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Collier Bankruptcy Case Update

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

January 13, 2003

 

2d Cir.

§ 362 Automatic stay did not apply to state court action against state agency which was brought by the debtor.
Covanta Onondaga, Ltd. v. Onondaga Cty. Res. Recovery Agency (N.D.N.Y.)

§ 362 Order enforcing settlement with debtor pursuant to prepetition motion but issued postpetition was void.
Building Serv. 32B-J Pension Fund v. Vanderveer Estates Holding, LLC (S.D.N.Y.)

28 U.S.C. § 586(a)(1) Bankruptcy trustee was a private party, not a court officer or other government employee.
United States v. Crispo (2d Cir.)

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3d Cir.

§ 365(e)(1) Bankruptcy filing by husband did not dissolve partnership with spouse.
Woskob v. Woskob (In re Woskob) (3d Cir.)

§ 510(c)(1) CEO’s proof of claim for payment of salaries equitably subordinated due to criminal conduct.
In re Mid-American Waste Sys., Inc. (Bankr. D. Del.)

§ 524 Claims for contempt of discharge injunction could not be brought as a class action since only the issuing court may enforce its injunction.
Beck v. Gold Key Lease (In re Beck) (Bankr. E.D. Pa.)

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4th Cir.

§ 362 State’s declaration that debtor mining company had forfeited performance bond effectively fixed damages and did not violate stay.
Graham v. West Virginia (In re War Eagle Constr. Co.) (S.D. W. Va.)

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5th Cir.

§ 523(a)(6) Judgment awarding real estate sales commission to broker was dischargeable where debtor did not act with willfulness or malice.
Cotton v. Deasy (N.D. Tex.)

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6th Cir.

§ 523(a) Court fines, fees and costs relating to debtor’s criminal act of destroying state property were nondischargeable.
Tennessee Dep’t of Corrections v. Farnsworth (In re Farnsworth) (Bankr. W.D. Tenn.)

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7th Cir.

§ 101(32) Report as to debtor’s insolvency, prepared by expert retained by trustee and based largely on speculation, was insufficient.
Barber v. Prod. Credit Servs. (In re KZK Livestock, Inc.) (Bankr. C.D. Ill.)

§ 106(a) As section 106(a) violates the Eleventh Amendment, debtor could not sue state entity absent consent or waiver of sovereign immunity.
Dixon v. University of Ill. (In re Dixon) (Bankr. C.D. Ill.)

§ 328(a) Retention agreements with debtors’ financial advisors affirmed where trustee failed to challenge the reasonableness of the indemnity clauses to which it objected.
Bodenstein v. Comdisco, Inc. (In re Comdisco, Inc.) (N.D. Ill.)

§ 506(c) Chapter 12 debtor’s motion for reimbursement of crop expenses granted as reasonable, necessary and beneficial to secured creditors.
In re Hamblen (Bankr. C.D. Ill.)

§ 523(a)(8) Debtor with several advanced degrees who had not diligently pursued appropriate employment was not eligible for an undue hardship discharge of student loans.
Redfern v. Illinois Student Assistance Comm’n (Bankr. C.D. Ill.)

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9th Cir.

§ 109(g) Dismissal with prejudice not appropriate despite debtor’s failure to provide for valid mortgage in chapter 13 plan.
In re Murin (Bankr. D. Ariz.)

§ 330(a) District court did not err in awarding attorneys’ fees to debtor’s special counsel, including fees for litigation of fee application.
Smith v. Edwards & Hale, Ltd. (In re Smith) (9th Cir.)

§ 502(d) Bankruptcy court properly sustained chapter 11 disbursing agent’s objection to claim of creditor who admitted to receiving an avoidable preference.
Alary Corp. v. Sims (In re Associated Vintage Group, Inc.) (B.A.P. 9th Cir.)

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11th Cir.

§ 101(10)(A) Bankruptcy court erred in holding that loan servicer was not a creditor and had engaged in unauthorized practice of law by filing proofs of claim.
Greer v. O’Dell (11th Cir.)

§ 505 Bankruptcy court had jurisdiction to determine amount and legality of county property tax as well as related fines, penalties or additions.
In re Mulberry Phosphates, Inc. (Bankr. M.D. Fla.)

§ 523 Payments owed to ex-spouse for the purchase of a home, equitable distribution and attorneys’ fees, pursuant to divorce mediation, were nondischargeable support obligations.
Baron v. Baron (In re Baron) (Bankr. M.D. Fla.) s

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Collier Bankruptcy Case Summaries

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3d Cir.

Bankruptcy filing by husband did not dissolve partnership with spouse. 3d Cir. PROCEDURAL POSTURE: Bankruptcy debtor appealed an order of the district court, which determined that she did not timely exercise her option to purchase her late husband’s interest in their real estate partnership. OVERVIEW: Under a partnership agreement, the debtor had 30 days from the date of an act of dissolution or 90 days from the death of a partner to exercise the option. She exercised the option about two weeks after her husband died. The bankruptcy court held that the debtor properly exercised the option, but the district court reversed. The circuit court found that the partnership dissolved only upon the husband’s death. Thus, the district court was required to properly determine whether the debtor validly exercised her option following her husband’s death. The husband’s exclusion of the debtor from the partnership after a marital separation did not dissolve the partnership, the debtor’s exclusion of her husband after a state court granted her plea for relief did not dissolve the partnership, and the husband’s filing for bankruptcy did not dissolve the partnership. The acts of exclusion were not in accordance with an expulsion power explicitly conferred by the partnership agreement. As to the husband’s bankruptcy, the debtor effectively consented to remain partners with him despite his debtor status, so 11 U.S.C. § 365(e)(1) applied, and the bankruptcy filing did not result in dissolution. Woskob v. Woskob (In re Woskob), 2002 U.S. App. LEXIS 19751, 305 F.3d 177 (3d Cir. September 20, 2002) (Fuentes, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.07 [back to top]

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CEO’s proof of claim for payment of salaries equitably subordinated due to criminal conduct. Bankr. D. Del. PROCEDURAL POSTURE: In a chapter 11 bankruptcy case, the debtor’s plan administrator objected to the proof of claim filed by the debtor’s former chief executive officer ("CEO"), president, and chairman of board of directors, for payment of salary and other fringe benefits (the employment claim or claim). OVERVIEW: The background of the case included the debtor’s board of directors’ determination to enter into a plea agreement to bribery charges and the former CEO’s entry of a plea agreement to bribery. He filed the employment claim as a non-priority, unsecured claim for the payment of salary and other benefits relating to his employment. The plan administrator challenged the amount and validity of the claim and asserted that any allowed portion of the claim should be equitably subordinated pursuant to 11 U.S.C. § 510(c)(1). The court first found that if allowed, the maximum amount of the claim was $430,500. Next, the court found that the three-part test for equitable subordination had been met and that equitable subordination of the claim up to the maximum value of that claim was appropriate. The CEO’s conduct consisting of a criminal act and breaches of fiduciary duties was inequitable, and caused both tangible and intangible harm to the debtor and its creditors. Although the extent of harm was not fully quantifiable, it far exceeded the maximum allowable amount of his claim. Therefore, equitable subordination of the claim to the claims of all other creditors was appropriate. In re Mid-American Waste Sys., Inc., 2002 Bankr. LEXIS 1021, 284 B.R. 53 (Bankr. D. Del. September 18, 2002) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.05 [back to top]

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Claims for contempt of discharge injunction could not be brought as a class action since only the issuing court may enforce its injunction. Bankr. E.D. Pa. PROCEDURAL POSTURE: Defendant creditor filed a motion to strike class claims for lack of subject matter jurisdiction contending that plaintiff debtor’s claim for contempt of the discharge injunction, 11 U.S.C. § 524, could not be adjudicated as a nationwide class action because only the court which had issued an injunction had the authority to enforce it. OVERVIEW: The debtor opposed the motion asserting that unlike a traditional injunction, the discharge injunction was a statutory injunction which was the same from court to court and as such, there was no impediment to the present court’s enforcement of same without regard to the court that had issued it. The court noted that as a general principle of law, only the court which issued the injunction had the authority to enforce it. The creditor contended that this general principle applied to discharge injunctions. The court found that violation of the injunctive effect of discharge order was a disobedience like the violation of any court order. The fact that the order was not individually crafted did not detract from the court’s responsibility to insure that it had been obeyed and did not provide a basis to allow its enforcement powers to be delegated to other courts. A review of the legislative history to section 524 further supported the conclusion that only the court which issued a discharge order that gave rise to a discharge injunction had authority through its contempt powers to enforce the injunction. Beck v. Gold Key Lease (In re Beck), 2002 Bankr. LEXIS 1056, 283 B.R. 163 (Bankr. E.D. Pa. August 6, 2002) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.01 [back to top]

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4th Cir.

State’s declaration that debtor mining company had forfeited performance bond effectively fixed damages and did not violate stay. S.D. W. Va. PROCEDURAL POSTURE: Plaintiff bankruptcy trustee sued defendants, a state and a state official (collectively, state), claiming that the state had violated an automatic stay in the debtor mining company’s chapter 7 bankruptcy case by declaring a performance bond forfeited. The bankruptcy court granted the trustee summary judgment and awarded attorneys’ fees. The state appealed the judgment. OVERVIEW: The district court concluded that the state, in issuing a letter revoking the mining company’s surface mining permit and declaring the associated bond forfeited, had not begun a collection activity because collection of a bond declared forfeited under W. Va. Code § 22-3-17(b) was a separate activity performed by state counsel or the West Virginia Attorney General. There was no indication in the record that the collection activity had ever begun, ordered, or otherwise performed. Since the declaration forfeiting the bond was in the nature of fixing the damages, which was distinguishable from the enforcement or collection of such damages, the district court concluded that the state’s action in declaring the mining company’s performance bond forfeited did not violate the automatic stay provision of 11 U.S.C. § 362. The mining company’s letter of credit, which constituted a large part of the mining company’s performance bond, was not subject to the automatic stay because it and its proceeds were not the property of the mining company’s estate under 11 U.S.C. § 541. Thus, the bankruptcy court erred when it determined that all of the mining company’s bond was property of the estate. Graham v. West Virginia (In re War Eagle Constr. Co.), 2002 U.S. Dist. LEXIS 17654, 283 B.R. 193 (S.D. W. Va. September 18, 2002) (Haden, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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5th Cir

Judgment awarding real estate sales commission to broker was dischargeable where debtor did not act with willfulness or malice. N.D. Tex. PROCEDURAL POSTURE: Appellant broker sought reversal of an order of the bankruptcy court, holding that appellee debtor’s debt to the broker was not based on willful and malicious conduct, and was, therefore, dischargeable under 11 U.S.C. § 523(a)(6). OVERVIEW: The broker entered into a one-year exclusive listing agreement to sell property belonging to the debtor and another. Just before it expired, the broker wrote to the debtor asking for an extension. The debtor and the other owner wrote back and authorized the broker to continue to represent them until April 30, 1986 with a reduced selling price. The letter was not signed by the broker. The debtor sold the property on a leaseback arrangement and refused to pay the broker a commission. The broker obtained a judgment in state court awarding him $145,335.34 as a commission, and then filed suit in the debtor’s bankruptcy, claiming that the debt was nondischargeable. The bankruptcy court found that the debt was dischargeable and the district court agreed, finding that the debtor did not act with willfulness or malice as was required under 11 U.S.C. § 523(a)(6) where he believed that the sale was not covered by the brokerage agreement because it was entered into after the expiration of the extension, or the extension was not valid, or that the leaseback arrangement was not covered by the agreement. Cotton v. Deasy, 2002 U.S. Dist. LEXIS 17851, — F. Supp.2d — (N.D. Tex. September 23, 2002) (Solis, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12[3] [back to top]

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Court fines, fees and costs relating to debtor’s criminal act of destroying state property were nondischargeable. Bankr. W.D. Tenn. PROCEDURAL POSTURE: A creditor state department of corrections sought a determination that the debts owed to it by the debtor prisoner arising out of the debtor’s prepetition criminal and related actions, including various court costs, fees, expenses, and a criminal fine for destroying state property, were nondischargeable under 11 U.S.C. § 523(a)(7), (17). The creditor filed a motion for a judgment on the pleadings under Fed. R. Bankr. P. 7012(b). OVERVIEW: The criminal court fine, fees, costs, and expenses arising out of criminal actions were not subject to discharge. 11 U.S.C. § 523(a)(7) intended to deter and punish debtors arising from certain conduct deemed offensive to society. The debtor had pled guilty to a charge of destroying state property and incurred a fine that was not intended to compensate the state for its actual pecuniary loss. The issue of the fine was moot; it had been paid. The clause of 11 U.S.C. § 523(a)(17) beginning with the word "regardless" was read as qualifying the particular type of debt that was intended to be excepted from discharge — costs, fees, and expenses incurred by prisoner litigants. The debtor incurred: (1) filing fees arising from complaints filed in federal district courts; (2) court costs arising from writs of execution in state court cases; and (3) various expenses including postage, copies, and notary services. Court costs manifested in writs of execution and denoted as "court costs" on the writs were the type of "costs" that section 523(a)(17) described as other costs and expenses. The writs did not represent a form of garnishment that the debtor could avoid utilizing his state exemptions. Tennessee Dep’t of Corrections v. Farnsworth (In re Farnsworth), 2002 Bankr. LEXIS 1037, 283 B.R. 503 (Bankr. W.D. Tenn. September 16, 2002) (Kennedy, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.01 [back to top]

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7th Cir.

Report as to debtor’s insolvency, prepared by expert retained by trustee and based largely on speculation, was insufficient. Bankr. C.D. Ill. PROCEDURAL POSTURE: The trustee brought an adversary proceeding to recover two payments made to the creditors of the debtor’s principal as fraudulent transfers under 11 U.S.C. § 548(a)(2). On cross motions for summary judgment, the creditors argued that the trustee’s expert accountant’s report as to insolvency as defined under 11 U.S.C. § 101(32)(A) was insufficient and should not be admitted. OVERVIEW: The only issue was the debtor’s insolvency on the dates of the transfers. The expert’s affidavit admitted that he did not consider any of the debtor’s financial records including accounts receivable, accounts payable, tax returns, or payroll records. Those records did not exist. The attempt to recreate operations was too speculative, given the lack of reliable records and the principal’s commingling of assets. No attempt was made to reconcile the transfers between the principal personally, the debtor, and his other entities. There was a lack of meaningful testing of the underlying information and an insufficient validation of the underlying sources. Neither the principal’s inventory counts nor the inventory reports completed by a secured creditor were in the record. In his opinion, the expert acknowledged that inventories were commingled and that the inventory counts during certain periods were not accurate. All of his information regarding assets and liabilities were gleaned from the trustee’s attorneys. He did not talk to any of the debtor’s officers or employees. The trustee did not meet his burden of proof as to insolvency under 11 U.S.C. §§ 101(32)(A), 548(a)(2). Barber v. Prod. Credit Servs. (In re KZK Livestock, Inc.), 2002 Bankr. LEXIS 1036, — B.R. — (Bankr. C.D. Ill. May 31, 2002) (Altenberger, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.32 [back to top]

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As section 106(a) violates the Eleventh Amendment, debtor could not sue state entity absent consent or waiver of sovereign immunity. Bankr. C.D. Ill. PROCEDURAL POSTURE: The debtor sued defendants, a board of trustees and an employee, for civil contempt and damages. Defendants moved to dismiss. The debtor moved for an application for entry of default. OVERVIEW: Defendants asserted that the board of trustees was an arm of the state and that the employee was one of its employees acting within the scope of his employment. As such, defendants stated that they were entitled to sovereign immunity under the Eleventh Amendment to the Constitution. Defendants argued that 11 U.S.C. § 106(a) violated the Eleventh Amendment in that Congress did not have the authority under that section to abrogate the sovereign immunity of a state entity. The court found that absent consent or waiver of sovereign immunity, it lacked jurisdiction to entertain a suit brought by a private party against a state without its consent. Dixon v. University of Ill. (In re Dixon), 2002 Bankr. LEXIS 1035, — B.R. — (Bankr. C.D. Ill. August 1, 2002) (Fines, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.10 [back to top]

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Retention agreements with debtors’ financial advisors affirmed where trustee failed to challenge the reasonableness of the indemnity clauses to which it objected. N.D. Ill. PROCEDURAL POSTURE: Appellant bankruptcy trustee objected before the bankruptcy court, arguing that the indemnification provisions in the retention agreements between appellees, the chapter 11 debtors, a committee of unsecured creditors, and two financial advisors, were unreasonable under 11 U.S.C. § 328(a). The bankruptcy court denied the objection. The trustee appealed the decision. OVERVIEW: The trustee argued that indemnification provisions for the negligence of professional advisors were never reasonable under 11 U.S.C. § 328(a). The district court rejected a per se rule, holding that whether a particular indemnity clause was reasonable depended on the facts of the case and was properly determined only on an individual basis. The bankruptcy court had considered and assessed all of the relevant factors, including the extent of the debtors’ need for a financial advisor, the advisors’ experience and levels of expertise, whether and on what terms the advisors would have agreed to remove the indemnity clause, and whether comparable services were available without the indemnity clauses. Since the trustee had not challenged the reasonableness of the particular indemnification agreements or the facts that led the bankruptcy court to approve them, the decision to approve the applications to retain the financial advisors was affirmed. Bodenstein v. Comdisco, Inc. (In re Comdisco, Inc.), 2002 U.S. Dist. LEXIS 17994, — F. Supp.2d — (N.D. Ill. September 25, 2002) (Kennelly, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.02 [back to top]

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Chapter 12 debtor’s motion for reimbursement of crop expenses granted as reasonable, necessary and beneficial to secured creditors. Bankr. C.D. Ill. PROCEDURAL POSTURE: The debtor filed a chapter 12 petition under the Bankruptcy Code. The debtor filed a motion for reimbursement of crop expenses and two creditors objected. OVERVIEW: The creditors objected to the motion for reimbursement and claimed that: (1) the requested expenses did not appear to be actual expenses; and (2) there was no evidence of any out-of-pocket expenses. The creditors asserted that the debtor could have determined the actual expenses incurred in harvesting, but instead decided to rely on the University of Illinois’ custom rates for an average. They claimed that the custom rates overstated the amount which the debtor was actually entitled to because the custom rates included depreciation, which was not an actual out-of-pocket expense. The debtor countered and offered substantial evidence of his harvesting and hauling expenses, including: (1) evidence of the number of acres harvested; (2) the types and amounts of crops harvested; and (3) the equipment used. The court found that the debtor’s evidence was sufficient to justify reimbursement. The expenses incurred were: (1) reasonable; (2) necessary; and (3) beneficial to the secured creditors. The debtor met the burden of proving the amount and his entitlement to the expenses, and the creditors failed to rebut the debtor’s evidence. In re Hamblen, 2002 Bankr. LEXIS 1031, — B.R. — (Bankr. C.D. Ill. July 26, 2002) (Lessen, B.J.).

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

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Debtor with several advanced degrees who had not diligently pursued appropriate employment was not eligible for an undue hardship discharge of student loans. Bankr. C.D. Ill. PROCEDURAL POSTURE: Plaintiff debtor filed a chapter 7 petition under the Bankruptcy Code. The debtor commenced an adversary action against defendants, two creditors, and another action against defendant creditor. Both cases were related to the purpose of discharging the debtor’s student loans under the undue hardship provision of 11 U.S.C. § 523(a)(8). OVERVIEW: The court described the debtor as a professional student with several bachelors and masters degrees. The debtor previously filed bankruptcy and testified that he had not had a steady source of income for 15 years. The debtor could not identify any companies that he had recently sought employment with. The court analyzed whether the debtor could maintain a minimal standard of living if required to repay the student loans, and examined the debtor’s monthly income and expenses. The court found that the debtor met the first prong of the Brunner test for an undue hardship under section 523(a)(8). The court also found that there was no evidence of any physical or mental illness. Additionally, the debtor had: (1) marketable job skills; (2) advanced degrees; and (3) no dependents. The court did not believe that the debtor had diligently pursued the type of employment which would help him pay off his student loans and did not meet the conditions for an undue hardship discharge. Redfern v. Illinois Student Assistance Comm’n, 2002 Bankr. LEXIS 1028, — B.R. — (Bankr. C.D. Ill. May 13, 2002) (Lessen, B.J.).

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

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9th Cir.

Dismissal with prejudice not appropriate despite debtor’s failure to provide for valid mortgage in chapter 13 plan. Bankr. D. Ariz. PROCEDURAL POSTURE: A creditor objected to confirmation of a debtor’s proposed chapter 13 bankruptcy plan and requested the court deny confirmation and either convert the case to chapter 7 or dismiss the case with prejudice with a 180 day bar against the refiling of any other bankruptcy petition pursuant to 11 U.S.C. § 109(g). OVERVIEW: The debtor granted the creditor a mortgage on his home. At the time, the home was owned by the debtor, the debtor’s wife, and a third party, as joint tenants. After the debtor and his wife divorced, the debtor became the owner of the home. The debtor argued that the creditor’s claim was unsecured and that the lien did not attach to the home because the debtor’s wife did not sign the deed of trust. The creditor responded that any defect in the debtor’s deed of trust was cured by the doctrine of after-acquired title, under Ariz. Rev. Stat. § 33-703(B). The court found that at the time the debtor and his wife acquired the home, the option to take it as community property with right of survivorship was available, but they agreed to take it as joint tenants. Thus the home was not community property. It appeared from the deed of trust that the debtor intended to give the creditor a lien against the entire house, not just against his interest. Thus, the court found that the creditor had a valid lien against the house. The court found that the creditor failed to establish either of the two elements required for dismissal under 11 U.S.C. § 109(g). In re Murin, 2002 Bankr. LEXIS 1029, 283 B.R. 588 (Bankr. D. Ariz. September 17, 2002) (Haines, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.08 [back to top]

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District court did not err in awarding attorneys’ fees to debtor’s special counsel, including fees for litigation of fee application. 9th Cir. PROCEDURAL POSTURE: Debtor appealed from an order of the district court affirming: (1) the bankruptcy court’s award of attorneys’ fees to appellee law firm, debtor’s special counsel in a 1992 state court action; (2) the bankruptcy court’s award of certain administrative fees and costs to the debtor’s chapter 11 counsel; and (3) the bankruptcy judge’s refusal to recuse himself. OVERVIEW: The debtor argued, inter alia, that 11 U.S.C. § 330(a) did not permit the award of fees to chapter 7 or chapter 11 debtor’s attorneys and thus the bankruptcy court was not authorized to award fees to either appellee, law firm or chapter 11 counsel who served in that capacity. The court of appeals affirmed the district court’s awards of attorneys’ fees on finding that the debtors’ attorneys remained eligible, even after the 1994 amendments of the Bankruptcy Reform Act, 11 U.S.C. § 330(a), for award of compensation from the bankruptcy estate for services rendered and expenses incurred and that the award of fees for litigation of the fee application was necessary for purposes of section 330(a). The court also affirmed the district court’s denial of the debtor’s recusal motion. Notably, the court found that the bankruptcy court judge’s opinions did not display a deep-seated favoritism or antagonism towards the debtor and there was no indication that the bankruptcy judge’s disposition was fixed from the outset. Smith v. Edwards & Hale, Ltd. (In re Smith), 2002 U.S. App. LEXIS 20091, 305 F.3d 1078 (9th Cir. September 24, 2002) (Cudahy, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.01 [back to top]

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Bankruptcy court properly sustained chapter 11 disbursing agent’s objection to claim of creditor who admitted to receiving an avoidable preference. B.A.P. 9th Cir. PROCEDURAL POSTURE: The bankruptcy court sustained a confirmed chapter 11 disbursing agent’s objection to a creditor’s secured claim status based on an avoidable preference. In its appeal, the creditor argued that the plan: (1) did not sufficiently reserve avoidance actions; (2) did not explicitly transfer such rights to the agent; and (3) did not say that objections to claims included objections due to avoidance. OVERVIEW: The claim objection had little to do with the confirmation proceeding. The creditor’s treatment was not specially-negotiated. The plan permitted the creditor to be paid if it had an allowed claim. There was no natural grouping or common nucleus of operative facts and convenient unit for trial between confirmation and the objectionable preference to conclude that it was part of the same transaction for claim preclusion purposes. Under the plan, allowed claims excluded claims subject to disallowance under 11 U.S.C. § 502(d) and authorized the agent to object to claims. Section 502(d) automatically disallowed a claim of a creditor that had received a preference, leaving the creditor with the choice of surrendering the preference or taking nothing. The creditor conceded it received an avoidable preference. Thus, it agreed to permit splitting. Claim preclusion did not apply. There was nothing inconsistent about the plan and the objection. There was no material nondisclosure that required application of judicial estoppel. The creditor could not have relied on the hope that the preference would not be challenged. The creditor was not "sandbagged" and could not assert equitable estoppel. Alary Corp. v. Sims (In re Associated Vintage Group, Inc.), 2002 Bankr. LEXIS 1051, 283 B.R. 549 (B.A.P. 9th Cir. September 13, 2002) (Klein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.05 [back to top]

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11th Cir.

Bankruptcy court erred in holding that loan servicer was not a creditor and had engaged in unauthorized practice of law by filing proofs of claim. 11th Cir. PROCEDURAL POSTURE: In a chapter 13 bankruptcy case, plaintiffs, a loan servicer, its attorneys, and their law firm, appealed a bankruptcy court ruling, inter alia to the effect that the servicer was not a creditor and engaged in the unauthorized practice of law. The debtors appealed the judgment of the district court reversing the judgment of the bankruptcy court. OVERVIEW: In its normal course of business, the servicer purchased lenders’ accounts where borrowers had filed chapter 13 bankruptcy, including the debtors’ account. The servicer filed a claim in the bankruptcy as the servicer on behalf of the lender and its assigns. This identification was used in this and other bankruptcies because transfer of the formal ownership of accounts could not be effected immediately. The servicer, pursuant to its contractual obligations to the lender, engaged the plaintiff attorneys and law firm to represent the servicer in the debtors’ bankruptcy proceeding. The issue before the court of appeals was whether the servicer was a "real party in interest" with standing to conduct, through licensed counsel, the legal affairs of the lender relating to the debt that it serviced. The court found that it was. Invoking the Bankruptcy Code’s definitions of creditor and claim, under 11 U.S.C. § 101(10)(A) and (5)(A), and Fed. R. Civ. P. 17, the court concluded that a loan servicer was a party in interest in proceedings involving loans which it serviced. The servicer possessed the rights sought to be enforced in its bankruptcy claim and had an economic interest. Greer v. O’Dell, 2002 U.S. App. LEXIS 19956, 305 F.3d 1297 (11th Cir. September 23, 2002) (Cowen, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.10 [back to top]

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Bankruptcy court had jurisdiction to determine amount and legality of county property tax as well as related fines, penalties or additions. Bankr. M.D. Fla. PROCEDURAL POSTURE: In a chapter 7 bankruptcy case, the trustee moved to determine the amount of secured status with respect to claims for unpaid ad valorem and tangible personal property taxes made by the creditor, a county tax collector. The trustee sought a determination, pursuant to 11 U.S.C. §§ 505, 506, of the values of the properties which generated the taxes. The trustee also challenged the right of the creditor to impose an interest rate of 18 percent. OVERVIEW: The creditor challenged the trustee’s rights to seek a valuation, contending that the court lacked jurisdiction to review and redetermine the valuation of the properties involved. The creditor asserted that the valuation was only able to be challenged through the appropriate procedural requirements of the statute pursuant to which the taxes were imposed. The court found that 11 U.S.C. § 506 clearly granted the court jurisdiction to determine the value of the property regardless of whether the lien was consensual or statutory. In addition, 11 U.S.C. § 505 provided that the court had jurisdiction to determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to a tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction. Considering the two sections together, the court had no difficulty in concluding that the position taken by the creditor was not well founded. In re Mulberry Phosphates, Inc., 2002 Bankr. LEXIS 1046, 283 B.R. 347 (Bankr. M.D. Fla. July 3, 2002) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:505.01 [back to top]

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Payments owed to ex-spouse for the purchase of a home, equitable distribution and attorneys’ fees, pursuant to divorce mediation, were nondischargeable support obligations. Bankr. M.D. Fla. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition under the Bankruptcy Code. Plaintiff creditor filed an adversary action against the debtor to determine the dischargeability of certain debts related to the parties’ divorce. The debtor filed a motion to dismiss a claim, which the court granted. Both parties filed motions for summary judgment. The court made a determination regarding some of the issues and left the rest for trial. OVERVIEW: The creditor claimed that certain monetary obligations imposed on the debtor by the final judgment of their divorce were in the nature of support and excepted from discharge pursuant to 11 U.S.C. § 523. The debtor did not attend the bankruptcy trial, but the creditor and her divorce attorney testified. Regarding the tax refund debt at issue, the court determined that those sums were in the nature of an equitable distribution and were the only property that could be divided between the debtor and the creditor. This debt to the creditor was dischargeable. However, the court believed that the credits and housing issues were nondischargeable, because it was evident that these were in the nature of support for the creditor per their divorce agreement. The court also determined that the attorneys’ fees and costs incurred, plus the applicable interest, by the creditor during her divorce from the debtor were also nondischargeable. Baron v. Baron (In re Baron), 2002 Bankr. LEXIS 1043, 283 B.R. 328 (Bankr. M.D. Fla. May 31, 2002) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.01 [back to top]

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