Collier Bankruptcy Case Update July-23-01
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 23, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 362(a)(6) B.A.P. affirmed holding that creditor violated automatic stay by requiring debtors to reaffirm unsecured debt as a condition to reaffirming their mortgage.
Katahdin Fed. Credit Union v. Jamo (In re Jamo) (B.A.P. 1st Cir.) 073004
§ 364(d) Debtor seeking to subordinate lien failed to show adequate protection of secured creditor.
In re Smith (Bankr. D.N.H.) 073008
§ 506(a) Court split the difference in valuation dispute.
Manakos v. BCC Investors, L.L.C. (In re Manakos) (Bankr. D.N.H.) 073011
§ 523(a)(2)(A) Creditor did not establish elements of fraud.
Denton v. Girard (In re Girard) (Bankr. D.N.H.) 073016
§ 523(a)(4) Summary judgment was granted to creditor.
Martineau v. Pratt (In re Pratt) (Bankr. D.N.H.) 073018
§ 523(a)(5) Obligation was not excepted from discharge.
Weeden v. Weeden (In re Weeden) (Bankr. D.N.H.) 073021
§ 523(a)(6) Debtor did not have actual intent to harm.
Brown v. Timlake (In re Timlake) (Bankr. D.N.H.) 073024
§ 523(a)(15) Marital debt was not dischargable.
Belanger v. Fortier (In re Fortier) (Bankr. D.N.H.) 073026
§ 1325(a)(3) Plan was filed in good faith.
In re Kafanelis (Bankr. D.N.H.) 073041
28 U.S.C. § 157(a) Bankruptcy court had no jurisdiction to hear breach of contract dispute between nondebtor third parties.
Balzotti v. RAD Investments, LLC (In re Shepherds Hill Dev. Co.) (Bankr. D.N.H.) 073043
Rule 7015 Objection to discharge was tried by consent of the parties.
Marshall v. Kalantzis (In re Kalantzis) (Bankr. D.N.H.) 073044
§ 362(a)(1) Suit against nondebtor violated the automatic stay.
Singer Co. B.V. v. Groz Beckert KG (In re Singer Co. N.V.) (Bankr. S.D.N.Y.) 073002
§ 510(b) Former shareholders’ claims were for damages arising from purchase of debtors’ stock; thus, statutory subordination was mandated.
In re Kaiser Group Int’l Inc. (Bankr. D. Del.) 073014
§ 523(a)(5) Despite designation as 'division of marital property,' obligations were deemed to represent support for section 523(a)(5) purposes.
Mendez v. Mendez (In re Mendez) (Bankr. W.D. Pa.) 073022
§ 523(a)(2)(B) Creditor established nondischargeability of debt.
Global Express Money Orders, Inc. v. Davis (In re Davis) (Bankr. E.D. Va.) 073017
§ 541(a) Debtor’s estate did not have cause of action against insurer for negligently failing to settle claims within policy.
Safeway Managing Gen. Agency, Inc. v. Osherow (In re Davis) (5th Cir.) 073028
§ 544(a)(1) Debtor’s transfer of funds in exchange for a forged check was recoverable as a fraudulent transfer.
Dayton Title Agency, Inc. v. White Family Cos., Inc. (In re Dayton Title Agency, Inc.) (Bankr. S.D. Ohio) 073029
§ 507 Employees state law claim was not preempted by federal labor law where it did not require interpretation of collective bargaining agreement.
Faehnrich v. Bentz Metal Prods. Co. (In re Bentz Metal Prods. Co.) (7th Cir.) 073013
§ 1327(a) Chapter 13 debtor could not challenge the value of collateral postconfirmation.
In re Fareed (Bankr. N.D. Ill.) 073042
§ 362(d) Postpetition termination of agreement was void.
In re Nat’l Hydro-Vac Indus. Servs., L.L.C. (Bankr. E.D. Ark.) 073005
§ 341 United States serviceman’s motion for continuance of section 341 hearing denied, but some deadlines extended to protect his potential interests.
In re Wlaschin (Bankr. M.D. Fla.) 073001
§ 362(h) Creditor who delivered a repossessed vehicle to auction agency prepetition for a postpetition sale did not violate automatic stay.
In re Ratliff (Bankr. M.D. Fla.) 073006
§ 522(b)(2)(A) Debtor’s boat did not qualify for homestead exemption.
In re Hacker (Bankr. M.D. Fla.) 073015
Collier Bankruptcy Case Summaries
B.A.P. affirmed holding that creditor violated automatic stay by requiring debtors to reaffirm unsecured debt as a condition to reaffirming their mortgage. B.A.P. 1st Cir. The chapter 7 debtors had a first mortgage on their home with the creditor, to whom they were also indebted on several unrelated, unsecured loans. After the petition filing, the creditor refused to accept payments on the mortgage and, when the debtors sought to reaffirm the mortgage, declined unless the debtors also reaffirmed the unsecured loans. The creditor represented that, should the reaffirmation package not be approved, it would foreclose on the debtors’ home. The debtors filed this adversary proceeding seeking monetary and other damages for violation of the stay. The bankruptcy court entered an order enjoining the creditor from foreclosing on the home for any reason associated with the chapter 7 filing, approving the terms of the reaffirmation of the mortgage, and striking any provisions of that agreement conditioned upon the reaffirmation of unsecured indebtedness. The creditor appealed, arguing that (1) the court erred in holding that 'linking' its consent to reaffirm the mortgage with the debtor’s reaffirmation of the unsecured debts was a violation of the automatic stay and (2) the court exceeded its authority by approving a reaffirmation agreement not consented to by the creditor and by granting injunctive relief. The B.A.P. for the First Circuit affirmed, holding that the creditor’s refusal to execute the reaffirmation agreement unless the dischargeable unsecured debt was also paid violated the automatic stay provided by section 362(a)(6). The B.A.P. also held that, under the doctrine of equitable estoppel, the bankruptcy court was not inappropriate in granting injunctive relief, as the practical effect was to reimpose the status quo as to the mortgage, which both protected the rights of the debtors and left the creditor in the same position it would have held if the petition had never been filed.Katahdin Fed. Credit Union v. Jamo (In re Jamo), 2001 Bankr. LEXIS 574, 262 B.R. 159 (B.A.P. 1st Cir. May 29, 2001) (Hillman, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.05
Debtor seeking to subordinate lien failed to show adequate protection of secured creditor. Bankr. D.N.H. The chapter 13 debtor filed a motion asking the bankruptcy court to approve secured financing and to subordinate the mortgage interest held by the creditor, the debtor’s former spouse, pursuant to section 364(d). The debtor argued that the secured claim of the creditor should be valued at zero, making it unnecessary to subordinate it, and that the borrowing to make repairs on the real property subject to the mortgage would increase its value and thereby confer adequate protection for the purposes of section 364(d). The debtor also argued that the value of the property, approximately $228,000, should be reduced by a broker’s commission and transfer taxes, thereby reducing the value for to approximately $204,000. Since that amount was less than the $208,000 claim of the primary secured creditor, the debtor argued that the creditor’s claim attached to no value in the collateral. The court held that the replacement cost should not be reduced by hypothetical sales costs and that the value of the property remained at the $228,000 figure. The court then determined that the creditor’s lien could not be subordinated because the debtor failed to demonstrate adequate protection. The court reasoned that any additional loan for repairs would reduce the security held by the creditor, thereby depriving her of the adequate protection required under section 364(d). In re Smith, 2000 Bankr. LEXIS 1813, – B.R. – (Bankr. D.N.H. July 6, 2000) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:364.05
Court split the difference in valuation dispute. Bankr. D.N.H. The debtors initiated an adversary proceeding requesting a determination of the extent to which the junior mortgagee was secured. At trial, each party submitted the testimony of credible real estate appraisers but their respective values were $23,000 apart. The bankruptcy court held that after applying adjustments for specific items, the value of the residence was at the midpoint between the adjusted fair values offered by the parties. The court extensively examined the testimony of the appraisers and made adjustments to each appraiser’s valuations based upon roofing problems, squirrel damage, termite damage and the fact that the creditor’s expert compared the debtors’ residence to those of higher acreage. After the adjustments, the court’s final figure fell at the midpoint between the appraisals.Manakos v. BCC Investors, L.L.C. (In re Manakos), 2000 Bankr. LEXIS 1785, – B.R. – (Bankr. D.N.H. September 8, 2000) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03[b]
Creditor did not establish elements of fraud. Bankr. D.N.H. The chapter 7 debtor’s former spouse filed an adversary proceeding seeking to have an obligation owed to her declared nondischargeable. Pursuant to the separation agreement, any proceeds from the sale of the marital home were to be divided equally between the parties. The debtor was also obligated to pay tax and condominium liens and keep current all expenses of the home pending the sale. Upon the sale of the home, the entire amount of the proceeds was to be used to pay the liens. The former spouse argued that the debtor fraudulently induced her to sign the agreement and that he never intended to carry out its provisions. The bankruptcy court found in favor of the debtor, holding that the former spouse failed to show that the debtor made a false representation when he signed the agreement. At the time the debtor signed the agreement, he intended that the liens would be paid and that his former wife would receive her share of the net proceeds.Denton v. Girard (In re Girard), 2001 Bankr. LEXIS 585, – B.R. – (Bankr. D.N.H. March 23, 2001) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Summary judgment was granted to creditor. Bankr. D.N.H. The administrator of the estate of the chapter 7 debtor’s father filed a complaint seeking to except a judgment debt from discharge pursuant to section 523(a)(4). The complaint was based upon a state court judgment which found that the debtor engaged in self-dealing while acting in a fiduciary capacity with respect to a joint account held with her imprisoned father. The bankruptcy court granted summary judgment to the administrator, holding that because the state court judgment sufficiently established that the debtor committed defalcation while acting in a fiduciary capacity, the debt was excepted from discharge. Since the debtor was fully represented in the state court action, the judgment was given full effect in the bankruptcy court.Martineau v. Pratt (In re Pratt), 2001 Bankr. LEXIS 595, – B.R. – (Bankr. D.N.H. April 26, 2001) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Obligation was not excepted from discharge. Bankr. D.N.H. The chapter 7 debtor’s former spouse filed an adversary proceeding alleging that the debtor’s liability to her was excepted from his discharge under section 523(a)(5). The parties’ divorce stipulation created an obligation for the debtor to pay one half of a home equity loan to the former spouse. The loan was arranged by the former spouse prior to the marriage and did not require the debtor to be obligated on the note. As a result of the divorce, the former spouse retained her home. The bankruptcy court denied the requested relief, holding that at the time of the divorce, the parties did not intend for the repayment obligation to be in the nature of support or alimony. The court noted that the benefit of the loan to the debtor was minimal.Weeden v. Weeden (In re Weeden), 2001 Bankr. LEXIS 589, – B.R. – (Bankr. D.N.H. February 8, 2001) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Debtor did not have actual intent to harm. Bankr. D.N.H. Chapter 7 baker signed a lease and obtained a loan from her lessors, providing her bakery equipment as security for the debt. When the business failed, she contemplated bankruptcy and sought advice from an attorney. At that time, she learned that the security agreement she signed had not been recorded to perfect that interest. Not understanding the import of this information, she sold the equipment and used the proceeds to pay other obligations. Upon the lessors’ objection to discharge and dischargeability, the bankruptcy court held that since the debtor did not have the actual intent to harm the lessors, the debt was dischargeable. In any event, since the lessors’ security interest was not perfected, it was likely that the trustee would have sold the equipment, and the lessors would have only received their pro rata share with the other unsecured creditors.Brown v. Timlake (In re Timlake), 2001 Bankr. LEXIS 593, – B.R. – (Bankr. D.N.H. April 20, 2001) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
Marital debt was not dischargable. Bankr. D.N.H. The parties’ divorce decree provided that the debtor would hold his former spouse harmless from all debts of the marriage, including the mortgage, credit card and business debt. After the parties divorced, the debtor obtained a second mortgage, but paid none of the marital obligations with the loan proceeds. Upon the former spouse’s complaint to determine nondischargeability of debt, the bankruptcy court held that the debtor had the ability to pay and the equities required that he do so. Although at the time of trial, the debtor’s income and expenses were equal, approximately $225 of the expenses was about to terminate and, upon completion of his education, he would earn substantially more income. Moreover, his lower income status was, presently, self-inflicted. The equities were in favor of nondischargeability because the debtor had obtained $33,000 from the second mortgage but paid no bills with the funds; he chose a career which provided less remuneration than he could otherwise obtain; and the former spouse, although remarried, had the expenses of a handicapped child.Belanger v. Fortier (In re Fortier), 2001 Bankr. LEXIS 594, – B.R. – (Bankr. D.N.H. April 17, 2001) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.21
Plan was filed in good faith. Bankr. D.N.H. An unsecured creditor filed an objection to the debtor’s chapter 13 plan, asserting that it was filed in bad faith. The creditor’s claim arose out of a criminal conviction for second degree assault and a civil judgment for damages against the debtor. The debtor’s monthly disposable income was meager, and the plan proposed to pay unsecured creditors approximately three percent of their claims. The creditor argued that the plan could not be confirmed because the debt owed to him, which was also the most significant claim against the debtor, would have been excepted from a chapter 7 discharge under section 523(a)(6). The bankruptcy court overruled the objection, holding that the debtor’s attempt to discharge a debt that could otherwise be excepted from discharge in a chapter 7 case did not establish that the debtor failed to propose his plan in good faith. The debtor was able to show that he was entitled to chapter 13 relief and that his disposable income was as he purported it to be.In re Kafanelis, 2000 Bankr. LEXIS 1819, – B.R. – (Bankr. D.N.H. November 6, 2000) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.04
Bankruptcy court had no jurisdiction to hear breach of contract dispute between nondebtor third parties. Bankr. D.N.H. After the debtor, a limited liability company, filed a chapter 11 petition, the debtor and several of its members attempted to find new investors or to sell its development project. By November 1999, a purchase and sale agreement was signed with an investment group, and the debtor sought approval of the bankruptcy court for bidding procedures and authorization for the sale. In December 1999, the debtor’s members filed a motion to dismiss the petition so they could sell their membership interests to the investment group. The debtor was not a party to the sale agreement. In June 2000, the members commenced an adversary proceeding against the investment group seeking damages for breach of the sale agreement, negligent misrepresentation and detrimental reliance. The members asserted that the court had 'related to' jurisdiction over the adversary proceeding because its outcome would have an effect on the chapter 11 estate. The court held that, for the purposes of section 157(a), it lacked jurisdiction to hear the adversary proceeding. The court reasoned that the alleged breach arose in January 2000, when the estate was in no way affected by that claim, and that the dispute was between two nondebtor third parties, whose underlying claim could be heard in state court (citing Collier on Bankruptcy 15th Ed. Revised).Balzotti v. RAD Investments, LLC (In re Shepherds Hill Dev. Co.), 2001 Bankr. LEXIS 598, – B.R. – (Bankr. D.N.H. May 15, 2001) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:1.02
Objection to discharge was tried by consent of the parties. Bankr. D.N.H. In the midst of a trial objecting to discharge and dischargeability, the parties settled. The court declined to approve the settlement, however, and, ultimately, the trial was concluded with the United States trustee, being substituted as party plaintiffs on the objection to discharge. Prior to the resumption of the trial after the substitution, the court, with extensive comments, denied the debtor’s motion for a directed verdict. Thereafter, the debtor presented no evidence in his defense. During closing argument, when the debtor argued additional facts not in the record, the court offered the debtor the opportunity to submit that evidence, but the debtor declined to do so. At the conclusion of trial, the court denied the debtor’s discharge for making a false oath, 11 U.S.C. § 727(a)(4). The debtor moved for reconsideration, asserting that section 727(a)(4) had not been pleaded in the original complaint. The bankruptcy court held that the debtor was sufficiently aware that his failure to disclose transfers was at issue in the trial of the complaint objecting to discharge so that the issues were tried by the consent of the parties. Although the complaint did not clearly plead section 727(a)(4), the debtor was aware that his failure to disclose the transfer was at issue, mentioned the issue in his answer, testified to the transfer, and it was made clear at the motion for directed verdict that the failure to disclose the transfer was at issue. Accordingly, the debtor was on notice of the issue and had an opportunity to present evidence, not only during the trial, but was granted another opportunity during closing arguments to present evidence. Marshall v. Kalantzis (In re Kalantzis), 2001 Bankr. LEXIS 592, – B.R. – (Bankr. D.N.H. April 26, 2001) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7015.05
Suit against nondebtor violated the automatic stay. Bankr. S.D.N.Y. The chapter 11 plan was confirmed and provided that the stay would remain in effect until the effective date of the plan, some weeks later. Although it was aware of the chapter 11 bankruptcy case and pending confirmation, purchaser of a patent sued the U.S. distributor of one of the debtors in state (Florida) court for patent infringement and to enjoin the distribution of products it claimed were infringing upon its patent. The chapter 11 debtors filed an adversary proceeding to enjoin the state court litigation. The bankruptcy court held that the interests of the debtors and nondebtor distributor were so inextricably intertwined that actions against the distributor were actions against the debtors. The core of the state court lawsuit was the patent originally assigned to its subsidiary by one debtor and subsequently sold and in which another debtor held an implied license.. Moreover, the debtor manufacturer had openly been the sole manufacturer of the product for seventeen years so that the state court plaintiff was aware of that debtor’s implied license. The court rejected the plaintiff’s argument that the violation of the automatic stay was 'brief' so that the issue was moot. The court stated that a slight violation of the automatic stay is still a violation and concluded that the filing of the state court action was void (citing Collier on Bankruptcy, 15th Ed. Revised).Singer Co. B.V. v. Groz Beckert KG (In re Singer Co. N.V.), 2000 Bankr. LEXIS 1782, – B.R. – (Bankr. S.D.N.Y. November 3, 2000) (Lifland, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
Former shareholders’ claims were for damages arising from purchase of debtors’ stock; thus, statutory subordination was mandated. Bankr. D. Del. Chapter 11 debtors objected to proofs of claim asserted by certain former shareholders of one of its subsidiaries. The proofs of claim asserted damages arising from a merger, including violations of securities laws, breach of contract, and related claims. The debtors argued that the former shareholders’ claims had to be subordinated under the plain language of section 510(b) because they were 'for damages arising out of the purchase or sale of a security of the debtor.' The former shareholders asserted that their claims were not for damages relating to the issuance of stock in the debtors; rather, they were claims for breach of the debtors’ contractual obligation to pay cash or issue additional shares to assure the former shareholders the full merger value. The bankruptcy court held that the shareholders’ claims were for damages arising from the purchase of stock of the debtors; thus, statutory subordination under section 510(b) was mandated. The court noted that the debtors’ obligation to pay a stated 'merger value' was undertaken in connection with the issuance of their stock and as a guarantee of the stock’s value. In addition, despite the former shareholders’ attempt to recharacterize their claims, the basis of the claims was the allegation that the debtors committed securities fraud and made material misrepresentations to induce them to enter into a merger agreement.In re Kaiser Group Int’l Inc., 2001 Bankr. LEXIS 579, 260 B.R. 684 (Bankr. D. Del. April 11, 2001) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.04
Despite designation as 'division of marital property,' obligations were deemed to represent support for section 523(a)(5) purposes. Bankr. W.D. Pa. At the time the debtor and his spouse were litigating divorce proceedings, the debtor’s gross annual income was $130,000, and the spouse’s income derived from employment was $17,343, the remainder of her income coming from the debtor’s court-ordered support payments of $1,533 monthly for spousal support and $1,588 monthly for child support. The state (Pennsylvania) court issued a memorandum opinion and order that found the debtor’s total obligation with respect to the division of marital property to be $279,000. Additionally, the debtor was ordered to pay $1,500 per month in alimony for 10 years. After the debtor filed a chapter 7 petition, the spouse filed an adversary proceeding seeking a determination that none of the obligations owed to her were dischargeable. The bankruptcy court held that none of the debtor’s obligations to his former spouse were dischargeable. The court determined that, despite the designation 'division of property,' the obligations met the criteria sufficiently to characterize them as support. Specifically, the court examined three factors: (1) the substance of the decree in the context of its circumstances; (2) the respective financial conditions of the parties at the time of the decree; and (3) the function of the obligation served by the decree. The court concluded that an examination of all three factors led to the determination that all the obligations fell within the section 523(a)(5) exception to discharge.Mendez v. Mendez (In re Mendez), 2001 Bankr. LEXIS 601, – B.R. – (Bankr. W.D. Pa. April 5, 2001) .
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Creditor established nondischargeability of debt. Bankr. E.D. Va. The creditor filed a complaint seeking a determination that the chapter 7 debtor’s obligation to it was excepted from discharge. The debtor was the manager and 90 percent equity owner of a firm that operated several convenience store gas stations. The creditor had entered into an agreement with the debtor’s company whereby the latter would sell the creditor’s money orders, with the debtor personally guaranteeing all payments due. As a condition precedent of the arrangement, the debtor provided personal financial statements to the creditor. After the debtor’s company commingled the proceeds with the stores’ revenues and defaulted in payments, the debtor filed for bankruptcy. The creditor argued that it would not have approved of the credit if the debtor’s asset entries on his financial statement had been accurate. The debtor claimed that he was not responsible for the delivery of the inaccurate statement. The bankruptcy court entered judgment for the creditor, holding that the debtor recklessly allowed his materially false financial statement to be used by the creditor for its consideration of the business transaction. The court noted that the creditor reasonably relied upon several of the grossly overstated asset entries in the statement, and the statement was delivered to the creditor by an employee of the debtor’s company.Global Express Money Orders, Inc. v. Davis (In re Davis), 2001 Bankr. LEXIS 567, – B.R. – (Bankr. E.D. Va. May 7, 2001) (Tice, Jr., C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Debtor’s estate did not have cause of action against insurer for negligently failing to settle claims within policy. 5th Cir. The debtor’s automobile insurer appealed a district court judgment affirming a bankruptcy court decision that held that a cause of action for negligently failing to settle claims within policy limits pursuant to G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929) existed in the property of the chapter 7 debtor’s estate. The United States Court of Appeals for the Fifth Circuit reversed and rendered judgment in favor of the insurer. The court noted that the Texas Supreme Court has held that a Stowers cause of action does not accrue until the judgment in the underlying case becomes final. In this case, there was no judgment against the debtor until more than three years after the commencement of his bankruptcy case. The court concluded that the debtor could not have had a Stowers claim against the insurer before that date because 'the tort was not complete.' Since the debtor had no Stowers claim as of the commencement of his bankruptcy case, such a claim could not have been included in his estate. The court also concluded that even assuming facts suggesting that the insurer negligently failed to settle claims, the debtor suffered no legal injury cognizable under a Stowers cause of action since, by virtue of his chapter 7 discharge, he was no longer personally liable for any judgment in excess of the amount covered by the insurance policy.Safeway Managing Gen. Agency, Inc. v. Osherow (In re Davis), 2001 U.S. App. LEXIS 11861, – F.3d – (5th Cir. June 7, 2001) (Parker, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.08
Debtor’s transfer of funds in exchange for a forged check was recoverable as a fraudulent transfer. Bankr. S.D. Ohio The debtor was a title agency which conducted closing agent services on transactions for a real estate broker. Many of these transactions involved the broker channeling funds through the debtor’s trust accounts, which were used primarily to hold third-party escrow funds. In 1998, the debtor began having difficulties collecting funds from the broker to cover disbursements made at the broker’s direction. At that time, the broker, who ran a lending institution, arranged for two separate entities to provide short-term financing to the lender in order to enable the lender to acquire commercial real estate. One of the entities made five bridge loans to the lender ranging from $1.9 million to $3.2 million. The other entity furnished a $1.2 million bridge loan to the lender. Each loan transaction was carried out by the lender depositing funds into one of the debtor’s accounts. After subsequent loans were made by the entities, the loans became past due. The broker deposited a $5 million check into the debtor’s account for the purpose of paying the entities. That same day, pursuant to the broker’s instructions, the debtor issued a check, purportedly covered by the broker’s deposit, to the two entities to satisfy the outstanding loans. It developed that the broker’s check was returned as a forgery, drawn on a nonexistent account. Consequently, the debtor’s accounts became substantially overdrawn, and the debtor filed a chapter 11 petition. The debtor then filed a motion requesting summary judgment, asserting that the funds transferred to the entities were recoverable as fraudulent transfers under state (Ohio) law and the strong-arm provision of section 544(a). The bankruptcy court granted the motion, finding that all elements of a fraudulent conveyance under state law had been met. Specifically, the court concluded that (1) the debtor exerted control over the funds, since the debtor made the decision to write checks to the entities without waiting for the broker’s deposit to clear; (2) the debtor received no reasonably equivalent value, since the transfer created a negative balance in its trust account; and (3) the debtor’s financial problems were the direct result of the transfer of funds creating new claims that did not exist prior to the transfer.Dayton Title Agency, Inc. v. White Family Cos., Inc. (In re Dayton Title Agency, Inc.), 2001 Bankr. LEXIS 576, – B.R. – (Bankr. S.D. Ohio May 15, 2001) .
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Employees state law claim was not preempted by federal labor law where it did not require interpretation of collective bargaining agreement. 7th Cir. Union members who were parties to a collective bargaining agreement with their employer, an involuntary debtor, filed an adversary proceeding in bankruptcy court to determine the validity and priority of certain liens. The liens at issue were filed under a state (Indiana) statute in order to secure unpaid vacation pay owed to the employees under the collective bargaining agreement. Under the applicable state statute, the employees held a mechanic’s lien that was superior to the rights of other creditors. The bankruptcy court held that section 301 of the Labor Management Relations Act of 1947 (29 U.S.C. § 185(a)) preempted the employees’ liens. The district court affirmed, and the employees appealed. The United States Court of Appeals for the Seventh Circuit reversed and held that a state law claim is not preempted if it does not require interpretation of the collective bargaining agreement, even if it may require reference to the agreement. The court explained that as a benefit provided to the employees based on a state policy protecting workers, the mechanic’s lien was a separate claim not dependent on interpretation of the collective bargaining agreement for its existence, even though the amount of the pay was dependent on the collective bargaining agreement. The court stated that for preemption to apply, interpretation of the collective bargaining agreement, and not simply a reference to it, is required.Faehnrich v. Bentz Metal Prods. Co. (In re Bentz Metal Prods. Co.), 2001 U.S. App. LEXIS 11847, – F.3d – (7th Cir. June 7, 2001) (Evans, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.01
Chapter 13 debtor could not challenge the value of collateral postconfirmation. Bankr. N.D. Ill. After the debtor filed her chapter 13 petition, the creditor, who held a claim against the debtor secured by an automobile, filed its proof of claim. The total claim was bifurcated into secured and unsecured portions. Shortly thereafter, the debtor’s plan was confirmed. Three weeks later, the debtor filed an objection to the proof of claim, stating that the replacement cost of her vehicle was significantly less than the secured portion of the creditor’s claim, and requesting that the claim be reduced accordingly. The creditor argued that the objection, being filed after confirmation, could not be considered. The bankruptcy court denied the debtor’s objection, adopting the general rule pursuant to section 1327(a) that the failure to raise an objection at the confirmation hearing or to appeal from the order of confirmation should preclude attack on the plan or any of its provisions. The court concluded that the debtor was, therefore, collaterally estopped from challenging the claimed value postconfirmation. The court noted that if the plan had left open the question of collateral valuation for later determination, then the pending objection could have been heard on the merits. But valuation was conclusively determined because no challenge was made to the proof of claim.In re Fareed, 2001 Bankr. LEXIS 575, – B.R. – (Bankr. N.D. Ill. May 31, 2001) (Wedoff, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1127.04
Postpetition termination of agreement was void. Bankr. E.D. Ark. Prior to the chapter 11 debtor’s bankruptcy, the debtor and the bank entered into a bankcard merchant agreement whereby the debtor’s customers could charge amounts owed to the debtor for services rendered. After the bank became aware of the debtor’s filing, it exercised its contractual right to terminate the agreement before the debtor assumed or rejected the agreement, and subsequently moved for retroactive relief from the automatic stay. The bank argued that it was not adequately protected, the debtor had no equity in the agreement and the agreement was not necessary to an effective reorganization of the debtor. The bankruptcy court denied the bank relief, holding that the debtor demonstrated a need for the agreement in order to reorganize. The debtor was not in default, no chargebacks had been asserted by the debtor’s customers, and the bank had a security interest in the reserves and accounts of the debtor (citing Collier on Bankruptcy, 15th Ed. Revised).In re Nat’l Hydro-Vac Indus. Servs., L.L.C., 2001 Bankr. LEXIS 578, – B.R. – (Bankr. E.D. Ark. May 24, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
United States serviceman’s motion for continuance of section 341 hearing denied, but some deadlines extended to protect his potential interests. Bankr. M.D. Fla. The chapter 7 debtor’s ex-husband, a 24-year veteran of the United States Navy, was allegedly out to sea when the debtor commenced her chapter 7 case. The ex-husband requested that the bankruptcy court delay or continue all proceedings pursuant to the Soldiers and Sailors Civil Relief Act of 1940 (as amended), 50 App. U.S.C. § 521 et seq. and allow him at least one month after coming ashore to consult with an attorney and consider any options he might have in the case. The bankruptcy court denied the ex-husband’s motion to continue all proceedings until he returned from abroad, but agreed to extend certain deadlines in the case to enable him to protect his potential interests. The court found that the request for a delay of the entire case was overbroad and that continuance of the section 341 meeting and all the ensuing administration was unnecessary to prevent prejudice to the ex-husband. However, the court found that the ex-husband was entitled to have the deadlines established by the court for filing certain actions tolled pursuant to section 525 of the Soldiers and Sailors Civil Relief Act of 1940. The court extended the ex-husband’s deadline for (1) filing complaints objecting to discharge, (2) complaints seeking exception from discharge and (3) filing objections to exemptions beyond dates that had already been set by the court.In re Wlaschin, 2000 Bankr. LEXIS 1777, 260 B.R. 306 (Bankr. M.D. Fla. November 30, 2000) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:341.01
Creditor who delivered a repossessed vehicle to auction agency prepetition for a postpetition sale did not violate automatic stay. Bankr. M.D. Fla. The debtors purchased an automobile from the creditor, who provided purchase money financing and retained a security interest in the vehicle. Thereafter, the debtors filed a chapter 13 petition. The creditor represented that at the time of the petition filing, the debtors were $3,000 in arrears on their payments and that the debtors had no equity in the vehicle. Several months later, the bankruptcy court dismissed the chapter 13 case because the debtors failed to file timely certifications that their plan could be confirmed. Upon receiving notice of the dismissal on June 20, 2000, the debtors drove the vehicle to their attorney’s office to prepare to file a second chapter 13 petition. The creditor also received notice of the dismissal on that date, and at approximately 4:00 p.m. that day, lawfully repossessed the vehicle from the debtors’ attorney’s parking lot. The debtors asserted that within ten minutes of the debtors’ second petition filing, the attorney’s office telephoned the creditor and informed a representative there of the second filing. Again on that day, at approximately 5:20 p.m., a copy of the second petition was delivered to the creditor, who represented that the vehicle had already been sold. The debtors contended that the vehicle had not been sold prepetition because the auto auction did not begin until 6:00 p.m. The creditor argued that the vehicle was completely disposed of upon delivery to the auction agency sometime before the second filing. The debtors filed for sanctions for violations of the automatic stay, pursuant to section 362(h). The bankruptcy court denied the debtors’ motion, holding that the debtors failed to carry their initial burden under section 362(h) because they introduced no evidence to show that the creditor exercised dominion over the vehicle after the petition was filed. Conversely, the creditor completely disposed of the vehicle before the debtors filed their second petition and gained the protection of the stay. In re Ratliff, 2000 Bankr. LEXIS 1779, 260 B.R. 526 (Bankr. M.D. Fla. August 23, 2000) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
073015 Debtor’s boat did not qualify for homestead exemption. Bankr. M.D. Fla. The creditor held a purchase money security interest in the debtor’s boat, which sat on dry ground awaiting repair. On March 15, 2000, the creditor levied on the boat and also claimed a judgment for all personal property aboard the boat. On March 31, 2000, the debtor filed a chapter 13 petition, listing the boat and all property on the boat as exempt under state (Florida) law. The creditor objected to the debtor’s claimed exemptions. The debtor asserted that the boat was his primary, permanent residence, thereby entitling him to a homestead exemption. The creditor contended that the boat was uninhabitable, being filled as if it were a storage unit, and that the boat could not be characterized as the debtor’s primary residence for exemption purposes. The bankruptcy court, following prevalent opinion, sustained the objection to the homestead exemption. The court held that the debtor’s boat was a movable motor boat that could not support a homestead exemption under state (Florida) law because the boat, by virtue of its potential self-powered mobility, was a moveable chattel, not a residence. Conversely, the court determined that the creditor failed to meet the burden of proving that the personal property at issue exceeded the exemption limits, and so allowed that exemption.In re Hacker, 2000 Bankr. LEXIS 1825, 260 B.R. 542 (Bankr. M.D. Fla. November 7, 2000) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.02