Collier Bankruptcy Case Update February-7-05

Collier Bankruptcy Case Update February-7-05

 


Collier Bankruptcy Case Update

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

February 7, 2005

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

 

1st Cir.

§ 704 Approval of trustee’s settlement of severance contract dispute with debtor’s former president affirmed but the claim was not entitled to administrative priority. ARS Brook, LLC v. Jalbert (In re ServiSense.com, Inc.) (1st Cir.)

§ 1329 Modification of plan to substantially decrease payments after debtor was four payments in arrears, with no showing of change in circumstances, was not proposed in good faith and was denied. In re Santiago (Bankr. D.P.R.)


3d Cir.

§ 502(a) Debtors motion for default for IRS failure to respond to objection to initial proof of claim denied where proof of claim was subsequently amended to reflect actual, not estimated taxes. Warner v. United States (In re Warner) (Bankr. M.D. Pa.)

§ 546(a)(1)(B) Interim trustee appointed within two years of order for relief and who later became permanent trustee was entitled to one-year extension of time to file avoidance actions. Claybrook v. Ponderosa Indus. de Mexico (In re U.S. Wood Prods., Inc.) (Bankr. D. Del.)


4th Cir.

§ 523(a)(2)(B) Debtors’ submission of materially false financial statements in order to induce company to issue bonds rendered debt nondischargeable. Lyndon Prop. Ins. Co. v. Adams (In re Adams) (Bankr. M.D.N.C.)


5th Cir.

§ 502(a) Proof of claim by minority owner of chapter 11 debtor disallowed due to failure to present factual basis for claims of mismanagement and other improper conduct. In re Mirant Corp. (Bankr. N.D. Tex.)

§ 523(a)(6) Nondischargeability of state court judgment reversed on grounds that state court finding of intentionally injury should have been given preclusive effect. Raspanti v. Keaty (In re Keaty) (5th Cir.)


6th Cir.

§ 521 Debtor’s failure to reaffirm debt in accordance with statement of intentions was grounds for termination of stay. In re Aubrey (Bankr. W.D. Ky.)

§ 707(b) Case ordered converted to chapter 13 or dismissed where debtors had excellent incomes and excessive expenditures.
In re Mooney (Bankr. N.D. Ohio)


7th Cir.

§ 107(b)(1) Bankruptcy court properly refused to turn over debtor’s customer list to creditors to prevent diminution of the estate. In re A.G. Fin. Serv. Ctr., Inc. (7th Cir.)

§ 330(a)(1) Debtor was not entitled to administrative expense for attorneys’ fees incurred in adversary proceeding where the attorney was not employed by trustee or approved by the court. In re Weinschneider (7th Cir.)

§ 506(c) Wholesale rather than replacement value was the appropriate valuation for redemption of exempt vehicle. Smith v. Household Auto. Fin. Corp. (N.D. Ill.)


8th Cir.

§ 523(a)(8) Undue hardship discharge of student loan debt denied where debtor and spouse were young and employed despite debtor’s hypertension and nausea. Holmes v. NCO Fin. Sys., Inc. (In re Holmes) (Bankr. W.D. Mo.)


9th Cir.

§ 544(b) Additional avoidance powers granted to assignees under state law were inconsistent with and preempted by the Bankruptcy Code. Sherwood Partners, Inc. v. Lycos, Inc. (9th Cir.)

28 U.S.C. § 1334 Contract claims based on state’s breach of settlement agreement with debtor were related to bankruptcy. Montana v. Goldin (In re Pegasus Gold Corp.) (9th Cir.)


10th Cir.

§ 330(a)(4)(B) Bankruptcy court erred in denying administrative expense for chapter 13 debtor’s prepetition attorneys’ fees. In re Busetta-Silvia (B.A.P. 10th Cir.)

§ 548(a)(1)(B) Trustee could not avoid payments to investors in debtor’s Ponzi scheme on grounds that debtor received insufficient value where all investors received less than they paid debtor. Soule v. Alliot (In re Tiger Petroleum Co.) (Bankr. N.D. Okla.)

§ 727(a)(10) Bankruptcy court affirmed that approval of waiver of discharge was conditioned upon limit on use of waiver in debtor’s legal malpractice action against bankruptcy attorney. In re Colbert (Bankr. D. Kan.)


11th Cir.

§ 365(d) Landlord’s right to administrative expense claim for postpetition rent was not limited to non-residential leases. In re Mandel (Bankr. S.D. Fla.)


Collier Bankruptcy Case Summaries

 

1st Cir.

Approval of trustee’s settlement of severance contract dispute with debtor’s former president affirmed but the claim was not entitled to administrative priority. 1st Cir. PROCEDURAL POSTURE: Appellee, the liquidating supervisor overseeing debtor corporation’s chapter 7 liquidation, entered into a settlement with the corporation’s president concerning the severance that was owed him upon his termination by the corporation. The bankruptcy court approved the settlement. Appellant creditors sought review after the District Court for the District of Massachusetts affirmed the bankruptcy court’s action. OVERVIEW: The corporation’s president assisted the corporation throughout the bankruptcy process. A month before his termination, the president reached an agreement with the supervisor concerning his rights under a previously executed severance contact. After the president was terminated, the supervisor exercised his authority under 11 U.S.C. §§ 363(b) and 704 and agreed to pay the president in accordance with the agreement; the president’s claim was given priority as an administrative claim. In approving the settlement, the bankruptcy court concluded that the president had a colorable claim, that the cost of litigating the claim would exceed any settlement amount, and that the settlement, therefore, served the creditors’ interests. The court disagreed with the bankruptcy and district courts’ findings that the president was entitled to administrative priority as to his severance claim. It agreed with the courts’ finding that the claim was colorable and that litigation of the president’s claim would likely exceed the settlement amount. The bankruptcy court had the authority to approve the settlement based on that finding and did not abuse its discretion in doing so. ARS Brook, LLC v. Jalbert (In re ServiSense.com, Inc.), 2004 U.S. App. LEXIS 18938, 382 F.3d 68 (1st Cir. September 8, 2004) (Dyk, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:704.01[back to top]

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Modification of plan to substantially decrease payments after debtor was four payments in arrears, with no showing of change in circumstances, was not proposed in good faith and was denied. Bankr. D.P.R. PROCEDURAL POSTURE: Chapter 13 trustee initially moved to dismiss debtors’ case for failure to make plan payments. Instead of bringing their payments current, the debtors filed a motion seeking postconfirmation modification of their plan pursuant to 11 U.S.C. § 1329. The trustee moved for summary judgment objecting to the approval of the postconfirmation modification. OVERVIEW: The bankruptcy court first rejected the debtors’ contention that they did not have to comply with the original confirmed plan because their creditors received no less under their chapter 13 plan than they would have in a liquidation and the debtors could have proposed their modified version of the plan from the beginning. The provisions of a confirmed plan bound the debtor and each creditor. Plan confirmation was a final order, with res judicata effect, and was imbued with the strong policy favoring finality. The court then found that the debtors’ modification was not proposed in good faith. The confirmed plan originally called for 60 monthly payments and a 100 percent distribution. After being four payments in arrears, the debtors moved to modify their plan to substantially decrease payments on their unsecured debt. The debtors showed no changes of circumstances or in their financial situation which would have affected their ability to pay creditors. In re Santiago, 2004 Bankr. LEXIS 2146, — B.R. — (Bankr. D.P.R. August 26, 2004) (Vaughn, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1329.01[back to top]

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3d Cir.

Debtors motion for default for IRS failure to respond to objection to initial proof of claim denied where proof of claim was subsequently amended to reflect actual, not estimated taxes. Bankr. M.D. Pa. PROCEDURAL POSTURE: Chapter 13 debtors filed a motion for a default judgment on their objection to a proof of claim filed by the IRS for taxes due. OVERVIEW: Debtors filed a petition under chapter 13, listing the IRS as a creditor holding an unsecured priority claim in the amount of $15,233 for taxes due in 2001 and $6,917 for taxes due in 2002. The IRS filed a timely proof of claim in the estimated amount of $12,000.00. The claim was estimated because debtors had not yet filed their tax returns for 2001 and 2002. Debtors filed an objection to the IRS proof of claim in which they requested that the allowed claim of the IRS be limited to the amount of the estimated claim, $12,000. The IRS amended its proof of claim to reflect a total claim of $30,273.59. However, the IRS did not file a response to the objection to its original proof of claim until three days beyond the deadline for filing a response. Subsequently, debtors moved for default judgment on their objection to the original proof of claim. In denying debtors’ motion for default and allowing the claim of the IRS, the court held that debtors did not claim to have been surprised by the amount of the amended proof of claim or that the IRS figure was excessive; rather, debtors simply sought to assert a procedural defect in the claim process and obtain a windfall. Warner v. United States (In re Warner), 2004 Bankr. LEXIS 2142, — B.R. — (Bankr. M.D. Pa. December 23, 2004) (France, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02
[back to top]

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Interim trustee appointed within two years of order for relief and who later became permanent trustee was entitled to one-year extension of time to file avoidance actions. Bankr. D. Del. PROCEDURAL POSTURE: After the debtor’s chapter 11 bankruptcy petition was converted to a chapter 7 bankruptcy case, plaintiff trustee sued defendant companies seeking to avoid and recover alleged preferential transfers. Pursuant to Fed. R. Civ. P. 12(b)(6) and Fed. R. Bankr. P. 7012, the companies moved to dismiss the complaints as time-barred under 11 U.S.C. § 546(a). OVERVIEW: The trustee argued that the actions were covered by 11 U.S.C. § 546(a)(1)(B), which provided a one year extension of the statute of limitations from the time the trustee was appointed. The companies argued that section 546(a)(1)(B) did not apply because the trustee was an interim trustee under 11 U.S.C. § 701 rather than an elected trustee under 11 U.S.C. § 702. The bankruptcy court concluded that an interim trustee, who was appointed within two years of the order of relief and who became the permanent trustee by operation of 11 U.S.C. § 702(d), was entitled to the extension of the statute of limitations provided by 11 U.S.C. § 546(a)(1)(B). Here the trustee was appointed within the two years of the order for relief and became the permanent trustee when no trustee was elected. Thus, he was entitled to the one-year extension of time to file avoidance actions granted by section 546(a)(1)(B). Since the trustee had filed the complaint within one year of his appointment, there was no basis to dismiss the complaints. Claybrook v. Ponderosa Indus. de Mexico (In re U.S. Wood Prods., Inc.), 2004 Bankr. LEXIS 1243, — B.R. — (Bankr. D. Del. August 20, 2004) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:546.02[2][a][back to top]

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4th Cir.

Debtors’ submission of materially false financial statements in order to induce company to issue bonds rendered debt nondischargeable. Bankr. M.D.N.C. PROCEDURAL POSTURE: Plaintiff, a corporation engaged in the surety business, brought an adversary proceeding against defendant debtors, a husband and wife, alleging that indebtedness of debtors was nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B). OVERVIEW: The corporation’s theory was that in obtaining the bonds, debtors submitted documents that were materially false regarding the financial condition of a construction company, which fraudulently induced it to issue the bonds, and that debtors were liable for damages it sustained as a result of their issuance. The court found that the corporation was an “insider” and the documents pertaining to its financial condition that were submitted to the corporation were documents subject to 11 U.S.C. § 523(a)(2)(B). The documents presented were materially false. The evidence established that there was actual reliance upon the false information and that such reliance was reasonable. Furthermore, the surrounding circumstances were more than sufficient to establish that debtor husband intended to deceive. Finally, the evidence established that the corporation suffered extensive losses as a result of its reliance upon the false statements. The loss constituted a debt of debtor husband which was nondischargeable under section 523(a)(2)(B). The corporations showed no basis for imposing liability upon debtor wife. The evidence did not disclose personal involvement on her part in obtaining the bonds. Lyndon Prop. Ins. Co. v. Adams (In re Adams), 2004 Bankr. LEXIS 1298, 312 B.R. 576 (Bankr. M.D.N.C. July 12, 2004) (Stocks, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[2][back to top]

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5th Cir.

Proof of claim by minority owner of chapter 11 debtor disallowed due to failure to present factual basis for claims of mismanagement and other improper conduct. Bankr. N.D. Tex. PROCEDURAL POSTURE: Chapter 11 debtors filed a motion to disallow certain proofs of claim filed by claimant. OVERVIEW: Claimant owned 49 percent of a company that owned a new power plant, with debtors owning the remaining 51 percent. The plant proved to be unprofitable and closed after a little more than a year of operation. Claimant’s proofs of claim alleged breach of fiduciary duty, inequitable conduct, mismanagement, and wrongful failure to enter into a tolling agreement for the plant. With respect to the tolling agreement, the court held that debtors did not breach the tolling agreement provision because their duty to enter into a tolling agreement was not mandatory. The court also held that a failure to enter into a tolling agreement would be actionable, if at all, for the benefit of the company that owned the plant, not claimant as the 49 percent owner of the company. The court further held that the conduct of debtors was not such as would constitute a breach of any fiduciary duty and claimant presented no evidence indicating that debtors did anything other than conduct their business within the four corners of their agreement. The court further held that claimant failed to offer any factual basis for its claims of mismanagement and inequitable conduct. In re Mirant Corp., 2005 Bankr. LEXIS 44, — B.R. — (Bankr. N.D. Tex. January 12, 2005) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.02[back to top]

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Nondischargeability of state court judgment reversed on grounds that state court finding of intentionally injury should have been given preclusive effect. 5th Cir. PROCEDURAL POSTURE: Appellant creditor brought an adversary proceeding against appellee debtor in bankruptcy court and sought a determination that a state court judgment against the debtor was not dischargeable under 11 U.S.C. § 523(a)(6). The bankruptcy court held that the debt was dischargeable. The District Court for the Western District of Louisiana affirmed. The creditor appealed. OVERVIEW: The creditor asked the bankruptcy court to apply collateral estoppel principles to the Louisiana appellate court’s findings on the issue of whether the debt arose from a willful and malicious injury as required under 11 U.S.C. § 523(a)(6). The bankruptcy court did not give preclusive effect to the Louisiana appellate court’s findings that the debtor should have been sanctioned under La. Code Civ. Proc. art. 863 for filing a frivolous lawsuit against the creditor. The appellate court found that because both 11 U.S.C. § 523(a)(6) and La. Code Civ. Proc. art. 863 required an inquiry into whether the party acted either with an objective substantial certainty of injury or a subjective motive to cause injury, and the Louisiana appellate court issued sanctions against the debtor under art. 863 for intentionally pursuing meritless litigation against the creditor for the purpose of harassment, the creditor’s claim for sanctions under Louisiana law encompassed the elements of the willful and malicious injury requirement under 11 U.S.C. § 523(a)(6). Thus, the bankruptcy court erred when it refused to give preclusive effect to the findings made by the Louisiana appellate court. Raspanti v. Keaty (In re Keaty), 2005 U.S. App. LEXIS 480, — F.3d — (5th Cir. January 12, 2005) (King, C.C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12[back to top]

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6th Cir.

Debtor’s failure to reaffirm debt in accordance with statement of intentions was grounds for termination of stay. Bankr. W.D. Ky. PROCEDURAL POSTURE: Creditor moved for relief from the automatic stay in a bankruptcy action. OVERVIEW: Creditor requested the automatic stay be modified so as to permit it to proceed with its state court remedies for debtor’s alleged failure to make payments on a promissory note and a mortgage on certain real property. Debtor responded alleging that she was current with her payments. A review of the file in this case indicated that no reaffirmation agreement had been filed, though the deadline for filing such an agreement had passed. By itself, the failure to perform debtor’s statement of intention to reaffirm the debt within the time allowed in 11 U.S.C. § 521 served as a ground to warrant termination of the automatic stay. Debtor’s argument that she was current on her payments and apparently believed that lack of default sufficed to warrant denial of stay motion was not relevant. In re Aubrey, 2004 Bankr. LEXIS 2144, — B.R. — (Bankr. W.D. Ky. December 27, 2004) (Stosberg, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:521.01[back to top]

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Case ordered converted to chapter 13 or dismissed where debtors had excellent incomes and excessive expenditures. Bankr. N.D. Ohio PROCEDURAL POSTURE: Chapter 7 trustee filed a motion pursuant to 11 U.S.C. § 707(b) for dismissal of debtors’ chapter 7 case. OVERVIEW: Debtors, a husband and wife with two young children, filed a chapter 7 petition, listing secured and unsecured debts in excess of their assets. Both debtors were employed. Trustee objected to a number of debtors’s expenditures, including mortgage, taxes and insurance on debtors’ residence totaling $1,759.42 per month, internet access charges and cell phone expenses totaling $160.00, food at $700.00 per month, transportation at $350.00 per month, auto maintenance/repairs at $80.00 per month, child care at $900.00 per month, clothing at $150.00 per month, laundry and dry cleaning at $80.00 per month, and water softener/trash removal at $170.00 per month. In granting trustee’s motion, the court held that, to allow debtors to discharge the debt owed to their unsecured creditors while attempting to keep their current lifestyle intact would frustrate the designs of Congress in enacting chapter 7 by allowing debtors to get a head start rather than a fresh start. The court held that debtors had excellent incomes and could trim expenses and make a meaningful repayment to unsecured creditors without depriving themselves or their children of life’s necessities. In re Mooney, 2004 Bankr. LEXIS 1302, 313 B.R. 709 (Bankr. N.D. Ohio August 9, 2004) (Kendig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.04[back to top]

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7th Cir.

Bankruptcy court properly refused to turn over debtor’s customer list to creditors to prevent diminution of the estate. 7th Cir. PROCEDURAL POSTURE: Appellant creditors sought review of a decision of the District Court for the Southern District of Indiana, which upheld the approval of a debtor’s bankruptcy reorganization plan, but remanded the case to amend the plan to include certain language. The plan rejected the creditors’ claims for punitive damages and enjoined the creditors from suing the debtor’s parent. OVERVIEW: The debtor filed for bankruptcy after suits by users of its private-label credit cards resulted in a $167 million judgment. The debtors’ principal asset was a claim against its corporate parent averring that it bore responsibility for this award. Five creditors rejected the settlement. They sought an order directing the bankruptcy court to give them jury trials regarding punitive damages. The district court had rejected the creditors’ claims, but remanded the case, directing the bankruptcy court to amend the plan by including certain language. Although the creditors appealed this decision prior to completion of the remand directive, the court held that it had jurisdiction as the remand was for a ministerial act. The appeals court affirmed. The creditors did not show that they were entitled to punitive damages. They did not have individual claims against the parent. The debtor’s claim was derivative and the parent was not a joint tortfeasor. The court also affirmed the refusal to turn over the debtor’s customer list to the creditors’ attorney. The list was an asset of the debtor that was sold to benefit the estate. Turning it over would have diminished the value of the estate. In re A.G. Fin. Serv. Ctr., Inc., 2005 U.S. App. LEXIS 959, — F.3d — (7th Cir. January 19, 2005) (Easterbrook, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:107.03[back to top]

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Debtor was not entitled to administrative expense for attorneys’ fees incurred in adversary proceeding where the attorney was not employed by trustee or approved by the court. 7th Cir. PROCEDURAL POSTURE: Appellant debtor was the prevailing party in an adversary action in bankruptcy court. The bankruptcy court denied his motion for attorney fees. The District Court for the Northern District of Illinois affirmed that decision. The debtor appealed. OVERVIEW: The debtor contended that: (1) 11 U.S.C. §§ 503(b)(1)(a) and 507(a)(1), and the Reading Co. v. Brown decision permitted him to recover as an administrative expense his damages, i.e., attorneys’ fees, for breach of the covenant not to sue; (2) Illinois law permitted him to recover damages for the breach of a covenant not to sue; and (3) the contract, which included the covenant not to sue, allowed the recovery of attorney fees for breach of the covenant. The Reading decision was of no help because: (1) it was a claim for tort damages, (2) the beneficiary of the court’s holding was a third party, and (3) the issue was one of priorities. The debtor’s claim could not arise from the Bankruptcy Code itself pursuant to 11 U.S.C. §§ 327 and 330. Finally, attorneys’ fees were not awardable under state law. The contract in the case did not provide for an award of attorneys’ fees. In re Weinschneider, 2005 U.S. App. LEXIS 886, — F.3d — (7th Cir. January 18, 2005) (Evans, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.03[back to top]

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Wholesale rather than replacement value was the appropriate valuation for redemption of exempt vehicle. N.D. Ill. PROCEDURAL POSTURE: Appellant debtor sought review of a discrete legal question: should exempt property that a chapter 7 debtor wants to redeem from a secured creditor be valued at its wholesale or its replacement value? Appellee creditor opposed review. OVERVIEW: Debtor filed for chapter 7 bankruptcy and claimed a personal exemption for her vehicle. The creditor held a security interest in her car. Debtor sought to redeem her car at its wholesale value. The bankruptcy judge, however, ruled that debtor could only redeem her car at 90 percent of its replacement value. Because the replacement value of debtor’s car was higher than its wholesale value, debtor promptly appealed. The bankruptcy judge applied United States Supreme Court precedent, but the district court held that the precedent was not controlling. The language used by the Supreme Court, consistent with 11 U.S.C. § 506(a)’s requirement that valuation should be determined in light of the purpose of the valuation, limited its holding to chapter 13’s cramdown provision. Because redeemed property did not directly generate income, that rationale was not transferable to the chapter 7 context. Therefore, the replacement-value standard did not similarly measure the value of the debtor’s use of redemption property. Thus, the Supreme Court’s rationale for rejecting the wholesale-value standard in the cramdown context applied with minimal force to the redemption context. Smith v. Household Auto. Fin. Corp., 2004 U.S. Dist. LEXIS 17841, 313 B.R. 267 (N.D. Ill. August 19, 2004) (Castillo, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.05[back to top]

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8th Cir.

Undue hardship discharge of student loan debt denied where debtor and spouse were young and employed despite debtor’s hypertension and nausea. Bankr. W.D. Mo. PROCEDURAL POSTURE: Plaintiff debtor filed a complaint seeking a determination that his student loan debt was excepted from discharge, pursuant to 11 U.S.C. § 523(a)(8), on the ground that repayment of such debt would have imposed upon him an undue hardship, which allegations defendant guarantor denied. OVERVIEW: The debtor defaulted on a student loan owned and guaranteed by the guarantor. The debtor received a discharge in bankruptcy. The court, considering the totality of the circumstances, found that the student loan debt was not dischargeable pursuant to section 523(a)(8) because the debtor failed to prove that it would have been an undue hardship for him to repay the loan. However, the court found that, based on the debtor’s net monthly household income from his job as a hood deck fitter and his wife’s job as a bank branch manager, their reasonable monthly household expenses, and proper money management, the household had a disposable income of $573 per month, which could have been used to make the $300 monthly payment that the guarantor found acceptable. The court found no evidence of unique facts or circumstances because both spouses were young and had significant working life ahead of them. The debtor’s hypertension and nausea did not appear to have a major effect on his ability to earn. The court found that the family had a less expensive alternative reading program available for their daughter and that there was no evidence that another daughter would need heart surgery. Holmes v. NCO Fin. Sys., Inc. (In re Holmes), 2004 Bankr. LEXIS 2136, — B.R. — (Bankr. W.D. Mo. December 27, 2004) (Dow, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14[back to top]

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9th Cir.

Additional avoidance powers granted to assignees under state law were inconsistent with and preempted by the Bankruptcy Code. 9th Cir. PROCEDURAL POSTURE: Plaintiff assignee sued defendant creditor under Cal. Code Civ. Proc. § 1800, seeking to recover a $1 million payment as a preferential transfer. The District Court for the Central District of California denied the creditor’s motion to dismiss and granted summary judgment in favor of the assignee. The creditor appealed. OVERVIEW: Pursuant to a renegotiated agreement, the debtor paid the creditor $1 million but failed to deliver stock. About two months later, the debtor made a voluntary general assignment for the benefit of creditors to the assignee. The assignee shut down the debtor’s business and sought to recover the $1 million payment to the creditor as a preferential transfer. The court determined that the Bankruptcy Code preempted Cal. Code Civ. Proc. § 1800, which gave the assignee the power to void preferential transfers that could not be voided by an unsecured creditor. The statute was preempted because (1) 11 U.S.C. § 544(b) did not specifically incorporate the preference avoidance provisions of Cal. Code Civ. Proc. § 1800, since the trustee’s powers under 11 U.S.C. § 544(b) were limited to those of unsecured creditors and the assignee appointed pursuant to Cal. Code Civ. Proc. § 1800 was given new avoidance powers by virtue of his position, and (2) the exercise of the preference avoidance power by the assignee under the authority of section 1800 was inconsistent with the enactment and operation of the federal bankruptcy system. Sherwood Partners, Inc. v. Lycos, Inc., 2005 U.S. App. LEXIS 490, — F.3d — (9th Cir. January 12, 2005) (Kozinski, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09[back to top]

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Contract claims based on state’s breach of settlement agreement with debtor were related to bankruptcy. 9th Cir. PROCEDURAL POSTURE: Appellant state filed proofs of claims pertaining to appellee debtors’ environmental clean up obligations in the debtors’ bankruptcy. A settlement agreement was reached. Subsequently, debtors filed suit in bankruptcy court, alleging contract claims stemming from the state’s alleged breach of the agreement. The bankruptcy court denied the state’s motion to dismiss. The District Court for the District of Nevada affirmed. The state appealed. OVERVIEW: The court found that it had subject matter jurisdiction over the action because debtors’ claims were “related to” the original bankruptcy action in that they involved the interpretation and implementation of the confirmed bankruptcy plan. Debtors alleged that the state breached the bankruptcy plan and the settlement agreement, the state breached the covenant of good faith and fair dealing with respect to these agreements, and the state committed fraud in the inducement at the time it entered into the plan and the settlement agreement. Resolution of those claims likely would have required interpretation of the settlement agreement and the bankruptcy plan. However, while the state’s proofs of claim (seeking environmental compliance) and the settlement agreement (creating an entity to effect compliance) obviously involved the same general subject matter, the claims against the state did not arise out of the “same transaction or occurrence” as the state’s original proofs of claims, and thus the state had not waived its Eleventh Amendment immunity with respect to the current adversary proceeding. Montana v. Goldin (In re Pegasus Gold Corp.), 2005 U.S. App. LEXIS 399, — F.3d — (9th Cir. January 11, 2005) (Hawkins, C.J.).

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

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10th Cir.

Bankruptcy court erred in denying administrative expense for chapter 13 debtor’s prepetition attorneys’ fees. B.A.P. 10th Cir. PROCEDURAL POSTURE: Appellant chapter 13 debtor and trustee challenged the Bankruptcy Court for the District of New Mexico’s prepetition fee order, which concluded that the debtor’s prepetition attorneys’ fees were not an administrative expense entitled to priority under 11 U.S.C. §§ 330 or 507. OVERVIEW: In a case of first impression within the Tenth Circuit, the issue was whether counsel for chapter 13 debtors had the right to be paid under the terms of a chapter 13 plan for services performed prepetition. The bankruptcy court ruled that such services must be paid for in full prior to the filing of the case or be treated like any other prepetition unsecured claim. The bankruptcy appellate panel had jurisdiction to consider the prepetition fee order because the bankruptcy court had conclusively resolved the allowance of and priority afforded to the attorneys’ claim and fixed his prepetition claim as a matter of law. Thus, the prepetition fee order was a final order under 28 U.S.C. § 158(a)(1). Finding that 11 U.S.C. § 330(a)(4)(B) was unambiguous, the panel concluded that the prepetition fees fell squarely within the parameters of the statute because the language “in connection with the case” contemplated that counsel for chapter 13 debtors would perform services prior to a bankruptcy filing and that fees for such services fell within the protections of 11 U.S.C. § 503(b) and 507(a). Moreover, the prepetition/postpetition distinction was not written into 11 U.S.C. § 330. In re Busetta-Silvia, 2004 Bankr. LEXIS 1304, 314 B.R. 218 (B.A.P. 10th Cir. September 8, 2004) (Michael, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.04[1][b][v][back to top]

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Trustee could not avoid payments to investors in debtor’s Ponzi scheme on grounds that debtor received insufficient value where all investors received less than they paid debtor. Bankr. N.D. Okla. PROCEDURAL POSTURE: Debtor company sold investments in oil and gas wells. It went bankrupt and filed for chapter 7 relief. Alleging the company operated a Ponzi scheme, plaintiff, the bankruptcy trustee, sought to recover all or part of the monies paid to defendant investors. The trustee moved for partial summary judgment, seeking a determination the company operated a Ponzi scheme. The investors sought summary judgment, arguing they were innocent victims. OVERVIEW: The trustee’s complaint contained four claims. However, the trustee’s motion did not seek judgment as a matter of law on any of them. The court observed that, were it to grant the trustee’s motion, it would not result in the entry of judgment on any of his claims. The matter would still proceed to trial. The trustee’s motion could not be construed as a proper motion for summary judgment under Fed. R. Civ. P. 56. On whether the investors acted in good faith when they invested their money with the company, questions of fact remained as to whether a reasonable person would have been placed on notice of the company’s fraudulent purpose or should have done more in the way of due diligence before investing funds. On the trustee’s third claim for relief, alleging the company received less than reasonably equivalent value from the investors in exchange for the monies which the company paid to them, the investors were entitled to judgment as a matter of law. No evidence was offered proving the investors had any knowledge of the company’s malfeasance. A comparison of the dollars invested to dollars returned indicated that each investor received less from the company than they put in. Soule v. Alliot (In re Tiger Petroleum Co.), 2004 Bankr. LEXIS 2143, — B.R. — (Bankr. N.D. Okla. December 30, 2004) (Michael, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.05[back to top]

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Bankruptcy court affirmed that approval of waiver of discharge was conditioned upon limit on use of waiver in debtor’s legal malpractice action against bankruptcy attorney. Bankr. D. Kan. PROCEDURAL POSTURE: Debtor moved for reconsideration of the court’s order regarding the conditional approval of debtor’s waiver of discharge in bankruptcy. The order limited the effect that the waiver could have in debtor’s legal malpractice suit against his former attorney. OVERVIEW: Debtor was concerned that the court’s order restricted the evidence that he could present in the malpractice suit. The court explained that its concern was that debtor would use the waiver of discharge as to establish through res judicata or collateral estoppel that the attorney’s alleged negligence had caused debtor to lose the discharge. In other words, debtor could not use the waiver of discharge to show the third element of legal malpractice, which was that there was a causal connection between the attorney’s breach of duty and the loss of a discharge. The court explained that debtor could still use the waiver of discharge to attempt to show that he took such a course of action to mitigate the damage caused by the attorney’s alleged malpractice. The court was convinced that the condition should stand, and as such, stated that the waiver of discharge would not be approved unless debtor accepted the condition. In re Colbert, 2004 Bankr. LEXIS 2138, — B.R. — (Bankr. D. Kan. December 22, 2004) (Somers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.12[back to top]

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11th Cir.

Landlord’s right to administrative expense claim for postpetition rent was not limited to non-residential leases. Bankr. S.D. Fla. PROCEDURAL POSTURE: Creditor moved allowance and payment of administrative rent claim. OVERVIEW: Creditor sought the award and payment of an administrative expense claim for the unpaid postpetition monthly rent due it from debtor pursuant to a written residential lease agreement between debtor and creditor. Debtor’s postpetition occupation of the apartment conferred an actual, concrete benefit upon the estate because debtor was self-employed, using the apartment in his business to generate income to pay the creditors of the estate. Debtor pointed out that he had until plan confirmation to assume or reject the lease under 11 U.S.C. § 365(d)(2), and that the obligation of a trustee to timely perform all obligations postpetition under section 365(d)(3) only applied to non-residential leases. However, debtor cited no authority for his contention. The court rejected debtor’s contention that the absence of any reference to a residential-lease in section 365(d)(3) meant that a landlord of a residential lease could not ever be awarded an administrative rent claim for postpetition rent. If the landlord could prove, as was shown in this case, a concrete benefit to the estate, then the landlord of a residential lease could be granted an administrative claim. In re Mandel, 2005 Bankr. LEXIS 37, — B.R. — (Bankr. S.D. Fla. January 12, 2005) (Cristol, B.J.).

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

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