Collier Bankruptcy Case Update January-28-02

Collier Bankruptcy Case Update January-28-02

 


Collier Bankruptcy Case Update

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

January 28, 2002

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

  • 2d Cir.

    § 303(i)(2) Court sua sponte awarded sanctions against creditor and his attorney for filing involuntary chapter 11 petition in bad faith.
    In re Grossinger
    (Bankr. S.D.N.Y.)

    § 303(i)(2) Court sua sponte awarded sanctions against creditors for filing sham involuntary chapter 11 petition.
    In re Stern
    (Bankr. S.D.N.Y.)

    § 364(c) Interim postpetition financing was authorized to avoid irreparable harm to estates.
    In re Enron Corp.
    (Bankr. S.D.N.Y.)

    28 U.S.C. § 157(d) Motion to withdraw reference was denied without prejudice to its renewal after bankruptcy court concluded oversight of discovery and pretrial motions.
    Mishkin v. Ageloff (In re Adler, Coleman Clearing Corp.)
    (S.D.N.Y.)


    3d Cir.

    § 541(a)(1) Insurance proceeds were not part of bankruptcy estate based on language contained in financing statement.
    In re Tower Air, Inc.
    (Bankr. D. Del.)


    4th Cir.

    § 327(a) Court of Appeals affirmed denial of nunc pro tunc approval of broker’s employment.
    Binswanger Cos. v. Merry-Go-Round Enters.
    (4th Cir.)

    § 523(a)(4) Officers of travel agency were held personally liable for conversion of funds held in trust by travel agency.
    Ellison v. Airlines Reporting Corp. (In re Ellison)
    (S.D. W. Va.)


    5th Cir.

    § 726(a)(1) Court of Appeals defined effective date on which chapter 7 distribution commenced.
    Security State Bank v. Internal Revenue Service (In re Van Gerpen)
    (5th Cir.)

    28 U.S.C. § 158(d) Issues raised on appeal from district court order that was pending at time of debtor’s bankruptcy filing were not moot.
    Supreme Beef Processors, Inc. v. United States Dep’t of Agriculture
    (5th Cir.)


    6th Cir.

    § 329(b) Bankruptcy court had authority and discretion to order disgorgement for failure to disclose fees.
    Henderson v. Kisseberth (In re Kisseberth)
    (6th Cir.)

    § 362(b)(3) Materialman’s lien was not superior to lien held by secured lender.
    Durkan Patterned Carpet, Inc. v. Premier Hotel Dev. Group (In re Premier Hotel Dev. Group)

    (Bankr. E.D. Tenn.)

    § 523(a)(15) Court determined that debtor was unable to pay only a portion of his divorce obligations.
    Woolard v. Axline (In re Woolard)
    (Bankr. S.D. Ohio)

    § 541(a)(1) Disgorged fees, originally paid by third parties, were not property of the estate.
    Henderson v. Kisseberth (In re Kisseberth)
    (6th Cir.)

    § 1325(b) Plan which paid secured creditor more than debtors’ obligation under prepetition mortgage payment was confirmed.
    In re Elrod
    (Bankr. E.D. Tenn.)


    7th Cir.

    § 547(c)(2) Creditor failed to prove payments were in the ordinary course of business.
    H.L. Hansen Lumber Co. v. G & H Custom Craft, Inc. (In re H.L. Hansen Lumber Co. of Galesburg, Inc.)
    (Bankr. C.D. Ill.)


    8th Cir.

    § 362(d) Bankruptcy court granted retroactive relief from the automatic stay in order to prevent state court judgment from being void.
    In re Harris
    (Bankr. W.D. Mo.)

    § 523(a)(6) Debts arising from state court punitive damage award and contempt order were nondischargeable.
    Siemer v. Nangle (In re Nangle)
    (8th Cir.)

    § 1325(a)(5) Secured creditor was not entitled to payment of contract interest rate through debtors’ plan.
    Household Auto. Fin. v. Gorham
    (8th Cir.)


    9th Cir.

    § 727(a)(4)(A) Debtor was denied a discharge for signing corporation’s schedules and statement of affairs in blank.
    Kavanagh v. Leija (In re Leija)
    (Bankr. E.D. Cal.)


    11th Cir.

    § 523(a)(8) Debtor’s impecunious circumstances warranted discharge of her student loan obligation.
    Ivory v. United States (In re Ivory)
    (Bankr. N.D. Ala.)

    28 U.S.C. § 157(d) District court denied motion to withdraw the reference.
    United States v. Heller Healthcare Fin., Inc. (In re Numed Healthcare, Inc.)
    (M.D. Fla.)


Collier Bankruptcy Case Summaries

2nd Cir.

Court sua sponte awarded sanctions against creditor and his attorney for filing involuntary chapter 11 petition in bad faith. Bankr. S.D.N.Y. The petitioning creditor filed an involuntary chapter 11 petition against the alleged debtor using FORM 1, which is the voluntary petition form, and altering the form in a make-shift manner to resemble an involuntary petition form. The petitioning creditor then signed the declaration section, indicating that the information contained in the petition was true and correct and that filing of the petition on behalf of the debtor was authorized. The petitioning creditor was the only creditor to sign the petition. Further, the petition was never served on the alleged debtor and no further action was taken by the petitioning creditor or his attorney. The petitioning creditor, however, did notify the alleged debtor’s mortgagee, which was then required to file a motion for relief from stay in order to pursue its action against the alleged debtor. After granting the bank’s relief from stay motion, the court sua sponte issued an order to show cause why the involuntary petition should not be dismissed, and why sanctions should not be assessed against the petitioning creditor for filing the petition in bad faith. At the show cause hearing, the court found that the petitioning creditor’s claim was based on a simple, nominal claim that could have been pursued in state court. The court also found that the requirements of 11 U.S.C. § 303 had not been satisfied, including the fact that no evidence had been presented that the debtor was not paying his debts as they became due. The court also found that the amount in dispute was significantly less than the statutory minimum required to file an involuntary petition and that the petition had been filed by only one creditor.Because the petitioning creditor had filed the involuntary bankruptcy petition solely to obtain an advantage in its dispute with the alleged debtor, the bankruptcy court found that the petition had been filed in bad faith and awarded sanctions against the creditor and his counsel. In re Grossinger, 2001 Bankr. LEXIS 1584, 268 B.R. 386 (Bankr. S.D.N.Y. October 19, 2001) (Hardin, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.15

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Court sua sponte awarded sanctions against creditors for filing sham involuntary chapter 11 petition. Bankr. S.D.N.Y. Three alleged creditors filed an involuntary chapter 11 petition against the debtor, citing unpaid claims based on a judgment and outstanding loans. The creditors took no further action to prosecute the chapter 11 case and, approximately two months later, the debtor’s mortgage-holder bank filed a motion for relief from stay. One of the creditors filed an objection to the relief from stay motion but failed to appear at the hearing. However, the other two petitioning creditors appeared and indicated that the chapter 11 had been filed for the purpose of stalling the bank’s foreclosure sale so that the petitioning creditors could purchase the debtor’s residence. As of the lift stay hearing date, there was no affidavit of service of the summons listed on the docket, and the debtor later stated that she had not been served with the petition. In light of the petitioning creditors’ dubious motive for filing the involuntary petition and their failure to serve the petition on the debtor, the court issued an order to show cause why sanctions should not be ordered for a bad faith filing. At the sanctions hearing, the court noted that the petitioning creditors had previously filed two other involuntary chapter 11 petitions, which had been dismissed with prejudice for failure to prosecute. The court also noted that, rather than filing an involuntary petition, the petitioning creditors could have appeared at the foreclosure sale and purchased the debtor’s residence. Because the petitioning creditors failed to serve a summons on the alleged debtor until after the court issued its order to show cause, and because they failed to take any action to advance the involuntary petition they had filed, the court ordered that each of the petitioning creditors be sanctioned for filing the involuntary petition in bad faith. In re Stern, 2001 Bankr. LEXIS 1585, 268 B.R. 390 (Bankr. S.D.N.Y. October 19, 2001) (Hardin, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.15

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Interim postpetition financing was authorized to avoid irreparable harm to estates. Bankr. S.D.N.Y. The chapter 11 debtors, producers and sellers of natural gas, electricity and communications to wholesale and retail customers, requested authorization to obtain interim postpetition financing. While the debtors’ precarious financial condition had curtailed their availability of credit, a steady stream of cash was essential to the maintenance of their businesses. The debtors needed substantial working capital to preserve their going concern and negotiated with a syndicate of financial institutions to provide a postpetition credit facility. The bankruptcy court approved the debtors’ motion, holding that the debtors’ urgent and immediate need for cash to continue to operate warranted the authorization of postpetition financing on an interim basis. The credit provided under the debtor in possession credit agreement enabled the debtors to continue financing their numerous operations, pay their employees and operate their businesses in an orderly and reasonable manner to preserve and enhance the value of their assets and enterprise for the benefit of all parties in interest. The court further concluded that the terms of the agreement were fair and reasonable, and were negotiated by the parties in good faith and at arm’s length. Absent entry of an order, the debtors’ estates would have been immediately and irreparably harmed.In re Enron Corp., 2001 Bankr. LEXIS 1563, – B.R. – (Bankr. S.D.N.Y. December 3, 2001) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:364.04

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Motion to withdraw reference was denied without prejudice to its renewal after bankruptcy court concluded oversight of discovery and pretrial motions. S.D.N.Y. The plaintiff moved to withdraw the reference of the adversary proceeding from the bankruptcy court, asserting that its demand for a jury trial and the need to adjudicate issues under RICO, the Securities Exchange Act and the Sherman Antitrust Act made withdrawal mandatory. The underlying bankruptcy case had been pending before the bankruptcy court for approximately six years, expert discovery was still in progress and dispositive pretrial motions remained to be decided. The district court denied the motion without prejudice, holding that the plaintiff failed to assert sufficient grounds to withdraw the reference of the adversary proceeding under either the mandatory or permissive provisions of 28 U.S.C. § 157(d). The court noted that the proceeding was still in the early stages and, considering judicial economy, concluded that the proper course was to allow the proceeding to mature under the supervision of the bankruptcy court until the matter was ready for trial.Mishkin v. Ageloff (In re Adler, Coleman Clearing Corp.), 2001 U.S. Dist. LEXIS 20362, 270 B.R. 562 (S.D.N.Y. December 7, 2001) (Marrero, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04

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3d Cir.

Insurance proceeds were not part of bankruptcy estate based on language contained in financing statement. Bankr. D. Del. Prior to the debtor filing for bankruptcy, the creditor was a major equipment lender for the debtor. In one of their transactions, the creditor and the debtor entered into a loan consolidation agreement in which the creditor loaned the debtor money to purchase an airplane and four jet engines. The loan documents provided for cross-collateralization of each item of security and granted the creditor a security interest in insurance proceeds. In addition, the security agreement for the transaction stated that the debtor was required to obtain approval for the use of any insurance proceeds, and the creditor retained sole discretion over any insurance moneys. Prior to the debtor’s bankruptcy, one of the engines on the airplane became damaged and the debtor repaired the engine at its expense. After the bankruptcy petition was filed, the chapter 7 trustee filed a claim with the insurance company for the cost of the engine repairs, and the matter came before the court when the trustee filed a motion to approve a compromise with the insurance company. At the hearing on the trustee’s motion, the trustee argued that since the creditor had received the repaired engine, it was not also entitled to the insurance proceeds which covered the repair costs of the engine. The court found in favor of the creditor and against the trustee, noting that based on their loan and security agreements, it was the obvious intention of the parties that the insurance proceeds were property of the creditor and must be turned over to the creditor. In re Tower Air, Inc., 2001 Bankr. LEXIS 1588, 268 B.R. 404 (Bankr. D. Del. December 12, 2001) (Newsome, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.05; .10

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4th Cir.

Court of Appeals affirmed denial of nunc pro tunc approval of broker’s employment. 4th Cir. In 1995, the creditor, a real estate broker, learned that the debtor’s chapter 11 case was likely to be converted to chapter 7 and approached the debtor in the hope of obtaining an exclusive listing for the sale of the debtor’s distribution center. The debtor did not agree, but the creditor proceeded to search for a buyer. Thereafter, the debtor’s board of directors authorized an agreement with the creditor to list the property. Before any such agreement was finalized, the board revoked its authorization, and the case was converted to chapter 7. The creditor contacted the trustee, requesting that it be employed as the broker for the property sale, and also forwarded a copy of a $15 million offer from a prospective purchaser. The trustee did not accept the offer and instead employed a different broker. Ultimately, the trustee accepted a $19 million offer from the same purchaser, and paid the appropriate commission to the appointed broker. The creditor filed a complaint in bankruptcy court, asserting it was entitled to a brokerage commission under state (Maryland) law, and moved for summary judgment. The court denied the motion, finding that (1) a genuine issue of fact existed as to whether the creditor was the procuring broker, and (2) the creditor was not licensed as a broker in the state. The trustee then moved for summary judgment, arguing that the nonlicensed status of the creditor entitled the trustee to judgment as a matter of law. The court denied that motion, concluding that the license requirement would not prevent the creditor’s recovery should the court decide to approve the creditor as the broker on a nunc pro tunc basis. After trial, the court found that the creditor was not entitled to that approval, because it was never formally employed by the trustee, and because the creditor failed to prove that the purchaser was ready, willing and able to meet the terms under which the sale was finally made. The district court affirmed. The Court of Appeals affirmed the district court’s conclusions that (1) the state licensing requirement precluded recovery under a procuring broker theory; (2) consequently, the finding that the creditor was not the procuring broker was not clearly erroneous; and (3) the denial of nunc pro tunc approval was correct because of the creditor’s failure to request appointment prior to the sale.Binswanger Cos. v. Merry-Go-Round Enters., 2001 U.S. App. LEXIS 26137, – F.3d. – (4th Cir. December 6, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 3:327.03[3]

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Officers of travel agency were held personally liable for conversion of funds held in trust by travel agency. S.D. W. Va. The chapter 7 debtors appealed an order of the bankruptcy court awarding a nondischargeable judgment in favor of the creditor. The creditor was a corporation authorized on behalf of airlines to demand payment and collect from travel agents the airlines’ portion of the revenues received by agents from their sales of tickets. The debtors were officers of a travel agency which had entered into a prepetition agreement specifying that proceeds of the ticket sales remained the property of the airlines held in trust for the carrier. The debtors were involved in the day-to-day operations and were personal guarantors of the travel agency. After the agency failed to remit funds collected from the sale of tickets, the creditor filed an adversary proceeding seeking a nondischargeable judgment. The bankruptcy court granted summary judgment to the creditor, finding that a fiduciary relationship existed between the debtors and the creditor and that because the debtors’ actions constituted defalcation, they were personally liable for the breach of fiduciary duty. The district court affirmed, holding that the bankruptcy court did not err in finding that the debtors were fiduciaries of the creditor under section 523(a)(4). The creditor proved that the debtors committed fraud or defalcation while acting in a fiduciary capacity.Ellison v. Airlines Reporting Corp. (In re Ellison), 2001 U.S. Dist. LEXIS 20211, – B.R. – (S.D. W. Va. September 20, 2001) (Faber, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10

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5th Cir.

Court of Appeals defined effective date on which chapter 7 distribution commenced. 5th Cir. In 1997, the debtor filed a chapter 7 petition. The trustee retained a law firm to provide legal services on behalf of the estate. Subsequently, the bankruptcy court approved the firm’s application for compensation, which was paid by the trustee in January 1998. The court issued a notice advising creditors that the estate might contain assets and set a bar date of June 15, 1998. In January 1999, the debtor filed two proofs of claim on behalf of the IRS. The majority of the indebtedness to the IRS was entitled to priority. Another creditor objected to the claims, arguing that they were untimely and not entitled to priority. The IRS asserted that the claims were made before the trustee had commenced distribution and, pursuant to section 726(a)(1), were entitled to priority status. The court overruled the objections, stating that the trustee had not commenced distribution, but offered no further basis for its ruling. On appeal, the district court held that distribution had not commenced because the trustee had not filed his final report when the IRS claims were filed. This second appeal followed. The creditor maintained that the trustee’s payment of administrative expenses constituted a distribution for the purposes of determining the effective date of distribution. The Court of Appeals for the Fifth Circuit affirmed, holding that the disbursement of estate funds for routine liquidation expenses did not equate with actual distribution, which only took place when the final liquidation occurred. Thus, the proper interpretation of 'commences distribution' is the date when the court approved the trustee’s final report (citing Collier on Bankruptcy 15th Ed. Revised). Security State Bank v. Internal Revenue Service (In re Van Gerpen), 2001 U.S. App. LEXIS 26013, 267 F.3d. 453 (5th Cir. October 10, 2001) (Politz, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:726.02

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Issues raised on appeal from district court order that was pending at time of debtor’s bankruptcy filing were not moot. 5th Cir. Before filing for bankruptcy protection, a beef processing corporation filed a complaint against the United States Department of Agriculture ('USDA') in federal district court. The complaint alleged that the federal Food Safety Inspection Service (a subsidiary agency of the USDA) overstepped the authority given to it by the federal Meat Inspection Act by creating tests to detect salmonella in raw meat products. On cross-motions for summary judgment, the district court granted summary judgment in favor of the beef processor and held that certain salmonella standards exceeded the USDA’s statutory authority. The district court entered a permanent injunction enjoining enforcement of the standard against the beef processor, and the USDA appealed to the Court of Appeals for the Fifth Circuit. While the appeal was pending, the beef processor filed a chapter 11 case. The USDA moved to lift the stay on its appeal and filed a suggestion of mootness. A motions panel of the Court of Appeals denied a motion for remand with instructions to dismiss as moot. Thereafter, the beef processor’s case was converted into a chapter 7 liquidation. The USDA again raised the question of mootness. The bankruptcy court held that the appeal was not moot; the possibility that the beef processor might continue to function as a meat processor even after its chapter 7 proceeding satisfied Article III.Supreme Beef Processors, Inc. v. United States Dep’t of Agriculture, 2001 U.S. App. LEXIS 26205, – F.3d – (5th Cir. December 6, 2001) (Higginbotham, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02[4]

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6th Cir.

Bankruptcy court had authority and discretion to order disgorgement for failure to disclose fees. 6th Cir. When their attorney sued them for unpaid legal fees, the chapter 7 debtors reopened their bankruptcy case. The bankruptcy court concluded that the fees were excessive and that the attorney failed to comply with the disclosure requirements of the Code and Rules. As a sanction, the bankruptcy court ordered disgorgement of $9,000 of the nearly $12,000 already collected and directed that it be paid to the chapter 7 estate. The district court affirmed but reversed the bankruptcy court’s allocation of the funds, holding that a portion of the disgorged fees, which had been paid by third parties, was to be returned to the debtors rather than to the estate. The Court of Appeals for the Sixth Circuit affirmed, holding that section 329 granted authority to the bankruptcy court to order, at its discretion, disgorgement of the fees. The court rejected the argument that the bankruptcy court had in rem jurisdiction over the funds because the funds had been paid by third parties and, thus, were not property of the estate. The court also determined that there was no denial of Fifth Amendment due process because, by submitting the fee application, the attorney placed all issues before the court. In any event, the attorney was on notice that the court intended to exercise jurisdiction over the full amount of the fees. Finally, the court determined that the bankruptcy court did not abuse its discretion in ordering disgorgement of the fees because, although the bankruptcy court failed to determine precisely the amount by which the fees were excessive, disgorgement was an appropriate sanction for the attorney’s failure to disclose the fees. Henderson v. Kisseberth (In re Kisseberth), 2001 U.S. App. LEXIS 26412, 273 F.3d 714 (6th Cir. December 12, 2001) (Leegilman, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.03[1][k], 329.04[2], 329.05[3]

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Materialman’s lien was not superior to lien held by secured lender. Bankr. E.D. Tenn. The creditor sought to enforce its materialman’s lien against the chapter 11 debtor’s real property and a determination that its lien was superior to the lien held by the debtor’s principal secured lender. The creditor supplied materials for the completion of the debtor’s hotel and recorded its lien after the debtor had executed a deed of trust in favor of the secured lender. The secured lender moved to dismiss the complaint, arguing that the creditor did not record its notice of lien within the time required under state (Tennessee) law to preserve the lien as to subsequent encumbrancers for value. The creditor argued that it could file its lien within 90 days after the building was completed and because the debtor filed bankruptcy during the 90-day period following completion of the building, its ability to preserve the lien was stayed. The bankruptcy court granted the secured lender’s motion to dismiss, holding that because the automatic stay did not preclude the filing of the notice of lien, the period for filing the notice was not tolled. Sections 362(b)(3) and 546(b), construed together, indicated that the filing of the bankruptcy did not stay the perfection of certain interests in property whereby under nonbankruptcy law, the perfection related back and was effective over intervening lien creditors if it occurred prior to the expiration of the grace period (citing Collier on Bankruptcy, 15th Ed. Revised).Durkan Patterned Carpet, Inc. v. Premier Hotel Dev. Group (In re Premier Hotel Dev. Group), 2001 Bankr. LEXIS 1576, 270 B.R. 234 (Bankr. E.D. Tenn. October 11, 2001) (Parsons, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[4]; 5:546.03

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Portion of support payments was disguised property settlement outside scope of dischargeability exception. Bankr. S.D. Ohio The chapter 7 debtor filed an adversary proceeding seeking to determine the dischargeability of monthly support payments he was obligated to make to his former wife pursuant to a separation agreement and decree of dissolution. The separation agreement denominated the payments as spousal support and was uncontested. Although the parties had originally agreed that the debtor would pay the wife’s share of his businesses in equal monthly installments, the payments were ultimately added to the amount designated as spousal support in the separation agreement. The bankruptcy court granted judgment in favor of the debtor in part, holding that although designated as spousal support, a significant portion of the award was not actually in the nature of alimony, maintenance or support and was therefore dischargeable for purposes of section 523(a)(5). To the extent that the monthly payments exceeded what the debtor’s wife had originally negotiated for support, the payments were nothing more than an effort to divide equitably what the parties believed at one time to be the value of the debtor’s businesses.Woolard v. Axline (In re Woolard), 2001 Bankr. LEXIS 1542, 269 B.R. 754 (Bankr. S.D. Ohio August 3, 2001) (Sellers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.11

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Court declined approval of reaffirmation agreements found to be against debtor’s best interests. Bankr. S.D. Ohio The chapter 7 debtor, proceeding without legal counsel, executed two reaffirmation agreements with a credit union. The first reaffirmation agreement related to a loan made to the debtor and his wife by the credit union. The debtor’s wife owned a car at the time the loan was made, and the car was pledged as security for the loan. Thereafter, the debtor and his wife separated and the wife moved out of state with the car, which the debtor no longer drove. The second reaffirmation agreement related to an unsecured debt incurred on a Visa card issued by the credit union. The debtor stated that he wanted to reaffirm the debts because he was told by the credit union that his membership would be canceled if he 'filed bankruptcy on them.' The bankruptcy court held a hearing to determine whether the reaffirmation agreements were voluntary, in the debtor’s best interests and imposed undue hardship on the debtor or his dependents. The court held that the agreements did not impose an undue hardship upon the debtor since he might be able to make the agreed-upon payments. Nevertheless, the court refused to approve the agreements because it found that they were not in the debtor’s best interests. The court noted, among other things, that the debtor was free to pay both of the obligations at issue if he freely chose to do so, and that he did not need to waive the benefit of his discharge to do that. The court also reminded the credit union that threats or coercive actions designed to force a debtor to repay a discharged debt may have serious legal consequences.In re Ezell, 2001 Bankr. LEXIS 1541, 269 B.R. 768 (Bankr. S.D. Ohio September 4, 2001) (Sellers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.04

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Plan which paid secured creditor more than debtors’ obligation under prepetition mortgage payment was confirmed. Bankr. E.D. Tenn. The chapter 13 trustee objected to confirmation of the debtors’ proposed plan. The debtors proposed to pay the holder of a second mortgage on their home an additional payment each month at an interest rate lower than the prepetition mortgage rate. The proposed plan called for 60 months of payments and provided for a 25 percent dividend on unsecured claims. The trustee contended that the extra payments should have been made toward the claims of other unsecured creditors. The bankruptcy court overruled the objection, holding that the plan satisfied the disposable income test. The court assumed that the extra monthly payment to the secured creditor was disposable income and noted that the plan payments after the first 36 months of the plan paid the shortage created by the extra payments. The court further found that the plan had been proposed in good faith.In re Elrod, 2001 Bankr. LEXIS 1573, 270 B.R. 258 (Bankr. E.D. Tenn. December 6, 2001) (Stinnett, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.08[4]

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7th Cir.

Creditor failed to prove payments were in the ordinary course of business. Bankr. C.D. Ill. The chapter 11 debtor, a manufacturer of building supplies, initiated an adversary proceeding against one its suppliers to recover a preference. Upon the supplier’s assertion that the payments were subject to the ordinary course of business exception, the bankruptcy court held that although some late payments were ordinary as between the parties, the supplier failed to demonstrate that the payments were made according to industry standards. The supplier failed to introduce testimony to define the industry or to demonstrate the credit practices in the relevant industry. With regard to the subjective element, the court rejected the creditor’s argument that the payments should be analyzed in 'batches,' as it had been the debtor’s practice to pay for a number of invoices with one check. The court instead analyzed each invoice and its related payment separately. The court determined the outer limit of late payments and concluded that those payments which were paid during the preference period more than 10 percent later than the outer limit of the established practice were not ordinary. H.L. Hansen Lumber Co. v. G & H Custom Craft, Inc. (In re H.L. Hansen Lumber Co. of Galesburg, Inc.), 2001 Bankr. LEXIS 1580, 270 B.R. 273 (Bankr. C.D. Ill. October 16, 2001) (Perkins, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2]

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8th Cir.

Bankruptcy court granted retroactive relief from the automatic stay in order to prevent state court judgment from being void. Bankr. W.D. Mo. After the creditors filed an action in the Kansas state court against the debtors, the debtors filed a chapter 13 petition in the Western District of Missouri. The creditors sought relief from the automatic stay in order to proceed with their state court action. The debtors did not oppose the creditors’ motion for relief from stay and the bankruptcy court granted the motion. For an undisclosed reason, the parties then voluntarily dismissed the state court action and the creditors refiled the case the next day. However, the newly-filed state court case omitted one of the creditor’s claims against the debtors. After the state court ruled in favor of the creditors on the refiled case, the debtors appealed. Meanwhile, the debtors moved to convert their chapter 13 case to one under chapter 7. The bankruptcy court granted the debtors’ motion to convert and entered an order discharging the debtors. Although the debtors never challenged the creditors’ right to prosecute the refiled state court case based on the existence of the automatic stay, the bankruptcy court noted that, absent annulment of the automatic stay, the state court judgment entered in the refiled case would be void. The bankruptcy court then considered whether it would be appropriate to retroactively annul the automatic stay as to the second state court case. Retroactive relief from the automatic stay requires compelling circumstances, including considerations of (1) whether the creditor had actual or constructive knowledge of the bankruptcy filing, (2) whether the debtor has acted in bad faith, (3) whether there was any equity in the property of the estate, (4) whether the property was necessary for an effective reorganization, (5) whether grounds for relief from the stay existed and whether the motion for relief would otherwise have been granted, (6) whether failure to grant retroactive relief would cause unnecessary expense to the creditor, (7) whether the creditor has detrimentally changed its position on the basis of the action taken, (8) whether the creditor took affirmative action postpetition to bring about the violation of the stay, and (9) whether the creditor promptly sought retroactive relief and approval for actions already taken. Since the bankruptcy court had previously granted relief from the automatic stay, so that the creditors could proceed with their original state court case and since the refiled state court case was filed immediately after the voluntary dismissal of the first and contained essentially the same claims, the court found that the circumstances warranted retroactively annulling the automatic stay. In re Harris, 2001 Bankr. LEXIS 1343, 268 B.R. 199 (Bankr. W.D. Mo. August 17, 2001) (Koger, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07

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Debts arising from state court punitive damage award and contempt order were nondischargeable. 8th Cir. After the commencement of the debtor’s chapter 7 case, a judgment creditor brought an adversary proceeding against the debtor seeking a determination that two judgment debts were nondischargeable. The first judgment debt at issue arose from a state (Illinois) court jury verdict against the debtor that awarded punitive damages to the creditor. The second judgment arose after the creditor registered the Illinois judgment in Missouri as a foreign judgment, and the Missouri court imposed a fine against the debtor for contempt after he failed to comply with court-ordered discovery. The creditor moved for summary judgment, and the bankruptcy court granted the motion. The debtor appealed, and the B.A.P. reversed the bankruptcy court’s determination that the debt created by the contempt order was not dischargeable. The Court of Appeals for the Eighth Circuit affirmed, in part, and reversed, in part, and held that both the debt arising out of the Illinois judgment and the one arising from the Missouri contempt order were not dischargeable under § 523(a)(6). With respect to the Illinois judgment, the court concluded that the jury’s verdict could only have been based on a conclusion that the debtor’s acts involved an actual or deliberate intention to harm the creditor; thus, he inflicted a 'willful' and 'malicious' injury upon her for the purpose of section 523(a)(6). The court also concluded that the contempt order established that the debtor’s failure to comply with a court order constituted 'willful and malicious' conduct under section 523(a)(6).Siemer v. Nangle (In re Nangle), 2001 U.S. App. LEXIS 26274, 274 F.3d. 481 (8th Cir. September 12, 2001) (Arnold, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

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Secured creditor was not entitled to payment of contract interest rate through debtors’ plan. 8th Cir. The secured creditor appealed the district court’s affirmance of the bankruptcy court’s order overruling the creditor’s objection to the debtors’ chapter 13 plan. In their plan, the debtors elected to retain an automobile financed by the creditor, pursuant to the 'cram-down' provision of section 1325(a)(5)(B). The plan proposed that the debtors would pay interest at a rate calculated based on the 30-year treasury bond rate for a specified date, plus nominal interest. The creditor contended that the appropriate rate was the substantially higher contract rate. The bankruptcy court overruled the creditor’s objection and held that the plan’s proposed rate was a reasonable means of determining the appropriate interest rate in the chapter 13 context and that the creditor’s proposed rate improperly accounted for profit and overhead. The Court of Appeals for the Eighth Circuit affirmed the district court, holding that there was no clear error in the bankruptcy court’s conclusion that the interest rate proposed in the debtor’s plan was reasonable.Household Auto. Fin. v. Gorham, 2001 U.S. App. LEXIS 26351, – F.3d – (8th Cir. December 11, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.06[3]

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9th Cir.

Debtor was denied a discharge for signing corporation’s schedules and statement of affairs in blank. Bankr. E.D. Cal. The chapter 7 trustee filed an adversary proceeding against the individual debtor, seeking the denial of his discharge pursuant to sections 727(a)(4)(A) and 727(a)(7). The debtor, as president of the debtor corporation, signed the corporation’s schedules and statement of financial affairs in blank, knowing that they would be subsequently completed by his attorney and filed in the corporation’s case. The debtor had provided the attorney with copies of the corporation’s prior bankruptcy documents to use in preparing the schedules and did not review them before they were filed. The bankruptcy court denied the debtor’s discharge, holding that the debtor’s signing of blank schedules in his corporation’s bankruptcy case constituted a knowing and fraudulent false oath under section 727(a)(4)(A). The verification clauses in the Official Forms, which the debtor signed under the penalty of perjury, (1) represented that the debtor had read the information in the documents and (2) they were true and correct to the best of his information and belief. Since the debtor verified the pleadings in blank, the court did not need to assess the truthfulness of the information in the documents or consider the debtor’s efforts to explain the disposition of the corporation’s assets. Because the corporation was an insider of the debtor, the debtor’s discharge was denied pursuant to section 727(a)(7).Kavanagh v. Leija (In re Leija), 2001 Bankr. LEXIS 1568, 270 B.R. 497 (Bankr. E.D. Cal. December 3, 2001) (Lee, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.04, .10

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10th Cir.

Debtor’s impecunious circumstances warranted discharge of her student loan obligation. Bankr. N.D. Ala. The chapter 7 debtor filed an adversary proceeding seeking to have her student loan debt declared dischargeable. The debtor, a single mother of three unhealthy children, obtained the loan while attending a vocational school which lost its accreditation and closed before she completed her course of study. Due to the debtor’s own unstable health, her employment was sporadic and her expenses were greater than her income. The bankruptcy court discharged the debt, holding that excepting the student loan debt from the debtor’s discharge would have imposed an undue hardship on the debtor and her dependents. The debtor could not maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loan. Additional circumstances existed, indicating that the debtor’s state of affairs was likely to persist for a significant portion of the repayment period of the student loan. The court further noted that there was no evidence that the debtor’s failure to make more than token repayment was the result of bad faith because she never had the ability to pay her student loan debt.Ivory v. United States (In re Ivory), 2001 Bankr. LEXIS 1566, 269 B.R. 890 (Bankr. N.D. Ala. October 29, 2001) (Cohen, B.J.).

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

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District court denied motion to withdraw the reference. M.D. Fla. The United States moved to withdraw the reference of an adversary proceeding brought against another creditor to determine the validity, priority and extent of liens that both parties held against the chapter 11 debtors. The complaint against the creditor asserted that in the event it lent money to the debtors, it could have a tax liability. The United States argued that the Internal Revenue Code and state law conversion claims against the creditor required withdrawal of the reference. The district court denied the motion, holding that neither mandatory nor permissive withdrawal was appropriate. The court noted that no substantial and material consideration of nonbankruptcy federal law was necessary, and the bankruptcy court possessed familiarity with the action. Conducting discovery in the context of the bankruptcy proceeding provided greater efficiency for the parties and the judicial system.United States v. Heller Healthcare Fin., Inc. (In re Numed Healthcare, Inc.), 2001 U.S. Dist. LEXIS 19264, – B.R. – (M.D. Fla. October 12, 2001) (Merryday, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04

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