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 30, 2002

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

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4th Cir.

§ 541 Repossession and sale of debtor’s vehicle by creditor with notice of bankruptcy was conversion of estate property.
Ivey v. Ford Motor Credit Co. (Bankr. M.D.N.C.)

Collier Bankruptcy Case Summaries

2d Cir.

Bankruptcy court did not abuse discretion in lifting stays to allow malpractice claims to proceed against debtor lawyer and debtor law firm. E.D.N.Y. PROCEDURAL POSTURE: Appellants, a lawyer and his law firm, both debtors in two separate pending Chapter 7 proceedings, challenged two orders entered by the Bankruptcy Court for the Eastern District of New York, which lifted the automatic stay pursuant to 11 U.S.C. § 362, and allowed appellees clients to proceed with their claim for malpractice against the lawyer and the law firm in state court. OVERVIEW: The lawyer and the law firm filed voluntary petitions for bankruptcy pursuant to Chapter 7. The clients filed a proof of claim against the lawyer and the law firm in bankruptcy court and moved for an order lifting the automatic stay to pursue their malpractice action in state court. The bankruptcy court issued two orders that lifted the automatic stays against both the lawyer and the law firm. On appeal from the bankruptcy court’s orders, the district court found that the lawyer and the law firm failed to file their brief within 15 days of the docketing of the bankruptcy appeal as was required by Fed. R. Bankr. P. 8009. The neglect, indifference, and dilatoriness of the lawyer and the law firm were the reasons for the failure to comply with Fed. R. Bankr. P. 8009. The bankruptcy court did not abuse its discretion when it lifted the automatic stay because litigation of the malpractice action in state court would have fixed the amount of the claim and resolved the issue, litigation of the malpractice action in state court did not interfere with the bankruptcy case, and the state litigation involved the lawyer’s role as a fiduciary because he was sued in his capacity as an attorney. In re Godt, 2002 U.S. Dist. LEXIS 16833, 282 B.R. 577 (E.D.N.Y. September 10, 2002) (Spatt, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01  [back to top]

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Loan holders’ representative had unconditional right to intervene in adversary proceeding involving loan collateral. 2d Cir. PROCEDURAL POSTURE: Pursuant to 11 U.S.C. § 1109 and Fed. R. Civ. P. 24, appellant term loan holder committee ('TLHC') moved to intervene, as of right or permissively, in an adversary proceeding brought by appellee joint liquidators against the debtors. The bankruptcy court denied the motion, and the District Court for the Southern District of New York affirmed the bankruptcy court’s order. TLHC appealed. OVERVIEW: TLHC represented the holders of a term loan secured by the debtors’ inventory and a real estate loan secured by the debtors’ real estate. The debtors, discount retailers, filed for protection under Chapter 11 and eventually sold its inventory to the joint liquidators. The joint liquidators initiated an adversary proceeding, alleging breach of contract against the debtors and seeking damages. TLHC sought intervention as a matter of right, arguing that 11 U.S.C. § 1109(b) conferred on it a right to appear and be heard. The joint liquidators argued that section 1109(b) provided a party in interest with a right to be heard in a case only and that it stated nothing about intervention in an adversary proceeding. The appellate court determined that TLHC possessed an unconditional right to intervene under section 1109(b) and Fed. R. Civ. 24(a)(1). The appellate court found that the phrase 'any issue in a case' plainly grants a right to raise, appear, and be heard on any issue regardless whether it arises in a contested matter or an adversary proceeding. The appellate court rejected the joint liquidators’ arguments to the contrary. Term Holder Comm. v. Ozer Group, LLC (In re Caldor, Corp.), 2002 U.S. App. LEXIS 18475, 303 F.3d 161 (2d Cir. September 9, 2002) (Parker, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1109.01   [back to top]

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Claim of fraudulent transfer in contemplation of bankruptcy, in context of RICO claim, dismissed where allegations lacked factual basis. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff creditors sought reconsideration of the court’s prior order that dismissed claims alleging violation of the Racketeer Influenced and Corrupt Organizations Act ('RICO'), 18 U.S.C. § 1961 et seq. for lost debt injury as not ripe. Some defendant corporate insiders also moved for reconsideration of the RICO claims the court refused to dismiss, for bankruptcy fraud and under Fed. R. Civ. P. 9(b), 12(b)(6). OVERVIEW: The creditors argued that the court erred in ruling that they lacked standing under RICO to recover their alleged lost debt. The insiders argued that the remainder of the RICO claims, including a claim for conspiracy under 18 U.S.C. § 1962(d), should be dismissed for failure to plead fraud with particularity or to state a claim upon which relief could be granted. The creditors attempted to address the deficiencies, pointing to allegations describing the RICO pattern, but the court noted that the allegations were inconsistent with the alleged predicate offense, a fraudulent transfer in contemplation of bankruptcy. The court ultimately found that the creditors’ conclusory allegations of scienter, lacking a coherent factual basis, were insufficient to meet the specificity requirements of Fed. R. Civ. P. 9(b). The court also rejected the conclusion that the specific racketeering activities alleged constituted the sort of long-term criminal conduct that RICO claims required. Finally, the court declined to exercise supplemental jurisdiction over state law claims. First Capital Asset Mgmt. v. Brickellbush, Inc., 2002 U.S. Dist. LEXIS 16890, 219 F. Supp.2d 576 (S.D.N.Y. September 11, 2002) (Kaplan, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:7.02[7]  [back to top]

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  District court properly enjoined creditor from prosecuting fraudulent transfer claim extinguished by confirmation of debtor’s plan. 3d Cir. PROCEDURAL POSTURE: Appellant noteholder challenged the order of the District Court for the District of Delaware which enforced its previous confirmation order of a bankruptcy reorganization plan for a company. The order enjoined the prosecution of certain fraudulent transfer claims asserted by the noteholder under the Alabama Uniform Fraudulent Transfer Act, Ala. Code § 8-9A-1 et seq., in Alabama state court. OVERVIEW: The noteholder purchased subordinated notes in the company. The company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Although the final reorganization plan and the confirmation order specifically provided that the fraudulent transfer claims asserted in the noteholder’s Alabama action under the Alabama Uniform Fraudulent Transfer Act, Ala. Code § 8-9A-1 et seq., were extinguished, the noteholder continued prosecution of the Alabama action. The district court granted the company’s motion to enforce the confirmation order. The appellate court found that the noteholder’s argument that his claims were not extinguished under the reorganization plan and confirmation order because the fraudulent transfer claims did not constitute assets of the debtor in possession failed because it was a well-established rule under 11 U.S.C. § 544(b) that a debtor in possession was empowered to pursue fraudulent transfer claims for the benefit of all creditors, and the debtor in possession had explicitly extinguished all fraudulent transfer claims in its reorganization plan. Thus, the noteholder was precluded from prosecuting those claims in Alabama state court.In re PWS Holding Corp., 2002 U.S. App. LEXIS 18753, 303 F.3d 308 (3d Cir. September 12, 2002) (Fuentes, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09 [back to top]

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Civil case before the U.S. District Court was not the proper vehicle for hearing a claim of fraud on a bankruptcy court. E.D. Pa. PROCEDURAL POSTURE: Plaintiffs, a debtor and its lender, sued defendant buyer for defaulting on an agreement to buy the debtor’s assets out of bankruptcy. The buyer filed a motion for reconsideration of the court’s order denying its motion for summary judgment. OVERVIEW: The debtor, after defaulting on its debt to the lender and filing bankruptcy, agreed to sell its assets to the buyer. The buyer defaulted, and the debtor retained the $50,000 deposit. The buyer claimed that the deposit constituted liquidated damages and was the debtor’s sole remedy. The court held that (1) its earlier decision that plaintiffs were not barred by an enforceable liquidated damages provision from recovering damages was in error; (2) Pennsylvania law did not recognize a claim for breach of implied covenant of good faith and fair dealing; (3) there were issues as to the lender’s status as a third party beneficiary as the parties’ agreement did not mention the lender; (4) plaintiffs could not recover purely economic losses for negligent misrepresentation; (4) plaintiffs’ fraud claims were barred by the 'gist of the action' doctrine and because any reliance by plaintiffs on the buyer’s misrepresentations was unreasonable; and (5) the promissory estoppel claim failed as the interest of justice did not require enforcement of the alleged promise, and any reliance on such promise was unreasonable. Blue Mt. Mushroom Co. v. Monterey Mushroom, Inc., 2002 U.S. Dist. LEXIS 17329, — F. Supp.2d — (E.D. Pa. September 5, 2002) (Antwerpen, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:7.07 [back to top]

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Repossession and sale of debtor’s vehicle by creditor with notice of bankruptcy was conversion of estate property. Bankr. M.D.N.C.PROCEDURAL POSTURE: The debtor filed a Chapter 7 petition under the Bankruptcy Code. Plaintiff trustee commenced an adversary action against defendants, a towing company and a towing company driver, related to a disputed conversion during bankruptcy. The trustee filed a motion for summary judgment against the towing company regarding the conversion claim.OVERVIEW: After the debtor filed the bankruptcy petition, the trustee notified a storage facility about the estate’s interest in the debtor’s vehicle in storage. A creditor received notice of the filing, but instructed the towing company to repossess the vehicle. The towing company’s driver performed the repossession. At the storage facility, the manager contacted the trustee, who spoke with the driver and instructed him not to remove the estate’s vehicle. The driver refused to comply and took the vehicle. The creditor, without notification to the trustee and without relief from the automatic stay, sold the vehicle at public auction. The court found that the vehicle was property of the bankruptcy estate pursuant to 11 U.S.C. § 541, and pursuant to 11 U.S.C. § 323, the trustee was the representative of the estate and entitled to possession of the vehicle. Since the driver was acting within the scope of his employment, the towing company was imputed with liability from the violation of the automatic stay. The taking and retention of the vehicle was wrongful and amounted to a conversion.Ivey v. Ford Motor Credit Co., 2002 Bankr. LEXIS 958, — B.R. — (Bankr. M.D.N.C. August 23, 2002) (Stocks, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.01 [back to top]

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  Debtor not entitled to costs and attorneys’ fees after dismissal of involuntary petition where petitioning creditor had not acted in bad faith. Bankr. N.D. Tex. PROCEDURAL POSTURE: The court dismissed the petitioning creditors’ involuntary petition, finding that whether the alleged debtor’s merger was a change of control authorizing the creditors to accelerate convertible subordinated notes, was the subject of a bona fide dispute under 11 U.S.C. § 303(h) which was pending in state court. The alleged debtor filed a motion for costs and attorneys’ fees under 11 U.S.C. § 303(i). The petitioning creditors objected. OVERVIEW: Denying the alleged debtor’s motion, the court held that section 303(i) did not establish a rebuttable presumption for the award of attorneys’ fees. The petitioning creditors did not file the petition in bad faith, believing that the facts as to securities registration immediately following the merger established their position, and had sought to preserve the alleged debtor’s cash and causes of actions. The fact that the state court had denied an injunction against the merger did not show bad faith. Post merger, the debtor would not have positive cash flow for some time. The efforts of creditors to preserve cash was reasonable. The alleged debtor’s sector of the economy had virtually crashed. No evidence established an adverse effect on the alleged debtor due to the petition. If an appellate court were to find a presumption under section 303(i), the bankruptcy court held it had been rebutted. The court had required the equivalent of an 11 U.S.C. § 330(a) application. If fees were awarded, time billed on the change of control issue, time coordinating work, and excessive time would be excluded. Expenses would be reduced by 60 percent, as amount of the work covered the change of control issue. In re Allied Riser Comm. Corp., 2002 Bankr. LEXIS 964, 283 B.R. 420 (Bankr. N.D. Tex. August 8, 2002) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.01 [back to top]

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Absent proof that debtor contractor willfully or maliciously converted funds paid by creditor for construction of home, any resulting debt was dischargeable. Bankr. S.D. Ohio PROCEDURAL POSTURE: The creditors filed a complaint seeking a determination that a debt owed to them by the debtor in connection with the construction of their house was nondischargeable under 11 U.S.C. § 523(a)(6). The creditors argued that the debtor obtained construction draws and other funds belonging to the creditors and failed to account for the expenditures, that the debtor’s actions were a conversion. OVERVIEW: A claim for a breach of contract arising from the debtor’s lack of knowledge and skills was compounded by poor workmanship. But that did not establish a claim for conversion. The creditors acknowledged the debtor’s efforts to construct their home and that he used at least part of their money to obtain supplies which went into the home. The averment that the receipts produced by the debtor did not add up to the total funds he obtained under the contract did not by itself prove conversion. Contractors were entitled to a measure of profit and reimbursement for overhead expenses. The creditors were not able to show that the debtor spent the money to purchase supplies not used in the construction of their residence or that the defendant misappropriated money for his own benefit. Not all acts of conversion rose to the level of willful and malicious conduct under section 523(a)(6). The creditors did not prove that the debtor desired to cause the consequences of his act or believed that those consequences were substantially certain to occur. Recklessness did not satisfy the requirements for willful and malicious conduct. Beard v. Devore (In re Devore), 2002 Bankr. LEXIS 991, 282 B.R. 643 (Bankr. S.D. Ohio June 4, 2002) (Sellers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12 [back to top]

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Marital debt nondischargeable where debtor was voluntarily unemployed and court believed debtor had the ability to pay. Bankr. N.D. Ohio PROCEDURAL POSTURE: Defendant debtor filed a Chapter 7 petition under the Bankruptcy Code. Plaintiff creditor filed an adversary complaint to determine the dischargeability of marital debt that the debtor was required to pay as a result of the parties’ divorce. OVERVIEW: The court believed that the debtor’s obligation constituted a nondischargeable debt under bankruptcy law, but still applied the exceptions to nondischargeability of 11 U.S.C. § 523(a)(15). The court found that the debtor had become voluntarily unemployed and in the past had sufficient resources to pay the marital obligation, but had failed to do so. Under 11 U.S.C. § 523(a)(15)(A), the court was required to examine both the debtor’s income and the amount of the debtor’s property available to pay the marital debt. The court believed that the debtor had the ability to pay the marital debt. The debtor’s standard of living, based upon income and expense figures presented to the court, failed to indicate that the debtor’s standard of living would fall materially below the creditor’s if the debt was not discharged. The court found that the debtor failed to sustain his burden under the exception to nondischargeability set forth in 11 U.S.C. § 523(a)(15)(B). Courtney v. Traut (In re Traut), 2002 Bankr. LEXIS 998, 282 B.R. 863 (Bankr. N.D. Ohio August 5, 2002) (Speer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.21 [back to top]

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124004 District court did not err in affirming voluntary dismissal without prejudice or sanctions absent evidence of debtor’s bad faith. 7th Cir. PROCEDURAL POSTURE: Only four months after filing for bankruptcy under Chapter 11, appellee debtor filed a motion to dismiss his petition. Appellant creditor believed that the debtor had abused the bankruptcy process and asked the bankruptcy court to dismiss with prejudice and impose sanctions. The bankruptcy court denied the creditor’s requests; the District Court for the Northern District of Indiana, Hammond Division, affirmed. The creditor appealed. OVERVIEW: The debtor had purchased a failing company and had personally guaranteed many of the company’s loans. The company’s failings spawned several lawsuits including a class action. The bankruptcy filing stayed these proceedings (although cases in which the debtor was a plaintiff were not stayed). The debtor testified that he filed the bankruptcy petition in an attempt to achieve a 'global settlement' of these numerous suits. The appellate court noted that this was a common motive for debtors, not one that immediately raised concerns about bad faith. The debtor attempted to gather before one court parties that represented both his and his company’s liabilities to achieve a financial settlement. Once it became clear that there would be no settlement, the debtor immediately dismissed his Chapter 11 proceeding. On this record, the appellate court found that the district court did not clearly err in finding that the debtor did not act in bad faith. Finally, although the debtor testified falsely regarding some matters, the testimony was not material. Consequently, the district court did not abuse its discretion in refusing to award monetary sanctions against the debtor. In re Hall, 2002 U.S. App. LEXIS 19172, 304 F.3d 743 (7th Cir. September 18, 2002) (Wood, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:349.01[1]; .02 [back to top]

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Debtor’s failure to timely file plan was sufficient cause for dismissal or conversion. N.D. Ill. PROCEDURAL POSTURE: Appellee creditor obtained a $4.5 million judgment against appellant debtor in a state negligence action and commenced collection from the debtor’s individual assets. The debtor filed for bankruptcy. The debtor appealed from decisions rendered by the Bankruptcy Court for the Northern District of Illinois, dismissing his case, and subsequently denying his motion to vacate and reconsider. OVERVIEW: The creditor urged the court to dismiss the debtor’s appeal for failure to designate the content of the record on appeal in a timely fashion. Dismissal was warranted under the third standard utilized in Bulic, the excusable neglect standard. It appeared that the debtor miscalculated the filing period under Fed. R. Bankr. P. 8006, which was not excusable neglect. Thus, the debtor’s appeal was dismissed for his untimely designation of the content of record. Nevertheless, even if the district court were to reach the opposite conclusion and reach the merits of the debtor’s appeal, it would have affirmed the bankruptcy court’s decisions to dismiss the debtor’s Chapter 11 petition and deny his motion to vacate the dismissal and for leave to file a plan instanter. The debtor’s issues on appeal, including that the creditor failed to meet the burden placed upon movants under 11 U.S.C. § 1112(b) when she did not establish that the continued pendency of the action was prejudicial to her or other creditors, were without merit. Debtor’s failure to file a plan within the deadlines established by the bankruptcy court was sufficient cause for dismissal or conversion under section 1112(b). Han v. Linstrom, 2002 U.S. Dist. LEXIS 17205, — F. Supp.2d — (N.D. Ill. September 11, 2002) (Guzman, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1112.04 [back to top]

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Homestead exemption allowed over trustee’s objection absent evidence of conversion with intent to hinder, delay or defraud creditors. Bankr. W.D. Ark. PROCEDURAL POSTURE: The Chapter 7 trustee objected to the debtors’ claim of a homestead exemption under Ark. Code Ann. § 16-66-218(b) (Supp. 2001), Ark. Const. art. 9, § 5, arguing that the purchase of the property was facilitated by numerous transfers made with the intent to hinder, delay, or defraud creditors, and that the debtors acted arbitrarily, capriciously, and unreasonably in attempting to carve out a one quarter acre tract from the rest of the property. OVERVIEW: There was no evidence that non-exempt assets were converted into exempt assets with the intent to hinder, delay, or defraud creditors. The conversions were in response to a potential tax liability upon the forgiveness of certain debt. The conversion was permissible. If a homestead exceeded $2,500 in value, the debtors could claim it as a homestead if its area did not exceed one quarter acre. The debtors had carved out one quarter acre of the 1.98 acre tract and claimed that one quarter acre as exempt property. Even if the property was ordered sold, the debtors could select a homestead within the constitutional limits. Under section 5, they could carve out one quarter acre. The proposed homestead exemption was not arbitrary, capricious, or unreasonable in the light of the allowed exemption. There was no cap on the dollar amount provided the homestead did not exceed one quarter acre. But, the only way to detach the property from the zoning requirements was to de-annex the property from the subdivision and seek to have it re-zoned. Thus, the trustee was ordered to sell the property, after which the court would hold a valuation hearing to determine the amount of the exemption. In re Bradley, 2002 Bankr. LEXIS 942, 282 B.R. 430 (Bankr. W.D. Ark. August 21, 2002) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.01 [back to top]

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Substitutions of bounced checks with cashier’s checks were neither contemporaneous exchanges nor made in the ordinary course of business and were avoidable. B.A.P. 8th Cir. PROCEDURAL POSTURE: A creditor, a cattle auctioneer, appealed from a judgment of the Bankruptcy Court for the Western District of Arkansas that avoided two transfers as preferential under 11 U.S.C. § 547(b). The auctioneer argued that two cashier’s checks from the debtor, that replaced bounced checks, were contemporaneous exchanges under 11 U.S.C. § 547(c)(1) and were made in the ordinary course of business under 11 U.S.C. § 547(c)(2). OVERVIEW: The cashier’s checks were given in satisfaction of the debtor’s obligation arising out of the dishonored checks delivered two weeks earlier for the purchase of cattle. They were not contemporaneous exchanges. The auctioneer argued that the 'new value' was the right to participate in that day’s auction. But, the opportunity to participate in future auctions was a consequence of the satisfaction of the bounced checks. The intent of the debtor and the auctioneer was to satisfy the outstanding obligations. 'New value' under 11 U.S.C. § 547(a)(2) expressly excluded an obligation substituted for an existing obligation. A single insufficient funds check delivered prior to the preference period did not establish an ordinary course of business of bouncing checks and replacing them with cashier’s checks. Rather, it reflected the beginning of the debtor’s slide into bankruptcy. The parties’ dealings during the preference period were not consistent with their dealings prior thereto and thus were not in the ordinary course of business of the debtor and the auctioneer under 11 U.S.C. § 547(c)(2). Stewart v. Barry County Livestock Auction, Inc. (In re Stewart), 2002 Bankr. LEXIS 984, 282 B.R. 871 (B.A.P. 8th Cir. September 17, 2002) (Schermer, B.J.).

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

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Debtor tenant’s obligation to construct a building for landlord was not a rental obligation. Bankr. C.D. Cal. PROCEDURAL POSTURE: After the court held that the 11 U.S.C. § 502(b)(6)(A) calculation in connection with the creditor landlord’s claim was based upon the total rent due under the lease, the landlord amended its claim, seeking sums for the debtors’ rejection of the lease, sums for 'future rent' damages under section 502(b)(6)(A) and sums in damages for the failure to build a building as 'unpaid rent' under 11 U.S.C. § 502(b)(6)(B). The debtor objected. OVERVIEW: The landlord was precluded by judicial estoppel from arguing that the construction obligation was rent because it had previously argued that the construction obligation was not rent, consistently contending that there were two separate claims during confirmation and in opposing the debtors’ objection to a prior claim. And, in asserting it had two separate claims, it was permitted to vote twice against the plan. Forcing the debtors to defend against this same issue through the guise of the amended claim would be detrimental and prejudicial to the estate. Further, the construction obligation was not unpaid rent under 11 U.S.C. § 502(b)(6)(B); the amendment was futile. The lease did not denominate the construction obligation as rent, the construction obligation did not relate to the value of the leased premises or the value of the lease, and it was not a fixed, regular, or periodic payment. It was one-time performance obligation that did not require a payment to the landlord. The debtor was to begin paying rent on the commencement date, which never occurred. Therefore, no rent ever became due as of the petition date for the landlord to claim as 'unpaid rent' under section 502(b)(6)(B). In re Edwards Theaters Circuit, Inc., 2002 Bankr. LEXIS 808, — B.R. — (Bankr. C.D. Cal. August 5, 2002) (Ryan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[7] [back to top]

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Lien impairing property sold postdischarge could be avoided, provided encumbered property was property of debtors at time lien was 'fixed.' 9th Cir. PROCEDURAL POSTURE: Appellees debtors obtained a discharge in bankruptcy. However, during the bankruptcy proceedings, debtors did not take action to avoid a lien on their residential property held by appellant creditor. After selling their property and with money held in escrow, the debtors reopened their case. The bankruptcy court granted their motion to avoid the lien. The Bankruptcy Appellate Panel affirmed the decision and the creditor appealed. OVERVIEW: The appellate court rejected the debtors’ mootness argument because the buyers of the house were aware of the lien and expressly took title subject to the lien. The creditor contended that the debtors did not satisfy the requirements of 11 U.S.C. § 522(f)(1) because they did not have an interest in the property when they brought the motion to avoid the lien. The debtors argued that to satisfy section 522(f)(1), they only needed to have had an interest in the property at the time they filed for bankruptcy or, in the alternative, at the time the lien attached. The appellate court agreed. The appellate court held that the debtors need not have had an interest in the property at the time they moved to avoid. The operation of section 522(f) was not to avoid a 'lien,' per se. Rather, by its terms, section 522(f) provided for the avoidance of the 'fixing' of certain liens. Thus, section 522(f) operated retrospectively to annul the event of fastening the subject lien upon a property interest. Accordingly, the fundamental question of ownership was whether the property encumbered by the subject lien was 'property of the debtors' at the time of the fixing of that lien on their property. Culver, LLC v. Kai-Ming Chiu (In re Kai-Ming Chiu), 2002 U.S. App. LEXIS 19181, 304 F.3d 905 (9th Cir. September 18, 2002) (Mahan, D.J.).

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

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Trustee allowed to sell property held in tenancy by the entirety as partition was difficult and benefit to estate outweighed harm to nondebtor co-owner. Bankr. N.D. Fla. PROCEDURAL POSTURE: The debtor filed an individual Chapter 7 petition under the Bankruptcy Code and claimed as exempt property held in tenancy by the entireties. The trustee objected to the debtor’s exemption claim. OVERVIEW: The debtor’s wife did not file bankruptcy, and the debtor’s claim for exemption was based on the lack of joint creditors who could enforce claims against the tenancy by the entireties assets. The trustee objected to the exemption where there existed joint debts on the date the debtor filed his bankruptcy case. The court found that under the Bankruptcy Code, property only partially owned by the bankruptcy estate could be sold. Where the debtor owned an undivided interest in property as a joint tenant, the trustee could sell both the estate’s interest and the co-owner’s interest if all four of the conditions of 11 U.S.C. § 363(h) were met. The court held that the postpetition payment of the debt by the debtor’s wife could not create an exemption that did not exist on the petition date. There was no separate classification for joint debt in the distribution priorities under 11 U.S.C. § 726. The joint unsecured claims were of equal rank to the other unsecured claims pursued exclusively against the debtor. In re McRae, 2002 Bankr. LEXIS 957, 282 B.R. 704 (Bankr. N.D. Fla. August 6, 2002) (Killian, B.J.).

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

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Debtor attorney’s contingent referral fee, for which no postpetition services were required, was estate property. Bankr. S.D. Fla. PROCEDURAL POSTURE: A debtor filed a voluntary Chapter 7 bankruptcy petition. The bankruptcy trustee filed an objection to the debtor’s exemptions and a motion to strike the second amendment to the debtor’s schedules, based on legal fees the debtor was entitled to receive for a case he had referred to another law firm. OVERVIEW: Prior to the filing of the bankruptcy case, the debtor met with clients to handle their automobile personal injury matter. The debtor arranged to have another law firm litigate the case. However, the debtor was entitled to a referral fee, based on the amount of the settlement. The court determined that for contingency fees for legal representation that began prepetition and continued postpetition, the threshold determination was whether the performance by the debtor of any of his postpetition services was a prerequisite to his obtaining the referral fee. Upon the debtor’s referral of the litigation to the other firm, the other firm performed all aspects of the litigation. The debtor’s services were not necessary for obtaining the payment at issue. Therefore, the court found that the debtor’s portion of the contingency fee was entirely 'rooted in the pre-bankruptcy past', and the entire payment had to be included in the bankruptcy estate. Since the debtor had already claimed all of his allowed exemptions except $305, he was only able to claim $305 of the fee as exempt. The amendment to the debtor’s schedules was permissible under Fed. R. Bankr. P. 1009(a). In re Riker, 2002 Bankr. LEXIS 982, 282 B.R. 724 (Bankr. S.D. Fla. September 12, 2002) (Friedman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.01 [back to top]

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