Collier Bankruptcy Case Update December-10-01

Collier Bankruptcy Case Update December-10-01

 

 


Collier Bankruptcy Case Updates

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.

December 10, 2001

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

  • 1st Cir.

    § 106(b) Court of Appeals upheld the constitutionality of section 106(b)’s waiver of sovereign immunity.
    Arecibo Cmty. Health Care, Inc. v. P.R. (1st Cir.)


    2d Cir.

    § 522(b)(2)(A) Deferred compensation plan funds deemed exempt.
    In re Maurer (Bankr. W.D.N.Y.)

    § 523(a)(8) Tuition incentive program fell within the ambit of section 523(a)(8).
    Mehlman v. N.Y. City Board of Educ. (In re Mehlman) (Bankr. S.D.N.Y.)

    28 U.S.C. § 157(b) Core proceeding was remanded for arbitration.
    Cibro Petroleum Prods. v. City of Albany (In re Winimo Realty Corp.) (S.D.N.Y.)


    3d Cir.

    § 366(a) Utility improperly refused to restore service.
    One Stop Realtour Place, Inc. v. Allegiance Telecom, Inc. (In re One Stop Realtour Place, Inc.) (Bankr. E.D. Pa.)

    § 503(b) Plaintiff’s motion for administrative expense priority granted, in part and denied, in part.
    In re Grand Union Co. (Bankr. D.N.J.)


    4th Cir.

    § 727(a)(4)(A) Denial of discharge was upheld on appeal because the debtor knowingly made a false oath in his chapter 7 case. Brown v. Presidential Fin. Corp. (In re Brown) (W.D. Va.)


    5th Cir.

    Rule 9006(b)(1) Creditors demonstrated excusable neglect in late filing of proofs of claim.
    In re Babcock & Wilcox Co. (E.D. La.)


    6th Cir.

    § 362(b)(4) Automatic stay was applicable to lawsuit.
    Chao v. Hosp. Staffing Servs., Inc. (6th Cir.)

    § 502 Government entitled to offset debtor’s postpetition claim for tax refund against IRS’s prepetition tax penalty claims.
    Gordon Sel-Way, Inc. v. United States (In re Gordon Sel-Way, Inc.) (6th Cir.)

    § 510(c) Court of Appeals refused to equitably subordinate participation interest claims.
    Bayer Corp. v. Mascotech, Inc. (In re Autostyle Plastics, Inc.) (6th Cir.)


    7th Cir.

    § 553(a) Bank was entitled to setoff against funds in joint account.
    Mottaz v. Union Planters Bank, N.A. (In re Dame) (Bankr. S.D. Ill.)

    § 1322(b)(1) Denial of plan confirmation was upheld on appeal.
    Crawford v. Chatterton (In re Crawford) (W.D. Wis.)


    8th Cir.

    § 507(a)(8) Debtor could not change status of tax claim from priority to general unsecured claim absent clear notice to the IRS.
    De Jesus v. United States (In re De Jesus) (Bankr. D. Minn.)


    9th Cir.

    § 1322(b)(1) District court vacated bankruptcy court order that confirmed debtor’s plan and excused her from proving that plan classification favoring her mother did not discriminate unfairly.
    Meyer v. Hill (In re Hill) (B.A.P. 9th Cir.)


    10th Cir.

    § 510(b) Application of section 510(b) subordination hinged on whether issuer of note was the debtor’s affiliate.
    NationsBank, N.A. v. Commercial Fin. Servs. (In re Commercial Fin. Servs.) (Bankr. N.D. Okla.)

    Rule 9011(b) Sanctions warranted where debtors primary motive in filing multiple chapter 13 petitions was to stop the bank’s foreclosure sales rather than participate in debt adjustment.
    In re Copeland (Bankr. D. Kan.)


    11th Cir.

    § 362(d) Stay was lifted to permit regulatory proceedings to commence.
    White v. Weatherford (In re Abrass) (Bankr. M.D. Fla.)

    § 522(g) Debtors could not exempt assets that they failed to disclose in initial schedules.
    Henkel v. Green (In re Green) (Bankr. M.D. Fla.)

    § 523(a)(6) Attorney’s fees were recoverable in nondischargeability action based on willful and malicious injury.
    USAA Cas. Ins. Co. v. Auffant (In re Auffant) (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st. Cir.

Court of Appeals upheld the constitutionality of section 106(b)’s waiver of sovereign immunity. 1st Cir. In 1984 the health department of the commonwealth (Puerto Rico) entered into a series of contracts with the debtor, a private entity, for the administration of a hospital. In 1991, the department filed suit against the debtor in superior court, alleging failure to render services pursuant to the contract. Shortly thereafter, the debtor filed its chapter 11 petition, which was later converted to chapter 7. The department filed a proof of claim in the approximate amount of $1.6 million. The trustee commenced an adversary proceeding against the department, based on various state law claims, and arising out of the same contract and operative facts as the superior court action. The department argued that the trustee’s claims were barred by the Eleventh Amendment. The bankruptcy court held that sections 106(a) and (b) were invalid as to the department, reasoning that Congress could not abrogate states’ Eleventh Amendment sovereign immunity by a conditional waiver, namely, by filing the proof of claim. On appeal, the district court affirmed the ruling as to the invalidity of section 106(a), but concluded that waiver of immunity was permissible because it was premised upon the affirmative undertaking of the state to participate in the bankruptcy process. The department asked the court to reconsider its ruling, and during the pendency of that request, the United States Supreme Court decided College Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 144 L.E.2d 605, 119 S.C. 2219 (1999), which reasoned that a constructive waiver approach was incompatible with cases requiring the express waiver of sovereign immunity. The district court upheld the constitutionality of section 106(b), and an appeal followed. The Court of Appeals for the First Circuit reversed, holding that section 106(b) was constitutionally infirm. The debtor moved for a rehearing, which was granted. The department grounded its argument in the College Savings ruling, which stated that the voluntariness of a waiver was destroyed when it was presumptively triggered by 'otherwise lawful activity,' which, the department contended, was the nature of its claim filing. The debtor argued that section 106(b) was a permissible means of obtaining a waiver of sovereign immunity with respect to compulsory counterclaims arising from a proof of claim. The Court of Appeals vacated its prior decision and affirmed the ruling of the district court, holding that the College Savings decision recognized that a state relinquished its sovereign immunity when it voluntarily invoked federal court jurisdiction. The Court of Appeals concluded that the department waived its immunity when it availed itself of federal jurisdiction by filing the proof of claim. The Court of Appeals also held that the waiver was broad in scope, and not restricted to defensive counterclaims for recoupment, because nothing in College Savings purported to impose such restrictions once the waiver was triggered.Arecibo Cmty. Health Care, Inc. v. P.R., 2001 U.S. App. LEXIS 23202, – F.3d. – (1st Cir. October 29, 2001) (Torruella, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.06

 

 

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2d. Cir.

Deferred compensation plan funds deemed exempt. Bankr. W.D.N.Y. In connection with a request made by the court in an earlier decision regarding the debtor’s claimed exemption for certain deferred compensation plan funds, the debtor’s counsel provided the court with a copy of an IRS ruling concluding that, at least as of the end of 1999, the plan was 'qualified' under section 457 of the Internal Revenue Code. The court then held that a section 457-qualified plan is a plan 'on account of age'; thus, the deferred compensation plan funds in this case were deemed exempt. The court analyzed case law interpreting the phrase 'on account of age' and concluded that the phrase seems to require simply that rights and benefits be defined, by statute, by reference to age; it is not necessary that achieving a particular age be a precondition to receiving any rights or benefits.In re Maurer, 2001 Bankr. LEXIS 1330, 268 B.R. 339 (Bankr. W.D.N.Y. August 17, 2001) (Kaplan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:522.10

 

 

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Tuition incentive program fell within the ambit of section 523(a)(8). Bankr. S.D.N.Y. The creditor was a city (New York) board of education, which provided occupational and physical therapy services to special education students. The creditor created an incentive program providing training in such therapy, whereby a student enrolling in a training program could receive tuition benefits from the incentive program in exchange for accepting employment as directed by the creditor for a number of years commensurate with the years during which the student received tuition payments. The debtor was accepted into the incentive program in 1996. In 1998, the debtor failed two consecutive fieldwork projects and was removed from her occupational therapy program. In 2000, the debtor received a letter from the creditor requesting repayment of approximately $42,000 in scholarship monies. Shortly thereafter, the debtor filed a chapter 7 petition and commenced an adversary proceeding, seeking a declaration that her obligation to the creditor was dischargeable. The debtor argued that the incentive program was not an 'educational benefit program' or 'student loan' within the meaning of section 523(a)(8). The creditor argued that the tuition payments made on the debtor’s behalf were precisely the type of debt barred from discharge by section 523(a)(8). The bankruptcy court ruled for the creditor, holding that the funds paid by the creditor were based on a contract whereby the creditor delivered a sum of money to the debtor, who agreed to return at a future time the rendering of services equivalent to that which was borrowed, constituting a paradigm of a loan as encompassed by section 523(a)(8).Mehlman v. N.Y. City Board of Educ. (In re Mehlman), 2001 Bankr. LEXIS 1340, 268 B.R. 379 (Bankr. S.D.N.Y. October 16, 2001) (Hardin, B.J.).

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

 

 

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Core proceeding was remanded for arbitration. S.D.N.Y. The public lessor appealed the bankruptcy court’s order denying its motion to compel arbitration of disputes arising under prepetition contracts between the chapter 11 debtor and itself and for a stay of proceedings pending arbitration. Although the leases between the parties provided that any claim arising out of the leases was to be settled by arbitration, the debtor filed an adversary proceeding against the lessor seeking a declaratory judgment with respect to payments made in lieu of taxes. The bankruptcy court concluded that the matter was a core proceeding and refused to compel arbitration of the proceeding. The district court reversed, holding that although the proceeding was core, the bankruptcy court improperly determined that it had discretion to proceed to trial rather than compel arbitration. The bankruptcy court’s determination that the matter was a core proceeding was correct, because the lessor’s codefendant had filed proofs of claim against the estate, and the debtor’s interest in the leases was the single biggest asset of the estate that remained to be liquidated. Nevertheless, because there was no evidence that arbitration of the proceeding would have jeopardized an underlying policy of the Bankruptcy Code, the bankruptcy court lacked the discretion to proceed to trial.Cibro Petroleum Prods. v. City of Albany (In re Winimo Realty Corp.), 2001 U.S. Dist. LEXIS 17500, – B.R. – (S.D.N.Y. October 25, 2001) (Scheindlin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02

 

 

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3d. Cir.

Utility improperly refused to restore service. Bankr. E.D. Pa. The debtor filed a complaint against the telephone service provider, arguing that the provider wrongly refused to restore telephone service upon the filing of the company’s chapter 11 petition as required by section 366. After the debtor filed its petition and its principal contacted the provider requesting that service be restored, the provider refused to restore service prior to receipt of a cash deposit. The provider subsequently restored service pending receipt of adequate assurances approximately one month later, in accordance with an agreement obtained by the debtor’s counsel. The bankruptcy court determined that the provider violated section 366, holding that the filing of the debtor’s petition required the service provider to restore telephone service prior to obtaining adequate assurance payment. Because the debtor could be entitled to compensatory damages, the court allowed the debtor an opportunity to present further evidence of damages suffered as a result of the violation (citing Collier on Bankruptcy, 15th Ed. Revised).One Stop Realtour Place, Inc. v. Allegiance Telecom, Inc. (In re One Stop Realtour Place, Inc.), 2001 Bankr. LEXIS 1353, 268 B.R. 430 (Bankr. E.D. Pa. October 17, 2001) (Carey, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:366.02

 

 

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Plaintiff’s motion for administrative expense priority granted, in part and denied, in part. Bankr. D.N.J. Pursuant to a prepetition contract, the plaintiff provided prepetition and postpetition warehousing, ice manufacturing, supply and transportation services to the chapter 11 debtor. After the debtor rejected the contract, the plaintiff moved to obtain administrative expense priority and payment for certain of its claims against the debtor. The debtor opposed this relief on the ground that all of the plaintiff’s claims constituted rejection damages pursuant to section 502(g) and, thus, were not entitled to priority under section 503(b). The bankruptcy court granted the plaintiff’s motion, in part, and denied the motion, in part. The court held that the plaintiff’s claim for excess inventory that had been delivered qualified as an administrative priority expense because it arose postpetition, and was incurred at the request of the debtor and for the benefit of the debtor’s estate. However, the court also held that claims that arose pursuant to 'shortfall' and 'repurchase' provisions contained in the parties’ agreement were not entitled to administrative priority status. The court concluded that the plaintiff’s right to payment under the 'shortfall' and 'repurchase' provisions were part of the plaintiff’s rejection damages and were only entitled to be treated as prepetition unsecured claims.In re Grand Union Co., 2001 Bankr. LEXIS 1326, 266 B.R. 621 (Bankr. D.N.J. August 30, 2001) (Winfield, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06

 

 

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4th. Cir.

Denial of discharge was upheld on appeal because the debtor knowingly made a false oath in his chapter 7 case. W.D. Va. The chapter 7 debtor appealed the bankruptcy court’s order denying his discharge pursuant to section 727(a)(4)(A). The debtor failed to disclose in his schedules and statement of affairs the sale of his residence eight days prior to his petition, the payment of creditors with a portion of the sale proceeds and the transfer of a substantial portion of the proceeds to his wife. The debtor also falsely testified at the meeting of creditors that he had paid a share of the proceeds to the IRS. The district court affirmed, holding that the record adequately supported the bankruptcy court’s finding that the debtor knowingly and fraudulently made a false oath in connection with the case. The omissions in the debtor’s schedules and statement were material because they related directly to the discovery of the debtor’s assets, and the false testimony was material because it falsely construed the disposition of the debtor’s property. Brown v. Presidential Fin. Corp. (In re Brown), 2001 U.S. Dist. LEXIS 17676, – B.R. – (W.D. Va. October 26, 2001) (Wilson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.04

 

 

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5th. Cir.

Creditors demonstrated excusable neglect in late filing of proofs of claim. E.D. La. The debtors filed petitions in February 2000. In April 2000, the district court withdrew the reference of these cases with respect to certain issues, including motions to set a bar date, setting procedure for notifying claimants, and prescribing the form of proofs of claim. On October 6, 2000, the bankruptcy court entered an order requiring persons with settled claims to submit proofs of claim by March 29, 2001. On October 30, 2000, the district court entered an order requiring all personal injury claimants to file proofs of claim by July 30, 2001. On August 20, 2001, the court granted the claimants’ motion for an enlargement of time to file a proof of claim under the 'excusable neglect' provision of Rule 9006(b)(1). The debtors then moved the court to reconsider that decision, arguing that the claimants failed to meet their burden of showing excusable neglect. The court rejected the debtors’ argument and denied the motion to reconsider, holding that the requirements for demonstrating excusable neglect had been met. Namely, (1) the debtors acted in good faith in seeking more time; (2) the claimants’ stated reasons for seeking the motion were sufficient, because the admitted clerical errors and oversight were understandable when their attorney filed nearly 7,000 proofs of claim; and (3) the length of delay was negligible, since the claims were filed only 10 days after the original deadline. In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 16741, – B.R. – (E.D. La. October 11, 2001) (Vance, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9006.06[3]

 

 

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6th. Cir.

Automatic stay was applicable to lawsuit. 6th Cir. The chapter 7 trustee appealed the district court’s preliminary injunction ordering him to deposit sufficient funds with the clerk of district court. The United States Secretary of Labor filed a lawsuit postpetition in the district court to enforce certain provisions of the Fair Labor Standards Act. The secretary contended that certain of the debtor’s records had been produced in violation of the Act’s wage provisions, because the debtor’s employees had not been paid their wages during the company’s last weeks of operation. The district court allowed the trustee to transfer the records, which were necessary to generate accounts receivable, only upon the payment of the employees’ wage claims. The Court of Appeals for the Sixth Circuit reversed, holding that because the secretary’s lawsuit was not in furtherance of her statutory powers to regulate and enforce labor standards, but rather was designed to promote the private rights of the unpaid workers vis-a-vis other creditors of the estate, the suit did not fall within the police power exception to the automatic stay. Because the automatic stay was applicable, the district court lacked jurisdiction to entertain the secretary’s lawsuit.Chao v. Hosp. Staffing Servs., Inc., 2001 U.S. App. LEXIS 23426, – F.3d – (6th Cir. October 31, 2001) (Boggs, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5]

 

 

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Government entitled to offset debtor’s postpetition claim for tax refund against IRS’s prepetition tax penalty claims. 6th Cir. The debtor filed a voluntary petition for relief under chapter 11. The debtor’s plan of reorganization and liquidation called for the debtor to sell all its assets and cease doing business. The IRS had filed claims for unpaid unemployment tax ('FUTA') penalties and, under the reorganization plan, these claims were treated as general unsecured claims. After the plan was confirmed, the debtor paid its unemployment taxes and became entitled to FUTA refunds. Although the IRS agreed that the debtor was entitled to the tax refund, it refused to pay the refund because it argued that the debtor was liable for past tax penalties. The debtor then filed an adversary complaint against the IRS to subordinate the IRS’s claim, and the bankruptcy court granted the debtor’s motion. The IRS appealed the bankruptcy court’s decision and, while this appeal was pending, the debtor liquidated all of its assets (except for the tax refunds) and disbursed the proceeds pursuant to the terms of the plan, except that the debtor did not make any disbursements to the IRS. The bankruptcy court ultimately reversed its ruling regarding subordination of the IRS’s claim but still ruled that the government was not entitled to setoff. The IRS appealed the setoff ruling. On appeal, the district court reversed the bankruptcy court’s ruling and the Court of Appeals for the Sixth Circuit affirmed the district court’s decision. In this case, setoff was permissible because the debtor’s status as a debtor in possession had expired upon confirmation of the plan, and, thus, there was no mutuality problem. Further,because the IRS had not been paid its pro rata share of the monies that were distributed to all unsecured claims, allowing setoff was necessary in order to prevent a situation where the government would be treated worse than other creditors in the same class. Gordon Sel-Way, Inc. v. United States (In re Gordon Sel-Way, Inc.), 2001 U.S. App. LEXIS 22938, – F.3 – (6th Cir. October 26, 2001) (Jones, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03

 

 

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Court of Appeals refused to equitably subordinate participation interest claims. 6th Cir. In 1982, the debtor entered into a long-term, revolving loan agreement with Creditor A, secured by a continuously perfected blanket lien on substantially all the debtor’s assets. Subsequently, Creditors B and C entered into subordinated participation agreements that provided for an extension of funds to allow Creditor A to fund additional borrowings by the debtor. In 1988, the debtor formally asked Creditor D to guarantee a proposed $4 million loan from a separate lender. That proposed loan was characterized as a bridge loan. Creditor D later stated that it was never informed by the debtor that the loans were secured by senior security interests in favor of Creditor A. Creditor B extended the loan, and the debtor granted a security interest in machinery and equipment, second in priority only to Creditor A’s lien. The participation interests of Creditors B and C were disclosed in general terms in the debtor’s audited financial statements. In 1996, the debtor filed a chapter 11 petition, which was later converted to chapter 7. In 1997, Creditor D filed a motion for adequate protection, asserting that it had a security interest in property of the debtor that was second in priority to Creditor A’s security interest, but ahead of the claims of Creditors B and C. The bankruptcy court treated the motion as an adversary proceeding, and the parties filed cross-motions for summary judgment. The court granted summary judgment to Creditors B and C, rejecting Creditor D’s contention that the B and C claims must be equitably subordinated to Creditor D’s claim. Later, the court found that the participation agreements were valid. The district court affirmed, and this appeal followed. Creditor D argued that equitable subordination was mandated because (1) the subordination agreements were essentially 'secret liens' that were concealed from Creditor D; (2) Creditors B and C engaged in inequitable conduct by not putting Creditor D on notice of their claim to share Creditor A’s senior lien position; and (3) the debtor was undercapitalized at the time the subordination agreements were made. The Court of Appeals for the Sixth Circuit affirmed, holding that Creditor D had failed to meet the requirements of equitable subordination pursuant to section 510(c). Specifically, (1) the assertion regarding bridge loans was baseless, since there was no evidence that Creditors B and C used power to control in such a way that they engaged in inequitable conduct, particularly in that the subordination agreements were valid; (2) the notice argument was insufficient, since the loans were discussed in the financial statements within the context of Creditor A’s credit facility; and (3) undercapitalization alone was not adequate to justify subordination of insider claims, which required some additional showing of inequitable conduct.Bayer Corp. v. Mascotech, Inc. (In re Autostyle Plastics, Inc.), 2001 U.S. App. LEXIS 22602, – F.3d. – (6th Cir. October 22, 2001) (Boggs, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.05[1][a]

 

 

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7th. Cir.

Bank was entitled to setoff against funds in joint account. Bankr. S.D. Ill. The married debtors opened a deposit account in joint tenancy, with the right of survivorship, at the creditor bank. The debtor wife was the chief executive officer of a corporation, which executed a promissory note payable to the creditor in the principal sum of $120,000. The codebtor personally guaranteed payment of the note, which matured in 1999, and remained unpaid. In 2000, the debtors deposited the sum of $15,400 in the joint account and shortly thereafter, the creditor set off deposit account funds of $14,852.18 against the unpaid balance of the note. After the debtors filed their chapter 7 petition, the trustee commenced this adversary proceeding to recover the sum of $7,426.09, representing the debtor husband’s share of the funds. The trustee argued that the account documents did not contractually authorize the creditor to set off funds belonging to the debtor husband, and that state (Illinois) law created only a presumption that each of the owners of a joint account could be treated as the absolute owner of all funds, which presumption could be rebutted by proof that a portion of the funds was owned individually. The bankruptcy court examined the deposit agreement and determined that it unequivocally granted the creditor the right to set off the debtor wife’s obligation under the guaranty against any funds she had at the bank, including funds in a joint account. The court then held that extrinsic evidence of the debtor husband’s ownership of funds was of no bearing, because the creditor was contractually entitled to exercise its right to setoff. Mottaz v. Union Planters Bank, N.A. (In re Dame), 2001 Bankr. LEXIS 1347, 268 B.R. 529 (Bankr. S.D. Ill. October 12, 2001) (Meyers, B.J.).

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

 

 

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Denial of plan confirmation was upheld on appeal. W.D. Wis. The chapter 13 debtor appealed the order of the bankruptcy court denying confirmation of his proposed plan and dismissing his petition. Under the debtor’s plan, his general unsecured nondischargeable claim for child support assigned to a governmental entity was to be paid before the other unsecured claims. The debtor argued that such discrimination between classes of claims was not unfair, but rather promoted the public policies of encouraging the payment of child support obligations and giving him a fresh start. The district court affirmed, holding that the bankruptcy court did not err when it concluded that the assigned child support obligation could not be classified more favorably than other general unsecured claims. The court noted a split of authority on the issue and followed the line of cases that focused on the disparate treatment received by unsecured claimants not in the favored class.Crawford v. Chatterton (In re Crawford), 2001 U.S. Dist. LEXIS 17473, 268 B.R. 832 (W.D. Wis. July 27, 2001) (Crabb, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05

 

 

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8th. Cir.

Debtor could not change status of tax claim from priority to general unsecured claim absent clear notice to the IRS. Bankr. D. Minn. The debtor filed a chapter 13 petition, and the IRS was scheduled as a creditor in the case. In the debtor’s plan of debt adjustment, the debtor typed language stating, in part, that 'notwithstanding a creditor’s proof of claim... the classification of tax debts... [are classified] as unsecured... and confirmation of the plan will be considered a determination of proper classification.' The IRS filed several proofs of claim asserting priority status, but the IRS did not object to the debtor’s plan. The debtor’s plan was confirmed, and the debtor made payments as called for under the plan. After the end of the plan term, the trustee filed a motion to dismiss the debtor’s case without discharge because, while the debtor had paid the 'raw-dollar amount' contemplated by the debtor’s plan, the debtor had failed to pay the trustee an amount sufficient to satisfy all allowed priority claims in full, and the maximum term of the debtor’s plan had expired under statute. At the hearing on the trustee’s motion, the debtor indicated that he would file an adversary proceeding against the IRS, seeing declaratory relief regarding the IRS’s claim. The court noted that the debtor had submitted his plan on the standard form mandated by local bankruptcy rules, and the prefatory language on the form clearly preserved the process of formal allowance of claims as the means by which a priority creditor’s actual distribution rights are fixed. The court also found that the IRS’s right to the status of a priority claim and the total amount it was entitled to receive were established by that process. Further, the court found that, had the debtor desired to change the IRS’s claim from priority status to unsecured status, the simple requirements of due process required a clear notice to the IRS. The court then ruled that (1) the IRS’s claim was properly treated as a priority claim, (2) confirmation of the debtor’s plan did not result in the IRS’s claim being transformed to a general unsecured claim, and (3) the debtor was not entitled to discharge under chapter 13 until he paid the trustee sufficient funds to pay the allowed IRS claim in full.De Jesus v. United States (In re De Jesus), 2001 Bankr. LEXIS 1337, 268 B.R. 185 (Bankr. D. Minn. September 28, 2001) (Kishel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10

 

 

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9th. Cir.

District court vacated bankruptcy court order that confirmed debtor’s plan and excused her from proving that plan classification favoring her mother did not discriminate unfairly. B.A.P. 9th Cir. The chapter 13 trustee appealed a bankruptcy court order that confirmed the debtor’s plan and excused her from proving that a plan classification favoring her mother over other creditors did not discriminate unfairly. The debt arose, apparently, from the debtor’s use of her mother’s personal credit cards. The bankruptcy court held that because of the 'however' clause contained in section 1322(b)(1), which allows a debtor to treat claims for consumer debt with a coobligor differently than other unsecured claims, the ban on unfair discrimination contained in section 1322(b)(1) did not apply. The B.A.P. for the Ninth Circuit vacated the bankruptcy court’s decision and remanded the matter for further proceedings. The court held that the 'however' clause did not apply in this case, because there was no individual who was liable on the relevant debt with the debtor within the meaning of section 1322(b)(1); thus, the bankruptcy court incorrectly premised confirmation on a hypothetical question. The court explained that the 'liable with' requirement of section 1322(b)(1) means that both the debtor and the co-obligor must be liable to some other creditor. In this case, absent evidence that the credit card issuers were parties to any arrangement between the debtor and her mother regarding the use of the mother’s credit cards, the debtor’s mother did not qualify as an individual who was 'liable on the debt with the debtor' (citing Collier on Bankruptcy 15th Ed. Revised).Meyer v. Hill (In re Hill), 2001 Bankr. LEXIS 1323, 268 B.R. 548 (B.A.P. 9th Cir. September 28, 2001) (Klein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05

 

 

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10th. Cir.

Application of section 510(b) subordination hinged on whether issuer of note was the debtor’s affiliate. Bankr. N.D. Okla. The debtor was engaged in the business of purchasing defaulted consumer loans and receivables, and then attempting to collect them. In 1998, the debtor and creditor entered an agreement whereby the debtor would effectuate the transfer of loan packages to a master business trust, which would issue trust certificates. The creditor would receive a promissory note from one of the certificate holders, in consideration for extending a loan whose proceeds would be redirected to the debtor. The note was to be repaid with proceeds from collections by the debtor on the loans contained in the master trust. The creditor entered the note purchase agreement, after performing a due diligence investigation prior to committing to the proposed agreement, during which the debtor made a number of false or misleading statements to explain its financial status, principally by failing to disclose that it had been relying on bulk sales of loans to an affiliated company at inflated prices to meet its collection goals. Accordingly, the master trust issued trust certificates to a series trust, which in turn issued a series note to the creditor, who transferred $189 million to the debtor. After the debtor filed its chapter 11 petition, the creditor filed an adversary proceeding, arguing that certain funds held by the debtor had been impressed with a constructive or resulting trust in the creditor’s favor and that, consequently, such funds were not property of the estate and were, therefore, within the creditor’s reach. The debtor filed a motion to dismiss, arguing that the creditor’s claim for a constructive trust was essentially a claim for the rescission of the sale of a security and therefore conflicted with section 510(b), which mandated that such rescission claims must be subordinated to other claims. The creditor countered with the assertion that the funds were not estate property because the note’s issuer, the series trust, was not an affiliate of the debtor. The bankruptcy court held that the series note was a security encompassed by the language of section 510(b), but declined to rule whether the creditor’s claim fell within the parameters of subordination as required by that provision. The court found that it could not yet determine as a matter of law whether the series note was a security of the debtor or a security of an affiliate of the debtor. The court concluded that, because the creditor could present a set of facts that would exclude it from the reach of section 510(b) if the issuer of the series note was not an affiliate of the debtor, the adversary complaint could not be dismissed (citing Collier on Bankruptcy 15th Ed. Revised). NationsBank, N.A. v. Commercial Fin. Servs. (In re Commercial Fin. Servs.), 2001 Bankr. LEXIS 1342, 268 B.R. 579 (Bankr. N.D. Okla. October 15, 2001) (Rasure, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.04

 

 

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Sanctions warranted where debtors primary motive in filing multiple chapter 13 petitions was to stop the bank’s foreclosure sales rather than participate in debt adjustment. Bankr. D. Kan. On the day before the bank was to foreclose against the debtor’s residence, the debtor filed an individual chapter 13 petition, automatically staying the sale. When the debtor’s petition was dismissed, the debtor filed a second chapter 13 petition, stopping a second foreclosure sale. When that petition was dismissed, the debtor’s husband filed his individual petition, stopping a third sale. At a hearing on the bank’s motion for relief from the stay in the third case, the court sua sponte ordered the debtor, his wife and counsel to show cause why sanctions should not be imposed pursuant to Rule 9011. At the show cause hearing, where the debtors and counsel did not appear, the court found that the debtors did not evidence an intent to comply with the rules and procedures of chapter 13 or to complete a plan of debt adjustment. The court also found that their primary motive from the outset was to stop the bank’s foreclosure sales by filing chapter 13 petitions. The court further found that counsel for the debtors failed to show cause why his conduct in filing and participating in the debtors’ multiple filings did not constitute an abuse of the bankruptcy process. After finding that the conduct of the debtors and their counsel constituted an abuse of the bankruptcy system, the court imposed sanctions against the debtors to reimburse the bank for its attorney’s fees, publication costs and other expenses. The court also imposed sanctions against the debtors’ counsel for its participation in the debtors’ abuses.In re Copeland, 2001 Bankr. LEXIS 1344, 268 B.R. 273 (Bankr. D. Kan. June 14, 2001) (Flannagan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9011.04[8], 06[2], 08

 

 

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11th. Cir.

Stay was lifted to permit regulatory proceedings to commence. Bankr. M.D. Fla. After the bankruptcy court determined that the chapter 13 debtor had committed actual fraud against the creditor, the creditor moved for relief from the automatic stay to initiate a complaint with the state (Florida) real estate commission. The creditor intended to assert a claim against the debtor, stating that as his company’s real estate broker, she committed fraud resulting in a loss of funds. The creditor further sought to recover a portion of his monetary damages from the state real estate recovery fund, which had been established to reimburse parties defrauded by real estate brokers. The bankruptcy court granted the motion, holding that the creditor demonstrated sufficient cause to justify modification of the automatic stay to allow the filing of a claim before the state regulatory commission. The creditor was entitled to pursue recovery from the fund, and the public deserved protection from the commission’s oversight. The court further noted that in the event the commission revoked or suspended the debtor’s license, she would likely be unable to propose a feasible chapter 13 plan.White v. Weatherford (In re Abrass), 2001 Bankr. LEXIS 1361, 268 B.R. 665 (Bankr. M.D. Fla. September 28, 2001) (Jennemann, B.J.).

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

 

 

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Debtors could not exempt assets that they failed to disclose in initial schedules. Bankr. M.D. Fla. In January 1999, the debtors, who were married, filed a chapter 7 petition, but failed to disclose various financial accounts whose value was approximately $800,000. In addition, the debtors listed their combined 1998 income as $45,840, but it developed that their income for the four years prepetition was over $2.6 million. It was not until September 2000 that the debtors filed amended schedules disclosing the financial accounts, all of which the debtors designated as exempt. The trustee objected to the claims of exemption, arguing that the debtors were not entitled to exempt the belatedly-scheduled accounts because they deliberately failed to disclose them until 18 months after the original schedules were filed. The trustee asserted that the exemptions were claimed in bad faith and that, pursuant to section 522(g), the debtors were not entitled to exempt recovered property. One debtor explained the omission by stating that the original schedules were signed in blank, with the required information to be entered by their attorneys afterward, and that access to necessary information was frustrated by the FBI’s investigation of one debtor’s medical practice. The trustee also sought denial of the debtors’ discharge pursuant to various subsections of section 727(a), and sought to recover the debtors’ $50,000 wedding gift to their daughter. The bankruptcy court, noting the omission of property in the original schedules and the failure to disclose transfers of estate property worth $300,000, termed the debtors’ pattern of behavior a 'textbook illustration' of when discharge should be denied. The court went on to examine the trustee’s section 522(g) arguments and held that the provision did not apply because the trustee did not actually bring any property into the estate that was not already in the debtors’ possession. But the court followed Eleventh Circuit precedent and determined that the debtors could not exempt property omitted from their initial schedules, because it was clear that the debtors intended to hide assets from the reach of creditors. The court concluded that if the only penalty imposed on the debtors was the requirement to amend schedules once the omissions were detected, dishonesty would be too attractive. The court also found that the trustee was entitled to recover the wedding gift as a fraudulent conveyance and that the debtors were entitled to retain an exempt annuity account because it was listed in the initial schedules.Henkel v. Green (In re Green), 2001 Bankr. LEXIS 1362, 268 B.R. 628 (Bankr. M.D. Fla. July 10, 2001) (Jennemann, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.12[1]

 

 

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Attorney’s fees were recoverable in nondischargeability action based on willful and malicious injury. Bankr. M.D. Fla. The debtor commenced an action in state (Florida) court against the creditor, her insurance carrier, which had denied the debtor’s claim for a theft loss of a laptop computer. The basis for the denial was that the debtor had (1) intentionally concealed and misrepresented material facts in the investigation of the claim and (2) made false statements or engaged in fraudulent conduct during the investigation. The jury returned a verdict for the creditor, based on both of the creditor’s allegations. Specifically, the jury found that the debtor had made the claim in an inflated amount and that certain supporting documents were either fabricated or materially misleading. Thereafter, the creditor filed a motion for attorney’s fees and costs of approximately $57,000. After the debtor filed a chapter 7 petition, the creditor filed a motion for summary judgment, seeking a determination that the award of attorney’s fees and costs was nondischargeable pursuant to section 523(a)(6). Both parties stipulated that the state court judgment should be given collateral estoppel effect. The bankruptcy court held, as a threshold matter, that the debt resulted from the debtor’s intentional misrepresentation, which was intended to cause injury to the creditor by the prosecution of a false claim. The court went on to find that because the actions of the debtor were willful and malicious, the attorney’s fees and costs were nondischargeable. USAA Cas. Ins. Co. v. Auffant (In re Auffant), 2001 Bankr. LEXIS 1321, 268 B.R. 689 (Bankr. M.D. Fla. October 16, 2001) (Williamson, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

 

 

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