Collier Bankruptcy Case Update December-17-01

Collier Bankruptcy Case Update December-17-01

 


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 17, 2001

  • 1st Cir.

    § 549(a) Law firm cannot be paid with property of the estate for representing chapter 7 debtor in adversary proceeding.
    Erricola v. Thomas, Utell, Van De Water & Raiche, PA (In re Gaudette)
    (Bankr. D.N.H.)

    § 704(1) Trustee’s motion for authority to make interim distribution granted.
    In re Bank of New Eng. Corp.
    (Bankr. D. Mass.)

    Rule 2002(b) Attorney’s failure to certify notice to parties was breach of duty.
    Michels v. Sheridan
    (Bankr. D.N.H.)


    2d Cir.

    § 365(c) Merger agreement was assumable.
    In re Teligent, Inc.
    (Bankr. S.D.N.Y.)

    § 1104(a) Refusal to appoint trustee was upheld on appeal.
    Schuster v. Dragone (In re Dragone)
    (D. Conn.)

    § 1112(b) Court dismissed debtor’s second chapter 11 filing for cause but did not find 'bad faith' where debtor’s circumstances had changed but were still foreseeable.
    In re AMC Realty Corp.
    (Bankr. S.D.N.Y.)


    4th Cir.

    28 U.S.C. § 1334 Adversary proceeding against IRS was dismissed.
    Medlin v. Commissioner of Internal Revenue Serv. and Bureau of Prisons (In re Medlin)
    (Bankr. E.D.N.C.)


    5th Cir.

    § 365(c) Trustee could assume and assign exclusive license.
    Murray v. Franke-Misal Techs. Group, L.L.C. (In re Supernatural Foods, L.L.C.)
    (Bankr. M.D. La.)


    6th Cir.

    § 503(b)(1)(B) Court of Appeals for the Sixth Circuit allowed real estate taxes as administrative expense.
    City of White Plains v. A & S Galleria Real Estate, Inc. (In re Federated Dep’t Stores, Inc.)
    (6th Cir.)

    § 550 Recovery remedy was inapplicable.
    Suhar v. IMC Mortg. Co. (In re Burns)
    (B.A.P. 6th Cir.)

    28 U.S.C. § 158(d) Court of Appeals for the Sixth Circuit affirmed denial of motion for fees and costs following dismissal of involuntary case.
    DBH Ltd., Inc. v. Barrons (In re DBH Ltd., Inc.) (6th Cir.)


    7th Cir.

    § 547(b) State court consent order that provided for appointment of receiver could not be avoided as preference.
    Headline Promotions, Inc. v. Trupiano (In re Headline Promotions, Inc.)
    (Bankr. N.D. Ill.)


    8th Cir.

    § 547 Expert’s valuation supported court’s finding of no fraudulent or preferential transfer.
    Dullea Land Co. v. Ideal Ag Corp. (In re Dullea Land Co.)
    (B.A.P. 8th Cir.)

    § 553(a) Section 522(c) did not prevent United States agencies from exercising right of setoff against exempt property.
    In re Allen
    (Bankr. N.D. Iowa)

    § 706(b) Court declined to review for substantial abuse.
    In re Ryan
    (Bankr. N.D. Iowa)


    9th Cir.

    § 522(b)(2)(A) Debtor could not exempt IRA account acquired pursuant to divorce decree.
    Anderson v. Seaver (In re Anderson)
    (B.A.P. 8th Cir.)

    § 523(a)(3) Laches doctrine was not a proper defense against a creditor whose debt was not scheduled.
    Selinger v. Beaty (In re Beaty)
    (B.A.P. 9th Cir.)

    § 523(a)(4) Bankruptcy court erred in holding that corporate officer had fiduciary status.
    Cantrell v. Cal-Micro, Inc. (In re Cantrell)
    (B.A.P. 9th Cir.)

    § 524(c) Reaffirmation agreement had no preclusive effect.
    Rein v. Providian Fin. Corp.
    (9th Cir.)

    28 U.S.C. § 158(d) Debtor judicially estopped from pursuing claims against insurer in federal district court because of failure to disclose claims in bankruptcy schedules.
    Hamilton v. State Farm Fire & Cas. Co.
    (9th Cir.)


    10th Cir.

    § 363(b)(1) Debtor could not use collateral, oral agreements to contravene terms of court-approved contract of sale.
    Bass v. Parsons (In re Parsons)
    (D. Colo.)


    11th Cir.

    § 363 Sale to highest bidder was approved.
    In re Parkstone Med. Info. Sys.
    (Bankr. S.D. Fla.)

    26 U.S.C. § 6321 Tax liens attached to debtors’ equitable interest in property.
    In re Ready
    (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st Cir.

Law firm cannot be paid with property of the estate for representing chapter 7 debtor in adversary proceeding. Bankr. D.N.H. A law firm represented the chapter 7 debtor in an adversary proceeding to determine whether assets from a certain pension plan and trust (the 'trust') were exempt and not part of the debtor’s chapter 7 bankruptcy proceeding. After trial, but before the court rendered its decision, the law firm withdrew from representation, and attorneys’ fees were paid from the assets of the trust without authorization from the bankruptcy court. Following the court’s decision that the trust was part of the debtor’s estate, the trustee brought an action to recover the attorneys’ fees pursuant to 11 U.S.C. § 549(a)(2)(B). The law firm argued that it was representing the trust and not the debtor, and that the fees were paid prior to the court’s decision that the trust was property of the estate. While professionals may be awarded reasonable compensation for actual, necessary services and expenses, the bankruptcy courts are split as to whether counsel for a chapter 7 debtor may be awarded compensation from property of the estate, since the 1994 amendments to section 330 of the Code eliminated the term 'debtor’s attorney' from the list of those who may receive compensation from the estate. However, even if attorneys’ fees are to be awarded from estate property, services provided by the attorney must actually benefit the estate. After finding that there is no benefit to the estate where an attorney represents a chapter 7 debtor in an adversary proceeding, the court ruled that the trustee was entitled to recover funds paid from property of the estate which were paid to the debtor’s law firm. Erricola v. Thomas, Utell, Van De Water & Raiche, PA (In re Gaudette), 2001 Bankr. LEXIS 1385, – B.R. – (Bankr. D.N.H. Sept. 26, 2001) (Vaughn, B.R.).

Collier on Bankruptcy, 15th Ed. Revised 5:549.03[1]

ABI Members, click here to get the full opinion.

Trustee’s motion for authority to make interim distribution granted. Bankr. D. Mass. The chapter 7 trustee moved for authority to make a fourth interim distribution, in the amount of $ 11,000,000, to creditors of the debtor’s estate. With respect to all 'senior indebtedness,' the trustee had paid to all allowed claims for principal and prepetition interest, plus postpetition fees and expenses incurred through the date of the last distribution. The trustee created a reserve to cover any future fees and legal expenses, and proposed to make the next interim distribution to junior debt. Senior indenture trustees objected to the trustee’s motion, arguing that the distribution should be first applied to postpetition interest due on senior debt. The senior indenture trustees based their argument on language contained in the junior indentures that provided for prior payment, 'in full,' of senior indentures before any distribution could be made on junior indentures. The bankruptcy court granted the trustee’s motion and allowed the proposed distribution. The court rejected the senior indenture trustees’ claims that, based upon nonbankruptcy New York precedents, the term 'paid in full' would require payment of interest until the date of the payment of all principal, and that the words 'due or to become due' satisfied the New York law requirement for specific language. The court noted the New York Court of Appeals’ determination, on a question certified by the United States Court of Appeals for the Eleventh Circuit in Chemical Bank v. First Trust of New York (In re Southeast Banking Corp.), that, in accordance with the Rule of Explicitness, New York law requires specific language in a subordination agreement to alert a junior creditor to its assumption of the risk and burden of allowing the payment of a senior creditor’s postpetition interest demand.In re Bank of New Eng. Corp., 2001 Bankr. LEXIS 1434, 269 B.R. 82 (Bankr. D. Mass. Nov. 1, 2001) (Hillman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:704.02

ABI Members, click here to get the full opinion.

Attorney’s failure to certify notice to parties was breach of duty. Bankr. D.N.H. Special counsel, appointed to investigate possible violations of rules of professional conduct by the attorney for numerous debtors, filed a complaint requesting that disciplinary action be taken against the attorney. The debtors’ attorney had, among other things, failed to file a certificate of service for chapter 13 plans seventeen times in sixteen cases. While the attorney claimed that he had properly served the plans in each of the cases, he admitted that no certificates of service showing that the plans had been properly served were filed. The bankruptcy court suspended the attorney from practice before the bankruptcy courts for one year, holding that the attorney’s failure to file certificates of service breached his duty to his clients and the court. The court noted that without a certificate of service on file, there was no proof that creditors in the cases ever received proper notice of the plans. Enormous harm could result should a creditor come into court claiming that it had not received proper notice of the plan and was, therefore, not bound by the confirmation order.Michels v. Sheridan, 2001 Bankr. LEXIS 1383, – B.R. – (Bankr. D.N.H. Oct. 12, 2001) (Deasy, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:2002.03

ABI Members, click here to get the full opinion.

2nd Cir.

Merger agreement was assumable. Bankr. S.D.N.Y. Shareholders of an independent corporation filed a motion for a declaration that a merger agreement could not be assumed. The shareholders and the chapter 11 debtor had entered into a prepetition agreement, whereby the corporation would be merged into a subsidiary of the debtor. Pursuant to the agreement, the debtor was required to pay in excess of 50 percent of the total merger consideration in its common stock instead of cash. The shareholders contended that the debtor could not assume the agreement because it was a contract to 'issue a security of the debtor' within the meaning of section 365(c)(2). The bankruptcy court denied the shareholders’ motion, holding that because the merger agreement was not a contract 'to issue a security of the debtor,' the debtor was not prevented from assuming it. The court considered the legislative history of the Code and concluded that a contract 'to issue a security of the debtor' referred to a prepetition agreement obligating the nondebtor to advance new cash or credit in exchange for the debtor’s note or its stock. Section 365(c)(2) did not, however, apply to every contract involving an extension of credit, or, by analogy, the issuance of a security (citing Collier on Bankruptcy, 15th Ed. Revised).In re Teligent, Inc., 2001 Bankr. LEXIS 1372, 268 B.R. 723 (Bankr. S.D.N.Y. Oct. 29, 2001) (Bernstein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.06[2]

ABI Members, click here to get the full opinion.

Refusal to appoint trustee was upheld on appeal. D. Conn. The creditor appealed an order of the bankruptcy court, which denied his motion for appointment of a chapter 11 trustee for the debtors. Although the bankruptcy court had appointed an interim trustee to operate the affairs of the debtors while the involuntary chapter 7 petition against them was pending, the conversion of the case to chapter 11 terminated the appointment of the interim trustee. The bankruptcy court denied the appointment of a chapter 11 trustee, determining that the creditor had not carried his burden of proving fraud or dishonesty to such a degree to warrant the appointment. An examiner was instead appointed to investigate and monitor the debtors’ affairs and to ensure compliance with the Code. The district court affirmed, holding that the decision to not appoint a trustee in the chapter 11 case was not an abuse of discretion. The bankruptcy court was afforded wide discretion to determine whether an appointment of a trustee was in the best interests of creditors.Schuster v. Dragone (In re Dragone), 2001 U.S. Dist. LEXIS 17356, 266 B.R. 268 (D. Conn. Aug. 17, 2001) (Goettel, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1104.02

ABI Members, click here to get the full opinion.

Court dismissed debtor’s second chapter 11 filing for cause but did not find 'bad faith' where debtor’s circumstances had changed but were still foreseeable. Bankr. S.D.N.Y. The debtor was a single asset real estate debtor that was formed solely to hold title and lease the property to one tenant. The debtor’s property was secured by a mortgage held by the creditor. After the debtor defaulted, the creditor started a foreclosure action against the debtor and sought to have a receiver appointed. The debtor then filed a chapter 11 petition and brought an adversary proceeding against the creditor. The parties agreed to a mediation of the adversary proceeding, which resulted in an Ordered Stipulation that provided for modification and extension of the mortgage upon certain new terms and conditions. The stipulation also called for the debtor to immediately execute a deed to the property if the debtor failed to comply with the terms of the stipulation. When the debtor failed to make the necessary payments, the creditor filed a motion to reopen the adversary proceeding and enter default judgment to implement the Ordered Stipulation. On the day before the motion was heard, the debtor filed a second chapter 11 case. The creditor then filed a motion to dismiss or for relief from stay, arguing that the case was filed in bad faith. The debtor argued that the court should not dismiss the case because the debtor now had the potential, by reason of a proposed sale of the property, to pay the creditor and make significant payments to unsecured creditors. The debtor further argued that honoring the Ordered Stipulation would result in a windfall to the creditor and that 'exceptional circumstances' existed to warrant relief pursuant to Fed. R. Civ. P. 60(b). At the hearing, the court found that the settlement anticipated the possibility that the debtor might fail to pay and that such a condition was expressly provided for in the settlement. Further, it was foreseeable that the property might be worth more than the mortgage principle. Thus, the court rejected the debtor’s request for Rule 60(b) relief because the debtor failed to prove extraordinary circumstances or extreme and undue hardship warranting Rule 60(b) relief. The court then addressed the creditor’s motion and reviewed factors indicative of a 'bad faith' filing, including whether: (1) the debtor has only one asset, (2) the debtor has few unsecured creditors whose claims are small compared to those of secured creditors, (3) the debtor’s one asset is the subject of a foreclosure action, (4) the case is, in essence, a two-party dispute related to a foreclosure action, (5) the timing of the filing indicates an intent to delay or frustrate a secured creditor’s enforcement of its rights, (6) the debtor has little or no cash flow, (7) the debtor cannot meet current expenses, (8) debtor has no employees, and (9) the case is a repeat filing and the circumstances behind the second filing. Although most of the 'bad faith' factors were present, the court declined to find 'bad faith' because of the changed (but not unanticipated) circumstances, but concluded that dismissal was warranted because there were no material assets to distribute to creditors. In re AMC Realty Corp., 2001 Bankr. LEXIS 1380, – B.R. – (Bankr. S.D.N.Y. Oct. 23, 2001) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1112.01

ABI Members, click here to get the full opinion.

4th Cir.

Adversary proceeding against IRS was dismissed. Bankr. E.D.N.C. After receiving his discharge, the chapter 7 debtor filed an adversary proceeding, asserting that the IRS violated the discharge injunction through the entry and enforcement of a restitution order. The debtor had been ordered by the district court to pay criminal restitution to the IRS as the result of his conviction on tax-related charges. The bankruptcy court dismissed the adversary proceeding, sua sponte holding that the court lacked subject matter jurisdiction over the complaint. The debtor’s cause of action directly challenged the postpetition criminal proceeding and the matter did not affect the bankruptcy case.Medlin v. Commissioner of Internal Revenue Serv. and Bureau of Prisons (In re Medlin), 2001 Bankr. LEXIS 1396, – B.R. – (Bankr. E.D.N.C. Oct. 4, 2001) (Leonard, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:3.01, .02, .03

ABI Members, click here to get the full opinion.

5th Cir.

Trustee could assume and assign exclusive license. Bankr. M.D. La. An inventor assigned his interest in patents to a company. The company had difficulty in commercializing the processes, however, and defaulted on the payments required under the contract. Accordingly, on December 11, 2000, the inventor sent letters via facsimile transmission and Federal Express detailing the defaults. It was not until January 31, 2001, however, that the inventor sent a letter certified mail, as required to invoke the default clause in the contract. The defaults were not cured and, on March 5, 2001, an involuntary chapter 7 petition was filed against the debtor. The petitioning creditors filed an adversary proceeding to obtain a declaratory judgment that the license agreement had not terminated prepetition and, after the order for relief was entered, the trustee was substituted as plaintiff. The inventor argued that the license could not be assigned because the agreement restricted assignment. Upon cross motions for summary judgment, the bankruptcy court held that because generally applicable law did not prohibit assignment of the agreement, the trustee could assume and assign the contract, despite a contract provision to the contrary. Although the agreement contained a restriction on transfer, the agreement also permitted assignment incident to the liquidation of all of the company’s assets. Since the case was a case under chapter 7, under which all of the assets of the company would be liquidated, consent to assign the exclusive license to the chapter 7 trustee existed. Murray v. Franke-Misal Techs. Group, L.L.C. (In re Supernatural Foods, L.L.C.), 2001 Bankr. LEXIS 1427, 268 B.R. 759 (Bankr. M.D. La. Oct. 17, 2001) (Phillips, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.06[1]

ABI Members, click here to get the full opinion.

6th Cir.

Court of Appeals for the Sixth Circuit allowed real estate taxes as administrative expense. 6th Cir. The debtor filed a chapter 11 petition on January 15, 1990. The creditor filed a proof of claim for certain municipal taxes and water charges but did not file a claim for the city and school taxes at issue. In 1997, the creditor filed a motion to recover those taxes as an administrative expense pursuant to section 503(b)(1)(B)(i), arguing that the taxes were not 'assessed' until after the petition was filed. The bankruptcy court held that the creditor assessed the taxes prepetition and, as such, were not allowable as an administrative expense. The district court did not agree with the holding regarding the date of assessment but affirmed on other grounds, reasoning that a tax was assessed on the date an entity was made liable for it. The district court concluded that the debtor was liable for the tax on the tax status date of January 1, 1990, and that, consequently, such tax was a prepetition debt. The Court of Appeals for the Sixth Circuit reversed, holding that the tax was both (1) incurred by the estate, and (2) assessed by the creditor postpetition. The Court of Appeals found that the district court had erred in holding that, for the purposes of section 503(b)(1)(B)(i), the tax status date was operative in determining the date the tax was incurred because only the value and taxability of real property were established on the tax status date, but the debtor’s actual liability for the tax was not. Similarly, the tax was not assessed on the tax status date because personal liability did not occur until the taxes were levied, which occurred postpetition, thereby allowing their collection as an administrative expense.City of White Plains v. A & S Galleria Real Estate, Inc. (In re Federated Dep’t Stores, Inc.), 2001 U.S. App. LEXIS 23881, – F.3d – (6th Cir. Nov. 6, 2001) (Gwin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.07[2][b]

ABI Members, click here to get the full opinion.

Recovery remedy was inapplicable. B.A.P. 6th Cir. The assignee mortgage company appealed the bankruptcy court’s finding that the chapter 7 trustee could avoid the debtors’ improperly executed mortgage under section 544(a)(3), without giving any lien in favor of the mortgage company under section 550(e). The mortgage was avoided because it was not witnessed by two persons, as required by state (Ohio) law. The mortgage company contended that section 550(e) provided it with a lien on the residence for the amount of 'improvements' made thereon, including the debtors’ payment of existing mortgages. The B.A.P. for the Sixth Circuit affirmed, holding that section 550 was not applicable to the properly avoided mortgage. The B.A.P. noted the distinction between the avoidance powers granted to the trustee by section 544(a), and the separate liabilities and protections accorded certain transferees by section 550. Because avoidance alone was adequate to preserve the interest for the estate’s benefit, the trustee had not sought recovery of any property or its value from the mortgage company.Suhar v. IMC Mortg. Co. (In re Burns), 2001 Bankr. LEXIS 1398, 269 B.R. 20 (B.A.P. 6th Cir. Nov. 2, 2001) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:550; 5:544

ABI Members, click here to get the full opinion.

Court of Appeals for the Sixth Circuit affirmed denial of motion for fees and costs following dismissal of involuntary case. 6th Cir. The bankruptcy court dismissed the debtor’s involuntary chapter 7 case after it determined that there were fewer than three petitioning creditors and more than twelve general creditors because the prerequisites to an involuntary petition contained in section 303(b) had not been met. Thereafter, the debtor appealed a district court order that affirmed the bankruptcy court’s denial of the debtor’s motion for attorney’s fees and costs following the dismissal of the case pursuant to section 303(i)(1). The United States Court of Appeals for the Sixth Circuit affirmed. The court held that the bankruptcy court’s findings of fact were not clearly erroneous nor were conclusions of law incorrect, and the record contained ample evidence supporting the bankruptcy court’s decision to deny the debtor’s motion for attorney’s fees and costs. The court noted that its review of the bankruptcy court’s findings of fact was under the clearly erroneous standard, and that its review of the district court’s legal conclusions was de novo.DBH Ltd., Inc. v. Barrons (In re DBH Ltd., Inc.), 2001 U.S. App. LEXIS 24293, – F.3d – (6th Cir. Nov. 6, 2001).

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

ABI Members, click here to get the full opinion.

7th Cir.

State court consent order that provided for appointment of receiver could not be avoided as preference. Bankr. N.D. Ill. The sole shareholder/director/president of the chapter 11 debtor, an Illinois corporation in the business of providing sports marketing memorabilia to businesses and individuals for their promotional activities, entered into a prepetition business arrangement with an individual who operated a sports memorabilia business in Missouri. The business relationship failed after a few months, and the individual filed a state (Missouri) court action against the debtor’s sole shareholder/director/president. The state court entered a consent order in that action which provided, among other things, for the appointment of a receiver 'within 24 hours.' No receiver was appointed prior to the date of the filing of the debtor’s bankruptcy petition. The debtor filed an adversary proceeding against the individual, seeking, among other things, to have the consent order avoided as a preferential transfer. The debtor argued that the consent order was a transfer of an interest of the debtor in property because it affected the debtor’s right to have possession and control of its personal property, and transferred such possession and control to the St. Louis court through its appointed receiver. The bankruptcy court disagreed, and held that the consent order did not transfer possession, custody or control of property of the debtor’s estate. The court explained that the consent order simply stated that a receiver would be appointed within 24 hours and did not, in and of itself, constitute a direct, indirect, absolute or conditional, voluntary or involuntary disposing of, or parting with, property or with an interest in property of the debtor’s estate. Moreover, the court found no authority for the proposition that a statement contained in a court order, that states that a receiver shall be appointed constitutes a transfer of property.Headline Promotions, Inc. v. Trupiano (In re Headline Promotions, Inc.), 2001 Bankr. LEXIS 1407, – B.R. – (Bankr. N.D. Ill. Oct. 30, 2001) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03[2]

ABI Members, click here to get the full opinion.

8th Cir.

Expert’s valuation supported court’s finding of no fraudulent or preferential transfer. B.A.P. 8th Cir. After the debtors defaulted on their loans with the creditor, they entered into a restructuring agreement with the creditor and executed three new promissory notes in favor of the creditor. The notes were secured by various real estate mortgages. The debtors subsequently defaulted on the restructuring agreement and the parties entered into a settlement related to the default. The settlement called for the creditor to once again restructure the loans and extend the maturity dates of the notes. In exchange, the debtors executed three quit claim deeds and agreed that, if they defaulted in making payments, the creditor could record the deeds and reduce the debtors’ debt by a percentage of the appraised value of the land. The debtors defaulted and the creditor recorded the deeds and reduced the debtors’ outstanding debt as had been agreed. The debtors then filed three chapter 11 bankruptcy cases and commenced three adversary proceedings, alleging that the filing of the deeds and the resulting transfers were fraudulent conveyances or preferential transfers. The bankruptcy court ruled in favor of the creditor and the debtors appealed, arguing that the court clearly erred when it accepted the valuation testimony of the creditor’s expert. On appeal, the panel noted that the bankruptcy court had articulated its reasons for crediting the testimony of the creditor’s expert and discrediting the debtors’ expert. As to the debtors’ expert, the court found that the expert’s methodology was deficient, self-serving and without credibility because the debtors’ expert had used significantly lesser values in the debtors’ bankruptcy schedules. The court also considered the fact that the properties had been listed for sale but not sold at a price lower than the value determined by the debtors’ appraiser. After noting that it did not sit in judgment of the credibility or demeanor of witnesses and noting that it is not the appellate court’s role to second guess a trial court’s decision to credit the testimony of one side over the other, the B.A.P. for the Eighth Circuit affirmed the bankruptcy court’s decision that creditor had not received a fraudulent or preferential transfer of property. Dullea Land Co. v. Ideal Ag Corp. (In re Dullea Land Co.), 2001 Bankr. LEXIS 1370, 269 B.R. 33 (B.A.P. 8th Cir. Oct. 29, 2001) (Dreher, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03

ABI Members, click here to get the full opinion.

Section 522(c) did not prevent United States agencies from exercising right of setoff against exempt property. Bankr. N.D. Iowa The United States Department of Treasury seized the chapter 7 debtor’s tax refund and earned income credit pursuant to the federal intercept statute (26 U.S.C. § 6402(d)), and applied it postpetition to the debtor’s outstanding debts to the Department of Housing and Urban Development ('HUD') and the United States Department of Agriculture ('USDA'). The debtor claimed the refund and earned income credit as exempt, and moved for turnover of the refund and earned income credit. The debtor argued, among other things, that section 522(c) bars a creditor from exercising the right of setoff against a debtor’s exempt property. The bankruptcy court denied the debtor’s turnover motion, and held that section 522(c) does not prevent offset against exempt property. The court reasoned that while the debtor’s 'interest' in the tax refund is, to an extent, exempt under state (Iowa) law (Iowa Code § 627.6(9)(c)), that interest was limited by the government’s rights (citing Collier on Bankruptcy 15th Ed. Revised).In re Allen, 2001 Bankr. LEXIS 1420, 266 B.R. 713 (Bankr. N.D. Iowa Aug. 21, 2001) (Edmonds, B.J.).

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

ABI Members, click here to get the full opinion.

Court declined to review for substantial abuse. Bankr. N.D. Iowa The creditor moved to convert the debtor’s chapter 7 case to chapter 11, arguing that the debtor had the ability to pay unsecured creditors in full over 60 months. The individual debtor opposed the motion and pointed out that she did not have a business to reorganize, but only had personal earnings. The bankruptcy court held the matter in abeyance, holding that the creditor had legal standing to request conversion to chapter 11 only pursuant to section 706(b). The court determined that the creditor stated grounds for dismissal based on substantial abuse pursuant to section 707(b), and only the court sua sponte or the United States trustee could raise the issue. The creditor was provided with an opportunity to present additional evidence to support conversion under section 706(b). The court noted that, in such an analysis, it would consider whether conversion to chapter 11 was futile in light of section 1112(b), which governed reconversion from chapter 11 to chapter 7, and whether conversion promoted the purposes of chapter 11 to rehabilitate the debtor and maximize the value of her estate.In re Ryan, 2001 Bankr. LEXIS 1369, 267 B.R. 635 (Bankr. N.D. Iowa Sept. 26, 2001) (Kilburg, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:706.03

ABI Members, click here to get the full opinion.

Ten-day filing requirement for notice of appeal does not violate due process clause of 14th Amendment. 8th Cir. A group of employees and subcontractors ('appellants') of the debtor filed an adversary proceeding against a bank. The bankruptcy court ruled in favor of the bank and entered its final order. The appellants personally served a notice of appeal on the bankruptcy court a month later. Included in the notice of appeal was a 'Motion for Leave to File Notice of Appeal Out of Time.' In its motion, counsel for the appellants argued that in every other forum with which counsel was familiar, notice of time to appeal is 30 days or more and that the 'plaintiffs’ attorney must be excused for never thinking that a decision as to whether or not to appeal had to be made within such an unreasonably short period of time.' The bankruptcy court denied the appellants’ motion for leave, as did the B.A.P. for the Eighth Circuit, explaining in its order that the appeal was dismissed for lack of jurisdiction because appellants failed to timely file their notice of appeal. On review, the Eighth Circuit court held that the B.A.P. did not err in dismissing for lack of jurisdiction the appellants’ untimely appeal. The court further noted that it was not aware of, and the appellants cited no authority for, any proposition that the 10-day filing requirement in Rule 8002(a) violated the due process clause of the Fourteenth Amendment.Hamilton v. Lake Elmo Bank (In re Delta Eng’g Int’l, Inc.), 2001 U.S. App. LEXIS 23712, 270 F.3d 584 (8th Cir. Nov. 2, 2001) (McMillian, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:8004.01

ABI Members, click here to get the full opinion.

9th Cir.

Debtor could not exempt IRA account acquired pursuant to divorce decree. B.A.P. 8th Cir. Prior to their divorce, the debtor and his spouse participated in a farming operation on their land and established IRA accounts in their individual names. The contributions to the IRA accounts were made from income derived from the farming operation. In 2000, the debtor and spouse, in connection with their divorce, entered a property settlement agreement whereby the debtor was awarded a portion of one of the spouse’s IRA accounts. As of the date of the debtor’s petition filing, the funds were still in the spouse’s account. The debtor claimed an exemption of the interest in the IRA account, and the trustee objected. The bankruptcy court sustained the objection, and disallowed the claimed exemption that derived from the divorce settlement. The debtor appealed. The B.A.P. for the Eighth Circuit affirmed, holding that the debtor could not exempt the IRA because it was awarded by way of the divorce decree. The B.A.P. followed Eighth Circuit precedent, which required that assets be directly derived from the debtor’s employment in order for the employee benefits exemption to apply, and rejected the debtor’s assertion that such precedent was distinguishable because the IRA in issue involved self-employment in a family enterprise. It concluded that the debtor had no right to the account except through the divorce decree. Anderson v. Seaver (In re Anderson), 2001 Bankr. LEXIS 1406, 260 B.R. 27 (B.A.P. 8th Cir. Nov. 5, 2001) (Koger, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.02

ABI Members, click here to get the full opinion.

Laches doctrine was not a proper defense against a creditor whose debt was not scheduled. B.A.P. 9th Cir. In January 1991, the creditor filed an action in state (California) court against a corporation, alleging various claims of misconduct on the part of the codebtor. In September 1991, the debtors filed a chapter 7 petition but did not list the creditor in their schedules because they did not know of the creditor’s identity. In January 1992, the debtors received a discharge. In June 1993, the state court entered a default judgment in favor of the creditor, stating that the codebtor had injured the creditor by willfully suppressing a material fact, and that this conduct was fraudulent, willful and malicious. In August 1994, the creditor filed an adversary proceeding in bankruptcy court, seeking to revoke the debtors’ discharge. The court granted summary judgment in favor of the debtors. The creditor filed a motion for reconsideration, which was denied, and then appealed to the district court, which affirmed by an order entered in April 1997. Subsequently, the creditor filed a second complaint against the codebtor, asserting that the default judgment was nondischargeable pursuant to sections 523(a)(2), (a)(4) and (a)(6). The codebtor filed a motion to dismiss, which was granted in September 1998. The codebtor also answered the complaint, affirmatively alleging the doctrine of laches, arguing that the creditor had formal notice of the chapter 7 discharge no later than June 1993, and that the delay of nearly six years was prejudicial. The creditor filed a motion to strike the laches defense, which the court denied. The creditor now appealed, arguing that his due process rights had been violated by the court’s use of the laches doctrine. The B.A.P. for the Ninth Circuit determined that the creditor’s due process rights had not been violated because the codebtor’s answer provided sufficient basis for a laches defense, which placed the creditor on notice for pleading purposes. But the B.A.P. went on to reverse, in part, holding that the bankruptcy court erred in allowing laches to serve as an affirmative defense because Rule 4007(b) provides that a nondischargeability complaint under section 523(a)(3)(B) could be filed at any time. Because the creditor’s judgment was not scheduled, section 523(a)(3)(B) applied to his complaint, which was thereby timely filed. The B.A.P. remanded on the issue of whether the judgment satisfied the elements of collateral estoppel. Selinger v. Beaty (In re Beaty), 2001 Bankr. LEXIS 1404, 268 B.R. 839 (B.A.P. 9th Cir. July 23, 2001) (Ryan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.09

ABI Members, click here to get the full opinion.

Bankruptcy court erred in holding that corporate officer had fiduciary status. B.A.P. 9th Cir. The creditors filed a suit in state (California) court against the debtor and others as a result of a failed stock purchase transaction. The complaint alleged that the debtor, as an officer of the entity that had defaulted in payments on the agreement, had breached fiduciary duties to the creditors. In April 1996, the creditors obtained a default judgment against the debtor for an excess of $1 million in compensatory damages, and an additional award for punitive damages, costs and attorney’s fees. That judgment did not specify the causes of action on which it was based, and did not make any express findings concerning the allegations in the complaint. In 1998, the debtor moved to set aside the default judgment, alleging that he was never served personally with the summons and complaint. In response, the creditors argued that the debtor’s motion was untimely, and the motion was denied. Thereafter, the debtor filed a chapter 7 petition and the creditors filed an adversary proceeding to determine the dischargeability of the default judgment. The parties filed motions for summary judgment. The bankruptcy court held that the same issues had been decided in the state court suit and gave the creditors’ default judgment preclusive effect. The court also held that, under state law, an officer, director or controlling shareholder was the trustee of a statutory trust and thereby qualified as a fiduciary under section 523(a)(4). The debtor appealed. The B.A.P. for the Ninth Circuit reversed, holding that collateral estoppel should not have been invoked because the debtor did not have a full and fair opportunity to litigate. The debtor was not served personally and did not have knowledge of the litigation before the default judgment was entered. The B.A.P. then held that the bankruptcy court had erred in determining that the debtor was a fiduciary, reasoning that California law did not make corporate principals the trustees of express or statutory trusts, a necessary element in determining fiduciary status. Cantrell v. Cal-Micro, Inc. (In re Cantrell), 2001 Bankr. LEXIS 1411, – B.R. – (B.A.P. 9th Cir. Oct. 23, 2001) (Russell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10[1][c]

ABI Members, click here to get the full opinion.

Reaffirmation agreement had no preclusive effect. 9th Cir. The chapter 7 debtor appealed the district court’s dismissal of his complaint under Fed. R. Civ. P. 12(b)(6). The debtor, as part of a class action lawsuit seeking monetary damages, alleged that the unsecured creditor’s postpetition distribution of the reaffirmation letter constituted a violation of the automatic stay. Because the debtor was represented by counsel, the reaffirmation agreement was filed with, but not approved by, the court. The district court concluded that the debtor was precluded from relitigating the issue pursuant to the doctrine of res judicata. The Court of Appeals for the Ninth Circuit reversed, holding that the reaffirmation agreement, unaccompanied by a court order, was not a final judgment on the merits and could not be given preclusive effect. The court noted that because of its voluntary nature, the reaffirmation agreement could have no preclusive effect regarding the question of whether the debt reaffirmed would have been held to be nondischargeable if the nondischargeability issue had been litigated.Rein v. Providian Fin. Corp., 2001 U.S. App. LEXIS 23838, – F.3d – (9th Cir. June 11, 2001) (Kelleher, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.04

ABI Members, click here to get the full opinion.

Debtor judicially estopped from pursuing claims against insurer in federal district court because of failure to disclose claims in bankruptcy schedules. 9th Cir. Based on false information provided in his chapter 7 schedules and financial statements, the bankruptcy court discharged the debtor’s debts. Among the misstatements and omissions contained in the debtor’s schedules was the omission of an insurance claim and a pending lawsuit against the debtor’s insurer. The trustee moved to dismiss the debtor’s chapter 7 case, based upon bad faith, lack of truthfulness under oath and failure to cooperate. The bankruptcy court dismissed the debtor’s chapter 7 case and vacated the debtor’s discharge. Thereafter, the debtor brought a state court action against the insurer, alleging breach of the covenant of good faith and fair dealing and breach of contract. The insurer removed the action to the district court, and moved to dismiss and for summary judgment. The insurer argued, among other things, that the debtor’s claim was barred by the doctrine of judicial estoppel because he had failed to list his insurance claim and pending lawsuit against the insurer on his chapter 7 bankruptcy schedules, and the bankruptcy court discharged the debtor’s debts because of his omissions. The United States Court of Appeals for the Ninth Circuit affirmed. The court held that the debtor was judicially estopped from pursuing claims against the insurer about which he had knowledge, but did not disclose, during his bankruptcy proceedings. The court stated that, under these circumstances, the discharge of debt by the bankruptcy court was sufficient 'judicial acceptance' to provide a basis for judicial estoppel, even though the discharge was later vacated. The court cautioned that its holding did not imply that a bankruptcy court must actually discharge debts before 'judicial acceptance' can be found, and stated that a bankruptcy court may 'accept' a debtor’s assertions by relying on his nondisclosure of potential claims in many other ways.Hamilton v. State Farm Fire & Cas. Co., 2001 U.S. App. LEXIS 23875, 270 F.3d 778 (9th Cir. Nov. 5, 2001) (Brunetti, C.J.).

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

ABI Members, click here to get the full opinion.

10th Cir.

Debtor could not use collateral, oral agreements to contravene terms of court-approved contract of sale. D. Colo. The debtor was the owner of a cattle ranch. After the debtor filed a chapter 11 petition, the debtor and the trustee entered into a contract for the sale of a portion of the ranch, along with cattle, to a third party. This contract expressly conditioned the sale on the bankruptcy court’s approval, and contained a provision that no modification was valid except in writing. An addendum to the contract was also signed, which stated that the debtor’s intent was to seek dismissal of the chapter 11 petition upon full payment to creditors from sale proceeds, and that the sale contract would survive that dismissal. The addendum also designated the trustee to hold, as escrow agent, the third party’s letter of credit, the deeds to remaining properties and the proceeds of the sale. On the same day, the debtor and the third party entered into a separate, written consulting agreement, which was not referred to in the contract of sale. In December 1994, the court approved the sale contract pursuant to section 363(b)(1), but did not approve the consulting contract. In February 1995, the third party paid the purchase price to the trustee, who then distributed the sale proceeds to creditors. In December 1995, the court granted the trustee’s motion to dismiss, but retained jurisdiction over the case to enforce previous orders approving the sale of real estate and to implement and resolve disputes regarding executory contracts previously approved by the court. When the debtor did not deliver his 1995 tax return to the trustee, the trustee released the letter of credit to the issuing bank, pursuant to the escrow agreement. On the trustee’s motion, the court opened the chapter 11 case to allow the trustee to file an interpleader action, which sought, among other relief, an order that would permit him to deposit the escrow funds into court and declare the addendum null and void. In 1996, the debtor filed a complaint against the third party in state (Colorado) court, which was then removed to the bankruptcy court. In this action, the debtor sought a declaration that the contract and addendum were void but that certain enforceable, oral promises were included in its terms. The debtor also moved to dismiss the interpleader action, asserting that the court did not have jurisdiction to determine entitlement to the escrowed funds. The court denied that motion, and subsequently, the debtor, the trustee and the third party filed motions for summary judgment. The debtor argued that (1) he had the right to redeem the portion of the ranch under the contract and addendum, (2) he had a life estate in a specific parcel of land based on a side agreement with the third party, and (3) the third party breached the consulting agreement. The court found that it lacked jurisdiction to determine the enforceability of side agreements because its order of dismissal specifically limited its retention of jurisdiction, and that the plain language of the contract and addendum did not provide the debtor with an option to redeem. The debtor appealed. The district court affirmed, holding that the bankruptcy court was correct in concluding that the terms of a court-approved asset sale under section 363(b)(1) were binding on the parties and could not be modified by extrajudicial agreements to the contrary. The district court reasoned that state contract law precluded the debtor from introducing evidence of oral promises and other collateral agreements. The court also determined that the award of attorney’s fees and costs to the trustee was proper because there was sufficient basis in the record to determine the necessity and reasonableness of the trustee’s services. The court further held that the debtor failed to present any valid legal or factual basis for challenging the bankruptcy court’s retention of jurisdiction over disputes arising under the contract and addendum.Bass v. Parsons (In re Parsons), 2001 U.S. Dist. LEXIS 16336, – B.R. – (D. Colo. Sept. 14, 2001) (Nottingham, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.02

ABI Members, click here to get the full opinion.

11th Cir.

Sale to highest bidder was approved. Bankr. S.D. Fla. The chapter 11 debtor filed a motion for an order authorizing the sale of substantially all of its assets free and clear of liens, claims and encumbrances. The assets included licensed software, hardware, contracts with customers and suppliers, intellectual property contracts and accounts receivable owed to the debtor. The debtor negotiated an agreement with a stalking horse bidder for the purchase of the assets, which permitted the debtor to solicit higher and better bids for the assets. The purchaser subsequently submitted a higher competitive bid to the debtor in accordance with established bidding procedures. The purchaser agreed to deliver to the debtor cash at closing and shares of stock of its parent company, as well as assume certain obligations of the debtor. The bankruptcy court granted the motion, holding that the consideration offered by the purchaser for the assets was fair and reasonable, and the best available to the estate under the circumstances. The court further concluded that the asset purchase agreement was entered into at arm’s length and in good faith.In re Parkstone Med. Info. Sys., 2001 Bankr. LEXIS 1356, – B.R. – (Bankr. S.D. Fla. Oct. 16, 2001) (Hyman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363

ABI Members, click here to get the full opinion.

Tax liens attached to debtors’ equitable interest in property. Bankr. M.D. Fla. The chapter 7 debtors filed a motion for order to show cause, asserting that the IRS willfully violated the discharge injunction by virtue of its failure to release a tax lien on property acquired by the debtors after the entry of their discharge. The debtors had entered into a prepetition agreement with a third party to purchase real property. Because the debtors were unable to qualify for refinancing or assumption of the mortgage, they took possession of the property and paid all of the expenses attendant to the property while the seller retained legal title to the property. Prior to the date of the debtors’ petition, the IRS had filed tax liens for unpaid income taxes. In a separate adversary proceeding, the bankruptcy court determined that the debtors’ income tax liabilities were dischargeable, although all liens remained in full force and effect as to any property. After the debtors received their discharge, the sellers signed a quitclaim deed transferring the property to the debtors. The bankruptcy court denied the debtors’ motion to show cause, holding that the tax liens remained attached to the debtors’ equitable interest in the property even though the debtors’ personal liability for the underlying tax had been discharged, and even though the debtors did not acquire record ownership of the property until after the bankruptcy case was filed. Since the IRS was entitled to enforce its tax lien on the debtors’ property, it had not violated the discharge injunction by declining to release the liens.In re Ready, 2001 Bankr. LEXIS 1394, 269 B.R. 258 (Bankr. M.D. Fla. Sept. 7, 2001) (Glenn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2][d]

ABI Members, click here to get the full opinion.