Collier Bankruptcy Case Update February-25-02
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A Weekly Update of Bankruptcy and Debtor/Creditor Matters
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 25, 2002
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 362(a)(1) Stay modified to allow state court litigation to proceed.
Gelinas v. Gelinas (In re Gelinas) (Bankr. D. Conn.)
2d Cir.
Rule 9006 Union’s appeal from order that denied its motion for extension of time to object to debtor’s discharge dismissed as untimely.
In re Singer Co., N.V. (S.D.N.Y.)
3d Cir.
§ 303(h) Court denied one general partner’s motion to dismiss involuntary case filed against partnership by other general partner. McClain v. Jones (In re Jones & McClain, LLP) (Bankr. W.D. Pa.)
§ 506(c) Debtors’ counsel was entitled to agreed 'carve-out' from undersecured creditor’s collateral.
In re Nuclear Imaging Sys. (Bankr. E.D. Pa.)
4th Cir.
§ 362(b)(4) Court of Appeals ruled that bond order issued by South Carolina environmental control department was not subject to automatic stay.
Safety-Kleen, Inc. v. Wyche (4th Cir.)Rule 8005 The debtor’s failure to obtain a stay pending appeal of an order granting relief from the automatic stay rendered his appeal moot.
Riley v. Robey (In re Riley) (4th Cir.)
5th Cir.
§ 105(a) Bankruptcy court held that section 105(a) may be used to authorize payment of prepetition claims and set forth requirements for relief.
In re Coserv, L.L.C. (Bankr. N.D. Tex.)§ 523(a)(6) Debt was dischargeable because injury to creditors was not willful and malicious.
Pharr v. Ford (In re Ford) (Bankr. N.D. Miss.)§ 1101(2) Appeals from confirmation order dismissed where no stay was obtained, plan was 'substantially consummated,' and appeals jeopardized success of plan.
In re Efficient Solutions, Inc. (E.D. La.)
6th Cir.
§ 362(h) Insurer did not violate automatic stay or discharge injunction by withholding payments because it was exercising right to recoupment.
Sigman v. Aetna Life Ins. Co. (In re Sigman) (Bankr. S.D. Ohio)§ 1141 Based on confirmed plan’s plain and unambiguous language, third party’s state court contribution claim was neither barred nor discharged.
Ohio Med. Instrument Co. v. Eagle-Picher Indus. (In re Eagle-Picher Indus.) (Bankr. S.D. Ohio)
7th Cir.
§ 108(c) Prior bankruptcy case tolled dischargeability period for federal income taxes.
Crawford v. Dep’t of Treasury IRS (In re Crawford) (Bankr. W.D. Wis.)
8th Cir.
§ 363(m) Appellate court was unable to grant effective relief and the appeal was moot.
Jefferson Co. v. Halverson (In re Paulson) (8th Cir.)§ 522(d)(5) Trustee’s failure to object to exemption with 'unknown' value did not make asset fully exempt.
Stroebner v. Wick (In re Wick) (8th Cir.)§ 523(a)(2)(A) Section 20(a) of the Securities Exchange Act of 1934 did not create 'agency-like relationship' sufficient to impute third party’s fraud to debtors.
Owens v. Miller (In re Miller) (8th Cir.)Rule 4004(b) Equitable grounds existed for extension of deadline by which creditor could file complaint objecting to debtor’s discharge.
Landmark Cmty. Bank v. Perkins (In re Perkins) (B.A.P. 8th Cir.)
9th Cir.
§ 523(a)(4) Retainer prepaid to attorney did not create fiduciary relationship.
Stephens v. Bigelow (In re Bigelow) (B.A.P. 9th Cir.)§ 524 Court of Appeals found no private right of action under section 524.
Walls v. Wells Fargo Bank, N.A. (9th Cir.) 024025§ 1322(b)(1) Remand was required for determination of whether full payment of student loan obligations constituted unfair discrimination.
Labib-Kiyarash v. McDonald (In re Labib-Kiyarash) (B.A.P. 9th Cir.)
10th Cir.
§ 522(g) Avoided transfer of real property that created tenancy by the entirety did not deprive debtor of homestead exemption. Zubrod v. Duncan (In re Duncan) (B.A.P. 10th Cir.)
§ 548(a)(1)(B) Spouse’s homemaking did not qualify as reasonably equivalent value.
Zubrod v. Kelsey (In re Kelsey) (B.A.P. 10th Cir.)
11th Cir.
§ 523(a)(1) The government met its burden of proving that the debtor’s tax liabilities were nondischargeable.
Mastrantoni v. United States (In re Mastrantoni) (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.
Stay modified to allow state court litigation to proceed. Bankr. D. Conn. The debtor and creditor were formerly married and had jointly conducted the operations of a corporate entity. In 1997, the creditor, along with others, commenced a state (Connecticut) court action to determine the rightful owners of the corporate stock. In 1999, the court ruled that the creditor was the sole owner of the stock and ordered the debtor to render a financial accounting during the period when the debtor exercised control of the entity, and enjoined the debtor from holding herself out as an officer or director of the entity. The state supreme court denied the debtor’s petition for certification to appeal, and the debtor’s request for reconsideration was pending when she filed a chapter 11 petition. The debtor never complied with the order to provide an accounting. The state court granted the creditor’s application for a prejudgment remedy and recorded, along with the other claimants, real estate attachments in the amount of $1.35 million against the debtor’s properties. The creditor and other claimants then moved in bankruptcy court to modify the automatic stay in order to conclude the debtor’s appeal, enforce the injunction provision of the state court ruling, determine damages and perfect the attachments by recording judgment liens. The creditors contended that they established cause to continue with the state court action, while the debtor argued that the bankruptcy court was the appropriate forum to have all claims resolved. The court ruled that the creditors established cause to have their motion granted, and modified the automatic stay to conclude the debtor’s appeal, enforce the injunction and determine damages. The court relied on several relevant factors: (1) allowing the state court action to proceed would result in a complete resolution of the debtor’s liability; (2) the litigation would prejudice no other creditor and did not interfere with the bankruptcy case; (3) judicial economy lay in state court since 12 days of trial had already been conducted; and (4) the parties were ready to continue the state court trial. But the court held that the request to modify the stay in order to perfect attachments was premature, and declined the granting of that relief. Gelinas v. Gelinas (In re Gelinas), 2001 Bankr. LEXIS 1626, 270 B.R. 88 (Bankr. D. Conn. November 26, 2001) (Krechevsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3]
2nd Cir.
Union’s appeal from order that denied its motion for extension of time to object to debtor’s discharge dismissed as untimely. S.D.N.Y. Chief members of a labor union that represented employees of the debtor’s Taiwanese affiliate moved before the bankruptcy court for an order extending the time in which to file an objection to the debtor’s discharge. The bankruptcy court denied the motion, and the union appealed. The union’s appeal was filed 11 days after entry of the bankruptcy court order, and the debtor moved to dismiss the appeal as untimely. The union claimed that its appeal was timely under Rule 6(a) of the Federal Rules of Civil Procedure, which specifically excludes intermediate weekends and holidays from the 10-day appeal period calculation. The district court denied the union’s motion for leave to appeal and held that it was not timely filed. In addition, the court affirmed the bankruptcy judge’s refusal to find that the union’s misplaced reliance on Rule 6(a) of the Federal Rules of Civil Procedure constituted 'excusable neglect.' The district court explained that the Federal Rules of Bankruptcy Procedure governed the calculation of applicable time periods in this proceeding. Under Bankruptcy Rule 9006(a), which provides that intermediate Saturdays, Sundays and holidays are to be included in calculating the 10-day appeal period, the union’s appeal was untimely. The district court also concluded that it was reasonable for the bankruptcy judge to have determined that the applicability of Rule 9006 was well settled, and that the union’s misconstruction of the applicable law was not plausible or excusable.In re Singer Co., N.V., 2001 U.S. Dist. LEXIS 21765, – B.R. – (S.D.N.Y. January 3, 2002) (Mukasey, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9006.02, .06
3d Cir.
Court denied one general partner’s motion to dismiss involuntary case filed against partnership by other general partner. Bankr. W.D. Pa. One general partner filed an involuntary chapter 7 petition against his law partnership. The partnership’s other general partner moved to dismiss the involuntary petition. In support of his dismissal motion, the nonfiling partner denied that the partnership was generally not paying its debts as they became due. He also asserted that it would be 'inequitable' for the partnership to receive a bankruptcy discharge, when fees it expected to receive in the future from cases it assigned to other counsel for prosecution would allow the partnership to pay its debts in full. The bankruptcy court denied the motion for dismissal of the involuntary petition and entered an order for relief under chapter 7. The court held that the nonfiling partner’s testimony effectively conceded that prepetition partnership debts were not paid as they became due, and his assurances that fees collected in the future would allow the partnership to pay its debts in full were not credible, and, in any event, not relevant to the issue of whether an order for relief should be granted. The court explained that the nonfiling partner’s assertion that it would be 'inequitable' to grant the law partnership a bankruptcy discharge because it would be able to pay its past-due prepetition debts in the future had no bearing on whether the involuntary petition should be dismissed in accordance with section 303(h)(1). The court noted that although bankruptcy proceedings are undoubtedly equitable in nature, it lacked 'free-floating discretion' to act in accordance with its personal view of what is just and fair.McClain v. Jones (In re Jones & McClain, LLP), 2001 Bankr. LEXIS 1676, 271 B.R. 473 (Bankr. W.D. Pa. December 20, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:303.14
Debtors’ counsel was entitled to agreed 'carve-out' from undersecured creditor’s collateral. Bankr. E.D. Pa. Counsel for the related debtors filed an application requesting compensation for services rendered and reimbursement of expenses incurred prior to conversion of the cases from chapter 11 to chapter 7. The debtors and an undersecured creditor had entered into a postpetition agreement, allowing the debtors’ counsel to collect a surcharge from the sale of the creditor’s collateral. A chapter 11 administrative claimant objected to the fee application on the basis that the funds that had been allocated to pay debtors’ counsel represented property of the estate and could only be distributed to all administrative claimants pro rata. The bankruptcy court overruled the objection, holding that the expressly agreed 'carve-out' from the undersecured creditor’s collateral was not estate property payable to the trustee. Because the section 506(c) surcharge came directly from the undersecured creditor’s recovery, it did not fall within the priority scheme of the Code. The debtors’ counsel was entitled to the proceeds of the collateral, in accordance with the express terms of the prior settlement agreement (citing Collier on Bankruptcy, 15th Ed. Revised).In re Nuclear Imaging Sys., 2001 Bankr. LEXIS 1663, 270 B.R. 365 (Bankr. E.D. Pa. December 31, 2001) (Fox, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.05[6]
4th Cir.
Court of Appeals ruled that bond order issued by South Carolina environmental control department was not subject to automatic stay. 4th Cir. The chapter 11 debtor operated a commercial hazardous waste landfill. The debtor operated under a permit issued by the creditor, the state (South Carolina) department of health and environmental control. In 1989, the creditor issued a final permit to the debtor, which provided for a capacity limit of acre-feet of waste, and essentially rejected a separate cap for nonhazardous waste. Both the debtor and various environmental groups petitioned the Court of Common Pleas (Sumter County) for judicial review of the creditor’s decision. The court upheld the creditor’s decision, but also ruled that the rejection of the separate cap for nonhazardous waste would operate retrospectively, as well as prospectively. The debtor petitioned for a writ of certiorari. While that petition was pending, the United States Treasury removed the debtor’s insurance company from the list of approved sureties. The company was the issuer of the bonds posted by the debtor to secure the costs associated with the facility’s closure and postclosure maintenance. As a result of the removal, the creditor ordered the debtor to acquire substitute bonds within 18 days or cease accepting waste. The debtor did not have the financial ability to comply with this bond order, and the same day filed its chapter 11 petition. Shortly thereafter, the state (South Carolina) court denied the debtor’s petition for a writ of certiorari. The debtor then filed this adversary proceeding in bankruptcy court, challenging the creditor’s actions and seeking injunctive relief. The district court granted the debtor’s motion for withdrawal of the reference. The creditor moved to dismiss. Among its arguments was the assertion that the automatic stay did not bar enforcement of the bond order. The court ruled that the bond order was subject to the automatic stay, and granted the debtor a 30-day injunction pending this appeal by the creditor. The Court of Appeals for the Fourth Circuit reversed, holding that the regulatory exception of section 362(b)(4) applied to the bond order. The Court of Appeals reasoned that, because the purpose of the bond order was to promote public safety and welfare, the governmental regulatory power exception applied. The Court of Appeals also ruled that the Rooker-Feldman doctrine did not bar the debtor’s action, but affirmed the denial of the debtor’s motion for a preliminary injunction, based on its section 362(b)(4) ruling. Safety-Kleen, Inc. v. Wyche, 2001 U.S. App. LEXIS 26910, 274 F.3d. 846 (4th Cir. December 19, 2001) (Michael, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5]
The debtor’s failure to obtain a stay pending appeal of an order granting relief from the automatic stay rendered his appeal moot. 4th Cir. The chapter 12 debtor appealed the district court’s dismissal of his appeal of a bankruptcy court order lifting the automatic stay. After the debtor filed his petition, the bankruptcy court vacated the automatic stay to permit the scheduled foreclosure sale of the debtor’s property to proceed. The debtor appealed to the district court, arguing that the stay had been improperly vacated and the foreclosure sale was void because the order failed to take effect prior to the sale. The district court determined that, regardless of the merits of the debtor’s position, the appeal was moot because the debtor had failed to obtain a stay of the order prior to the consummation of the foreclosure sale. The Court of Appeals for the Fourth Circuit affirmed, holding that the district court properly dismissed the debtor’s appeal as moot. When the debtor failed to obtain a stay of the order lifting the automatic stay, thus allowing the creditor to foreclose and the sale to be effected, the foreclosure rendered moot any appeal concerning the propriety of the lifting of the sale or the validity of the sale, as the court lacked a proper remedy.Riley v. Robey (In re Riley), 2002 U.S. App. LEXIS 193, – F.3d – (4th Cir. January 7, 2002) (per curiam).
Collier on Bankruptcy, 15th Ed. Revised 10:8005.02
5th Cir.
Bankruptcy court held that section 105(a) may be used to authorize payment of prepetition claims and set forth requirements for relief. Bankr. N.D. Tex. The consolidated chapter 11 debtors filed an emergency motion seeking authority to pay prepetition claims of certain 'critical vendors.' Although the motion was unopposed, the bankruptcy court treated the motion as a contested matter based, in part, on its independent obligation to ensure that the Code is complied with, and indications that there were additional 'critical vendors' whose pleas for special treatment were likely to follow a favorable ruling. The court held that in appropriate cases, section 105(a) may be used to authorize payment of prepetition claims, but three factors must be established, by a preponderance of the evidence, in order for such payment to be authorized. First, it must be established that dealing with the claimant is virtually indispensable to profitable operations or preservation of the estate. Second, it must be shown that unless the debtor deals with the claimant, the debtor risks the probability of harm, or, alternatively, loss of economic advantage to the estate or the debtor’s going concern value, which is disproportionate to the amount of the claimant’s prepetition claim. Third, it must be established that aside from payment of the claim, there is no practical or legal alternative by which the debtor can deal with the claimant. The court applied the foregoing test, and only partially granted the debtors’ motion. The court commended the debtors on their efforts to pare down their 'critical vendor' list, and accepted that the motion represented the debtors’ best efforts to deal with angry creditors anxious for payment. Nevertheless, the court refused to fully accommodate the debtors’ request for relief based, in part, on well-established law that, absent the most extraordinary circumstances, prepetition general unsecured claims must not be paid other than through a plan.In re Coserv, L.L.C., 2002 Bankr. LEXIS 6, – B.R. – (Bankr. N.D. Tex. January 4, 2002) (Lynn, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.04[5][a]
Debt was dischargeable because injury to creditors was not willful and malicious. Bankr. N.D. Miss. The creditors filed an adversary proceeding seeking a determination of the nondischargeability of a prepetition state (Mississippi) court judgment rendered in their favor. The chapter 7 debtor had employed an independent logger to cut and harvest timber located on his property. The logger, however, inadvertently or intentionally cut the timber on a tract of land, adjoining the debtor’s property, which was owned by the creditors. The debtor testified that he never knew that the logger was cutting on the creditors’ property and that he never would have allowed it had he been aware that the creditors’ timber was being harvested. The bankruptcy court dismissed the adversary proceeding, holding that the debtor’s conduct did not result in a willful and malicious injury to the creditors as contemplated by section 523(a)(6). The court concluded that the debtor did not foster a subjective motive to cause harm, and, because he was unaware that the logger was cutting timber on the creditors’ property, his actions were not substantially certain to cause harm (citing Collier on Bankruptcy, 15th Ed. Revised).Pharr v. Ford (In re Ford), 2001 Bankr. LEXIS 1685, – B.R. – (Bankr. N.D. Miss. September 28, 2001) (Houston, III, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
Appeals from confirmation order dismissed where no stay was obtained, plan was 'substantially consummated,' and appeals jeopardized success of plan. E.D. La. Former customers and creditors of the chapter 11 debtor filed appeals from a final order of the bankruptcy court that confirmed the debtor’s plan. A creditor moved to dismiss the appeals as equitably moot. The district court granted the motion and dismissed the appeals. The court held that dismissal of the appeals was warranted because no stay pending appeal was obtained, the plan was 'substantially consummated,' and granting the relief requested would jeopardize the success of the plan. In determining whether the plan was 'substantially consummated,' the court noted that all of the property the plan proposed to transfer was transferred, and that the debtor’s liquidation agent had assumed the business and management of all the property dealt with in the plan. The court also found that the 'centerpiece' of the plan was completed, and the terms of settlement between the debtor, its largest secured creditor and the official unsecured creditors committee were carried out. The court also stated that the transactions that took place – the exchange of mutual releases and the general implementation of the plan by all involved parties – evidenced substantial consummation of the plan.In re Efficient Solutions, Inc., 2001 U.S. Dist. LEXIS 21815, – B.R. – (E.D. La. December 19, 2001) (Vance, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1101.02
6th Cir.
Insurer did not violate automatic stay or discharge injunction by withholding payments because it was exercising right to recoupment. Bankr. S.D. Ohio The joint husband and wife chapter 7 debtors filed a motion for contempt, sanctions and expenses against their disability insurer. The debtors claimed that the insurer violated the automatic stay and the discharge injunction by withholding payments from them and applying those payments to debt that was discharged. The insurer argued that it was withholding overpayments made to the debtors and exercising its right to recoupment; thus, it was not in violation of the automatic stay or the discharge injunction. In response, the debtors claimed that the insurer’s deduction of the overpayments was not recoupment, but rather a setoff, which is subject to the automatic stay and the discharge injunction. The bankruptcy court denied the debtors’ motion, and held that the insurer did not violate either the automatic stay or the discharge injunction because it was exercising its right to recoupment. The court concluded that although there were two different agreements at issue — the disability policy, which was a contract between the debtor’s employer and the insurer and provided long-term disability insurance to the debtor, and the debtor’s agreement with the insurer, which consisted of a series of monthly benefit checks paid by the insurer — the agreements were part of a single integrated transaction; thus, the insurer had a right of recoupment against the funds it owed to the debtors. The court noted that the back of the checks paid by the insurer, which were signed by the debtor, stated that the debtor would pay back any overpayments in accordance with the terms of the plan. The court also held that since recoupment is neither a claim nor a debt that is dischargeable, the insurer had no obligation to file a proof of claim or to commence a dischargeability proceeding.Sigman v. Aetna Life Ins. Co. (In re Sigman), 2001 Bankr. LEXIS 1670, 270 B.R. 858 (Bankr. S.D. Ohio December 7, 2001) (Perlman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
Based on confirmed plan’s plain and unambiguous language, third party’s state court contribution claim was neither barred nor discharged. Bankr. S.D. Ohio After the effective date following plan confirmation in consolidated chapter 11 cases, plaintiffs filed a state (Florida) court complaint against the debtor. The complaint sought damages for injuries caused by an allegedly defective component of a product manufactured and sold by one of the preconfirmation debtors’ divisions prior to the date that the debtors’ consolidated chapter 11 case was filed. After the state court case was commenced, a third party who was also named as a defendant in Florida state court litigation became aware of the claim asserted by the plaintiffs against the debtor and filed a third-party complaint for contribution and indemnity against the postconfirmation reorganized debtor. The debtor claimed that the third party complaint was barred by its confirmed plan. The third party filed a complaint in the bankruptcy court seeking a declaratory judgment regarding the scope of the confirmed plan. The bankruptcy court held that based on the plain and unambiguous language of the confirmed plan, the product liability contribution claim asserted by the third party was neither barred nor discharged, and the third party was free to proceed on its third-party complaint in state court. The court rejected the reorganized debtor’s argument that a plan provision that governed future tort claims did not apply to claims for contribution and indemnification.Ohio Med. Instrument Co. v. Eagle-Picher Indus. (In re Eagle-Picher Indus.), 2001 Bankr. LEXIS 1675, 270 B.R. 842 (Bankr. S.D. Ohio October 25, 2001) (Perlman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1141.01
7th Cir.
Prior bankruptcy case tolled dischargeability period for federal income taxes. Bankr. W.D. Wis. Upon the filing of the chapter 13 petition, the IRS filed a proof of claim for priority obligations for the 1995 and 1996 taxable years, and a general unsecured claim for the 1993 and 1994 taxable years. The debtor objected to the claim, asserting that the 1995 taxable obligation constituted a priority claim inasmuch as the obligation was due more than three years prior to the filing of the chapter 13 petition. The IRS asserted that since the debtor had previously been in a chapter 13 case, it was entitled to toll the three-year dischargeability period of section 507(a)(8)(A)(i). Following the majority line of the case authority, the bankruptcy court held that section 108(c), in conjunction with Internal Revenue Code § 6503, tolled the three-year dischargeability period of section 507(a)(8) while the prior bankruptcy case was pending. Crawford v. Dep’t of Treasury IRS (In re Crawford), 2001 Bankr. LEXIS 1075, – B.R. – (Bankr. W.D. Wis. July 23, 2001) (Martin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:108.04[1], [2]
8th Cir.
Appellate court was unable to grant effective relief and the appeal was moot. 8th Cir. The chapter 7 debtors appealed the district court’s affirmance of the bankruptcy court order requiring the conveyance of the debtors’ property from a trust to the estate. The debtors had formed a business trust prepetition and transferred real estate to the trust in exchange for certificates of beneficial interest in the trust. The debtors listed the beneficial interest in the trust as personal property of the estate. The bankruptcy court concluded that because the conveyance from the debtors to the trust was fraudulent, the property never left the ownership of the debtors and was property of the estate. No party applied for a stay pending appeal, and the bankruptcy court authorized the sale of the parcels of real estate to third parties. The trustee moved to dismiss the debtors’ appeal on the grounds of mootness. The Court of Appeals for the Eighth Circuit dismissed the appeal, holding that the sale could not be overturned because the good faith purchasers were protected pursuant to section 363(m). The debtors were unable to assert a valid claim against the sale proceeds, as well, since they had previously listed their interest in the trust as property of the estate.Jefferson Co. v. Halverson (In re Paulson), 2002 U.S. App. LEXIS 215, 276 F.3d 389 (8th Cir. January 8, 2002) (Beam, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.11
Trustee’s failure to object to exemption with 'unknown' value did not make asset fully exempt. 8th Cir. The chapter 7 trustee appealed the district court’s decision that the debtor was entitled to exempt the entire amount of proceeds from stock options that were not yet vested when she filed her petition. The debtor had received a contingent stock option prepetition as part of the sale of her company, and listed the asset as exempt with an 'unknown' value. After fulfilling the terms of her employment agreement postpetition, the stock options vested and a state (Minnesota) court ordered the debtor’s requested buy-out of her company stock. The trustee reopened the case and demanded turnover of the value of the stock minus the debtor’s remaining wildcard exemption limit. The bankruptcy court determined that because the options were only one-third into their vesting period when the debtor filed her petition, the estate’s interest was limited to one-third of the options’ overall value minus the debtor’s exemption. The district court reversed and held that the options were fully exempted and that the trustee’s failure to timely object to the exemption barred the estate from receiving the proceeds. The Court of Appeals for the Eighth Circuit reversed the decision of the district court, holding that because the asset was only partially exempted by the debtor, the estate was entitled to the pro rata portion of the stock options that was the result of the debtor’s prepetition services, less her exemption amount. The court rejected the debtor’s contention that listing 'unknown' as the current market value of the exemption was sufficient as a matter of law to make the asset fully exempt, as section 522(d) limited the amount of the exemption. The court further distinguished the facts of the case from Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), in which the Supreme Court held that a trustee’s failure to object, when a valid objection could have been made if the trustee had acted promptly, prevented a later challenge to the validity of an exemption. The trustee in the case at bar had no grounds to object to the claimed exemption because the debtor listed a valid statutory basis for her asset and had sufficient exemption value left to exempt the options partially.Stroebner v. Wick (In re Wick), 2002 U.S. App. LEXIS 271, 276 F.3d 412 (8th Cir. January 9, 2002) (Arnold, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.09[5]; 9:4003.03
Section 20(a) of the Securities Exchange Act of 1934 did not create 'agency-like relationship' sufficient to impute third party’s fraud to debtors. 8th Cir. Individual investors filed a prepetition NASD arbitration proceeding against the debtors, who were officers and directors of a securities brokerage firm. The investors asserted various claims against the debtors, including violations of the Securities Exchange Act, breach of fiduciary duty and common law fraud. NASD-appointed arbitrators entered an award against the debtors, which was later confirmed by the district court. The arbitrators did not specify the grounds for the award or make explicit factual findings. After the debtors’ chapter 7 cases were commenced, the investors sought a determination by the bankruptcy court that the debt that arose from the arbitration award was nondischargeable under section 5235(a)(2)(A). Because the precise grounds for the NASD award were uncertain, the bankruptcy court determined that nondischargeability under the Code could not necessarily be implied from the nature of the debt. The court further concluded, however, that conduct of a third party vice president/registered representative of the securities firm constituted fraud within the meaning of section 523(a)(2)(A); that the third party’s conduct violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder; that pursuant to section 20 of the Securities Exchange Act of 1934, the debtors, as controlling persons, were jointly and severally liable for the third party’s fraud to the same extent that the third party was liable; and that the debtors were not eligible for the 'good faith' exception of section 20(a) of the Securities Exchange Act of 1934 because they were negligent in their supervision of the third party. The bankruptcy court held that the debt that resulted from the arbitration award was nondischargeable, and the district court affirmed. The United States Court of Appeals for the Eighth Circuit reversed. The court held that the bankruptcy court erred in concluding that section 20(a) of the Securities Exchange Act of 1934 created an 'agency-like relationship' sufficient to impute the third party’s fraud to the debtors, and that the debt in question was therefore nondischargeable under section 523(a)(2)(A). The court noted that section 20(a) of the Securities Exchange Act of 1934 extends liability well beyond traditional doctrines and provides expansive remedies in a highly regulated industry, while section 523 of the Code addresses actual, traditional fraud. The court declined to read section 523 in such a way as to encompass the nontraditional liability imposed under section 20(a) of the Securities and Exchange Act of 1934, and stated that the extension of such liability should come from Congress and not the judiciary.Owens v. Miller (In re Miller), 2002 U.S. App. LEXIS 350, 276 F.3d 424 (8th Cir. January 10, 2002) (Wollman, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Equitable grounds existed for extension of deadline by which creditor could file complaint objecting to debtor’s discharge. B.A.P. 8th Cir. The secured creditor appealed from the bankruptcy court’s order dismissing its section 727 adversary complaint against the chapter 7 debtor. The bankruptcy court had entered an order deferring the debtor’s discharge after the meeting of creditors was continued to a second hearing date. The bankruptcy court clerk’s office erroneously set a new deadline for filing complaints and published the new bar date in the electronic case file on its website. The creditor’s attorney subsequently confirmed with the clerk’s office that the later date was the deadline for filing complaints objecting to the debtor’s discharge, and filed a complaint by the second bar date. The bankruptcy court dismissed the complaint on the grounds that it had been untimely filed and equitable reasons did not exist to extend the filing deadline. The B.A.P. reversed, holding that the bankruptcy court abused its discretion by failing to exercise its equitable powers and permit the creditor’s adversary complaint to proceed. The information contained in the electronic case file on the court’s website was confusing, and the creditor had reasonably relied upon the second bar date established by the clerk’s office.Landmark Cmty. Bank v. Perkins (In re Perkins), 2002 Bankr. LEXIS 7, 271 B.R. 607 (B.A.P. 8th Cir. January 9, 2002) (Koger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:4004.02, .03
9th Cir.
Retainer prepaid to attorney did not create fiduciary relationship. B.A.P. 9th Cir. The creditor, who was incarcerated on a murder charge, hired the debtor, a criminal defense attorney. The creditor arranged for the debtor to receive a prepaid fee of $15,000, for which the debtor would act as third counsel, supervising the work of two public defenders. In November 1995, the creditor was convicted of first degree murder. He then sued the debtor in state (Washington) court for breach of contract, fraud and embezzlement for the alleged failure to render promised legal services. The creditor alleged also that the debtor violated several rules of professional conduct, including the failure to render an accounting of 'trust funds.' Because the debtor failed to appeal in the state court action, a default judgment with no express findings was entered in favor of the creditor for $15,000. In 1999, the debtor filed a chapter 7 petition, after which the creditor filed an adversary proceeding and a motion for summary judgment, asserting that the state court default judgment conclusively determined the issues required for a determination of nondischargeability for fraud, defalcation or embezzlement. The bankruptcy court denied the motion, holding that the creditor had not proven fraud or embezzlement. The court also held that the $15,000 was properly characterized as a 'classic retainer,' which did not create a fiduciary relationship for the purposes of section 523(a)(4). Because the creditor had failed to prove defalcation by a fiduciary, the court dismissed his complaint. The creditor appealed. The B.A.P. for the Ninth Circuit affirmed, holding that (1) state law did not give collateral estoppel effect to a pure default judgment, since the 'actually litigated' requirement was lacking, and (2) the bankruptcy court’s finding that the retainer was a nonrefundable, prepaid retainer, and not client trust funds, was not clearly erroneous, and concluded that there could not have been any defalcation without a finding that the funds were being held in trust.Stephens v. Bigelow (In re Bigelow), 2001 Bankr. LEXIS 1617, 271 B.R. 178 (B.A.P. 9th Cir. November 30, 2001) (Marlar, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Court of Appeals found no private right of action under section 524. 9th Cir. The chapter 7 debtor brought a class action in federal district court on behalf of chapter 7 bankruptcy debtors against a bank. The class action complaint alleged, among other things, that the bank violated the discharge injunction by attempting to collect a debt from the debtor after it had been discharged. The district court concluded that the remedy Congress intended for violations of the discharge injunction was contempt pursuant to section 105(a). Accordingly, the district court referred the debtor’s claims for contempt to the bankruptcy court but dismissed her claims for relief under section 524. The debtor appealed. The Court of Appeals for the Ninth Circuit affirmed, and held that there is no private right of action under section 524. The court rejected the debtor’s argument that section 105(a) itself empowered district courts to enforce violation of section 524 and that Congress created a private cause of action for enforcement of the discharge injunction directly under the terms of section 524. The court also held that the debtor was precluded from pursuing a simultaneous claim under the Fair Debt Collections Practices Act ('FDCPA'), 15 U.S.C. § 1692f. The court reasoned that allowing a simultaneous claim under the FDCPA would circumvent the remedial scheme of the Code by providing the debtor with a 'back door' private right of action (citing Collier on Bankruptcy 15th Ed. Revised).Walls v. Wells Fargo Bank, N.A., 2002 U.S. App. LEXIS 202, 276 F.3d 502 (9th Cir. January 8, 2002) (Rymer, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02[c][i]
Remand was required for determination of whether full payment of student loan obligations constituted unfair discrimination. B.A.P. 9th Cir. The chapter 13 trustee objected to the debtor’s proposal to pay his long-term student loan obligation outside the plan. The debtor had four outstanding student loans and contemplated making the full monthly payments to those creditors, thus paying a total of $1,100 per month. In contrast, the other unsecured creditors would receive a mere three percent of their claims. The bankruptcy court concluded that the plan unfairly discriminated against the nonstudent loan creditors. On appeal, the B.A.P. for the Sixth Circuit vacated and remanded, holding that the bankruptcy court erred in failing to apply the four-part test enunciated in In re Wolff, 22 B.R. 510, 6 C.B.C.2d 1282 (B.AP. 9th Cir. 1982) to determine whether the discrimination among classes of claims violated section 1322(b)(1). Although there was circuit authority that the debtor could not discriminate if the loans were to be paid in their entirety during the life of the plan, the bankruptcy court should have applied the Wolff test to determine whether the same rule applied when the student loan obligations would extend beyond the life of the plan. The court noted that, although applied primarily in the mortgage context, the provisions of section 1322(b)(5) also applied to student loan obligations that matured after completion of the chapter 13 plan. Since the bankruptcy court had failed to apply the appropriate test, the cause was remanded.Labib-Kiyarash v. McDonald (In re Labib-Kiyarash), 2001 Bankr. LEXIS 1615, 271 B.R. 189 (B.A.P. 9th Cir. December 4, 2001) (Ryan, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.05[2][b], 1322.09[2]
10th Cir.
Avoided transfer of real property that created tenancy by the entirety did not deprive debtor of homestead exemption. B.A.P. 10th Cir. In 1993, the debtor, an attorney, purchased real property in his name only. In 1994, the debtor transferred title to the property to himself and his spouse as tenants by the entirety. The property was used by the debtor and his spouse as their residence and also as the location of the debtor’s law practice. In 1998, the debtor filed a chapter 7 petition. The property was scheduled as having a market value of $200,000 and being encumbered by a secured claim in the approximate amount of $95,000. The debtor claimed a homestead exemption in the amount of $10,000. The trustee commenced an adversary proceeding against the debtor and spouse to avoid the 1994 transfer as a fraudulent transfer. The bankruptcy court ruled for the trustee, who then filed a notice of intent to sell the property and a motion seeking approval to conduct the sale. In response, the debtor moved for turnover of his homestead proceeds at the conclusion of the sale. The debtor did not object to the sale, but argued that he was entitled to the first $10,000 of the sale proceeds as a result of his valid, uncontested homestead exemption. The trustee argued that the debtor was not entitled to a homestead exemption pursuant to section 522(g)(1) because of the fraudulent conveyance judgment. The debtor responded by objecting to the property sale to the extent that the trustee failed to pay the debtor $10,000 for his homestead exemption. The court granted the debtor’s motion and required the trustee to disburse $10,000 to the debtor. This appeal followed. The B.A.P. for the Tenth Circuit affirmed, holding that the trustee’s fraudulent transfer judgment avoiding the 1994 transfer that created the tenancy by the entirety resulted in a recovery of the property from the spouse alone. As such, section 522(g)(1) had no application to the exemption claimed in the property by the debtor, and the debtor was entitled to the exemption, which had not been timely objected to by the trustee.Zubrod v. Duncan (In re Duncan), 2002 Bankr. LEXIS 4, 271 B.R. 196 (B.A.P. 10th Cir. January 3, 2002) (Boulden, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.12[1]
Spouse’s homemaking did not qualify as reasonably equivalent value. B.A.P. 10th Cir. The debtor was an accountant and his spouse was a homemaker. The debtor and his spouse maintained a joint checking account into which the debtor deposited his paycheck and from which both he and his spouse wrote checks. On September 16, 1999, an arbitration order and judgment in the amount of $18,142 was entered against the debtor. On or about September 21 or 22, 1999, the debtor withdrew all of the funds, namely $10,419.01, from the checking account. The debtor used the funds to make two payments toward the couple’s mortgage, one of which was a prepayment, paid attorney’s fees in connection with the arbitration and a bankruptcy filing, and then gave half the withdrawn funds to his spouse. On September 22, 1999, the debtor filed a chapter 7 petition. Thereafter, the debtor’s spouse redeposited the withdrawn funds into the checking account. The trustee filed an adversary proceeding to avoid the transfer by the debtor to his spouse pursuant to section 548(a)(1)(B). The bankruptcy court ruled for the trustee, and this appeal followed. The debtor’s spouse argued that the debtor received reasonably equivalent value for the transfer, thereby removing the transfer from the ambit of a fraudulent transfer, because of her agreement to forego employment outside the home, to take care of the family, and to provide comfort, advice and society as the debtor’s wife. The B.A.P. for the Tenth Circuit affirmed, holding that the bankruptcy court was correct in ruling that, for the purposes of section 548(a)(1)(B), value was limited to economic or monetary consideration, and that the care and comfort received from a marital relationship did not qualify. The B.A.P. reasoned that value must be measured not from the subjective, emotional perspective but from the objective, economic perspective of creditors.Zubrod v. Kelsey (In re Kelsey), 2001 Bankr. LEXIS 1618, 270 B.R. 776 (B.A.P. 10th Cir. December 19, 2001) (Krieger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.05[1][b]
11th Cir.
The government met its burden of proving that the debtor’s tax liabilities were nondischargeable. Bankr. M.D. Fla. The chapter 7 debtor filed a complaint to determine the dischargeability of his liabilities for income taxes and interest for prepetition tax years. The debtor, who owned and operated an S corporation, underreported taxable income of the corporation and made deposits of business receipts into his personal bank account. The debtor ignored his bookkeeper’s warnings about keeping inadequate books and records and failing to deposit and account for all funds. Before filing his petition, the debtor entered into a stipulation in tax court, admitting that there were deficiencies in his income tax, due to civil fraud. The debtor nevertheless denied that his tax returns were fraudulent under section 523(a)(1)(C) because he was inexperienced in financial matters and relied upon his bookkeeper and accountant to prepare tax returns. The bankruptcy court granted judgment for the United States, holding that the debtor’s liabilities for income tax and interest thereon for prepetition tax years were excepted from discharge pursuant to section 523(a)(1)(C). The government established that there was an understatement of tax on the returns, that the debtor knew the returns were false and that the debtor intended to evade the tax due. The court rejected the debtor’s defense that he had relied upon his bookkeeper and accountant due to his business experience and failure to provide sufficient data necessary to maintain complete and accurate records.Mastrantoni v. United States (In re Mastrantoni), 2001 Bankr. LEXIS 1668, – B.R. – (Bankr. M.D. Fla. November 29, 2001) (Briskman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07[4]