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 7, 2003

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

---

3d Cir.

§ 362(d) Indenture trustee that neither perfected its lien nor obtained required approval of Bureau of Indian Affairs was not entitled to equitable subordination of prior lien of lender that acted equitably.
Bank of N.Y. v. Epic Resorts-Palm Springs Marquis Villas, LLC (In re Epic Capital Corp.) (Bankr. D. Del.)

§ 506(a) Confirmation of chapter 13 plan resulted in avoidance of lien where creditor had received proper and sufficient notice and did not object.
Dickey v. Beneficial Fin. (In re Dickey) (Bankr. M.D. Pa.)

§ 510(c) Bankruptcy court properly exercised equitable powers to subordinate administrative and professional fees due to creditor’s inequitable conduct.
Citicorp Venture Capital, Ltd. v. Committee of Creditors (3d Cir.)

Collier Bankruptcy Case Summaries

Prepetition settlement of claim against debtor for fraud while acting in fiduciary capacity was nondischargeable. 2d Cir. PROCEDURAL POSTURE: Plaintiff, executor of an estate, previously settled a claim against defendant debtor for fraud while debtor acted as trustee of the decedent’s trust. Debtor subsequently filed bankruptcy. The bankruptcy court held that the debt was dischargeable. On review, the District Court for the Eastern District of New York held that the debt was not dischargeable under 11 U.S.C. § 523(a)(4). Debtor appealed. OVERVIEW: The district court held that a debt incurred pursuant to a settlement agreement was nondischargeable in bankruptcy if the settlement was of claims that, if proven, would have created a nondischargeable debt under 11 U.S.C. § 523(a)(4). Accordingly, if the tort claims against debtor would have created a nondischargeable debt under 11 U.S.C. § 523(a)(4), had those claims been litigated to judgment in the executor’s favor, then it was no defense for debtor that he replaced that possible liability with a dischargeable contractual obligation through the settlement agreement. If the bankruptcy court determined that the debt owed pursuant to the settlement agreement “arose out of” fraud, that debt must be excepted from discharge. Giaimo v. DeTrano (In re DeTrano), 2003 U.S. App. LEXIS 7087, 326 F.3d 319 (2d Cir. April 15, 2003) (Sotomayor, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10 [back to top]

ABI Members, click here to get the full opinion.

Irrevocable trust could not be pierced to make corpus property of the estate where debtor’s spouse was the equitable owner and played no role in debtor’s fraud. 2d Cir. PROCEDURAL POSTURE: Appellant, trustee and wife of the debtor, challenged the judgment of the District Court for the Southern District of New York, acting in its capacity as an appellate court in a bankruptcy case, which ruled that property held in an irrevocable trust should have been considered part of the bankruptcy estate of the debtor because appellee banks had satisfied the alter ego theory of piercing, which applied to irrevocable trusts. OVERVIEW: The debtor applied to the banks for loans and pledged property that was owned by an irrevocable trust, of which the wife was the trustee. The debtor falsely represented that a revocable trust, over which he had control, owned the property. The first bank gave the debtor a loan for $1,000,000, and the second bank gave him a loan for $700,000. When the debtor filed for bankruptcy, the trustee sought to have the debtor declared the alter ego of the irrevocable trust and to have the property treated as part of the debtor’s bankruptcy estate. On appeal from the district court’s finding that the property was part of the debtor’s bankruptcy estate, the appellate court found that the district court erred in holding that the irrevocable trust could be pierced based upon the debtor’s conduct, because the wife, and not the debtor, was the equitable owner of the trust and its property. Neither the wife nor her trust was equitably estopped from asserting ownership over the property because the wife played no role in the debtor’s fraud, having had no prior knowledge of his unlawful activities. Moreover, the banks did not rely upon the wife’s conduct in deciding to extend loans to the debtor. Babitt v. Vebeliunas (In re Vebeliunas), 2003 U.S. App. LEXIS 11716, — F.3d — (2d Cir. June 13, 2003) (Pooler, C.J.).

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

ABI Members, click here to get the full opinion.

Indenture trustee that neither perfected its lien nor obtained required approval of Bureau of Indian Affairs was not entitled to equitable subordination of prior lien of lender that acted equitably. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiff indenture trustee filed an adversary proceeding against defendants, a lender and a resort owner, to determine validity, to determine the extent and priority of liens, and for equitable subordination. The lender moved for relief from the automatic stay, adequate protection, and summary judgment. The indenture trustee cross-moved for summary judgment. OVERVIEW: The resort owner, a subsidiary of a debtor, had a resort that was located on land administered by the United States Department of Interior, Bureau of Indian Affairs (“BIA”), but the indenture trustee never obtained BIA’s approval regarding a trust indenture, under which two debtors issued secured redeemable bonds. Subsequently, the lender loaned money to the resort owner and obtained a security interest in the resort owner’s assets. The lender perfected its security interest, but the indenture trustee did not perfect a security interest. The court determined that the lender’s lien remained as a first perfected lien in the collateral. The indenture trustee did not have an equitable lien on the lender’s collateral, because (1) the imposition of an equitable lien would conflict with federal law requiring the BIA’s approval of a lien, (2) the indenture did not clearly express the parties’ intention to convey a security interest, and (3) the lender performed a diligent inquiry to determine whether any prior liens existed. Also, the indenture trustee was not entitled to equitable subordination under 11 U.S.C. § 510(c), because the lender did not engage in inequitable conduct. Bank of N.Y. v. Epic Resorts-Palm Springs Marquis Villas, LLC (In re Epic Capital Corp.), 2003 Bankr. LEXIS 143, 290 B.R. 514 (Bankr. D. Del. February 27, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07 [back to top]

ABI Members, click here to get the full opinion.

Confirmation of chapter 13 plan resulted in avoidance of lien where creditor had received proper and sufficient notice and did not object. Bankr. M.D. Pa. PROCEDURAL POSTURE: A debtor filed a chapter 13 petition. The debtor filed a plan, which was approved without a creditor’s objection, and moved to compel satisfaction of a mortgage in accordance with the plan. OVERVIEW: The court found that the only lien avoidance issue that could be resolved through the confirmation process was valuation of a lien under 11 U.S.C. § 506(a). If a debtor intended to modify the rights of lien holders in a chapter 13 plan, the debtor was required to determine whether the only issue was the lien’s value. Where value was the only issue, the debtor was required to meet certain due process requirements related to the plan. The notice to be received by a creditor was required to be reasonably calculated to make the party aware of the impact plan confirmation would have on the creditor’s rights. Such notice was required to provide a reasonable time in which the creditor could respond. The court found that the creditor was provided sufficient notice of the plan filing. Dickey v. Beneficial Fin. (In re Dickey), 2003 Bankr. LEXIS 199, 293 B.R. 360 (Bankr. M.D. Pa. March 17, 2003) (France, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.03 [back to top]

ABI Members, click here to get the full opinion.

Warning issued to bankruptcy petition preparer enjoining reference to “supervising attorney” and collection of excessive fees. Bankr. E.D.N.C. PROCEDURAL POSTURE: The bankruptcy court issued an order to show cause under 11 U.S.C. § 110 directed at a bankruptcy petition preparer (“BPP”), his document services company, and its franchisor, to show cause why sanctions and an injunction should not be imposed for charging excessive fees, offering a “supervising attorney’s” services to customers, and providing workbooks and other documents to customers in violation of N.C. Gen. Stat. § 84-2.1. OVERVIEW: The show cause order was detailed to allow a full defense of the allegations, providing the franchisor with due process and the court with authority to bring the franchisor before the court sua sponte. The BPP had no discretion whether to use the franchisor’s typist for preparing petitions. Decisions as to inputting information went beyond the services of a typist. The BPP did not direct preparation of the forms. The franchisor was a BPP under 11 U.S.C. § 110(a)(1). Fees over $80 were excessive. Customers were invited to “chat” with a supervising attorney, but were not informed that they could not rely on his advice such referrals were deceptive and unfair. The documents prepared by the franchisor and provided by the BPP contained legal advice, could not be included as part of a BPP’s services, and were unfair and deceptive by giving a false impression that only those documents were needed for deciding whether to file bankruptcy and completing the forms. All of the BPP’s services fell within N.C. Gen. Stat. § 84-2.1 since it included preparing and filing of petitions for use in court. The services had to be limited to typing the documents as directed by his customers. In re Moore, 2003 Bankr. LEXIS 213, 290 B.R. 287 (Bankr. E.D.N.C. March 20, 2003) (Small, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:110.01 [back to top]

ABI Members, click here to get the full opinion.

District court properly exercised bankruptcy jurisdiction over legal malpractice action by debtor against its bankruptcy counsel that arose in debtor’s bankruptcy. 4th Cir. PROCEDURAL POSTURE: Plaintiff, a bankruptcy debtor, filed a professional malpractice action against defendant, the law firm that represented him in his bankruptcy case. The District Court for the District of Maryland awarded summary judgment to the law firm, and the debtor appealed. OVERVIEW: The district court had bankruptcy jurisdiction over the action under 28 U.S.C. § 1334 because the malpractice claim arose in the bankruptcy case. Also, the district court correctly determined that the bankruptcy court’s final fee order barred the malpractice claim under principles of res judicata. The bankruptcy court’s final fee order approving the firm’s second and final fee application was a final judgment on the merits. Also, debtor was a party in interest because he had a pecuniary interest in the outcome of the fee applications. If legal fees were reduced or disallowed, there would be more money available in the estate to pay the nondischargeable priority claims, and the debtor’s personal liability would be reduced. Additionally, the “core of operative facts” in the two actions were the same. By granting the firm’s fee application, the bankruptcy court impliedly found that the firm’s services were acceptable throughout its representation of the debtor. Finally, by the time the bankruptcy court entered the final fee order for the firm, the debtor knew or should have known there was a real likelihood that he had a malpractice claim against the firm. Grausz v. Englander, 2003 U.S. App. LEXIS 3945, 321 F.3d 467 (4th Cir. March 6, 2003) (Michael, C.J.).

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

ABI Members, click here to get the full opinion.

Bankruptcy court properly vacated default judgment against bank due to failure to make service upon an “officer.” 4th Cir. PROCEDURAL POSTURE: Appellant debtor appealed the judgment of the District Court for the Western District of Virginia affirming two orders of the bankruptcy court (one vacating a prior default judgment against appellee bank, the other denying his motion to avoid liens held by the bank). OVERVIEW: The bankruptcy court did not abuse its discretion in vacating the default judgment against the bank. Fed. R. Bankr. P. 7004(h) clearly required service on an “officer” of an insured depository institution, and there was no basis for concluding that a registered agent should be treated as an “officer” of the institution under that rule. As to the merits of the adversary proceeding, the bankruptcy court correctly found that the bank’s liens were not extinguished by its failure to timely file its claims against the bankrupt estate. A bankruptcy discharge extinguished only in personam claims against the debtors, but generally has no effect on an in rem claim against the debtor’s property. Given the United States Supreme Court’s holding that liens pass through bankruptcy unaffected, the failure to file a timely claim, like the failure to file a claim at all, did not constitute sufficient grounds for extinguishing a perfectly valid lien. Hamlett v. Amsouth Bank (In re Hamlett), 2003 U.S. App. LEXIS 3946, 322 F.3d 342 (4th Cir. March 6, 2003) (Motz, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7004.09 [back to top]

ABI Members, click here to get the full opinion.

Discharge revoked due to debtor’s fraudulent failure to disclose outstanding obligation owed to him pursuant to a real estate transaction Bankr. E.D. Tenn. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition and received a discharge. Plaintiff creditor filed a complaint to revoke and deny the discharge under 11 U.S.C. § 727 due to alleged fraud. OVERVIEW: The creditor alleged that the debtor obtained a discharge through actual fraud and that the debtor’s discharge should be revoked and denied pursuant to 11 U.S.C. § 727(d)(1) for failure to disclose prepetition assets. The debtor failed to disclose an outstanding obligation owed to him pursuant to a real estate transaction. The court had several concerns related to the debtor’s testimony about his failure to disclose the transaction in issue. The court found that the debtor had notice about the necessity to schedule the required debt owed to the debtor on the bankruptcy schedule. The failure to disclose the postpetition payment received satisfied the court that the debtor’s discharge could be denied under either 11 U.S.C. § 727(a)(2)(A), (B), or (a)(4)(A). Buckeye Retirement Co., LLC v. Heil (In re Heil), 2003 Bankr. LEXIS 192, 289 B.R. 897 (Bankr. E.D. Tenn. February 21, 2003) (Stair, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.15[2] [back to top]

ABI Members, click here to get the full opinion.

One month delay in payment to creditor did not provide grounds to deny plan confirmation. Bankr. E.D. Mich. PROCEDURAL POSTURE: A secured creditor filed an objection to confirmation of the chapter 13 plan proposed by a debtor. OVERVIEW: The creditor argued that any delay in distributions, no matter how short, deprived it of adequate protection for the debtor’s continued use of its depreciating collateral. According to the creditor, this deficiency barred confirmation, but the defect could have easily been cured by payment of the debtor’s attorney’s fees over time instead of up front. The issue was whether the court should have denied confirmation, despite the plan’s compliance with 11 U.S.C. § 1325(a)(5)(B). The debtor’s counsel agreed to a lump sum payment. There was nothing in 11 U.S.C. § 1322(a)(2) that precluded such an agreement. Therefore, the court rejected the creditor’s argument that the debtor’s plan somehow failed to comply with section 1322(a)(2). The court was not persuaded that there was any requirement for adequate protection of any kind to the creditor in addition to the treatment required for the creditor’s secured claim under 11 U.S.C. § 1325(a)(5)(B). The court limited its ruling to the facts of the case, where there was only a one-month delay before payments were to be made to the creditor and the parties agreed that the requirements of section 1325(a)(5)(B) had otherwise been met. In re Moses, 2003 Bankr. LEXIS 564, 293 B.R. 711 (Bankr. E.D. Mich. June 5, 2003) (Shefferly, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.06[3] [back to top]

ABI Members, click here to get the full opinion.

Insurer denied relief from stay to file interpleader action in which debtor would be a claimant because bankruptcy court would be the proper forum for such litigation. Bankr. C.D. Ill. PROCEDURAL POSTURE: A few days before her death, the decedent changed the beneficiary on a life insurance policy to that of her daughter, one of two debtors in bankruptcy. The previously named beneficiary asserted a claim to the proceeds. The insurer moved for relief from the automatic stay, pursuant to 11 U.S.C. § 362(d)(1), in order to initiate an interpleader action. The daughter objected and expressed an intent to file