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 3, 2001

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CASES IN THIS ISSUE
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• 1st Cir.

  ß 523(a)(6) Tape recording of conversation was willful and malicious.
  Mazurczyk v. O’Neil (Bankr. D. Mass.)

  ß 547(b) Trustee was granted summary judgment.
  Stephenson v. Schreiber (In re Emerson) (Bankr. D.N.H.)

  ß 1325(a)(6) Creditor’s objection was overruled.
  In re Amadon (Bankr. D.N.H.)

  ---

  2d Cir.

  ß 328(a) Debtor seeking attorney’s fees was entitled to one-third of the actual recovery in discrimination action.
  Schlant v. Victor Belata Belting Co. (W.D.N.Y.)

  ß 547(c)(2) Insiders’ motions for summary judgment were denied.
  Lawson v. Corrao Family LLC (In re Kelly’s Chocolates, Inc.) (Bankr. W.D.N.Y.)

  ---

  3d Cir.

  ß 109(e) Judgment based on guarantee was held to be noncontingent.
  In re Heaton (E.D. Pa.)

  ß 541(d) No sufficient nexus existed to establish constructive trust.
  EBS Pension, L.L.C. v. Edison Bros. Stores, Inc. (In re Edison Bros., Inc.) (Bankr. D. Del.)

  ß 1127(b) Creditor precluded from seeking payment on its claim where payment would be inconsistent with debtor’s plan of reorganization.
  In re Planet Hollywood Int’l (Bankr. D. Del.)

  ---

  4th Cir.

  ß 101(5) Assigned annuity payments were property rights, not dischargeable claims.
  Granati v. Stone St. Capital, Inc. (In re Granati) (Bankr. E.D. Va.)

  ---

  6th Cir.

  ß 550(e) Holder of avoided lien could not invoke section 550(e) entitlement to replacement lien.
  Carpenter v. G.E. Capital Mortg. Servs. (In re Carpenter) (Bankr. E.D. Tenn.)

  ß 1307(c) Motion to reconsider dismissal of chapter 13 denied.
  In re Nosker (Bankr. S.D. Ohio)

  ---

  7th Cir.

  ß 523(a)(1) Debtor willfully evaded tax liabilities and was not entitled to discharge the tax debt in bankruptcy.
  Krumhorn v. United States (In re Krumhorn) (N.D. Ill.)

  ---

  8th Cir.

  ß 362(a) Although creditor violated automatic stay, debtor failed to establish damages.
  In re Hoskins (Bankr. W.D. Mo.)

  ß 523(a)(8) Debtor’s obligation to repay student loans not dischargeable, despite hardship, where hardship was not 'undue.' Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful) (8th Cir.)

  ---

  9th Cir.

  ß 110(b)(1) Preparers were held in contempt.
  In re Powell (Bankr. N.D. Cal.)

  ß 522(f) Debtors were entitled to avoid lien on real property after sale to third parties.
  Culver, LLC v. Chiu (In re Chiu) (B.A.P. 9th Cir.)

  ß 523(a)(6) B.A.P. for the Ninth Circuit remanded for determination of insolvency and intent on section 523(a)(6) claims.
  Nahman v. Jacks (In re Jacks) (B.A.P. 9th Cir.)

  ß 523(a)(8) Student loans were not discharged.
  Furneri v. Graduate Loan Ctr. (In re Furneri) (Bankr. D. Alaska)

  Rule 7015 Adversary proceeding 'related back' to contested matter.
  Gschwend v. Markus (In re Markus) (B.A.P. 9th Cir.)

  ---

  11th Cir.

  ß 505(a)(1) District court remanded for determination of whether tax debt was unliquidated.
  United States v. Goldsby (In re Goldsby) (S.D. Fla.)

  ß 548(d)(2)(B) Transfers made to commodity broker were not protected by section 548(d)(2)(B).
  Harpley v. A.G. Edwards & Sons, Inc. (In re Paramount Citrus, Inc.) (M.D. Fla.)

  ---

Collier Bankruptcy Case Summaries

1st Cir.

Tape recording of conversation was willful and malicious. Bankr. D. Mass. The debtor and creditor, who were neighbors with a history of disputes, launched into an argument during which the debtor tape recorded their oral exchanges. The argument culminated in the creditor’s assault of the debtor with a fishing net. The creditor was charged with assault and battery, but the jury found him not guilty of assault with a dangerous weapon. The creditor then filed suit against the debtor for tape recording the conversation in violation of state (Massachusetts) law. Shortly thereafter, the debtor filed a chapter 7 petition. The bankruptcy court lifted the automatic stay to allow the state court action to proceed. The creditor obtained a judgment against the debtor, based on the debtor’s act of illegally tape recording conversations he had with the creditor. The state court found that the tape recording was 'willful and malicious,' but also determined that the debtor’s intent was not to injure the creditor but to create an accurate record. The creditor then filed a motion for summary judgment seeking a determination that the judgment was nondischargeable pursuant to section 523(a)(6). The court ruled for the creditor, holding that the state court findings were not inconsistent because an intent to injure was not required for an act to be willful and malicious. The court concluded that (1) the act was willful, because the debtor intentionally used the tape recorder; (2) the act was malicious, because the debtor acted in conscious disregard of his duties, despite the lack of intent to cause injury; and (3) the creditor suffered an injury, because the state court awarded the creditor a monetary amount (citing Collier on Bankruptcy, 15th Ed.). Mazurczyk v. O’Neil, 2001 Bankr. LEXIS 1302, 268 B.R. 1 (Bankr. D. Mass. October 11, 2001) (Rosenthal, B.J.).

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

Trustee was granted summary judgment. Bankr. D.N.H. A transferee filed a complaint seeking the net proceeds from the auction sale of the debtor’s aircraft by the chapter 7 trustee. The trustee denied that the transferee was entitled to the net proceeds from the sale and filed a motion for summary judgment. The bankruptcy court had previously concluded that the debtor’s transfer of the aircraft to the transferee was preferential under section 547(b) and fraudulent under section 544. The transferee asserted that under the Uniform Fraudulent Transfer Act, he held a lien on the proceeds of the sale of the aircraft because he held a lien on the property at the time it was auctioned by the trustee. The bankruptcy court granted the trustee’s motion for summary judgment, holding that a defense under the Uniform Fraudulent Transfer Act was not a defense to the preferential transfer action under the Code. Because the transferee failed to establish a claim of defense under which he could ultimately prevail against the trustee with respect to the proceeds, judgment was entered in favor of the trustee.Stephenson v. Schreiber (In re Emerson), 2001 Bankr. LEXIS 1305, – B.R. – (Bankr. D.N.H. July 24, 2001) (Deasy, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03, .04

Creditor’s objection was overruled. Bankr. D.N.H. The secured creditor objected to confirmation of the debtors’ chapter 13 plan, asserting that the debtors were unable to show that they had the ability to make the payments under the plan. The debtors’ plan provided for monthly payments both through the trustee and outside the plan for two years, followed by a substantial balloon payment to the secured creditor. One of the debtors testified that her codebtor’s brother had committed to obtain a loan to permit him to buy the secured collateral as an investment. The creditor argued that the lack of a legally enforceable obligation to refinance the property was fatal to the debtors’ efforts to confirm the plan. The bankruptcy court overruled the objection, holding that the debtors satisfied their burden of proof to establish a reasonable likelihood of their ability to make the balloon payment. The court noted that the Code did not require absolute certainty that the balloon payment would be made, only that the likelihood of payment was based on more than pure speculation.In re Amadon, 2001 Bankr. LEXIS 1304, – B.R. – (Bankr. D.N.H. September 6, 2001) (Deasy, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.07

2nd Cir.

Debtor seeking attorney’s fees was entitled to one-third of the actual recovery in discrimination action. W.D.N.Y. The debtor commenced an action alleging that her employer discriminated against her on the basis of sex and intentionally inflicted emotional distress. In 1998, the trustee was substituted as plaintiff because the debtor had failed to list the claims in her schedule of assets, resulting in the inclusion of those claims in the estate. The debtor claimed as damages all past salary and increases, retirement benefits, vacation pay from 1992 to the date of judgment, along with $1 million in punitive damages and $1 million in compensatory damages. The district court dismissed the claim for emotional distress and granted the employer’s motion to bifurcate the liability and damages phases of the action. After trial, the jury awarded neither compensatory nor punitive damages, and the court eventually awarded $832.34 in back pay and $316.64 in interest. The trustee then filed a motion seeking to recover attorney’s fees of approximately $46,500 and disbursements of about $2,000. The employer opposed any award of attorney’s fees, arguing that the debtor’s success was de minimis. The court determined that the debtor’s recovery was de minimis, (1) given the substantial difference between the judgment sought and the award recovered, and (2) in light of the legal issue on which the debtor prevailed, which had no particular significance beyond the parties to the action. The court concluded that the de minimis nature of the recovery foreclosed a full award of attorney’s fees, which consequently was limited to one-third of the recovery amount. The court, however, allowed the disbursements, which were not addressed in any opposition pleadings by the employer. Schlant v. Victor Belata Belting Co., 2001 U.S. Dist. LEXIS 16539, – B.R. – (W.D.N.Y. October 2, 2001) (Elfvin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.02

Insiders’ motions for summary judgment were denied. Bankr. W.D.N.Y. Various insiders of the chapter 7 debtor moved for summary judgment on the trustee’s complaints seeking avoidance of preferential transfers. The debtor, whose business cycle necessitated annual short-term loans, sought a prepetition loan from a quasi-public development authority. The development authority authorized the loan, under the condition that the debtor obtain a matching subordinated loan from a separate entity. The debtor’s principal and her family members advanced the debtor sufficient funds, and the obligations were paid back several weeks before their due dates and within one year of the debtor’s involuntary petition. The insiders argued that because they were first-time lenders in what was the ordinary borrowing cycle for the debtor, the loans were made in the ordinary course of their and the debtor’s businesses. The bankruptcy court denied the motions for summary judgment, holding that the insiders’ loan transactions were not ordinary within the meaning of section 547(c)(2). The court noted that the purpose of the preference statute was to ensure equity of distribution in favor of those creditors who were not relatives of the debtor’s principal officer.Lawson v. Corrao Family LLC (In re Kelly’s Chocolates, Inc.), 2001 Bankr. LEXIS 1328, 268 B.R. 345 (Bankr. W.D.N.Y. September 28, 2001) (Kaplan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2]

3d Cir.

Judgment based on guarantee was held to be noncontingent. E.D. Pa. In 1990, an entity entered into agreements with the creditor for the financing of vehicles. The debtor was one of two officers and shareholders of the entity. To secure the loan, the entity granted security interest in the vehicles and other assets, and the debtor executed continuing guarantees, agreeing to act as surety. After defaulting on its payment, the entity entered a forbearance agreement with the creditor to allow repayment, but the entity was unable to do so and instead filed a chapter 11 petition. As a result, the creditor declared the entire indebtedness due and confessed judgment in state (Pennsylvania) court against the debtor. That court entered judgment in the claimed amount of approximately $947,000. The debtor filed a chapter 7 petition in 1998. The creditor filed an adversary proceeding seeking a determination of nondischargeability. Prior to the hearing, the debtor filed a motion to convert to chapter 13, which was granted. Thereafter, the creditor filed an amended motion to reconvert to chapter 7, which the bankruptcy court granted, holding that the debtor did not qualify under chapter 13 because the debtor owed a noncontingent, liquidated and unsecured debt in excess of the statutory limit of $250,000. The debtor appealed, arguing principally that the judgment was a confessed judgment and was subject to challenge. As such, the debt was disputed and not final and could not be classified as liquidated. The district court affirmed, holding that, for the purposes of section 109(e), the debt was liquidated and noncontingent. The court reasoned that the judgment made the value of the claim ascertainable, and the possibility of a challenge to its validity was not an occurrence of an extrinsic event which would trigger liability, thereby making it contingent.In re Heaton, 2001 U.S. Dist. LEXIS 15813, – B.R. – (E.D. Pa. September 28, 2001) (Waldman, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[2][a]

No sufficient nexus existed to establish constructive trust. Bankr. D. Del In the debtors’ first chapter 11 cases during 1997, an order was entered confirming a joint plan of reorganization that provided for the termination of the debtors’ over-funded pension plan and the payment of the excess funds to the creditor, for distribution to general unsecured creditors. A portion of the funds was reserved by the debtors to pay potential tax liabilities arising from the termination. To the extent that no money was due to the IRS, the debtors were required to remit the balance to the creditor. In 1998, the IRS notified the debtors that no additional taxes were owed, and the creditor thus made demand for turnover of the reserved funds. Before remitting those funds, the debtors filed new chapter 11 petitions in 1999. At all times between the termination of the pension plan and the second petition filing, the debtors had sufficient availability under a revolving credit facility to borrow the sum due to the creditor. The creditor then filed this adversary proceeding seeking turnover of the funds, which it claimed were being held by the debtors in a constructive trust for the creditor’s benefit and were therefore exempt from estate property pursuant to section 541(d). The debtors argued that the funds were never segregated but were commingled with other funds, and that, consequently, no constructive trust had been created. The bankruptcy court issued an opinion in which it denied both parties’ motions for summary judgment, based on the conclusion that a material issue of disputed fact existed as to whether there was a nexus between the alleged constructive trust and the funds sought. The parties stipulated that, at the time of the second petition filing, the debtor, by way of the revolving credit facility, had access to the amount sought. The parties then filed motions seeking final judgment. The debtor argued that the creditor was equitably estopped from arguing that there was a constructive trust on the funds, since the creditor filed statements with the SEC identifying itself as an unsecured creditor, not the beneficiary of a constructive trust. The creditor argued that it disagreed with the characterization of its claim as unsecured and pointed to its filed proof of claim as evidence. The court rejected the debtor’s equitable estoppel argument, holding that there was no evidence of the debtor’s reliance on the creditor’s statements, a necessary component of equitable estoppel. But the court went on to grant the debtor’s motion, holding that there was no sufficient nexus to establish a constructive trust. Specifically, the debtors did not designate the funds they had available to borrow or identify them in any way as funds subject to a trust. The court concluded that there was a significant difference between having cash on hand and being able to draw upon a line of credit because, until the money was borrowed, it remained the property of the secured lenders.EBS Pension, L.L.C. v. Edison Bros. Stores, Inc. (In re Edison Bros., Inc.), 2001 Bankr. LEXIS 1333, 268 B.R. 409 (Bankr. D. Del October 11, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.26

Creditor precluded from seeking payment on its claim where payment would be inconsistent with debtor’s plan of reorganization. Bankr. D. Del. The bankruptcy court disallowed a portion of creditor’s claim because the creditor had not provided sufficient evidence to establish that the expense was payable by the debtor, but allowed the remainder of the claim. The debtor filed a timely appeal of the court’s order allowing the remainder of the claim and, as a result, had not paid the creditor’s claim. The creditor then filed a motion for reconsideration, arguing that the court should modify its order and direct the debtor to make an immediate distribution of the amounts owed to the creditor under the plan or, alternatively, escrow that sum until the appeal was completed. The creditor based its motion on the deterioration of the debtor’s financial condition and its concern that the debtor would not have any funds left to pay the creditor if payment was not required until after the debtor’s appeal was decided. In rebuttal, the debtor argued that it could not pay the creditor because the debtor’s confirmed plan of reorganization only allowed for payment of 'allowed claims,' which were defined in the plan as claims that were allowed by a final order no longer subject to appeal. The bankruptcy court then denied the creditor’s motion, finding that the creditor was bound by the terms of the debtor’s plan of reorganization and could not ask for relief, including payment of its claim or escrowing of funds, that was inconsistent with the debtor’s confirmed plan. In re Planet Hollywood Int’l, 2001 Bankr. LEXIS 1352, – B.R. – (Bankr. D. Del. October 19, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1127.04

4th Cir.

Assigned annuity payments were property rights, not dischargeable claims. Bankr. E.D. Va. The debtor entered an agreement settling an action she brought for the wrongful death of her husband. The defendant in the action, a trucking company, agreed to make monthly payments to the debtor, which would be secured by the purchase of an annuity contract from a life insurance company. After the debtor had received monthly payments for 12 years, the debtor and creditor entered a purchase agreement whereby the creditor paid the debtor a lump sum of $52,000 in exchange for the remaining annuity payments payable between 1997 and 2015. Anticipating that the payor might not honor the assignment, the agreement required the debtor to instruct the payor to mail the payments to a lockbox address designated by the creditor, for deposit into an account in the debtor’s name but under the creditor’s control. The creditor received payments in this fashion for approximately 21 months, but in March 1999 the debtor instructed the payor to cease sending payments to the lockbox and send them instead to an account under the debtor’s control. Consequently, the debtor kept payments made for April 1999 and subsequent months. The creditor filed suit in circuit court against the debtor, alleging breach of contract and fiduciary duty, fraud and conversion. The court directed the debtor to deposit into the court’s registry any payments received pending a final ruling. The debtor did not comply but instead, in November 2000, filed a chapter 7 petition and claimed the payments as exempt under state (Virginia) law. The creditor filed an objection to the exemption and an adversary proceeding to determine that its claim against the debtor was nondischargeable. Eventually the creditor moved for summary judgment based on section 523(a)(6). The debtor argued that a valid assignment never occurred because assignment was prohibited under the terms of the settlement agreement and annuity contract. The bankruptcy court granted the creditor’s motion in part and denied it in part, based on two principal rulings: (1) although the debtor had no power to make a valid legal assignment of the payments, a finding of equitable assignment was appropriate because allowing the debtor to keep the lump sum payment along with the annuity payment would constitute unjust enrichment; and (2), according to the majority of decisions, equitable assignments of personal injury proceeds were not dischargeable claims, pursuant to section 101(5), but property interests and that, accordingly, the creditor’s right to specific performance of the annuity purchase agreement was not a claim and had not been discharged. However, the court did not rule on the section 523(a)(6) claim with regard to the payments the debtor retained prepetition, holding that the factual element of malice remained in general dispute, and denying that portion of the summary judgment motion. Granati v. Stone St. Capital, Inc. (In re Granati), 2001 Bankr. LEXIS 1212, – B.R. – (Bankr. E.D. Va. September 1, 2001) (Mitchell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.05[5]

6th Cir.

Holder of avoided lien could not invoke section 550(e) entitlement to replacement lien. Bankr. E.D. Tenn. In 1998, the debtors executed a note and deed of trust in favor of the lender, by which they pledged their interest in previously-acquired real property as security for a loan. The lender mistakenly recorded the deed of trust in the wrong county. The creditor was the lender’s successor in interest. After the debtors filed their chapter 7 petition, the trustee sold the property pursuant to an order of the bankruptcy court, with the creditor’s lien attaching to the sale proceeds to the extent that it was enforceable against the real property. The trustee then filed a motion for summary judgment, seeking to avoid the lien pursuant to his powers under section 544(a). The creditor also sought summary judgment, arguing that, although its security interest could be avoided by the trustee, it was still entitled to a replacement lien pursuant to section 550(e). The parties stipulated that the funds obtained by the loan to the debtors were applied to a prior encumbrance on the property, therefore constituting an 'improvement' of the property, and that the prior lien would have been superior to the trustee’s rights. The bankruptcy court noted that the issue of whether the protections of section 550(e)(1) extended to holders of avoided security interests, or whether anything was actually 'recovered' when a trustee used strong arm powers to avoid a nonpossessory interest, was the subject of divided opinion. The court finally denied the creditor’s motion, reasoning that the debtor’s interest became property of the estate upon the petition filing and that, when such interest merged with the avoided mortgage, the trustee held the entire interest in the property. As such, there was no need for the trustee to recover the creditor’s interest under section 550. Because avoidance and recovery were distinct remedies, and because the trustee was not required to effectuate any additional recovery, section 550(e) was not implicated and defenses provided under that section were unavailable to the creditor. Carpenter v. G.E. Capital Mortg. Servs. (In re Carpenter), 2001 Bankr. LEXIS 1218, 266 B.R. 671 (Bankr. E.D. Tenn. August 13, 2001) (Stair, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:550.06

Motion to reconsider dismissal of chapter 13 denied. Bankr. S.D. Ohio The debtor filed a motion seeking reconsideration of the bankruptcy court’s order denying confirmation of his amended chapter 13 plan and dismissing the case. The court had determined that the debtor failed to (1) establish that he was an individual whose income was sufficiently stable and regular; (2) provide for submission of future income; (3