Collier Bankruptcy Case Update July-2-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
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.
July 2, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
522(b)(2)(A) Amendment of homestead exemption statute could not be applied retroactively.
In re Tardugno (Bankr. D. Mass.) 071013
547(b) Trustee met his burden of proving required elements under section 547(b) and was entitled to summary judgment as to $50,000 of $350,000 at issue.
Gray v. Oppenheimer & Co., Inc. (In re Molten Metal Technology, Inc.) (Bankr. D. Mass.) 071027
506(a) Unsecured lien was avoided.
Pond v. Farm Specialist Realty (In re Pond) (2d Cir.) 071010
546(c) Reclamation claim limited by 10-day provision of section 546(c).
In re Bradlees Stores, Inc. (Bankr. S.D.N.Y.) 071026
550(a) Trustee was not entitled to windfall.
McCord v. Agard (In re Bean) (2d Cir.) 071033
1141(a) Debtor, alleging that tax benefit transfer agreements were void, was not barred by res judicata by virtue of its chapter 11 plan’s confirmation.
Eastern Air Lines, Inc. v. Brown & Williamson Tobacco Corp. (In re Ionosphere Clubs, Inc.) (Bankr. S.D.N.Y.) 071037
350(b) Court reopened chapter 7 to modify discharge order.
Fonner v. Overdorf (In re Fonner) (Bankr. W.D. Pa.) 071002
362(g) Relief was denied preliminarily.
In re Krebs (Bankr. E.D. Pa.) 071005
Rule 1014(a)(1) Proceeding was transferred to the Court of Claims.
United Pac. Ins. Co. v. United States (In re Smith Technology Corp.) (Bankr. D. Del.) 071045
365 Rent-to-own contract was a security agreement and not an executory contract.
In re Smith (Bankr. E.D. Va.) 071006
506(a) Inchoate lien was entitled to secured status.
In re Terry (Bankr. E.D. Va.) 071011
523(a)(4) Conversion of collateral resulted in nondischargeable debt.
Johnson v. Davis (In re Davis) (Bankr. E.D. Va.) 071020
507(a)(8) IRS, as priority claimant, was entitled to amend proof of claim one year after confirmation of plan.
In re Goodman (Bankr. N.D. Tex.) 071012
523(a)(5) Economic disparity and sacrifice evidenced that marital debt was nondischargeable support obligation.
Kessel v. Kessel (In re Kessel) (Bankr. E.D. Tex.) 071021
28 U.S.C. 157(a) Removed claims were referred.
Jones v. JCC Holding Co. (E.D. La.) 071041
544(a)(3) Court of Appeals for Sixth Circuit affirmed decision allowing trustee to set aside mortgage because it was not properly executed under state law.
Simon v. Chase Manhattan Bank (In re Zaptocky) (6th Cir.) 071025
522(c) Right to setoff trumped right to exemption.
In re Kadrmas (Bankr. W.D. Wis.) 071015
28 U.S.C. 151 Bankruptcy court imposed sanctions.
Andros v. Soddy (In re Andros) (Bankr. W.D. Wis.) 071040
523(a)(1) Debts were not discharged.
Walsh v. United States (In re Walsh) (Bankr. D. Minn.) 071018
706(a) The bankruptcy court had authority to deny conversion to chapter 13.
In re Johnson (Bankr. E.D. Ark.) 071036
304 Bankrutpcy court granted motion to dismiss ancillary petition.
In re Master Home Furniture Co., Ltd. (Bankr. C.D. Cal.) 071001
502(a) Objection to IRS’s claim sustained because assessment of partnership was insufficient for collection of taxes from individual members of the partnership.
United States v. Galletti (In re Galletti) (C.D. Cal.) 071009
547(c)(3) Enabling loan exception did not apply when the debtor had leased the vehicle prior to the purchase transaction.
Roost v. Toyota Motor Credit Corp. (In re Moon) (Bankr. D. OR.) 071031
362(a)(1) Creditor willfully violated stay.
In re Pulliam (Bankr. D. Kan.) 071003
365(a) Stock options were assets of the estate and not exempt wages.
In re Lawson (Bankr. M.D. Fla.) 071007
544(a)(1) Trustee could not avoid lien that was inadvertently released when debt had not been satisfied.
Smith v. Am. Honda Fin. Corp. (In re Marshall) (Bankr. M.D. Ga.) 071024
Collier Bankruptcy Case Summaries
Amendment of homestead exemption statute could not be applied retroactively. Bankr. D. Mass. After the debtors filed their chapter 7 petition, a state (Massachusetts) amendment raising the its homestead exemption went into effect. Accordingly, the debtors amended their claim of exemption to increase the claim of homestead exemption from $100,000 to $300,000. When they sought to avoid a judicial lien as impairing this exemption, the lienholder objected to the amended exemption as well as the lien avoidance. The debtors asserted that, even though the effective date of the amendment was after the date the chapter 7 petition was filed, since the amendment was approved before the filing, and they were retroactively entitled to the increased exemption. The bankruptcy court held that debtors were not entitled to claim a homestead exemption that was not in effect at the time of the filing of their chapter 7 case. The amendment that raised the homestead exemption amount was not an emergency measure that took effect upon approval nor entitled to retroactive application. Accordingly, since section 522(b)(2)(A) only allows exemptions 'applicable on the date of the filing of the petition' the debtors were restricted to the homestead exemption in effect on the date of their filing, even though a higher exemption had been approved at that time.In re Tardugno, 2001 Bankr. LEXIS 482, – B.R. – (Bankr. D. Mass. May 9, 2001) (Rosenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
Trustee met his burden of proving required elements under section 547(b) and was entitled to summary judgment as to $50,000 of $350,000 at issue. Bankr. D. Mass. The chapter 11 trustee filed an adversary proceeding to recover an alleged preference from the debtor’s financial advisor. The financial advisor asserted affirmative defenses under sections 547(c)(1) and (2), and the parties cross-moved for summary judgment. The bankruptcy court held that the financial advisor was entitled to summary judgment on its 'new value' defense with respect to $300,000 of the $350,000 at issue. As to the same $50,000 of value, however, the court held that the trustee met his burden of establishing the required elements under section 547(b), (a transfer of an interest of the debtor in property; made on or within 90 days before the date of the filing of the petition; while the debtor was insolvent; to or for the benefit of a creditor; for or on account of an antecedent debt owed by the debtor before such transfer was made; which enabled the creditor to receive more than the creditor would have received in a hypothetical chapter 7 liquidation), and was entitled to summary judgment as to this amount. The court also held, as to the remaining $50,000, that the financial advisor failed to meet its burden of proof on its asserted ordinary-course-of-business defense.Gray v. Oppenheimer & Co., Inc. (In re Molten Metal Technology, Inc.), 2001 Bankr. LEXIS 505, – B.R. – (Bankr. D. Mass. May 11, 2001) (Kenner, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
Unsecured lien was avoided. 2d Cir. The creditors appealed the district court’s holding that the chapter 13 debtors could void their lien on the debtors’ residence. Due to senior liens encumbering the debtors’ property, there was insufficient equity to cover any portion of the creditors’ lien. The bankruptcy court held that the creditors’ lien could not be modified because the underlying security interest was the debtors’ principal residential property. The district court reversed. The Court of Appeals for the Second Circuit affirmed the district court, holding that the debtors could void the creditors’ lien because the lien was wholly unsecured under section 506 and, therefore, was not 'secured' by a residential property within the meaning of section 1322(b)(2). The court analyzed Nobelman v. American Savs. Bank, 508 U.S. 324 (1993) and concluded that the antimodification exception applied only in cases in which the creditor’s claim was at least partially secured under section 506(a).Pond v. Farm Specialist Realty (In re Pond), 2001 U.S. App. LEXIS 11287, – F.3d – (2d Cir. May 31, 2001) (Cabranes, C.J.).
Collier on Bankruptcy, 15th Ed. Revised
Reclamation claim limited by 10-day provision of section 546(c). Bankr. S.D.N.Y. The creditor sought an allowance of an administrative claim for prepetition merchandise received by the chapter 11 debtor, a retailer. The creditor argued that it shipped the merchandise upon the representations made by the debtor’s personnel that payment would be forthcoming. On December 18, 2000, the creditor made a written demand for reclamation of all goods shipped on credit for the previous 20 days. The debtor filed its chapter 11 petition on December 20, 2000. The creditor argued that it was entitled to reclamation notwithstanding its failure to deliver a reclamation demand to the debtor within the statutory 10-day period set forth in section 546(c). The bankruptcy court held that the 10-day notice period of section 546(c) could not be extended based upon the alleged misrepresentation of solvency. The court reasoned that the Code did not create a right of reclamation, only recognizing such a right if it existed under nonbankruptcy law, and that section 546(c) imposed additional procedural requirements before such rights would be recognized. As such, the court found that the 10-day rule governed and limited the reclamation claim to goods delivered within the 10-day period.In re Bradlees Stores, Inc.2001 Bankr. LEXIS 528, – B.R. – (Bankr. S.D.N.Y. May 1, 2001) (Lifland, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:546.04
Trustee was not entitled to windfall. 2d Cir. The chapter 7 trustee appealed a decision of the district court reversing the order of the bankruptcy court and dismissing his complaint to avoid a transfer. Although the debtor contracted to sell his home prepetition, the purchasers closed title on the property postpetition. With the proceeds of the sale, the debtor satisfied his mortgages, paid various costs and turned over the remaining proceeds to the trustee. The trustee commenced an adversary proceeding against the purchasers and the title company to recover the fair market value of the property at the time of the unauthorized transfer. The Court of Appeals for the Second Circuit affirmed the district court, holding that because the trustee had already recovered the equity value of the property from the debtor, he could not recover the fair market value of the property from the purchasers. The trustee was only entitled to recover the equity the debtor held in the property the day he filed bankruptcy.McCord v. Agard (In re Bean), 2001 U.S. App. LEXIS 11075, – F.3d – (2d Cir. May 30, 2001) (McLaughlin, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:550.02
Debtor, alleging that tax benefit transfer agreements were void, was not barred by res judicata by virtue of its chapter 11 plan’s confirmation. Bankr. S.D.N.Y. The debtor, an air line carrier, entered into a series if tax benefit transfer ('TBT') agreements under which the debtor transferred ownership interest in aircraft to the creditors, including the right to take deductions for depreciation and applicable investment tax credits. The debtor was deemed to have leased the aircraft for income tax purposes only, and retained all other attributes of ownership. In March 1989, the debtor filed its chapter 11 petition. The debtor negotiated the release of certain aircraft, in order to sell them, and the creditors were given replacement letters of credit. The bankruptcy court authorized the sale and confirmed the reorganization plan. Thereafter, the creditors, contending that the tax attributes of the TBT agreements were lost, drew on the letters of credit to satisfy indemnity claims that arose postconfirmation. As a result, the debtor filed several adversary proceedings, alleging that the sales of the aircraft were not disqualifying events and that the creditors had no right to draw on the letters of credit. Among many arguments made in response, the creditors asserted that the debtor could have litigated the issues in its chapter 11 proceeding and that its claims were now barred by res judicata. The court held that, for the purposes of section 1141(a), the debtor was not barred by res judicata. The court reasoned that the debtor sufficiently identified and reserved its contingent claims against the creditors in the stipulation, its disclosure statement, the plan and the confirmation order. Moreover, the claim was never previously addressed by any court, and the confirmation order expressly identified and preserved the debtor’s right to adjudicate this claim and all other 'reserved matters' beyond entry of the final decree.Eastern Air Lines, Inc. v. Brown & Williamson Tobacco Corp. (In re Ionosphere Clubs, Inc.), 2001 Bankr. LEXIS 532, – B.R. – (Bankr. S.D.N.Y. May 10, 2001) (Lifland, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1141.02
Court reopened chapter 7 to modify discharge order. Bankr. W.D. Pa. An individual was killed when she was struck by an automobile driven by the debtor. The vehicle had been rented by the joint debtor, the debtor’s husband. The debtors had personal automobile liability insurance, but the insurance company denied that the debtor was covered because only her husband signed the rental agreement. Another carrier, whose policy had a liability limit of $50,000, offered the deceased’s administrator a settlement in that amount in exchange for a complete release of the debtor. That offer was rejected, and the administrator commenced a wrongful death action against both debtors and the car rental company. During the pendency of that action, the debtors filed a chapter 7 petition. Eventually, a modified discharge order was entered, providing that the debtor’s discharge would not operate to enjoin the continuation of any action to determine the debtor’s liability for the fatal accident. Following trial, a jury arrived at a verdict in excess of $862,000. Combined with delay damages and interest, the total amount of the judgment was $1,239,640.59. When the debtor subsequently refused to sign her rights against the various insurance companies over to the administrator, the administrator commenced a proceeding against one carrier to recover the proceeds of the $1 million excess liability policy. Then the debtors filed a motion to reopen their chapter 7 case and for a preliminary injunction prohibiting the deceased’s estate from executing on or otherwise seizing the personal assets of the debtor. The administrator responded by filing a motion to again modify the previously modified discharge order, since the debtor’s refusal to assign her rights against the insurance carriers violated the modified discharge order. The bankruptcy court held that cause existed to reopen the case pursuant to section 350(b). The court found that it was necessary to reopen the case to allow for further modification of the discharge order, since the debtor became obligated in the first modification to do whatever was required to enable the administrator to collect the judgment from the liability insurance. The court concluded that a modification would enable the administrator to collect from the insurance carriers, and would not affect the status of the debtor’s liability. Fonner v. Overdorf (In re Fonner), 2001 Bankr. LEXIS 539, – B.R. – (Bankr. W.D. Pa. May 22, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:350.03
Relief was denied preliminarily. Bankr. E.D. Pa. The secured creditor filed a motion for relief from the stay in order to foreclose on the chapter 13 debtor’s real property. The debtor resided with a person who had previously filed three unsuccessful chapter 13 petitions that disclosed the same residence. The creditor claimed that the debtor filed the petition in an improper attempt to stall foreclosure after his roommate failed to reorganize. The bankruptcy court denied the motion for relief preliminarily, holding that the creditor failed to meet its initial burden of production on the issue of bad faith. The creditor offered no evidence concerning ownership of the realty or that the mortgage was a joint obligation between the debtor and his roommate. The creditor was provided the opportunity to present further evidence at another evidentiary hearing (citing Collier on Bankruptcy, 15th Ed. Revised).In re Krebs, 2001 Bankr. LEXIS 552, – B.R. – (Bankr. E.D. Pa. April 27, 2001) (Fox, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.10
Proceeding was transferred to the Court of Claims. Bankr. D. Del. Debtor contractor was due to receive funds upon completion of a construction project, and the debtor’s surety and the IRS each asserted superior rights in the funds. An adversary proceeding was filed to determine whether the surety, a bank, the debtor, or the IRS had superior rights in the funds. The debtor agreed that its interest in the funds should be paid to the IRS. Upon the IRS motion to dismiss, the bankruptcy court held that the case would be transferred to the Court of Claims. Since the debtor claimed no interest in the funds, and the matter was essentially a dispute between creditors, jurisdiction was appropriate in the U.S. Court of Claims, rather than the bankruptcy court. United Pac. Ins. Co. v. United States (In re Smith Technology Corp.), 2001 Bankr. LEXIS 494, – B.R. – (Bankr. D. Del. April 11, 2001) (Fitzgerald, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:1014.02
Rent-to-own contract was a security agreement and not an executory contract. Bankr. E.D. Va. After the debtor filed a chapter 13 petition, the creditor objected to the debtor’s proposed plan based upon the debtor’s default on two rental contracts and because the debtor continued to retain the property without making payments. The debtor argued that her plan was confirmable because it provided for payments of $20 per month for 60 months and because she was exercising her 40 percent early purchase option, as set forth in the rental agreement. The creditor filed a motion to compel assumption or rejection of the leases, classifying them as executory contracts. In examining the issue of whether the rental contracts should be deemed true leases or security agreements, the bankruptcy court recognized that considerable disagreement exists among bankruptcy court decisions on this issue. The court followed state (Virginia) statutory law and the case law interpreting this law to hold that a rent-to-own contract is a security agreement and not a lease. The court also adopted the reasoning that such contracts are disguised consumer credit sales since they are promoted by sellers and entered into by consumers who expect to become the owner of the property. The court concluded that rent-to-own contracts should be treated as secured debts rather than executory contracts. Because section 365 did not apply, the court overruled the creditor’s objection (citing Collier on Bankruptcy 15th Ed. Revised). In re Smith, 2000 Bankr. LEXIS 1772, – B.R. – (Bankr. E.D. Va. October 31, 2000) (Tice, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.02[b]
Inchoate lien was entitled to secured status. Bankr. E.D. Va. The debtors, after a fire at their residence, contracted with the creditor to repair the damage. Thereafter the creditor filed a memorandum for a mechanic’s lien based on the services and materials provided to the debtors pursuant to the contract. Subsequentl,y the debtors filed a chapter 13 petition and proposed plan. The creditor objected to confirmation of the plan and filed a proof of claim as a secured creditor holding a mechanic’s lien against the debtor’s residence in the amount of $10,658.78. The debtors then filed a second amended plan, treating the creditor as secured in the amount of $10,306.44. Again the creditor objected, and the debtors then filed an objection to the creditor’s proof of claim, requesting that the claim be treated as a general unsecured claim in the amount of $5,711.51. The debtors introduced evidence that the creditor failed to complete all repair work and that the work performed was significantly unacceptable, requiring at least a $3,000 expenditure to correct, and concluded that the reasonable value of the performance under the contract was $6,500. The bankruptcy court first determined that, under state (Virginia) law, the creditor had properly perfected the lien prior to the petition filing. The court then considered the argument that the creditor’s lien was inchoate, pursuant to federal case law holding that a state mechanic’s lien that had not been reduced to judgment was an inchoate lien. The court determined that an inchoate lien was entitled to secured status under section 506(a). Accordingly, the court found that the creditor was entitled to a secured claim to the extent of the value of the repair work, determined to be in the amount of $6,500 (citing Collier on Bankruptcy 15th Ed. Revised). In re Terry, 2001 Bankr. LEXIS 537, – B.R. – (Bankr. E.D. Va. January 24, 2001) (Tice, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03[a][i]
Conversion of collateral resulted in nondischargeable debt. Bankr. E.D. Va. The chapter 7 debtor’s former business associate filed a complaint seeking a determination that damages he suffered were the direct result of the debtor’s wrongful conduct and excepted from the discharge. The associate sold his interest in a retail used automobile business to the debtor but continued to purchase vehicles for resale for his own account. Because the associate was not a licensed dealer, the vehicles were titled in the name of the business and the associate received the proceeds of sales. The debtor, without the associate’s knowledge or permission, caused the business to borrow additional operating funds using the associate’s vehicles as collateral. After the bank threatened to liquidate the collateral, the associate paid the bank in exchange for return of the vehicles. The bankruptcy court entered judgment for the associate, holding that the debtor committed embezzlement and larceny under section 523(a)(4) by pledging the vehicles as collateral. The court noted that the debtor’s actions were intentional and done while the debtor had full knowledge of the associate’s interests.Johnson v. Davis (In re Davis), 2001 Bankr. LEXIS 553, – B.R. – (Bankr. E.D. Va. March 8, 2001) (Tice, Jr., C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
IRS, as priority claimant, was entitled to amend proof of claim one year after confirmation of plan. Bankr. N.D. Tex. In 1997 the debtor filed a late 1995 income tax return, reporting tax due of $8,901 but did not make the required payment. The IRS assessed a tax of $8,901 plus additional penalties and interest. After the debtor filed a chapter 13 plan, the IRS filed a proof of claim, which included an estimated income tax of $3,812 for the 1995 tax year. The chapter 13 plan was confirmed on September 17, 1999. On November 9, 2000, the IRS filed a first amended proof of claim that increased the 1995 tax liability to $8,499.41, reflecting the amount due at the date of the amendment and not at the petition date. Thereafter, the IRS filed a second amended proof of claim, increasing the amount to approximately $11,000. The debtor objected to the amended claim because the IRS filed it more than 18 months after the petition was filed and more than one year after confirmation of the plan. The debtor argued that it was inequitable to allow the IRS to amend the proof of claim because it knew that $8,901 was the amount owing when it filed its original proof of claim. The bankruptcy court overruled the objection and allowed the IRS’s amended claim. The court found that allowance of the claim would cause no prejudice to the debtor, since he was paying 100 percent to unsecured creditors pursuant to the plan and knew, prior to the petition filing, the amount of his tax liability. The court further reasoned that, because the IRS claim was entitled to priority under section 507(a)(8), allowing the correct amount of the claim would not unfairly treat unsecured creditors.In re Goodman, 2001 Bankr. LEXIS 540, 261 B.R. 415 (Bankr. N.D. Tex. April 6, 2001) (Felsenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.10
Economic disparity and sacrifice evidenced that marital debt was nondischargeable support obligation. Bankr. E.D. Tex. The former spouse of the chapter 13 debtor filed an adversary proceeding requesting that the court determine that the debtor’s obligation to her was nondischargeable support. The bankruptcy court held that the debtor’s obligation to his former spouse was a nondischargeable support obligation. Although not determinative of the issue, the parties’ divorce decree indicated that the former spouse was to receive the amounts as alimony and that the debtor could claim a deduction on his federal income tax return for the payments. The debtor was a veterinarian with a thriving practice, while his former spouse had terminated her college education in order to aid his educational efforts. She had worked their entire marriage in his clinic without pay and was unemployed after the divorce. Although she was raising two teenage children, the child support she was to receive would not even make the mortgage payment on the house. Accordingly, the payments were clearly designed to offset the difference in the relative economic positions of the parties and rectify the inequality created by the former spouse’s sacrifice. Since the payments were intended to and would provide for the health, education and comfort of herself and her children, they were clearly support, not property division.Kessel v. Kessel (In re Kessel), 2001 Bankr. LEXIS 480, – B.R. – (Bankr. E.D. Tex. May 9, 2001) (Parker, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Removed claims were referred. E.D. La. A former employee of one of the related chapter 11 debtors filed a cause of action against the debtors, two nondebtor corporations and two individual supervisors, alleging that she was wrongfully fired from her employment. After the action was removed to the district court from state (Louisiana) court, the employee sought remand on the grounds that it did not arise under nor was it related to the bankruptcy case. The district court referred the claims against the debtors to the bankruptcy court, holding that resolution of the claims could conceivably impact the administration of the debtors’ estates. The district court abstained from adjudicating the claims against the nondebtor defendants and remanded those claims to state court.Jones v. JCC Holding Co., 2001 U.S. Dist. LEXIS 7043, – B.R. – (E.D. La. May 21, 2001) (Livaudais, Jr., D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.02
Court of Appeals for Sixth Circuit affirmed decision allowing trustee to set aside mortgage because it was not properly executed under state law. 6th Cir. A bank appealed the Sixth Circuit B.A.P. decision that affirmed a bankruptcy court order that granted the chapter 7 trustee’s motion to set aside the mortgage the debtors had granted to the bank because it was not properly executed under state (Ohio) law. Specifically, the bankruptcy court found that the mortgage documents did not comply with an Ohio statute that required the mortgage to be signed in the presence of two witnesses (see Ohio Rev. Code 5301.01). The United States Court of Appeals for the Sixth Circuit affirmed. The court held that the bankruptcy court did not err in concluding that the mortgage was not validly executed under Ohio law; thus, the trustee, standing in the shoes of a hypothetical bona fide purchaser, was entitled to avoid the mortgage. The court also found that the trustee had the rights of a bona fide purchaser without actual knowledge, that no constructive knowledge had been established, that the trustee was entitled to the rights of a subsequent bona fide purchaser without knowledge of the prior mortgage, and that the bank was not entitled to be subrogated to the rights of the first mortgagee.Simon v. Chase Manhattan Bank (In re Zaptocky), 2001 U.S. App. LEXIS 10511, 250 F.3d 1020 (6th Cir. May 22, 2001) (Jones, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.08
Right to setoff trumped right to exemption. Bankr. W.D. Wis. The IRS filed a motion for relief from stay, seeking to offset the debtors’ income tax refund against their income tax liability. The debtors argued that because they claimed the tax refund as exempt, the IRS’s right to a setoff under section 553(a) yielded to their right to exempt assets under section 522(c). The bankruptcy court granted the IRS’s motion, holding that the IRS could exercise its right to setoff against the debtors’ exempt property. The court adopted the minority view and noted that allowing the debtors to retain all of their refund would result in a windfall to them.In re Kadrmas, 2000 Bankr. LEXIS 1764, – B.R. – (Bankr. W.D. Wis. September 19, 2000) (Martin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522; 5:553.03
Bankruptcy court imposed sanctions. Bankr. W.D. Wis. A lienholder sought attorney’s fees against the chapter 7 debtor’s counsel who waited until a week before the trial to dismiss a lien avoidance action, even though the grounds for dismissal were known five weeks earlier. The debtor’s counsel had dismissed the complaint claiming that, after being evicted by mobile home park authorities, the debtor lacked any significant equity in the mobile home. As a result of counsel’s delay in dismissing the adversary proceeding, the lienholder incurred attorney’s fees in preparing for trial. The bankruptcy court awarded judgment for the lienholder, holding that the court, as a unit of the district court, had authority to impose sanctions under 28 U.S.C. section 1927. The sanction bore a reasonable relationship to the burden imposed on the lienholder by counsel’s dilatory conduct.Andros v. Soddy (In re Andros), 2000 Bankr. LEXIS 1765, – B.R. – (Bankr. W.D. Wis. December 14, 2000) (Martin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:2.02
Debts were not discharged. Bankr. D. Minn. After his case was closed, the chapter 7 debtor filed an adversary proceeding seeking a determination that his liability to the IRS for personal income taxes was discharged. Because the debtor had not filed income tax returns, the IRS computed the debtor’s income tax from alternative information sources, prepared substitute returns, issued notices of deficiency and assessed the taxes owed. The debtor subsequently submitted tax returns for the years in question. The bankruptcy court denied the debtor’s request for summary judgment, holding that the debtor lost the right to subject his tax obligations to discharge when he allowed the IRS to complete its assessment process, notwithstanding the fact that the claims otherwise became stale and dischargeable under other provisions of section 523(a)(1). Walsh v. United States (In re Walsh), 2001 Bankr. LEXIS 522, 260 B.R. 142 (Bankr. D. Minn. March 29, 2001) (Kishel, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07
The bankruptcy court had authority to deny conversion to chapter 13. Bankr. E.D. Ark. The chapter 7 trustee filed an adversary proceeding against the debtor’s daughter to recover fraudulent transfers of property made before the filing of the chapter 7 petition. To halt that proceeding, the debtor filed a motion to convert his case from chapter 7 to chapter 13. At the hearing on the trustee’s objection to the conversion, the trustee presented evidence of transfers of property as well as material omissions on the schedules. The debtor asserted that under section 706 he had an absolute right to convert his case to chapter 13. The bankruptcy court held that the court had the inherent power to protect the bankruptcy process and deny the chapter 7 debtor’s motion to convert to chapter 13. The trustee established by clear and convincing evidence that conversion would constitute an unfair manipulation of the Code and that the debtor’s motion was made in bad faith. The debtor failed to disclose assets, filed grossly inaccurate schedules, failed to file tax returns, misrepresented his interests in various types of property and gave false or misleading answers to questions in his statement of financial affairs, as well as in testimony before the court. Since the debtor’s motive in filing his motion to convert was to protect his assets from the reach of his creditors rather than to pay his creditors in good faith, the motion to convert was denied.In re Johnson, 2001 Bankr. LEXIS 487, – B.R. – (Bankr. E.D. Ark. April 18, 2001) (Mixon, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:706.04
Bankruptcy court granted motion to dismiss ancillary petition. Bankr. C.D. Cal. The foreign representative of the debtor in foreign proceedings (a Taiwanese corporation) filed an ancillary petition under section 304. In conjunction with the ancillary petition, the debtor sought a preliminary injunction against American Express Bank ('AMEX') seeking, among other things, to enjoin prosecution of a receivership action in California state court. AMEX contested the ancillary petition and filed a motion to dismiss or abstain. The bankruptcy court granted the dismissal motion under Fed. R. Civ. P. 12(b)(6) debtor’s pending application for reorganization in Taiwan did not qualify as a foreign proceeding under section 304, and because the 'foreign representative' was not a fiduciary, had not been duly selected as a representative of a foreign bankruptcy estate, and therefore was not an appropriate foreign representative. The court explained that comity did not require a bankruptcy court in the United States to grant more relief than a court in Taiwan would grant.In re Master Home Furniture Co., Ltd., 2001 Bankr. LEXIS 544, 261 B.R. 671 (Bankr. C.D. Cal. April 24, 2001) (Jury, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:304.01, .08
Objection to IRS’s claim sustained because assessment of partnership was insufficient for collection of taxes from individual members of the partnership. C.D. Cal. The chapter 13 debtors, who were general partners of a partnership, objected to a claim filed by the IRS for taxes and penalties against the partnership. The debtors argued that the claim should not be allowed because it was a claim assessed against the partnership and not a proven claim against the estate. Specifically, the debtors argued that while they were jointly and severally liable for the partnership’s debts, the claim had to be individually assessed before it could be collected against them. The bankruptcy court held that the tax assessments against the partnership were not effective to bind the debtors as partners and that the collection was barred by the statute of limitations. The IRS appealed. The district court affirmed. The court held that the assessment of the partnership was insufficient for collection of taxes from the individual debtors and that the bankruptcy court was correct in holding that collection was barred because the debtors were not assessed within the applicable three-year period. The court found no compelling reason to conclude that it was error for the bankruptcy court, in interpreting the relevant Internal Revenue Code provisions, to read 'individual' as including individuals who are general partners of partnerships. Thus, the bankruptcy court correctly found that the debtors had presented sufficient evidence to rebut the prima facie validity of the IRS’s claim.United States v. Galletti (In re Galletti), 2001 U.S. Dist. LEXIS 6480, – B.R. – (C.D. Cal. March 23, 2001) (Phillips, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02
Enabling loan exception did not apply when the debtor had leased the vehicle prior to the purchase transaction. Bankr. D. OR. Debtor, who leased a vehicle from an automobile dealer, who in turn assigned the lease to a credit corporation, exercised his option to purchase the vehicle at the end of the lease. In a complicated series of transactions, which began on February 2, the lease was paid off and dealer assigned its rights in a newly executed installment contract to the credit corporation. On February 16, the dealer delivered the title and other documents to the motor vehicle department, which subsequently issued a new title noting the debtor as owner and the credit corporation as the security interest holder. On February 25, the debtor filed a chapter 7 petition and the trustee sought to set aside the security interest in the vehicle as a preference. The creditor asserted that the transaction was protected under section 547(c)(3) as an enabling loan as well as a contemporaneous exchange for new value under section 547(c)(1). The bankruptcy court held that the transaction was not an enabling loan because the debtor already had possession of the vehicle. Section 547(c)(3) requires that the new value be given to acquire the vehicle. Since the debtor had possession of the vehicle under the lease, the loan was not given to the debtor to acquire the vehicle and, thus, the enabling loan exception did not apply. The transaction was, however, an contemporaneous exchange for new value under 547(c)(1).Roost v. Toyota Motor Credit Corp. (In re Moon), 2001 Bankr. LEXIS 481, – B.R. – (Bankr. D. OR. May 4, 2001) (Radcliffe, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.04
Creditor willfully violated stay. Bankr. D. Kan. The chapter 7 debtors filed a motion to hold a creditor in contempt for violation of the automatic stay. The creditor had continued to garnish the debtor husband’s wages pursuant to a prepetition garnishment order even after receiving notice of the pending case from the court and a request for release from the debtors’ attorney. The creditor argued that its only delay was in awaiting the employer’s answer before releasing the garnishment. The bankruptcy court held the creditor in contempt for violation of the stay, holding that the creditor had an affirmative duty to release the garnishment of the debtor’s wages as soon as it learned of the bankruptcy. The court noted that awaiting the employer’s answer was not the sort of administrative delay that would excuse the stay violation.In re Pulliam, 2001 Bankr. LEXIS 524, – B.R. – (Bankr. D. Kan. May 15, 2001) (Nugent, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03, .03
Stock options were assets of the estate and not exempt wages. Bankr. M.D. FLA. The debtor was granted employee stock options on December 4, 1997. The options were to vest on dates between December 1999 and December 2002, provided the debtor continued in his employment. The debtor filed a chapter 7 petition on October 1, 1999. The trustee asserted that all the debtor’s rights under the stock option plans were property of the estate. The debtor argued that his interest in the stock option plans was not subject to assumption or assignment to the trustee and was exempt from the claims of creditors. Specifically, the debtor contended that the stock options were exempt wages and that they were executory contracts for personal services that the trustee could not assume or assign under section 365(a). The bankruptcy court held that the stock options were assets of the estate and were not exempt wages. The court reasoned that, for the purposes of section 365(a), the debtor’s argument that the options were executory personal service contracts failed because the debtor had the absolute right to exercise a number of options conditioned only upon his continued employment for a certain period. The court found that such a right was no different from the right to share in a trust upon reaching a certain age. The court finally ordered turnover of a portion of the options prorated by calculating the number of days between December 4, 1997 and the petition date, dividing that figure by the number of days between December 4, 1997 and the applicable vesting date, and applying that percentage to the number of options granted for that year. The court concluded that the prorated options were attributable to the debtor’s work completed prior to the petition date (citing Collier on Bankruptcy 15th Ed. Revised). In re Lawson, 2001 Bankr. LEXIS 536, 261 B.R.774 (Bankr. M.D. FLA. April 5, 2001) (Jennemann, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.03
Trustee could not avoid lien that was inadvertently released when debt had not been satisfied. Bankr. M.D. Ga. The debtor entered into a retail installment contract and security agreement with the creditor to purchase an automobile. The creditor perfected its security interest. Thereafter, the creditor executed a lien release on the certificate of title and mailed it to the debtor, apparently in error because at the time the debt had not yet been satisfied. The debtor did not forward the release to the state’s revenue department and so no new certificate of title reflecting the lien release had ever been issued. After realizing its error, the creditor applied for a replacement title, which was issued in October 1999. In November 1999 the debtor filed a chapter 13 petition and listed the creditor as unsecured, holding a $21,000 claim. The creditor’s proof of claim asserted secured status. Thereafter, the bankruptcy court confirmed the debtor’s plan proposing a dividend payment to general unsecured creditors. In July 2000, the trustee filed an adversary proceeding, asserting that the creditor released its lien on the automobile when it mailed the certificate of title to the debtor, at which time the lien became unperfected and that, accordingly, the application and receipt of the replacement title was an attempt at perfection. Because that took place within the 90 days prepetition, the trustee argued that a preferential transfer took place, one that was subject to avoidance. The creditor argued that, pursuant to state (Alabama) law, its lien was never released; the replacement title did not re-perfect the lien and its lien was at all times perfected because public records never reflected otherwise. The bankruptcy court held that, pursuant to state law, the creditor did not effectively release its security interest because the lien had not been satisfied and the final step of delivery to the revenue department had not been completed. The court concluded that the trustee was therefore unable to use her 'strong arm powers' under section 544(a)(1) because the lien was perfected on the day of the petition filing. The court also found that, because the lien had never been released, the trustee could not avoid the transfer since no transfer had taken place.Smith v. Am. Honda Fin. Corp. (In re Marshall), 2001 Bankr. LEXIS 534, – B.R. – (Bankr. M.D. Ga. May 21, 2001) (Laney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544