Collier Bankruptcy Case Update January-20-03

Collier Bankruptcy Case Update January-20-03

 

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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 20, 2003

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

     

    2d Cir.

    § 109 Foreign partnerships with places of business and property in the U.S. were eligible debtors.
    In re Paper I Partners, LP (Bankr. S.D.N.Y.)

    § 330(a) Attorneys failed to show that fees incurred post-conversion to chapter 7 were for services that benefited the estate.
    In re Hasset, Ltd. (Bankr. E.D.N.Y.)

    § 726(b) Attorney’s fees for services rendered in chapter 11 prior to conversion subordinated to subsequent chapter 7 administrative expenses.
    In re Hasset, Ltd. (Bankr. E.D.N.Y.)

    28 U.S.C. § 157(b)(2)(O) Prepetition tort claim against accounting firm for deficient audits of debtor’s financial statements was not a core proceeding.
    Complete Mgmt., Inc. v. Arthur Anderson, LLP (In re Complete Mgmt., Inc.) (S.D.N.Y.)


    3d Cir.

    § 523(a)(4) Indemnity agreement executed by debtor, in favor of creditor that issued surety bonds, created a fiduciary relationship and was nondischargeable.
    Mountbatten Surety Co. v. McCormick (In re McCormick) (Bankr. W.D. Pa.)

    § 1127 Setting aside legal releases granted under confirmed plan would be a modification of plan for which requesting creditors lacked standing.
    In re Vencor, Inc. (Bankr. D. Del.)


    4th Cir.

    § 523(a)(1)(A) Taxes not assessed prior to petition date were not discharged and could be assessed and collected once stay was lifted.
    Johnson v. Commissioner (In re Johnson) (Bankr. D.S.C.)


    5th Cir.

    § 503(b)(1)(B) Real estate taxes due on property on which mortgagee foreclosed were not administrative expenses.
    In re Tri-City Health Ctr., Inc. (Bankr. N.D. Tex.)

    § 523(a)(2)(A) Debt owed to attorney pursuant to false representations and forged signature on employment agreement was nondischargeable.
    Moss v. Littleton (N.D. Tex.)


    6th Cir.

    § 109(e) Chapter 13 bad faith dismissal affirmed where debtor failed to declare known tax liability which would have caused estate to exceed jurisdictional limit.
    Alt v. United States (In re Alt) (6th Cir.)

    § 552(a) Creditors’ security interest in funds transferred by debtor to third party and returned by third party to the estate was not extinguished.
    John Hancock Life Ins. Co. v. Jankowski (In re Hospitality Inv. Corp.) (Bankr. E.D. Mich.)

    § 1322 Unearned insurance premium incorporated into mortgage loan was other collateral that prevented application of home mortgage exception to cramdown.
    In re Pedigo (Bankr. E.D. Tenn.)


    7th Cir.

    28 U.S.C. § 157(a) Suit by securities corporation for fraud and conspiracy was related to bankruptcy in which trustee had brought a similar adversary proceeding.
    Bear Stearns Secs. Corp. v. Cho (N.D. Ill.)


    8th Cir.

    § 523(a)(2)(A) Bankruptcy court properly applied collateral estoppel and the Rooker-Feldman doctrine in allowing claim based on state court default judgment.
    Car Color & Supply, Inc. v. Raffel (In re Raffel) (B.A.P. 8th Cir.)


    9th Cir.

    § 1328 Bankruptcy court did not err in granting discharge to debtor who completed all plan payments.
    Meyer v. Pagano (N.D. Cal.)

    Rule 2004 Provider of performance bond to debtor allowed to pursue discovery from owner of construction project on which debtor had been working.
    In re International Fibercom (Bankr. D. Ariz.)


    11th Cir.

    § 350 Debtor could not reopen chapter 7 case to schedule judgment creditor who had not been listed despite several prior amendments.
    In re Hunter (Bankr. M.D. Fla.)

    § 362(a)(3) Creditor sanctioned for filing lawsuit against trustee during pendency of bankruptcy in violation of stay.
    Harpley v. Five Star Tickets, Inc. (In re Premiere Sports Tours) (Bankr. M.D. Fla.)

    § 706 Conversion from chapter 7 to chapter 13 denied where debtor’s intent appeared to be preservation of lawsuit proceeds for benefit of debtor’s attorneys.
    In re Gallagher (Bankr. M.D. Fla.)


    Collier Bankruptcy Case Summaries

    2d Cir.

    Foreign partnerships with places of business and property in the U.S. were eligible debtors. Bankr. S.D.N.Y. PROCEDURAL POSTURE: The creditors, former limited partners, commenced involuntary cases under the Bankruptcy Code, chapter 7, against the alleged debtors, two partnerships formed to effect a tender offer for shares of a Swiss company. Twenty-eight creditors filed against the first partnership. One creditor filed against the second. The court considered the merits. OVERVIEW: Failures to pay the creditors amounts due to them triggered the filings. After they gave notice of withdrawal, the value of their interests had to be paid within 30 days, according to the partnership agreements. The court found that "Promissory Security," instead of being the required payment, was instead a forced extension of credit by the creditors to the alleged debtors, which was not accepted as payment. The alleged debtors first argued that they were not "eligible debtors" under 11 U.S.C. § 109, but the court found that they had a place of business in the United States and property in the United States. Second, they contended that the creditors had not satisfied the requirement of 11 U.S.C. § 303(b) that they hold "non-contingent bona fide" claims, but the court found otherwise. Third, the court, noting the magnitude of the debts, found that the requirement of 11 U.S.C. § 303(h)(1), that the alleged debtors were not "generally paying their debts as they matured," easily had been satisfied. Fourth, applying the "801 Wells Street factors," the court found nothing warranting abstention under 11 U.S.C. § 305. Finally, it found no bad faith in the filing. In re Paper I Partners, LP, 2002 Bankr. LEXIS 1068, 283 B.R. 661 (Bankr. S.D.N.Y. September 3, 2002) (Gerber, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 2:109.01  [back to top]

    ABI Members, click here to get the full opinion.

    Attorneys failed to show that fees incurred post-conversion to chapter 7 were for services that benefited the estate. Bankr. E.D.N.Y. PROCEDURAL POSTURE: The debtor filed a chapter 11 petition under the Bankruptcy Code and the case was later converted to chapter 7. The debtor’s attorney filed a motion seeking an order for reasonable compensation for services performed as the debtor’s counsel when the matter was in chapter 11 and then in chapter 7. The chapter 7 trustee and the Office of the United States Trustee filed objections to the request. OVERVIEW: The objections to the request for compensation were that: (1) any work done prepetition should be paid by the retainer and not from the bankruptcy estate’s postpetition assets; (2) any fees for services rendered during the chapter 11 phase were subordinate to administrative expenses incurred in chapter 7 and must wait until the final creditors’ meeting to determine whether funds existed to pay these claims; (3) the attorney’s time entries were vague and uninformative; and (4) the attorney failed to show that the services rendered during the chapter 7 phase of the case were for the benefit of the estate. The court disallowed time submitted that was vague or uninformative. The court analyzed the work performed during chapter 11 and chapter 7. The court agreed that the award of compensation for services rendered during the chapter 11 phase of the case was required to be subordinated to the chapter 7 administration expenses pursuant to 11 U.S.C. § 726(b). The court found that the attorney performed some services that went beyond the typical duties required for a debtor after conversion of a bankruptcy case. Prior court authorization was required, but not obtained. In re Hasset, Ltd., 2002 Bankr. LEXIS 1082, 283 B.R. 376 (Bankr. E.D.N.Y. August 21, 2002) (Cyganowski, B.J.).

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

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    Attorney’s fees for services rendered in chapter 11 prior to conversion subordinated to subsequent chapter 7 administrative expenses. Bankr. E.D.N.Y. PROCEDURAL POSTURE: The debtor filed a chapter 11 petition under the Bankruptcy Code and the case was later converted to chapter 7. The debtor’s attorney filed a motion seeking an order for reasonable compensation for services performed as the debtor’s counsel when the matter was in chapter 11 and then in chapter 7. The chapter 7 trustee and the Office of the United States Trustee filed objections to the request. OVERVIEW: The objections to the request for compensation were that: (1) any work done prepetition should be paid by the retainer and not from the bankruptcy estate’s postpetition assets; (2) any fees for services rendered during the chapter 11 phase were subordinate to administrative expenses incurred in chapter 7 and must wait until the final creditors’ meeting to determine whether funds existed to pay these claims; (3) the attorney’s time entries were vague and uninformative; and (4) the attorney failed to show that the services rendered during the chapter 7 phase of the case were for the benefit of the estate. The court disallowed time submitted that was vague or uninformative. The court analyzed the work performed during chapter 11 and chapter 7. The court agreed that the award of compensation for services rendered during the chapter 11 phase of the case was required to be subordinated to the chapter 7 administration expenses pursuant to 11 U.S.C. § 726(b). The court found that the attorney performed some services that went beyond the typical duties required for a debtor after conversion of a bankruptcy case. Prior court authorization was required, but not obtained. In re Hasset, Ltd., 2002 Bankr. LEXIS 1082, 283 B.R. 376 (Bankr. E.D.N.Y. August 21, 2002) (Cyganowski, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 6:726.03  [back to top]

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    Prepetition tort claim against accounting firm for deficient audits of debtor’s financial statements was not a core proceeding. S.D.N.Y. PROCEDURAL POSTURE: Adversary proceedings were filed in bankruptcy by the debtor’s official committee of unsecured creditors against defendant accounting firm alleging that the debtor’s prepetition tort claim against its accounting firm was core proceeding pursuant to 28 U.S.C. § 157(b)(2)(O). The accounting firm moved to withdraw the reference from the bankruptcy court. OVERVIEW: In the Committee’s complaint, the creditors asserted that the accounting firm’s audits of debtor’s financial statements were deficient for failing to detect alleged reporting errors. The creditor’s claims were grounded in state law claims of negligence, relying on theories of malpractice and breach of fiduciary duty. Even though the accounting firm filed a proof of claim with the bankruptcy court, the court determined that the considerations of efficiency and fairness favored withdrawal of the reference of the accounting firm’s adversary proceeding. The creditor’s claims against the accounting firm were based in tort, had no relation to bankruptcy law, and would certainly still exist in the absence of the debtor’s bankruptcy filing. Further, the claims against the accounting firm arose entirely prepetition. Finally, as argued by the accounting firm, its adversary proceeding raised legal issues more commonly resolved by a federal district court than a bankruptcy court, and the advancement of the action would involve extensive discovery, expert testimony, and a lengthy and complex trial requiring a jury. Complete Mgmt., Inc. v. Arthur Anderson, LLP (In re Complete Mgmt., Inc.), 2002 U.S. Dist. LEXIS 18344, — B.R. — (S.D.N.Y. September 26, 2002) (Buchwald, D.J.).

    Collier on Bankruptcy, 15th Ed. Revised 1:3.02[3][d][ii]  [back to top]

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    3d Cir.

    Indemnity agreement executed by debtor, in favor of creditor that issued surety bonds, created a fiduciary relationship and was nondischargeable. Bankr. W.D. Pa. PROCEDURAL POSTURE: The debtor filed for chapter 7 bankruptcy. The creditor timely filed a complaint to determine dischargeability of debt under 11 U.S.C. § 523(a)(4). The debtor moved to dismiss the complaint for failure to state a claim upon which relief was able to have been granted. OVERVIEW: The debtor was a shareholder and an officer and/or an employee or agent of a construction business. The creditor issued performance and payment bonds on behalf of the debtor’s company, as principal, in connection with various construction contracts. The debtor and several others executed a general indemnity agreement in favor of the creditor, agreeing to jointly and severally indemnify the creditor against all losses in connection with the issuance of surety bonds on behalf of the debtor’s business. The debtor argued that the use of the word "trust" in the indemnity agreement did not alter the borrower-lender relationship into a fiduciary one as required by 11 U.S.C. § 523(a)(4) to make the debt nondischargeable. The court found that the language in the indemnity agreement created a trust relationship between the parties. The debtor, as trustee of the funds, owed a fiduciary duty arising from the trust. The remaining issue was whether the debtor acted in a manner that constituted a defalcation for the purposes of section 523(a)(4). The debtor did not assert that the allegations of the complaint concerning the defalcation were insufficient to state a claim. Mountbatten Surety Co. v. McCormick (In re McCormick), 2002 Bankr. LEXIS 1058, 283 B.R. 680 (Bankr. W.D. Pa. September 20, 2002) (Bentz, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.10 [back to top]

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    Setting aside legal releases granted under confirmed plan would be a modification of plan for which requesting creditors lacked standing. Bankr. D. Del. PROCEDURAL POSTURE: After their case was dismissed by a district court, personal injury creditors of the debtors’ nondebtor predecessor moved under Fed. R. Civ. P. 60(b) to set aside releases granted to the predecessor under the debtors’ confirmed chapter 11 plan. The debtors objected due to timeliness and moved for sanctions under Fed. R. Bankr. P. 9011. The creditors argued that the district court action could be treated as an action under 11 U.S.C. § 1144. OVERVIEW: Under Fed. R. Bankr. P. 9024 and 11 U.S.C. § 1144, an action to revoke confirmation had to be filed within 180 days. The creditor’s motion, filed one year later, was untimely. The district court complaint did not refer to section 1144. It simply alleged that the predecessor defrauded its creditors by spinning off the debtor, causing the bankruptcy, and by misleading claimants and the courts into believing that the claims were against the debtor and thus discharged. The district court action was not filed against the debtors and no notice was given to the debtors, or their creditors. The creditors were seeking to revoke the confirmation. The district court case could not be transferred under 28 U.S.C. §§ 1404, 1406. There was no case to be transferred. The bankruptcy court could not transfer venue of a case to itself. Striking the releases would materially modify the plan. Only the debtors could request such a modification, and the plan had been substantially consummated. The creditors lacked standing under 11 U.S.C. § 1127. Similar creditors had objected to the releases at confirmation. The court had jurisdiction to grant the releases. The creditors’ motion was not frivolous. In re Vencor, Inc., 2002 Bankr. LEXIS 1038, 284 B.R. 79 (Bankr. D. Del. September 19, 2002) (Walrath, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 7:1127.01 [back to top]

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    4th Cir.

    Taxes not assessed prior to petition date were not discharged and could be assessed and collected once stay was lifted. Bankr. D.S.C. PROCEDURAL POSTURE: Debtor-plaintiff moved to reopen his bankruptcy case to prosecute an adversary proceeding against Defendant Commissioner of Internal Revenue ("IRS"), seeking injunctive relief against further bankruptcy violations, and damages of $5,000,000, pursuant to 26 U.S.C. § 7433, for abusive, reckless, and negligent conduct. The IRS moved for summary judgment on the claims. OVERVIEW: The debtor based his claim on alleged violations of the automatic stay pursuant to 11 U.S.C. § 362 and the discharge injunction pursuant to 11 U.S.C. § 524, that occurred in the assessment and collection of the debtor’s tax deficiency. The IRS argued it had not violated the stay, because it did not mail a notice of deficiency to the debtor until after the stay was lifted, and did not violate the discharge injunction because the subject taxes were not discharged, as they fell under the ambit of 11 U.S.C. § 507(a)(8)(A)(iii) and was consequently exempted from discharge by 11 U.S.C. § 523(a)(1)(A). The court determined the IRS had not actually assessed the tax deficiency before the commencement of the bankruptcy case and had not yet assessed the actual tax deficiency, based on a tax court proceeding which concerned a partnership of which the debtor was a partner. The court also granted summary judgment on the damages claim, because the IRS conduct was not deserving of damages under 26 U.S.C. § 7433. Johnson v. Commissioner (In re Johnson), 2002 Bankr. LEXIS 1081, — B.R. — (Bankr. D.S.C. August 26, 2002) (Waites, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.07[1] [back to top]

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    5th Cir

    Real estate taxes due on property on which mortgagee foreclosed were not administrative expenses. Bankr. N.D. Tex. PROCEDURAL POSTURE: Moving party, a mortgagee of debtor, sought the approval of the bankruptcy court for an administrative expense for its payment of real property taxes on property that had been an asset of the bankruptcy estate, but the mortgagee had foreclosed on the property and sold it, paying the real estate taxes out of the sale proceeds. The trustee and debtor opposed the motion. OVERVIEW: The mortgagee foreclosed on the property after the debtor defaulted on its chapter 11 plan, and after the case was converted to a chapter 7 matter. The mortgagee then sold the property and paid three years of back real estate property taxes that had accrued while the debtor had owned the property. The court noted that facially, the taxes appeared to be administrative expenses under 11 U.S.C. § 503(b)(1)(B)(i). The trustee argued that the property ultimately did not benefit the estate and, therefore, the estate should not be liable for payment of the taxes as administrative expenses. The trustee had held the property to attempt to realize value for creditors by a sale of the estate’s assets, but the foreclosure removed the property from the estate. The court agreed with the trustee. Once the mortgagee took ownership of the property, it became liable for the taxes itself. Had the bankruptcy estate received the proceeds of the sale of the property, then the payment of the taxes might have benefited the estate. In re Tri-City Health Ctr., Inc., 2002 Bankr. LEXIS 1061, 283 B.R. 204 (Bankr. N.D. Tex. August 14, 2002) (Felsenthal, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:503.07 [back to top]

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    Debt owed to attorney pursuant to false representations and forged signature on employment agreement was nondischargeable. N.D. Tex. PROCEDURAL POSTURE: Appellant debtor appealed from the bankruptcy court’s judgment and contended that the bankruptcy court erred in finding that appellee attorney justifiably relied upon the representations and forgery she made in connection with an employment agreement between the two. OVERVIEW: The bankruptcy court determined that the attorney justifiably relied on the debtor’s representations and the forged signature of a third person in entering into the employment agreement and leaving his law firm, and, therefore, the debtor’s debt to the attorney in the amount of $1.8 million, plus postjudgment interest and court costs, was nondischargeable under 11 U.S.C. § 523(a)(2)(A). The debtor contended the bankruptcy court erred in concluding that the attorney’s reliance in this case was justified because he was aware of information that should have served as a warning or "red flag" that something was amiss. She contended that: (1) the attorney was aware that she had previously made misrepresentations concerning her financial ability that should have caused him to make additional inquiries; and (2) the document he signed bore inconsistencies on its face which should have raised a red flag. She maintained that under the circumstances, the attorney was required to investigate whether he had an enforceable employment agreement with an actual investor group. The applicable justifiable reliance standard, however, did not require such due diligence. Moss v. Littleton, 2002 U.S. Dist. LEXIS 18137, — B.R. — (N.D. Tex. September 26, 2002) (Lindsay, D.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1] [back to top]

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    6th Cir

    Chapter 13 bad faith dismissal affirmed where debtor failed to declare known tax liability which would have caused estate to exceed jurisdictional limit. 6th Cir. PROCEDURAL POSTURE: The district court affirmed the bankruptcy court’s dismissal of debtor’s bankruptcy petition on the grounds that she was ineligible for chapter 13 relief because the amount of her liquidated, non-contingent, unsecured debt exceeded the statutory limit, and because the record showed that her petition was not brought in good faith. Debtor appealed. OVERVIEW: Debtor’s failure to schedule a tax debt set forth in a notice of deficiency bolstered the bankruptcy court’s finding of bad faith. The circuit court concluded that debtor was aware of the tax debt, which put her clearly over the jurisdictional limit at the time under 11 U.S.C. § 109(e) and that debtor simply chose to ignore it when completing her schedules. At the hearing, counsel for the trustee expressed concern that debtor’s plan, including the omitted claim, would far exceed 60 months and was not confirmable under 11 U.S.C. § 109(e). Although debtor was not necessarily a tax protestor as the phrase was normally understood, that did not overcome the strong inference of bad faith and abuse of the bankruptcy process raised by her deposition performance and failure to schedule her tax debt. Alt v. United States (In re Alt), 2002 U.S. App. LEXIS 20740, 305 F.3d 413 (6th Cir. October 2, 2002) (Daughtrey, C.J.).

    Collier on Bankruptcy, 15th Ed. Revised 2:109.06 [back to top]

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    Creditors’ security interest in funds transferred by debtor to third party and returned by third party to the estate was not extinguished. Bankr. E.D. Mich. PROCEDURAL POSTURE: Plaintiff creditors filed an adversary complaint to determine the validity of their asserted prepetition lien in funds held by the bankruptcy trustee on behalf of the debtor. The creditors moved for partial summary judgment and the trustee moved for partial summary judgment on the issue of avoidance of the lien under the provisions of 11 U.S.C. § 552(a). OVERVIEW: The creditors sold motels to the debtor, which executed promissory notes totaling over $9 million and signed security agreements for each of the motels, granting a security interest in all present and future rents, issues, income, revenue, receipts, fees and profits from the motels. The debtor transferred the funds to a third-party, but the funds were returned to the estate. At issue was whether the bankruptcy estate’s recovery of the certain funds terminated the creditors’ security interest in those funds when the case was filed. The creditors argued that they had a prepetition security interest in the funds when the funds were in the debtor’s operating account, pursuant to Mich. Comp. Laws § 440.9315(1)(a), and their security interest continued in the funds when they were transferred to a third party, and until it was returned postpetition to the debtor’s estate. The court agreed. The purpose of 11 U.S.C. § 552(a) was to allow a trustee to avoid the postpetition application of an otherwise valid after-acquired property clause in a security agreement. The third-party held only a voidable and the transfer did not extinguish the creditors’ perfected security interest. John Hancock Life Ins. Co. v. Jankowski (In re Hospitality Inv. Corp.), 2002 Bankr. LEXIS 1052, 283 B.R. 451 (Bankr. E.D. Mich. September 23, 2002) (Rhodes, C.B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 5:552.02[1] [back to top]

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    Unearned insurance premium incorporated into mortgage loan was other collateral that prevented application of home mortgage exception to cramdown. Bankr. E.D. Tenn. PROCEDURAL POSTURE: A secured creditor, the beneficiary of a second deed of trust against debtors’ residential real property and a credit life insurance policy, objected to confirmation of the debtors’ chapter 13 plan, asserting that a proposed cram-down of its security interest was barred by the home mortgage exception of 11 U.S.C. § 1322, and that the plan was therefore not proposed in good faith under 11 U.S.C. § 1325. OVERVIEW: The balance on the creditor’s second deed of trust was $11,554. The debtors proposed a revised value of the collateral, their residence less the first mortgage, as a secured value of $5,013, payable at $102 per month, and thus a cram down of about $6,500, the difference between the debt and the collateral. The creditor argued that the cram down was barred under the home mortgage exception. The second deed of trust clearly met four of the five elements of the home mortgage exception. The only issue was whether the creditor’s claim was or was not secured by any other collateral. The court noted that the debtors had purchased credit life and credit disability insurance for which the premium was added to the loan amount, and thus effectively prepaid. The court decided that although the insurance policy and proceeds did not constitute other collateral secured by the deed of trust, the unearned premium for the policy did, because the creditor was given the option of applying the unearned premium to the debt. As there was other collateral, the home mortgage exception did not apply. It followed that the debtors’ plan was not proposed in bad faith. In re Pedigo, 2002 Bankr. LEXIS 1079, 283 B.R. 493 (Bankr. E.D. Tenn. September 23, 2002) (Stinnett, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 8:1322.01 [back to top]

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    7th Cir.

    Suit by securities corporation for fraud and conspiracy was related to bankruptcy in which trustee had brought a similar adversary proceeding. N.D. Ill. PROCEDURAL POSTURE: Plaintiff, securities corporation sued defendants, former officers, directors or employees of a partnership, alleging fraud and conspiracy. Two defendants moved to refer the action to the bankruptcy court, or in the alternative, stay the proceedings. OVERVIEW: The corporation was a party to a bankruptcy proceeding and had filed suit against the same individuals that were named defendants in the adversary proceedings pending in the bankruptcy court. The alleged misconduct of the defendants was the same in both the suit and the adversary proceedings, and the corporation sought to recover the same monies that the trustee sought to recover in the pending adversary proceedings. A judgment in favor of the corporation would have depleted the funds potentially available in the bankruptcy estate, as the defendants could not be required to repay twice the monies they allegedly converted or fraudulently conveyed. Accordingly, the corporation’s suit would have an impact on the estate of the debtor and the allocation of property among the partnership’s creditors. Therefore, the case was related to the bankruptcy proceeding. Bear Stearns Secs. Corp. v. Cho, 2002 U.S. Dist. LEXIS 18253, — B.R. — (N.D. Ill. September 17, 2002) (Darrah, D.J.).

    Collier on Bankruptcy, 15th Ed. Revised 1:3.02[1] [back to top]

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    8th Cir.

    Bankruptcy court properly applied collateral estoppel and the Rooker-Feldman doctrine in allowing claim based on state court default judgment. B.A.P. 8th Cir. PROCEDURAL POSTURE: Appealing an order of the bankruptcy court, the debtor argued the court erred in applying collateral estoppel when granting a creditor’s motion for summary judgment in an adversary proceeding to determine the dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A). The debtor claimed the state court default judgment was invalid for lack of jurisdiction. OVERVIEW: The Rooker-Feldman doctrine precluded federal jurisdiction, except in the United States Supreme Court, if the relief requested in federal court would reverse or void a state court decision. The debtor’s claims that the state court default judgment was void for lack of jurisdiction could only be raised in the state appeals court. While the Rooker-Feldman doctrine did not apply if the parties had no knowledge of the earlier state court proceeding, the state court had specifically found that it had jurisdiction, and that the debtor had notice of the action. Thus, the bankruptcy court had no jurisdiction to determine the validity of the default judgment. In the bankruptcy court, the creditor had alleged that the debtor fraudulently misrepresented his intent to repay the debt, which was the same issue presented to the state court. The parties to both actions were identical, and the creditor presented sufficient evidence to allow the state court to find that the creditor had proven a fraudulent misrepresentation. Though the debtor failed to appear in the state court, he had notice of the action, therefore, he had a full and fair opportunity to litigate the issue of liability. Car Color & Supply, Inc. v. Raffel (In re Raffel), 2002 Bankr. LEXIS 1074, 283 B.R. 746 (B.A.P. 8th Cir. September 26, 2002) (Federman, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1] [back to top]

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    9th Cir.

    Bankruptcy court did not err in granting discharge to debtor who completed all plan payments. N.D. Cal. PROCEDURAL POSTURE: Appellant trustee challenged the judgment entered by the bankruptcy court that granted a discharge under 11 U.S.C. § 1328 to appellee debtor. OVERVIEW: The debtor filed a voluntary petition for relief pursuant to chapter 13 of the Bankruptcy Code. The debtor proposed a pro-tanto plan whereby he would pay the trustee the sum of $100 for 36 months or until all allowed claims were paid. The debtor gave notice of his proposed plan to the creditor, which did not object to confirmation. The bankruptcy court confirmed the debtor’s proposed plan. After the debtor completed the 36 monthly payments required under the plan, the bankruptcy court entered an order of discharge pursuant to 11 U.S.C. § 1328. On appeal, the court found that the trustee had standing to appeal the order that granted the debtor a discharge. The bankruptcy court’s interpretation of the plan’s provisions as limiting the recovery on the creditor’s priority claim to a maximum of $3,600 was not erroneous. The debtor completed the 36 monthly payments of $100 as required under the plan. Because the plan, as confirmed, did not require the debtor to pay priority claims in full, the debtor completed all payments required under the plan. Thus, the bankruptcy court did not err when it granted the debtor’s motion for a discharge pursuant to 11 U.S.C. § 1328. Meyer v. Pagano, 2002 U.S. Dist. LEXIS 18187, — B.R. — (N.D. Cal. September 25, 2002) (Chesney, D.J.).

    Collier on Bankruptcy, 15th Ed. Revised 8:1328.01 [back to top]

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    Provider of performance bond to debtor allowed to pursue discovery from owner of construction project on which debtor had been working. Bankr. D. Ariz. PROCEDURAL POSTURE: The company that provided payment and performance bonds for the debtor in connection with a subcontract moved for a Fed. R. Bankr. P. 2004 examination of the project owner. The project owner opposed the motion on the ground that litigation was pending in other jurisdictions where such discovery was more suitable under Fed. R. Bankr. P. 7026-7037. OVERVIEW: The debtor was hired by a general contractor to be a subcontractor for the construction of a fiber optic telecommunications system for the project owner. The debtor filed bankruptcy before it finished the construction. The general contractor also filed bankruptcy. Legal proceedings were pending in several states concerning the contract between the general contractor and the project owner. The general contractor’s automatic stay had stayed those proceedings. The bond company sought discovery relating to the same contract that was the subject of the pending litigation. It argued that the discovery was appropriate under Fed. R. Bankr. P. 2004 because it sought to discover potential claims the debtor had against the project owner or the general contractor. The court found that it was not clear that all of the potential claims of the debtor and the bond company were the subject of the other pending litigation. The purpose of the "pending litigation" rule would not have been served by precluding discovery in this case. The bond company had initiated the use of Rule 2004 for its proper purpose, to investigate matters that may have affected the administration of the debtor’s estate. In re International Fibercom, 2002 Bankr. LEXIS 1067, 283 B.R. 290 (Bankr. D. Ariz. September 19, 2002) (Haines, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 9:2004.01 [back to top]

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    11th Cir.

    Debtor could not reopen chapter 7 case to schedule judgment creditor who had not been listed despite several prior amendments. Bankr. M.D. Fla. PROCEDURAL POSTURE: The debtor filed a chapter 7 petition under the Bankruptcy Code and later received a discharge. The court entered a final decree and the case was closed. The creditor attempted to enforce a judicial lien against the debtor and the debtor filed a motion to avoid the creditor’s lien, which was denied. The debtor filed a motion to reopen the bankruptcy case and the creditor objected. OVERVIEW: The debtor had failed to list the creditor on the bankruptcy schedules, even though the debtor amended the schedules several times, and the creditor did not receive any notice of the bankruptcy proceeding. The creditor obtained a state court judgment against the debtor and objected to the debtor’s late attempt to amend the schedules to list this debt after the discharge. The creditor claimed that the debt owed by the debtor was a nondischargeable debt based on 11 U.S.C. § 523(a)(4) and the creditor was not able to bring an adversary proceeding to determine the dischargeability of the debt. The creditor asserted that he would be prejudiced if the bankruptcy case was reopened in order to avoid the creditor’s judicial lien, and the court agreed. The court noted that the creditor had lost the right to participate in the chapter 7 case. The creditor had also lost the right to challenge the debtor’s claim of exemption of personal properties, which the creditor claimed exceeded the value of what could be claimed under applicable law. Reopening the case for the debtor’s benefit was not appropriate. In re Hunter, 2002 Bankr. LEXIS 1044, 283 B.R. 353 (Bankr. M.D. Fla. August 5, 2002) (Paskay, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 3:350.01 [back to top]

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    Creditor sanctioned for filing lawsuit against trustee during pendency of bankruptcy in violation of stay. Bankr. M.D. Fla. PROCEDURAL POSTURE: The court awarded a final judgment against defendant corporation, and in favor of the chapter 7 trustee. A writ of garnishment was issued. Although a motion to dissolve the writ was pending before the bankruptcy court, the corporation filed an ex parte emergency complaint for declaratory action to quash the writ of garnishment in a district court in Illinois. That complaint was granted. The trustee then filed an emergency motion for contempt. OVERVIEW: The corporation did not obtain leave from the bankruptcy court to institute a lawsuit against the trustee. The corporation argued that since the Illinois district court required the corporation to post a surety bond, the funds were not in "jeopardy" and therefore, it was inappropriate to punish the corporation. The bankruptcy court found that it was impermissible to sue the trustee without leave of the bankruptcy court. The bankruptcy court was equally satisfied that the funds at issue were property of the bankruptcy estate. The filing of the lawsuit in Illinois was a clear attempt to exercise control over property of the estate, which was protected by the automatic stay. The Illinois action was a willful and knowing violation of the automatic stay, especially in light of the fact that the trustee put the corporation on notice that if the hearing went forward, contempt proceedings would be instituted by the trustee. The bankruptcy court was also constrained to reject the proposition that the estate was not going to suffer any harm if the corporation posted a surety bond. That proposition was a total non sequitur and was of no consequence concerning the issue of contempt. Harpley v. Five Star Tickets, Inc. (In re Premiere Sports Tours), 2002 Bankr. LEXIS 1063, 283 B.R. 598 (Bankr. M.D. Fla. July 24, 2002) (Paskay, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 3:362.03[5] [back to top]

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    Conversion from chapter 7 to chapter 13 denied where debtor’s intent appeared to be preservation of lawsuit proceeds for benefit of debtor’s attorneys. Bankr. M.D. Fla. PROCEDURAL POSTURE: The debtor sought to convert his chapter 7 case to a chapter 13 case. The trustee filed an objection. OVERVIEW: The debtor had received his general discharge before he filed the motion to convert. The court determined that what was lurking behind the entire motion to convert was to save the anticipated proceeds of a lawsuit filed by the debtor. The trustee compromised the claim, and the compromise had already been approved by the court and was thus the binding and controlling law of the case. Moreover, the trustee had already successfully reduced the unsecured claims filed in the bankruptcy case. Any hope by the debtor that upon conversion, notwithstanding the approved settlement, the debtor’s attorney would have been permitted to reap a substantially larger recovery than the amount compromised by the trustee, was nonexistent. The debtor’s motivation for seeking conversion was obviously related solely to the claim of his attorneys in the compromised litigation. The court found that the benefits of conversion would not have been to the unsecured creditors but to the attorneys representing the debtor in the compromised litigation, and perhaps to the debtor. This was clearly not what a chapter 13 case was designed for. In re Gallagher, 2002 Bankr. LEXIS 1047, 283 B.R. 604 (Bankr. M.D. Fla. August 19, 2002) (Paskay, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 6:706.01 [back to top]

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