Collier Bankruptcy Case Updates

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.

January 12, 2001

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

• 2d Cir.

  328(a) Indemnification provision in employment contract was not unreasonable.
  United States Trustee v. Newmark Retail Financial Advisors LLC (In re Joan and David Helpern, Inc.) (S.D.N.Y.) 012003

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  3d Cir.

  § 349(a) Chapter 11 case dismissed to permit debtors to pursue settlement offer by IRS.
  In re Cawog (Bankr. W.D. Pa.) 012005

  § 523(a)(2)(A) Contractor granted summary judgment on subcontractor’s section 523(a)(2)(A) claim.
  Cormack v. Thomas (In re Thomas) (Bankr. D.N.J.) 012015

  28 U.S.C. § 158(a) District court affirmed, in part, and reversed, in part, decision denying trustee’s claim that insiders received excessive compensation and were liable for taxes.
  Miller v. Blatstein (In re Main, Inc.) (E.D. Pa.) 012024

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  4th Cir.

  § 506(d) Debtors could not void tax lien on residence.
  Hoekstra v. United States of America (In re Hoekstra) (E.D. Va.) 012012

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  5th Cir.

  § 523(a)(6) Debt arising from state (Oklahoma) court medical malpractice judgment based on debtor’s wanton and reckless conduct discharged.
  Stanley v. Cole (In re Cole) (Bankr. N.D. Tex.) 012017

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  6th Cir.

  § 362(a) Appellant entitled to relief from stay to pursue state (Michigan) law remedies against debtor who embezzled funds. Kitchen v. Boyd (In re Newpower) (6th Cir.) 012007

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  7th Cir.

  § 106(a) Waiver of sovereign immunity deemed unconstitutional.
  Peterson v. State of Florida (In re Peterson) (Bankr. N.D. Ill.) 012002

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  9th Cir.

  § 348(f) After conversion to chapter 7, appreciation of residence belonged to estate.
  In re Kuhlman (Bankr. N.D. Cal.) 012004

  § 505(a)(1) Court had jurisdiction to decide entitlement to tax refunds.
  Dunmore v. United States of America (In re Dunmore) (Bankr. N.D. Cal.) 012009

  § 506 Mootness, estoppel and waiver doctrines did not apply to preclude refund of unreasonable attorney’s fees.
  In re Staggie (Bankr. D. Idaho) 012010

  § 522(f) Chapter 7 trustee’s lien could be avoided under section 522(f).
  In re Bowden (Bankr. D. Idaho) 012013

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  10th Cir.

  § 1112(b) Creditors established cause for conversion of case to chapter 7.
  In re Orienta Cooperative Ass’n (Bankr. W.D. Okla.) 012023

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  11th Cir.

  § 105(a) Discharge period for taxes was equitably tolled under section 105(a).
  Hamrick v. United States of America (In re Hamrick) (Bankr. M.D. Ga.) 012001

  § 523(a)(1) Federal tax liens remained in full force and effect despite discharge.
  McGee v. United States of America (McGee) (Bankr. M.D. Fla.) 012014

  § 704 Chapter 7 trustee was entitled to quasi-judicial immunity.
  Barbee v. Price Waterhouse, LLP (In re Solar Financial Services, Inc.) (Bankr. S.D. Fla.) 012021

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Collier Bankruptcy Case Summaries

2d Cir.

Indemnification provision in employment contract was not unreasonable. S.D.N.Y. The chapter 11 debtor sought to employ an investment advisor. The contract contained an indemnification provision under which the debtor agreed to indemnify the advisor for any damages. The bankruptcy court approved the employment with the proviso that the debtor would not be required to indemnify the advisor for losses resulting from a breach of trust, bad faith, gross negligence or willful misconduct. The United States trustee, who had objected to the employment, appealed on the grounds that the indemnification provision was per se unreasonable and any payments should be subject to judicial review. The district court, affirmed, holding that the indemnification provision in the professional contract was reasonable and in the best interests of the estate. Since the bankruptcy court order required that the advisor’s ordinary expenses and attorney’s fees were to be reviewed monthly to ensure that the amounts claimed were in fact due, appropriate oversight existed.United States Trustee v. Newmark Retail Financial Advisors LLC (In re Joan and David Helpern, Inc.), 2000 U.S. Dist. LEXIS 17589, – B.R. – (S.D.N.Y. December 6, 2000) (Martin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.02[1]

3d Cir.

Chapter 11 case dismissed to permit debtors to pursue settlement offer by IRS. Bankr. W.D. Pa. The chapter 11 debtors made an oral motion to dismiss their petition. The IRS had offered the debtors a compromise with regard to tax obligations. The court granted the motion and dismissed the case without prejudice. The court held that the debtors remained legally liable for all debts as if the petition had never been filed, and that creditors’ remedies were reinstated pursuant to section 349. The court also ordered that if a second petition was filed, it would consider a waiver of filing fees if the debtors did not add any new creditors to the mailing matrix. In re Cawog, 2000 Bankr. LEXIS 1454, – B.R. – (Bankr. W.D. Pa. November 15, 2000) (Fitzgerald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:349.02

Contractor granted summary judgment on subcontractor’s section 523(a)(2)(A) claim. Bankr. D.N.J. The debtor moved for summary judgment on a creditor/subcontractor’s adversary complaint seeking a determination as to dischargeability of a debt under section 523(a)(2)(A). The subcontractor’s complaint alleged that the debtor used false representations, false pretenses or actual fraud to induce the government to make a payment to the debtor under a construction contract and that although the debtor advised the government that subcontractors had been or would be paid, the subcontractor did not receive any payment. The bankruptcy court granted the debtor’s motion for summary judgment on the subcontractor’s section 523(a)(2)(A) claim. The court held that the subcontractor offered no facts to support a claim of fraudulent inducement with respect to its oral contract with the debtor, except for the debtor’s possible insolvency. Since insolvency alone cannot prove fraud as a matter of law, the debtor was entitled to summary judgment. The court explained that representations made by the debtor to the government three months after the subcontractor and the debtor entered into their oral contract could not form the basis of the subcontractor’s section 523(a)(2)(A) claim.Cormack v. Thomas (In re Thomas), 2000 Bankr. LEXIS 1434, – B.R. – (Bankr. D.N.J. December 4, 2000) (Stripp, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08

District court affirmed, in part, and reversed, in part, decision denying trustee’s claim that insiders received excessive compensation and were liable for taxes. E.D. Pa. The trustee appealed a bankruptcy court decision that denied the trustee’s claim that the insider defendants received excessive compensation from the debtor. The order appealed from also held that the insiders were responsible for less than the full amount of certain tax penalties that had been imposed against the debtor. The district court affirmed the bankruptcy court’s decision, in part, and vacated the decision, in part. The court held that the trustee failed to prove that the insiders’ conduct was not discovered or discoverable until after the statute of limitations had run; thus, the bankruptcy court did not err as a matter of law when it concluded that consideration of certain payments was barred by the statute of limitations. However, the court vacated the bankruptcy court’s decision to exclude almost $480,000 in third-party payments from the amount of compensation, its denial of the trustee’s claim that the insiders received excessive compensation from the debtor, and its refusal to enter judgment against the insiders for the full amount of tax penalties imposed against the debtor. The court found that the bankruptcy court erred as a matter of law by placing the burden on the trustee to prove that sums that the individuals authorized the debtor to pay to third parties constituted compensation. The court also found that the bankruptcy court erred in concluding that the trustee abandoned his tax liability claims and failed to prove the amount of tax penalties incurred. The district court instructed the bankruptcy court, on remand, to place the burden on the insiders to prove that either the amount of tax penalties claimed by the trustee was inaccurate, or that their decision not to pay certain withholding taxes was in the best interests of the debtor.Miller v. Blatstein (In re Main, Inc.), 2000 U.S. Dist. LEXIS 17652, – B.R. – (E.D. Pa. November 27, 2000) (Yohn, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02[2]

4th Cir.

Debtors could not void tax lien on residence. E.D. Va. Four liens were recorded against the chapter 7 debtors’ residence. The third lien in priority was held by the United States for taxes and was secured by all real and personal property of the debtors. Upon motion for summary judgment, the bankruptcy court held that the third lien was void pursuant to section 506(c) because there was no value in the residence by which the lien could be secured. The district court reversed, holding that debtors could not strip down the tax lien because it was secured by personalty as well as real property. Since the lien was secured to some extent by personal property, there remained recourse to collateral. Therefore, Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992) applied to preclude voiding of the lien even though there was no equity in the real property to which the lien could attach. It was sufficient that the lien attached to personalty (citing Collier on Bankruptcy, 15th Ed. Revised).Hoekstra v. United States of America (In re Hoekstra), 2000 U.S. Dist. LEXIS 17572, – B.R. – (E.D. Va. November 7, 2000) (Lee, D.J.).

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

5th Cir.

Debt arising from state (Oklahoma) court medical malpractice judgment based on debtor’s wanton and reckless conduct discharged. Bankr. N.D. Tex. An individual obtained a prepetition state (Oklahoma) court judgment in a medical malpractice action brought against the chapter 7 debtor for injuries sustained as a result of ligament reconstruction surgery performed by the debtor on the individual’s hand. The judgment included a $750,000 punitive damage award based on the jury’s finding that the debtor’s actions were wanton and reckless. After various appeals and decisions on remand, the proceeding came before the bankruptcy court, again on remand from the district court, with instructions to reconsider whether the debtor’s actions constituted a willful and malicious injury to the individual under section 523(a)(6) in light of the Supreme Court’s holding in Kawaauhau v. Geiger, 523 U.S. 57 (1998). As instructed by the district court, the bankruptcy court conducted an evidentiary hearing and allowed the debtor to offer evidence on the issue of whether he committed a deliberate tortious injury, a deliberate or intentional act that led to injury, or whether he was negligent, grossly negligent, or reckless. Based upon the evidence, the court found that there was no evidence to support the conclusion that the debtor intended to injure the individual. Thus, his conduct did not rise to the level of the willful and malicious injury required to make the debt nondischargeable under section 523(a)(6). The court concluded that the injury was the result of medical malpractice, a cause of action based on negligence, and the debt arising from that injury was discharged (citing Collier on Bankruptcy 15th Ed. Revised).Stanley v. Cole (In re Cole), 2000 Bankr. LEXIS 1435, – B.R. – (Bankr. N.D. Tex. November 27, 2000) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

6th Cir.

Appellant entitled to relief from stay to pursue state (Michigan) law remedies against debtor who embezzled funds. 6th Cir. The chapter 7 debtor and the appellant entered into a prepetition agreement to form a corporation for the sole purpose of purchasing and developing real estate. The debtor and the appellant were the corporation’s sole shareholders and directors. After the debtor pleaded guilty to embezzlement and filed his chapter 7 case, the appellant moved for relief from the automatic stay with respect to the money that the debtor embezzled. The bankruptcy court held that funds that passed through the debtor’s hands in any way or that were used to purchase assets titled in the debtor’s name were property of the estate. On appeal, the district court held that none of the embezzled funds were property of the debtor’s estate, and, thus, were not subject to the automatic stay. The Court of Appeals for the Sixth Circuit held that the debtor obtained legal title to those items that he obtained with the embezzled funds, and those items were included in his estate and subject to the automatic stay. In addition, the appellant was entitled to an order lifting the automatic stay to pursue state (Michigan) law remedies against the debtor, including the remedy of a constructive trust (citing Collier on Bankruptcy 15th Ed. Revised).Kitchen v. Boyd (In re Newpower), 2000 U.S. App. LEXIS 31130, – F.3d – (6th Cir. December 7, 2000) (Kennedy, C.J.).

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

7th Cir.

Waiver of sovereign immunity deemed unconstitutional. Bankr. N.D. Ill. The chapter 13 debtor filed an adversary proceeding against the state (Florida) office of child support enforcement and department of revenue, seeking turnover of a tax refund payment which the department withheld postpetition and applied toward prepetition debt for child support. The department moved to dismiss the complaint, asserting Eleventh Amendment sovereign immunity. The court found that to prevail the debtor must show that Congress unequivocally expressed its intent to abrogate sovereign immunity and in doing so acted pursuant to a valid exercise of power. The court held that section 106(a) was unconstitutional. The court followed the holding in Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 116 S. Ct. 1114, 134 L.Ed.2d 252 (1996) and prevalent caselaw to determine that Congress could not abrogate state sovereign immunity by legislation passed pursuant to its Article I powers.Peterson v. State of Florida (In re Peterson), 2000 Bankr. LEXIS 1449, – B.R. – (Bankr. N.D. Ill. November 6, 2000) (Doyle, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.02[2]

9th Cir.

After conversion to chapter 7, appreciation of residence belonged to estate. Bankr. N.D. Cal. At the time the debtors filed their chapter 13 petition, their residence was worth $275,000. It was encumbered for $182,000 and the debtors were entitled to a $75,000 homestead exemption. The property was valued at $290,000 only three months later, when the debtors converted their case to chapter 7. No chapter 13 plan was ever confirmed. Thereafter, the chapter 7 trustee determined that the residence was worth much more than the scheduled amount and in fact found a buyer at $345,000. The debtors filed a motion to compel abandonment, arguing that, under section 348(f)(1)(B), valuations of property in a chapter 13 case must apply to a converted case. The bankruptcy court held that because the debtors never obtained confirmation of a chapter 13 plan, and because their home was never otherwise valued for any purpose during that time, they did not meet the valuation requirement of section 348(f)(1)(B), which was therefore inapplicable. The court rejected the debtors’ reasoning that valuations in the statute could be read as values and concluded that the appreciation in the property belonged to the estate. In re Kuhlman, 2000 Bankr. LEXIS 1447, – B.R. – (Bankr. N.D. Cal. October 6, 2000) (Jaroslovsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:348.07[3]

Court had jurisdiction to decide entitlement to tax refunds. Bankr. N.D. Cal. The debtor filed an adversary proceeding originally in district court. The amended complaint contained six claims, the first three alleging that the debtor was entitled to tax refunds of approximately $190,000 for the tax years 1988 and 1989. The fourth claim alleged that the IRS violated the discharge injunction by demanding payment for $20,000 for 1989, which the debtor asserted had been discharged. The remaining claims alleged that the IRS had improperly recorded tax liens and sought to quiet title to his property. By stipulation of the parties, the district court transferred the action to bankruptcy court. The trustee subsequently abandoned any interest in the tax refunds. The court issued an order setting the case for trial and directing the manner in which the parties were to prepare for trial. The debtor’s motion for summary judgment was argued, whereby the debtor asserted that the bankruptcy court had jurisdiction over all issues presented and also requested a determination as to the dischargeability of tax liability for a number of tax years. The debtor appeared for trial but failed to comply with the July 19 order in that he did not have witnesses and was not ready to proceed. The debtor then argued for the first time that the court did not have jurisdiction over the case and that it should be returned to the district court for jury trial. The court observed that it had jurisdiction over the discharge violation claim, and the debtor moved for dismissal of that claim with prejudice, which motion the court granted. The court held that, to the extent that the claims were properly before it, the debtor’s willful failure to prepare for trial and failure to prosecute required dismissal. But the court also ruled that, to the extent it lacked jurisdiction, it was required to send the case back to district court. The court concluded finally that it had full jurisdiction to decide all the issues. The court reasoned that the issues of dischargeability and violation of discharge rights were bound up in the issue of entitlement to tax refunds, and that section 505(a)(1) provided that the bankruptcy court could determine the amount or legality of any tax, so that the dispute could still have effect on the case despite the trustee having abandoned any interest in the refunds (citing Collier on Bankruptcy 15th Ed. Revised). Dunmore v. United States of America (In re Dunmore), 2000 Bankr. LEXIS 1448, – B.R. – (Bankr. N.D. Cal. October 20, 2000) (Jaroslovsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:505.01

Mootness, estoppel and waiver doctrines did not apply to preclude refund of unreasonable attorney’s fees. Bankr. D. Idaho In order to avoid foreclosure, chapter 13 debtors sold their residence for $105,000 and paid the first mortgage in full, including the principal of $20,000, interest and attorney’s fees. After the sale and distribution, the debtors requested a determination that payment of $3,782 for attorney’s fees was unreasonable. The mortgagee asserted that since the property had been sold and the mortgagee paid in full, the debtors were precluded from asserting that the fees were unreasonable by the doctrines of mootness, estoppel and waiver. The bankruptcy court held that the debtors were entitled to a refund of unreasonable attorney’s fees despite the fact that the property had been sold and the creditor paid in full. The issue was not moot because the bankruptcy court had the responsibility and authority to review the reasonableness of the fees as well as the ability to provide an effective remedy. The debtors did not waive their right to challenge the fees by signing the closing documents because the waivers in those documents were to protect the title company and were not a knowing relinquishment of their right to challenge the amount of fees under section 506(b). Finally, the chronology of events did not indicate any scheme or artifice warranting application of estoppel doctrines. Rather, the debtors’ actions were merely a reaction to a looming foreclosure deadline. In re Staggie, 2000 Bankr. LEXIS 1444, – B.R. – (Bankr. D. Idaho November 1, 2000) (Pappas, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04[3], [4]

Chapter 7 trustee’s lien could be avoided under section 522(f). Bankr. D. Idaho The chapter 7 trustee avoided a transfer of property and obtained a money judgment which was recorded, thereby giving the trustee a judicial lien on the debtor’s property. In a subsequent chapter 7 case, the same individual was appointed as chapter 7 trustee. The debtors sought to avoid the trustee’s judicial lien whereupon the trustee asserted that there was equity in the property. In response, debtors amended their schedules to claim the maximum homestead exemption and thereby removed any equity to which the judicial lien could attach. The trustee objected to the amendment of the schedules. After determining that amendment of the schedules was proper, the bankruptcy court held that the trustee’s judicial lien was avoided under section 522(f) because the sum of the liens and the exemption exceeded the value of the debtor’s interest in the property.In re Bowden, 2000 Bankr. LEXIS 1445, – B.R. – (Bankr. D. Idaho September 19, 2000) (Pappas, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11

10th Cir.

Creditors established cause for conversion of case to chapter 7. Bankr. W.D. Okla. Creditors moved to convert the debtor in possession/agricultural cooperative’s chapter 11 case to chapter 7 or, alternatively, for the appointment of a trustee. The creditors claimed that the debtor had no ongoing business to preserve and no assets with which to reorganize and that its case should therefore be converted to chapter 7. The debtor claimed that dismissal would be premature and