Collier Bankruptcy Case Update February-11-02

Collier Bankruptcy Case Update February-11-02

 


Collier Bankruptcy Case Update

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.

February 11, 2002

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

  • 1st Cir.

    § 362(d) Mortgagee’s motion for relief from stay denied but debtors ordered to make regular mortgage payments and pay arrears and attorneys’ fees.
    Chase Manhattan Mortg. Corp. v. Weeks (In re Weeks)
    (Bankr. D.N.H.)

    § 523(a)(6) State court judgment rendered against the debtor for his sexual harassment of the creditor was deemed nondischargeable.
    McDonough v. Smith (In re Smith)
    (Bankr. D. Mass.)


    2d Cir.

    § 362 Government did not violate stay by failing to withdraw debtor/dentist’s prepetition 'exclusion' and 'debarment' from federal health care programs.
    In re Moss
    (Bankr. W.D.N.Y.)

    § 362(a) Creditor’s retention and sale of the vehicle pursuant to state law did not violate automatic stay.
    Mfrs. & Traders Trust Co. v. Alberto (In re Alberto)
    (N.D.N.Y.)

    § 524 Discharge injunction did not preclude litigation of nondischarged tax liability.
    Taylor v. Comm’r (In re Taylor)
    (2d Cir.)

    28 U.S.C. § 158 Order deferring issue to the state court was not a final, appealable order.
    In re JJF Associates, LLC
    (S.D.N.Y.)


    3d Cir.

    § 544(b)(1) Trustee’s avoidance powers did not violate transferees’ religious freedoms.
    Liebersohn v. First Baptist Church (In re C.F. Foods, Inc.)
    (E.D. Pa.)


    4th Cir.

    § 523(a)(4) Court of Appeals affirmed decision that held that debt owed by former Rwandan ambassador to Republic of Rwanda was nondischargeable.
    Republic of Rwanda v. Uwimana (In re Uwimana)
    (4th Cir.)


    5th Cir.

    § 326(a) Chapter 7 trustee was not entitled to compensation based on distributions made by the debtors.
    In re Celano
    (E.D. La.)

    § 365(a) Land sale contract was not executory after state court entered decree of specific performance.
    In re Smith
    (Bankr. E.D. Tex.)


    6th Cir.

    § 546(a) Motion to amend complaint in preference action to add additional defendants denied.
    Southern Air Transp., Inc. v. B & H Worldwide, Inc. (In re Southern Air Transp., Inc.)
    (Bankr. S.D. Ohio)

    § 547(b) Kentucky debtor’s garnished wages not recoverable as preferential transfers.
    Johnson v. The Med. Center at Bowling Green (In re Johnson)
    (Bankr. W.D. Ky.)

    § 1322(b)(2) Wholly unsecured junior lien on debtors’ residence was stripped off and treated as an unsecured claim.
    Ernst v. Bank One, N.A. (In re Ernst)
    (Bankr. S.D. Ohio)


    7th Cir.

    § 110(h)(2) Petition preparer’s fee reduced from $299 to $75.
    In re Froehlich
    (7th Cir.)


    8th Cir.

    § 524(a)(2) Creditors’ efforts to assist police with criminal investigation of debtor did not violate discharge injunction.
    Ehrlich v. Badiner
    (D. Minn.)

    § 541(a)(1) Repossessed automobile was property of the estate.
    In re Clelland
    (Bankr. E.D. Ark.)

    § 547(c)(2) B.A.P. affirmed decision that 'excruciatingly late' payment was not made in parties’ ordinary course of business. Laclede Steel Co. v. Concast Canada, Inc. (In re Laclede Steel Co.) (B.A.P. 8th Cir.)


    9th Cir.

    § 365(a) Lessors not entitled to recovery of attorneys’ fees upon debtor’s assumption of lease.
    In re I-Mind Educ. Sys.
    (Bankr. N.D. Cal.)


    10th Cir.

    § 549(a) Trustee’s avoidance action was remanded for a determination of whether the imposition of a constructive trust was an equitable remedy.
    Hill v. Kinzler (In re Foster)
    (10th Cir.)


    11th Cir.

    § 507(a)(7) Child support claim assigned to governmental agency did not have priority.
    In re Gray
    (Bankr. N.D. Ala.)


Collier Bankruptcy Case Summaries

1st Cir.

Mortgagee’s motion for relief from stay denied but debtors ordered to make regular mortgage payments and pay arrears and attorneys’ fees. Bankr. D.N.H. The chapter 7 debtors’ mortgagee filed a motion seeking relief from the automatic stay in order to pursue state law remedies under the note and mortgage securing the debtors’ real property. The parties disputed aspects of the mortgage’s payment history and the current amount of the debtors’ arrears. However, it appeared that at the time the mortgagee prepared its motion for relief from the stay, the debtors’ mortgage remained unpaid for two months. Based upon payment statements submitted by the parties, the bankruptcy court denied the mortgagee’s motion for relief form the stay, but required the debtors to make regular mortgage payments as they became due, cure the existing arrears and pay the mortgagee’s reasonable attorneys’ fees. The court noted that the mortgagee believed that the debtors were two months behind in their mortgage payments when it filed its motion for relief, and concluded that, in light of the debtors’ payment history and pending chapter 7 case, it was not unreasonable for the mortgagee to have sought relief from the stay.Chase Manhattan Mortg. Corp. v. Weeks (In re Weeks), 2001 Bankr. LEXIS 1636, – B.R. – (Bankr. D.N.H. December 17, 2001) (Deasy, B.J.).

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

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State court judgment rendered against the debtor for his sexual harassment of the creditor was deemed nondischargeable. Bankr. D. Mass. The creditor filed an adversary proceeding against the chapter 11 debtor seeking a determination that a state (Massachusetts) court judgment based on a claim of sexual harassment was nondischargeable. The creditor and the debtor were involved in a consensual relationship while the creditor was employed by a company operated by the debtor. After the relationship ended, the debtor revoked the creditor’s employment privileges, as well as threatened her job security and her future in the industry if she did not resume their relationship. The creditor was forced to resign because of the debtor’s threats and was treated for anxiety and depression. After a jury trial, the debtor and his company were found jointly and severally liable for sexual harassment and punitive damages were assessed against the debtor. The appellate court subsequently affirmed the verdicts and damage awards. The bankruptcy court granted judgment for the creditor, holding that the state court judgment was nondischargeable pursuant to section 523(a)(6) because the injury caused to the creditor by the debtor was 'willful and malicious.' In finding the debtor liable for sexual harassment, the jury had determined that the debtor created an abusive work environment and caused injury to the creditor. The injury suffered was willful and malicious because the debtor’s acts of sexual harassment were deliberate, intentional and committed without just cause or excuse.McDonough v. Smith (In re Smith), 2001 Bankr. LEXIS 1627, 270 B.R. 544 (Bankr. D. Mass. December 11, 2001) (Rosenthal, B.J.).

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

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2nd Cir.

Government did not violate stay by failing to withdraw debtor/dentist’s prepetition 'exclusion' and 'debarment' from federal health care programs. Bankr. W.D.N.Y. Before filing his chapter 13 case, the debtor failed to pay his Health Education Assistance ('HEAL') loans and was excluded from participation in Medicare, Medicaid and all federal health care programs (the 'exclusion'). He was also 'debarred' from participating in both federal financial and nonfinancial assistance and benefit programs and federal contracting. After his chapter 13 case was filed and an order confirming his plan was entered, the debtor filed a motion seeking a determination that the government’s continuing postpetition exclusion and debarment violated the automatic stay. The bankruptcy court held that the failure of the government to withdraw the debtor’s prepetition exclusion and debarment did not constitute a violation of the automatic stay. The court noted, among other things, that any right of the debtor to participate in and be compensated for his participation in government programs was fully and completely terminated prepetition by the exclusion and debarment, which the debtor never contested. Therefore, at the time of his bankruptcy filing, the debtor (or his estate) had no property rights or interests in participating in any government programs that could be protected by the stay. The court also found that the neither the postpetition continuing existence of the debarment, nor the failure of the government to withdraw it, constituted the continuation of the administrative proceedings brought by the government that resulted in the exclusion and debarment. Finally, the court concluded that the mere postpetition existence of the debarment and the government’s failure to remove it for the term of the confirmed plan were not violations of the stay against acts to collect, assess or recover claims provided by section 362(a)(6). The court also stated that even if the mere postpetition existence of the debarment and the government’s failure to vacate the debarment during the term of the confirmed plan could be found to be technical violations of the stay (as continuing acts to collect and recover the government’s nondischargeable prepetition claim), the court would not find that the debtor was entitled to damages or any remedy under either section 362(h) or 105.In re Moss, 2001 Bankr. LEXIS 1605, 270 B.R. 333 (Bankr. W.D.N.Y. December 11, 2001) (Ninfo, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3], [5], [8]

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Creditor’s retention and sale of the vehicle pursuant to state law did not violate automatic stay. N.D.N.Y. The chapter 13 debtor’s case was converted to chapter 7, and a discharge was granted. Several days later, a secured creditor repossessed the debtor’s vehicle. Two days later, the debtor filed a second chapter 13 case, and his proposed payment schedule included a payment for the vehicle. The creditor, unaware of the second chapter 13 proceeding, sent the debtor a notice that the repossessed vehicle would be sold unless redeemed. The creditor received a notice from the bankruptcy court regarding the proceedings, which were apparently mishandled, and the creditor sold the vehicle at auction approximately one week later. The debtor filed a motion seeking damages for the creditor’s alleged violation of the automatic stay. The bankruptcy court held that the creditor violated the stay, and awarded actual economic damages, attorneys’ fees and damages for emotional distress. The creditor appealed. The district court reversed, and vacated the bankruptcy court’s decision. The district court held that absent a turnover order, only the debtor’s right to redeem the vehicle was property of his bankruptcy estate at the time the vehicle was repossessed and sold. Thus, the creditor’s retention and sale of the vehicle pursuant to state (New York) law did not violate the automatic stay. The court explained that if the debtor had moved for a turnover order under section 542 or 543, he could have effectuated a change in the right to possession of the vehicle from the creditor to the bankruptcy estate. However, the debtor 'sat on his rights under the bankruptcy code,' and could not later complain that the creditor’s actions, taken in accordance with state law, violated the automatic stay.Mfrs. & Traders Trust Co. v. Alberto (In re Alberto), 2001 U.S. Dist. LEXIS 20496, – B.R. – (N.D.N.Y. December 12, 2001) (Hurd, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01

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Discharge injunction did not preclude litigation of nondischarged tax liability. 2d Cir. When the taxpayer filed a chapter 7 petition, the Tax Court suspended its pending proceeding. After the debtor received a discharge, the Tax Court lifted the stay in order for the Tax Court case to proceed. When, despite notice and opportunity to cooperate, the debtor failed to appear pursuant to court order, the case was dismissed for lack of prosecution. The debtor appealed, asserting that either the automatic stay or the discharge injunction precluded dismissal of the Tax Court proceeding. The Court of Appeals for the Second Circuit affirmed, holding that the discharge injunction did not preclude continuation of the Tax Court proceeding against the debtor because the tax obligation had not been discharged. Since the Commissioner had not yet assessed the tax, it was not discharged pursuant to Bankruptcy Code section 507(a)(8)(A). Moreover, the automatic stay did not apply because the debtor’s discharge had been entered. Taylor v. Comm’r (In re Taylor), 2001 U.S. App. LEXIS 25218, – F.3d – (2d Cir. November 20, 2001) (per curiam).

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

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Order deferring issue to the state court was not a final, appealable order. S.D.N.Y. A real estate holding company filed a chapter 11 petition in order to forestall the sale of its real property after foreclosure. The debtor and mortgagee settled, but when the debtor reneged on its agreement, it filed a second chapter 11 petition to again forestall the foreclosure sale. In addition, the debtor filed a motion in the state court to compel the mortgagee to accept payment on its debt. When the United States trustee sought conversion or dismissal of the chapter 11 case, the debtor did not contest dismissal, but requested that the bankruptcy court order the mortgagee to accept payment on the debt. The bankruptcy court declined to rule on the debtor’s motion and dismissed the chapter 11 case. Upon the debtor’s appeal, the district court dismissed the appeal, holding that the bankruptcy court’s decision to defer resolution of the debtor’s motion to the state court was not a final, appealable order. Because the bankruptcy court did not address the debtor’s application to satisfy the mortgage, the order did not resolve the issue and the decision to defer to the state court, where the matter was also pending, was reasonable. In re JJF Associates, LLC, 2001 U.S. Dist. LEXIS 19360, – B.R. – (S.D.N.Y. November 26, 2001) (Dennychin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.07; 8003.07

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3d Cir.

Trustee’s avoidance powers did not violate transferees’ religious freedoms. E.D. Pa. The chapter 7 trustee commenced adversary proceedings against three religious organizations to recover prepetition transfers made by the debtor. The debtor, a wholesale distributer of candies, attracted investors by showing falsified sales records, balance sheets, income statements and accounts receivable listings. While the investors were being paid back through a Ponzi scheme, which eventually collapsed, the debtor transferred substantial sums to the religious organizations. The organizations moved for summary judgment claiming that sections 548 and 544(b) violated the Religious Freedom Restoration Act and impermissibly infringed upon their First Amendment religious liberty rights. The district court denied the motions for summary judgment, holding that the religious organizations failed to demonstrate that sections 544 and 548 substantially burdened their religious practices. Nothing in the Code prohibited religious activity, prevented the debtor from donating funds or prevented the religious organizations from accepting donations. Material questions of fact, as to whether the transfers constituted a substantial amount of the debtor’s assets or whether the debtor concealed the transfers, nevertheless precluded the entry of summary judgment in favor of the trustee.Liebersohn v. First Baptist Church (In re C.F. Foods, Inc.), 2001 U.S. Dist. LEXIS 21057, – B.R. – (E.D. Pa. December 20, 2001) (Newcomer, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09, 548.05

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4th Cir.

Court of Appeals affirmed decision that held that debt owed by former Rwandan ambassador to Republic of Rwanda was nondischargeable. 4th Cir. The Republic of Rwanda initiated an adversary complaint against the chapter 7 debtor, the former Rwandan ambassador to the United States, alleging that the ambassador owed the Republic a nondischargeable debt arising from 'defalcation' while acting in a fiduciary capacity. The bankruptcy court held that the ambassador committed a defalcation and owed Rwanda a nondischargeable debt of $17,475, and the district court affirmed. The ambassador appealed. The Republic cross-appealed, asserting that the amount of the debtor’s nondischargeable debt was actually $ 55,000. The Court of Appeals for the Fourth Circuit affirmed. The Court of Appeals agreed with the district court that ambassadors are, by definition, fiduciaries for the country they represent. Thus, the Ambassador’s use of funds that belonged to the Republic to purchase a substantial benefit for himself and his family (i.e., the preparation of a case for asylum) without disclosing this act to the Republic or seeking its consent, constituted a defalcation. The court also held that the doctrine of unclean hands did not bar the Republic’s recovery, and affirmed the district court’s determination that the amount of the nondischargeable debt was $17,475 because the Republic ratified all but this amount.Republic of Rwanda v. Uwimana (In re Uwimana), 2001 U.S. App. LEXIS 26591, 274 F.3d 806 (4th Cir. December 14, 2001) (Gribbon Motz, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10

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5th Cir.

Chapter 7 trustee was not entitled to compensation based on distributions made by the debtors. E.D. La. The chapter 7 trustee appealed an order of the bankruptcy court which denied her request for fees under section 326(a). After the individual debtors filed a chapter 7 petition and the trustee was appointed, the debtors converted the case to chapter 11. The debtors then agreed to distribute sufficient funds to pay creditors and the bankruptcy court granted their motion to voluntarily dismiss the chapter 11 case. The bankruptcy court denied the trustee’s request for compensation and found that section 326(a), which capped the trustee’s compensation based upon a percentage of moneys disbursed, barred the trustee from receiving compensation because she did not disburse any funds as trustee. On appeal, the trustee argued that a constructive disbursement theory permitted the court to base her section 326(a) fees on the money disbursed pursuant to the debtors’ agreement, even though she did not actually make any of the disbursements. The district court affirmed, holding that the plain meaning of section 326(a) did not allow the chapter 7 trustee to be compensated based on moneys distributed after the case was converted to chapter 11 and the trustee had been removed. The court noted that the plain language of section 326(a) indicated that only money the trustee distributed could be included in calculating her compensation base.In re Celano, 2001 U.S. Dist. LEXIS 21218, – B.R. – (E.D. La. December 7, 2001) (Vance, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:326.02[2]

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Land sale contract was not executory after state court entered decree of specific performance. Bankr. E.D. Tex. The debtors executed a contract to sell their home but later reneged on their agreement. When the purchasers obtained a judgment of specific performance, the debtors filed a chapter 13 petition in bankruptcy. The purchasers filed a motion for relief from stay and a motion to preclude the debtors from rejecting the contract. The debtors argued that the agreement was an executory contract that they could reject pursuant to 11 U.S.C. §§ 365, 1322(b)(7). The bankruptcy court held that the contract was no longer executory in nature because the state (Texas) court had entered a decree of specific performance. When the state court entered its decree of specific performance, there remained only ministerial acts to be performed so that the contract was not executory. Since the contract was not executory, it could not be rejected. Moreover, requiring the debtors to execute the documents of sale did not deprive them of their homestead rights. The fact that the debtors wanted to keep the particular residence as their homestead was not a compelling reason to conclude that the contract was executory. In re Smith, 2001 Bankr. LEXIS 1518, 269 B.R. 629 (Bankr. E.D. Tex. October 29, 2001) (Billparker, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.02[1]

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6th Cir.

Motion to amend complaint in preference action to add additional defendants denied. Bankr. S.D. Ohio The unsecured creditors’ committee for the chapter 11 debtor filed an adversary complaint to avoid and recover preferential transfers against a B & H Worldwide, Inc., a corporate entity of the United Kingdom. Approximately 119 days after the complaint was filed, the summons and a copy of the complaint were served on the defendant at offices located in Miami, Florida. In its answer, the defendant asserted that the alleged transfers were not made to or for the benefit of defendant, B & H Worldwide, Inc. Rather, the defendant claimed that the alleged transfers were made to and for the benefit of B & H Speedmail Ltd., trading as B & H Worldwide, a United Kingdom limited company. The committee then moved to amend the complaint to ensure the inclusion of all appropriate parties in the proceeding. The defendant claimed that any proposed addition of a party would be a futile amendment since the time to file an action had expired under section 546(a). The bankruptcy court denied the committee’s motion to file an amended complaint. The court held that the additional parties that the committee sought to be added to the action through the amended complaint did not receive their notice within the 120-day time period provided for in Fed. R. Civ. P. Rule 4(m), undue delay existed, and the requirements of Rule 15(c)(3) (which sets the standard for determining whether a proposed amended complaint can relate back to an initial filing) had not been met.Southern Air Transp., Inc. v. B & H Worldwide, Inc. (In re Southern Air Transp., Inc.), 2001 Bankr. LEXIS 1597, 270 B.R. 452 (Bankr. S.D. Ohio November 20, 2001) (Calhoun, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:546.01

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Kentucky debtor’s garnished wages not recoverable as preferential transfers. Bankr. W.D. Ky. The debtor filed an adversary proceeding seeking a declaration that all wages garnished by the defendants during the 180-day period prior to the debtor’s bankruptcy filing were preferential transfers pursuant to state (Kentucky) law. The debtor chose not to proceed under section 547(b) because no wages were garnished during the 90-day period prior to his bankruptcy filing. The bankruptcy court held that the debtor failed to prove that the wage garnishments were preferential transfers under the applicable Kentucky statutes (K.R.S. §§ 378.060, 378.070); thus, the debtor’s claim failed as a matter of law. The court found that the defendants effectively rebutted the debtor’s claim that the transfers were made with the design of preferring one creditor over another, a required element under state law. The court concluded that since the wage garnishments resulted from a default judgment and were not voluntary, the transfers could not have been made by the debtor with the design of preferring one creditor over another.Johnson v. The Med. Center at Bowling Green (In re Johnson), 2001 Bankr. LEXIS 1595, 270 B.R. 390 (Bankr. W.D. Ky. May 22, 2001) (Cooper, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.01

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Wholly unsecured junior lien on debtors’ residence was stripped off and treated as an unsecured claim. Bankr. S.D. Ohio The chapter 13 debtors filed an adversary proceeding to avoid a junior mortgage lien, alleging that the mortgage was not supported by any value and could be treated as an unsecured claim in their plan. Although the parties stipulated that senior mortgage and tax lien were greater than the fair market value of the residence, the creditor contended that its wholly unsecured lien could not be avoided. The bankruptcy court granted the relief requested by the debtors, holding that because there was no value to which the creditor’s security interest in the debtors’ residence could attach, the creditor’s rights were not protected from modification under section 1322(b)(2). The court noted a split of authority on the issue and joined the majority of courts in permitting the stripoff of wholly unsecured junior mortgages.Ernst v. Bank One, N.A. (In re Ernst), 2001 Bankr. LEXIS 1644, 270 B.R. 707 (Bankr. S.D. Ohio December 19, 2001) (Waldron, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.06]

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7th Cir.

Petition preparer’s fee reduced from $299 to $75. 7th Cir. A bankruptcy petition preparer gathered information and typed it onto forms for debtors. In addition, the preparer had an arrangement with an attorney whereby the clients could telephone the attorney and receive legal advice. The clients were not charged for these telephone calls. The bankruptcy court reduced the fees of a bankruptcy petition preparer from $299 to $75 and the preparer appealed. The district court affirmed and the Court of Appeals for the Seventh Circuit affirmed, holding that the bankruptcy court did not abuse its discretion in allowing only $25 per hour for the petition preparer’s services. The fact that the preparer made an attorney available to render legal advice was irrelevant because the clients were not charged for that service. The district court also noted that the preparer’s failure to include a transcript in the appellate record precluded meaningful review of the issues raised. In re Froehlich, 2001 U.S. App. LEXIS 15508, – F.3d – (7th Cir. November 26, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 2:110.09

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8th Cir.

Creditors’ efforts to assist police with criminal investigation of debtor did not violate discharge injunction. D. Minn. The chapter 7 debtor filed a complaint in district court alleging that the creditors failed to cease collection efforts after his obligation to them was discharged. The debtor had received authorization prepetition from the creditor jewelry store and its owner to take jewelry and watches from the store, without paying for them, for the purpose of showing the items to his girlfriend. The debtor agreed to make arrangements for payment if he chose to keep the jewelry, or return the jewelry to the store. Because the debtor neither paid for the jewelry nor returned it, the store’s owners filed a police report. The debtor subsequently filed for bankruptcy and his debt to the jewelry store was discharged. Nevertheless, the police department continued its investigation of the creditors’ allegations, resulting in the eventual prosecution and conviction of the debtor for theft. The debtor alleged that the creditors continued their collection efforts in violation of the discharge injunction by using the police as 'collection muscle' in the form of threats of criminal prosecution. The district court granted the creditors’ motion for summary judgment and dismissed the complaint, holding that the debtor failed to raise a genuine issue that the criminal investigation was commenced, or continued, in bad faith or for the purpose of collecting a discharged debt. The court noted that there were sufficient grounds upon which to commence the investigation, based upon the amount of jewelry taken, and based on the fact that the debtor had also been investigated for other theft by swindle and forgery charges.Ehrlich v. Badiner, 2001 U.S. Dist. LEXIS 21149, – F. Supp.2d – (D. Minn. November 28, 2001) (Davis, D.J.).

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

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Repossessed automobile was property of the estate. Bankr. E.D. Ark. When the debtor’s automobile was repossessed, he filed a chapter 13 petition and sought turnover of the vehicle. The lender resisted turnover and moved for relief from stay, relying upon In re Lewis, 137 F.3d 1280 (11th Cir. 1998), which held that, pursuant to state (Alabama) law, upon default of payment by the debtor, title of the automobile passed to the creditor. Applying United States v. Whiting Pools, 462 U.S. 198, 103 S. Ct. 2309, 76 L. Ed.2d 515 (1983), and Texas law, as required by the contract between the parties, the bankruptcy court held that the debtor’s interest in the vehicle was property of the estate so that turnover was required. In concluding that the vehicle was property of the estate, the bankruptcy court rejected Lewis because it was flawed and because applicable state (Texas) law was to the contrary. In re Clelland, 2001 Bankr. LEXIS 1513, 268 B.R. 539 (Bankr. E.D. Ark. October 22, 2001) (Scott, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.06[2]

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B.A.P. affirmed decision that 'excruciatingly late' payment was not made in parties’ ordinary course of business. B.A.P. 8th Cir. The payee of an alleged preference appealed from a bankruptcy court order that rejected the payee’s 'ordinary course of business' defense. Specifically, the bankruptcy court determined that the payment at issue, which was comprised of four checks and made 177 days after invoicing, was not in the ordinary course of business between the parties because the payment was not consistent with their prior payment patterns. The B.A.P. for the Eighth Circuit affirmed. The court held that the 'excruciatingly late' payment in this case was clearly inconsistent with this practice between the parties prior to the preference period and, thus, was not in the ordinary course of business between the parties even though there was no other change in the course of conduct between the parties. The court rejected the payee’s assertion that the bankruptcy court improperly focused solely on the fact that the payment was made so long after invoicing. The court also rejected the payee’s claim that since late payments were ordinary between the parties and consistent with prior practice, the 'degree of lateness' was not relevant.Laclede Steel Co. v. Concast Canada, Inc. (In re Laclede Steel Co.), 2001 Bankr. LEXIS 1592, 271 B.R. 127 (B.A.P. 8th Cir. December 14, 2001) (Scott, B.J.).

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

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9th Cir.

Lessors not entitled to recovery of attorneys’ fees upon debtor’s assumption of lease. Bankr. N.D. Cal. After the bankruptcy court granted the chapter 7 trustee’s motion to assume a real property lease, the lessors sought recovery of their reasonable attorneys’ fees as part of the cost of curing defaults. The trustee objected, arguing that there was no basis for the award of attorneys’ fees as part of the cost of assumption. The bankruptcy court denied the lessors’ request to include attorneys’ fees as part of the cure upon assumption. The court noted that while the notion that a landlord must always be compensated for attorneys’ fees upon assumption of a lease has been soundly rejected by the courts, a landlord may be entitled to recovery of attorneys’ fees if the lease clearly provides for them. In this case, the court concluded that the attorneys’ fee provision contained in the lease was not drafted with enough scope or precision to allow the lessors recovery of their attorneys’ fees from the bankruptcy estate.In re I-Mind Educ. Sys., 2001 Bankr. LEXIS 1601, 269 B.R. 47 (Bankr. N.D. Cal. September 30, 2001) (Jaroslovsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01

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10th Cir.

Trustee’s avoidance action was remanded for a determination of whether the imposition of a constructive trust was an equitable remedy. 10th Cir. The chapter 7 trustee appealed the district court order affirming the bankruptcy court’s imposition of a constructive trust on funds the debtor fraudulently obtained from a creditor. The debtor operated several Ponzi schemes whereby returns to investors were paid not from profits derived from his business, but with funds received from new investors. The debtor had fraudulently induced the creditor to invest funds in the scheme before an involuntary petition was filed against him, and the funds were commingled in an account comprised of funds acquired from other fraud victims. Between the filing of the petition and the order for relief, the debtor initiated a series of transfers back to the creditor and the trustee commenced an action to avoid the transfers pursuant to section 549(a). The bankruptcy court dismissed the trustee’s action, determining that the funds were subject to a constructive trust and thus not property of the estate, and the district court affirmed. The Court of Appeals for the Tenth Circuit reversed and remanded, holding that the bankruptcy court failed to weigh the claims of the remaining creditors before employing the equitable remedy of a constructive trust. The bankruptcy court had improperly applied an equitable tracing fiction to the creditor’s prepetition investment funds to elevate his claim over the claims of other potentially similarly-situated creditors. The proceeding was remanded for a determination of whether the equities supported the use of a constructive trust.Hill v. Kinzler (In re Foster), 2001 U.S. App. LEXIS 27194, – F.3d – (10th Cir. December 26, 2001) (Baldock, C.J.).

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

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11th Cir.

Child support claim assigned to governmental agency did not have priority. Bankr. N.D. Ala. After the debtor filed a chapter 13 petition, a state (Alabama) public assistance department filed proofs of claim representing the debtor’s prepetition child support arrears. A portion of the claim was the amount of assistance paid to the custodial parent in state benefits after a child support order was entered against the debtor. The remainder of the claim was owed directly to the custodial parent by the debtor. The chapter 13 trustee objected, arguing that the claims should not be given priority status but instead should be paid as general unsecured claims. The creditor argued that the claims should be paid entirely as priority claims. The bankruptcy court recognized the split of case authority on the issue of whether section 507(a)(7)(A) conferred priority status on child support claims assigned to a governmental entity, and followed Eleventh Circuit precedent in holding that an assigned child support claim did not have priority. The court reasoned that the plain language of section 507(a)(7) mandated the exclusion from priority of an assigned claim, notwithstanding its status as a nondischargeable debt under section 523(a)(5) (citing Collier on Bankruptcy, 15th Ed.). In re Gray, 2001 Bankr. LEXIS 1565, 269 B.R. 881 (Bankr. N.D. Ala. September 14, 2001) (Cohen, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.09[2]

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