Collier Bankruptcy Case Update July-29-02
- West's
Bankruptcy Newsletter
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 29, 2002
CASES IN THIS ISSUE
(scroll down to read the full
summary)
§ 522(f) § 522(f) provides a simple mathematical test to
determine avoidability of liens and is to be strictly applied.
Snyder v. Rockland Trust Co. (In re Snyder) (B.A.P. 1st Cir.)
§ 550(a)(1) Debtor's principal was initial fraudulent transferee
of check payable to 'cash' and IRS thus not liable for subsequent
transfer.
Richardson v. United States (In re Anton Noll, Inc.) (B.A.P. 1st
Cir.)
2d Cir.
§ 108(b) Debtor's failure to close within extension period of
§ 108(b) was an incurable default.
In re New Breed Realty Enters. (Bankr. E.D.N.Y.)
§ 507(a)(1) Claim based on provision of gas pipeline capacity to
debtor not priority administrative expense except for period of actual
use by debtor.
In re Enron Corp. (Bankr. S.D.N.Y.)
3d Cir.
§ 362 Defendant HMO's prepetition withholding of capitation
payments to debtor did not violate stay.
Pardo v. NYLCare Health Plans, Inc. (In re APF Co.) (Bankr. D.
Del.)
§ 510(a) Pre-petition tax penalties not subject to equitable
subordination.
Murphy v. Internal Revenue Service (In re Murphy) (Bankr. M.D.
Pa.)
5th Cir.
28 U.S.C. § 158 Appellant's appeal of subsequent injunction
was impermissible collateral appeal of original bankruptcy
order.
Sterritt v. Short (N.D. Tex.)
U.S.C. § 158(b) Writ of mandamus granted ordering District Court
to recall remand order and reassigning to new judge due to lack of
impartiality.
In re Daimler-Chrysler Corp. (5th Cir.)
6th Cir.
§ 1327(a) Confirmation of Chapter 13 plan did not bar
trustee's complaint to avoid creditor's lien.
Hildebrand v. Hays Imports, Inc. (In re Johnson) (Bankr. M.D.
Tenn.)
Rule 7004 Default judgment against non-debtor husband's creditor
vacated for improper service and possible lack of jurisdiction over
non-core matter.
Schoenlein v. Option One Mortg. Corp. (In re Schoenlein) (B.A.P.
6th Cir.)
7th Cir.
§ 548(a)(1)(A) Debtor's transfer of stock sale proceeds to
wife within one year of filing was voidable as fraudulent, despite being
provided for in long standing pre-marital agreement.
In re Frierdich (7th Cir.)
9th Cir.
§ 327 Trustee's employment of creditor's attorney to
prosecute fraudulent conveyance under § 327 instead of §
503(b)(3)(B) possible harmless error.
Com-1 Info, Inc. v. Wolkowitz (In re Maximus Computers, Inc.)
(B.A.P. 9th Cir.)
§ 522(c) Bankruptcy Court abused discretion in extending limited
state homestead exemption to cover nonexempt equity.
S & C Home Loans, Inc. v. Farr (In re Farr) (B.A.P. 9th
Cir.)
§ 523(a)(2) Debtor's fraud rendered debt nondischargeable
despite creditor bank's failure to fully investigate.
Merchants Bank v. Chai Cho Oh (In re Chai Cho Oh) (Bankr. C.D.
Cal.)
10th Cir.
§ 523(a)(2) Creditor's failure to file for an extension prior to sixty-day bar date barred late motion for exception to discharge.
Daniels v. Cowdin (In re Cowdin) (B.A.P. 10th Cir.)
§ 523(a)(8) Sanctions not warranted for inclusion in Chapter 13 plan of language providing for discharge of student loans based on undue hardship.
In re Wright (D. Kan.)
11th Cir.
§ 523(a)(8) Debtor could not apply for undue hardship discharge of student loan until completion of Chapter 13 plan payments.
Pair v. United States Dept. of Ed. (In re Pair) (Bankr. N.D. Ala.)
§ 1325 Chapter 13 plan paying only 11% of nondischargeable debts over 36 months non-confirmable.
In re McGovern (Bankr. S.D. Fla.)
U.S.C. § 158 Non-debtor homeowners' committee had standing to appeal as 'person aggrieved.'
Westwood Cmty. Two Ass'n v. Barbee (In re Westwood Cmty. Two Ass'n) (11th Cir.)
Collier Bankruptcy Case Summaries
§ 522(f) provides a simple mathematical test to determine
avoidability of liens and is to be strictly applied. B.A.P. 1st
Cir. PROCEDURAL POSTURE: Appellant debtor challenged a
decision from the United States Bankruptcy Court for the District of
Massachusetts that ruled he could not avoid the lien of appellee
creditor under 11 U.S.C.S. § 522(f) unless the debtor first paid
the creditor's legal fees stemming from prior litigation in the debtor's
bankruptcy case. OVERVIEW: The debtor appealed that portion of
the bankruptcy court's order that dealt with the lien motion. 11
U.S.C.S. § 522(f) allowed a debtor to avoid a lien that attached to
the debtor's interest in property to the extent that the lien impaired
an exemption the debtor was entitled to claim. The reviewing court noted
that courts could not use their discretion in applying § 522(f)
because the statute provided a simple arithmetic test to determine
whether an exemption was impaired. However, the reviewing court found
that the bankruptcy court did not apply a strict mathematical test to
the lien motion, but instead looked to the prejudice the creditor would
have suffered if the debtor had been allowed to avoid the lien based
upon the new state exemptions claims by the debtor. As the bankruptcy
court did not apply a strict mathematical test to the lien motion when
it rendered its November opinion and order, the reviewing court found
that the court's November order regarding the lien motion had to be
vacated. The reviewing court also held that the determination of whether
granting the debtor's motion to amend would prejudice the creditor had
to be remanded. Snyder v. Rockland Trust Co. (In re Snyder),
2002 Bankr. LEXIS 615, 279 B.R. 1 (B.A.P. 1st Cir. June 13, 2002)
(Lamoutte, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised
4:522.11[1]
ABI Members, click here to get the full opinion.
Debtor's principal was initial fraudulent transferee
of check payable to 'cash' and IRS thus not liable for subsequent
transfer. B.A.P. 1st Cir. PROCEDURAL POSTURE: In a
fraudulent transfer case under 11 U.S.C.S. § 548, the trustee
appealed from a portion of a judgment by the United States Bankruptcy
Court for the District of Rhode Island that held that the debtor's
principal, and not the United States, Internal Revenue Service (IRS),
was the 'initial transferee' of funds for purposes of 11 U.S.C.S. §
550(a)(1). OVERVIEW: The trustee maintained that the IRS was the
initial transferee of the funds fraudulently transferred from the
debtor. The panel found that because the check was payable to 'cash,' it
was negotiable upon delivery to the bearer, the principal. Under R.I.
Gen. Laws §§ 6A-1-201(5), 6A-3-202(1) (2000) (repealed 2001),
the principal obtained legal ownership and possession of the funds upon
receipt of the check. At that point, he obtained the legal right to use
the money as he pleased. He chose to purchase a treasurer's check to
satisfy his tax liabilities with the IRS. He, therefore, exercised
sufficient dominion and control over the funds for the panel to
determine that he was the initial transferee under § 550(a)(1) and
that the IRS was the subsequent transferee. Whether he held the check
for a mere eight hours was irrelevant. And, under R.I. Gen. Laws §
6A-3-119(2) (2000) (repealed 2001), instructions on the memo portion of
the check which stated 'IRS $ 260,892' did not affect negotiability.
Whether the funds were appropriated in a breach of his fiduciary duties
was no part of the 'dominion and control' test. Richardson v.
United States (In re Anton Noll, Inc.), 2002 Bankr. LEXIS 493, 277
B.R. 875 (B.A.P. 1st Cir. May 16, 2002) (Lamoutte, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised
5:550.02[4]
2d Cir.
Debtor's failure to close within extension period of § 108(b)
was an incurable default. Bankr. E.D.N.Y. PROCEDURAL
POSTURE: The debtor had contracted to purchase from the movant
seller all shares of stock of a corporation that owned real property.
The movant sought relief from the automatic stay under 11 U.S.C. §
362(d) to permit her to collect the debtor's escrow deposit as partial
damages due to the debtor's failure to close, and to permit her to sell
the property to another. The debtor asserted the contract was assumable
under 11 U.S.C. §§ 108(b), 365. OVERVIEW: The debtor
failed to cure its defaults within the 60-day period of 11 U.S.C. §
108(b). 11 U.S.C. §105(a) could not be used to grant an extension,
the debtor had not sought an extension before the time limit expired,
and there was no showing of the seller's wrongdoing or other
circumstances justifying an extension. The debtor's failure to close by
the essence closing date, including any extension under 11 U.S.C. §
108(b), was a non-monetary default which could not be cured because it
was a historical fact. Under New York law, the failure to close by the
specified closing date, due to a time of the essence clause, was a
material breach which terminated the debtor's rights. The failure to
close by the deadline was a default that was material and economically
significant. Under the contract, if the debtor failed to close by the
deadline, the seller was entitled to the escrow as liquidated damages,
not as a penalty. Assumption was not available under 11 U.S.C. §
365(d)(2) because defaults could not be cured as required by 11 U.S.C.
§ 365(b)(1). There was no equity in the property or the escrow;
cause existed to lift the stay under 11 U.S.C. § 362(d)(1), (2).
In re New Breed Realty Enters., 2002 Bankr. LEXIS 520, 278
B.R. 314 (Bankr. E.D.N.Y. March 7, 2002) (Craig, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:108.03
ABI Members, click here to get the full opinion.
Claim based on provision of gas pipeline capacity to
debtor not priority administrative expense except for period of actual
use by debtor. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In
this Chapter 11 action, the court had to determine whether a claim based
on the provision of pipeline capacity for the transportation of natural
gas to a debtor-in-possession pursuant to a pre-petition agreement with
the debtor was entitled to priority as an administrative expense for a
period during which there was no actual use of the pipeline capacity.
OVERVIEW: Prior to filing its petition, the debtor entered into
several natural gas transportation contracts with two companies. The
companies sought administrative expense priority for charges allegedly
accrued under its transportation contract with the debtor. The debtor
acknowledged that company 1 pipeline capacity was used on December 2 and
3, 2001, and was prepared to pay a transport charge for the actual usage
on those dates. However, for the balance of the period, the debtor
contended that its estate received no benefit and therefore company 1's
claim was not entitled to an administrative priority. With respect to
the debtor's contract with company 2, administrative expense priority
was sought for the post-petition period from December 1, 2002 until
February 6, 2002. The court held that because there was no actual usage
of the pipeline, the claims of the companies for those periods of
non-use were not entitled to an administrative priority. However, the
court held that company 1 was entitled to an administrative expense
priority for its claim for the two-day period between December 2 and 3,
2002 when the debtor actually used it's pipeline to transport
gas.In re Enron Corp., 2002 Bankr. LEXIS 614, 279 B.R. 79
(Bankr. S.D.N.Y. June 14, 2002) (Gonzalez, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.03
3d Cir.
Defendant HMO's prepetition withholding of capitation payments to
debtor did not violate stay. Bankr. D. Del. PROCEDURAL
POSTURE: Before the court were Fed. R. Civ. Proc. 12(b)(6) and 12(e)
motions filed by the defendants, health maintenance organizations
('HMOs'), to dismiss all nine counts of the complaint filed by the
plaintiffs, trustee of the creditor trust and the plan administrator,
seeking to recover capitation payments that were due the debtors
pre-petition under 11 U.S.C. §§ 362, 547(b), 550.
OVERVIEW: The debtors were a national physician practice
management company and its affiliates which acquired, organized and
managed primary care physician practices that contracted with health
maintenance organizations and health insurance plans. They provided
medical care services to capitated managed care enrollees and
fee-for-service patients and also provided physician management services
to hospital emergency departments, urgent care, radiology and
correctional facilities. At issue were two monthly capitation payments
that the HMO's had withheld in June and July of 1998, allegedly because
the debtors had breached their contract with the HMO's. The debtors
filed for bankruptcy shortly after the July 1998 payment was due. The
court found that the withholding of the payments occurred before the
filing of the petition for relief and since the automatic stay applied
by its terms only to affirmative post-petition acts, there could be no
violation of 11 U.S.C. § 362. However, the plaintiffs were entitled
to submit evidence to establish their rights to the withheld payments on
their remaining claims. The court found that the complaint was not
ambiguous. Pardo v. NYLCare Health Plans, Inc. (In re APF
Co.), 2001 Bankr. LEXIS 1909, 274 B.R. 408 (Bankr. D. Del. December
18, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
ABI Members, click here to get the full opinion.
Pre-petition tax penalties not subject to equitable
subordination. Bankr. M.D. Pa. PROCEDURAL POSTURE: The
United States, Internal Revenue Service filed a proof of claim which
represented penalties for the debtors' failure to pay taxes and stated
the claim was secured. The Chapter 13 debtors filed an objection to the
claim, arguing that 11 U.S.C. § 506(b) did not allow the penalties
to become liens, and that 11 U.S.C. § 510(a) provided for equitable
subordination of the penalties in favor of other unsecured creditors.
OVERVIEW: The court held that the rule that in the absence of an
agreement post-petition fees, costs, and charges such as penalties were
not allowed by 11 U.S.C. § 506(b) did not control because that rule
dealt with post-petition penalties. The penalties involved in the
debtors' case appeared to be wholly pre-petition. Holders of an
oversecured consensual claim or an oversecured nonconsensual claim were
entitled to interest, penalties, attorneys' fees, and costs that accrued
before the debtor's bankruptcy was filed. Interest, fees, costs, and
charges that accrued after the petition was filed were permitted only if
authorized under 11 U.S.C. § 506(b). The pre-petition penalty
amounts included in the nonconsensual, secured claim were not prohibited
by § 506(b). 11 U.S.C. § 510(a) did not provide for equitable
subordination of the penalties in favor of other unsecured creditors.
The claim could not be treated as unsecured solely because such
treatment would allow for a greater distribution to unsecured creditors.
A totality of the equities of a case had to be considered. The debtors
had asserted no other reason why equitable subordination should apply.
Murphy v. Internal Revenue Service (In re Murphy), 2002 Bankr.
LEXIS 522, 279 B.R. 163 (Bankr. M.D. Pa. April 9, 2002) (Woodside,
C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.03
5th Cir
Appellant's appeal of subsequent injunction was impermissible
collateral appeal of original bankruptcy order. N.D.
Tex. PROCEDURAL POSTURE: Appellant director sought judicial
review of a bankruptcy court's order granting the debtor company's
motion for a preliminary injunction enjoining the director from holding
himself out as a director of the debtor. In an earlier proceeding
terminated by the debtor's bankruptcy, the director had been enjoined
from acting as a director of the debtor. OVERVIEW: In support of
his position, the director argued that he had never been removed as a
director and that the bankruptcy court judge erred in appointing a
disbursing agent. He also argued that the limited reopening of the
bankruptcy proceeding was procedurally impermissible because the
bankruptcy court judge lacked jurisdiction to make changes to the
reorganization plan. The order stripping the director of his power was
the Disbursing Agent Agreement of July 2001. The director did not
challenge the agreement within the proper time permitted for appeal. The
director's instant action was an impermissible collateral appeal and
that included his assertion that the bankruptcy proceedings had been
reopened for an impermissible purpose. Sterritt v. Short, 2002
U.S. Dist. LEXIS 10559, B.R. (N.D. Tex. June 11, 2002) (Solis, D.J).
Collier on Bankruptcy, 15th Ed. Revised 1:5.01
ABI Members, click here to get the full opinion.
Writ of mandamus granted ordering District Court to
recall remand order and reassigning to new judge due to lack of
impartiality. 5th Cir. PROCEDURAL POSTURE:
Petitioners, auto makers, sought writs of mandamus against the United
States District Court for the Southern District of Texas to direct the
district court to recall its remand orders and to have all cases
regarding friction products claims assigned to a different district
court judge. OVERVIEW: Plaintiffs brought personal injury actions
against the auto makers in state court for injuries allegedly caused by
asbestos contained in friction products in the auto makers' automobiles.
The auto makers removed the cases to federal court on the grounds they
were related to the bankruptcy proceeding of another company that
supplied the products. The bankruptcy court issued a transfer order for
all claims against the auto makers that were related to the bankruptcy
proceeding. The district court remanded the two cases before it on the
basis that the cases were not related to the bankruptcy proceeding and,
therefore, there was no federal jurisdiction over them. The appellate
court held that the district court was bound by the transfer order and
it was for another federal circuit to decide if there was federal
jurisdiction over the cases. Because the petitions were meritorious,
sanctions were not warranted. It was necessary to reassign the cases
because of the hostility demonstrated toward the auto makers in the
district court's response to the petitions for writ of mandamus, such
that it appeared that it would be exceedingly difficult for the district
court to regain impartiality. In re Daimler-Chrysler Corp.,
2002 U.S. App. LEXIS 11718, B.R. (5th Cir. June 14, 2002) (Jolly,
C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02[3]
6th Cir.
Confirmation of Chapter 13 plan did not bar trustee's complaint to
avoid creditor's lien. Bankr. M.D. Tenn. PROCEDURAL
POSTURE: Plaintiff Chapter 13 trustee filed a complaint to avoid
perfection of defendant creditor's lien as a preference under 11 U.S.C.
§ 547 or as an unauthorized postpetition transfer under 11 U.S.C.
§ 549. The parties filed cross motions for summary judgment.
OVERVIEW: The debtors' Chapter 13 plan was confirmed before the
creditor filed a proof of claim, which was the typical course of events
in the current district. The creditor did not contest that the trustee
could avoid its lien, since the lien was unperfected at the time of
filing. Rather, the creditor contended that confirmation of the plan
precluded the trustee's complaint since the express provisions of the
plan barred the trustee's action under 11 U.S.C. § 1327(a), and the
holding in Chattanooga Wholesale should have been extended to preclude
the trustee's action. The court found that the creditor's arguments
invited a misreading of the confirmed plan and threatened to distort the
effects of confirmation under the Bankruptcy Code. The creditor's
argument confused the valuation of collateral with the filing and
allowance of proofs of claim. Although the value of collateral was
determined through the confirmation process, valuation did not morph
into allowance of unfiled claims. The court also found that Chattanooga
Wholesale was distinguishable since the case's discussion of the
preclusive effect of confirmation of a Chapter 11 plan did not translate
to the Chapter 13 context. Hildebrand v. Hays Imports, Inc. (In re
Johnson), 2002 Bankr. LEXIS 595, 279 B.R. 218 (Bankr. M.D. Tenn.
June 6, 2002) (Lundin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1327.02
ABI Members, click here to get the full opinion.
Default judgment against non-debtor husband's
creditor vacated for improper service and possible lack of jurisdiction
over non-core matter. B.A.P. 6th Cir. PROCEDURAL
POSTURE: Plaintiff husband, who was not a debtor in the bankruptcy,
filed a complaint in his debtor wife's bankruptcy case, challenging
several creditors' claims against him, including the validity or extent
of a mortgage interest claimed by defendant creditor. The United States
Bankruptcy Court for the Southern District of Ohio, Eastern Division,
granted a default judgment to the husband, and the creditor appealed.
OVERVIEW: The husband mailed the complaint to the creditor by
first class mail, to the attention of a named contract employee who had
previously communicated with the husband. Due to miscommunication, the
creditor did not file a timely answer. The bankruptcy court found that
the creditor's conduct was negligent, and therefore granted a default
judgment. The bankruptcy appellate panel found that the bankruptcy court
abused its discretion in entering a default judgment under circumstances
where (1) the creditor had filed its answer almost four months before
the final hearing on the default motion, (2) the husband purported to
give the creditor a 30-day extension to answer, and (3) the answer was
filed within one week of that extension. Further, negligence was an
insufficient standard to justify a default judgment. In addition,
service of process was insufficient. Service was not directed to a
proper person under Fed. R. Bankr. P. 7004, and first class mail service
did not comply with Ohio R. Civ. P. 4.2(F). Finally, the panel
questioned whether the bankruptcy court had jurisdiction over a claim by
a non-debtor plaintiff against non-debtor defendants, concerning
non-bankruptcy issues. Schoenlein v. Option One Mortg. Corp. (In
re Schoenlein), 2002 Bankr. LEXIS 618, 279 B.R. 212 (B.A.P. 6th Cir.
June 20, 2002) (Brown, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:1004.01
7th Cir.
Debtor's transfer of stock sale proceeds to wife within one year
of filing was voidable as fraudulent, despite being provided for in long
standing pre-marital agreement. 7th Cir. PROCEDURAL
POSTURE: Plaintiff trustee filed an adversary proceeding against
defendant wife, seeking to avoid the bankruptcy debtor's transfer of
proceeds of a stock sale to the wife. The bankruptcy court entered
summary judgment for the trustee. The United States District Court for
the Southern District of Illinois affirmed. The wife appealed.
OVERVIEW: In a premarital agreement, the debtor arranged to
transfer his stock in a closely held company to his wife and she waived
any interest in the debtor's estate. More than one year before filing
for bankruptcy, the debtor executed a stock transfer, giving the
company's officers power to transfer the stock. However, the wife never
received a stock certificate. Subsequently, within a year of filing for
bankruptcy, the debtor signed a stock sale agreement and deposited the
funds into the wife's account. The court determined that the transfer
was voidable as a fraudulent transfer under 11 U.S.C. §
548(a)(1)(A). Under state law, the wife did not take an interest in the
stock until the debtor deposited the proceeds from its sale into her
account. The wife failed to show that she was a purchaser of the stock,
because she failed to show delivery. Also, the wife's prenuptial waiver
did not recite the stock transfer. Therefore, the transfer occurred
within one year of the bankruptcy filing and § 548(a)(1)(A)
applied. No reasonable fact finder could conclude that the debtor did
not have an actual intent to defraud his creditors. In re
Frierdich, 2002 U.S. App. LEXIS 12278, B.R. (7th Cir. June 21, 2002)
(Easterbrook, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.04
ABI Members, click here to get the full opinion.
9th Cir.
Trustee's employment of creditor's attorney to prosecute
fraudulent conveyance under § 327 instead of § 503(b)(3)(B)
possible harmless error. B.A.P. 9th Cir. PROCEDURAL
POSTURE: Defendants in a fraudulent transfer action appealed two
orders of the United States Bankruptcy Court for the Central District of
California which, inter alia, ratified employment as special counsel
under 11 U.S.C.S. § 327 and, twice, refused to disqualify the firm.
OVERVIEW: Defendants in a fraudulent transfer action being
prosecuted for the benefit of the estate attempted to disqualify
opposing counsel because a creditor was paying the counsel's fees. The
three issues were (1) whether the firm was correctly employed by the
trustee as special litigation counsel under 11 U.S.C.S. § 327 while
concurrently representing a creditor; (2) whether the firm's creditor
client was eligible and had standing to prosecute a fraudulent transfer
action in the name of the trustee under 11 U.S.C.S. § 503(b)(3)(B),
and (3) whether the firm's representation of plaintiff was affected by a
disqualifying conflict of interest. The court concluded that the
bankruptcy court abused its discretion when it authorized employment
under 11 U.S.C.S. § 327 without the firm's prior compliance with
the procedure prescribed by 11 U.S.C.S. § 327(c) and Fed. R. Bankr.
P. 2014. The error, however, might have been harmless. Without 11
U.S.C.S. § 327 employment, the bankruptcy court could authorize the
firm to proceed pursuant to 11 U.S.C.S. § 503(b)(3)(B),
representing the creditor suing in the name of the trustee. The court
published to clarify that § 503(b)(3)(B) retained vitality.
Com-1 Info, Inc. v. Wolkowitz (In re Maximus Computers, Inc.),
2002 Bankr. LEXIS 500, 278 B.R. 189 (B.A.P. 9th Cir. May 8, 2002)
(Klein, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:327.01
ABI Members, click here to get the full opinion.
Bankruptcy Court abused discretion in extending
limited state homestead exemption to cover nonexempt equity.
B.A.P. 9th Cir. PROCEDURAL POSTURE: A judgment lien
creditor appealed from a judgment of the United States Bankruptcy Court
for the Northern District of California that held that 11 U.S.C.S.
§ 522(c) protected the debtor's entire residence from the
creditor's lien, even that value which exceeded the exemption provided
by Cal. Civ. Proc. Code § 704.730(3) (West 1987 & Supp. 2002).
OVERVIEW: The appellate panel held the bankruptcy court
misapplied 11 U.S.C.S. § 522(c) in invalidating the creditor's lien
in its entirety. California specifically limited the amount up to which
a homestead exemption could be claimed. The exemption was limited to $
100,000, as the debtor had claimed. 'Property exempted' in § 522(c)
meant only the $ 100,000 homestead exemption allowed by state exemption
law, and did not extend to any nonexempt equity in the real property to
which the creditor's lien might attach. The debtor's 'fresh start' was
protected by the state exemption scheme, grafted onto the Bankruptcy
Code. On the facts, there was no conflict of law because the creditor
did not attempt to enforce its nondischargeable lien claim against
exempt property. To the extent the lien attached, it remained a valid
lien on the residence, since it was not avoided under the Bankruptcy
Code. Section 522(c) did not prevent the creditor from satisfying its
lien from available nonexempt equity, under state law. The bankruptcy
court abused its discretion by using § 522(c) to avoid the lien on
the residence and in ordering that the creditor had no right, title, or
interest in the residence. S & C Home Loans, Inc. v. Farr (In
re Farr), 2002 Bankr. LEXIS 501, 278 B.R. 171 (B.A.P. 9th Cir. May
6, 2002)(Marlar, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.01
ABI Members, click here to get the full opinion
Debtor's fraud rendered debt nondischargeable despite
creditor bank's failure to fully investigate. Bankr. C.D.
Cal. PROCEDURAL POSTURE: A creditor bank brought an adversary
proceeding against the debtor under 11 U.S.C. § 523(a)(2). The bank
asserted it extended credit in the form of overdrafts on a checking
account opened by the debtor in connection with the debtor's brother's
check cashing business, and that the brother was operating a check
kiting scheme. The bank asserted it relied on financial statements
supplied by the debtor in opening the account. OVERVIEW: The
court found that the debtor understood that he was holding himself out
as the owner of the business. One bank statement the debtor gave to his
brother to prepare the financial statements belonged to his employer and
not to the debtor. The debtor intended to induce the bank to believe
falsely that he was the owner. The bank was not required to hire a
translator and carefully question the debtor as to his interest in the
business. The bank evaluated and relied on the debtor's
creditworthiness. But for opening the account, the bank would not have
sustained losses. Under 11 U.S.C. § 523(a)(2)(A), (B), the
statements were false, in writing, and related to the debtor's financial
condition. That the bank might have performed a more thorough
investigation to verify some of the information did not give rise to a
defense. The debtor could not sign a document purporting to describe his
finances without reading it and then be held blameless if it contained
materially false information. Under 11 U.S.C. § 523(a)(6), nothing
suggested that the debtor had reason to know of the check kiting scheme
or that if the account was opened the bank was substantially certain to
suffer injury. Merchants Bank v. Chai Cho Oh (In re Chai Cho
Oh), 2002 Bankr. LEXIS 603, 278 B.R. 844 (Bankr. C.D. Cal. June 7,
2002) (Bluebond, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
10th Cir.
Creditor's failure to file for an extension prior to sixty-day bar
date barred late motion for exception to discharge. B.A.P. 10th
Cir. PROCEDURAL POSTURE: Appellees debtors filed for Chapter
13 relief under the Bankruptcy Code. Appellant creditor objected to
confirmation of the plan. The Chapter 13 case was dismissed on the
trustee's motion. The debtors filed a Chapter 7 case and later received
a discharge. The creditor filed a motion to allow an exception to
discharge. The debtors objected under Fed. R. Bankr. P. 4007(c), and the
court denied the creditor's motion. The creditor appealed.
OVERVIEW: The creditor sought to file a complaint against the
debtors under 11 U.S.C. § 523(a)(2). The appellate panel found that
it was uncontested that the creditor did not file his motion until after
the 11 U.S.C. § 523 complaint period had expired. The panel found
that the bankruptcy court did not err in refusing to extend the creditor
time to file such a complaint. The panel rejected the creditor's claim
that his failure to meet the cutoff date was warranted. The panel
rejected the creditor's argument of excusable neglect and found that it
did not apply. The creditor argued that his objection to the
dischargeability of his alleged claims in the debtors' Chapter 7 case
should relate back to his objection to the plan confirmation in their
Chapter 13 case. The panel rejected this position, and found that the
debtors recognized the creditor as a creditor with potential claims when
they sent him notice of the meeting of creditors and the bar date for
filing § 523(a) complaints. Under Rule 4007(c) any request to
extend the sixty-day time limit under § 523(a)(2) must have been
made prior to the expiration of the bar date, which the creditor failed
to do. Daniels v. Cowdin (In re Cowdin), 2002 Bankr. LEXIS
608, B.R. (B.A.P. 10th Cir. May 30, 2002) (Clark, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
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Sanctions not warranted for inclusion in Chapter 13
plan of language providing for discharge of student loans based on undue
hardship. D. Kan. PROCEDURAL POSTURE: The bankruptcy
debtors proposed a Chapter 13 plan providing that student loan debts
would be discharged based on undue hardship, and the student loan
creditor asserted that such language was improper. The creditor appealed
the ruling of the United States Bankruptcy Court for the District of
Kansas, which deleted the language from the confirmation order but
declined to adopt a per se rule that such conduct was sanctionable.
OVERVIEW: The bankruptcy debtors proposed a Chapter 13 plan
providing that student loan debts would be discharged based on undue
hardship, and the student loan creditor asserted that such language was
improper. The creditor appealed the ruling of the United States
Bankruptcy Court for the District of Kansas, which deleted the language
from the confirmation order but declined to adopt a per se rule that
such conduct was sanctionable. In re Wright, 2002 U.S. Dist.
LEXIS 10800, B.R. (D. Kan. April 29, 2002) (Rogers, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
11th Cir.
Debtor could not apply for undue hardship discharge of student
loan until completion of Chapter 13 plan payments. Bankr. N.D.
Ala. PROCEDURAL POSTURE: After debtors petitioned for Chapter
13 bankruptcy relief, plaintiff--debtor wife--filed an adversary
proceeding to partially discharge a student loan obligation as being an
undue hardship under 11 U.S.C. § 523(a)(8). Defendant creditor
moved to dismiss the complaint. OVERVIEW: The creditor argued
that the debtor's claim was not ripe. Specifically, the creditor argued
that a complaint under 11 U.S.C. § 523(a)(8) should be filed at the
end of a Chapter 13 case because a Chapter 13 debtor is not entitled to
receive a discharge under 11 U.S.C. § 1328(a) until plan payments
are completed. The court agreed. It was impossible to address the
Brunner factors in a Chapter 13 case until near or at the time the plan
is scheduled for completion. It was impossible to determine whether a
Chapter 13 debtor would be able to maintain a minimal standard of living
after receiving a discharge because the debtor's income could increase
during the life of a Chapter 13 plan. Further, at the end of a plan a
debtor's circumstances would have changed. The debtor would receive a
discharge of most debts, which could increase the debtor's ability to
pay at least a portion of the student loan. Finally, the filing an undue
hardship complaint at the beginning of a case demonstrated a lack of
good faith under Brunner; good faith required that a debtor at least
attempt to pay some part of the loan. Pair v. United States Dept.
of Ed. (In re Pair), 2002 Bankr. LEXIS 1901, 269 B.R. 719 (Bankr.
N.D. Ala. November 14, 2002) (Caddell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
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Chapter 13 plan paying only 11% of nondischargeable
debts over 36 months non-confirmable. Bankr. S.D. Fla. PROCEDURAL
POSTURE: A creditor moved to dismiss the debtor's Chapter 13 case
under 11 U.S.C. § 1307(c), and filed an objection to confirmation
of the plan under 11 U.S.C. § 1325, arguing the debtor lacked
candor and honesty in the preparation of his schedules, failed to
disclose the full extent of his income, failed to accurately delineate
his expenses, and that the debtor's motivation in seeking relief under
Chapter 13 was bad faith. OVERVIEW: While the debtor testified
that he agonized for some time about filing bankruptcy, two months
earlier he leased a luxury car. But the court was satisfied that the
motivation in seeking Chapter 13 relief was to obtain a fresh start and
make substantial payment to his creditors under 11 U.S.C. §
1307(c), even if the plan as proposed was not confirmable under 11
U.S.C. § 1325(b)(2). The debtor could not propose a plan in good
faith for the minimum period of 36 months that proposed to pay only 11
percent of debts that would be nondischargeable under Chapter 7. Over 60
months, the dividend would be 41 percent. Post-petition bonuses were
subject to the disposable income test. The debtor's expenses for
utilities, telephone, food, laundry and dry cleaning, transportation,
and recreation were excessive. Since he had been receiving tax refunds,
an amount listed for estimated taxes was disallowed. Under the
disposable income requirement, he had to make plan payments totaling at
least $50,847, plus the bonuses. If he was unwilling to make payments
totaling such amount over a 36-month period, cause existed to extend the
plan to 60 months. In re McGovern, 2002 Bankr. LEXIS
610, 278 B.R. 888 (Bankr. S.D. Fla. May 24, 2002) (Friedman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.01
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Non-debtor homeowners' committee had standing to
appeal as 'person aggrieved.' 11th Cir. PROCEDURAL
POSTURE: Appellant homeowners' committee filed an adversarial
proceeding in a bankruptcy court challenging a special assessment
imposed by appellee trustee, and moved for reconsideration of certain
allowed claims. The bankruptcy court entered orders allowing the special
assessment and denying reconsideration. The United States District Court
for the Southern District of Florida dismissed the committee's appeals
of the orders. The committee appealed. OVERVIEW: The debtor in
the bankruptcy proceeding was a subdivision homeowners' association that
had been held liable to four claimants for fair housing violations. The
bankruptcy court allowed the claimants' requests for compensatory and
punitive damages. The trustee did not appeal the allowance of claims to
the district court, but instead imposed the special assessment of $7,250
on each homeowner in the subdivision in order to pay the claims. The
district court held that the committee lacked standing to appeal the
bankruptcy court's orders concerning the allowance of the claims and the
special assessment because the debtor, not the committee, was the real
party in interest. The court of appeals held that standing to appeal the
bankruptcy court's orders was not limited to a real party in interest;
instead, the question was whether the committee was a 'person aggrieved'
as set out under the former Bankruptcy Act of 1898. The orders in
question directly, adversely, and pecuniarily affected the committee
members because they were required to pay the special assessment.
Therefore, the committee was a person aggrieved and had standing to
appeal the orders. Westwood Cmty. Two Ass'n v. Barbee (In re
Westwood Cmty. Two Ass'n), 2002 U.S. App. LEXIS 11440, B.R. (11th
Cir. June 13, 2002) (Anderson, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.01
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