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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 27, 2003

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

 

1st Cir.

§ 506(b) Interest, reasonable fees and costs pursuant to debtor’s agreement with creditor may be added to a secured claim to the extent the security exceeds the claim.
In re Center (Bankr. D.N.H.)

§ 522(f) Order avoiding judgment liens voided on creditor’s post discharge motion due to failure of service.
Maloni v. Fairway Wholesale Corp. (In re Maloni) (B.A.P. 1st Cir.)

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2d Cir.

§ 547(b) Trustee’s preferential transfer claim did not put creditor on notice that the same transfer might be claimed to be fraudulent.
Coan v. Meryl Diamond, Ltd. (In re Gantos, Inc.) (Bankr. D. Conn.)

§ 1322(c)(1) Debtor allowed to cure mortgage default through chapter 13 plan despite loss of equity of redemption.
In re Pellegrino (Bankr. D. Conn.)

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3rd Cir.

§ 523(a)(4) Debt owed by contractor to subcontractor was nondischargeable due to fiduciary duty created by state construction trust fund statute.
Richard F. Kline, Inc. v. McCormick (In re McCormick) (Bankr. W.D. Pa.)

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5th Cir.

§ 105 Order for assumption of lease, of which financing lender had notice, did not require property lessor to give lender further notice of default by debtor lessee.
In re Woody Enters., Inc. (Bankr. E.D. Tex.)

§ 330 Appointment of special counsel to trustee approved as of date of filing proper application.
In re Rivera (Bankr. E.D. Tex.)

§ 502(b) Employees’ claims for postpetition attorneys’ fees and adjusted severance and bonus pay denied as amounts were fixed on the filing date.
Pride Cos., LP v. Johnson (In re Pride Cos., LP) (Bankr. N.D. Tex.)

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6th Cir.

§ 109 A business trust is an eligible debtor under the bankruptcy code.
Brady-Morris v. Schilling (In re Knight Trust) (6th Cir.)

§ 362(a) Employees’ discrimination claim against nondebtor managers with potential indemnification claim against debtor barred as an attempt to avoid stay.
Republic Techs. Int’l, LLC v. Maley (In re Republic Techs. Int’l, LLC) (Bankr. N.D. Ohio)

§ 524(a)(2) Debtor’s ex-wife and attorney violated discharge injunction by pursuing modification of divorce judgment as to joint debt for which debtor’s obligation was discharged.
In re Tostige (Bankr. E.D. Mich.)

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7th Cir.

§ 328(a) There is no flat prohibition of indemnification clauses in retention agreements between the estate and professional advisors.
Bodenstein v. KPMG Corp. Fin. LLC (In re Dec Int’l, Inc.) (W.D. Wis.)

§ 362(d)(1) Relief from stay granted to city tax creditor in debtor’s tenth bankruptcy filing in nineteen years which was filed in bad faith.
In re Foster (Bankr. E.D. Wis.)

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8th Cir.

§ 328(a) Financial advisor firm’s letter of engagement containing exculpation and indemnity clauses was unreasonable given potential cost to estate.
Unsecured Creditors’ Comm. v. Pelofsky (In re Thermadyne Holdings Corp.) (B.A.P. 8th Cir.)

§ 362 Bankruptcy court properly denied relief from stay to creditor who sought to pursue claim in state court with same subject matter as existing adversary proceeding.
Wintroub v. Wintroub (In re Wintroub) (B.A.P. 8th Cir.)

§ 1103 Bankruptcy court properly denied approval of financial advisor due to unreasonable exculpation and indemnity clauses in engagement letter.
Unsecured Creditors’ Comm. v. Pelofsky (In re Thermadyne Holdings Corp.) (B.A.P. 8th Cir.)

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9th Cir.

§ 105(a) Creditors allowed to file complaint against debtors post-discharge where the bankruptcy court mailed notices with conflicting bar dates.
In re Sutton (Bankr. D. Nev.)

§ 1322(b) Local rule requiring debtors to cure certain mortgage defaults within fifteen days of filing impermissibly conflicted with liberal cure provisions of bankruptcy code.
Steinacher v. Rojas (In re Steinacher) (B.A.P. 9th Cir.)

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11th Cir.

§ 523(a)(8) Bankruptcy court erred in discharging student loans where debtor had not met burden of showing future inability to repay.
Educational Credit Mgmt. Corp. v. Carter (M.D. Ga.)

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Collier Bankruptcy Case Summaries

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2d Cir.

Trustee’s preferential transfer claim did not put creditor on notice that the same transfer might be claimed to be fraudulent. Bankr. D. Conn. PROCEDURAL POSTURE: The trustee sought to recover a preferential transfer under 11 U.S.C. § 547(b) from a creditor. In an amended complaint, the trustee asserted a second claim, alleging that the same transaction was a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B). The creditor moved to dismiss the second claim, arguing it was time barred by the statute of limitations under 11 U.S.C. § 546(a)(1) and did not relate back under Fed. R. Civ. P. 15(c)(2). OVERVIEW: Noting that the pertinent inquiry under Fed. R. Civ. P. 15(c)(2), Fed. R. Bankr. P. 7015, was whether the original complaint gave the defendant fair notice of the newly alleged claims, the court found that the original complaint did not give such sufficient notice. Even if the result was the same, that is, the avoidance of a transfer, the amendment could not relate back if different facts were essential to reach that conclusion. While both the original and amended pleadings identified the same parties, date, and amount of the transfer, there was no allegation in the original complaint that claimed that the creditor received a preferential transfer under 11 U.S.C. § 547(b) that would put the creditor on notice of the amended claim that the creditor received a fraudulent transfer that was for less than reasonably equivalent value. The statutory basis and available defenses were different. The second claim, under 11 U.S.C. § 548(a)(1)(B), filed more than two years after the entry of the order for relief, did not relate back and was time barred under 11 U.S.C. § 546(a)(1). Coan v. Meryl Diamond, Ltd. (In re Gantos, Inc.), 2002 Bankr. LEXIS 1104, 283 B.R. 649 (Bankr. D. Conn. October 1, 2002) (Shiff, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03 [back to top]

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Debtor allowed to cure mortgage default through chapter 13 plan despite loss of equity of redemption. Bankr. D. Conn. PROCEDURAL POSTURE: In bankruptcy proceedings, creditor mortgage company objected to debtor’s chapter 13 plan. OVERVIEW: Debtor’s plan proposed to cure a payment default under a mortgage held by the company on his residence. Prior to debtor’s filing of bankruptcy, the company had obtained a foreclosure judgment against debtor in state court. The company objected to the proposed cure of the mortgage default, claiming that debtor’s equity of redemption expired during the pendency of the bankruptcy case, and that debtor no longer held an ownership interest in the residence. The court held that a chapter 13 debtor may argue in good faith that, despite an apparent loss of his equity of redemption through the interplay of state law and 11 U.S.C. § 108(b), he may have revived that interest by confirming a chapter 13 plan which utilized 11 U.S.C. § 1322(c)(1) to cure the mortgage default. Indeed, the substance of section 1322(c)(1) extended to chapter 13 debtors an ample, uniform federal window for curing a mortgage default, even if that time extended beyond the period provided by state law and 11 U.S.C. § 108(b). Finally, since the company had not acquired unified, or absolute title, 11 U.S.C. § 1322(c)(1) afforded debtor an indefinite period of time to the plan which cured the mortgage default. In re Pellegrino, 2002 Bankr. LEXIS 1097, 284 B.R. 326 (Bankr. D. Conn. August 19, 2002) (Dabrowski, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.15 [back to top]

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3rd Cir.

Debt owed by contractor to subcontractor was nondischargeable due to fiduciary duty created by state construction trust fund statute. Bankr. W.D. Pa. PROCEDURAL POSTURE: The debtor filed for chapter 7 bankruptcy. The creditor filed a complaint to determine the nondischargeability of a debt and an objection to discharge under 11 U.S.C. § 523, citing the Maryland Construction Trust Fund Statute ("Trust Fund Statute"), Md. Code Ann., Real Prop. § 9-201 et seq. The debtor moved to dismiss the complaint on the grounds that it failed to state a claim upon which relief could have been granted and that it was untimely. OVERVIEW: The creditor filed his complaint by facsimile the first working day after the deadline, which fell on a weekend. The court found that the filing was timely, since it was actually delivered to the clerk on that day. The creditor claimed that the debtor was the principal officer, managing agent, or director of a company that used the creditor as a subcontractor on construction projects. The creditor alleged that the debtor, as a principal of that company, was required to hold monies received for the creditor’s work in trust under the Trust Fund Statute for the purpose of paying the creditor and that the debtor knowingly and intentionally retained the funds or diverted them for other construction projects. The creditor alleged that the money it was owed was a nondischargeable obligation under 11 U.S.C. § 523(a)(4). The court found that the Trust Fund Statute was sufficient to create a fiduciary duty under section 523(a)(4). By alleging that the debtor breached his fiduciary duty by failing to maintain in trust payments due to the creditor and/or diverting such funds to other construction projects, the creditor had alleged a viable claim for defalcation under section 523(a)(4). Richard F. Kline, Inc. v. McCormick (In re McCormick), 2002 Bankr. LEXIS 1059, — B.R. — (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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5th Cir

Order for assumption of lease, of which financing lender had notice, did not require property lessor to give lender further notice of default by debtor lessee. Bankr. E.D. Tex. PROCEDURAL POSTURE: Debtor filed a voluntary petition for chapter 11 bankruptcy relief and promptly followed it with a motion to assume a lease agreement. At a hearing on the motion, debtor and the lessor presented to the court an agreed order, which the court signed. Pursuant to a motion of the United States trustee, the case was dismissed. However, the case was not closed. Movant, a guarantor, sought clarification of the agreed order under 11 U.S.C. § 105. OVERVIEW: Before filing for bankruptcy, debtor leased property for a marina. The lender loaned debtor money for a marina on the leased property. As security for the loan, the lessor agreed to provide to the lender, at least 30 days before any termination of the lease, notice of and an opportunity to cure any default by debtor. The lender was not made a party to the assumption agreement presented to the bankruptcy court, but counsel for the lender was included in the service of notice of the motion hearing and was afforded an opportunity to object. The agreed order stated, in part, that in the event of a breach, the lessor "shall have the right to provide" debtor, the lender, and the United States trustee with written notice of the breach and, 10 days thereafter, to cure such breach. The lender sought clarification of the order pursuant to 11 U.S.C. § 105. Contrary to the lender’s argument, the agreed order gave the lessor the right, but did not impose a duty, to give the lender notice of a default. The order did not nullify the notice the lessor gave to the lender before entry of the agreed order and did not restart the clock requiring the lessor to provide the lender with renewed notice of debtor’s default. In re Woody Enters., Inc., 2002 Bankr. LEXIS 976, — B.R. — (Bankr. E.D. Tex. September 6, 2002) (Sharp, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.01 [back to top]

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Appointment of special counsel to trustee approved as of date of filing proper application. Bankr. E.D. Tex. PROCEDURAL POSTURE: Debtor’s personal injury counsel filed an application for employment as special counsel for trustee nunc pro tunc. Counsel had represented the debtor in a personal injury action that was listed as an asset of the debtor’s estate. OVERVIEW: Some eight months after the debtor sought bankruptcy relief, the attorney filed his first application for employment as the debtor’s personal injury counsel. The first application was dismissed because it did not contain a certificate of service. Thereafter, counsel filed a second application, with proper service, which was originally approved and subsequently denied and the matter stayed upon a motion for reconsideration from the trustee. Counsel then filed the current nunc pro tunc application. The court denied the request for nunc pro tunc relief, but otherwise approved counsel’s employment from the date of the filing of the nunc pro tunc motion. The court determined that equity did not warrant nunc pro tunc relief when counsel was dilatory in seeking appointment as counsel in a timely manner. The court rejected counsel’s contingency fee contract and held that counsel was free to file a fee application detailing service rendered after the date certain. The court would not consider the requested referral fee to a second lawyer unless that lawyer filed an application for employment and fee application. In re Rivera, 2002 Bankr. LEXIS 975, — B.R. — (Bankr. E.D. Tex. August 21, 2002) (Sharp, B.J.).

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

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Employees’ claims for postpetition attorneys’ fees and adjusted severance and bonus pay denied as amounts were fixed on the filing date. Bankr. N.D. Tex. PROCEDURAL POSTURE: Five creditors, former employees, moved for reconsideration, under Fed. R. Bankr. P. 3008, 9023, of the court’s resolution of the debtor’s objection to their claims for bonuses and severance payments. The employees sought reconsideration of the denial of any attorneys’ fees under Tex. Civ. Prac. & Rem. Code Ann. § 37.001 (Vernon 2002), the denial of severance payments for two employees, and the court’s rationale as to the amounts of the bonuses. OVERVIEW: The motion was filed within 10 days of the order, thus, Fed. R. Bankr. P. 9023 and Fed. R. Civ. P. 59 applied. The Texas statute provided no substantive right recognizable in federal court. The proofs of claim were sufficient presentment under Tex. Civ. Prac. & Rem. Code Ann. § 38.002 (Vernon 2002), but the attorneys’ fees were incurred postpetition and had not accrued when the claims were filed. Under 11 U.S.C. § 502(b), the amount of a claim was determined as of the bankruptcy filing date. Postpetition fees could not be included. Agreeing with the majority, the court held the postpetition fees were not allowed. While one employee’s proof of claim asked for severance pay, and while the other may have orally amended his claim in court to include severance, the issue was first presented in the reconsideration motion. The three other employees signed waivers and releases as a condition to receiving severance. One of the two employees had left voluntarily and signed no release; the other received the severance he contracted for. The employment contracts did not entitle each to the same severance. The motion as to amounts of the bonuses merely rehashed the original arguments. Pride Cos., LP v. Johnson (In re Pride Cos., LP), 2002 Bankr. LEXIS 1090, 285 B.R. 366 (Bankr. N.D. Tex. September 27, 2002) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03 [back to top]

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A business trust is an eligible debtor under the bankruptcy code. 6th Cir. PROCEDURAL POSTURE: Plaintiff daughters sought review of a decision of the district court, which affirmed a decision of the bankruptcy court declaring that the debtor trust was a business trust that was entitled to bankruptcy protection pursuant to 11 U.S.C. § 101(9)(A)(v). OVERVIEW: The daughters were beneficiaries of the debtor trust and challenged its categorization as a business trust for purposes of filing for bankruptcy protection under 11 U.S.C. § 101(9)(A)(v). The daughters contended that the trust, which owned a house and a holding company that owned four subsidiary corporations, was a family trust that was not eligible for bankruptcy protection. The case was originally heard and eventually appealed to the court, which remanded it to the bankruptcy court for further factual findings, and was appealed again to the court after the bankruptcy court determined, and the district court affirmed, that the trust was a business trust. Affirming, the court held that the bankruptcy court applied the proper standard when it evaluated the primary purpose of the trust, without regard to whether the trust maintained transferable certificates of ownership. The bankruptcy court also properly determined that the primary purpose of the trust was to transact business for the benefit of its creator. The court rejected the daughters’ argument that state law controlled, finding the determination to be procedural rather than substantive, so that federal law applied. Brady-Morris v. Schilling (In re Knight Trust), 2002 U.S. App. LEXIS 18759, 303 F.3d 671 (6th Cir. September 13, 2002) (Batchelder, C.J.).

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

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Employees’ discrimination claim against nondebtor managers with potential indemnification claim against debtor barred as an attempt to avoid stay. Bankr. N.D. Ohio PROCEDURAL POSTURE: The debtor filed a declaratory judgment complaint, asserting the automatic stay of 11 U.S.C. § 362(a)(1) stayed a pending state court action brought by two creditors, a former employee and his wife, against two nondebtor former managers of the debtor, alleging age discrimination under Ohio Rev. Code Ann. ch. 4112. The debtor argued the managers could be entitled to indemnification by the debtor and the action was an "end run" around the stay. OVERVIEW: The original state court action was also filed against the debtor, and stated that the debtor had filed chapter 11. The filing of the complaint was a willful violation of the stay. The managers were no longer employed by the debtor, thus, interfering with their contribution to the reorganization process was not a factor. The employee testified that he did not know who decided to terminate him or why he was terminated. No replacement was hired. Under Ohio Rev. Code Ann. ch. 4112, some discriminatory conduct had to be undertaken by the supervisor. An indirect discrimination case against supervisors was not allowed. There was no evidence of discriminatory conduct by the manager or by the debtor. The managers held an indemnification claim under Ohio Rev. Code Ann. § 1701.13(E). The creditors had sought an "end run" around the stay. Under 11 U.S.C. § 105 it was appropriate to extend the stay. Many employees had lost their jobs. The creditors had little chance of succeeding in the action. The timing and efficacy of downsizing by debtors could be diluted if managers had to fear the prospect of being a sole defendant in an indirect discrimination case. Republic Techs. Int’l, LLC v. Maley (In re Republic Techs. Int’l, LLC), 2002 Bankr. LEXIS 1095, 283 B.R. 483 (Bankr. N.D. Ohio September 20, 2002) (Shea-Stonum, B.J.).

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

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Debtor’s ex-wife and attorney violated discharge injunction by pursuing modification of divorce judgment as to joint debt for which debtor’s obligation was discharged. Bankr. E.D. Mich. PROCEDURAL POSTURE: Debtor moved for sanctions against respondents, his ex-wife and her attorney, for allegedly violating the discharge injunction. The ex-wife and attorney filed an objection. The court conducted a hearing and took the matter under advisement. OVERVIEW: In debtor’s chapter 7 bankruptcy, a property settlement he owed to his ex-wife was discharged, as was a debt he owed to a bank for a boat. The ex-wife was jointly liable for the boat debt and, thus, she had to make payments on the debt after the debtor ceased doing so. The ex-wife then filed a motion in state court to set aside the property settlement provisions in the final judgment in the parties’ divorce proceedings. Debtor then initiated the instant proceeding, arguing that the ex-wife and her attorney violated the discharge injunction, 11 U.S.C. § 524(a)(2), by seeking to modify the divorce judgment. The ex-wife argued that she had not violated the discharge injunction because she was seeking reimbursement for payments she made after debtor’s bankruptcy petition was filed. The court disagreed. Debtor’s debt to the bank was discharged by his bankruptcy proceeding. He therefore was no longer obligated to make those payments. The fact that the ex-wife remained liable as a codebtor did not entitle her to seek reimbursement from debtor for payments she had made postpetition. In re Tostige, 2002 Bankr. LEXIS 1100, 283 B.R. 462 (Bankr. E.D. Mich. October 1, 2002) (Rhodes, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2] [back to top]

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7th Cir.

There is no flat prohibition of indemnification clauses in retention agreements between the estate and professional advisors. W.D. Wis. PROCEDURAL POSTURE: Appellant, the United States trustee, sought review of an order entered by the bankruptcy court, allowing the debtor to retain defendant finance company as its investment adviser to assist in the disposition of certain assets of the debtor and its subsidiaries. OVERVIEW: The trustee did not object to the retention of the finance company in and of itself, but objected to the fact that the retention agreement included a provision requiring the debtor to reimburse the finance company for any damages for which it might become liable arising out of its role as the debtor’s investment adviser. The trustee’s appeal was limited to the contention that indemnification provisions for professional advisers could never constitute reasonable terms and conditions of employment under 11 U.S.C. § 328(a). The court concluded that the trustee failed to show the necessity for a flat prohibition on indemnification provisions for professional advisers. Although such provisions had to be scrutinized with care, the court could not say that indemnification provisions were unreasonable in all situations. They might be either reasonable or unreasonable under 11 U.S.C. § 328, depending on the circumstances of the particular retention agreement, the specific terms of the agreement, the complexity of the work involved, and the nature of the particular bankruptcy proceeding. Therefore, the court refused to reverse the bankruptcy court’s ruling. Bodenstein v. KPMG Corp. Fin. LLC (In re Dec Int’l, Inc.), 2002 U.S. Dist. LEXIS 17064, 282 B.R. 423 (W.D. Wis. August 5, 2002) (Crabb, D.J.).

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

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Relief from stay granted to city tax creditor in debtor’s tenth bankruptcy filing in nineteen years which was filed in bad faith. Bankr. E.D. Wis. PROCEDURAL POSTURE: In the debtor’s 10th bankruptcy case, the debtor filed a motion under Fed. R. Civ. P. 60(b) for a new evidentiary hearing to reconsider the court’s order granting relief from the automatic stay under 11 U.S.C. § 362(d)(1) to a tax creditor, a city, in connection with property. The debtor claimed that material misrepresentations were made at the evidentiary hearing by a city assessor and an assistant city attorney. OVERVIEW: The debtor claimed that the city attorney’s statements that the debtor’s repeated bankruptcy filings frustrated the city’s efforts to obtain the property for many years were false. But, the city had, in at least one previous case, moved for relief from the stay. Any false statements, if made, were immaterial, had no bearing on the court’s order, and did not justify relief under Fed. R. Civ. P. 60(b). What was compelling was the debtor’s past pattern of repeated bankruptcies, broken promises to make payments on past due real estate taxes, and the increasing arrearage of the taxes. In the debtor’s first bankruptcy case in 1983, the taxes owed were $10,211. That sum had escalated to more than $115,000. The court had found that the case was filed in bad faith and that there was cause for relief from the stay under 11 U.S.C. § 362(d)(1). It was a fact situation of abuse due to the debtor’s appalling record of ten bankruptcy case filings over a 19-year period and the history of increasing unpaid taxes. To deny the city relief on its motion under the circumstances would be an abuse of the bankruptcy system. The court was not persuaded that any misrepresentations were made. In re Foster, 2002 Bankr. LEXIS 1094, 283 B.R. 917 (Bankr. E.D. Wis. September 4, 2002) (Shapiro, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3] [back to top]

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8th Cir.

Financial advisor firm’s letter of engagement containing exculpation and indemnity clauses was unreasonable given potential cost to estate. B.A.P. 8th Cir. PROCEDURAL POSTURE: A creditors’ committee and a financial advisor firm appealed an order of the bankruptcy court that denied approval of the indemnification and exculpation provisions in the firm’s letter of engagement under 11 U.S.C. § 1103(a), and appealed the denial of reconsideration under Fed. R. Civ. P. 60(b)(6). The United States trustee argued the provisions were unreasonable under 11 U.S.C. § 328(a). OVERVIEW: The bankruptcy court had not applied a per se rule that the provisions were unreasonable; it had considered market conditions, current economic conditions, and the potential economic costs to the estate under section 328(a). Under 11 U.S.C. § 1103(a), the bankruptcy court found that having the estate bear the risk of exculpation was unreasonable, and the impact and financial risk to the estate were not finite and certain. It correctly considered prevailing employment terms outside the bankruptcy context, one of many factors in the analysis. It correctly found that if economic conditions would spur dissatisfied parties to litigation, there was even greater cause to protect the estate from that risk. It was prudent that that risk be borne by the firm. Assuming higher fees would be charged without the indemnity provisions, such a result would have a finite and certain impact on the value of the estate, which was better than the potentially unlimited impact to be faced if the provisions were approved. The committee sought to hire the firm for its own use yet require the debtor to indemnify the firm. No exceptional circumstances justified relief under Fed. R. Civ. P. 60(b). Unsecured Creditors’ Comm. v. Pelofsky (In re Thermadyne Holdings Corp.), 2002 Bankr. LEXIS 1085, 283 B.R. 749 (B.A.P. 8th Cir. October 3, 2002) (Kressel, C.B.J.).

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

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Bankruptcy court properly denied relief from stay to creditor who sought to pursue claim in state court with same subject matter as existing adversary proceeding. B.A.P. 8th Cir. PROCEDURAL POSTURE: A creditor, a former client of the chapter 11 debtor attorney, appealed an order of the bankruptcy court that denied the creditor’s request for relief from the automatic stay of 11 U.S.C. § 362 to pursue a claim for reimbursement against the Client’s Security Trust Fund of the Bar of Iowa under Iowa Client Sec. & Atty. Disc. Comm. R. 39.9(3) (2002). OVERVIEW: The bankruptcy court had concluded that, because the dischargeability of the indebtedness was the subject of the creditor’s separate adversary action under 11 U.S.C. § 523(a)(4), it was improvident to let the creditor proceed in a foreign forum. The bankruptcy court concluded that the burden to the debtor and the chapter 11 estate if the creditor was allowed to proceed in another forum, when the same claims would nevertheless be tried before the bankruptcy court regardless of the outcome of the state proceeding, outweighed the harm to the creditor caused by a denial of the motion. The appellate panel found the bankruptcy court properly weighed the relevant factors and concluded that the distraction of defending the client trust fund proceeding would adversely impact the debtor’s chapter 11 efforts to reorganize. There was no abuse of discretion. The panel had been informed that the case had been converted to a chapter 7. If conversion had occurred, the panel saw no reason why a new motion for relief under 11 U.S.C. § 362 would not be granted, since the distraction from the debtor’s efforts to reorganize was no longer relevant. The creditor was invited to file a new motion. Wintroub v. Wintroub (In re Wintroub), 2002 Bankr. LEXIS 1088, 283 B.R. 743 (B.A.P. 8th Cir. October 4, 2002) (Schermer, B.J.).

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

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Bankruptcy court properly denied approval of financial advisor due to unreasonable exculpation and indemnity clauses in engagement letter. B.A.P. 8th Cir. PROCEDURAL POSTURE: A creditors’ committee and a financial advisor firm appealed an order of the bankruptcy court that denied approval of the indemnification and exculpation provisions in the firm’s letter of engagement under 11 U.S.C. § 1103(a), and appealed the denial of reconsideration under Fed. R. Civ. P. 60(b)(6). The United States trustee argued the provisions were unreasonable under 11 U.S.C. § 328(a). OVERVIEW: The bankruptcy court had not applied a per se rule that the provisions were unreasonable; it had considered market conditions, current economic conditions, and the potential economic costs to the estate under section 328(a). Under 11 U.S.C. § 1103(a), the bankruptcy court found that having the estate bear the risk of exculpation was unreasonable, and the impact and financial risk to the estate were not finite and certain. It correctly considered prevailing employment terms outside the bankruptcy context, one of many factors in the analysis. It correctly found that if economic conditions would spur dissatisfied parties to litigation, there was even greater cause to protect the estate from that risk. It was prudent that that risk be borne by the firm. Assuming higher fees would be charged without the indemnity provisions, such a result would have a finite and certain impact on the value of the estate, which was better than the potentially unlimited impact to be faced if the provisions were approved. The committee sought to hire the firm for its own use yet require the debtor to indemnify the firm. No exceptional circumstances justified relief under Fed. R. Civ. P. 60(b). Unsecured Creditors’ Comm. v. Pelofsky (In re Thermadyne Holdings Corp.), 2002 Bankr. LEXIS 1085, 283 B.R. 749 (B.A.P. 8th Cir. October 3, 2002) (Kressel, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1103.01 [back to top]

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9th Cir.

Creditors allowed to file complaint against debtors post-discharge where the bankruptcy court mailed notices with conflicting bar dates. Bankr. D. Nev. PROCEDURAL POSTURE: Two creditors attempted to file a complaint against the debtors under 11 U.S.C. §§ 523(a)(6) and 727(a)(2), but were told the case had been closed and a discharge had entered. The creditors moved for leave to file the complaint under Fed. R. Bankr. P. 9006(b)(3), arguing a second notice with a shorter time limit to file such actions was not received. The creditors asked for the date to be extended to the time stated in the original notice. OVERVIEW: Noting that the time limits of Fed. R. Bankr. P. 4004(a), 4007(c), were strict, the court held there was an exception where a party had relied on a bankruptcy court’s incorrect notice of a deadline. If a court had made a mistake upon which a party relied to its detriment, the court could use its equitable power under 11 U.S.C. § 105(a) to correct its mistake. The creditors had received a bar date in the original notice upon which they were justified in relying. After receiving the original notice from the clerk’s office through a mailing service, the creditors had attempted a timely filing of their complaint within that deadline. The debtors argued that 30 days’ advance knowledge of an impending bar date was necessary before a complaint would be dismissed as untimely, and that the creditors had more than the 30 days deemed sufficient under one case. But that case did not hold or suggest that a 30-day notice could cure conflicting bar date notices. The court, sua sponte, ordered that the case be reopened to decide the issue and for the filing of the complaint. In re Sutton, 2002 Bankr. LEXIS 1084, 283 B.R. 592 (Bankr. D. Nev. August 22, 2002) (Riegle, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.05 [back to top]

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Local rule requiring debtors to cure certain mortgage defaults within fifteen days of filing impermissibly conflicted with liberal cure provisions of bankruptcy code. B.A.P. 9th Cir. PROCEDURAL POSTURE: The debtors appealed the dismissal of their chapter 13 case from the bankruptcy court for failure to comply with Local Bankruptcy Rule 3015-1(m)(2) by not tendering unpaid prepetition mortgage payments that had become due in the two months prior to their chapter 13. The debtors argued that the rule impermissibly conflicted with the cure provisions of 11 U.S.C. § 1322(b). OVERVIEW: 28 U.S.C. § 2075 meant that any conflict between the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure had to be settled in favor of the Code. Under Fed. R. Bankr. P. 9029, a local rule could not enlarge, abridge, or modify any substantive right. 11 U.S.C. § 1322(b)(3) stated that a chapter 13 plan could provide for the curing or waiving of any default. And, 11 U.S.C. § 1322(b)(5) provided that, notwithstanding 11 U.S.C. § 1322(b)(2), the debtors could propose to cure any default within a reasonable time. Local Bankruptcy Rule 3015-1(m)(2) of the United States Bankruptcy Court for the Central District of California limited the chapter 13 debtors’ rights to cure prepetition defaults through their plans within a reasonable time. It impermissibly forced all debtors who had cases pending in the six months prior to the petition date to cure specified prepetition defaults within 15 days of their chapter 13, rather than within the "reasonable time" provided by 11 U.S.C. § 1322. Under the rule, the debtors would lose the ability to extend payment of those arrearages through the plan. Consequently, Local Bankruptcy Rule 3015-1(m)(2) abridged substantive rights regarding cure provided to all debtors under 11 U.S.C. § 1322(b) and was invalid. Steinacher v. Rojas (In re Steinacher), 2002 Bankr. LEXIS 1049, 283 B.R. 768 (B.A.P. 9th Cir. September 13, 2002) (Montali, B.J.).

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

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11th Cir.

Bankruptcy court erred in discharging student loans where debtor had not met burden of showing future inability to repay. M.D. Ga. PROCEDURAL POSTURE: Appellant creditor challenged a decision from the bankruptcy court that entered an order to discharge approximately $30,000 in student loans held by appellee debtor pursuant to 11 U.S.C. § 523(a)(8). OVERVIEW: The creditor contended that the bankruptcy court erred in discharging the debt because the debt did not imposed an "undue hardship" on the debtor and her dependents. The reviewing court noted that section 523(a)(8) stated that unless the debtor demonstrated the imposition of undue hardship, the debt was not dischargeable. In determining whether a nondischarge would impose an "undue hardship" upon the debtor, the Second Circuit set out a three-part test in Brunner. The debtor met the exception only if she showed: (1) she could not maintain a minimal standard of living for herself and her dependents if forced to repay the loans; (2) additional circumstances indicated that these conditions would persist; and (3) she had made good faith efforts to repay the loans. The court held that it could not grant a partial discharge for debts incurred from these types of loans. The court found no error in the bankruptcy court’s determination that the debtor met the first prong of the Brunner test. However, the court held that the debtor had not satisfied her burden of showing her future inability to repay her educational loans. Educational Credit Mgmt. Corp. v. Carter, 2002 U.S. Dist. LEXIS 18714, 279 B.R. 872 (M.D. Ga. May 16, 2002) (Fitzpatrick, D.J.).

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

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