Collier Bankruptcy Case Update July-8-02
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 8, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 510(c) Claim of investor who was beneficiary of fraud
equitably subordinated to claims of unsecured creditors.
In re Adler (Bankr. S.D.N.Y.)
§ 1322(d) Creditor lacks standing to force Chapter 13 debtor to commit its disposable income for the maximum five years.
In re Mandarino (Bankr. E.D.N.Y.)
§ 548(a)(1) Transfer of essence of debtor's business to
affiliate controlled by debtor's president held fraudulent.
Dobin v. Taiwan Machinery Trade Center Corp. (In re Victor Int'l, Inc.) (Bankr. D.N.J.)
§ 330(a)(1)(A) Estate owed attorney's fees only for services
rendered prior to conversion from Chapter 11 to Chapter 7.
U.S. Trustee v. Equipment Services, Inc. (In re Equipment Services, Inc.) (4th Cir.)
§ 523(a)(5) Debtor's obligations to ex-husband for paying school tuition and attorney's fees excepted from discharge as being in the nature of alimony.
Luppino v. Evans (In re Evans) (Bankr. D. Md.)
§ 707(b) Chapter 7 case dismissed on grounds of debtor's unreasonable and excessive family budget.
In re Schmonsees (Bankr. M.D.N.C.)
§ 541(a)(1) Debtors' claim of a homestead exemption for
property held by family limited partnership denied.
In re Monsivais (Bankr. W.D. Tex.)
§ 522(f)(2)(A) Creditor's lien entitled to priority over
subsequent tax lien which was not considered in avoidance
In re Radcliffe (Bankr. W.D. Ky.)
§ 523(a)(8) Student loans nondischargeable due to debtor's voluntary unemployment.
Kirchhofer v. Direct Loans (In re Kirchhofer) (Bankr. N.D. Ohio)
§ 523(a)(8) Student loan obligation not dischargeable, where debtor, despite substantial child-support arrearage, was living rent-free and had made no efforts to repay.
Hall v. U.S. Dept. of Education, Nat'l Payment Center (In re Hall) (Bankr. S.D. Ohio)
§ 523(a)(15) Ex-husband's payments under separation agreement non-dischargeable due to ability to pay.
Sacher v. Gengler (In re Gengler) (Bankr. N.D. Ohio)
§ 1141 Confirmation of Chapter 11 plan was final judgment preventing creditors from further litigation of issues.
Abram & Tracy, Inc. v. IRS (In re Abram & Tracy, Inc.) (Bankr. S.D. Ohio)
§ 105(a) Court had no discretionary power to relieve debtor
from previously ordered refinancing requirement.
In re Malmgren (Bankr. E.D. Wis.)
§ 523(a)(2)(A) Mere issuance of bad check does not except discharge of related debt for fraud.
New Austin Roosevelt Currency Exchange, Inc. v. Sanchez (In re Sanchez) (Bankr. N.D. Ill.)
§ 522(d)(10)(E) IRA under which debtor could withdraw with
only a ten percent penalty not entitled to an exemption under §
In re Rousey (Bankr. W.D. Ark.)
§ 523(a)(8) Totality of circumstances supported discharge of one of two student loans.
Morris v. U. of Ark (In re Morris) (Bankr. W.D. Ark.)
§ 1129(a)(9)(A) Creditor waived sovereign immunity by filing claim for costs of administration.
WCI Cable, Inc. v. Alaska RR Corp. (In re WCI Cable, Inc.) (Bankr. D. Or.)
§ 1322(b)(2) A Chapter 13 plan may provide for curing or waiving any default, including the violation of the due on sale clause of a mortgage on home debtor purchased from original borrower.
Bank of America v. Garcia (In re Garcia) (Bankr. D. Ariz.)
§ 544(a)(3) Trustee may avoid mortgage that appeared to be
released as of record as a bona fide purchaser.
Clark v. Banc One Mortgage Corp. (In re Gilbert) (Bankr. D. Kan.)
§ 1322(c)(2) Chapter 13 debtor allowed to bifurcate and
'cramdown' undersecured home mortgage into secured and unsecured debts,
provided original final payment due prior to end of plan.
Magnolia Mortgage, LLC v. Arnett (In re Arnett) (S.D. Ala.)
Collier Bankruptcy Case Summaries
Claim of investor who was beneficiary of fraud equitably
subordinated to claims of unsecured creditors. Bankr.
S.D.N.Y. PROCEDURAL POSTURE: In an action under the
Securities Investor Protection Act of 1970 ('SIPA'), 15 U.S.C.
§§ 78aaa through 78lll, plaintiff trustee for liquidation of
debtor filed an adversary action against defendant investor, seeking
equitable subordination of the investor's claim against debtor. The
investor objected to the trustee's determination that denied the
investor's customer claim status. The court consolidated the objection
and adversary action. OVERVIEW: The investor formerly held an
account at an introducing broker for which debtor served as the clearing
firm. The investor was used by broker personnel as a 'nominee' for the
broker in the broker's transactions for its own account, and investor
knowingly permitted himself to be used as such. The trustee alleged that
the investor was the single greatest beneficiary of illegal activity at
the broker, which illegality ultimately led to the failure of both
debtor and the broker. The court determined that the investor was the
beneficiary of the fraud and other illegal conduct, and was a knowing
beneficiary. Customer status was not proper for the investor, as the
investor sought for the Securities Investor Protection Corporation and
taxpayers to make him whole with respect to an account that plainly was
the beneficiary of unlawful conduct. Equitable subordination to claims
of unsecured creditors was proper. The investor was an 'insider,' due to
a close personal relationship with a trader at the broker. Also, he
engaged in the requisite unfair act, and circumstances were such that it
was inequitable for him to assert a parity with the other creditors in
the distribution of the estate.In re Adler, 2002 Bankr. LEXIS
453, 277 B.R. 520 (Bankr. S.D.N.Y. March 27, 2002) (Gerber, B.J ).
Collier on Bankruptcy, 15th Ed. Revised 4:510.05
Creditor lacks standing to force Chapter 13 debtor to
commit its disposable income for the maximum five years. Bankr.
E.D.N.Y. PROCEDURAL POSTURE: Debtor petitioned for relief
under Chapter 13 of the Bankruptcy Code. Creditor objected to the
confirmation of debtor's Chapter 13 plan, pursuant to 11 U.S.C. §
1322(d). Debtor replied to the objection. OVERVIEW: Creditor
objected to debtor's four-year Chapter 13 plan, claiming that debtor had
violated the standard of good faith by not committing his disposable
income for the maximum duration allowed, which was five years under 11
U.S.C. § 1322(d). The court held that without more proof of
debtor's intention, creditor has failed to meet its burden regarding the
claim of lack of good faith. The court had trouble understanding why
creditor would object to confirmation based on a minimal difference
between a plan term of four years, as debtor sought, and a plan term of
five years. The court concluded that creditor was haggling over a small
amount, and held that an objection based upon such was not sufficient as
a mixed issued of fact and law to deny confirmation. The court noted
that, as a matter of law, if a proof of claim was not contested, it was
deemed allowed. In this case, it meant that debtor only consented to the
amount owed, without admitting to the validity of the claim. It made no
sense to the court to sustain an objection to confirmation or to grant a
motion to dismiss because debtor took advantage of a fundamental
provision that Congress intentionally enacted. In re
Mandarino, 2002 Bankr. LEXIS 506, 277 B.R. 464 (Bankr. E.D.N.Y. May
14, 2002) (Bernstein, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.17
Transfer of essence of debtor's business to affiliate controlled
by debtor's president held fraudulent. Bankr. D.N.J.
PROCEDURAL POSTURE: The Chapter 7 trustee filed a complaint
against defendant, debtor's affiliate, alleging fraudulent transfers
under 11 U.S.C.S. §§ 548(a)(1)(A), 544(b), and the New Jersey
Uniform Fraudulent Transfer Act, specifically, N.J. Stat. Ann.
§§ 25:2-25(a), (b), 25:2-26. The court held the affiliate in
contempt, struck its answer, and entered a default for the failure to
comply with court orders. The trustee sought the entry of a default
judgment. OVERVIEW: The court found that the affiliate had
consistently refused to comply with court orders; it stymied discovery
efforts and efforts to bring the case to trial. The debtor's president
was the affiliate's president, and he and his family members were common
directors and shareholders in both companies. After a state court
judgment entered against the debtor, the affiliate began operating out
of the debtor's premises and all employees began working for the
affiliate. The affiliate completely took over the debtor's operations,
as reflected in the debtor's quick loss in revenue and a corresponding
increase in the affiliate's revenues. The affiliate's contumacious
behavior did not shield it from judgment because the badges of fraud
were established under 11 U.S.C. §§ 548(a)(1)(A), (B)(i),
(ii)(I), 544(b). The essence of the debtor's business was transferred to
the defendant with actual intent to hinder, delay, or defraud the
judgment creditor. Given the presence of multiple badges of fraud,
actual intent to defraud was established. The de facto merger rendered
the affiliate liable for all claims against the debtor, and the
affiliate's and the insiders' claims were disallowed. Dobin v.
Taiwan Machinery Trade Center Corp. (In re Victor Int'l, Inc.), 2002
Bankr. LEXIS 530, 278 B.R. 67 (Bankr. D.N.J. May 24, 2002) (Stern,
Collier on Bankruptcy, 15th Ed. Revised 5:548.01
Estate owed attorney's fees only for services rendered prior to
conversion from Chapter 11 to Chapter 7. 4th Cir.
PROCEDURAL POSTURE: The attorney for appellee/appellant debtor
corporation applied to the bankruptcy court for the payment of his legal
fees incurred pre-petition, during the Chapter 11 proceeding, and after
conversion to a Chapter 7 proceeding. The United States District Court
for the Western District of Virginia, at Abingdon, awarded the attorney
all his requested fees. The debtor and appellant/appellee United States
Trustee filed cross-appeals. OVERVIEW: The debtor retained the
attorney to prepare a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code. The debtor paid the attorney a $6,000 retainer, of
which $1,000 was used to pay the fees of filing the Chapter 11 petition.
The attorney deposited the remainder in his client escrow account. The
Chapter 11 proceeding was converted into a Chapter 7 proceeding. The
attorney filed an application with the bankruptcy court and sought
approval of attorney's fees. The trustee objected and argued that 11
U.S.C.S. § 330(a) made no provision for counsel of the debtor to be
compensated by the estate in a Chapter 7 proceeding. The bankruptcy
court awarded the attorney the requested fees. The district court
affirmed. The parties cross-appealed. The court found that under 11
U.S.C. § 330(a), the debtor's attorney was not authorized to be
paid funds from the bankruptcy estate for services rendered after the
case was converted to a Chapter 7 proceeding. Of the $6,000 retainer
held by the attorney, $1,000 was properly paid to him for pre-petition
work, $1,328.85 was payable to him for work performed during the Chapter
11 proceeding, and $3,617.15 belonged to the estate. U.S. Trustee
v. Equipment Services, Inc. (In re Equipment Services, Inc.), 2002
U.S. App. LEXIS 10563, 290 F.3d. 739 (4th Cir. May 31, 2002) (Niemeyer,
Collier on Bankruptcy, 15th Ed. Revised 3:330.04
Debtor's obligations to ex-husband for paying school
tuition and attorney's fees excepted from discharge as being in the
nature of alimony. Bankr. D. Md. PROCEDURAL POSTURE:
Plaintiff ex-husband filed a motion for summary judgment and defendant
ex-wife opposed the motion in an action in which the ex-husband sought
to except from the ex-wife's discharge under Chapter 7 bankruptcy
certain obligations that arose from the parties' separation agreement
pursuant to 11 U.S.C. § 523(a)(5). OVERVIEW: The ex-husband
argued that certain obligations should be excepted from discharge. Those
obligations were to share equally in the private school tuition costs
for their two minor children, work-related day care expenses, uncovered
medical expenses, and summer care expenses. The ex-husband also sought a
ruling that attorney fees incurred in connection with enforcing the
obligations were excepted from discharge. The ex-wife objected only to
the non-dischargeability of her obligation to share equally in the
school tuition and the attorney fees. The bankruptcy court granted the
ex-husband's motion for summary judgment. The court held that a
determination of whether a debt was in the nature of alimony,
maintenance, or support under § 523(a)(5) was a question of federal
bankruptcy law and the intent of the parties at the time of the divorce.
The court held that there was a domestic relations exception to federal
jurisdiction that permitted federal courts to refrain from acting in
matters pertaining to divorce, alimony, or child support claims. The
court concluded that the ex-wife had not offered any fact that could
support a finding that her obligations were anything but
non-dischargeable. Luppino v. Evans (In re Evans), 2002 Bankr.
LEXIS 531, 278 B.R. 407 (Bankr. D. Md. May 22, 2002) (Mannes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
Chapter 7 case dismissed on grounds of debtor's
unreasonable and excessive family budget. Bankr. M.D.N.C.
PROCEDURAL POSTURE: This Chapter 7 case was before the court for
a hearing on whether the case should be dismissed pursuant to 11 U.S.C.
§ 707(b). OVERVIEW: This voluntary Chapter 7 case was filed
by the debtor. The debtor's wife did not join in the filing. Both
spouses have been employed throughout the 1990's and have had total
income of $90,000.00 or more. The schedules filed by the debtor
reflected secured indebtedness of $186,568.56 consisting of two
mortgages on a residence valued at $295,000.00 which was owned by the
debtor and his wife as tenants by the entirety. In his Schedule F the
debtor listed unsecured indebtedness totaling $133,910.00 that included
$13,450.00 of indebtedness owed jointly by the debtor and his wife. The
debtor also listed student loan indebtedness of $13,510.00. In his claim
for property exemptions, the debtor claimed all of his personal property
and his interest in the jointly-owned residence as exempt property. The
court concluded that the granting of Chapter 7 relief in this case would
be a substantial abuse of the provisions of Chapter 7 and that this
case, therefore, should be dismissed under § 707(b). The court
reasoned that the debtor's family budget was excessive and unreasonable.
In re Schmonsees, 2001 Bankr. LEXIS 1896, - B.R. - (Bankr.
M.D.N.C. September 21, 2001) (Stocks, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:707.04
Debtors' claim of a homestead exemption for property held by
family limited partnership denied. Bankr. W.D. Tex.
PROCEDURAL POSTURE: Debtors filed a Chapter 7 bankruptcy.
The trustee objected to debtors' claim of an urban homestead in property
owned by a family limited partnership. OVERVIEW: Debtors claimed
as their exempt urban homestead 10.33 acres of land in El Paso County,
Texas, upon which were located a dwelling and horse sheds. Debtors never
held fee simple title to the property. When it was acquired in 1992,
title was taken in a family limited partnership but debtors lived on the
property continuously since 1992. The court held that when debtors filed
their petition in bankruptcy, all of their property, including their
interests in the partnership, became part of the bankruptcy estate and,
therefore, subject to the control of the trustee. Debtors did not claim
their interests in the partnership as exempt; thus, the partnership
remained in the estate and subject to the control of the trustee.
Debtors did not own the partnership and, thus, could not claim an
exemption in specific partnership property, even if the court should
decide that the older Texas partnership cases, which held that a partner
in a solvent partnership could designate his interest in partnership
realty as a part of his homestead, applied in the matter. In re
Monsivais, 2002 Bankr. LEXIS 470, 274 B.R. 263 (Bankr. W.D. Tex.
January 29, 2002) (Akard, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.04-11
Creditor's lien entitled to priority over subsequent tax lien
which was not considered in avoidance calculation. Bankr. W.D.
Ky. PROCEDURAL POSTURE: Debtor moved to avoid the judgment
lien of creditor lienholder. At issue was whether a state tax lien
against the subject real property, but lower in priority that the
creditor's lien, should be counted in determining the debtor's avoidance
of the lien under 11 U.S.C. § 522(f)(2)(A). The creditor argued the
tax lien should not be so considered. OVERVIEW: Debtor owned real
property that was valued at $250,000. In order of priority, there were
an ad valorem tax lien for real estate taxes of $15,000, a first
mortgage of $180,000, the creditor's judgment lien of about $112,000,
and a state tax lien of about $57,000. The debtor argued that all the
liens on the property plus the debtor's exemption totaled about
$370,000, which exceeded the stipulated $ 250,000 value of the property,
and that the creditor's judgment lien should be avoided in its entirety.
Debtor based his argument on the plain language of 11 U.S.C. §
522(f)(2)(A). The court rejected that logic as violative of the Fifth
Amendment takings clause. The creditor was entitled to have the priority
of its lien over the state tax lien, and only the encumbrances having
priority over the creditor's interest were used in the calculations,
resulting in avoidance of $48,400 and a retained lien of $64,000 for the
creditor. In re Radcliffe, 2002 Bankr. LEXIS 538, 278 B.R. 426
(Bankr. W.D. Ky. May 24, 2002) (Stosberg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.01
Student loans nondischargeable due to debtor's
voluntary unemployment. Bankr. N.D. Ohio PROCEDURAL
POSTURE: Plaintiff debtor brought an adversary action to discharge
student loan debts she owed to the defendants, lender and the United
States Department of Education, pursuant to 11 U.S.C. § 523(a)(8).
Each party filed a motion for summary judgment. OVERVIEW: The
debtor was a mother of a young child and had ceased her employment to
remain home with the child. The court applied the Sixth Circuit's test
for dischargeability for undue hardship, which implicitly required that
a debtor's financial woes be the result of events clearly out of the
debtor's control. The debtor's burden was to establish that she had done
everything within her power to improve their financial situation.
Because her unemployment was voluntary, the court found she had not met
that burden. However, the court granted partial relief, reducing the
loan obligation pursuant to 11 U.S.C. § 105(a), because the
equities of the situation were relatively even between the parties.
Kirchhofer v. Direct Loans (In re Kirchhofer), 2002 Bankr.
LEXIS 485, 278 B.R. 162 (Bankr. N.D. Ohio May 2, 2002) (Speer, B.J
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Student loan obligation not dischargeable, where
debtor, despite substantial child-support arrearage, was living
rent-free and had made no efforts to repay. Bankr. S.D. Ohio
PROCEDURAL POSTURE: Debtor husband filed a complaint to determine
the dischargeability of his student loan obligation to defendant
Department of Education National Payment Center, pursuant to 11 U.S.C.
§ 523(a)(8). OVERVIEW: The debtor husband had incurred a
substantial arrearage for support of his five children from previous
marriages, which was being collected from a weekly garnishment of his
paycheck. He was employed in a secure position and did not have to pay
rent, as he was living in his recently deceased father-in-law's
residence. The court noted that husband's current wife would now be able
to work outside the home, as she was no longer caring for her father.
Although the husband appeared to have obligations exceeding his income
and lived at a minimal standard, his wife's potential employment showed
that the condition would not likely last, and the husband had made
virtually no effort to pay back the student loan. Based on those
factors, the court found the student loan debt not to be dischargeable
under the three prong test for undue hardship, and denied him relief
under 11 U.S.C. § 523(a)(8). Hall v. U.S. Dept. of Education,
Nat'l Payment Center (In re Hall), 2002 Bankr. LEXIS 509, 277
B.R. 882 (Bankr. S.D. Ohio March 14, 2002) (Aug, B.J. ).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Ex-husband's payments under separation agreement
non-dischargeable due to ability to pay. Bankr. N.D. Ohio
PROCEDURAL POSTURE: Debtor former husband filed for Chapter 7
bankruptcy relief. Creditor, his former wife, timely filed an adversary
complaint, asserting that $21,000 of joint credit card debt that was the
responsibility of the husband to pay under the separation agreement
between the parties was nondischargeable under 11 U.S.C. §
523(a)(15). The husband argued he did not have the ability to pay the
debt. OVERVIEW: The husband had become unemployed at the time he
filed the petition, had since regained employment, and would possibly
regain his former job. The bankruptcy court applied the 'ability to pay'
test of 11 U.S.C. § 523(a)(15)(A), and determined that the debtor,
by reducing some expenditures, reasonably could afford $ 300 per month
to pay toward the debt. The court balanced the benefit of the discharge
to the husband against the standard of living of the wife in her new
marriage under 11 U.S.C. § 523(a)(15)(B), but determined the
husband's benefit did not outweigh the wife's. The husband was not
obligated to pay child support or alimony since the husband had not
carried his burden of proof by a preponderance of the evidence, the
court determined that paying $300 per month for about six years, which
would extinguish the $21,000 obligation, was reasonable for the husband
debtor to perform. Sacher v. Gengler (In re Gengler), 2002
Bankr. LEXIS 482, 278 B.R. 146 (Bankr. N.D. Ohio April 19, 2002) (Speer,
Collier on Bankruptcy, 15th Ed. Revised 4:523.21
Confirmation of Chapter 11 plan was final judgment
preventing creditors from further litigation of issues. Bankr.
S.D. Ohio PROCEDURAL POSTURE: The debtor filed an adversary
action to determine the extent and validity of two creditors' liens, the
United States, Internal Revenue Service ('IRS'), and a state taxing
authority. The debtor moved for partial summary judgment, asserting that
its confirmed plan released the debtor's principal. The creditors argued
11 U.S.C. § 524 precluded such a release and that the debtor was
attempting to impermissibly modify the confirmed Chapter 11 plan.
OVERVIEW: After confirmation, the debtor's real property sold for
much less than the listing price and the scheduled value. But, that was
a measure of reality. It was not an impermissible modification of the
original plan. The state taxing authority and the IRS did not challenge
the release provision during confirmation. They were thus precluded from
objecting to the release. They argued that the court had no jurisdiction
to grant a third-party release under § 524(e). But, the bankruptcy
court had jurisdiction to enjoin creditor action against third parties,
over creditor opposition. The confirmation of the plan had the effect of
a judgment. On that basis, the principle of res judicata precluded the
further litigation of any issues that the parties raised or could have
raised during confirmation. The debtor had disbursed the sale proceeds
to a first mortgage holder. As a result, the plan had been substantially
consummated. That fact precluded any modification of the terms of the
confirmed plan by the debtor or the creditors. Abram & Tracy,
Inc. v. IRS (In re Abram & Tracy, Inc.), 2002 Bankr. LEXIS 492,
277 B.R. 369 (Bankr. S.D. Ohio April 10, 2002) (Caldwell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1141.01-.06
Court had no discretionary power to relieve debtor from previously
ordered refinancing requirement. Bankr. E.D. Wis.
PROCEDURAL POSTURE: After finding that the debtor had failed to
obtain refinancing as required under a previous court order as a
condition for not converting the Chapter 11 case to a Chapter 7, the
court denied the debtor relief from the previous court order and
converted the case to a Chapter 7. Asserting Fed. R. Civ. P. 60(b),
59(a), the debtor filed an emergency motion for relief from the order
converting the case. OVERVIEW: The court held it had not based
its decision denying relief from the previous order exclusively, or even
primarily, on Fed. R. Civ. P. 60(b). The previous order requiring the
refinancing mandated strict compliance. The debtor admitted he did not
obtain the refinancing. He had not complied with the order, whether it
was a final order or not. The debtor was in default, and accordingly,
the case had to be converted. Even if the court were to 'rethink' its
earlier order, it would impose the same conditions and would rule the
same way. The refinancing was a major condition imposed in the previous
order. There had been no changed circumstances, no unforeseen events,
nor any new evidence which would support removing the refinancing from
the conditions. The debtor had repeatedly defaulted on court directives
and had afterward offered another excuse, an additional explanation, and
a new promise, with little progress. There was no reason justifying
relief from the operation of the previous order. The court could not
find, based any inherent discretionary power under 11 U.S.C. §
105(a), that the debtor was entitled to be relieved from the refinancing
requirement. In re Malmgren, 2002 Bankr. LEXIS 487, 277 B.R.
755 (Bankr. E.D. Wis. May 16, 2002) (Eisenberg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.01
Mere issuance of bad check does not except discharge
of related debt for fraud. Bankr. N.D. Ill. PROCEDURAL
POSTURE: Plaintiff creditor brought this adversary proceeding
objecting to the dischargeability of a debt under the fraud exception of
11 U.S.C. § 523(a)(2)(A). After the debtor failed to appear at a
scheduled status hearing, the creditor sought a judgment by default that
its debt was nondischargeable because it arose from the debtor's
issuance of a bad check. OVERVIEW: The creditor argued that the
debtor could not discharge its debt because, when he caused his business
check to issue, the debtor knew or should have known that there were not
sufficient funds to cover the check and his other obligations. The
creditor contended that the debtor's issuance of the check constituted
conventional fraud and therefore its debt was nondischargeable under 11
U.S.C. § 523(a)(2)(A). The court held that the creditor had not
offered any circumstantial evidence to establish that the debtor
intended to defraud it. The creditor had not shown that the debtor had
no intent to honor the check, or that the dishonor of it was not the
result of some financial difficulties that drove the debtor into
bankruptcy. Thus, the court held that the creditor could not except its
debt from discharge merely by showing that it was derived from a bad
check. New Austin Roosevelt Currency Exchange, Inc. v. Sanchez (In
re Sanchez), 2002 Bankr. LEXIS 497, 277 B.R. 904 (Bankr. N.D.
Ill. May 20, 2002) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
IRA under which debtor could withdraw with only a ten percent
penalty not entitled to an exemption under § 522(d)(10)(e).
Bankr. W.D. Ark. PROCEDURAL POSTURE: Debtors, husband and
wife, filed a Chapter 7 case. Among the property of the debtors were two
individual retirement accounts ('IRAs'), which they claimed as exempt
property. The Chapter 7 trustee filed an objection to claim of
exemptions and motion for turnover. OVERVIEW: The bankruptcy
court found, based on the debtors' testimony and the language of the IRA
agreements, that the debtors had a right to withdraw from the IRAs at
any time, subject only to a 10 percent excise tax penalty. Based on this
right of withdrawal, the court concluded that the IRAs were not 'similar
plans or contracts' within the meaning of 11 U.S.C. §
522(d)(10)(E). Because of the right of withdrawal, the debtors' right to
payment under the IRAs was not conditioned on account of illness,
disability, death, age, or length of service. Accordingly, the debtors'
right to payment under the IRAs was not entitled to an exemption under
11 U.S.C. § 522(d)(10)(E). However, the court found that debtors
were entitled to their 'wildcard exemption' in the total amount of
$10,681.00 pursuant to 11 U.S.C. § 522(d)(5). In re
Rousey, 2002 Bankr. LEXIS 466, 275 B.R. 307 (Bankr. W.D. Ark.
February 12, 2002) (Fussell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4: 522.09 
Totality of circumstances supported discharge of one
of two student loans. Bankr. W.D. Ark. PROCEDURAL
POSTURE: Debtor filed an adversary proceeding to determine the
dischargeability of education loans owed to the creditor who guaranteed
the student loans, alleging that repaying the indebtedness would cause
undue hardship to her and her dependents under 11 U.S.C. §
523(a)(8). OVERVIEW: The court found the debtor was employed as a
public school teacher and would receive modest raises plus a raise when
she completed her master's degree. She could find supplemental
employment during the summer, as the daughter would soon be old enough
to baby-sit for her younger brother. The debtor had reliable
transportation. The debtor's husband had a potential to net $1,000 more
annually. The debtor should have repaired her old car instead of buying
a new one. The home, which had equity of $8,000, would be paid off in
nine years. Some of the equity could be used to decrease the car debt or
to consolidate credit card debt, which would yield $200 a month to apply
to student loans. The debtor and her husband were young, healthy, and
had stable but low-paying jobs. They had no disabilities, nor did their
children. The student loans were 90 percent of the unsecured,
nonpriority debt. The debtor had not made any payments on the loans,
which were not in default. Repaying one loan of $65,912 would create
undue hardship, as monthly payments for 20 years would be $817. But the
remaining loans could be paid over 20 years at $362 per month.
Morris v. U. of Ark (In re Morris), 2002 Bankr. LEXIS 489, 277
B.R. 910 (Bankr. W.D. Ark. May 20, 2002) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Creditor waived sovereign immunity by filing claim for costs of
administration. Bankr. D. Or. PROCEDURAL POSTURE:
Debtors filed an adversary complaint alleging that the creditor
railroad's fees, charged for the debtors' permits for fiber optic cables
under Alaska Stat. § 42.40.010 et seq., were anti-competitive and
violated § 253 of the Federal Telecommunications Act of 1996. The
railroad, and the railroad's president, officer, and board members,
moved to dismiss for lack of jurisdiction based on sovereign immunity
under the Eleventh Amendment. OVERVIEW: The railroad had
previously been held to be an arm of the state, but the court found it
had waived the defense of sovereign immunity with respect to the issues
in the adversary proceeding. The railroad had filed objections to the
debtors' motions regarding the use of cash collateral and an extension
of the time to assume or reject executory contracts. It invoked the
bankruptcy court's jurisdiction specifically to require the debtors to
make payments due and owing under the permits both as a condition to
granting the motion to extend and as required to comply with 11 U.S.C.
§ 365(d)(3). It further invoked the courts' jurisdiction to require
the debtors to make the scheduled payments under the permits as adequate
protection. The railroad had characterized unpaid rent or fees under the
permits as costs of administration entitled to preferred administrative
expense treatment upon confirmation of any plan or liquidation in the
Chapter 11. The claims stated in the adversary complaint arose with
respect to the same transactions: the payment obligations of the debtors
under the permits, concerning which the railroad had invoked the court's
jurisdiction in the objections. WCI Cable, Inc. v. Alaska RR Corp.
(In re WCI Cable, Inc.), 2002 Bankr. LEXIS 488, 274 B.R. 529
(Bankr. D. Or. February 1, 2002) (Dunn, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1129.03
A Chapter 13 plan may provide for curing or waiving
any default, including the violation of the due on sale clause of a
mortgage on home debtor purchased from original borrower. Bankr.
D. Ariz. PROCEDURAL POSTURE: Plaintiff creditor moved for
summary judgment seeking stay relief to enforce its deed of trust
encumbering the home of defendants, the Chapter 13 debtors.
OVERVIEW: The creditor argued that the debtors were not their
borrowers, having acquired the house from the creditor's original
borrower without the creditor's knowledge or consent, without assuming
the loan and in violation of the due on sale clause in the deed of
trust. The creditor argued that such a default could not be cured, and
that permitting the debtors effectively to assume the creditor's loan
would constitute a 'modification' of the creditor's security interest in
the real property that was the debtors' principal residence, in
violation of 11 U.S.C. § 1322(b)(2). The court concluded the
default arising from the due on sale clause could be cured without
impermissibly modifying the creditor's lien rights. The court reasoned
that plans may cure any default, at least absent a showing of an
entitlement to an equitable remedy that would give rise to a
nondischargeable claim because neither damages nor a surrender of the
collateral could ever provide an adequate remedy at law, and a showing
that the debtor's plan could not provide that remedy. Bank of
America v. Garcia (In re Garcia), 2002 Bankr. LEXIS 393, 276 B.R.
627 (Bankr. D. Ariz. April 22, 2002) (Haines, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.06
Trustee may avoid mortgage that appeared to be released as of
record as a bona fide purchaser. Bankr. D. Kan. PROCEDURAL
POSTURE: Plaintiff, a Chapter 7 bankruptcy trustee, sued defendant
bank to avoid a mortgage lien on real estate owned by the debtors. The
trustee moved for summary judgment as a bona fide purchaser under 11
U.S.C. § 544(a)(3). OVERVIEW: The bank recorded a mortgage
on the property with the appropriate county register of deeds, but two
years later recorded a satisfaction and discharge of the mortgage debt.
When the trustee examined the record and saw that the mortgage had been
satisfied, he sought to avoid the mortgage lien. The court concluded
that the trustee was entitled to avoid the mortgage as a bona fide
purchaser because to a purchaser examining the record after the release,
the mortgage no longer appeared valid since there was no constructive
notice of a defect in title. Since the trustee was a bona fide purchaser
on the date of commencement of the bankruptcy case by virtue of 11
U.S.C. § 544(a)(3) and Kansas law, he was entitled to avoid the
mortgage lien. Moreover, the debtors' knowledge of the mortgage was not
imputed to the trustee because the trustee was a new entity that came
into existence with the filing of the bankruptcy case without knowledge
of past events. Finally, the bank was not entitled to reinstatement of
the mortgage on equitable grounds because the trustee was an intervening
third party whose presence negated the Kansas equitable rule for
reinstatement of mistakenly released mortgages. Clark v. Banc One
Mortgage Corp. (In re Gilbert), 2002 Bankr. LEXIS 498, 274 B.R. 541
(Bankr. D. Kan. March 6, 2002) (Flannagan, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.08
Chapter 13 debtor allowed to bifurcate and 'cramdown'
undersecured home mortgage into secured and unsecured debts, provided
original final payment due prior to end of plan. S.D. Ala.
PROCEDURAL POSTURE: The United States Bankruptcy Court for the
Southern District of Alabama confirmed debtor's Chapter 13 plan, which
provided for a modification of the mortgage of creditor pursuant to 11
U.S.C. § 1322(c). Creditor appealed confirmation of the plan.
OVERVIEW: Creditor held a second mortgage on debtor's residence.
There was equity above the first mortgage debt, but not enough to cover
creditor's full debt. The modification confirmed by the bankruptcy court
bifurcated creditor's claim into a secured claim, to be paid in full
with a balloon payment, and an unsecured claim to be paid pro rata with
the other unsecured creditors. The question before the district court on
appeal was whether 11 U.S.C. § 1322(c)(2) permitted a Chapter 13
debtor to bifurcate and 'cramdown' an undersecured home mortgage which
had already matured or had a last payment due before the last payment
due under the debtor's plan. Analyzing the statutory framework, the
court found that the exception to the anti-modification provisions
relating to home mortgages in § 1322(c) applied to creditor's
second mortgage. The exception included the power to bifurcate or split
undersecured claims consistent with 11 U.S.C. § 1325(a)(5). The
bankruptcy court thus did not err in confirming debtor's plan.
Magnolia Mortgage, LLC v. Arnett (In re Arnett), 2002 Bankr.
LEXIS 9238, 278 B.R. 239 (S.D. Ala. May 13, 2002) (Hand, D.J.).
Collier on Bankruptcy, 15th Ed. Revised