Collier Bankruptcy Case Update February-4-02

Collier Bankruptcy Case Update February-4-02

 


Collier Bankruptcy Case Update

The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.

February 4, 2002

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

  • 1st Cir.

    § 503(b)(1)(B) Bankruptcy Appellate Panel reversed the determination that real estate taxes that accrued during the bankruptcy period were the responsibility of the bankruptcy estate.
    Salem v. Mailman Steam Carpet Cleaning, Inc. (In re Mailman Steam Carpet Cleaning, Inc.)
    (B.A.P. 1st Cir.)


    2d Cir.

    § 547(b)(2) The court granted the trustees motion to avoid preferential transfer related to payments made by the debtor in a Ponzi-like scheme.
    Daly v. Simeone (In re Carrozzella & Richardson)
    (Bankr. D. Conn.)


    3d Cir.

    28 U.S.C. § 1452(b) District court refused to remand removed proceeding to state court.
    Hunt Capital Group, L.L.C. v. McHenry
    (D. Del.)


    4th Cir.

    § 109(g) Ineligible debtor could not avail himself of the protection provided by the automatic stay.
    McKay v. Alliance Mortg. Corp. (In re McKay)
    (Bankr. W.D. Va.)

    § 523(a)(15) Debt that arose from agreement to pay former wife a percentage of proceeds from sale of property sale was excepted from discharge.
    Ferraro v. Ballard (In re Ballard)
    (Bankr. E.D. Va.)

    28 U.S.C. § 1334(b) The district court declined jurisdiction over action where state law issues and nondebtor parties predominated. In re Asbestos Litig. (S.D. W. Va.)


    5th Cir.

    § 362(d) Judicial tax sale that violated automatic stay had no legal effect where bankruptcy court declined to retroactively annul stay.
    Elbar Invs., Inc. v. Pierce (In re Pierce)
    (Bankr. S.D. Tex.)

    § 503 Creditor’s postpetition loans were entitled to administrative priority.
    RFC Capital Corp. v. Equalnet Communs. Corp. (In re Equalnet Communs. Corp.)
    (S.D. Tex.)


    6th Cir.

    § 506(d) Complaint was dismissed because debtors could prove no set of facts that could support avoidance of creditor’s second mortgage.
    Bessette v. Bank One (In re Bessette)
    (Bankr. E.D. Mich.)

    § 547(b) Debtors could recover four payments made to secured creditor as preferential transfers.
    TennOhio Transp. Co. v. Navistar Fin. Corp. (In re TennOhio Transp. Co.)
    (Bankr. S.D. Ohio)


    7th Cir.

    § 503(b)(3) Expenses related to time spent by committee chairperson’s assistant were disallowed.
    Creditor’s Comm. Chariman v. Fibrex, Inc. (In re Fibrex, Inc.)
    (Bankr. S.D. Ind.)

    § 1129(a)(7) Creditor failed to produce evidence that plan violated best interest of creditors test.
    SK-Palladin Ptnrs., L.P. v. Platinum Entm’t, Inc.
    (N.D. Ill.)


    8th Cir.

    § 362(a)(1) Failure to request extension of stay’s applicability to nondebtor defendant resulted in dismissal of creditor’s action. C.H. Robinson Co. v. Paris & Sons, Inc. (N.D. Iowa)

    § 364(b) Court granted the debtor’s motion to approve administrative expense priority and pay prepetition debts prior to confirmation for vendors who would extend postpetition unsecured credit to debtor.
    In re Payless Cashways, Inc.
    (Bankr. W.D. Mo.)

    28 U.S.C. § 158(b) Debtor’s appeal from orders that granted relief from stay and denied motion for reconsideration held moot because of failure to seek stay pending appeal.
    Ciralsky v. Companion Mortg. Corp. (In re Ciralsky)
    (B.A.P. 8th Cir.)


    9th Cir.

    § 108(a) Trustee within statute of limitations for filing complaints for recovery.
    Smith v. Andersen L.L.P.
    (D. Ariz.)

    § 553 Because insurer was not entitled to recoupment, debtor’s discharge prevented an offset of prepetition claim against postpetition obligation to debtor.
    Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan)
    (B.A.P. 9th Cir.)


    11th Cir.

    § 506(b) Oversecured creditor’s unreasonable attorney’s fees were deemed an allowed unsecured claim.
    Welzel v. Advocate Realty Invs., LLC (In re Welzel)
    (11th Cir.)

    Rule 7055 Debtor failed to satisfy requirements for entry of default judgment on complaint to disallow creditor’s claim.
    King v. Cavc, Inc. (In re King)
    (Bankr. N.D. Ala.)


Collier Bankruptcy Case Summaries

1st Cir.

Bankruptcy Appellate Panel reversed the determination that real estate taxes that accrued during the bankruptcy period were the responsibility of the bankruptcy estate. B.A.P. 1st Cir. The debtor filed a voluntary chapter 7 petition in early 1993. The case was converted to chapter 11 and later reconverted to chapter 7 in late 1993. Nearly three years later, the chapter 7 trustee filed a notice of intention to abandon certain real estate property owned by the debtor, citing liabilities including a first mortgage, unknown hazardous material clean-up costs and an unknown market value. No objection to the trustee’s notice was received and the court approved the abandonment. Four years after the abandonment, the debtor filed an adversary complaint seeking to compel the trustee to pay real estate taxes owed to the city, which were incurred from the time the trustee was appointed until the property was abandoned. The bankruptcy court heard the adversary proceeding and, after trial, ordered the trustee to pay the real estate taxes. The trustee appealed to the Bankruptcy Appellate Panel for the First Circuit, arguing that first priority administrative expense was not warranted where the city had not filed a claim in the debtor’s chapter 7 bankruptcy, and the debtor had 'sat on its hands' for four years after the abandonment before seeking payment of the taxes. After reviewing the facts, the panel found that the debtor’s failure to object when the trustee noticed the abandonment of the property, along with the debtor’s failure to act in a timely manner, precluded the debtor’s argument that it should not be liable for the real estate taxes. The court then ordered the decision of the bankruptcy court requiring the trustee to pay real estate taxes to the city be reversed, thus, leaving the debtor liable for the taxes. Salem v. Mailman Steam Carpet Cleaning, Inc. (In re Mailman Steam Carpet Cleaning, Inc.), 2001 Bankr. LEXIS 1579, 270 B.R. 82 (B.A.P. 1st Cir. December 5, 2001) (Haines, B.A.P.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.07

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2nd Cir.

The court granted the trustees motion to avoid preferential transfer related to payments made by the debtor in a Ponzi-like scheme. Bankr. D. Conn. The creditors, who were a husband and wife, became acquainted with the debtor, a law firm, when the debtor provided legal representation for the creditors. After forming an attorney-client relationship, the creditors entered into a business arrangement with the debtor, whereby, on several occasions, they deposited funds with the debtor in exchange for the debtor’s promise to repay the principal deposit on demand and pay interest on the balance of the deposit at a specified annual rate. The deposits included the creditors’ personal funds, as well as certain bonds belonging to one of the creditor’s parents. Within 90 days preceding the debtor’s petition date, the creditors withdrew $5,000. After the petition was filed, the trustee filed an adversary proceeding to recover the amount of the transfer on the basis of preference. As a defense to the trustee’s claim, the creditors argued that the transfer was not voidable because the funds transferred by the debtor to the creditors were previously placed with and/or held by the debtor in trust for the creditors’ benefit. After evaluating the facts, the court found that the creditors had manifested no intention to create an express trust at the time they made their deposits. The court also found that, even if the creditors could prove the existence of a constructive trust, they could not identify the funds that were the subject of their constructive trust claim because their funds had been commingled in a unitary bank account with the funds of other 'depositors,' as well as income derived from investments and general revenues from the debtor’s legal practice. Since the creditors could not trace the funds they deposited, their constructive trust defense to the trustee’s claim failed and the court entered judgment in favor of the trustee. Daly v. Simeone (In re Carrozzella & Richardson), 2001 Bankr. LEXIS 1599, 270 B.R. 325 (Bankr. D. Conn. December 11, 2001) (Dabrowski, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03

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3d Cir.

District court refused to remand removed proceeding to state court. D. Del. The owners of common stock of the chapter 11 debtor filed a motion before the district court to remand a removed proceeding they had commenced against various creditors, officers and noteholders of the debtor. The stockholders filed a state (Oklahoma) court action alleging that the defendants had engaged in fraud on the bankruptcy court to undervalue the debtor. After the proceeding was removed to district court, the stockholders challenged the court’s jurisdiction, arguing there was neither diversity nor a federal claim. The district court denied the motion, holding that because the action arose directly from the debtor’s filing of bankruptcy and the disposition of the claims directly affected the estate, remand of the proceeding to state court was not warranted. The court noted that the stockholders’ action was, in reality, a collateral attack on the confirmed plan of reorganization.Hunt Capital Group, L.L.C. v. McHenry, 2001 U.S. Dist. LEXIS 20802, – B.R. – (D. Del. December 13, 2001) (Robinson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.07[5]

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4th Cir.

Ineligible debtor could not avail himself of the protection provided by the automatic stay. Bankr. W.D. Va. The chapter 13 debtor filed an adversary proceeding against the secured creditor, arguing that a foreclosure sale which took place after he filed a petition was in violation of the automatic stay and, therefore, void. The creditor moved for summary judgment and asserted that based upon the doctrine of issue preclusion, the debtor could not prevail as a matter of law. The debtor had previously filed a chapter 13 petition and, while motions for relief were pending, voluntarily moved to dismiss his case. One day before a scheduled foreclosure sale, the debtor filed a second petition within 180 days of his previous case. The bankruptcy court dismissed the second case because the debtor could not meet the eligibility requirements of section 109(g)(2). The state (Virginia) court validated the foreclosure sale and the debtor responded by filing a third petition. The bankruptcy court granted the creditor’s motion for summary judgment, holding that since the debtor was not eligible to file a petition, and the filing of the petition did not invoke the automatic stay, the foreclosure sale was not prohibited by the stay and was not void. The court dissolved a previously-granted preliminary injunction against the creditor.McKay v. Alliance Mortg. Corp. (In re McKay), 2001 Bankr. LEXIS 1609, 268 B.R. 908 (Bankr. W.D. Va. September 25, 2001) (Krumm, B.J.).

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

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Debt that arose from agreement to pay former wife a percentage of proceeds from sale of property sale was excepted from discharge. Bankr. E.D. Va. The debtor’s former wife filed an adversary complaint seeking a determination that an agreement to pay a percentage of proceeds from the sale of certain property that was incorporated into the parties’ divorce judgment created a nondischargeable obligation under section 523(a)(5), 523(a)(6) or 523(a)(15). The bankruptcy court held that the debt was nondischargeable under section 523(a)(15) because the debtor had the ability to pay the debt and the benefit to him of discharging the debt did not outweigh the detriment that a discharge would cause his former wife. The court also held that the debt at issue was not excepted from discharge under section 523(a)(5) because it was intended as a property settlement and not in the nature of support, and was not excepted from discharge under section 523(a)(6) because the evidence did not establish the debtor’s intent not to pay the debt or that the debtor believed his actions were substantially certain to harm his former wife. In holding the debt nondischargeable under section 523(a)(15), the court noted the sui generis circumstances in this case of a relatively affluent debtor and his new wife, and an affluent former spouse and her new husband. The court gave great consideration to the legislative intent of section 523(a)(15)(B). The court also concluded that a partial discharge under section 523(a)(15) would be inappropriate in this case.Ferraro v. Ballard (In re Ballard), 2001 Bankr. LEXIS 1661, – B.R. – (Bankr. E.D. Va. July 17, 2001) (St. John, B.J.).

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

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The district court declined jurisdiction over action where state law issues and nondebtor parties predominated. S.D. W. Va. The removing defendants, who were automakers, sought to remove 160 civil actions to the district court on the basis of 'related to' jurisdiction, arguing that some of the corporations named in the plaintiffs’ lawsuits were now divisions or subsidiaries of a corporation that had filed for bankruptcy protection. The plaintiffs disputed the fact that the debtor had a corporate relationship with any of the defendants and argued that there was no showing of any indemnity obligations. In its evaluation of the defendants’ notice of removal, the court considered the fact that a mechanism was already in place to try the asbestos litigation cases in the state court, as well as the fact that the district court had no reason to doubt or question the capacity of the state court system to handle the actions and to apply state law and that the potential for prejudice to the involuntarily removed parties was great. After noting that removal statutes are construed strictly against removal and that the party seeking to remove a case has the burden of establishing federal jurisdiction, the court found that the removing parties had not satisfied the requirements of the removal statue. Because the court found that the balance of equities tipped in favor of remand, it granted the plaintiffs’ motion and remanded the actions to the state court for all further proceedings. In re Asbestos Litig., 2001 U.S. Dist. LEXIS 20300, – F. Supp.3d – (S.D. W. Va. December 7, 2001) (Hadden, II, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9027.01

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5th Cir.

Judicial tax sale that violated automatic stay had no legal effect where bankruptcy court declined to retroactively annul stay. Bankr. S.D. Tex. A judicial tax sale of the debtor’s homestead took place minutes after his chapter 13 case was filed. The tax sale purchaser purchased the homestead without knowledge that the case had been filed. Nevertheless, the constable declined to issue a deed to the property to the tax sale purchaser until the bankruptcy court determined the effect of the automatic stay. The tax sale purchaser filed a motion in the debtor’s main bankruptcy case asking the court to annul the automatic stay retroactively to validate the sale. After that motion was denied, the tax sale purchaser filed an adversary proceeding asking that the court direct the constable to issue the deed to the tax sale purchaser as a good faith purchaser without knowledge of the debtor’s bankruptcy filing or the automatic stay. Alternatively, the tax sale purchaser sought the return of the purchase price. The bankruptcy court held that regardless of whether the parties knew that the statutory automatic stay existed, a foreclosure or judicial sale that violates the automatic stay has no legal effect unless the bankruptcy court retroactively annuls the stay and thereby validates the sale. The court noted that retroactive annulment of the stay is an extraordinary remedy, subject to the broad discretion afforded to a bankruptcy judge, and that the bankruptcy judge in this case had already declined to exercise his discretion to grant the tax sale purchaser retroactive relief from the stay. Thus, the tax sale purchaser’s 'good faith purchaser' status could not be the basis for validating the postpetition judicial tax sale. By separate judgment, the court ordered that the purchase price be returned to the tax sale purchaser, and that the tax sale proceedings be terminated without effect.Elbar Invs., Inc. v. Pierce (In re Pierce), 2001 Bankr. LEXIS 1537, – B.R. – (Bankr. S.D. Tex. November 25, 2001) (Steen, B.J.).

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

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6th Cir.

Complaint was dismissed because debtors could prove no set of facts that could support avoidance of creditor’s second mortgage. Bankr. E.D. Mich. The creditor filed a motion to dismiss the chapter 7 debtors’ adversary complaint to avoid its lien on their residential property under section 506(d). The debtors argued that because no equity remained in the property after deducting the amount of their exemption plus the balance of the creditor’s first mortgage, the creditor’s second mortgage was wholly unsecured under section 506(a) and therefore void under section 506(d). The bankruptcy court granted the motion to dismiss, holding that the debtors could not use section 506(d) to void the consensual wholly unsecured junior mortgage. The court followed Dewsnup v. Timm, 502 U.S. 410 (1992), and held that section 506(d) applied only to claims that had not been allowed as a result of the claims allowance process. Even assuming the creditor’s first mortgage exceeded the fair market value of the property without considering the claimed exemption, the creditor still had an 'allowed secured claim' for purposes of section 506(d) based on its second mortgage, and therefore, the lien on the property could not be voided (citing Collier on Bankruptcy, 15th Ed. Revised).Bessette v. Bank One (In re Bessette), 2001 Bankr. LEXIS 1612, 269 B.R. 644 (Bankr. E.D. Mich. October 30, 2001) (Spector, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.06[1]

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Debtors could recover four payments made to secured creditor as preferential transfers. Bankr. S.D. Ohio The chapter 11 debtors filed an adversary complaint seeking to avoid four payments made to a secured creditor as preferential transfers pursuant to section 547(b). The parties stipulated that the debtors established the first four elements of a preference (e.g., the payments benefited the creditor; the payments were made on account of an antecedent debt; the payments were made while the debtors were insolvent; and the payments were made within 90 days before the filing of the debtors’ chapter 11 petition). Thus, the critical determination was whether the transfers enabled the creditor to receive a larger share of the estate than if the case had been filed as a chapter 7 case and the payments had not been made. The bankruptcy court determined that the liquidation value of the creditor’s collateral was the appropriate standard for determining its secured claim, that the creditor was not fully secured on the petition date and that the debtors therefore established the fifth and final element necessary for recover of the transfers. The court also found that the creditor failed to successfully assert an 'ordinary course of business' defense under section 547(c)(2) because the evidence did not present an ordinary course pattern for either the debtors or the creditor, and the creditor failed to establish that the payments were made according to ordinary business terms.TennOhio Transp. Co. v. Navistar Fin. Corp. (In re TennOhio Transp. Co.), 2001 Bankr. LEXIS 1543, 269 B.R. 769 (Bankr. S.D. Ohio September 5, 2001) (Sellers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03

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7th Cir.

Expenses related to time spent by committee chairperson’s assistant were disallowed. Bankr. S.D. Ind. The chapter 11 debtor objected to the application of the creditors’ committee for allowance and payment of expenses. The committee sought reimbursement for time spent by its chairperson’s administrative assistant to assist the chairperson in performing his duties. The chairperson asserted that he would not have been able to meet his committee obligations without her assistance, and that her work was extremely valuable to him, the committee and to the creditors as a whole. The bankruptcy court sustained the debtor’s objection, holding that expenses incurred due to the services provided by an employee of the committee member were not entitled to administrative priority pursuant to section 503(b)(3)(F) as a matter of law. The legislative history indicated that Congress rejected the suggestion that committee members should be compensated for their time. Rather, Congress intended to limit reimbursement to expenses for travel, lodging, food and the like. The court further noted that allowing the expenses would run afoul of section 1103, which required judicial approval before employing any type of professional or agent. Creditor’s Comm. Chariman v. Fibrex, Inc. (In re Fibrex, Inc.), 2001 Bankr. LEXIS 1608, 270 B.R. 714 (Bankr. S.D. Ind. December 4, 2001) (Coachys, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.10[7]

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Creditor failed to produce evidence that plan violated best interest of creditors test. N.D. Ill. The unsecured creditor appealed the bankruptcy court’s order confirming the joint plan of reorganization submitted by the chapter 11 debtor and creditors’ committee. Prior to confirmation, the debtor had settled a prepetition class action suit conditioned on the approval of class members and subject to confirmation of the plan. The creditor argued that the plan did not serve the best interest of creditors because the debtor’s primary asset was improperly valued by the bankruptcy court. The creditor contended that the bankruptcy court erred by not allowing additional evidence that would have appraised the asset at a higher value due to the settlement of the class action suit. The district court affirmed, holding that the bankruptcy court’s determination that the plan satisfied the best interest of creditors test was not in error. The creditor had merely made unsupported assertions that the asset’s value was higher because the class action suits had settled. There was sufficient evidence that the creditors received at least as much pursuant to the plan as they could have under a chapter 7 liquidation.SK-Palladin Ptnrs., L.P. v. Platinum Entm’t, Inc., 2001 U.S. Dist. LEXIS 20710, – B.R. – (N.D. Ill. December 10, 2001) (Conlon, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1129.03[7]

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8th Cir.

Failure to request extension of stay’s applicability to nondebtor defendant resulted in dismissal of creditor’s action. N.D. Iowa The codefendant of the chapter 11 debtor moved to dismiss an action commenced against it on the ground that the action was time-barred. The creditor’s claim for unpaid freight charges accrued approximately five months before the debtor filed its petition. After it had been pending for 21 months, the bankruptcy court dismissed the debtor’s case, and nearly one year later the creditor filed its complaint. Because the statutory basis for the creditor’s action imposed an 18 month limitations period on claims, the codefendant asserted that the complaint was time-barred. The creditor argued that the automatic stay’s tolling effect redounded to stay the action against the codebtor. The district court granted the motion to dismiss, holding that because the provisions of section 362(a)(1) did not stay the creditor’s action against the codefendant during the debtor’s bankruptcy, the lawsuit was time-barred. The court determined that the automatic stay did not automatically apply to nondebtors, but could only have been extended by a court order. Even if the action against the codefendant had been automatically stayed, unusual circumstances did not exist to justify an extension because the creditor’s claim against the codefendant was independent of any liability on the part of the debtor.C.H. Robinson Co. v. Paris & Sons, Inc., 2001 U.S. Dist. LEXIS 20723, – F. Supp.2d – (N.D. Iowa December 10, 2001) (Bennett, D.J.).

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

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Court granted the debtor’s motion to approve administrative expense priority and pay prepetition debts prior to confirmation for vendors who would extend postpetition unsecured credit to debtor. Bankr. W.D. Mo. The chapter 11 debtor, who operated stores that sold building materials to contractors and individuals, filed a motion to grant administrative expense priority to critical lumber vendors for postpetition credit, and to pay all or a portion of those vendors’ prepetition claims. The debtor argued that such treatment was warranted for these critical vendors because one of the core services provided by the debtor was the retail supply and sale of lumber and wood products. If the debtor did not have wood available to supply, its potential customers would go elsewhere for the wood and other products necessary for their construction jobs. In considering the motion, the court looked at the following factors: (1) whether the procedural requirements of Rule 4001 had been complied with; (2) whether the contemplated transaction was at arms-length; (3) whether approval of the borrowing was critical to the future of the business; (4) whether the transaction benefited the estate and its creditors; (5) whether interested parties were represented; and (6) the extent to which there was support or disagreement over the proposed financing from the creditor body. After considering the six factors, and over the trustee’s objection, the court found that the facts weighed in favor of granting the debtor’s motion to give postpetition administrative expense priority and pay, prior to confirmation, the prepetition debts of those vendors who would extend unsecured credit on certain terms to the debtor. In re Payless Cashways, Inc., 2001 Bankr. LEXIS 1589, 268 B.R. 543 (Bankr. W.D. Mo. December 12, 2001) (Federman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:364.03

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Debtor’s appeal from orders that granted relief from stay and denied motion for reconsideration held moot because of failure to seek stay pending appeal. B.A.P. 8th Cir. Four days before his chapter 13 case was commenced, the debtor’s mortgagee purchased the property that secured its mortgage lien. The purchase was made pursuant to validly conducted state (Missouri) foreclosure proceedings. After the debtor’s case was commenced, the mortgagee moved for relief from the stay to enforce its rights to possession of the property. The bankruptcy court granted the mortgagee’s motion. The debtor filed a timely motion for reconsideration, which was denied. Thereafter, the bankruptcy court issued an order dismissing the debtor’s case. The debtor appealed from both the order granting relief from the stay and the order that denied his reconsideration motion. The B.A.P. affirmed. The court held that since the debtor failed to seek or obtain a stay pending appeal, no effective relief could be afforded to the debtor, and the issues raised on appeal were moot. The court noted that the mortgagee foreclosed on the property prior to the debtor’s chapter 13 filing and that title was transferred to the mortgagee pursuant to validly conducted state foreclosure proceedings. The court explained that a sale in a bankruptcy case is not subject to modification by an appellate court unless the appellant receives a stay pending appeal.Ciralsky v. Companion Mortg. Corp. (In re Ciralsky), 2002 Bankr. LEXIS 1, – B.R. – (B.A.P. 8th Cir. January 2, 2002) (Dreher, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02[3]

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9th Cir.

D. Ariz. After the debtor filed for chapter 11 relief, the plan trustee filed a complaint on behalf Trustee within statute of limitations for filing complaints for recovery. of the estate and its affiliates alleging nineteen counts against the debtor’s corporate principals and its advisors. The complaint included claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligent misrepresentation of the debtor’s financial condition, fraudulent transfers, breach of contract and professional malpractice and negligence. As alleged by the trustee, the purpose of the defendants’ wrongful actions was to create the illusion of growth and prosperity of the company and to conceal the defendants’ misconduct and mismanagement of the debtor. The defendants responded by filing several Fed. R. Civ. P. 12(b) motions to dismiss on the grounds that all the trustee’s actions were barred by a two-year statute of limitations. In reply, the trustee argued that 11 U.S.C. § 108(a)(2) tolled the statute of limitations on the debtor’s claims and that the parties had a separate tolling agreement, which further extended the filing date for the complaint. The trustee also argued that the debtor’s causes of action should be tolled where the defendants affirmatively misled or concealed the causes of action from the debtor. In its decision, the district court noted that because the filing of a bankruptcy case often brings a new party, the trustee, into the affairs of the debtor, the Code provides special time limitations for the trustee to take action that the debtor otherwise could have taken under nonbankruptcy law. It also found that the complaint pleaded with sufficient particularity the fraudulent concealment of the trustee’s claims until well beyond the alleged agreed-upon tolling date. significant discussion regarding all of the trustee’s counts, the court found that the Thus, after applicable statutes of limitation had not run and denied the defendants’ motions to dismiss (citing Collier on Bankruptcy, 15th Ed. Revised). Smith v. Andersen L.L.P., 5, 2001) (Rosenblatt, D.J.).2001 U.S. Dist. LEXIS 20377, 175 F. Supp.2d 1180 (D. Ariz. December

Collier on Bankruptcy, 15th Ed. Revised 2:108.02

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Because insurer was not entitled to recoupment, debtor’s discharge prevented an offset of prepetition claim against postpetition obligation to debtor. B.A.P. 9th Cir. The chapter 7 debtor’s insurer appealed the bankruptcy court’s order granting summary judgment in favor of the debtor. The debtor had applied for and received disability benefits prepetition. Because he failed to inform the insurer that he had also received social security benefits in connection with the same disability, the insurer demanded reimbursement of the overpayment. The debtor subsequently returned to work, filed a bankruptcy petition listing the insurer as a creditor and received a discharge. The debtor applied again for disability benefits postpetition and received reduced payments because of the past-due benefit overpayments. The debtor reopened his case in order to file a complaint against the insurer for its alleged violation of the discharge injunction. The bankruptcy court determined that the interval between the debtor’s illnesses created separate disability claim periods and that the overpayment for the first period was not 'logically related' to the insurer reimbursement rights relative to the second disability claim. Because the 'same transaction' requirement for equitable recoupment had not been met, the bankruptcy court concluded that the insurer’s action was a prohibited postpetition setoff. The B.A.P. affirmed, holding that because equitable recoupment was not available to the insurer, it violated the discharge injunction by deducting the balance of the overpayments from the debtor’s postpetition disability benefits. The B.A.P. agreed that the insurer’s claim for overpayments of benefits that were recoverable under the policy and the debtor’s right to postpetition benefits for a separate disability claim did not arise from the same transaction and were not logically related (citing Collier on Bankruptcy, 15th Ed. Revised).Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 2001 Bankr. LEXIS 1616, 270 B.R. 749 (B.A.P. 9th Cir. December 6, 2001) (Marlar, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.10

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10th Cir.

Oversecured creditor’s unreasonable attorney’s fees were deemed an allowed unsecured claim. 11th Cir. The oversecured creditor appealed the decision of the district court holding that a portion of its claim for attorney’s fees was disallowed. The promissory notes signed by the chapter 7 debtor provided that the creditor was entitled to 15 percent of the principal, plus accrued interest as attorney’s fees in the event of default. The creditor’s claim included the contractually set attorney’s fees that had vested prepetition, even though only a portion of the fees was actually incurred. The bankruptcy court concluded that the fees determined to be reasonable under section 506(b) were treated as a secured claim, with the balance of fees treated as an unsecured claim under section 502. The district court agreed that the attorney’s fees were subject to the reasonableness standard; however, it held that the portion of contractual fees found unreasonable was disallowed entirely. The Court of Appeals for the Eleventh Circuit affirmed, in part, and reversed, in part, the district court, holding that the claim for attorney’s fees should have been bifurcated between secured and unsecured claims based on the amount of fees deemed reasonable. Once the bankruptcy court determined that the fees were allowed under section 502, it properly analyzed their reasonableness under section 506(b). Fees deemed reasonable constituted a secured claim, with the balance of unreasonable fees treated as an unsecured claim (citing Collier on Bankruptcy, 15th Ed. Revised).Welzel v. Advocate Realty Invs., LLC (In re Welzel), 2001 U.S. App. LEXIS 26783, – F.3d – (11th Cir. December 17, 2001) (Birch, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04

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Debtor failed to satisfy requirements for entry of default judgment on complaint to disallow creditor’s claim. Bankr. N.D. Ala. The chapter 13 debtor filed a complaint seeking to disallow a creditor’s claim. The debtor alleged that the debt underlying the claim was incurred fraudulently by her son when he allegedly opened a charge card account in the debtor’s name and made numerous charges on the account by signing her name. The debtor’s application for entry of a default judgment was supported by her counsel’s affidavit, but the affidavit merely alleged that the defendant had not answered or otherwise defended against the complaint within the time required by the summons. The bankruptcy court held that the debtor failed to comply with Fed. R. Civ. P. Rule 55, which governs the entry of judgments by default, and that her pleading would be dismissed if she did not comply with the Rule within 15 days of the court’s order. The court noted that the elements of proof to take a default judgment are the same as those required for summary judgment. Thus, to prove that she had a valid claim for relief against the creditor, the debtor had to submit an affidavit by a competent witness setting forth facts that would be admissible in evidence to prove the elements of her cause of action. In addition, the debtor was required to file an amended certificate of service to show the capacity of the person served. Finally, the debtor had to file a proposed judgment setting forth who was served, their corporate capacity, the date of the service, what proof was presented to support the judgment and a statement granting the judgment.King v. Cavc, Inc. (In re King), 2001 Bankr. LEXIS 1654, 270 B.R. 783 (Bankr. N.D. Ala. December 21, 2001) (Caddell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7055.01

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