL POSTURE: A bankruptcy creditor obtained a judgment against the debtor and filed a memorandum of judgment as a judicial lien against the debtor’s real property. The debtor moved to avoid the judicial lien under 11 U.S.C. § 522(f)(1)(A), claiming that the existence of the creditor’s lien on the debtor’s real estate impaired the debtor’s homestead exemption. OVERVIEW: The debtor contended that the judicial lien clouded the title to the debtor’s real property and thus impaired his homestead exemption in the property. The court held, however, that under state law the lien only attached to any equity left over in the real estate over and above the amount paid on the debtor’s homestead exemption, and thus there was no impairment of the debtor’s exemption as required for avoidance under section 522(f)(1)(A). In re Brazallo, 2003 Bankr. LEXIS 483, — B.R. — (Bankr. C.D. Ill. April 24, 2003) (Fines, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11 [back to top]

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Judgment for child support arrearage was nondischargeable despite emancipation of children which terminated obligation under original support order. Bankr. C.D. Ill. PROCEDURAL POSTURE: Plaintiff bankruptcy debtor brought an adversary proceeding seeking discharge of a debt to defendant former spouse of the debtor, but the spouse asserted that the debt was nondischargeable under 11 U.S.C. § 523(a)(5)(B) as a debt in the nature of child support. The bankruptcy court considered the matter on stipulated facts and legal memoranda. OVERVIEW: Upon dissolution of the marriage of the debtor and the spouse, the debtor was ordered by a state court to pay child support until the parties’ children were emancipated. A subsequent order entered judgment against the debtor for arrearages in the debtor’s support obligation, but the debtor contended that the debt to the spouse created by the judgment was dischargeable since the children were emancipated before the judgment was entered. The bankruptcy court held, however, that the judgment debt was not dischargeable since it was clearly in the nature of support, even though the debtor had no current support obligation at the time of the judgment. The effect of the judgment was essentially to reimburse the spouse for amounts spent supporting the children without the financial assistance of the debtor, even though the debtor was under a court order to provide such financial support. Cunningham v. Cunningham (In re Cunningham), 2003 Bankr. LEXIS 490, 294 B.R. 724 (Bankr. C.D. Ill. May 29, 2003) (Fines, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11[5] [back to top]

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Undue hardship discharge of student loan debt denied where debtor’s medical condition did not interfere with gainful emp