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 21, 2003

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

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3d Cir.

§ 507(a)(4) Creditor’s claim for workers’ compensation insurance premiums entitled to priority status as contribution to employee benefit plan.
In re Integrated Health Servs., Inc. (Bankr. D. Del.)

Collier Bankruptcy Case Summaries

Liens filed pursuant to state law which would not attach to interest of a bona fide purchaser could be avoided. Bankr. S.D.N.Y. PROCEDURAL POSTURE: A creditor contractor moved for summary judgment in its adversary action to determine the validity and priority of its liens against a jointly administered debtor’s property, arguing it was secured under the New Jersey Construction Lien Claim Law, N.J. Stat. § 2A:44A-1 et seq. and 11 U.S.C. § 546(b)(1). The debtor argued the liens were not perfected at the time of the bankruptcy and could be avoided under 11 U.S.C. § 545(2). OVERVIEW: N.J. Stat. § 2A:44A-10 explicitly stated that a lien would not attach to the interest acquired by a bona fide purchaser first recorded. A trustee was treated as an intervening lien creditor under 11 U.S.C. § 544(a). Thus, the liens, filed after the bankruptcy, did not qualify for the 11 U.S.C. § 546(b) exception. The creditor had not filed a Notice of Unpaid Balance and Right to File Lien (“NUB”) under N.J. Stat. § 2A:44A-20(a), (f), which was the only way to gain priority, thus the liens did not date back to the start of the creditor’s work. Even if the creditor was ineligible to file a NUB, it could have filed actual lien claims once it completed the majority of the work. Under N.J. Stat. § 2A:44A-10, liens that were eligible to participate in a lien fund did not relate back to the initial lien filed in connection with such fund so as to gain priority over intervening claims. The liens were not enforceable against a hypothetical bona fide purchaser prior to the filing of the petition, and could be avoided under 11 U.S.C. § 545(2), thus, the lien fund did not apply. Schoonover Elec. Co. v. Enron Corp. (In re Enron Corp.), 2003 Bankr. LEXIS 630, 294 B.R. 232 (Bankr. S.D.N.Y. June 23, 2003) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:545.01 [back to top]

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Securities law actions brought by pensions against fiduciaries of debtor were “related to” debtor’s bankruptcy and properly removed to federal court. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff pension systems sued defendants, who were connected to a telecommunications corporation, in state court alleging federal securities law and state law claims but did not name the corporation, which earlier had filed for bankruptcy. Defendants removed the action and others like it, based on the bankruptcy. Plaintiffs moved to remand for lack of subject matter jurisdiction or on equitable grounds, or alternatively, for abstention. OVERVIEW: The court examined the propriety of removal and whether the state court action was so related to the bankruptcy that there was federal subject matter jurisdiction over it pursuant to 28 U.S.C. § 1334(b). Inter alia, the court held that, because the contribution claims had the potential to alter the distribution of assets among creditors, the effect of contribution claims on the bankruptcy estate was at least “conceivable.” The conditions for bankruptcy jurisdiction were met, and the action did not fall within the two limited exceptions to removal under 28 U.S.C. § 1452(a), which did not require defendants’ unanimous consent to removal. As to abstention, the pension systems failed to prove that the action could be timely adjudicated in state court, or that 28 U.S.C. § 1334 provided the sole basis for jurisdiction. The mandatory abstention provision was not available because the action could have been commenced in federal court, since it pled two federal securities law claims. Moreover, most of the Second Circuit factors for discretionary abstention weighed heavily against abstention. New York City Employees’ Ret. Sys. v. Ebbers (In re Worldcom Secs. Litig.), 2003 U.S. Dist. LEXIS 2790, 293 B.R. 308 (S.D.N.Y. March 3, 2003) (Cote, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.07 [back to top]

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Creditor’s claim for workers’ compensation insurance premiums entitled to priority status as contribution to employee benefit plan. Bankr. D. Del. PROCEDURAL POSTURE: In a chapter 11 proceeding, creditor, a workers’ compensation insurance provider, filed a claim for $3,919,891 representing insurance premiums due for workers’ compensation coverage. Creditor filed the claim as a priority claim under 11 U.S.C. § 507(a)(4), asserting it represented contributions to an employee benefit plan. Debtors objected to the status of the claim, asserting it should be classified as a general unsecured claim. OVERVIEW: The court opined that 11 U.S.C. § 507(a)(4) was a simple provision that granted priority to “allowed unsecured claims for contributions to an employee benefit plan.” Without a definition of “contributions to an employee benefit plan,” the Bankruptcy Code relied on courts to apply the provision according to the plain meaning of its terms. The court determined that reference to the legislative history of section 507(a)(4) was not warranted. The underlying payments to injured employees from workers’ compensation fitted the archetypical examples of employee benefit plans such as health insurance, disability, and pension plans. The debtors’ choice to contract with the creditor for insurance to cover such employee benefits was the implementation of a “plan.” Accordingly, the court found that the premiums were “contributions to an employee benefit plan.” As such, the creditor’s claim enjoyed priority under section 507(a)(4). The court found that there was no clearly expressed legislative intent to exclude workers’ compensation benefits from the plain language of section 507(a)(4). In re Integrated Health Servs., Inc., 2003 Bankr. LEXIS 123, 291 B.R. 611 (Bankr. D. Del. February 24, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.06 [back to top]

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Medical malpractice settlement funds were not property of the estate where there had been no timely objection to original claim of exemption. Bankr. E.D. Va. PROCEDURAL POSTURE: A former chapter 7 debtor moved to reopen his case to determine if a medical malpractice claim, claimed as exempt under Va. Code § 34-28.1, was property of the estate under 11 U.S.C. § 541 when a state court disbursed settlement funds. The debtor argued his bankruptcy counsel, the trustee, and his medical malpractice counsel acted improperly with respect to the action, and if it was property of the estate, sought review of such conduct. OVERVIEW: Because no objection to the claim of exemption was timely filed within 30 days after the end of the first meeting of creditors under Fed. R. Bankr. P. 4003(b), the exemption was allowed and the medical malpractice claim ceased to be property of the bankruptcy estate. Thus, later, when the state court authorized the disbursement, the trustee had no further interest in the fund. The state court overruled the debtor’s objection to the disbursement, but it appeared no appeal was taken. The funds were disbursed to the malpractice lawyers. Reopening the case could not affect the state court order. The bankruptcy court was not an appellate court of state court judgments. There was nothing per se improper about the trustee endorsing the state court order. It appeared that the Office of the United States Trustee investigated the debtor’s complaints and responded to them. There was nothing for the bankruptcy court to do. If there was professional misconduct of the personal injury lawyers, the matter could be pursued with the state bar association which regulated the conduct of attorneys. It was inappropriate for the bankruptcy court to become involved in such action. In re Zaidi, 2002 Bankr. LEXIS 1721, 293 B.R. 861 (Bankr. E.D. Va. December 16, 2002) (Mayer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.01 [back to top]

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Debt arising from violation of collective bargaining agreement was dischargeable where debtor did not intend to cause injury to the union. 5th Cir. PROCEDURAL POSTURE: The District Court for the Western District of Texas affirmed a decision of the Bankruptcy Court that a union’s two unsecured claims against the debtor were excepted from discharge under 11 U.S.C. § 523(a)(6). The debtor appealed that decision. OVERVIEW: There were two debts at issue, one arising from the violation of a collective bargaining agreement (“CBA”) and the other arising from the violation of an agreed final judgment and decree. The dischargeability of the debts depended on the intentional or certain nature of the injury the debtor inflicted upon the union. When the debtor hired non-union electricians in violation of the CBA, he was motivated by a desire to save his business. Although he acted intentionally, he did not intend to injury the union. The only direct injuries to the union were to its prestige and to its ability to uphold its contracts. There was no showing of an intentional or substantially certain injury to the union. Turning to the violation of the agreed final judgment and decree, the debtor knew his obligations under the CBA, yet he knowingly violated those obligations. Even if the debtor did not intend to injure the union, the agreed final judgment and decree made him substantially certain that his acts would inflict injury. The debtor’s argument advocating discharge of the damages for contempt overlooked the fact the damages assessed arose from his defiance of the agreed final judgment and decree. Williams v. International Bhd. of Elec. Workers (In re Williams), 2003 U.S. App. LEXIS 13579, — F.3d — (5th Cir. July 7, 2003) (Little, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12[2]. [back to top]

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Security interest granted within 90 days of petition was avoidable despite state law permitting relation back. Bankr. S.D. Ohio PROCEDURAL POSTURE: The chapter 7 trustee filed a complaint to avoid a preferential transfer, alleging that the notation of a lien upon the title for the debtors’ car within 90 days before the petition date was recoverable under 11 U.S.C. §§ 547(b), 550. On the trustee’s motion for summary judgment, the bank argued that under Ohio Rev. Code § 4505.06(A)(5)(b), the lien related back to when the debtors took possession. OVERVIEW: The debtors filed bankruptcy 77 days after the perfection of the security interest, but had bought and taken possession of the car 26 days before the perfection. Ohio Rev. Code § 4505.06(A)(4) and (5)(a)(1) required the car dealer to submit an application for a certificate of title and pay the applicable tax within seven business days after the date of delivery of the car, but the dealer failed to do so. The promissory note and security interest taken by the dealer at the time of the sale was assigned to the bank. 11 U.S.C. § 547(c)(3)(B) created a uniform 20-day federal perfection period immune to alteration by state laws permitting relation back. The debtors took possession of the car on April 25, but the bank’s lien was not noted on the certificate of title until May 21. The notation of lien was made to or for the benefit of the bank while the debtors were presumed to have been insolvent, was made within 90 days of the bankruptcy petition, and enabled the bank to receive more than it would have received if the transfer had not been made. All of the elements of 11 U.S.C. § 547(b) were established and the trustee was entitled to judgment as a matter of law. Luper v. United Bank, Inc. (In re Owens), 2003 Bankr. LEXIS 660, 294 B.R. 289 (Bankr. S.D. Ohio May 14, 2003) (Calhoun, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04 [back to top]

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Security interest granted within 90 days of petition was avoidable despite state law permitting relation back. Bankr. S.D. Ohio PROCEDURAL POSTURE: The chapter 7 trustee filed a complaint to avoid a preferential transfer, alleging that the notation of a lien upon the title for the debtors’ car within 90 days before the petition date was recoverable under 11 U.S.C. §§ 547(b), 550. On the trustee’s motion for summary judgment, the bank argued that under Ohio Rev. Code § 4505.06(A)(5)(b), the lien related back to when the debtors took possession. OVERVIEW: The debtors filed bankruptcy 77 days after the perfection of the security interest, but had bought and taken possession of the car 26 days before the perfection. Ohio Rev. Code § 4505.06(A)(4) and (5)(a)(1) required the car dealer to submit an application for a certificate of title and pay the applicable tax within seven business days after the date of delivery of the car, but the dealer failed to do so. The promissory note and security interest taken by the dealer at the time of the sale was assigned to the bank. 11 U.S.C. § 547(c)(3)(B) created a uniform 20-day federal perfection period immune to alteration by state laws permitting relation back. The debtors took possession of the car on April 25, but the bank’s lien was not noted on the certificate of title until May 21. The notation of lien was made to or for the benefit of the bank while the debtors were presumed to have been insolvent, was made within 90 days of the bankruptcy petition, and enabled the bank to receive more than it would have received if the transfer had not been made. All of the elements of 11 U.S.C. § 547(b) were established and the trustee was entitled to judgment as a matter of law. Luper v. United Bank, Inc. (In re Owens), 2003 Bankr. LEXIS 660, 294 B.R. 289 (Bankr. S.D. Ohio May 14, 2003) (Calhoun, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04 [back to top]

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Debtor’s obligation to pay down mortgage on marital residence occupied by custodial former spouse was in the nature of child support and nondischargeable. Bankr. C.D. Ill. PROCEDURAL POSTURE: Plaintiff creditor filed a motion for summary judgment in her adversary complaint against defendant debtor, seeking a determination that the debtor’s debt to the creditor arising out of a judgment for dissolution of marriage was nondischargeable pursuant to 11 U.S.C. § 523(a)(5). OVERVIEW: When the parties’ marriage was dissolved, physical custody of the children was awarded to the creditor. The debtor agreed to pay child support, which would be increased once the debt on the marital residence was reduced from the sale of another property, listed on the real estate market. The creditor was awarded the marital residence, and the husband had to pay the mortgage until the debt was reduced to $18,000. When she filed the adversary proceeding, the creditor had been making payments on the mortgage. The husband had sold the other property but had not applied the proceeds against the mortgage of the marital residence, and the balance remained in excess of $18,000. The court held that the subject obligation was in the nature of a child support obligation and was nondischargeable pursuant to section 523(a)(5). The divorce court intended that the debtor pay down the mortgage with the sale proceeds of the other property as additional support for the minor children. The court emphasized that the creditor had physical custody of the children and that the child support obligation would be increased after the sale proceeds were applied to reduce the mortgage. Waters v. Waters (In re Waters), 2003 Bankr. LEXIS 644, 292 B.R. 907 (Bankr. C.D. Ill. April 17, 2003) (Lessen, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.01] [back to top]

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Debtor’s mere failure to pay tuition did not create a nondischargeable student loan. N.D. Ill. PROCEDURAL POSTURE: Appellee bankruptcy debtor, a former university student, brought an adversary proceeding against appellant university official alleging that the student’s university tuition debt was discharged, where the official contended that the debt was a nondischargeable loan under 11 U.S.C. § 523(a)(8). The official appealed the order of the U.S. Bankruptcy Court for the Northern District of Illinois which granted summary judgment to the student. OVERVIEW: The student registered, enrolled, and attended classes at the university but failed to pay tuition. The official contended that the student’s tuition debt constituted an educational loan which was not dischargeable under section 523(a)(8), but the student argued that her failure to pay tuition when due, while creating an obligation to pay, did not create a loan. The district court held that, in the abs