Collier Bankruptcy Case Update February-14-05

Collier Bankruptcy Case Update February-14-05

 


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 14, 2005

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

 

3d Cir.

§ 547(c)(2) Transferee could not maintain ordinary course of business defense to avoidance absent sufficient evidence of prior course of dealings with debtor. Waslow v. Dover Findings, Inc. (In re M Group, Inc.) (Bankr. D. Del.)


4th Cir.

§ 506(a) Petition date was proper valuation date for debtor’s primary residence in proceeding to determine validity of third mortgage on the property. Dean v. LaPlaya Inv., Inc. (In re Dean) (Bankr. E.D. Va.)

§ 547(b) Debtors who were solvent at time of alleged preferential transfers could not prevail on avoidance claims. Heilig-Meyers Co. v. Wachovia Bank (In re Heilig-Meyers Co.) (Bankr. E.D. Va.)


5th Cir.

§ 109(e) Chapter 13 case dismissed after creditor whose claim was not discharged in debtor’s prior chapter 7 case obtained judgment resulting in noncontingent, liquidated debt in excess of limits. In re Muller (Bankr. N.D. Tex.)

§ 365 Debtor ordered to pay increased, alternative rent under lease of assets without prejudice to future showing that “lease” was actually a financial transaction or that increase was a penalty. In re Mirant Corp. (Bankr. N.D. Tex.)


6th Cir.

§ 329 Trustee’s motion to disgorge attorneys’ fees incurred in connection with debtor’s redemption of vehicle denied in absence of any actual or statutory conflict of interest. In re Ray (Bankr. M.D. Tenn.)

§ 544(a) Trustee waived right to exercise strong arm powers by not referencing section 544(a) in joint pre-trial order singed by counsel for trustee and debtor. Gold v. National City Home Loan Servs. (In re Hamama) (Bankr. E.D. Mich.)


7th Cir.

§ 503(b)(1)(A) Creditor’s breach of contract claim against debtor did not give rise to an administrative expense. In re National Steel Corp. (Bankr. N.D. Ill.)

§ 523(a)(9) Bankruptcy court ruling that claim for injuries caused by debtor’s operation of a motorboat while intoxicated was nondischargeable reversed as a motor boat is not a “motor vehicle.” Dilk v. Delph (S.D. Ind.)


8th Cir.

§ 547(c) Bankruptcy court properly held that creditor did not establish that the ordinary course of business or subsequent new value exceptions to avoidance applied to transfers trustee sought to avoid. Shodeen v. Airline Software, Inc. (In re Accessair, Inc.) (B.A.P. 8th Cir.)

§ 549(a) Bankruptcy court properly avoided postconversion quitclaim deed from debtor to spouse pursuant to prepetition prenuptial agreement as an unauthorized postpetition transfer. Cox v. Griffin (B.A.P. 8th Cir.)

28 U.S.C. § 1334(c)(2) Stay pending appeal denied because bankruptcy court decision to abstain and remand fraud case was not appealable. Official Plan Comm. of Omniplex Communs. Group, LLC v. Lucent Techs., Inc. (E.D. Mo.)


9th Cir.

§ 362(h) Telephone company that sent postpetition collection letter willfully violated stay but was not subject to sanctions absent proof of actual damages by debtor. In re McCain (Bankr. D. Idaho)


10th Cir.

§ 349(a) Debtors’ sixth chapter 13 petition, field after prior five cases were dismissed for failure to make plan payments, dismissed with prejudice, due to debtors’ bad faith. In re Smith (Bankr. D. Utah)

§ 1325(b) Plan including private school tuition for debtors approved where debtors had significantly reduced other expenses and private education was demonstrably superior to public school. In re Villegas (Bankr. D. Utah)


11th Cir.

§ 106(a)(3) IRS could not be held liable for punitive damages for willful violation of stay. Baird v. United States (In re Baird) (Bankr. M.D. Ala.)

§ 505(a) Request for redetermination of taxes was properly within jurisdiction of bankruptcy court. Hospitality Ventures/LaVista v. Heartwood 11, LLC (In re Hospitality Ventures/La Vista)
(Bankr. N.D. Ga.)


D.C. Cir.

§ 105(a) Bankruptcy court declined to exercise equitable powers to order IRS to consider debtor’s offer in compromise. 1900 M Rest. Assocs. v. United States (1900 M Rest. Assocs.) (Bankr. D.D.C.)

Rule 2002(f)(3) Court refused to adjust bar date despite failure of clerk’s office to fill in date in notice to creditors as failure to inquire would be a lack of due diligence and debtor could file on creditors’ behalf. In re Barnes (Bankr. D.D.C.)



Collier Bankruptcy Case Summaries

 

3d Cir.

Transferee could not maintain ordinary course of business defense to avoidance absent sufficient evidence of prior course of dealings with debtor. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiff unsecured claims administrator filed a motion for summary judgment in his action to avoid and recover under 11 U.S.C. § 547 certain preferential transfers made to defendant transferee. The transferee also filed a motion for summary judgment. OVERVIEW: The administrator asserted that, within 90 days prepetition, debtor issued checks to the transferee and that the payments constituted preferential transfers that were avoidable under 11 U.S.C. § 547. The transferee asserted that the transfers at issue were made on a debt that was antecedent pursuant to section 547(b)(2) because debtors’ obligations were incurred before debtor made the transfers. The court held that the only conclusive evidence presented to the court of a preferential payment were payments represented by two checks. The court held that the amount of the checks would constitute an avoidable preference unless the transferee could establish that the payments were in the ordinary course of the parties’ business or financial affairs and according to ordinary business terms. In granting the administrator’s motion for summary judgment in part and denying the transferee’s motion for summary judgment, the court held that there was insufficient evidence of the parties’ course of dealing before the preference period, and there was no evidence of what constituted the ordinary course of business or financial affairs of the parties. Waslow v. Dover Findings, Inc. (In re M Group, Inc.), 2005 Bankr. LEXIS 72, — B.R. — (Bankr. D. Del. January 20, 2005) (Fitzgerald, B.J.).

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

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4th Cir.

Petition date was proper valuation date for debtor’s primary residence in proceeding to determine validity of third mortgage on the property. Bankr. E.D. Va. PROCEDURAL POSTURE: After filing for chapter 13 bankruptcy protection, plaintiff debtors filed an adversary proceeding to determine the validity and nature of a third mortgage lien held by defendant creditor. The parties moved for summary judgment. At the hearing on the motions, the parties agreed that the issue was the proper valuation date of the debtors’ primary residence for the purpose of determining whether the creditor’s third mortgage lien was allowable. OVERVIEW: The bankruptcy court did not interpret 11 U.S.C. § 506(a) or its legislative history to mean that a totality of the circumstances or other flexible method applied in determining the valuation date. Rather, the legislative history called for permitting different valuations depending on a debtor’s use of the property as revealed during a bankruptcy case. Within the context of a debtor’s principal residence, the bankruptcy court did not need to wait until the confirmation date to determine a debtor’s use of his principal residence since a debtor’s proposed use of his principal residence was to provide shelter for the debtor and his dependents and was known on the date the debtor filed the bankruptcy petition date. In this case, the petition date was the appropriate date to value the debtors’ principal residence because they had used the property as their principal residence throughout the bankruptcy case. Moreover, permitting a valuation date removed from the petition date would have allowed the creditor’s status to change from that of an unsecured creditor to a secured creditor through no affirmative action of the debtors to put their property to more productive use. Dean v. LaPlaya Inv., Inc. (In re Dean), 2005 Bankr. LEXIS 2168, — B.R. — (Bankr. E.D. Va. December 28, 2005) (Tice, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.03[back to top]

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Debtors who were solvent at time of alleged preferential transfers could not prevail on avoidance claims. Bankr. E.D. Va. PROCEDURAL POSTURE: Plaintiff debtors filed a complaint to avoid allegedly preferential or fraudulent cash transfers and grants of liens made to defendants, a group of prepetition secured creditors. OVERVIEW: The transfers at issue were made on May 25, 2000, as part of a major financial restructuring of the debtors. The issues for decision were: (1) whether the debtors were insolvent on a consolidated basis on May 25; (2) whether defendant lenders were entitled to a new value defense with regard to the allegedly preferential transfers; and (3) whether the lenders were entitled to an ordinary course of business defense with regard to the allegedly preferential cash transfers. In finding the debtors were solvent on May 25, the court applied the balance sheet test of insolvency because debtors were operating as a going concern on May 25; debtors were not on their deathbed. After subtracting total liabilities from total assets the result was $ 41,629,000 of positive shareholders’ equity, which represented the court’s finding that on a balance sheet analysis the debtors were solvent on May 25. Other factors also suggested solvency. Inter alia, debtors’ did not report significant losses for the five fiscal years 1996 through 2000, and a large part of their loss was from two nonrecurring items; further, debtors were not without cash to meet operating and debt servicing needs at May 25. Heilig-Meyers Co. v. Wachovia Bank (In re Heilig-Meyers Co.), 2005 Bankr. LEXIS 2167, — B.R. — (Bankr. E.D. Va. December 21, 2005) (Tice, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03[back to top]

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5th Cir.

Chapter 13 case dismissed after creditor whose claim was not discharged in debtor’s prior chapter 7 case obtained judgment resulting in noncontingent, liquidated debt in excess of limits. Bankr. N.D. Tex. PROCEDURAL POSTURE: Creditor filed a motion to dismiss debtors’ chapter 13 case, on the grounds that debtors’ noncontingent, liquidated, unsecured debts exceeded the allowable debt limits under 11 U.S.C. § 109(e). OVERVIEW: Debtors, husband and wife, filed for relief under chapter 7 and listed creditor as the holder of an unsecured nonpriority claim. Creditor, the provider of satellite television service, had sued debtors in state court, alleging that debtor husband had on 42 occasions surreptitiously possessed and illegally used in violation of federal communications and copyright laws various devices and equipment designed to intercept and decrypt creditor’s protected satellite communications. The court discharged debtors but held that creditor’s debt was not discharged. Subsequently, debtors filed for relief under chapter 13, and the next day creditor obtained a default judgment on its claim. In dismissing debtors’ chapter 13 case, the court held that the debt was noncontingent because debtors’ liability did not depend on the happening or occurrence of a future extrinsic event and disputed debts were included in the eligibility calculations. The court also held that the debt was liquidated because it was ascertainable prepetition to the extent of minimum damages, based on a calculation of the minimum statutory damages under the federal statutes that debtor husband violated. In re Muller, 2005 Bankr. LEXIS 57, — B.R. — (Bankr. N.D. Tex. January 19, 2005) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[back to top]

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Debtor ordered to pay increased, alternative rent under lease of assets without prejudice to future showing that “lease” was actually a financial transaction or that increase was a penalty. Bankr. N.D. Tex. PROCEDURAL POSTURE: Putative lessors, special purpose entities affiliated with financial institutions, asserted that a bankruptcy debtor was liable for increased rent on unexpired leases of assets to the debtor, which also acted as an issuer of notes securing the lessors’ loans, upon the debtor’s termination of its status as an issuer of securities. The lessors moved to compel payment of the alternative rent under 11 U.S.C. § 365.OVERVIEW: The leases provided for increased rent to offset the increased interest rate the lessors were required to pay on the loans upon termination of the debtor’s issuer status. The debtor contended that section 365 did not apply to require payment of the alternative rent because the relationship of the lessors to the debtor was not that of lessors-lessee within the meaning of section 365 but rather of parties to a financial transaction. The debtor also argued that section 365 was inapplicable since its default under the lease was nonmonetary and the increased rent constituted a penalty. The bankruptcy court first held that the evidence was insufficient to establish whether the parties’ transactions were in fact leases but, under section 365, payment of the increased rent was mandatory until it was judicially determined that no lease was involved, and the relevant documents were labeled as leases and contained no terms inconsistent with true leases. Further, in the absence of any express obligation of the debtor to maintain its status as a securities issuer, its obligation to pay the increased rent was a monetary obligation subject to section 365 rather than a cure of a nonmonetary obligation or a penalty. In re Mirant Corp., 2004 Bankr. LEXIS 1377, — B.R. — (Bankr. N.D. Tex. September 15, 2004) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01[back to top]

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6th Cir.

Trustee’s motion to disgorge attorneys’ fees incurred in connection with debtor’s redemption of vehicle denied in absence of any actual or statutory conflict of interest. Bankr. M.D. Tenn. PROCEDURAL POSTURE: Three otherwise unrelated chapter 7 cases involving various debtors were before the court on movant United States trustee’s (“UST”) motion to disgorge attorney fees under 11 U.S.C. § 329. The UST sought disgorgement in connection with debtors’ redemption of automobiles on the basis of the existence of an alleged conflict of interest and unreasonableness of the fees. Non-movant attorney hired independent counsel and objected to the UST’s motion. OVERVIEW: Debtors redeemed vehicles pursuant to 11 U.S.C. § 722 whereby they borrowed the redemption funds from a lender that provided redemption loans. Debtors’ loans included a provision that allowed them to borrow enough funds to pay the attorney fees associated with the redemption. At the closing of each of the loans, the lender disbursed the loan proceeds that paid off the redemption value to the secured creditor, paid the fees associated with the loan, and paid the attorney his fees. The UST argued that the attorney accepted, or appeared to accept, financial incentives to refer his clients to the lender, resulting in a conflict of interest, and that the fees charged for the redemptions were unreasonable for the routine redemption services. The court concluded that delving into the relationships of the parties fully exonerated any conflict of interest allegations. It also found no statutory conflict of interest either, as the Bankruptcy Code was willing to overlook an attorney’s representation of the debtor and a creditor absent an objection where there was no actual conflict. It also held that the attorney demonstrated the reasonableness of the $300 fee charged for the redemptions. In re Ray, 2004 Bankr. LEXIS 1370, 314 B.R. 643 (Bankr. M.D. Tenn. September 17, 2004) (Paine, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.01[back to top]

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Trustee waived right to exercise strong arm powers by not referencing section 544(a) in joint pre-trial order singed by counsel for trustee and debtor. Bankr. E.D. Mich. PROCEDURAL POSTURE: Chapter 7 trustee filed a complaint against creditor, seeking to avoid the recording of a mortgage as a post-petition transfer in violation of 11 U.S.C. § 549(a). OVERVIEW: Debtor and his wife executed a mortgage in favor of creditor. Subsequently, debtor filed for chapter 7 relief and the mortgage was recorded 17 days later. The court held that, because the recording of a mortgage was not a transfer, as defined under 11 U.S.C. § 101(54), the recording of the mortgage did not constitute a post-petition transfer that was avoidable under 11 U.S.C. § 549(a). The court also held that trustee waived his right to exercise his strong arm powers under 11 U.S.C. § 544(a) to avoid the transfer because the joint final pre-trial order signed by counsel for trustee and debtor did not mention section 544(a). The court further held that trustee could not pursue a claim of a violation of the automatic stay under 11 U.S.C. § 362(a), which claim was not included in the complaint, but was included in the final pretrial order, because the pretrial order could not be used as a vehicle for adding claims or defenses. Gold v. National City Home Loan Servs. (In re Hamama), 2005 Bankr. LEXIS 65, — B.R. — (Bankr. E.D. Mich. January 24, 2005) (Rhodes, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.02[back to top]

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7th Cir.

Creditor’s breach of contract claim against debtor did not give rise to an administrative expense. Bankr. N.D. Ill. PROCEDURAL POSTURE: Creditor moved for allowance and payment of a chapter 11 administrative expense pursuant to 11 U.S.C. § 503(b)(1)(A) from the bankruptcy estates of related debtor entities (the “debtor”). OVERVIEW: This was not the typical scenario where a creditor provided goods or services to the debtor and sought payment for them as an administrative expense claim. Creditor’s request for an administrative expense claim was based on a contract and debtors’ alleged breach thereof. Creditor maintained that it purchased substantial amounts of steel above the contract rate and that, in doing so, debtor’s estate benefited. The court found that creditor failed the Jartran test. The first element of the test was met, as creditor’s claim arose from its postpetition purchase of steel from debtor. However, the second element was not met. Creditor did not incur any actual, necessary costs and expenses of preserving the estate in connection with the purchaser of steel at the increased price under the amended price proposal. Instead, creditor sought the costs and expenses it incurred as a result of debtor’s alleged breach of the contract, including the amount it paid above the contract price, financing charges, interest, and attorneys’ fees. Further, the price creditor paid was under the market rate at the time. Creditor was not entitled to an administrative expense claim under section 503(b)(1)(A). In re National Steel Corp., 2004 Bankr. LEXIS 1639, 316 B.R. 287 (Bankr. N.D. Ill. October 26, 2004) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06[back to top]

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Bankruptcy court ruling that claim for injuries caused by debtor’s operation of a motorboat while intoxicated was nondischargeable reversed as a motor boat is not a “motor vehicle.” S.D. Ind. PROCEDURAL POSTURE: Plaintiff married couple filed an adversary complaint in the bankruptcy court against defendant debtor. Pursuant to 11 U.S.C. § 523(a)(9), the couple sought to except from discharge their claims for damages arising out of injuries that the husband had received in a boating accident. The debtor filed an interlocutory appeal after the bankruptcy court denied his motion to dismiss the claim. OVERVIEW: The couple filed a personal injury suit against the debtor in a state court after the debtor’s motorboat collided with their vessel, causing severe injuries to the husband. The debtor thereafter filed a chapter 11 bankruptcy petition, which triggered a stay of the couple’s civil suit. The couple responded by filing the adversary complaint; in one count they asked the bankruptcy court to except from discharge, pursuant to section 523(a)(9), those debts resulting from the motorboat accident. The debtor filed a Fed. R. Civ. P. 12(b)(6) motion to dismiss the claim. In denying the motion, the bankruptcy court rejected the debtor’s argument that 11 U.S.C. § 523(a)(9) did not apply because the term “motor vehicle,” as used in section 523(a)(9), did not include motorboats. The court found that the bankruptcy court had erred in interpreting section 523(a)(9). Dictionaries, the federal Dictionary Act, and the overall statutory framework of the United States Code made clear that “motor vehicle” as used in section 523(a)(9) referred only to land vehicles. The debtor’s dismissal motion should have been granted because the term “motor vehicle,” as used in section 523(a)(9), did not include motorboats. Dilk v. Delph, 2005 U.S. Dist. LEXIS 26727, — B.R. — (S.D. Ind. November 24, 2005) (Tinder, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.15[back to top]

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8th Cir.

Bankruptcy court properly held that creditor did not establish that the ordinary course of business or subsequent new value exceptions to avoidance applied to transfers trustee sought to avoid. B.A.P. 8th Cir. PROCEDURAL POSTURE: Plaintiff chapter 7 trustee sought to avoid six preferential transfers that the debtor had made to defendant creditor. The Bankruptcy Court for the Southern District of Iowa held that the creditor failed to meet its burden of proof in demonstrating that the trustee could not avoid the transfers remitted to the creditor under either the ordinary course or subsequent new value defenses contained in 11 U.S.C. §§ 547(c)(2) and (c)(4). OVERVIEW: The bankruptcy court properly concluded that the creditor failed to establish that the debtor remitted the preference payments in the ordinary course of business under 11 U.S.C. § 547(c)(2) because its determination that the creditor’s witness was not credible was clearly within its purview, the documentary evidence showed that the tardiness of the debtor’s payments became substantially more significant during the preference period, and the payments for which no invoice was provided were properly ignored. Moreover, the creditor’s mere provision of the dates of the debtor’s payments did not establish a baseline of dealings between the parties, two of the preference payments were made in response to heightened collection efforts, and the creditor failed to establish the general range of terms prevailing within the industry. The bankruptcy court properly held that the creditor did not provide subsequent new value to the debtor after receiving at least some of the preference payments because it failed to present credible evidence that it installed software and hardware per a later agreement. Shodeen v. Airline Software, Inc. (In re Accessair, Inc.), 2004 Bankr. LEXIS 1369, 314 B.R. 386 (B.A.P. 8th Cir. September 22, 2004) (McDonald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[back to top]

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Bankruptcy court properly avoided postconversion quitclaim deed from debtor to spouse pursuant to prepetition prenuptial agreement as an unauthorized postpetition transfer. B.A.P. 8th Cir. PROCEDURAL POSTURE: In a chapter 7 bankruptcy case originally filed as a chapter 11 case, plaintiff trustee filed against defendant wife an adversary complaint seeking to avoid the transfer of funds to the wife and the filing of a quitclaim deed. The United States Bankruptcy Court for the Western District of Arkansas entered judgment in favor of the trustee. The wife appealed. OVERVIEW: In January 2002, debtor husband filed a chapter 11 bankruptcy petition, which was converted into a chapter 7 case in 2003. After the conversion, the wife recorded a quitclaim deed allegedly executed by debtor early in 2000 as part of a prenuptial agreement. The agreement and the deed addressed property on which a liquor store was located. In late 2000, debtor purchased the liquor store. That store made rental payments to him. Later, debtor filed articles of incorporation and issued 50 shares of the corporation to himself and 50 shares to the wife. No assets were transferred to the corporation, and the wife paid no consideration for her stock. In 2001, debtor instructed his bookkeeper to make certain payments to the wife. After debtor filed for bankruptcy, the trustee sought to avoid those payments and the later filing of the quitclaim deed. The bankruptcy court properly ruled for the trustee. The prenuptial agreement evinced an intent to grant a future interest, and debtor did not relinquish control of the property. Further, even if the wife obtained an interest in the land, the trustee’s interest in the property had priority over the wife’s interest. Cox v. Griffin, 2005 Bankr. LEXIS 68, — B.R. — (B.A.P. 8th Cir. January 27, 2005) (Federman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:549.03[back to top]

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Stay pending appeal denied because bankruptcy court decision to abstain and remand fraud case was not appealable. E.D. Mo. PROCEDURAL POSTURE: Plaintiff, the official plan committee of a chapter 11 debtor, filed a fraud suit in state court against defendant contractor. After the contractor filed a notice of removal, the committee filed a motion to remand. After the court granted the committee’s motion to remand, the contractor filed a motion for a stay of the court’s remand order pending appeal. OVERVIEW: In granting the committee’s motion for remand, the court found that it was required to abstain from hearing the case pursuant to 28 U.S.C. § 1334(c)(2). After the court entered an order remanding the case to state court, the contractor filed a notice of appeal. The contractor subsequently filed a motion to stay the remand order pending appeal. The court held that it would deny the contractor’s motion for a stay because the contractor failed to show that the remand order was appealable under § 1334 and, thus, the contractor failed to demonstrate a likelihood of success on the merits. Moreover, even if the remand order was found to be appealable, the statutory requirements for abstention under section 1334(c)(2) were met, and, thus, the contractor was unlikely to succeed on merits of the appeal. The court further held that the remaining factors also counseled against a stay because (1) the contractor would not be irreparably injured in the absence of a stay, and (2) the issuance of a stay would cause an unnecessary time delay in the adjudication of the case. Official Plan Comm. of Omniplex Communs. Group, LLC v. Lucent Techs., Inc., 2004 U.S. Dist. LEXIS 23291, — B.R. — (E.D. Mo. September 14, 2004) (Webber, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05[2][back to top]

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9th Cir.

Telephone company that sent postpetition collection letter willfully violated stay but was not subject to sanctions absent proof of actual damages by debtor. Bankr. D. Idaho PROCEDURAL POSTURE: Chapter 7 debtors filed motions to recover monetary sanctions from diverse creditors pursuant to 11 U.S.C. § 362(h), alleging that the creditors violated the automatic stay in effect in their bankruptcy case. The court conducted a hearing at which none of the creditors appeared, although one filed a motion to dismiss, and the court entered findings of fact and conclusions of law under Fed. R. Bankr. P. 7052 and 9014. OVERVIEW: Debtors filed a mailing matrix with their petition, pursuant to Fed. R. Bankr. P. 1007, that named the creditors, and they were mailed a copy of the notice commencing the bankruptcy case. Five creditors sent letters attempting to collect the relevant debt from the debtors, but only one sent a letter while the stay was actually in effect. Claims against four of the creditors were thus dismissed. The one creditor that filed a motion to dismiss, however, had violated the stay. The court also found that the creditor’s principal, a telephone company, had violated the stay, although it may not have had actual knowledge of the bankruptcy. Neither the creditor nor its principal appeared for the hearing. Although a willful violation of 11 U.S.C. § 362(a) had been committed, the debtors had not offered any proof of actual damages resulting from the violation. Debtors and their counsel apparently had made no attempt to resolve the problem directly with the creditor. In the absence of actual damages, punitive damages and attorneys’ fees were not available. In re McCain, 2004 Bankr. LEXIS 2172, — B.R. — (Bankr. D. Idaho August 19, 2004) (Pappas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.11[3][back to top]

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10th Cir.

Debtors’ sixth chapter 13 petition, field after prior five cases were dismissed for failure to make plan payments, dismissed with prejudice, due to debtors’ bad faith. Bankr. D. Utah PROCEDURAL POSTURE: Debtors filed a sixth chapter 13 bankruptcy petition. Pursuant to 11 U.S.C. § 349(a), the United States trustee moved to dismiss debtors’ current case with prejudice and bar the discharge of scheduled debts in the case to any case filed in the future. OVERVIEW: Debtors filed two chapter 7 petitions and received a discharge in each case. Debtors also filed five previous chapter 13 petitions that were dismissed for failure to make plan payments. Regarding the present case, debtors were five months delinquent on their plan payments when the trustee moved to dismiss. The court determined that a dismissal with prejudice, barring the discharge of scheduled debts in the present case to any case filed in the future, was warranted because debtors’ plan was filed in bad faith. The court based its finding upon: (1) significant inconsistencies in the statements and schedules filed in debtors’ eight bankruptcy cases; (2) the dismissal of each of the previous chapter 13 cases; (3) debtors’ unstable employment history; (4) debtors’ escalating amounts of unsecured debt; and (5) debtors’ serial filings. In re Smith, 2004 Bankr. LEXIS 2169, — B.R. — (Bankr. D. Utah November 19, 2004) (Thurman, B.J.).

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

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Plan including private school tuition for debtors approved where debtors had significantly reduced other expenses and private education was demonstrably superior to public school. Bankr. D. Utah PROCEDURAL POSTURE: Debtors moved to confirm their chapter 13 plan. The debtors listed as an expense an item for private school tuition for their two children. The chapter 13 trustee initially objected to this expenditure because the debtors did not propose a plan that would have paid 100 percent of their unsecured debt. The trustee subsequently withdrew his objection. The court scheduled a hearing on the matter. OVERVIEW: Private school expenses were presumed to not be reasonably necessary for maintenance and support under 11 U.S.C. § 1325(b). However, this presumption was rebuttable based, inter alia, on the debtors’ reducing other expenses and/or increasing the plan terms so that creditors received the same distribution as if the debtors were not paying for private school. The debtors rebutted this presumption. The debtors chose to pursue a plan for 55 months instead of the 36-month minimum in order to repay more to their creditors. In addition, the debtors voluntarily reduced what typically would have been considered reasonable expenses. For example, the debtors had only two cars, one for each household (the debtors separated after filing their petition), both of which were about 10 years old. In addition, the debtors surrendered their home and were each living with relatives to reduce living expenses. Finally, the debtors provided evidence that a private education curriculum was superior to the local public schools and that private school had helped the children to stay away from such things as drugs and alcohol. The trustee did not attempt to rebut this evidence. In re Villegas, 2004 Bankr. LEXIS 1747, — B.R. — (Bankr. D. Utah October 5, 2004) (Thurman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.08[back to top]

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11th Cir.

IRS could not be held liable for punitive damages for willful violation of stay. Bankr. M.D. Ala. PROCEDURAL POSTURE: Plaintiff debtor filed an adversary proceeding against defendant IRS, alleging a willful violation of the automatic stay imposed by 11 U.S.C. § 362 and seeking to hold the IRS in contempt of court. The debtor sought compensatory damages, punitive damages, and attorney fees. OVERVIEW: The IRS violated the automatic stay by its collection actions during the pendency of the chapter 13 case. The IRS contended that its actions were justified, hence not willful, because it mistakenly believed the debtor’s case had been dismissed. However, the dismissal was conditional, and the court ultimately decided not to dismiss the case. The IRS was not justified in unilaterally treating the case as dismissed based on receipt of an order which clearly made dismissal conditional. The IRS had a duty to make an inquiry as to the status of the case prior to commencing actions in violation of the automatic stay. As to damages, pursuant to 11 U.S.C. § 106(a)(3), punitive damages were not available. The debtor also requested damages for emotional distress, specifically, “worry, embarrassment, humiliation, and mental anguish.” However, he provided no evidence supporting these damages. As for attorney fees, the debtor failed to prove that the IRS was substantially unjustified in its position. The wrongful conduct of the IRS occurred pre-litigation. During the course of the adversary proceeding, the IRS was justified in its challenge of the debtor’s claim for damages. Baird v. United States (In re Baird), 2004 Bankr. LEXIS 2174, — B.R. — (Bankr. M.D. Ala. November 24, 2004) (Williams, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.05[back to top]

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Request for redetermination of taxes was properly within jurisdiction of bankruptcy court. Bankr. N.D. Ga. PROCEDURAL POSTURE: Plaintiff bankruptcy debtor-in-possession brought an adversary proceeding against defendants, a purchaser of tax claims against the debtor and the taxing authority, seeking a redetermination of ad valorem taxes under 11 U.S.C. § 505(a). Defendants moved the bankruptcy court to abstain under 28 U.S.C. § 1334(c)(1) or to decline to exercise its discretionary jurisdiction under 11 U.S.C. § 505(a). OVERVIEW: The debtor contended that the assessed value of its property was erroneous and resulted in excessive taxes, but the time for challenging the taxes in state court expired. Defendants argued that abstention or declining jurisdiction was warranted because any relief to the debtor would not benefit unsecured creditors and would prejudice defendants. The bankruptcy court held that abstention under 28 U.S.C. § 1334(c)(1) was debtor’s tax issues, and 11 U.S.C. § 505(a) did not grant the court discretion to decline jurisdiction over the tax redetermination claim except through abstention under 28 U.S.C. § 1334(c)(1). Permissive abstention was available only where interests such as comity or federalism warranted state resolution of an issue, but such state resolution was not possible since the debtor no longer had a state remedy. Further, even though 11 U.S.C. § 505(a) provided that the court may redetermine a tax, the word “may” was used in the sense of stating authorization, and section 505(a) did not permit the court to decline to exercise its jurisdiction unless permissive abstention was appropriate. Hospitality Ventures/LaVista v. Heartwood 11, LLC (In re Hospitality Ventures/La Vista), 2004 Bankr. LEXIS 1638, 314 B.R. 843 (Bankr. N.D. Ga. August 18, 2004) (Bonapfel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:505.01[back to top]

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D.C. Cir.

Bankruptcy court declined to exercise equitable powers to order IRS to consider debtor’s offer in compromise. Bankr. D.D.C. PROCEDURAL POSTURE: Plaintiff debtor brought an adversary proceeding against defendant, the United States, seeking an order compelling the government to have IRS to consider under I.R.C. § 7122(a) an offer-in-compromise submitted by the debtor on IRS Form 656 after the commencement of the debtor’s chapter 11 case but before the filing of any proposed chapter 11 plan. Pending before the court were cross-motions for summary judgment. OVERVIEW: IRS procedure directed that form offers were to be treated as nonprocessable if a taxpayer had a pending bankruptcy case and that payment proposals were to be considered through the plan confirmation process. The debtor claimed that this treatment constituted discrimination in violation of 11 U.S.C. § 525(a). The court found that 11 U.S.C. § 525(a) was not available because the debtor’s asserted right to submit a form offer was not a license, permit, charter, or franchise within the meaning of the law. Further, the court found that mandamus relief was not available under 11 U.S.C. § 105(a) because the decision was a discretionary one for which mandamus was not available. The IRS owed no clear duty to the debtor under I.R.C. § 7122 or 11 U.S.C. § 1129(a)(9)(C) to process the offer, and it was not an abuse of discretion to treat the offer as nonprocessable. Mandamus was also unavailable on an alternative ground because the debtor had an alternate adequate remedy through the plan confirmation process. Finally, the “fresh start” principle served as no basis for compelling the IRS to process the offer because 11 U.S.C. § 105(a) was not a roving commission to do equity. 1900 M Rest. Assocs. v. United States (1900 M Rest. Assocs.), 2005 Bankr. LEXIS 66, — B.R. — (Bankr. D.D.C. January 24, 2005) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.05[back to top]

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Court refused to adjust bar date despite failure of clerk’s office to fill in date in notice to creditors as failure to inquire would be a lack of due diligence and debtor could file on creditors’ behalf. Bankr. D.D.C. PROCEDURAL POSTURE: Debtor filed for bankruptcy relief. The court clerk sent to debtor’s creditors notice regarding the conversion of the case to a chapter 13 case, but the notice did not state the deadline for a creditor other than a governmental unit to file a proof of claim. OVERVIEW: Inadvertently, the clerk’s office left blank the space in the notice for indicating the deadline for filing proofs of claim. Thus, the creditors had not been notified of the Fed. R. Bankr. P. 3002(c) deadline as required by Fed. R. Bankr. P. 2002(f)(3). Further, the deadline would expire before creditors received a new, complete notice. Fed. R. Bankr. P. 9006(b)(3) prohibited the court from fixing a new bar date. The court had power to apply equitable tolling to the bar date, but that power ought not be invoked when it would be inconsistent with the text of the relevant statute. Also, a creditor who failed to inquire about the bar date probably had not acted with due diligence. Fed. R. Bankr. P. 2002(c)(3) did not specify the consequences of failing to notify creditors of the bar date. If the court did not extend the bar date, the ineffectiveness of debtor’s bankruptcy plan to discharge claims of creditors who were not given notice protected the creditors’ due process rights. Under Fed. R. Bankr. P. 3004, debtor could file a proof of claim on behalf of a creditor. And, the court could and would allow late-filed claims unless and until debtor objected to them. In re Barnes, 2005 Bankr. LEXIS 2171, — B.R. — (Bankr. D.D.C. December 10, 2005) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:2002.07[back to top]

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