Collier Bankruptcy Case Update January-20-03
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)
§ 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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion
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]
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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
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ABI Members, click here to get the full opinion.
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
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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
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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
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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
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