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 28, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Bankruptcy Code’s extension of time for trustee to file an action on behalf of debtor applied to federal appeals over Fed. R. App. P. 4(a). 2d Cir. PROCEDURAL POSTURE: Appellee union sought confirmation of an arbitration award against appellant corporation and another business. The District Court for the Southern District of New York confirmed the award, and the corporation appealed. The union sought to dismiss the appeal as untimely. OVERVIEW: The judgment confirming the arbitration award was entered in November 2002. On the same day, the corporation filed for bankruptcy. In January 2003, the corporation filed its notice of appeal from the district court’s order. The union moved to dismiss the appeal, arguing that (1) 11 U.S.C. § 108(b) did not extend the 30-day deadline in Fed. R. App. P. 4(a) for filing the notice of appeal; (2) even if 11 U.S.C. § 108(b) extended that deadline, it did so only for a bankruptcy trustee, not a debtor in possession; and (3) the Rules Enabling Act, 28 U.S.C. § 2072, provided that Fed. R. App. P. 4(a), rather than 11 U.S.C. § 108(b), established the deadline. The court rejected each of those arguments. Section 108(b) permitted the trustee, when he stepped into the shoes of the debtor, an extension of time for filing an action or doing some act required to preserve the debtor’s rights, and the section made a sweeping reference to the “filing” of “any pleading, demand,” or “notice.” As to the second argument, a debtor in possession essentially functioned as a trustee. And, finally, the later-enacted 11 U.S.C. § 108(b) governed over Fed. R. App. P. 4(a). Local Union No. 38 v. Custom Air Sys., Inc., 2003 U.S. App. LEXIS 12750, — F.3d — (2d Cir. June 24, 2003) (Miner, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:108.03 [back to top]

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Debtor could not maintain chapter 13 case in order to take advantage of mortgage “strip down” while prior chapter 7 case remained open pending resolution of personal injury action. Bankr. E.D.N.Y. PROCEDURAL POSTURE: Debtor had previously filed a joint chapter 7 case in which a discharge was granted but remained open pending the resolution of debtor’s personal injury action. After receiving his chapter 7 discharge, debtor filed a chapter 13 case. The chapter 13 trustee moved to dismiss the chapter 13 case. OVERVIEW: The chapter 13 trustee asserted that the bankruptcy court should adopt the majority rule that simultaneous cases relating to the same debtor could not be maintained (even if under different chapters of the Bankruptcy Code). Debtor contended that his chapter 13 case was filed in good faith, after the discharge of his unsecured debt in the chapter 7 case, in order to permit him to cure and reinstate his home mortgage, pursuant to 11 U.S.C. § 1322(b)(5). The bankruptcy court found that it agreed with the majority rule with regard to Fed. R. Bankr. P. 1015. Debtor was attempting to manipulate the bankruptcy process to obtain the benefit of the automatic stay while evading the requirements of chapter 13, which would have required him to pay all the mortgage payments. The chapter 7 case was not being kept open simply for administrative reasons. Rather, the case remained open because the personal injury action could result in a recovery to creditors in the chapter 7 estate. There was no reason why the debtor’s unsecured creditors in the chapter 7 case should receive different treatment than the unsecured debt receives under the debtor’s chapter 13 plan. In re Lord, 2003 Bankr. LEXIS 712, — B.R. — (Bankr. E.D.N.Y. June 27, 2003) (Craig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.09 [back to top]

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Homestead exemption in single family residence owned by debtor and nondebtor spouse in tenancy by the entirety upheld over trustee’s objection. Bankr. D. Md. PROCEDURAL POSTURE: Chapter 7 trustee filed an objection to debtor’s amended claim of exempt property. OVERVIEW: The trustee took exception and sought to prevent debtor from exempting from administration by the trustee debtor’s interest in a single family residence owned by debtor and debtor’s spouse (not in bankruptcy), as tenants by the entireties. The residence was located in Maryland. The trustee argued that debtor’s interest in the tenancy by the entireties could not be exempted for any purpose. The trustee’s position had been rejected without exception by other courts. The trustee would have the court find that where only a hypothetical creditor could be posited that could collect from debtor’s interest in the tenants by the entirety property, the exemption totally failed and the property was administrable for all actual creditors, regardless of their rights against the property interest. The court, however, found that the ruling sought by the trustee would render 11 U.S.C. § 522(b)(2)(B) nugatory. In re Greathouse, 2003 Bankr. LEXIS 717, — B.R. — (Bankr. D. Md. June 12, 2003) (Keir, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.02[4] [back to top]

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Voluntarily reduced attorneys’ fees awarded as reasonable final compensation for 296 hours of work in a compressed time period. Bankr. N.D. Tex. PROCEDURAL POSTURE: Attorneys for the unsecured creditors committee moved for final allowance of compensation and reimbursement of expenses under 11 U.S.C. § 330(a). OVERVIEW: In an effort to comply with its obligation, and in response to the comments of the United States trustee, the attorneys reduced the fee request to $160,868.50, and the expense request to $4,952.49. The trustee agreed that this voluntary reduction addressed concerns about inadequate descriptions of work performed, clumping of time, paralegal rates charged for ministerial tasks, and similar objections. In addition, the voluntary reduction also addressed de minimus charges that should not be billed to a client and staffing levels for particular conferences and meetings. With regard to the time expended and benefit to the estate, the court analyzed the services in light of the exigencies faced by the committee and its counsel. Circumstances necessitated a considerable workload in a compressed time period. The attorneys engaged 116 hours worth of services on plan related matters, including the plan, the trust agreement, an employment agreement, and the voting procedures for the plan. They spent 180 hours investigating assets and potential causes of actions against insiders. Except for certain reductions, the time spent was reasonable and necessary, with a benefit to the estate. In re Avatex Corp., 2003 Bankr. LEXIS 719, — B.R. — (Bankr. N.D. Tex. July 8, 2003) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.03 [back to top]

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Chapter 7 bankruptcy ordered dismissed unless converted to chapter 13 due to debtors’ ability to fund plan. Bankr. N.D. Tex. PROCEDURAL POSTURE: Debtors filed a chapter 7 petition and United States trustee moved to dismiss the petition because of substantial abuse, pursuant to 11 U.S.C. § 707. Debtors opposed the motion. OVERVIEW: Trustee’s dismissal motion under 11 U.S.C. § 707(a), (b) claimed that debtors did not file in good faith and that their conduct supported a dismissal for cause for a period of one year. Trustee alternatively claimed that the petition was a substantial abuse. Debtors denied that they abused the chapter 7 process and replied that they complied with all of their obligations under the Bankruptcy Code. 11 U.S.C. § 101(8) provided that the term consumer debt meant debt incurred by an individual primarily for a personal, family, or household purpose. The court applied the test to be used for the determination of whether a debt should be classified as a debt acquired for personal, family or household purposes, rather than as a business debt, which was incurred with an eye for profit. The court found that the debts in this case were primarily consumer debts. The court looked at debtors’ ability to pay. In evaluating whether debtors’ case should be dismissed as a substantial abuse of the provisions of chapter 7, the court reviewed expenses in light of their reasonableness and found that debtors had the ability to pay more to their creditors, and did not qualify for chapter 7. In re Logan, 2003 Bankr. LEXIS 600, — B.R. — (Bankr. N.D. Tex. June 17, 2003) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.01 [back to top]

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As sovereign immunity was abrogated by the Bankruptcy Code, debtor could maintain claim for state tax refund if district court opted not to abstain. 6th Cir. PROCEDURAL POSTURE: Appellant, a subsidiary of the debtor, sought a refund of sales and use taxes from appellee, the Commissioner of Revenue for the Commonwealth of Massachusetts. The bankruptcy court ruled that Massachusetts’ sovereign immunity was abrogated by the Constitution, denying a motion to dismiss for lack of subject matter jurisdiction. The District Court for the Middle District of Tennessee reversed. OVERVIEW: This case raised an interesting question of sovereign immunity, specifically the question of whether the states gave up their sovereign immunity in bankruptcy matters under the Constitution. The question the court had to answer was whether or not the Commissioner was entitled to immunity from suits in bankruptcy. While this issue was a novel one during the pendency of the litigation, it had since been resolved. No sovereign immunity existed as to bankruptcy matters. Therefore, the Commissioner was not entitled to sovereign immunity in the matter. The district court did not consider the core proceeding and abstention questions, because it found that sovereign immunity existed. The Commissioner recommended that the appellate court remand those questions for the district court’s determination. The appellate court agreed with the Commissioner that it was for the district court to determine in each individual case whether hearing it would have promoted or impaired efficient and fair adjudication of bankruptcy cases, with regard to abstention. H.J. Wilson Co., Inc. v. Commissioner of Revenue (In re Service Merchandise Co., Inc.), 2003 U.S. App. LEXIS 12729, — F.3d — (6th Cir. June 24, 2003) (Martin, C.C.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.02 [back to top]

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Untimely adversary proceeding to determine dischargeability of mortgage debt under section 523(a)(4) should properly have been brought under section 523(a)(3)(B). Bankr. E.D. Ky. PROCEDURAL POSTURE: Defendants, debtors, filed a motion for judgment on the pleadings and to dismiss adversary proceeding. Plaintiff mortgage company had filed its complaint to determine dischargeability. OVERVIEW: The matter was before the court on a motion for judgment on the pleadings and to dismiss adversary proceeding filed by the debtors. The mortgage company had filed its complaint to determine dischargeability on April 6, 2003. The basis for the debtors’ motion was that the dischargeability proceeding under 11 U.S.C. § 523(a)(4) was brought outside the time limit for filing such a proceeding. The court stated that the complaint of the mortgage company was more properly filed under 11 U.S.C. § 523(a)(3)(B). Its section 523(a)(4) complaint was untimely and the untimeliness of that complaint could not be waived. It was the opinion of the court that the debtors’ motion for judgment on the pleadings and to dismiss adversary proceeding was well taken, and unless the complaint was amended, it should be dismissed. The mortgage company was permitted 10 days to amend its complaint to bring its action under section 523(a)(3)(B), failing which, the complaint would be dismissed. Consolidated Mortg., Inc. v. Gentry (In re Gentry), 2003 Bankr. LEXIS 713, — B.R. — (Bankr. E.D. Ky. July 7, 2003) (Howard, B.J.).

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

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Dismissal or conversion to chapter 13 ordered where debtors failed to demonstrate good faith and candor and showed a consistent pattern of living beyond their means. Bankr. E.D. Mich. PROCEDURAL POSTURE: Debtors filed a joint chapter 7 petition and United States trustee moved to dismiss the case, pursuant to 11 U.S.C. § 707(b) for substantial abuse related to amended expenses. Debtors answered the dismissal motion. OVERVIEW: Trustee’s dismissal motion under 11 U.S.C. § 707(b) for substantial abuse alleged that several of debtors’ listed amended expenses were excessive, grossly inflated, or unnecessary. The court examined the totality of the circumstance to determine whether debtors were honest and whether they were really in need of chapter 7 bankruptcy. The court’s review of debtors’ schedules established that debtors had an ability to repay a portion of their debts out of future earnings. The court applied the three Krohn prongs to show that debtors lacked the honesty required for a chapter 7 discharge. The vast majority of their debts were for credit card debts, which showed a consistent pattern that debtors’ lived beyond their means. Debtors were not forced into bankruptcy by an unforeseen or catastrophic event. Debtors also failed to demonstrate good faith and candor when they filed their chapter 7 petition and schedules where the schedules required two amendments to disclose all of debtors’ income and interests in property. The court agreed with trustee that debtors were not entitled to a chapter 7 bankruptcy. In re Siemen, 2003 Bankr. LEXIS 611, 294 B.R. 276 (Bankr. E.D. Mich. June 19, 2003) (Rhodes, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.04 [back to top]

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As bankruptcy courts do not have supplemental jurisdiction, proceeding with claims both affecting and not affecting administration was remanded in the interests of judicial economy. Bankr. E.D. Mich. PROCEDURAL POSTURE: An involuntary petition was filed against defendant debtor under chapter 7. Plaintiff creditor filed suit against the debtor and defendants, various corporations and individuals, to recover amounts owed for services performed as a subcontractor to the debtor. The debtor removed the action. The court ordered a show cause hearing related to whether any claims in the action should be remanded. OVERVIEW: The creditor asserted that the case should be remanded because the claims fell outside of the bankruptcy estate and would not have any effect on the administration of the case. The debtor, other individual defendants, and the trustee argued that the court had jurisdiction over the claims against the debtor where the resolution of those claims would impact the amount of the escrowed funds that remained, against which the trustee asserted an interest. These parties further claimed that because there were overlapping factual issues between those claims and the claims against individual defendants, all the claims should remain before the court. The claims against the debtor were within the court’s jurisdiction. However, the court did not have jurisdiction over the claims against individual defendants where the outcome of those claims would have no conceivable effect on the administration of the bankruptcy proceeding. Rather than remand only the claims against individual defendants, the court remanded the entire complaint in the interest of judicial economy. Indicon Corp. v. Mollicone (In re Stellar Indus., Inc.), 2003 Bankr. LEXIS 125, — B.R. — (Bankr. E.D. Mich. February 24, 2003) (Rhodes, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01 [back to top]

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Postpetition repayment of new value transfer defeated the new value defense. Bankr. N.D. Ill. PROCEDURAL POSTURE: Defendant association moved for summary judgment in an adversary action, where the issue was whether a postpetition repayment by a bankruptcy debtor of a new value transfer defeated the new value defense set out in 11 U.S.C. § 547(c)(4). OVERVIEW: Postpetition repayment by the debtor of a new value transfer defeated the new value defense. The association established that its delivery of books to the debtor involved an advance of unsecured credit subsequent to the debtor’s allegedly preferential payments to association, but plaintiff trustee argued association could not establish the advance was not itself repaid. The trustee pointed to the return of the books to the association as an otherwise unavoidable transfer to the association on account of the association’s new value, defeating the new value defense. The association acknowledged the postpetition return of books was authorized by the court and therefore unavoidable. However, the association argued that, because it received the return of its new value after the filing of the bankruptcy case, it was not deprived of its new value defense. The court concluded that interpreting the language of the Bankruptcy Code according to its plain meaning did not allow section 547(c)(4)(B) to be limited to prepetition repayment. Further, the policy behind the new value exception would be defeated if a creditor could keep a preferential payment and also receive repayment of the contribution. Moglia v. American Psychological Ass’n (In re Login Bros. Book Co., Inc.), 2003 Bankr. LEXIS 596, 294 B.R. 297 (Bankr. N.D. Ill. June 4, 2003) (Wedoff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[4] [back to top]

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Conflicting duties of trustee to expedite administration and serve as sole class representative in debtor’s class action required court to vacate class certification. 7th Cir. PROCEDURAL POSTURE: Plaintiff bankruptcy trustee had himself substituted as the plaintiff in the debtor’s lawsuit against defendant company. The trustee then moved the District Court for the Southern District of Indiana to certify the suit as a class action, with him as the only named plaintiff and therefore as the only class representative. The district court did so and the company appealed.