Collier Bankruptcy Case Update January-14-02

Collier Bankruptcy Case Update January-14-02

 


Collier Bankruptcy Case Update

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

January 14, 2002

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

  • 1st Cir.

    § 503(b)(1)(B) Court of Appeals ruled that postpetition interest owed to IRS was entitled to first priority.
    United States v. Yellin (In re Weinstein)
    (1st Cir.)


    2d Cir.

    § 323(b) Trustee had standing to sue for losses that were separate and distinct from injuries to debtor’s subsidiary.
    Ochs v. Simon (In re First Cent. Fin. Corp.)
    (Bankr. E.D.N.Y.)

    28 U.S.C. § 1334 Debtor/gasoline supplier’s rejection of supply agreement did not defeat district court’s jurisdiction over complaint brought under Petroleum Marketing Practices Act.
    Koylum, Inc. v. Peksen Realty Corp.
    (2d Cir.)


    3d Cir.

    § 502(a) Debtor’s objections to proofs of claim sustained as to claims where state law statute of limitations on collection of the underlying debt had expired.
    Pagnotti v. Lehigh Valley Coal Sales Co. (In re. Pagnotti)
    (Bankr. M.D. Pa.)

    § 523(a)(7) Court of Appeals reversed district court and held that forfeited bail bond was nondischargeable.
    City of Philadelphia v. Nam (In re Nam)
    (3d Cir.)

    Rule 7041 Bankruptcy court denied defendants’ motion for dismissal of third party complaint in adversary proceeding.
    HHCA Tex. Health Servs., L.P. v. LHS Holdings, Inc. (In re Home Health Corp. of America)
    (Bankr. D. Del.)


    4th Cir.

    28 U.S.C. § 158 Order dismissing motion for sanctions was not a final, appealable order.
    CitiBank South Dakota, N.A. v. Topper (In re Topper)
    (4th Cir.)


    5th Cir.

    § 541(a)(1) Court of Appeals vacated dismissal of discrimination action brought by debtor instead of trustee.
    Wieburg v. GTE Southwest, Inc.
    (5th Cir.)


    6th Cir.

    § 105(a) Section 105(a) did not authorize order permitting debtor in possession to distribute assets absent a confirmed plan.
    Ohio Dep’t of Taxation v. Swallen’s, Inc. (In re Swallen’s, Inc.)
    (B.A.P. 6th Cir.)


    7th Cir.

    § 523(a)(8) Student loan debtor failed to demonstrate undue hardship.
    Shirzadi v. U.S.A. Group Loan Servs. (In re Shirzadi)
    (Bankr. S.D. Ind.)


    8th Cir.

    § 523(a)(8) B.A.P. affirmed discharge of debtor’s student loan obligation.
    Ford v. Student Loan Guar. Found. of Ark. (In re Ford)
    (B.A.P. 8th Cir.)

    § 707(b) Debtors’ ability to fund a chapter 13 plan resulted in the dismissal of their chapter 7 case.
    In re Beckel
    (Bankr. N.D. Iowa)


    9th Cir.

    § 330(a)(2) Attorneys’ fees were reduced for lack of benefit to the estate.
    In re Berg
    (Bankr. D. Mont.)

    § 723(a) Trustee could not recover against debtor’s general partner.
    Ehrenberg v. WSCR, Inc. (In re Hoover WSCR Assocs.)
    (Bankr. C.D. Cal.)

    Rule 9024 Court of Appeals dismissed appeal as moot.
    IRS v. Pattullo (In re Pattullo)
    (9th Cir.)


    10th Cir.

    § 1325(a)(1) Chapter 13 was properly reconverted on finding of bad faith.
    Sladek v. Zeman (In re Sladek)
    (D. Colo.)


    11th Cir.

    § 704(1) Complaint was not dismissed because trustee sufficiently pled a claim on behalf of the debtor.
    Tabas v. Greenleaf Ventures, Inc. (In re Flagship Healthcare, Inc.)
    (Bankr. S.D. Fla.)


    D.C. Cir.

    § 507 Bankruptcy court sustained, in part, and denied, in part, debtors’ objections to administrative claims.
    In re Greater Southeast Cmty. Hosp. Found., Inc.
    (Bankr. D.C.)


Collier Bankruptcy Case Summaries

1st Cir.

Court of Appeals ruled that postpetition interest owed to IRS was entitled to first priority. 1st Cir. After the debtor filed a chapter 7 petition in 1992, the trustee sold assets of the estate but did not file an income tax return. The IRS determined that the estate owed, in addition to taxes, both penalties and interest. The IRS agreed to forgive the penalties but in 1997, filed a request for the remaining interest. The trustee offered to pay that interest as a first priority, but a successor trustee suggested paying the IRS as a fifth priority, which would have resulted in no payment since the estate assets were insufficient. The IRS maintained that it was entitled to first priority, arguing that section 503(b)(1)(B)(i) included interest. The bankruptcy court ruled for the trustee, and on appeal the B.A.P. for the First Circuit affirmed. This second appeal followed. The Court of Appeals for the First Circuit reversed, holding that the IRS was entitled to first priority administrative expense. The Court of Appeals interpreted section 503(b)(1)(B)(i) by reading the statute in conjunction with section 726(a)(5) and its provision for postpetition interest, and found that the analysis could not end with the silence of section 503(b) on the issue of interest, but instead required an examination of legislative history and underlying policy. The need for trustees to pay postpetition tax claims promptly and to compensate the taxing authority for delayed payment led to the conclusion that it was unlikely that Congress would choose to give priority treatment to penalties but not to interest (citing Collier on Bankruptcy 15th Ed. Revised). United States v. Yellin (In re Weinstein), 2001 U.S. App. LEXIS 25446, 272 F.3d. 39 (1st Cir. November 30, 2001) (Lynch, C.J.).

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

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2nd Cir.

Trustee had standing to sue for losses that were separate and distinct from injuries to debtor’s subsidiary. Bankr. E.D.N.Y. The superintendent of insurance, in his capacity as liquidator of the debtor’s subsidiary insurance company, moved to dismiss the adversary proceeding commenced by the chapter 7 trustee, on the grounds that the trustee lacked standing to assert claims against certain former officers and directors of the debtor holding company. The trustee’s complaint sought recovery for the officers’ and directors’ breach of fiduciary duty to the debtor by committing waste and mismanagement of corporate assets and for fraudulent conveyances by the debtor to the officers and directors. The superintendent also commenced an action against many of the same officers and directors, for their breach of duty to the subsidiary. The superintendent asserted that the trustee’s causes of action belonged exclusively to the subsidiary and should be dismissed on the grounds that they were derivative rather than direct. The bankruptcy court denied the motion to dismiss, holding that the trustee had standing to assert claims against the debtor’s former officers and directors because the trustee was suing for damages caused to the debtor, not its subsidiary. The claims against the debtor’s officers and directors belonged to the debtor, and the trustee was the only person with standing to assert those claims.Ochs v. Simon (In re First Cent. Fin. Corp.), 2001 Bankr. LEXIS 1478, 265 B.R. 481 (Bankr. E.D.N.Y. November 6, 2001) (Craig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:323.03[2]; 6:704.03

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Debtor/gasoline supplier’s rejection of supply agreement did not defeat district court’s jurisdiction over complaint brought under Petroleum Marketing Practices Act. 2d Cir. A tenant leased a gas station that was operated in accordance with two agreements, a lease agreement and a supply agreement. The supply agreement provided that the debtor would purchase its gasoline supplies from a designated supplier. During the term of the agreements, the designated supplier commenced a chapter 11 case. The tenant filed a postpetition district court action against its lessors that asserted improper breach of an alleged franchise agreement under the Petroleum Marketing Practices Act ('PMPA') (15 U.S.C. § 2801 et seq.) and sought, among other things, a preliminary injunction enjoining the lessors from pursuing holdover or nonpayment proceedings in state court. The district court granted the preliminary injunction, and the lessors appealed. The Court of Appeals for the Second Circuit affirmed. The court held that the PMPA provided jurisdiction over the debtor’s complaint, and the district court did not abuse its discretion in granting a preliminary injunction under the PMPA’s lenient standard. The court also held that the supplier/debtor’s rejection of the supply agreement did not defeat the tenant’s claim that a franchise relationship existed and did not deprive the court of its subject matter jurisdiction. The court explained that whether the complaint alleged a violation of the PMPA depended on whether a franchise relationship existed at the time of the events complained of, and that the facts asserted in the tenant’s complaint relating to the time prior to the debtor/supplier’s rejection of the supply agreement properly alleged a claim under the PMPA and properly pleaded a federal question.Koylum, Inc. v. Peksen Realty Corp., 2001 U.S. App. LEXIS 24949, 272 F.3d 138 (2d Cir. November 21, 2001) (Leval, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01

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3rd Cir.

Debtor’s objections to proofs of claim sustained as to claims where state law statute of limitations on collection of the underlying debt had expired. Bankr. M.D. Pa. The debtor had received a series of loans and surety promises from businesses who were closely related to the debtor and other members of the debtor’s family. When the debtor filed a petition under chapter 11, the creditors filed several proofs of claim. The debtor objected to the claims, arguing that the creditors were time-barred from asserting their claims. In assessing the validity of the debtor’s position, the court was called upon to determine when the statute of limitations to collect each debt started running, the length of the statute of limitations, and whether each creditor had acted within the required time period. Since the Code does not establish a statue of limitations, the court looked to state (Pennsylvania) law, which provided that an action to recover a debt must be commenced within four years. Because the debts were 'payable on demand' and because the debtor’s family members never made a demand (since they knew debtor was not financially able to repay), the court determined that the statutory period began running at the time when the loan repayment time was extended. The court then determined that the statute of limitations had run on all but two of actions to collect and sustained the debtor’s objections as to the remaining proofs of claim. Pagnotti v. Lehigh Valley Coal Sales Co. (In re. Pagnotti), 2001 Bankr. LEXIS 1471, 269 B.R. 326 (Bankr. M.D. Pa. August 3, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:502.

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Court of Appeals reversed district court and held that forfeited bail bond was nondischargeable. 3d Cir. In 1997, the debtor’s son was charged with murder, robbery, and burglary. Bail was set at $1 million, conditioned on a 10 percent cash payment by a surety, who was also obligated to assume legal responsibility to pay the full amount of the bond. The debtor provided the son with living quarters and necessaries, but the son fled the country. Subsequently, the son failed to appear in court for a pretrial status and, as a result, the criminal court entered a judgment against the debtor as a surety on the forfeited bond. In 1999, the debtor filed a chapter 7 petition listing the creditor (the City of Philadelphia) to whom the bond was payable. The creditor filed an adversary proceeding seeking a determination of nondischargeability pursuant to section 523(a)(7). The debtor filed a motion to dismiss, arguing that the debt was dischargeable. The bankruptcy court granted the debtor’s motion, holding that section 523(a)(7) must be construed narrowly to exempt from discharge only obligations imposed on the debtor as punishment for his wrongdoing, and that the judgment against the debtor arose because a condition of the bond was breached, not because the debtor, as surety, was being punished. The district court affirmed, holding that section 523(a)(7) excepted from discharge only sanctions that were penal, not civil, in nature, and that resulted from the debtor’s wrongdoing. The court also noted that the debtor never assumed any obligation to produce his son in court, and that a judgment arising from a forfeited bail bond was exempted from discharge only if the surety had an affirmative hand in the defendant’s failure to appear. The creditor appealed. The Court of Appeals for the Third Circuit reversed, holding that the debt fell within the meaning of 'forfeiture' as provided by section 523(a)(7). The Court of Appeals reasoned that the district court’s conclusion that a forfeiture must be penal in order to be nondischargeable conflicted with the plain language of the statute, which sets forth 'penalty' and 'forfeiture' as two distinct terms. The Court of Appeals also found that case law and state (Pennsylvania) law supported its finding, as well as public policy considerations (citing Collier on Bankruptcy, 15th Ed.). City of Philadelphia v. Nam (In re Nam), 2001 U.S. App. LEXIS 24859, 273 F.3d. 281 (3d Cir. November 20, 2001) (Roth, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.13

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Bankruptcy court denied defendants’ motion for dismissal of third party complaint in adversary proceeding. Bankr. D. Del. An affiliate of the chapter 11 debtor filed an adversary complaint against several defendants seeking reimbursement for more than $600,000 that was allegedly owed in overpayments on a Medicare provider agreement that the affiliate acquired from the defendants. The defendants asserted that they were entitled to offset or recoup sums that were due to them from the affiliate against the amounts they owed to the affiliate. A secured lender filed a third party complaint against the defendants. The third party complaint alleged that any sums due to the defendants, including sums due for setoff or recoupment, should be subordinated to the secured lender’s claims pursuant to a subordination agreement between the defendants and the secured lenders. The defendants moved to dismiss the third party complaint and asserted that by the terms of the parties’ agreement, subordination did not apply to setoff or recoupment rights. The bankruptcy court denied the dismissal motion. The court noted that the subordination agreement did not expressly except setoff or recoupment rights from the effect of the subordination, and held that absent an express exclusion of setoff or recoupment rights, the court could not, in the context of a motion to dismiss in which all pleaded facts and all reasonable inferences were drawn in the secured lender’s favor, dismiss the secured lender’s complaint.HHCA Tex. Health Servs., L.P. v. LHS Holdings, Inc. (In re Home Health Corp. of America), 2001 Bankr. LEXIS 1476, 267 B.R. 687 (Bankr. D. Del. October 4, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7041.01

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4th Cir.

Order dismissing motion for sanctions was not a final, appealable order. 4th Cir. The bankruptcy court dismissed a party’s motion for sanctions and, upon appeal, the district court denied leave to appeal that interlocutory order. Upon further appeal, the Court of Appeals for the Fourth Circuit dismissed the appeal for lack of jurisdiction, holding that the denial of a motion for sanctions is not final and, thus, is not reviewable on appeal.CitiBank South Dakota, N.A. v. Topper (In re Topper), 2001 U.S. App. LEXIS 24600, – F.3d – (4th Cir. November 16, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 1:5.07; 8003.07

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5th Cir.

Court of Appeals vacated dismissal of discrimination action brought by debtor instead of trustee. 5th Cir. In 1996, the debtor was discharged by her employer. Shortly thereafter, she and her husband filed a chapter 7 petition. In early 1997, the debtor wrote a letter to the Equal Employment Opportunity Commission ('EEOC') making an official charge of age and sex discrimination. In April 1997, the debtor received a discharge, and later that month the debtor filed formal discrimination charges with the EEOC. In August 1998, the debtor filed this action against the employer, and shortly thereafter, the bankruptcy court, unaware of the discrimination claim, approved the trustee’s final report and closed the case. The employer moved to dismiss the complaint in the discrimination action, arguing that the claim was property of the estate and that only the chapter 7 trustee had standing to assert it. Soon thereafter, the bankruptcy court granted the trustee’s motion to reopen the chapter 7 case, and the debtor filed an adversary proceeding asserting that the claim was not part of the estate. The debtor and trustee reached an agreement providing that the discrimination claim was deemed estate property, but that the debtor’s counsel would pursue the claim in the debtor’s name without formal intervention by the trustee. In April 2000, the employer supplemented its motion to dismiss, arguing that the debtor had had a reasonable time to join or substitute the trustee and that her claims should be dismissed or, alternatively, that she should be ordered to join or substitute the trustee as the real party in interest. The debtor argued that, in keeping with her agreement with the trustee, she was properly pursuing the action without substitution or joinder. The district court granted the motion to dismiss, holding that the debtor lacked standing because the trustee was the real party in interest. The court noted the bankruptcy court’s finding that the discrimination claim was estate property, while making no allusion to the agreement, and concluded that the trustee was the only proper plaintiff. The debtor moved to vacate the judgment, arguing that there was no basis for dismissal without allowing an opportunity for the trustee to be joined or substituted. The court denied the motion, and the debtor appealed. The Court of Appeals for the Fifth Circuit affirmed the dismissal, holding that, although the agreement granted the debtor the right to pursue the claims in her own name without intervention by the trustee, the claims still belonged to the estate. But the Court of Appeals also held that the district court’s dismissal had failed to address, pursuant to Fed. R. Civ. P. Rule 17(a), whether the debtor had been given reasonable time after the employer’s objection during which to obtain joinder, ratification, or substitution of the trustee, or whether her decision to pursue the action in her own name was the result of an understandable mistake. Accordingly, the case was remanded for a determination of that issue.Wieburg v. GTE Southwest, Inc., 2001 U.S. App. LEXIS 24854, 272 F.3d. 302 (5th Cir. November 20, 2001) (Jolly, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.08

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6th Cir.

Section 105(a) did not authorize order permitting debtor in possession to distribute assets absent a confirmed plan. B.A.P. 6th Cir. After six years in a chapter 11 case, and, having failed to even file a plan, the debtor in possession moved for an order allowing it to distribute funds on hand pursuant to section 507 and dismiss the chapter 11 case. The bankruptcy court granted the motion over the objection of a priority creditor. On appeal, the B.A.P. for the Sixth Circuit reversed, holding that distribution may not take place except pursuant to a confirmed plan of reorganization, absent extraordinary circumstances. The bankruptcy court abused its discretion by permitting the debtor in possession to distribute its assets, and thereby circumvent the provisions of the Code for the administration of a chapter 11 case, without a confirmed plan. The equitable powers of section 105(a) were not a license to disregard the language of the Code and Rules. The court rejected the creditor’s argument that the motion was subject to being set aside for lack of notice to all creditors. The creditor had no standing to raise the issue since it had received notice of the motion.Ohio Dep’t of Taxation v. Swallen’s, Inc. (In re Swallen’s, Inc.), 2001 Bankr. LEXIS 1474, 269 B.R. 634 (B.A.P. 6th Cir. November 19, 2001) (Cook, B.J.).

Collier on Bankruptcy, 15th Ed. Revised : 2:105.04[5], 105.05; 7:1112.04

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7th Cir.

Student loan debtor failed to demonstrate undue hardship. Bankr. S.D. Ind. The chapter 7 debtor filed an adversary proceeding against her student loan creditors, seeking to have her loan obligations declared dischargeable under the undue hardship exception of section 523(a)(8). The debtor had earned a Ph.D. in adult education and at the time of the adversary proceeding, was employed by two separate universities. The debtor alleged that her former spouse’s delinquency in child support payments had principally contributed to her financial hardship. The bankruptcy court held that the debtor did not meet the requirements for a finding of undue hardship. Specifically, the court found that (1) many of the debtor’s expenditures could be reduced or eliminated, such as contributions to retirement accounts and her children’s education funds; (2) the debtor was not maximizing her income because she was not claiming both her children as dependents and thereby decreasing her tax burden; (3) the debtor was not attempting to collect child support to which she was entitled; and (4) there was no reason to believe that the debtor’s earning potential would be reduced or eliminated in the future.Shirzadi v. U.S.A. Group Loan Servs. (In re Shirzadi), 2001 Bankr. LEXIS 1516, 269 B.R. 664 (Bankr. S.D. Ind. November 19, 2001) (Coachys, B.J.).

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

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8th Cir.

B.A.P. affirmed discharge of debtor’s student loan obligation. B.A.P. 8th Cir. A student loan lender appealed from a bankruptcy court order that declared the debtor’s student loan obligation to be dischargeable. The bankruptcy court held that repaying the loan would cause an undue hardship for the debtor and declared the loan dischargeable under section 523(a)(8). The B.A.P. for the Eighth Circuit affirmed, and held that the bankruptcy court’s conclusion that the student loan debt was dischargeable was not clearly erroneous. Specifically, the B.A.P. held not clearly erroneous the bankruptcy court’s finding that the debtor’s frugal expenses consumed all of her scheduled income, and that, as a result, she had no excess funds in her budget to finance the repayment of the student loan. The court also held that the bankruptcy court did not clearly err in concluding that a physical disability suffered by the 62-year-old debtor was likely to continue, and that her ability to work would only continue to deteriorate.Ford v. Student Loan Guar. Found. of Ark. (In re Ford), 2001 Bankr. LEXIS 1482, 269 B.R. 673 (B.A.P. 8th Cir. November 5, 2001) (Koger, B.J.).

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

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Debtors’ ability to fund a chapter 13 plan resulted in the dismissal of their chapter 7 case. Bankr. N.D. Iowa The United States trustee moved to dismiss the chapter 7 debtors’ case for substantial abuse under section 707(b). The debtors had considerable income, late model cars and a sizable house. Although they had minimal savings, the debtors spent substantial sums each month on housing, dining out, movies, gifts, food, cable television, lawn service and credit card payments. The debtors’ total expenses were higher than average consumers in their area and equaled approximately 150 percent of the IRS collection financial standards. The bankruptcy court granted the motion to dismiss, holding that because the debtors had a substantial ability to pay their creditors, granting them chapter 7 relief would have constituted substantial abuse of the Code. The court measured the debtors’ ability to pay creditors by evaluating their financial condition in a hypothetical chapter 13 case.In re Beckel, 2001 Bankr. LEXIS 1490, 268 B.R. 179 (Bankr. N.D. Iowa October 16, 2001) (Kilburg, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.04

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9th Cir.

Attorneys’ fees were reduced for lack of benefit to the estate. Bankr. D. Mont. The United States trustee objected to the fee applications filed by the debtor’s attorneys, which sought compensation for services rendered while the case was in chapter 11. The individual debtor filed the petition to stop a sheriff’s sale of the inventory and machinery of his unprofitable business. While the case was pending under chapter 11, the debtor sold assets without court authorization, rebuked offers to purchase certain assets, and personally spent accounts receivable and proceeds from the business. The debtor further failed to pay postpetition taxes and incurred additional debt. The debtor’s violations of his fiduciary obligations ultimately resulted in the conversion of the case to chapter 7. The United States trustee contended that the attorneys’ services furthered the debtor’s interests rather than the estate’s and that they should have recognized that no prospect of plan confirmation was possible. The bankruptcy court sustained the objection and awarded reduced fees and costs, holding that the services rendered by the debtor’s attorneys were not reasonably likely to benefit the estate or were not necessary for the administration of the case. The court determined that the attorneys lacked professional control over their client and knew, or should have known, that a financial reorganization of the debtor’s business was not a viable possibility.In re Berg, 2001 Bankr. LEXIS 1493, 268 B.R. 250 (Bankr. D. Mont. September 25, 2001) (Kirscher, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.04[1][b][iv]

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Trustee could not recover against debtor’s general partner. Bankr. C.D. Cal. The debtor was a limited partnership formed by three entities. Entity A transferred a shopping center lease, along with its appurtenant rights and obligations as landlord, to the debtor. In 1990, the lessees filed suit against the debtor and other defendants seeking damages of breach of the lease. Entity B was not named as a defendant. Prior to trial, the debtor filed its chapter 11 petition. The trial proceeded and the lessees obtained a judgment against the remaining defendants. In 1994, Entity B assigned its partnership interest to assignees C and D. In April 1995, the chapter 11 case was dismissed and, subsequently, the lessees obtained a judgment against the debtor in the approximate amount of $401,000. The debtor made no payments on the judgment, and in October 1998, one of the lessees filed an involuntary chapter 7 petition against the debtor and then a timely proof of claim. The estate contained no cash or assets with which to pay any claims, and the chapter 7 trustee filed an adversary proceeding against Entity B to recover the amount of judgment debt owed to the lessees by the debtor. Entity B argued that it was not personally liable for the deficiency under state (California) law because the lessees did not sue or obtain a judgment against it and were now barred from doing so because the statute of limitations had expired. The trustee argued that Entity B was liable for the debtor’s debts even if the lessees could not obtain a judgment against it on the partnership debt, since section 723(a) only required that the trustee prove that Entity B was liable to the trustee for the debtors of the debtor partnership, not that it was directly liable to the lessees for the partnership debt. The bankruptcy court held that the trustee was entitled to judgment against general partners under section 723(a) only to the extent that partnership creditors have recovered or could recover against those partners under nonbankruptcy law. The court concluded that Entity B was not personally liable to the trustee under state law, because the lessees could never obtain a judgment against Entity B on its claim against the debtor since the statute of limitations had expired. Consequently, Entity B was not liable to the trustee for any portion of that claim. The court also denied the trustee’s claim for an administrative expense against Entity B, reasoning that the trustee of a partnership could not include administrative expenses incurred in claims against a partner’s estate because, for the purposes of section 723, the term 'creditor' did not include administrative expenses of the bankruptcy estate (citing Collier on Bankruptcy 15th Ed. Revised). Ehrenberg v. WSCR, Inc. (In re Hoover WSCR Assocs.), 2001 Bankr. LEXIS 1475, 268 B.R. 227 (Bankr. C.D. Cal. August 6, 2001) (Barr, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:723.02

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Court of Appeals dismissed appeal as moot. 9th Cir. The IRS filed a motion to dismiss the debtor’s chapter 13 petition, arguing that the debtors were not eligible under section 109(e) because their unsecured debts exceeded the statutory cap of $250,000. The debtors argued that the IRS was precluded from asserting that argument because it had previously stipulated to the amount of unsecured debt as part of a prior settlement. The debtors moved for summary judgment and the bankruptcy court granted the motion, holding that the prior stipulation had preclusive effect. When the district court affirmed, the IRS filed an appeal. During the pendency of the appeal, the bankruptcy court dismissed the chapter 13 petition because the debtors failed to comply with their plan. Prior to being informed of the dismissal, the Court of Appeals for the Ninth Circuit issued a memorandum disposition. Thereafter, the IRS filed a motion to vacate that disposition and to dismiss the appeal as moot. The debtors opposed the motion, arguing that they filed a new chapter 13 petition and that the amount of unsecured debt was likely to be litigated in the new proceeding, thereby establishing that a live controversy still existed. The debtors also asserted that the bankruptcy court’s order of dismissal explicitly provided for the possible reinstatement of the first chapter 13 proceeding, which prevented this appeal from being moot. The Court of Appeals focused its mootness inquiry upon whether it could still grant relief between the parties, and concluded that the appeal was moot. Because the only relief available was to confirm or reject the validity of the original chapter 13 proceeding, and because that proceeding was dismissed, the Court of Appeals held that it could grant no effective relief. It also rejected the debtors’ argument regarding the possible reinstatement, holding that, Fed. R. Civ. P. 60, made applicable by Rule 9024, explicitly provided that a motion for relief from a judgment or order, even a motion for reinstatement, did not affect the finality of an order or suspend its operation. Accordingly, because the chapter 13 petition was dismissed, any ruling to its validity would be moot. As such, the Court of Appeals found that it lacked jurisdiction, vacated its memorandum disposition, and dismissed the appeal. Its decision also contained the ruling that the decisions below should be vacated, since the chapter 13 was dismissed as a result of the debtors’ failure to comply with plan previsions, and vacatur was in order when mootness occurs through the unilateral action of the party who prevailed in the lower court.IRS v. Pattullo (In re Pattullo), 2001 U.S. App. LEXIS 24947, 271 F.3d. 898 (9th Cir. November 21, 2001) (Schroeder, Lay and Thompson, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9024.01

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10th Cir.

Chapter 13 was properly reconverted on finding of bad faith. D. Colo. The chapter 13 trustee objected to certain of the debtors’ exemptions in certain malpractice causes of action and also filed a motion to reconvert the proceeding to chapter 7. The bankruptcy court granted both requests, and the debtors appealed, arguing that they did not intend to claim the causes of action as exempt but rather that those assets did not belong to the estate. The debtors also argued their actions, such as the filing of a motion to convert only after the chapter 7 discharge and the errors of omission in their schedules, were not the result of bad faith, as the bankruptcy court held, but of mistake and lack of knowledge. The district court denied the appeal, holding that the bankruptcy court’s findings of bad faith were sufficient grounds to grant the trustee’s motion for reconversion. The court noted that (1) the debtors had repeatedly tried to use the bankruptcy court as their personal debt restructuring agency with little or no regard for ultimate creditors, (2) they attempted to correct their omissions by moving to exempt those items, and (3) they resisted the chapter 7 and chapter 13 trustees’ efforts to administer the estate, all of which supported a finding of bad faith. The court also rejected the exemption claims, because the claimed exemptions did not fall within any statutory exemptions, and found that the bankruptcy court did not err in holding that the debtors’ plan was unfeasible, since the debtors lacked sufficient income and hinged their proposed plan on the successful outcome of their causes of action.Sladek v. Zeman (In re Sladek), 2001 U.S. Dist. LEXIS 19421, 269 B.R. 229 (D. Colo. October 11, 2001) (Kane, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.04[1]

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11th Cir.

Complaint was not dismissed because trustee sufficiently pled a claim on behalf of the debtor. Bankr. S.D. Fla. The debtor’s financial advisor moved to dismiss the chapter 7 trustee’s adversary proceeding filed against it, arguing that the trustee lacked standing to pursue the claim. The financial advisor had been engaged by the debtor prepetition to prepare a valuation analysis in connection with various acquisitions. Because the advisor’s valuation recorded significant goodwill in companies previously acquired by the debtor, the debtor continued its acquisition program. The complaint alleged that the debtor’s reliance on the negligent valuation resulted in the debtor making a bad decision to obtain increased financing and to acquire another company, leading to its demise. The advisor argued that the trustee lacked standing to pursue the negligence claim since the only damage allegations referred to were damages suffered by specific creditors. The bankruptcy court denied the motion to dismiss, holding that the trustee had standing because the complaint asserted damages incurred independently by the debtor. The court noted that even if the debtor had been insolvent before the advisor’s valuation, the additional debt incurred thereafter, (and allegedly as a result of the advisor’s negligence) could provide a measure of damages recoverable by the trustee.Tabas v. Greenleaf Ventures, Inc. (In re Flagship Healthcare, Inc.), 2001 Bankr. LEXIS 1497, 269 B.R. 721 (Bankr. S.D. Fla. November 13, 2001) (Mark, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:704.03; 3:323.03[2]

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DC Cir.

Bankruptcy court sustained, in part, and denied, in part, debtors’ objections to administrative claims. Bankr. D.C. The chapter 11 debtors were among several entities that made up a regional healthcare system. A pension plan and certain employees filed administrative claims that arose principally out of the debtors’ employment of numerous employees for an operating hospital. The debtors objected to the claims. The bankruptcy court sustained the debtors’ objections, in part, and denied the objections, in part. Specifically, the court held that the debtors were liable for a challenged 1999 plan contribution because their employees were still employed by the debtors as of December 31, 1999. The court also held that the 1999 plan contribution obligation gave rise to an administrative claim entitled to priority under section 507(a)(1). The court further determined that a plan contribution obligation for 1998 was entitled to priority under and subject to the dollar limitations of section 507(a)(4), to the extent that the final triggering event of liability occurred on or after 180 days prior to the debtors’ bankruptcy filing. The court found that the 1998 contribution obligation was not entitled to treatment as an administrative claim, despite provisions in a postpetition collective bargaining agreement that called for benefits to remain unchanged. Finally, the court held that the pension plan committee had an allowable administrative expense claim for postpetition expenses incurred in connection with pension plan administration up until the effective date of a plan amendment that provided for the payment of such expenses.In re Greater Southeast Cmty. Hosp. Found., Inc. 2001 Bankr. LEXIS 1481, 267 B.R. 7 (Bankr. D.C. July 9, 2001) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.01

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