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 7, 2002

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

• 1st Cir.

  § 524(a)(2) Allegations regarding creditor’s continued collection of discharged debt were sufficient to defeat motion to dismiss. Singleton v. Wells Fargo Bank, N.A. (In re Singleton) (Bankr. D.R.I.)

  § 541(a)(1) Pledged stock was property of the chapter 11 estate.
  In re Country Estates Nursing Home, Inc. (Bankr. D. Mass.)

  ---

  2d Cir.

  § 523(a)(4) Business partner’s fiduciary duty to creditor was imputed to debtor.
  Zois v. Cooper (S.D.N.Y.)

  § 1322(b) Fire insurance proceeds were required to be applied to principal balance on the mortgage.
  In re Denario (Bankr. N.D.N.Y.)

  ---

  3d Cir.

  § 362(b)(4) United States’ action seeking civil penalties for environmental violations was exempt from automatic stay.
  United States v. LTV Steel Co. (W.D. Pa.)

  § 506(c) Neither the debtor nor the creditors’ committee had standing to seek surcharge of collateral.
  In re Concord Mktg., Inc. (Bankr. D.N.J.)

  § 547(b)(2) Committee met its burden of proving that the debtor’s transfers were for or on account of an antecedent debt.
  Official Comm. of Unsecured Creditors of Contempri Homes, Inc. v. Seven D. Wholesale, Inc. (In re Contempri Homes, Inc.) (Bankr. M.D. Pa.)

  § 727(b) Debtors’ personal obligations to pay postpetition property assessments were discharged.
  Eno v. Indian Country Campsites Recreation and Maint. Fund (In re Eno) (Bankr. M.D. Pa.)

  Rule 8002 Under the specific facts, lack of awareness of filing deadline caused by unknowing failure of firm’s calendar system constituted excusable neglect.
  Sonders v. Mezvinsky (In re Mezvinsky) (Bankr. E.D. Pa.)

  ---

  4th Cir.

  § 523(a)(2)(A) Dischargeability of debtor’s credit card debt was affirmed.
  Citibank N.A. v. Parker (4th Cir.)

  28 U.S.C. § 1738 Bankruptcy court’s nondischargeability judgment was void because it altered a prior state court judgment.
  Heckert v. Dotson (In re Heckert) (4th Cir.)

  ---

  6th Cir.

  § 109(e) Debtor was ineligible for chapter 13 relief because claims against him exceeded allowable amount.
  In re Faulhaber (Bankr. W.D. Mich.)

  § 362(h) Bank’s motion for relief from punitive damage award was denied.
  In re Dunning (Bankr. N.D. Ohio)

  Rule 9019(a) Court of Appeals held that district court did not err in refusing to seal settlement agreement.
  Friedman v. Mitan (In re Polemar Constr. Ltd. P’ship) (6th Cir.)

  Rule 9024 Debtor’s attempts to relitigate previously-rejected arguments were properly denied by reviewing court.
  Javens v. Ruskin (In re Javens) (6th Cir.)

  ---

  7th Cir.

  § 547(b) Prepetition transfers were avoidable and trustee was allowed to recover sums.
  Krol v. The Finishing Company (In re H. King & Assoc.) (Bankr. N.D. Ill.)

  ---

  8th Cir.

  § 362(a) Automatic stay precluded district court authority over motion for temporary restraining order.
  United Steelworkers of America v. LTV Steel Mining Co. (D. Minn.)

  § 1325(a)(3) Criminal assault debt did not defeat debtor’s good faith.
  In re Gillespie (Bankr. N.D. Iowa)

  ---

  9th Cir.

  § 1325(a)(4) Forgiveness of debt was estate property.
  In re Profit (Bankr. D. Nev.)

  ---

  11th Cir.

  § 502(a) Debtor’s objection to IRS’ claim overruled.
  In re Jones (Bankr. M.D. Fla.) 011009

  ---

Collier Bankruptcy Case Summaries

1st Cir.

Allegations regarding creditor’s continued collection of discharged debt were sufficient to defeat motion to dismiss. Bankr. D.R.I. The creditor moved to dismiss the adversary proceeding brought by the chapter 7 debtor that alleged violations of the discharge injunction. After the debtor filed her petition, she signed a reaffirmation agreement on her credit card debt at the creditor’s request, but the agreement was never executed or filed by the creditor. Because the debtor made postdischarge payments to the creditor without an enforceable reaffirmation agreement, she complained that the continued collection of the prepetition debt violated section 524(a)(2). The bankruptcy court denied the motion to dismiss, holding that sufficient facts were alleged in the debtor’s complaint to support her claim that the creditor had violated the discharge injunction. To establish a prima facie violation of the discharge order, the debtor had to allege that the creditor knew a discharge order was in place and that the creditor intended the conduct that constituted a violation of the order.Singleton v. Wells Fargo Bank, N.A. (In re Singleton), 2001 Bankr. LEXIS 1467, 269 B.R. 270 (Bankr. D.R.I. November 13, 2001) (Votolato, B.J.).

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

Pledged stock was property of the chapter 11 estate. Bankr. D. Mass. An individual who was a shareholder and director of several nursing homes pledged his stock as security for various obligations. When he defaulted on the loans and the secured parties sought foreclosure of the interest in the stock, the director filed a chapter 11 petition. Soon thereafter, the secured parties purported to vote the director’s stock and removed the individual as a director. In spite of his 'removal,' approximately one month later, the director signed chapter 11 petitions on behalf of the nursing homes. The secured parties sought dismissal of the nursing homes’ chapter 11 cases on the basis that the filings were unauthorized. Specifically, the secured parties asserted that the director, having been removed, did not have the authority to place the nursing homes in chapter 11. The director defended by asserting that the secured parties’ act of voting his shares, and, therefore, his removal, was a violation of the automatic stay. The bankruptcy court held that the stocks, although pledged, were property of the individual director’s chapter 11 estate. Since the secured parties had not, prior to the filing of the chapter 11 petition, foreclosed upon the shares, the debtor had a right to redeem the shares and, thus, the shares were property of the estate. By exercising the voting rights to remove the director, the secured parties violated the automatic stay in the director’s case, rendering the vote to remove the director void. Accordingly, the director had the authority to sign the petitions and the cases would not be dismissed.In re Country Estates Nursing Home, Inc., 2001 Bankr. LEXIS 1381, 268 B.R. 316 (Bankr. D. Mass. September 28, 2001) (Feeney, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.06

2nd Cir.

Business partner’s fiduciary duty to creditor was imputed to debtor. S.D.N.Y. The chapter 7 debtor appealed the bankruptcy court’s order declaring the creditor’s judgment debt nondischargeable under section 523(a)(4). The creditor had sued the debtor, her psychiatrist, and his business partner, her former lawyer, in state (New York) court for breach of fiduciary duty and fraud. After the debtor and the creditor’s lawyer formed a partnership, in part to manage the affairs of the creditor, the lawyer misappropriated the creditor’s funds through fraudulent payments to himself, the debtor and their partnership. The state court determined that the findings in an earlier disciplinary proceeding against the debtor’s partner were dispositive of the same issues against the debtor under the doctrine of collateral estoppel. The bankruptcy court subsequently adopted the state court holding that the debtor was collaterally estopped from claiming that he neither embezzled nor committed fraud or defalcation while acting in a fiduciary capacity within the meaning of section 523(a)(4). On appeal, the debtor argued that the bankruptcy court erred in imputing his business partner’s fiduciary duty as the creditor’s lawyer to himself. The district court affirmed, holding that the bankruptcy court properly imputed the business partner’s fiduciary duty to the creditor to the debtor and did not err in declaring the debt nondischargeable under section 523(a)(4). The debtor not only knew of the fraudulent activity, but he also took part in it. The court noted that the debtor’s reprehensible behavior toward the creditor, including revealing to his business partner her intimate secrets learned through her psychiatric sessions, placed the debtor outside the reach of the fresh start policy.Zois v. Cooper, 2001 U.S. Dist. LEXIS 16983, 268 B.R. 890 (S.D.N.Y. October 10, 2001) (Jones, D.J.).

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

Fire insurance proceeds were required to be applied to principal balance on the mortgage. Bankr. N.D.N.Y. After the mortgagee filed a state court action to foreclose upon its lien interest on the debtor’s real property, the property suffered fire damage. When the debtor filed a chapter 13 petition, the mortgagee filed a proof of claim that included an arrearage claim of over $35,000. Asserting that the debtor would be unable to cure this arrearage, the mortgagee filed a motion for relief from stay in order to continue with its foreclosure proceedings in state (New York) court. In response, the debtor modified the chapter 13 plan to apply the insurance proceeds from the fire damage to the arrearage. The bankruptcy court held that the modified plan could not be confirmed because, pursuant to state law, the fire insurance proceeds could only be applied to reduce the principal balance of the mortgage. Relief from stay was denied, however, because the debtor was current in her payments to the chapter 13 trustee and cause was not shown.In re Denario, 2001 Bankr. LEXIS 1371, 267 B.R. 496 (Bankr. N.D.N.Y. January 4, 2001) (Gerling, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.06

3d Cir.

United States’ action seeking civil penalties for environmental violations was exempt from automatic stay. W.D. Pa. The debtor owned and operated a coke production plant. In 1997, the county health department issued notices of violation as a result of certain air emissions at the plant. The United States commenced this suit in 1998 to recover a civil penalty for the alleged violations. In 2000, the debtor filed a chapter 11 petition. The official committee of unsecured creditors moved to intervene in the United States’ civil action. The debtor took the position that the automatic stay operated to stay that action, but the United States argued that the seeking of civil penalties for environmental violations was an exercise of police or regulatory power that fell within the exception of section 362(b)(4). The bankruptcy court held that the suit was exempt from the stay, emphasizing that, in line with the statutory language, the United States was not seeking to enforce a money judgment, which would be limited by the statute, but rather was seeking entry of a civil penalty judgment for violations of environmental laws, which fell squarely within the police and regulatory powers exception of the statute. The court also found that the action fit within the police powers exception as defined by the pecuniary interest and public policy test, since the environmental laws were enacted to public safety and the resultant civil penalties designed as a deterrent. The court also ruled that the committee had no right to intervene, because the United States’ action could not be deemed a case under chapter 11.United States v. LTV Steel Co., 2001 U.S. Dist. LEXIS 18367, – B.R. – (W.D. Pa. November 7, 2001) (Cindrich, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362

Neither the debtor nor the creditors’ committee had standing to seek surcharge of collateral. Bankr. D.N.J. The assets of the chapter 11 debtor were sold and the case converted to chapter 7. During the pendency of the chapter 7 proceedings, the chapter 7 trustee assigned its right to pursue any cause of action under section 506 to the debtor and the creditors’ committee. The debtor and committee sought to surcharge the secured creditors’ collateral for attorneys’ fees and other professional services related to preserving and disposing of the debtor’s assets. The creditors objected to the motion, asserting that neither the debtor nor the committee had standing to bring a motion to surcharge the collateral. The committee analogized its ability to file the motion to the ability of a committee to pursue preference actions under the appropriate circumstances and with court approval. The bankruptcy court held that the Supreme Court’s opinion in Hartford Underwriters Ins. Co. v. Union Planters Bank, 520 U.S. 1, 120 S.C. 1942, 147 L. Ed.2d 1, 43 C.B.C.2d 861 (2000) clearly and unambiguously precluded the debtor and the committee from seeking to surcharge the secured creditor’s collateral. Hartford did not distinguish between different kinds of obligations for which surcharge may be sought, so it was irrelevant that the parties sought to surcharge for approved professionals’ fees rather than a vendor’s costs. Moreover, while Hartford did not preclude a party from seeking permission to file a motion under section 506(c) in the trustee’s stead, neither the debtor nor the committee had sought such approval and the court was not inclined to retroactively grant such relief. Finally, since the assignment was outside of the ordinary course of the trustee’s duties, and no motion had been filed, noticed or heard, the assignment would not be considered (citing Collier on Bankruptcy, 15th Ed. Revised).In re Concord Mktg., Inc., 2001 Bankr. LEXIS 1363, 268 B.R. 415 (Bankr. D.N.J. October 12, 2001) (Gambardella, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.05

Committee met its burden of proving that the debtor’s transfers were for or on account of an antecedent debt. Bankr. M.D. Pa. The official committee of unsecured creditors filed an adversary proceeding against the chapter 11 debtor’s supplier, seeking to avoid certain transfers pursuant to section 547. The parties had a modified cash on delivery arrangement whereby once the debtor’s credit limit with its supplier was reached, the supplier would not deliver goods unless a payment approximating the amount of the newly shipped goods was made at or near the time of delivery. The payments were then applied to aged invoices in order to approximate or equal the amount of the material delivered to the debtor. The parties stipulated that all elements under section 547(b) were established except whether or not the transfers were for or on account of an antecedent debt owed by the debtor. The bankruptcy court entered judgment in favor of the committee, holding that all payments made within 90 days of the petition were made for or on account of antecedent debt between the parties. All of the payments made were posted to aged invoices and none were applied to the current invoices for current material shipped. The advances of new value were nevertheless used to offset a portion of the preferences under section 547(c)(4).Official Comm. of Unsecured Creditors of Contempri Homes, Inc. v. Seven D. Wholesale, Inc. (In re Contempri Homes, Inc.), 2001 Bankr. LEXIS 1472, 269 B.R. 124 (Bankr. M.D. Pa. October 17, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03[4]

Debtors’ personal obligations to pay postpetition property assessments were discharged. Bankr. M.D. Pa. The chapter 7 debtors brought an adversary proceeding against the property association fund after the fund continued to send them invoices for postpetition annual assessments. The debtors neither used nor rented the property or the trailer, which was upon the camp lot. The bankruptcy court entered judgment in favor of the debtors, holding that the postpetition property association assessments were barred by the debtors’ discharge. The court noted a split of authority on the issue and concluded that the debtors’ continuing personal obligations to pay the future assessments were discharged. Nevertheless, the annual assessment was a covenant running with the land and, as such, constituted a continuing lien upon the premises that could be enforced in the same manner as mortgages were foreclosed.Eno v. Indian Country Campsites Recreation and Maint. Fund (In re Eno), 2001 Bankr. LEXIS 1463, 269 B.R. 319 (Bankr. M.D. Pa. June 29, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.13

Under the specific facts, lack of awareness of filing deadline caused by unknowing failure of firm’s calendar system constituted excusable neglect. Bankr. E.D. Pa. The bankruptcy court entered an order in connection with complaints seeking to deny the debtor a discharge. Counsel for the debtor received a copy of the order and immediately transmitted the substance of the order to the debtor, who then instructed her counsel to file an appeal. The debtor’s counsel agreed to file the appeal and noted the appeal bar date in his firm’s calendar, which was a computerized system accessible to all members of the firm and which was linked to the firms email system. The firm’s computers became infected by a computer virus that was apparently transmitted through e-mail attachments from unknown sources. The virus corrupted data stored on the firm’s server and, ultimately, outside specialists were required to repair the system. During the disruption of the firm’s computer system, the debtor’s calendared appeal bar date was erased. The debtor’s counsel was not aware of the damage to the calendaring system until after the deadline for filing the debtor’s appeal, and he filed the appeal two days after the bar date, along with a motion for extension of time pursuant to Rule 8002. In assessing whether the circumstances constituted excusable neglect for purposes of Rule 8002, the court found that the failure of a firm’s automated calendar system may be a basis to excuse the late filing of an appeal where the technical failure is externally caused and unknown to the attorney, provided that there are no other reminders of his duty to file that make complete reliance on the automated calendar system unreasonable. After noting that its test was highly fact sensitive and was not intended to shift personal responsibility from people to machines, the court found that the circumstances constituted 'excusable neglect,' and allowed the debtor’s appeal, because the debtor’s counsel’s firm had made immediate and full efforts to discover the extent of the computer problem and correct it, and that counsel for the debtor had acted promptly to file his notice of appeal once he became aware that the virus had erased entries in his calendar. Sonders v. Mezvinsky (In re Mezvinsky), 2001 Bankr. LEXIS 1468, – B.R. – (Bankr. E.D. Pa. October 5, 2001) (Weissignund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:8002.02

4th Cir.

Dischargeability of debtor’s credit card debt was affirmed. 4th Cir. The creditor appealed the district court’s order affirming the bankruptcy court’s order declaring the debtor’s credit card obligation dischargeable. The debtor had incurred additional charges on her credit card after she conferred with her bankruptcy attorney and before she filed her petition. The first month after she decided to file for bankruptcy, the debtor paid her balance in full, but made minimal payments on subsequent charges. The debtor testified that she intended to pay her credit card bill when she incurred the prepetition charges and that she had sufficient cash in her bank account and income from her husband’s business to do so. The district court affirmed the bankruptcy court’s conclusion that the debtor established that she intended to pay her debt when she incurred it. The Court of Appeals for the Fourth Circuit affirmed, holding that the bankruptcy court’s factual finding that the debtor intended to pay the charges when she incurred them was not clearly erroneous. The record also supported the finding that the debtor believed she would be financially able to pay her credit card bills.Citibank N.A. v. Parker, 2001 U.S. App. LEXIS 24599, – F.3d – (4th Cir. November 16, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08

Bankruptcy court’s nondischargeability judgment was void because it altered a prior state court judgment. 4th Cir. The chapter 7 debtor appealed the district court’s order affirming the bankruptcy court’s entry of a judgment order with respect to a nondischargeable debt that a state (West Virginia) court had already reduced to judgment. Four years before the debtor filed his petition, the creditor obtained a state court judgment against the debtor for wrongful discharge from employment. The bankruptcy court subsequently declared that the judgment was nondischargeable and entered its own judgment in the creditor’s favor, plus prepetition interest at the state rate and postpetition interest at the federal rate. The debtor asserted that the judgment was void for lack of jurisdiction because the bankruptcy court entered a judgment on an already existing state court judgment, which was beyond the scope of its powers in the proceeding to determine dischargeability. The Court of Appeals vacated the district court’s judgment and remanded the case, holding that the bankruptcy court erroneously issued its own judgment on the debt to replace the state court judgment previously obtained. The lower courts failed to accord the state judgment the full faith and credit required by 28 U.S.C. § 1738 by changing both the interest rate and the initial effective collection deadline of the judgment owed by the debtor.Heckert v. Dotson (In re Heckert), 2001 U.S. App. LEXIS 24597, 272 F.3d 253 (4th Cir. November 16, 2001) (Widener, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.06

6th Cir.

Debtor was ineligible for chapter 13 relief because claims against him exceeded allowable amount. Bankr. W.D. Mich. The judgment creditors objected to the debtor’s motion to convert his case from chapter 7 to chapter 13, asserting that he was ineligible for chapter 13 relief. The creditors had sued the debtor, their investment advisor, for alleged securities law violations and received a prepetition district court default order; however, the debtor’s intervening bankruptcy petition stayed entry of the default judgment. The debtor’s original schedules listed the creditors’ claim as a noncontingent, liquidated, unsecured debt in an amount greater than the limits set forth in section 109(e). After the objection was filed, the debtor amended his schedules, changing the creditors’ claim from a stated amount to 'unknown' and the description of the claim to 'contingent, unliquidated and disputed.' The bankruptcy court sustained the objection, holding that the debtor was ineligible for relief under chapter 13 because his recharacterization of the creditors’ claim was not made in good faith. The court noted that it could rely upon the debtor’s representations of the amounts set forth in his schedules only if he had made an honest effort to set forth the amount of each claim. The court concluded that the claim was readily ascertainable and that the debtor was simply attempting to restate the claim so that the debts owed by him on the date of the petition did not exceed the maximum amount set by section 109(e).In re Faulhaber, 2001 Bankr. LEXIS 1465, 269 B.R. 348 (Bankr. W.D. Mich. November 7, 2001) (Hughes, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06

Bank’s motion for relief from punitive damage award was denied. Bankr. N.D. Ohio The bank moved for relief from the bankruptcy court’s order, which found it in violation of the automatic stay and imposed punitive damages. Despite the fact that the debtor had personally informed the bank of his filing, the bank offset amounts due for a deficiency balance two days after the petition date. The bank claimed that it had made no effort to collect any debt owed to it by the debtor, and all deposits into checking accounts were applied to negative balances without regard to any bankruptcy filings, as a matter of course. The bankruptcy court imposed punitive damages for the willful violation of the stay and allowed the bank an opportunity to purge a portion of the award by demonstrating that it examined its procedures and considered how to avoid similar future violations. The bank argued that the court lacked authority to enter a remedial order and could not force it to reveal such propriety information. The bankruptcy court denied the bank’s motion for relief from judgment, holding that the punitive damage award against the bank for its willful violation of the automatic stay was authorized and appropriate. Allowing the bank to purge most of its damage award if, in good faith, it examined its policies and procedures with an openness to making appropriate changes, served the intended purpose of punitive damages of avoiding mistakes in the future, encouraging compliance with the Code and protecting both the bank and the debtor. The fact that the bank chose not to avail itself of the option did not make the remedy improper.In re Dunning, 2001 Bankr. LEXIS 1466, 269 B.R. 357 (Bankr. N.D. Ohio October 3, 2001) (Shea-Stonum, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.11

District court reversed bankruptcy court’s denial of trustee’s motion seeking authority to settle section 727 proceeding. D. Vt. The chapter 7 trustee filed an adversary proceeding against the chapter 7 debtors seeking to deny their discharge pursuant to section 727(a)(4)(A). The parties reached an amended settlement, and the trustee moved for approval of the amended settlement. The bankruptcy court denied the trustee’s motion, and held that settlement or compromise of section 727 complaints was not authorized under the Bankruptcy Code or Rules. The bankruptcy court reasoned that as a matter of public policy, negotiations concerning a debtor’s right to discharge were repugnant to the integrity of the bankruptcy system. The chapter 7 trustee appealed. The district court reversed, and remanded the proceeding to the bankruptcy court. The district court held that although the bankruptcy court’s concerns about protecting the integrity of the bankruptcy system and avoiding the taint of compromise were entirely laudable, a blanket prohibition on settlement of section 727 cases was not justified by the language of the Bankruptcy Code or Rules, the decisions by the majority of courts that have considered the matter or countervailing public policy concerns favoring dispute resolution. The district court remanded the matter to the bankruptcy court with instructions for that court to exercise its judgment and determine whether the terms of the settlement were fair and equitable and in the best interests of the estate, and to fashion case-appropriate terms and conditions, if necessary, to protect other creditors.Wolinsky v. Maynard (In re Maynard), 2001 U.S. Dist. LEXIS 18494, – B.R. – (D. Vt. October 31, 2001) (Sessions, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9019.02

Court of Appeals held that district court did not err in refusing to seal settlement agreement. 6th Cir. The chapter 7 trustee commenced an adversary proceeding against various individuals and entities seeking to recover approximately $500,000 in damages. In April 1997, the parties entered a settlement agreement, which was noticed to creditors, and in September 1997, the bankruptcy court approved the settlement and denied a motion for an order sealing the court file, which had been filed by one of the individuals. The district court affirmed, and this appeal followed. The Court of Appeals for the Sixth Circuit affirmed, holding that the district court had not abused its discretion by refusing to seal the court records. The Court of Appeals reasoned that there was a strong policy favoring public access to judicial proceedings, particularly an order embodying a settlement, and noted that the provisions of the settlement agreement had already been noticed out to parties in interest, so that a material part of what the individual sought to seal had already been disclosed. Friedman v. Mitan (In re Polemar Constr. Ltd. P’ship), 2001 U.S. App. LEXIS 24307, – F.3d. – (6th Cir. November 6, 2001) (Keith, Boggs and Moore, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9019.01, .02

7th Cir.

Prepetition transfers were avoidable and trustee was allowed to recover sums. Bankr. N.D. Ill. The debtor was in the business of designing and building retail displays for various retail chains. When the debtor’s displays required metal finishing, the debtor would ship the fixtures to the creditor’s company. The creditor performed work for the debtor and issued invoices to the debtor. These invoices included customary and usual payment terms of '2% 10 net 30 days.' While the debtor paid the invoices, the debtor testified that it usually paid such invoices by issuing checks to the defendant within 40 to 45 days of the date of the invoice. Within 90 days of the filing of the debtor’s bankruptcy petition, the debtor paid two invoices. The trustee then sought to recover these two payments as preferences. The creditor moved for summary judgment, arguing that the ordinary course of business exception applied. After the court denied the creditor’s motion, the trustee moved for summary judgment. The only preference elements contested by the creditor were whether the debtor was insolvent at the time of transfer and whether the creditor received more than it would have received under a chapter 7 distribution. The court found that the Code presumes a debtor to be insolvent, as a matter of law, during the 90 days prior to the bankruptcy petition and that the creditor had not proved otherwise. The court also found that the trustee’s 402.M statement established that the creditor would have received less under a chapter 7 distribution and that the creditor had not disputed trustee’s statement. Accordingly, the court granted the trustee’s motion for summary judgment and held that the prepetition transfers made by the debtor to the creditor were voidable preferences and that the trustee could recover the amount of the preferences. Krol v. The Finishing Company (In re H. King & Assoc.), 2001 Bankr. LEXIS 1373, – B.R. – (Bankr. N.D. Ill. October 22, 2001) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03

8th Cir.

Automatic stay precluded district court authority over motion for temporary restraining order. D. Minn. A steelworkers’ union and the debtor, a mining operation and power plant, entered into a collective bargaining agreement under which restrictions were placed upon the debtor’s ability to shut down or sell its operations. When the debtor filed a chapter 11 petition and closed some of its operations, the union sought an order from the bankruptcy court conditioning the closing of the plant upon compliance with provisions of the collective bargaining agreement. The bankruptcy court denied the motion for lack of subject matter jurisdiction. Without moving for relief from the automatic stay, the union filed a motion for a temporary restraining order in the district court, seeking to halt the sale of the power plant until arbitration regarding the collective bargaining agreement was completed. The district court held that the automatic stay prevented the district court from hearing the union’s motion for a temporary restraining order. The court rejected the theory that the bankruptcy court had implicitly lifted the stay in the prior hearing because section 362, by its terms, requires that a motion be filed, noticed and heard in order for relief from stay to be granted. Because the union had failed to file a motion, the automatic stay precluded the district court from granting the union any relief against the debtor. United Steelworkers of America v. LTV Steel Mining Co., 2001 U.S. Dist. LEXIS 17823, – F. Supp. – (D. Minn. October 30, 2001) (Kyle, D.J.).

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

Criminal assault debt did not defeat debtor’s good faith. Bankr. N.D. Iowa In 1996, the debtor was involved in a fistfight that occurred in a bar. Also involved was the creditor, who suffered head injuries and only slowly returned to a normal state of brain function. The creditor received funds from the state (Iowa) victims’ reparation fund and in settlement of claims against the owner of the bar, whose insurer paid the creditor $90,000. The criminal charges brought against the debtor resulted in a civil judgment against him and in favor of the creditor, also for $90,000. Shortly after the creditor began collection efforts, the debtor filed a chapter 13 petition. The schedules included the debt to the creditor as a general unsecured claim. Other scheduled claims included the $90,000 as a potential subrogation claim by the bar’s insurer. The debtor’s amended chapter 13 plan proposed payments of approximately $50 per month for 60 months. The creditor objected to confirmation of the plan, asserting that the plan was not proposed in good faith, as required by section 1325(a)(3). The creditor argued that the debtor filed the petition primarily to avoid paying the punitive damages obligation, that the debtor was previously able to pay $100 per month to the victims’ reparation fund but could now only pay $50 toward monthly plan payments, and that the debtor should not, as a matter of public policy, be able to use chapter 13 to discharge liability resulting from a serious criminal assault. The bankruptcy court confirmed the plan, finding that the debtor’s petition filing was not directed at the creditor but was instead an attempt to support himself and his family. The court also held that a public policy exception for all criminal assaults must not be applied too broadly. The court reasoned that the debtor’s prefiling conduct was not determinative of the good faith issue, as long as the plan represented a good faith effort by the debtor to satisfy creditors’ claims. In re Gillespie, 2001 Bankr. LEXIS 1415, 266 B.R. 721 (Bankr. N.D. Iowa September 5, 2001) (Edmonds, B.J.).

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

9th Cir.

Forgiveness of debt was estate property. Bankr. D. Nev. The debtors’ chapter 13 plan was confirmed in 1996. Under the plan, the debtors were to remit their tax refunds to the trustee for the 60-month duration of the plan. The debtors failed to remit their 1998 refund, choosing instead to apply it to their 1999 tax liability. In 1998 and 1999, one codebtor was working for an employer who controlled a trust. Both debtors were in the process of purchasing a home from the trust by paying off a personal note they executed. When the employer died in 1999, his estate forgave the remaining indebtedness on the note in the approximate amount of $146,000 and transferred title to the house to the debtors. Although the debtors never sought to amend their chapter 13 schedules to reflect the debt forgiveness, they included the amount as income on their 1999 tax return. In June 2000, the debtors sold the property for $168,000 and used some of the proceeds to purchase a second home. In December 2000, the trustee filed a motion seeking to modify the chapter 13 plan, based upon the postpetition income. The debtors argued that the plan payments had been made in full and that, consequently, the trustee’s motion was untimely. The debtors also argued that the debt forgiveness was not estate property. Nonetheless, the debtors made the outstanding tax refund payment to the trustee in January 2001 and amended their schedules to reflect their interest in the second home, which they claimed as exempt. The bankruptcy court found as a threshold issue that the trustee’s motion was timely because the debtors, by failing to remit the tax refund when due, had failed to make all required plan payments. The court then went on to hold that, although the sale proceeds did not constitute future earnings or income because they were not part of an anticipated stream of income, the debt forgiveness needed to be analyzed for the purposes of the best interest of creditors test under section 1325(a)(4). The court followed majority opinion and held that the date of modification was the effective date to determine the best interest of creditors, and concluded that the forgiveness of the debt, as represented by the sales proceeds, was property of the estate that must be accounted for at the time of modification. Thus the trustee’s motion was granted, subject to the resolution of the exemption claim.In re Profit, 2001 Bankr. LEXIS 1418, 269 B.R. 51 (Bankr. D. Nev. October 9, 2001) (Zive, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.05[2]

11th Cir.

Debtor’s objection to IRS’ claim overruled. Bankr. M.D. Fla. The debtor had owned an automobile dealership and had contracted with another company to also serve as a dealership. When the other dealership closed, the debtor sued the dealership. Ultimately, the debtor settled its claim with the dealership and received a settlement from it. The debtor excluded the settlement from his income and did not pay taxes on the settlement amount. When the debtor filed for relief under chapter 11, the IRS then filed a proof of claim, asserting that the settlement funds were not received by the debtor on account of personal injuries or sickness, as required by section 104(a)(2) of the Internal Revenue Code, and that the funds should not have been excluded from debtor’s income, and, thus, income tax payments. The debtor objected to the IRS’ claim. In ruling on cross-motions for summary judgment, the court found that the funds received by the debtor were actually financial and economic damages related to the debtor’s business losses and that the debtor had improperly characterized the funds as being for personal injuries. Since nothing in the underlying litigation or settlement indicated that funds received by the debtor were for personal injuries, the court granted the IRS’ motion for summary judgment and allowed the IRS’ claim against the debtor. In re Jones, 2001 Bankr. LEXIS 1365, 268 B.R. 865 (Bankr. M.D. Fla. September 6, 2001) (Glenn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03