Collier Bankruptcy Case Update February-26-01

Collier Bankruptcy Case Update February-26-01

 

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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 26, 2001

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

  • 1st Cir.

    § 503(b)(1)(A) Contractor’s claim was allowable as administrative expense.
    Tim Givens Building & Remodeling, Inc. v. Cummings (In re Cummings)
    (Bankr. S.D. Fla.) 024009

    § 523(a)(8) Debtor seeking discharge of student loan failed to establish lack of future employment prospects.
    Bloch v. Windham Professionals (In re Bloch)
    (Bankr. D. Mass.) 024013


    2d Cir.

    28 U.S.C. § 1452(b) Court refused remand of removed action that alleged trustee’s breach of fiduciary duty.
    Liu v. Silverman (In re Liu)
    (Bankr. S.D.N.Y.) 024038

    Rule 9015(a) Motion for new trial based upon evidentiary rulings was denied.
    LNC Investments, Inc. v. First Fidelity Bank
    (S.D.N.Y.) 024044


    3d Cir.

    28 U.S.C. § 1334(c) Abstention in action alleging state fraud claims was warranted.
    Breed Technologies Inc. v. Allied Signal Inc.
    (D. Del.) 024036


    4th Cir.

    § 109(g) Debtor was enjoined from filing for 180 days.
    In re Hobbs
    (Bankr. E.D. Va.) 024003

    § 365(g) Debtor alleging damages resulting from lease rejection by another debtor could not maintain state court action against the other debtors’ insiders.
    Transcolor Corporation v. Cerberus Partners, L.P. (In re Transcolor Corp.)
    (Bankr. D. Md.) 024007

    § 502(b)(1) Subcontractors failed to prove debtor’s control over contracting business sufficient to establish personal liability.
    In re McGee
    (Bankr. D. Md.) 024008

    § 524(c) Court abstained from ruling on reaffirmation agreements.
    In re Phelan
    (Bankr. E.D. Va.) 024020

    § 549(a) Postpetition transfer was not avoidable.
    Musika v. Arbutus Shopping Center Ltd. P’ship (In re Farm Fresh Supermarkets of Maryland, Inc.)
    (Bankr. D. Md.) 024022


    5th Cir.

    Rule 8005 Stay pending appeal warranted.
    In re National Gypsum Company
    (N.D. Tex.) 024042


    6th Cir.

    § 523(a)(15) Debtor did not meet burden of proof.
    Helsel v. Marsh (In re Marsh)
    (Bankr. W.D. Tenn.) 024016

    § 553(a) Debtor failed to establish that interests derived from the Code overcame enforcement of arbitration agreement.
    Pelikan Holding Ag v. Nu-Kote Holding, Inc. (In re Nu-Kote Holding, Inc.)
    (Bankr. M.D. Tenn.) 024023


    7th Cir.

    § 362(h) Court of Appeals held that emotional injury was not compensable under section 362(h).
    Aiello v. Providian Fin. Corp.
    (7th Cir.) 024005

    § 722 Court granted debtor’s motion to redeem automobile.
    In re Tripplett
    (Bankr. N.D. Ill.) 024024


    8th Cir.

    § 1113 Denial of motion to reject collective bargaining agreement did not result in automatic assumption of the agreement.
    United Food & Commercial Workers Union v. Family Snacks, Inc. (In re Family Snacks, Inc.)
    (B.A.P. 8th Cir.) 024025


    9th Cir.

    § 101(5) Equity security holder did not hold claim against debtors.
    In re Einstein/Noah Bagel Corp.
    (Bankr. D. Ariz.) 024001

    § 365(d)(3) Sublessee did not have priority claim.
    In re BCE West, L.P.
    (Bankr. D. Ariz.) 024006

    § 523(d) Fee award was upheld on appeal.
    First Card v. Hunt (In re Hunt)
    (N.D. Cal.) 024019

    § 1124(2) Debtor was not required to pay penalty rate of interest to effect cure.

    In re Phoenix Bus. Park (Bankr. D. Ariz.) 024030


    10th Cir.

    § 523(a)(1) Debtors failed to demonstrate that income did not constitute taxable income.
    In re Bailey
    (Bankr. D. Colo.) 024011

    § 1325(a)(3) Chapter 13 case was filed in bad faith to manipulate Code and avoid judgment debt.
    In re White (Bankr. D. Wyo.) 024034


    11th Cir.

    § 523(a)(8) Student loans of debtor suffering from panic attacks were held dischargeable under policy test.
    Morris v. United States of America (In re Morris)
    (Bankr. N.D. Ala.) 024014

    § 1123(a)(1) Chapter 11 plan failed to comply with section 1123(a)(1).
    In re Yates Dev., Inc.
    (Bankr. M.D. Fla.) 024027

    28 U.S.C. § 1930 Postconfirmation quarterly fees are based upon all disbursements, including ordinary operating expenses.
    Walton v. Jamko, Inc. (In re Jamko, Inc.)
    (11th Cir.) 024040


    Collier Bankruptcy Case Summaries

1st Cir.

Contractor’s claim was allowable as administrative expense. Bankr. S.D. Fla. The debtor filed a chapter 11 petition on November 30, 1998. Between December 1998 and April 1999 the creditor, a contractor, made substantial improvements on the debtor’s residence. In April 1999, the creditor recorded a claim of lien for the charges incurred and made demand upon the debtor for payment. After the debtor refused to pay, the creditor filed an adversary proceeding seeking a determination of the validity of the lien and an allowance of his claim as an administrative expense. The debtor argued that the creditor was not entitled to an administrative claim under section 503(b)(1)(A) because the services performed did not benefit the estate. The bankruptcy court ruled for the creditor, holding that the creditor’s services were beneficial to the estate, entitling the creditor to an allowance of his claim as an administrative expense. The court reasoned that the sole purpose of the debtor filing a chapter 11 petition was to preserve the equity in her homestead, which was accomplished by the improvements effectuated by the creditor. Tim Givens Building & Remodeling, Inc. v. Cummings (In re Cummings), 2000 Bankr. LEXIS 1637, – B.R. – (Bankr. S.D. Fla. September 15, 2000) (Friedman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06[3][b]

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024013 Debtor seeking discharge of student loan failed to establish lack of future employment prospects. Bankr. D. Mass. The chapter 7 debtor filed an adversary proceeding seeking a declaration that her student loans were dischargeable. The debtor attended several prestigious colleges and universities and received a graduate degree in public administration in 1995. The debtor established a pattern of sporadic, full time employment supplemented by temporary clerical assignments. The debtor then moved across country and was again unable to obtain permanent work. The debtor had no mental or physical disabilities that prevented employment. The bankruptcy court held that the debtor had failed to establish undue hardship in repaying the loans, pursuant to section 523(a)(8). The court found that the debtor did not prove that prospects for future employment were bleak and that the debtor had not minimized her reasonably necessary living expenses. The court also took into account that the debtor had no burden of dependents or disabilities that might support a granting of discharge. Bloch v. Windham Professionals (In re Bloch), 2001 Bankr. LEXIS 45, – B.R. – (Bankr. D. Mass. January 23, 2001) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14[2]

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2nd Cir.

A chapter 11 debtor may seek to reject a collective bargaining agreement after it has sold all its assets. B.A.P. 8th Cir. Snack food distributor entered into a collective bargaining agreement with a union for a term of five years under which the debtor was to pay its employee’s dental and medical expenses. At the time the debtor filed its chapter 11 petition, its obligations on medical and dental expenses was nearly $500,000. In the course of the chapter 11 case, the debtor sold virtually all of its assets. Over the union’s objection, the bankruptcy court approved the sale and did not require the purchaser to assume the collective bargaining agreement. Thereafter, the debtor moved to reject the collective bargaining agreement on the grounds that it had no assets and, therefore, could not assume the agreement. The bankruptcy court denied the motion to reject on the grounds that, since the debtor had sold all of its assets, the debtor could not meet the requirement that rejection was necessary to permit the reorganization of the debtor. The bankruptcy court also held that denial of the motion to reject the agreement did not automatically result in assumption of the agreement. The B.A.P. for the eighth circuit reversed and affirmed, holding that a debtor may reject a collective bargaining agreement even if it has sold virtually all of its assets because, although section 1113 requires that rejection of a collective bargaining agreement be necessary for reorganization, that section does not equate reorganization with rehabilitation. The requirement that rejection of the agreement be 'necessary to permit the reorganization' does not necessarily require that the debtor will be rehabilitated, but, rather, that the rejection is necessary to accommodate confirmation of the chapter 11 plan. This interpretation of 'necessary to permit reorganization' was consistent with fair and equitable treatment of the union members and other creditors, and comported with the problems that section 1113 was meant to redress. Since the plan had not yet been confirmed, the debtor’s motion to reject the agreement was not untimely and the B.A.P. remanded the proceeding for a determination of the remaining eight factors to be applied to determine whether the debtor could reject the agreement (citing Collier on Bankruptcy, 15th Ed. Revised).United Food & Commercial Workers Union, v. Family Snacks, Inc. (In re Family Snacks, Inc.), 2001 Bankr. LEXIS 41, – B.R. – (B.A.P. 8th Cir. January 31, 2001) (Dreher, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1113.06[1][b],[2]; 3:365.03[3]

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3rd Cir.

Abstention in action alleging state fraud claims was warranted. D. Del. Chapter 11 debtor filed suit in the state (Florida) court alleging state law fraud claims, but also included claims referencing sections 554 and 550 of the Bankruptcy Code. The defendant removed the action to the district court which transferred the action to the district of Delaware where the chapter 11 case was pending. Upon the debtor’s motion to remand to the state court in Florida, the district court held that since jurisdiction was premised only under section 1334 and no federal questions existed, abstention was warranted. The claims arose solely under state law and could not have been commenced in the district court absent the chapter 11 filing so that exercise of jurisdiction by the district court was inappropriate. Neither remand to a court in another state nor a transfer to the district court in Florida were procedurally proper remedies. It appeared, however, that a state court in Delaware could take jurisdiction over the proceeding.Breed Technologies Inc. v. Allied Signal Inc., 2001 U.S. Dist. LEXIS 651, – B.R. – (D. Del. January 5, 2001) (Sleet, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05[1], [3]

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4th Cir.

Debtor was enjoined from filing for 180 days. Bankr. E.D. Va. The secured creditor filed a motion for relief from the automatic stay and moved to dismiss the chapter 13 debtor’s cases with prejudice. The debtor had filed two cases simultaneously shortly after the creditor had scheduled a foreclosure sale on one of the debtor’s properties. The debtor had also filed at least three previous cases on the eve of foreclosures. The bankruptcy court granted the motion for relief and dismissed the cases with prejudice, holding that based upon the debtor’s filing history, the present cases were filed in bad faith. The court enjoined the debtor from filing a case under any chapter or in any district for a period of 180 days.In re Hobbs, 2000 Bankr. LEXIS 1646, – B.R. – (Bankr. E.D. Va. May 22, 2000) (Tice, Jr., C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.08

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Debtor alleging damages resulting from lease rejection by another debtor could not maintain state court action against the other debtors’ insiders. Bankr. D. Md. The chapter 7 debtor had a lease of nonresidential real property and equipment, and a licensing agreement, with another corporation. That corporation filed a chapter 11 petition (Northern District of California) and rejected the lease pursuant to section 365 with court approval. The debtor did not file an objection to the rejection of the lease nor a claim for damages. Instead the debtor filed suit in state (Maryland) court against defendants whom it claimed were insiders of the corporation, and alleged a cause of action based on interference with contractual relations, and claiming damages as a result of the lease rejection. This suit was eventually removed to the bankruptcy court after the debtor filed its petition. The alleged insiders filed a motion for summary judgment. The bankruptcy court granted the motion and dismissed the debtor’s complaint, holding that the debtor could not maintain a cause of action seeking damages resulting from a lease rejection in a state court against the insiders of the other debtor. The court reasoned that the debtor was attempting to circumvent the rulings of the California court and was precluded by waiver, res judicata and collateral estoppel from maintaining the new litigation. The court concluded that the debtor’s right to damages was by section 365(g) to what it could have rightfully claimed in the California proceeding by reason of the lease rejection. Transcolor Corporation v. Cerberus Partners, L.P. (In re Transcolor Corp.), 2001 Bankr. LEXIS 50, – B.R. – (Bankr. D. Md. January 19, 2001) (Schneider, B.J.).

Collier on Bankruptcy, 15th Ed. Revised Vol:Section

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Subcontractors failed to prove debtor’s control over contracting business sufficient to establish personal liability. Bankr. D. Md. The debtors jointly owned 100 percent of the stock in various corporations that were development projects at which the creditors supplied labor and materials. After the debtors filed a chapter 13 petition, the creditors filed proofs of claim, asserting that the debtors were subject to personal liability under state (Maryland) construction trust law. The debtors objected to the claims, disputing their individual liability. The bankruptcy court allowed the claim against one debtor but not the second debtor, holding that for the purposes of section 502(b)(1) the creditors had failed to establish sufficient proof that the second debtor’s control over the corporate entities rendered the claims enforceable against her. The court noted that although a properly executed proof of claim shifted the burden of producing evidence to the objector, the burden of persuasion always remained with the claimant (citing Collier on Bankruptcy 15th Ed. Revised).In re McGee, 2001 Bankr. LEXIS 52, – B.R. – (Bankr. D. Md. January 12, 2001) (Schneider, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[2]

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Court abstained from ruling on reaffirmation agreements. Bankr. E.D. Va. The pro se chapter 7 debtor entered into two separate reaffirmation agreements with creditors. The reaffirmed debts were fully secured by the debtor’s principal residence. The bankruptcy court abstained from ruling on both reaffirmation agreements, holding that because the reaffirmation agreements covered consumer debts that were fully secured by real estate, the court’s approval or disapproval was not required. The court found no exceptional or egregious circumstances which would necessitate the use of the court’s equitable powers to prevent an abuse of process.In re Phelan, 2000 Bankr. LEXIS 1647, – B.R. – (Bankr. E.D. Va. May 12, 2000) (Tice, Jr., C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.04

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Postpetition transfer was not avoidable. Bankr. D. Md. The chapter 7 trustee filed an adversary proceeding to recover from the debtor’s landlord a postpetition transfer. After the debtor defaulted, the landlord, pursuant to the terms of the parties’ commercial lease, drew down a standby letter of credit postpetition. The trustee subsequently obtained court approval to sell the lease and paid the landlord one month’s rent, which was required to cure postpetition defaults. Nearly one year later the trustee sought turnover of the cure payment, as well as the funds received from the letter of credit. The bankruptcy court dismissed the complaint, holding that the postpetition cure payment tendered by the trustee was not avoidable because it was not an unauthorized postpetition transfer. Likewise, the payment under the letter of credit was not a postpetition transfer that required court approval and was not property of the estate (citing Collier on Bankruptcy, 15th Ed. Revised).Musika v. Arbutus Shopping Center Ltd. P’ship (In re Farm Fresh Supermarkets of Maryland, Inc.), 2001 Bankr. LEXIS 51, – B.R. – (Bankr. D. Md. January 12, 2001) (Schneider, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:549.04[4]

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5th Cir.

Stay pending appeal warranted. N.D. Tex. Two chapter 11 cases were consolidated and the debtors ultimately merged into one corporation. The confirmed plan provided for creation of a trust to provide for payment of asbestos injury claims, and, absent certain events, injured persons could not seek recovery for personal injury claims against the new corporation. Known holders of asbestos disease claims were permanently enjoined from seeking recovery against any person other than the trust. Unknown claimants were channeled first to the trust and enjoined from commencing an action against any other entity other than the trust until remedies against the trust were exhausted. The trustee determined that its assets would be insufficient to pay full tort values for all claimants so that two persons, previously unknown claimants, filed a tort action against the new corporation. The bankruptcy court determined that the trust had committed all of its available resources to other beneficiaries and terminated the channeling order, thus permitting the claimants to proceed against the new corporation. The new corporation appealed and sought a stay of the bankruptcy court, asserting that the trust in fact had sufficient assets to address the claims. Applying the general four part test, the district court held that stay pending appeal was warranted. (1) The new corporation demonstrated a probability of success on the merits because the bankruptcy court did not resolve whether there were additional assets which, at some time, could be utilized to benefit other claimants. (2) The new corporation would be substantially harmed if the stay were not granted because it had not bargained for the additional litigation and, if trial were conducted before the appeal was concluded, the issues could become moot. (3) The claimants would not be substantially harmed since it had been contemplated that these claimants would be required to first pursue their administrative remedies through the trust, although some delay would occur. (4) The public interest favored enforcement of the provision that claimants to first pursue the procedures established under the plan. In re National Gypsum Company, 2000 U.S. Dist. LEXIS 19482, – B.R. – (N.D. Tex. September 29, 2000) (Linday, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:8005.09

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6th Cir.

Debtor did not meet burden of proof. Bankr. W.D. Tenn. The chapter 7 debtor’s former spouse filed an adversary proceeding to determine the dischargeability of certain hold harmless debt assumptions under the parties’ divorce decree. Under the marital dissolution agreement, the debtor assumed two credit card accounts, one of which his former wife had paid in full upon demand. The bankruptcy court entered judgment in favor of the former spouse, holding that the debtor failed to establish that either of the affirmative defenses of section 523(a)(15) applied. The court was unable to conduct a balancing test to review the financial status of the debtor and his former spouse. The debtor never established his ex-wife’s expenses, debts, assets, future employment prospects, or her new spouse’s income.Helsel v. Marsh (In re Marsh), 2000 Bankr. LEXIS 1650, – B.R. – (Bankr. W.D. Tenn. December 20, 2000) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.21

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Debtor failed to establish that interests derived from the Code overcame enforcement of arbitration agreement. Bankr. M.D. Tenn. After the debtor filed a chapter 11 petition in 1998, the creditor filed several proofs of claim for accounts receivable, excess taxes, invoices and pension contributions. The creditor then filed an adversary proceeding for a declaration that the underlying agreements with the debtor required arbitration of all disputes. The creditor also raised the defenses of setoff, pursuant to section 553(a), and recoupment. The debtor argued that bankruptcy interests overcame enforcement of the arbitration provisions. The bankruptcy court held that the arbitration provisions were enforceable. The court determined that the issue was whether the claims involved were derived from the Code, and found that no federal right of setoff was created by the Code but, rather, was a right that was preserved by the Code. The court concluded that, in light of the causes of action in issue being derivative of prepetition legal or equitable rights and not conferred by the Code, the debtor failed to demonstrate substantial bankruptcy interests to overcome enforcement of the arbitration procedures agreed to prepetition. Pelikan Holding Ag v. Nu-Kote Holding, Inc. (In re Nu-Kote Holding, Inc.), 2001 Bankr. LEXIS 53, – B.R. – (Bankr. M.D. Tenn. January 5, 2001) (Lundin, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.03

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7th Cir.

Court of Appeals held that emotional injury was not compensable under section 362(h). 7th Cir. After the debtor filed a chapter 7 petition, a creditor to whom she owed a credit card debt of $1,000 asked her to reaffirm the debt and threatened her with fraud if she refused. The debtor refused, the creditor did not charge her with fraud, but the debtor filed a class action suit to obtain redress for herself and similarly situated victims of the alleged harassment. The bankruptcy court held that the debtor could not obtain an award of damages under section 362(h) because her only evidence of injury was an affidavit stating that upon receipt of the threatening letter she cried, felt nauseous and frightened, and quarreled with her spouse. The district court affirmed, and this appeal followed. The Court of Appeals for the Seventh Circuit affirmed, holding that emotional injury was not compensable under section 362(h) when there was no allegation of financial injury. The Court of Appeals also noted that the potential abuse was considerable if damages for purely emotional injury were awarded to redress violations of the automatic stay, that the injury suffered by the debtor was by her own account slight, and that the debtor and other members of the class had the normal tort remedies against oppressive collection tactics (citing Collier on Bankruptcy 15th Ed. Revised). Aiello v. Providian Fin. Corp., 2001 U.S. App. LEXIS 1664, – F.3d. – (7th Cir. February 6, 2001) (Posner, C.J.).

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

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Court granted debtor’s motion to redeem automobile. Bankr. N.D. Ill. The chapter 7 debtor moved to redeem her automobile pursuant to section 722(a). The debtor’s motion proposed payment at a midpoint between the retail and wholesale values of the automobile, as set out on an appraisal submitted by the debtor. The creditor holding the lien on the automobile objected. The creditor argued that in order to redeem the property under section 722, the debtor had to pay either the amount currently due under her contract or, if payment was limited to the value of the collateral, the full replacement value of the automobile. The bankruptcy court overruled the creditor’s objection. The court held that under section 722, a secured creditor is entitled only to the value of its collateral, valued on the basis of what the creditor would obtain upon repossession. The debtor proposed to pay no less than this amount. Thus, the motion to redeem was granted.In re Tripplett, 2000 Bankr. LEXIS 1635, – B.R. – (Bankr. N.D. Ill. December 28, 2000) (Wedoff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:722.01

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8th Cir.

Denial of motion to reject collective bargaining agreement did not result in automatic assumption of the agreement. B.A.P. 8th Cir. Snack food distributor entered into a collective bargaining agreement with a union for a term of five years under which the debtor was to pay its employee’s dental and medical expenses. At the time the debtor filed its chapter 11 petition, its obligations on medical and dental expenses was nearly $500,000. In the course of the chapter 11 case, the debtor sold virtually all of its assets. Over the union’s objection, the bankruptcy court approved the sale and did not require the purchaser to assume the collective bargaining agreement. Thereafter, the debtor moved to reject the collective bargaining agreement on the grounds that it had no assets and, therefore, could not assume the agreement. The bankruptcy court denied the motion to reject on the grounds that, since the debtor had sold all of its assets, the debtor could not meet the requirement that rejection was necessary to permit the reorganization of the debtor. The bankruptcy court also held that denial of the motion to reject the agreement did not automatically result in assumption of the agreement The bankruptcy appellate panel affirmed and reversed, holding thatthe bankruptcy court’s denial of the motion to reject the collective bargaining agreement did not automatically result in, or require assumption of, the agreement. Since the use of the term 'assumption' in section 1113 was ambiguous, and section 1113 governs only the standards for rejection or modification of a collective bargaining agreement, section 365(b), governing assumption and rejection of executory contracts, applied. Section 365 permitted only the debtor to request assumption, and, in order to do so, the debtor was required to meet the specific requirements of that section. Neither section 365 nor 1113 permits an implied assumption because a motion and court approval is required; assumption could not be effected by mere inaction. The court noted the fundamental difference between an affirmative assumption of a collective bargaining agreement and the pendency of that agreement until such time as the debtor obtains rejection of that agreement. The fact that the agreement was operative prior to rejection was distinct from the obligations accompanying affirmative assumption of the agreement. Indeed, as the court noted, denial of a rejection could be followed by a renewed motion to reject under changed circumstances rather than assumption (citing Collier on Bankruptcy, 15th Ed. Revised).United Food & Commercial Workers Union v. Family Snacks, Inc. (In re Family Snacks, Inc.), 2001 Bankr. LEXIS 41, – B.R. – (B.A.P. 8th Cir. January 31, 2001) (Dreher, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1113.02, 7:1113.03[2][c] 3:365.03[3][

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9th Cir.

Equity security holder did not hold claim against debtors. Bankr. D. Ariz. The chapter 11 affiliated debtors filed a motion for an order determining that they properly classified the rights of an equity security holder of the debtor developer in their joint plan of reorganization. Pursuant to a partnership agreement between the parties, a 'put right' provision was granted to the equity security holder, giving it the right to require that its equity interest be purchased by either debtor. The debtors argued that the put right was an equity security interest and the security holder argued that the put right was a claim against the debtors. The bankruptcy court granted the debtors’ motion, holding that the put right was an equity security in the debtor developer’s case and was not a claim in the debtor partner’s case. The put right was intended as a liquidity device, a method of providing to the equity security holder a mechanism for liquidating its otherwise illiquid investment. It did not include a right to payment in cash.In re Einstein/Noah Bagel Corp., 2000 Bankr. LEXIS 1649, – B.R. – (Bankr. D. Ariz. August 7, 2000) (Case II, B.J.).

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

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Sublessee did not have priority claim. Bankr. D. Ariz. The chapter 11 plan trustee objected to the claimant’s administrative claim and moved for summary judgment. The claimant subleased space from the debtor and was entirely dependent upon the latter’s continued tenancy with the landlord for its right of possession. The debtor rejected the lease in its bankruptcy proceedings without having obtained a non-disturbance agreement from the landlord to protect the possession of the claimant pursuant to the terms of the sublease. The claimant sought administrative expense priority, arguing that the debtor was obligated by section 365(d)(3) to timely perform the non-disturbance covenant and that its failure to do so gave rise to administrative liability. The bankruptcy court granted summary judgment for the trustee, holding that the claimant had only an unsecured claim because section 365(d)(3) was limited to protecting the rights of lessors.In re BCE West, L.P., 2000 Bankr. LEXIS 1651, – B.R. – (Bankr. D. Ariz. October 11, 2000) (Case II, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.04[3][f]

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Fee award was upheld on appeal. N.D. Cal. The creditor appealed the bankruptcy court’s award of attorney fees pursuant to section 523(d). The debtor had used a cash advance on a credit card issued by the creditor to pay the balance on a different credit card account. After the creditor failed to prove that the debtor obtained funds fraudulently under section 523(a)(2)(A), the bankruptcy court found that the position of the creditor was not substantially justified and awarded attorney’s fees to the debtor. The fee award was slightly reduced, but affirmed by the B.A.P. On appeal, the creditor argued that sufficient evidence was admitted at trial to show that its claim was not unreasonable or brought in bad faith. The Court of Appeals for the Ninth Circuit affirmed, holding that because the evidence that the creditor submitted did not show that its claim had a reasonable basis in law and in fact, the bankruptcy court did not abuse its discretion in finding that the creditor’s position was not substantially justified. The evidence admitted at trial had virtually no tendency to prove that the debtor did not intend to repay the creditor. The court further noted that section 523(d) did not distinguish between pro bono representation, which the debtor had, and fee-generating representation.First Card v. Hunt (In re Hunt), 2001 U.S. App. LEXIS 1554, – F.3d – (N.D. Cal. February 6, 2001) (Tashima, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.27

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Debtor was not required to pay penalty rate of interest to effect cure. Bankr. D. Ariz. The creditor was a first priority lienholder pursuant to a note and deed. The note provided for a contract rate of interest at 10.75 percent and a default rate of 24 percent. The debtor filed a chapter 11 petition, classifying the creditor’s claim as impaired. The debtor proposed to cure the arrearages prior to the effective date by paying an amount equal to the number of monthly payments in arrears multiplied by the regular monthly payment but not including default interest. The creditor objected to its treatment under the plan, particularly to the debtor’s attempt to avoid all consequences of its default. The bankruptcy court held that, for the purposes of section 1124(2), the debtor did not need to satisfy a penalty rate in order to effect a cure and leave the creditor unimpaired, but was only required to pay interest at the contract rate. Notwithstanding that holding, the court ruled that section 1124(2)(C) entitled a creditor who reasonably relied on an acceleration clause to receive damages resulting from the acceleration as part of the cure.In re Phoenix Bus. Park, 2001 Bankr. LEXIS 46, – B.R. – (Bankr. D. Ariz. January 12, 2001) (Case, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1124.03

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10th Cir.

Debtors failed to demonstrate that income did not constitute taxable income. Bankr. D. Colo. The chapter 7 debtors received a discharge in 1993. In 1997 the IRS filed a notice of federal tax lien against the debtors’ property for income taxes due for the years 1989, 1990, 1991, 1992 and 1993. The IRS alleged that the debtors did not file tax returns for those years. The debtors admitted that they had not filed returns but argued that they were not required to file because their income did not fall within the definition of taxable income. Specifically, the debtors argued that the income in question was private section remuneration under the meaning of the IRC. The IRS filed a motion for summary judgment. The bankruptcy court granted the motion, holding that, for the purposes of section 523(a)(1), the debtors merely argued that their income for which no returns were filed did not constitute taxable income, and presented no facts to support that interpretation of the relevant IRC provisions. In re Bailey, 2000 Bankr. LEXIS 1638, – B.R. – (Bankr. D. Colo. October 12, 2000) (Matheson, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.07[3]

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Chapter 13 case was filed in bad faith to manipulate Code and avoid judgment debt. Bankr. D. Wyo. The chapter 13 debtor’s former husband, who had obtained a prepetition state court judgment against the debtor, objected to confirmation of the debtor’s chapter 13 plan. The former husband alleged that the plan was not proposed in good faith and that the debtor was unable to make the payments required by the plan. The bankruptcy court sustained the objection because it could not find, based upon consideration of six factors, that the debtor’s plan was proposed in good faith. The six factors that the court considered were: whether the debtor stated her debts and expenses accurately; whether the debtor made fraudulent misrepresentations to mislead the court; whether the debtor unfairly manipulated the Bankruptcy Code; whether any of the debts would be nondischargeable in a chapter 7 case; whether the debtor used her best efforts to satisfy the obligation; and the egregiousness of debtor’s prepetition conduct. The court found that the debtor filed her chapter 13 case in an effort to manipulate the Code and avoid payment of her former husband’s judgment debt, which had already been declared nondischargeable in the debtor’s prior chapter 7 case. The court concluded that the debtor’s conduct subsequent to the judgment and prior to the filing of the chapter 13 case constituted an abuse of the purpose and spirit of chapter 13.In re White, 2000 Bankr. LEXIS 1661, – B.R. – (Bankr. D. Wyo. December 8, 2000) (McNiff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.04

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11th Cir.

Student loans of debtor suffering from panic attacks were held dischargeable under policy test. Bankr. N.D. Ala. The chapter 7 debtor filed an adversary proceeding seeking a declaration that his student loans were dischargeable. The debtor had held approximately 13 different jobs in the two years prepetition, and suffered from panic attacks that were debilitating and rendered him unable to drive or leave his home for long periods of time. The bankruptcy court held that the loans were dischargeable. The court found little reason to believe that the debtor’s income would greatly increase in the near future, or to conclude that the debtor had sufficient funds to repay the loans over the longest possible repayment period. But the court also found that the debtor failed to meet the good faith test, since the debtor made only a single payment on the loan. The failure of the good faith test then triggered application of the policy test, and the court concluded, taking into consideration the debtor’s health problems, that the debtor was the type envisioned by Congress in enacting section 523(a)(8)(B), thereby entitling the debtor to a discharge of the loans. Morris v. United States of America (In re Morris), 2000 Bankr. LEXIS 1643, – B.R. – (Bankr. N.D. Ala. April 5, 2000) (Mitchell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14

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Chapter 11 plan failed to comply with section 1123(a)(1). Bankr. M.D. Fla. The debtor entered into a prepetition option agreement with a property owner that granted the debtor two options to purchase certain property. The debtor exercised the first option but filed its chapter 11 case prior to exercising the second option. Various orders adverse to the debtor were entered regarding its exercise of the second option. Appeals from several of those adverse orders were pending when the debtor filed its chapter 11 plan. The property owner objected to confirmation of that plan. The owner alleged that the plan did not comply with section 1123(a)(1), which requires that a plan designate classes of claims. The owner argued that the plan failed to include its amended claim in the classes of claims it designated and defined. The owner argued that because its claim was contingent and unliquidated, and because the debtor appealed a bankruptcy court order that overruled the debtor’s objection to its amended proof of claim, the claim was not an 'allowed claim' as defined by the plan. The debtor argued that the owner would have an allowed claim under the plan if the debtor elected to exercise the second option in the future. The bankruptcy court agreed with the owner that the debtor’s reliance on the possibility that it might obtain a favorable appellate ruling sometime in the future, at which point the owner’s claim would become allowed, was too speculative to constitute a proper classification for the owner’s claim. Consequently, the debtor’s plan did not comply with section 1123(a)(1).In re Yates Dev., Inc., 2000 Bankr. LEXIS 1641, – B.R. – (Bankr. M.D. Fla. December 5, 2000) (Proctor, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1123.01[1]

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Postconfirmation quarterly fees are based upon all disbursements, including ordinary operating expenses. Ct. App. 11th Cir. Over objection of the United States Trustee, the bankruptcy court confirmed the chapter 11 plan which contained a provision limiting the calculation of the debtor’s postconfirmation fees to those 'disbursements made pursuant to the plan of reorganization.' Upon the United States trustee’s appeal, the district court reversed and the United States Court of Appeals for the Eleventh Circuit affirmed, holding that disbursements under section 1930(a)(6) included all payments from the bankruptcy estate, including ordinary business expenses, not merely payments made pursuant to the confirmed plan.Walton v. Jamko, Inc. (In re Jamko, Inc.), 2001 U.S. App. LEXIS 1525, – F.3d – (11th Cir. February 5, 2001) (Hill, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:906[2]

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