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.

July 15, 2002

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Debtor's violation of business use restriction on credit card did not render debt non-dischargeable. Bankr. D. Conn. PROCEDURAL POSTURE: In bankruptcy proceedings, plaintiff creditor sued defendant debtor, seeking a determination of nondischargeability of a debt in the amount of $10,647.97, which arose through the use of a credit card. OVERVIEW: Creditor claimed that the debt was incurred as a result of false pretenses, false representations and actual fraud by debtor. The court held that in general, credit card debts were dischargeable absent a determination that debtor did not intend to repay the charges when they were incurred. In the case at bar, there was no evidence that debtor was conscious at any relevant time of the 'personal, family or household use only' restriction in the credit card agreement, as referenced in the credit card application. Further, creditor solicited debtor with the carrot of a 'pre-approved credit line of $6,500.' The ordinary recipient of such solicitation would likely have done exactly what debtor did -- examine the finance terms making the decision to avail themselves of the opportunity to access such credit without meticulous examination of the terms -- many irrelevant to debtor. Moreover, even if debtor knew, or should have known, of the business use restriction on the card, and breached the agreement by using the card for a business purpose, there was no evidence to support a finding that he acted with the actual intention and purpose of deceiving creditor. AT & T Universal Card Services, Corp. v. Harrington, 2001 Bankr. LEXIS 1900, B.R. (Bankr. D. Conn. October 4, 2001) (Dabrowski, B.J.).

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

Debtor's dispute with insurer over asbestos liability coverage is a non-core proceeding. Bankr. D.N.J. PROCEDURAL POSTURE: Plaintiff bankruptcy debtor sued defendant insurers in state court, alleging that the insurers' coverage extended to the debtor's potential asbestos liability. The action was removed to federal court and referred to the bankruptcy court. One insurer moved to withdraw the reference, and the United States District Court for the District of New Jersey remanded to the bankruptcy court to determine whether the action was a core proceeding. OVERVIEW: The insurers contended that the coverage action was a non-core proceeding and thus did not require resolution in the bankruptcy court. The debtor claimed that the substantial effect of the outcome of the action on the bankruptcy estate indicated that the action was a core proceeding. The bankruptcy court held that the coverage action was not a core proceeding since it arose under state law rather than invoking any substantive right created by the federal bankruptcy laws. While the action was related to the bankruptcy proceedings, the action could exist independently of the bankruptcy proceedings and was not similar to typical core proceedings. Further, although the potential proceeds of the environmental policies were significant, the debtor failed to show that the insurance coverage was the linchpin of, or essential to, the debtor's effort to reorganize under Chapter 11. G-I Holdings, Inc. v. Hartford Accident & Indem. Co. (In re G-I Holdings, Inc.), 2002 Bankr. LEXIS , 278 B.R. 376 (Bankr. D.N.J. May 21, 2002) (Gambardella, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.03[4]

Proceeds of debtor's settlement with tortfeasor not exempt and subject to equitable lien of health plan that paid related medical benefits. 4th Cir. PROCEDURAL POSTURE: In the United States District Court for the Eastern District of Virginia, at Norfolk, the bankruptcy and district courts held that defendant employer, the sponsor and administrator of a health benefits plan with a reimbursement provision, had an equitable lien on personal injury settlement proceeds received by plaintiff employee after she filed for bankruptcy. Plaintiff appealed. OVERVIEW: Plaintiff was seriously injured in an automobile wreck caused by a third party. Plaintiff's medical expenses totaled nearly $300,000. Defendant employer's health plan paid plaintiff $106,935.11 in medical benefits. Defendant's health plan contained a reservation of rights provision giving it the right to reimbursements for recovery by the employee from the third party tortfeasor. Plaintiff signed an acknowledgment of defendant's right to reimbursement. Overwhelmed by the medical bills, plaintiff filed for bankruptcy. Plaintiff later received $125,000 in settlement from the third party who caused her injuries. Plaintiff claimed the proceeds as exempt under 11 U.S.C. § 522(b)(2) and state law. The bankruptcy court found that defendant had an enforceable equitable lien on the settlement proceeds, recognizing defendant's security interest in the proceeds and determining that nothing prevented defendant from foreclosing in that interest. The district court affirmed. The appellate court agreed with the conclusion of the bankruptcy and district courts. Wal-Mart Stores, Inc. v. Carpenter (In re Carpenter), 2002 U.S. App. LEXIS 10615, B.R. (4th Cir. June 3, 2002) (Michael, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.01

Creditor who failed to file proof of claim against debtor was not barred by § 524(a) from seeking recovery from other entities. N.D. Tex. PROCEDURAL POSTURE: Appellant injured employee sought reversal of the bankruptcy court's order denying his motion to collect and/or execute on a state court judgment and from an order denying his motion to reconsider. OVERVIEW: Under a services contract, the contractor agreed to indemnify debtor for claims brought against it by any employees. The contractor had an umbrella policy and a general liability policy through defendant indemnity insurer. Debtor was insured under a policy through defendant general liability insurer. A judgment was entered in the personal injury action against debtor who filed for bankruptcy. The injured employee did not file a proof of claim. A remittitur was entered in state court, and the employee appealed. Subsequently, the employee filed garnishment actions against the insurers. When the employee asked for authority to go after the insurance proceeds, the bankruptcy court held that the remitted judgment violated the automatic stay and was void or voidable. On review, the court concurred that since the employee had not filed a timely proof of claim, he could not proceed against debtor, which meant that any indemnification obligations were likewise discharged. However, the employee could proceed against the general liability insurer, because the injunction did not extend to efforts to recover from other entities which might be liable for the discharged debt. Chapman v. Coho Res., Inc., 2002 U.S. Dist. LEXIS 9395, B.R. (N.D. Tex. May 24, 2002) (Solis, D.J.).

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

Debtor allowed to maintain Chapter 13 case filed prior to closing of same debtor's Chapter 7 case. Bankr. N.D. Ohio PROCEDURAL POSTURE: Debtors filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. The court, in accordance with 11 U.S.C. § 727(a), issued an order of discharge. However, the case still remained open for administrative purposes and this proceeding was again stayed when debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code. Debtors filed a motion to allow a Chapter 13 plan. OVERVIEW: The court was concerned about abuse of the bankruptcy process when a debtor filed another bankruptcy petition, before the first case was closed. The court agreed with the bankruptcy cases which have declined to adopt a rule against a debtor who, before the first bankruptcy case was closed, filed for relief under another chapter of the United States Bankruptcy Code. Because the court believed that given the lack of any statutory prohibition against a debtor maintaining two simultaneous bankruptcy cases, and together with Fed. R. Bankr. P. 1015, which specifically contemplated a debtor maintaining more than one bankruptcy case, the court should decline to adopt a rule against such an act. The court would closely scrutinize the subsequent case so as to ensure that the debtor was not abusing the bankruptcy process. In re Strohscher, 2002 Bankr. LEXIS 479, B.R. (Bankr. N.D. Ohio May 1, 2002) (Speer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:1015.01

Vendor buying agreement pursuant to which creditor was obliged to pay for delivered product was executory and could be rejected. Bankr. N.D. Ill. PROCEDURAL POSTURE: Appellant creditor sought review from an order of the United States Bankruptcy Court, which approved appellee debtor's rejection of an executory contract. OVERVIEW: The creditor and debtor entered into a Vendor Buying Agreement (VBA). Each Purchase Order Agreement ('POA') under the VBA required the debtor, as the vendor, to indemnify the creditor. At the time the POA was entered, the debtor was operating as debtor in possession in a Chapter 11 proceeding, which was subsequently converted to a Chapter 7 proceeding. The debtor filed its motion to reject the executory contract, which the bankruptcy court approved. On appeal, the creditor filed a timely notice of appeal, arguing that it had no obligations under the VBA and, therefore, the VBA was not executory. However, the POA, which formed a part of the VBA, expressly made all purchase orders subject to the POA and therefore a part of the VBA. In addition, the creditor was obligated to pay for delivered product, a significant unperformed obligation, so the contract was executory and the bankruptcy court properly allowed the debtor to reject it.Home Depot U.S. v. Krause, Inc., 2002 U.S. Dist. LEXIS 10022, B.R. (Bankr. N.D. Ill. June 3, 2002) (Reinhard, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.03

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Chapter 13 debtor cannot cure mortgage default once highest bid at foreclosure sale has been entered and accepted. N.D. Ill. PROCEDURAL POSTURE: A United States bankruptcy court granted creditor relief from the automatic stay in a Chapter 13 case with respect to a foreclosure action against debtor's residence. Debtor appealed. OVERVIEW: Creditor held the mortgage on debtor's residence. Debtor failed to make timely payments on the mortgage debt, and creditor commenced foreclosure proceedings. Three days after the property was sold at a judicial sale, debtor filed her bankruptcy petition. She claimed creditor was not entitled to relief from the stay because debtor's right to cure the default extended until a state court confirmed the sale. The district court disagreed. Under 11 U.S.C. § 1322(c)(1), debtor had the right to cure the default until the residence was sold at a foreclosure sale that was conducted in accordance with applicable nonbankruptcy law. The Illinois Mortgage Foreclosure Act, 735 Ill. Comp. Stat. 5/15-1501 to -1509, required a state court to confirm a foreclosure sale if none of four specific defects had occurred. Although some district and bankruptcy judges had held that an Illinois debtor had a right to cure under 11 U.S.C. § 1322(c)(1) until state court confirmation, the district court joined other judges in concluding that the right to cure was extinguished once the property was sold at the judicial sale. Colon v. Option One Mortg., 2002 U.S. Dist. LEXIS 10033, B.R. (N.D. Ill. June 4, 2002) (Kocoras, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.15

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Payment of markers by debtor to casino held preferential as casino's delay in submitting for payment was in the nature of a loan. 8th Cir. PROCEDURAL POSTURE: Appellant casino challenged a decision from the United States District Court for the Eastern District of Arkansas that affirmed the bankruptcy court's decision for appellee trustee in the trustee's adversary proceeding initiated in the bankruptcy court to avoid preferential transfers from the debtor to the casino under 11 U.S.C. §§ 547, 548(a)(1). OVERVIEW: The debtor signed for markers from the casino. When the casino sought payment on the markers by depositing them for payment from the debtor's checking account, there were insufficient funds in the account. The debtor then secured a fraudulent loan to pay off the markers. After the debtor was incarcerated, a voluntary bankruptcy proceeding was initiated and an order was entered. The trustee sought to avoid the transfer of the markers was based upon a preference under 11 U.S.C. § 547(b). The casino argued that the trustee did not make out a prima facie case for a preference because he did not prove under § 547(b)(2) that the transfer was for or on account of an antecedent debt owed by the debtor before such transfer was made. The casino argue that the markers were negotiable instruments - checks made out by the debtor in a concurrent transaction for gambling chips. The reviewing court held that when the casino offered to hold the markers for a period of time before submitting them to the debtor's bank for payment, the casino made a short term loan to the debtor. The court concluded that the payment of the markers constituted the payment of antecedent debt for purposes of § 547(b).Harrah's Tunica Corp. v. Meeks, 2002 U.S. App. LEXIS 10034, B.R. (8th Cir. May 29, 2002) (Beam, C.J.).

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

Issuing bank not liable with debtor on obligation to creditor and not eligible for subrogation under § 509. 9th Cir. PROCEDURAL POSTURE: Appellant debtor challenged the judgment of the United States District Court for the Central District of California which reversed the judgment of the bankruptcy court and held that appellee bank was entitled to subrogation of the nondischargeable claims that arose out of a judgment against the debtor. OVERVIEW: A judgment was entered against the debtor. A deposit company agreed to provide a supersedeas bond if the debtor posted a letter of credit for the full amount. The debtor secured a letter of credit from the bank. The debtor filed for bankruptcy. When the debtor could not pay the judgment, the deposit company presented the letter of credit to the bank. The deposit company assigned to the bank any rights it had to subrogation based upon its partial satisfaction of the judgment against the debtor. The bank filed an adversary action against the debtor and sought non-dischargeability of the debts owed to it. The bankruptcy court held that the bank was not entitled to subrogation to the non-dischargeability of the judgment. The district court reversed that ruling. The debtor appealed. The court found that the bank, as an issuer of a letter of credit, was not liable with the debtor on the obligation owed to the creditor. Thus, the bank was not eligible under 11 U.S.C. § 509 for statutory subrogation. The bank was not entitled to equitable subrogation because it did not satisfy the requirement that it could not be considered primarily liable on the debt upon which the claim was founded. Hamada v. Far East Nat'l Bank (In re Hamada), 2002 U.S. App. LEXIS 10040, B.R. (9th Cir. May 29, 2002) (Thomas, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:509.02

Tax creditor could not consolidate numerous defendants with debtor absent notice to all of defendants' creditors as 'parties in interest.' Bankr. D. Utah PROCEDURAL POSTURE: A tax creditor filed an adversary proceeding to substantively consolidate defendants companies and individuals into the debtor's Chapter 11 nunc pro tunc to the date of the debtor's bankruptcy. One defendant company moved to dismiss, arguing that nunc pro tunc relief could not be used with substantive consolidation and the court lacked subject matter jurisdiction to consolidate non-debtor individuals and entities with the debtor. OVERVIEW: The court noted that none of the defendants were in bankruptcy. When the debtor filed bankruptcy, the court had jurisdiction over the debtor, but not over the defendants. 28 U.S.C. § 1334. The court could not issue an order nunc pro tunc to create jurisdiction where none existed. None of the defendants' creditors had been given notice of the complaint. Because their rights could be affected, they had to be given notice and an opportunity to be heard as to consolidation, otherwise their right to due process would be denied. The defendants' creditors were 'parties in interest' under 11 U.S.C. § 1109 and had to be given notice and an opportunity to be heard. The tax creditor had to provide notice of its complaint to all of the creditors of the defendants in the adversary. The complaint lacked the specificity and breadth of factual allegations necessary for the court to base an order substantively consolidating two individuals and six corporate entities into a single corporate bankruptcy. The complaint sounded in fraud; the allegations had to be stated with particularity under Fed. R. Civ. P. 9(b), especially because the allegations were the basis of the court's jurisdiction. United States v. AAPC, Inc. (In re AAPC, Inc.), 2002 Bankr. LEXIS 563, 277 B.R. 785 (Bankr. D. Utah March 15, 2002) (Clark, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1109.02