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.

June 11, 2001

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

Collier Bankruptcy Case Summaries

1st Cir.

Summary judgment was affirmed. B.A.P. 1st Cir. The chapter 11 debtor appealed an order of the bankruptcy court granting summary judgment in favor of the debtor’s shareholders on the debtor’s complaint seeking subordination of the shareholders’ claims pursuant to section 510(c). As part of a prepetition financial restructuring, the debtor issued shares of preferred stock in exchange for notes which were in default. In order to insure performance by the debtor, an irrevocable trust holding the common stock of a nondebtor entity was established contemporaneously for the benefit of the new shareholders. After the shareholders sought to redeem their rights in the trust, the debtor brought an action to subordinate their claims. The B.A.P. affirmed the bankruptcy court, holding that because the property held by the trust was not property of the estate, the shareholders did not hold claims, in the form of redemption rights, which could be subordinated to the claims of unsecured creditors. Section 510(c) could not be utilized to prevent the shareholders from exchanging their interest for property that was not property of the estate (citing Collier on Bankruptcy, 15th Ed. Revised). Town & Country Corp. v. Hare & Co. (In re Town & Country Corp.), 2000 Bankr. LEXIS 1755, – B.R. – (B.A.P. 1st Cir. July 10, 2000) (Vaughn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.05

Abstention from determining debtor’s tax liabilities was in error. B.A.P. 1st Cir. The IRS appealed a bankruptcy court order approving the chapter 7 trustee’s final accounts in the administratively consolidated cases. The appointed receiver of a separate corporation purchased the stock of the debtors as well as certain claims against the debtors. After the assets of the bankruptcy estates and the receivership estate were sold, the trustee and receiver agreed that all claims would be paid from the proceeds, with the remainder going to the receiver. Although the IRS objected on the grounds that it had not fully assessed the debtors’ tax liability, the bankruptcy court ordered that a set sum be placed in escrow and deemed to fully satisfy the IRS’s claim. The bankruptcy court also ceded jurisdiction to determine the tax liabilities to the district court that presided over the receivership case. The B.A.P. reversed, holding that because the district court was without jurisdiction to determine the tax liabilities of the estates, which were core matters within the exclusive jurisdiction of the bankruptcy court, the bankruptcy court erred by ceding jurisdiction over those issues to the district court (citing Collier on Bankruptcy, 15th Ed. Revised). United States v. Sterling Consulting Corp. (In re Indian Motocycle Co.), 2001 Bankr. LEXIS 434, – B.R. – (B.A.P. 1st Cir. April 26, 2001) (Vaughn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01, .05

2nd Cir.

Attorney was not entitled to fees generated in litigating a fee dispute. Bankr. W.D.N.Y. Debtor’s counsel filed a fee application in the amount of nearly $100,000 to which the debtor objected. The court allowed payment in the amount of $86,000. Upon the attorney’s second fee application for $13,400 based upon the fees generated in litigating the first fee application, the bankruptcy court held that fees incurred in defending the fee application were not compensable from the estate. Although section 330(a)(3) permits compensation for preparing the fee application, that service was distinguishable from defending the application. Pursuant to section 330(a)(3)(A)(E), the court examined whether such services were customarily compensable outside of the bankruptcy context. Since attorneys generally may not be reimbursed for litigating a fee dispute, the bankruptcy attorney was similarly precluded from recovering fees for defending his fee application before the bankruptcy court. However, the attorney was entitled to recover all expenses that were actual and necessary to the litigation (citing Collier on Bankruptcy, 15th Ed. Revised). In re St. Rita’s Assocs. Private Placement, L.P., 2001 Bankr. LEXIS 410, 260 B.R. 650 (Bankr. W.D.N.Y. March 30, 2001) (Bucki, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.04[5][a]

Debtor, a retired New York City police officer, was entitled to exemption of interest in deferred compensation plan. Bankr. E.D.N.Y. The chapter 7 trustee objected to the debtor’s claim of exemption for his interest in a deferred compensation plan pursuant to state (New York) law (N.Y. Debt. & Cred. Law § 282(2)(e)). The bankruptcy court overruled the objection. The court held that in accordance with Second Circuit precedent, the debtor was entitled to the claimed state law exemption because the plan qualified under section 457 of the Internal Revenue Code and made payments on account of "illness, disability, death, age, or length of service." The court concluded that consideration of the factors that resulted in the termination of the debtor’s employment was permissible. It further decided that the debtor should be permitted to exempt payments received under his section 457-qualified plan where, as here, the termination of employment that gave rise to the right to receive payments resulted directly from "illness, disability, death, age, or length of service." The court noted that the debtor, a retired New York City police officer, retired because of disability and that any payments made to the debtor from the plan would be made on account of disability. The court also noted that although the debtor elected not to receive payments from the plan until 2014, this election did not change the character of the payment. In re Ruffo, 2001 Bankr. LEXIS 445, – B.R. – (Bankr. E.D.N.Y. April 27, 2001) (Craig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.10

"Make whole" rule precluded former employer’s challenge to debtor’s exemption for personal injury lawsuit. Bankr. D. Conn. The debtor’s former employer challenged an exemption claimed by the chapter 7 debtor for a personal injury lawsuit. The employer asserted a superior right in the personal injury claim based upon its payment through a self-funded medical plan of medical expenses incurred by the debtor after she was involved in an automobile accident. The bankruptcy court overruled and denied the objection. The court held that under the "make-whole rule," the debtor had no duty to facilitate the plan’s acquisition of the injury claim or its proceeds until she was fully compensated for all damages proximately caused by the accident. The "make whole rule" is a general equitable principle of insurance law that provides that absent agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for her injuries. The court refused to recognize a subrogation right in the plan based on its conclusion, upon the stipulated facts, that the amount recovered on the injury claim would not make the debtor whole. The court also held that the plan had no equitable subrogation rights and no equitable lien interest in the injury claim, and that constructive trust principles did not apply to exclude the injury claim and its proceeds from the debtor’s bankruptcy estate. In re DeLucia, 2001 Bankr. LEXIS 423, – B.R. – (Bankr. D. Conn. April 24, 2001) (Dabrowski, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.09[11]

Section 727(a) complaint was so without merit that the court issued an order to show cause why sanctions should not be imposed. Bankr. D. Conn. The chapter 7 debtors’ schedules were sloppily prepared and inadequately reviewed by the attorney and debtors. Among the many glaring errors, the income and expense statements stated that the debtors’ monthly income was $4.33 and their monthly expenses were $1.00. At the section 341(a) meeting the debtors candidly admitted to each error and disclosed information, but thereafter failed to amend their schedules. Their lender subsequently filed an objection to dischargeability under section 523(a)(2) and amended the complaint to add a cause under section 727(a)(4) for false oath in the execution of their schedules. At the inception of trial the lender voluntarily dismissed its section 523(a)(2) claim and proceeded solely upon the false oath charge. The bankruptcy court concluded that the debtors did not make a false oath in connection with the case because there was no fraudulent intent in the inaccuracies. In light of the fact that the debtors candidly admitted to the errors at the section 341(a) meeting and that the errors were so obvious that allegations of an intent to defraud were absurdity, the bankruptcy court held that the lack of fraudulent intent was so apparent that plaintiff and counsel were ordered to show cause why sanctions should not be imposed.In light of the nature of the errors, it appeared that the section 727(a) cause of action was prosecuted only for the purpose of coercing a settlement regarding payment of the debt owed to the creditor. The bankruptcy court issued the order to show cause under the authority of Rule 11, as well as 28 U.S.C. § 1927 and the inherent power of the court. Northeast Alliance Fed. Credit Union v. Butler (In re Butler), 2001 Bankr. LEXIS 403, 260 B.R. 622 (Bankr. D. Conn. April 11, 2001) (Albert, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9011.04

3rd Cir.

Costs, reasonable attorney’s fees and punitive damages assessed against debtor/partnership’s former partner for filing frivolous involuntary case. Bankr. M.D. Pa. Holding herself out as a "creditor partner for her capital account," a partnership’s former partner filed an involuntary case against a debtor/partnership under section 303(b)(3)(A). Her former partner, who was also her former husband, moved to dismiss the involuntary petition and for sanctions. The bankruptcy court granted the motion. The court held that costs, reasonable attorney’s fees, and punitive damages were justified for the former partner’s frivolous filing under both section 303(i) and Rule 9011. The court found that the petitioning former partner knew that the debts of the partnership (to the extent there remained a partnership) were actually paid, with the alleged exception of her own highly disputed capital claim. With respect to that claim, the court noted that the former partner had been advised in several state court proceedings that the debtor was not obligated to her (citing Collier on Bankruptcy 15th Ed. Revised). In re Law Ctr., 2001 Bankr. LEXIS 422, – B.R. – (Bankr. M.D. Pa. March 16, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:303.07

Relief from stay to foreclose on debtor’s sole asset was warranted. Bankr. E.D. Pa. Fifty-year old chapter 11 debtor married a woman 33 years his senior and, when she died, he inherited the marital residence. Some years later, at the age of 56, he married a woman 28 years his senior and, within a few years, through recreational gambling and bad investments, squandered the half million dollars in assets she had. In the course of their divorce proceeding, the wife obtained a judgment against the debtor in the amount of $385,000. When the debtor filed his case, the former wife filed a complaint objecting to the dischargeability of the obligation under section 523(a)(5), (a)(15), and (a)(4) and a motion for relief from stay in order to foreclose upon her judgment. In response, the debtor objected to the former spouse’s proof of claim on the grounds that she was not fully secured. The dischargeability complaint was tried with the objection to the proof of claim, and, after concluding that the obligation was nondischargeable under section 523(a)(15), the bankruptcy court held that relief from stay was warranted in order for the former spouse to foreclose on her judgment. The debtor’s sole asset, which was worth less than the former spouse’s judgment, was his residence. The court held that (a) it was undisputed that the debtor had no equity in the property and (b) that such property was not necessary for an effective reorganization. In reaching the second conclusion, the court noted that no steps had been taken for reorganization although the debtor’s bankruptcy had been pending for nearly two years and that since he was unemployed, the only means of settling his former spouse’s claim was through sale of the property.Since the debtor’s only asset was to be sold, the court issued an order to show cause why the case should not be converted to chapter 7 (citing Collier on Bankruptcy, 15th Ed. Revised). Laddeck v. Laddeck (In re Laddeck), 2001 Bankr. LEXIS 386, – B.R. – (Bankr. E.D. Pa. April 11, 2001) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07

Reconsideration motion granted to give trustee opportunity to satisfy burden of proving that transferee/debtors held property in trust. Bankr. M.D. Pa. The bankruptcy court denied a chapter 7 trustee’s motion for relief from the automatic stay to recover an alleged fraudulent transfer of real estate and household goods made by a debtor to his former wife and her husband prior to the commencement of their chapter 7 case. The bankruptcy court concluded that the trustee’s claim was no more viable than any other discharged unsecured claim and that, since the trustee neither timely objected to discharge nor the dischargeability, any obligation to the trustee was effectively eliminated by the transferee/debtors’ discharge. The trustee moved for reconsideration. The bankruptcy court granted the reconsideration motion. The court held that the trustee was entitled to an opportunity to satisfy his burden of establishing that the transferee/debtors held the transferred property in trust for the former husband of the debtor’s wife. The court explained that courts have traditionally declared the existence of a constructive trust where one estate has been unjustly enriched at the expense of another. The court acknowledged that under existing case law, proving a constructive trust theory would be a "daunting task." However, the court concluded that its prior order foreclosed the trustee’s opportunity to attempt such proof. Schwab v. Oster (In re Oster), 2000 Bankr. LEXIS 1754, – B.R. – (Bankr. M.D. Pa. November 9, 2000) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.10

Objection to exemption was sustained. Bankr. M.D. Pa. The chapter 7 trustee objected to the exemption claimed by the debtor in the proceeds of a workers’ compensation claim traceable to a checking account. The funds in the account were deposited as a result of a lump sum settlement the debtor received from his employer after he suffered a work-related injury. The agreement provided that the payment covered all of the wage loss benefits the debtor was entitled to receive for the remainder of his life with regard to the work injury. The bankruptcy court sustained the trustee’s objection, holding that section 522(d)(10)(C) did not exempt property that was traceable from the original workers’ compensation award. Section 522(d)(10(C) exempted "the debtor’s right to receive" the benefits and not the benefits that had already been paid over to the debtor. Szybist v. Michael (In re Michael), 2001 Bankr. LEXIS 429, – B.R. – (Bankr. M.D. Pa. April 12, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10]

Tax debt held dischargeable where IRS failed to establish that debtor filed fraudulent tax returns or willfully evaded payment of tax liabilities. Bankr. E.D. Pa. The IRS sought a determination that the chapter 7 debtor’s tax liabilities for four tax years were excepted from discharge pursuant to section 523(a)(1)(C). The IRS claimed that the debtor filed fraudulent returns or willfully evaded payment of his tax liabilities during each of the four years in question. The bankruptcy court held that the evidence established that any errors on the debtor’s tax returns for the years in question were negligent mistakes rather than the result of fraudulent intent or a willful effort to evade or defeat payment of taxes. Therefore, the debtor’s tax liabilities for the years in question were dischargeable. The court found that the IRS failed to meet its burden of proof by preponderate evidence on its contention that the tax liabilities were nondischargeable due to improper deductions. The court also found the evidence presented by the IRS to be insufficient with respect to its assertion that the debtor underreported income for the tax years in question. Frosch v. United States (In re Frosch), 2001 Bankr. LEXIS 424, – B.R. – (Bankr. E.D. Pa. April 10, 2001) (Fitzgerald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.07

Trustee could recover transfers of property made by debtor wife in connection with settlement of embezzlement litigation against debtor husband. Bankr. M.D. Pa. A debtor wife agreed, prepetition, to transfer real property held in tenancy by the entireties with her husband and cash to a homeowners association. The transfers were made in connection with the settlement of civil and criminal proceedings that the association initiated against the debtor husband based on his alleged embezzlement. After the debtors’ filed their chapter 7 case, the trustee sought to recover the transfers pursuant to section 548(a)(1)(B). The trustee argued, among other things, that the debtor wife received less than a reasonably equivalent value in exchange for the transfers, which were made solely for the benefit of the debtor/husband to settle criminal and civil actions that were brought against him alone. The bankruptcy court held that the trustee met his burden of establishing that the debtor wife did not receive a reasonably equivalent value for the transfers. The court concluded that the written settlement agreement was an agreement only between the debtor husband and the association, and that the debtor wife signed on only as an accommodation party. The court concluded that if there was a release of liability intended for the debtor wife in consideration for the transfers, there was nothing in the agreement to memorialize that release. The court held that judgment should be entered in the trustee’s favor, but that because its ruling might directly and significantly affect the rights of the debtor husband’s creditors, the entry of final judgment should be postponed for a stated period to allow for the debtor husband’s joinder in the proceeding (citing Collier on Bankruptcy 15th Ed. Revised). Schwab v. Birches III Prop. Owners Ass’n (In re Hefner), 2001 Bankr. LEXIS 426, – B.R. – (Bankr. M.D. Pa. January 25, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.05

Tax sale purchaser failed to meet burden of proving that it was "good faith purchaser" under section 549(c). Bankr. M.D. Pa. The chapter 7 trustee brought an adversary proceeding seeking an order requiring a tax sale purchaser to turn over and reconvey certain property to the trustee. The trustee also sought a determination that the postpetition tax sale was void because it was conducted in violation of the automatic stay. The bankruptcy court entered judgment in the trustee’s favor. The court held that an unrecorded transfer of the subject property to the debtor was sufficient to vest a property interest in the debtor, and, therefore, to his bankruptcy estate. The court also held that the transferee failed to meet its burden of proving that it was a good faith purchaser "without knowledge of the commencement of the case" under section 549(c); thus, the automatic stay prevented the tax sale from effecting a transfer of the subject property. In addition, the court concluded that the purchaser’s lack of good faith prevented application of any exception to the voidness doctrine. Finally, the court found that neither the taxing authority nor the tax sale purchaser presented any argument to support an annulment of the automatic stay or a validation of the tax sale (citing Collier on Bankruptcy 15th Ed. Revised). Szybist v. McKean County Tax Claim Bureau (In re Taft), 2001 Bankr. LEXIS 425, – B.R. – (Bankr. M.D. Pa. January 4, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:549.06

5th Cir.

Defenses were established. Bankr. N.D. Tex. The chapter 11 debtor moved for summary judgment on its complaint seeking to avoid alleged preferential transfers to a creditor. The transferee asserted that section 547(c)(6) shielded two of the transfers from recovery by the debtor. Had the debtor not paid for the services, the transferee could have perfected a lien under state (Texas) law. The transferee did not perfect its lien because the debtor paid for the services. The bankruptcy court granted partial summary judgment to the transferee, holding that because the transferee had a statutory right to a lien, the transfers were not avoidable. The court questioned, but was compelled to follow, the controlling precedent, Cimmaron Oil Co. v. Cameron Consultants, Inc., 71 B.R. 1005 (N.D. Tex. 1987). Rand Energy Co. v. Strata Directional Tech., Inc. (In re Rand Energy Co.), 2001 Bankr. LEXIS 405, 259 B.R. 274 (Bankr. N.D. Tex. February 20, 2001) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[6]

6th Cir.

Michigan state court judgment that arose out of defamation proceeding held nondischargeable. 6th Cir. The United States District Court for the Western District of Kentucky affirmed an order entered by the United States Bankruptcy Court for the Western District of Kentucky that granted summary judgment in favor of judgment creditors on their claim that a state (Michigan) court judgment obtained against the debtors in a defamation proceeding was nondischargeable. In granting summary judgment in the creditors’ favor, the bankruptcy court also considered a proceeding related to the Michigan defamation action in which a Kentucky state court found that the claims arising out of the Michigan proceeding did not come within the scope of the debtors’ homeowners’ insurance coverage. The United States Court of Appeals for the Sixth Circuit affirmed the district court’s decision and held that based on the Supreme Court’s decision in Kawaauhau v. Geiger, 523 U.S. 57 (1998), the debt at issue was nondischargeable. The court reasoned that even if the bankruptcy court should not have considered the Kentucky state court judgments along with the Michigan judgment, the outcome would remain unchanged. The court explained that the Michigan judgment, in and of itself, precluded litigation of the dischargeability issue because the statements at issue were defamation per se under Michigan law. Kennedy v. Mustaine (In re Kennedy), 2001 U.S. App. LEXIS 8705, – F.3d – (6th Cir. May 10, 2001) (Clay, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

First time transaction was not in the ordinary course of business. Bankr. E.D. Ky. Debtor, a clothing retailer, purchased items from a new contractor. The items were invoiced immediately and shipped two months later. Although the invoice indicated that payment was due within 20 days after invoicing, the debtor paid the invoice 63 days after the shipping date. When the debtor filed the chapter 11 petition, it sought avoidance of the payments to the contractor as a preference. The parties agreed that all of the elements of a preference had been met, but disputed whether the contractor demonstrated that the ordinary course of business exception applied. The bankruptcy court held that the contractor failed to demonstrate that the transaction was ordinary as between the parties since they had no prior dealings. The debtor met the objective prong of the test, that the transaction was made on ordinary business terms within the industry, because payment was made approximately 60 days after shipping. However, although there is no particular rule that section 547(c)(2) never applies to first transactions, since the contractor was unable to demonstrate this subjective element, that the transaction was ordinary as between the parties, the ordinary course of business exception did not apply. Official Comm. of Unsecured Creditors v. Charleston Forge, Inc. (In re Russell Cave Co.), 2001 Bankr. LEXIS 402, 259 B.R. 879 (Bankr. E.D. Ky. March 27, 2001) (Howard, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2]

Government failed to establish that defendant knowingly and fraudulently concealed or willfully caused to be concealed estate property. W.D. Ky. After trial, an individual charged with 14 separate criminal counts related to an alleged scheme to defraud the chapter 7 estate moved for a judgment of acquittal. The district court granted the motion. The court held, among other things, that the government failed to present sufficient evidence that the defendant knowingly and fraudulently concealed or willfully caused to be concealed property belonging to the estate of the debtor. Specifically, the court found that the government failed to establish that the defendant had a duty to report the property (money), or any act of concealment. Without specific evidence of concealment tied to the defendant, the court concluded that the charges could not be proven beyond a reasonable doubt (citing Collier on Bankruptcy 15th Ed. Revised). United States v. Heavrin, 2001 U.S. Dist. LEXIS 5328, – B.R. – (W.D. Ky. April 25, 2001) (Heyburn, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:7.02[1]

8th Cir.

Default of payments required by the plan was not cause to reopen chapter 11 case. Bankr. D. Minn. Chapter 11 debtor’s confirmed plan provided for distribution to bondholders from future cash flow. Five years after the case was closed, the debtor defaulted on the payments and a bondholder moved to reopen the case in order to request conversion to chapter 7. The bankruptcy court held that cause to open the case was not shown because no relief was available. Since all property vested with the debtor upon confirmation of the chapter 11 plan, reopening the case and converting it to chapter 7 would not bring the assets back into the estate. Thus, liquidation of assets and collection of funds would not occur. In any event, the bondholder had a remedy at law in the state court so that there was no reason for the bankruptcy court to assert jurisdiction over the dispute. In re Canal St. Ltd. P’ship, 2001 Bankr. LEXIS 401, 260 B.R. 460 (Bankr. D. Minn. March 26, 2001) (Kishel, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:350.03[5]

Missouri Division of Child Support Enforcement’s claim for child support debt that arose out of state court judgment held nondischargeable. Bankr. W.D. Mo. The State of Missouri, Division of Child Support Enforcement ("DCSE") filed a proof of claim in the chapter 7 debtor’s case. The DSCE alleged an unsecured priority claim for a child support debt that arose out of a state court judgment entered in favor of the state’s Division of Family Services. The amount of the judgment represented the debtor’s minor child’s mother’s assignment of her right to receive child support payments from the debtor, which she made in order to receive AFDC payments. In response to the DCSE’s proof of claim, the debtor filed an adversary complaint against the DCSE seeking a determination that the judgment debt was dischargeable. The bankruptcy court held that the judgment debt was excepted from discharge under section 523(a)(5). The court noted that the state court judgment, which was entered prepetition, established the debtor as the father of the minor child and granted judgment in favor of the state’s Division of Family Services against the debtor for the amount of AFDC benefits paid. The court also found that the debt at issue was for child support, that the AFDC benefits paid were for child support, and that the minor’s mother assigned her right to receive child support from the debtor to a state governmental unit as a condition of receiving benefits under the AFDC program. The court also noted that Eighth Circuit precedents establishing exceptions from discharge for spousal and child support deserve a liberal construction, and that the policy underlying section 523 favors the enforcement of familial obligations over a fresh start for the debtor, even if the support obligation is owed directly to a third party (citing Collier on Bankruptcy 15th Ed. Revised). Pitts v. Missouri Div. of Child Support Enforcement (In re Pitts), 2001 Bankr. LEXIS 453, – B.R. – (Bankr. W.D. Mo. April 30, 2001) (Koger, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.11

Lien on specialized mobile equipment was properly perfected so that no preference existed. Bankr. D. Minn. Prior to filing its chapter 11 case, the Minnesota debtor, a producer of potting soil and other soil enhancements, purchased a specialized piece of equipment intended for use at its plants in Minnesota and Iowa. The equipment was sufficiently mobile to move to the various locations but carried no passengers. Although the debtor purchased the equipment for use at all locations, it ultimately came to reside at its plant in Iowa. The lender who provided the financing filed a UCC-1 statement with the Minnesota Secretary of State more than ninety days before the filing of the chapter 11 petition, but made no effort to record its interest in Iowa when the equipment was moved there. The chapter 11 trustee filed a complaint to set aside the payments on the equipment as preferences, asserting that the lender did not properly perfect its interest in the equipment. The bankruptcy court held that since the equipment was a mobile good within the scope of § 9-103(3) the lender properly perfected its interest in the equipment. Utilizing an objective test and focusing upon the equipment’s inherent characteristics, the court concluded that the equipment was of a type normally used in more than one jurisdiction even though the debtor ultimately placed the vehicle at one location. Second, the equipment was not covered by a certificate of title, i.e., was not a vehicle, since it was not designed to carry or pull persons or property and only incidentally moved over a highway. Since the lender properly perfected its interest, the prepetition and postpetition payments were not subject to avoidance as preferences. Iannocone v. New Holland Credit Co. (In re Organic Conversion Corp.), 2001 Bankr. LEXIS 387, 259 B.R. 350 (Bankr. D. Minn. February 26, 2001) (Kishel, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.05

9th Cir.

Bankruptcy court erroneously denied creditors’ objection to claimed exemption as untimely. B.A.P. 9th Cir. Insurers appealed a bankruptcy court judgment that denied their joint objection to the chapter 7 debtor’s claimed exemption in a corporate pension plan as untimely. The bankruptcy court noted that the creditors’ right to object to the debtor’s objections terminated 30 days following the conclusion of the creditors’ meeting, and held that the meeting concluded on the date that the trustee filed a worksheet stating that it was concluded and failed to announce a continuance date on the record. The Ninth Circuit B.A.P. reversed. The B.A.P. held that the bankruptcy court erroneously reached the following conclusions: that the trustee effectively concluded the creditors’ meeting by failing to announce a continued date; that there was insufficient evidence to establish that the trustee erroneously sent out the worksheet stating that the creditors’ meeting was concluded; and that the trustee’s error in sending out the worksheet was irrevocable. The B.A.P explained that although a trustee may not indefinitely continue a creditors’ meeting, the meeting is not concluded merely because the trustee does not specify, on the record and at that meeting, a new meeting date. The B.A.P. concluded that an amended worksheet filed by the trustee was consistent with other statements and positions taken, that the trustee should be able to correct his own administrative errors (in the absence of judicial reliance on his error, laches or estoppel), and that the bankruptcy court erred in holding that the parties were bound by the erroneous worksheet. Chubb & Son, Inc. v. Clark (In re Clark), 2001 Bankr. LEXIS 451, – B.R. – (B.A.P. 9th Cir. May 3, 2001) (Montali, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:4003.03

10th Cir.

Claim disallowed where credit union mistakenly filed IRS form canceling debt in one chapter 13 case; res judicata barred defense based on IRS form in second case. Bankr. D. Kan. Debtors in two chapter 13 cases objected to a credit union’s proof of claim. In both cases, the credit union mistakenly filed a 1099-C form with the IRS, which erroneously advised the IRS that debts owed by the debtors to the credit union had been canceled. The 1099-C form in the first case was filed after a judgment for the underlying debt was obtained by the credit union against the debtor. The 1099-C form in the second case was filed before the credit union obtained a default judgment against the debtor. In both cases, the bankruptcy court concluded generally that until the credit union corrected or withdrew the mistaken 1099-C forms, it could not enforce its claims. The court reasoned that the credit union’s filing of the 1099-C forms was analogous to an assignment of the debts to the IRS, which necessarily passed to the IRS any right to collect money from the debtors on account of the debts. However, the court did not disallow the credit union’s claims in both cases. Rather, the court found that since the credit union obtained judgment on the underlying debt in the second case after it filed the 1099-C form with the IRS, res judicata precluded the debtor in that case from relying on the 1099-C form as a defense to the judgment. The court disallowed the credit union’s claim pursuant to section 502(b)(2) in the first case, but held that the second debtor’s failure to assert a defense based on the 1099-C form when the credit union sued her and obtained a default judgment precluded her from attacking that judgment based on the 1099-C form. The court also exercised its power under section 510(c)(1) to subordinate the credit union’s claim against the second debtor to all the other allowed claims in her case. In re Crosby, 2001 Bankr. LEXIS 420, – B.R. – (Bankr. D. Kan. January 22, 2001) (Pusateri, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[2]

11th Cir.

Perfection of lien violated stay. Bankr. M.D. Ga. The chapter 13 trustee filed a complaint against the secured creditor to avoid the perfection of a lien as a preferential transfer. The debtor and his spouse purchased a mobile home together prepetition. The debtor’s spouse then filed a chapter 13 petition and the creditor perfected its lien on the home. Although the debtor was not a party to the action, the preference was avoided as to his spouse, but not as to him. After the debtor filed his own chapter 13 petition, the trustee alleged that the perfection violated the codebtor stay under section 1301. The bankruptcy court granted judgment for the trustee, holding that the creditor’s act of perfecting its interest without seeking relief to do so was a stay violation. The codebtor stay of section 1301 was applicable to the perfection of the creditor’s interest, and the perfection of the security interest was an act to collect a debt. Hope v. United Cos. Funding, Inc. (In re Holder), 2001 Bankr. LEXIS 432, 260 B.R. 571 (Bankr. M.D. Ga. March 26, 2001) (Walker, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[7]

Creditor willfully violated automatic stay by repossessing debtor’s automobile. Bankr. M.D. Fla. The chapter 13 debtor moved for an order of contempt and the imposition of sanctions against a secured creditor. The debtor alleged that the creditor willfully violated the automatic stay when it repossessed the debtor’s automobile postpetition. The bankruptcy court found that the creditor willfully violated the automatic stay by repossessing the debtor’s automobile with actual notice that a bankruptcy had been filed and that an automatic stay had been imposed. The court awarded the debtor actual damages for lost wages and goods in connection with the repossession, and a daily allowance for the debtor’s car rental for every day between the date of repossession and the date upon which the creditor satisfied the judgment created by the court’s order. In addition, the court held that the debtor was entitled to $35,000 in punitive damages for the creditor’s willful and knowing disregard of the court’s order for relief. In re Meeks, 2000 Bankr. LEXIS 1756, 260 B.R. 46 (Bankr. M.D. Fla. November 13, 2000) (Funk, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.11

Payment of postpetition interest was not allowed. Bankr. S.D. Ga. The unsecured creditor requested relief from the codebtor stay to seek recovery from the cosigner on the debt to the extent the chapter 13 debtors’ plan proposed not to pay its claim in full with interest at the contract rate. The debtors filed an amended plan proposing to pay 100 percent of the creditor’s claim at the contract rate of interest and concurrently with secured claims. The trustee stipulated that the plan could be recommended for confirmation if the debtors modified the plan to provide payment of the claim in full without interest. The bankruptcy court granted the trustee’s motion to confirm the plan as amended, holding that the debtors’ plan could provide for payment of the claim for principal and interest owed as of the date of the petition concurrently with secured claims; however, postpetition interest was disallowed. The court noted that section 1322(b)(1) created no exception to the general rule of section 502(b)(2) disallowing postpetition interest (citing Collier on Bankruptcy, 15th Ed. Revised). In re Deen, 2000 Bankr. LEXIS 1752, – B.R. – (Bankr. S.D. Ga. September 29, 2000) (Walker, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[3]

Creditor’s motion was granted. Bankr. M.D. Fla. The chapter 11 debtor, an owner of a championship golf course, objected to the creditor’s motion for allowance of an administrative claim. The creditor had entered into a contract with the debtor prepetition to promote a nationally televised golf tournament at the debtor’s course. The creditor proceeded with the tournament, provided significant postpetition services and agreed to accept deferred payment of the site fee from the debtor. The debtor objected to the claim as an administrative expense and argued that the services did not provide a substantial benefit to the estate. The bankruptcy court overruled the debtor’s objection, holding that because the postpetition services substantially benefitted the estate, the creditor’s claim was an allowed administrative expense claim. The court noted that the debtor induced the creditor to perform and willingly accepted the benefits thereof. In re Section 20 Land Group, Ltd., 2000 Bankr. LEXIS 1746, – B.R. – (Bankr. M.D. Fla. October 19, 2000) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06

Debtor’s successor did not have standing to avoid postpetition transfers. Bankr. M.D. Fla. The confirmed chapter 11 plan provided for a new entity to purchase the assets of the debtor, and that the proceeds of the sale would fund the plan payments to the creditors. After consummation of the plan, the new entity filed a complaint against numerous individuals and entities to avoid postconfirmation transfers, obtain judgment for breach of fiduciary duties and obtain declaratory judgment regarding a purchase agreement. One of the individual defendants moved to dismiss, and the bankruptcy court held that the nondebtor plaintiff did not have standing to avoid postpetition transfers. Although the plan reserved bankruptcy court jurisdiction to hear preference and similar actions, it did not confer the power to file those actions upon the nondebtor entity that emerged from the reorganization process. Accordingly, the cause of action seeking to avoid transfers was dismissed. Trident Shipworks, Inc. v. Nichols (In re Trident Shipworks, Inc.), 2001 Bankr. LEXIS 385, – B.R. – (Bankr. M.D. Fla. April 10, 2001) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1142.04

Bankruptcy court remanded removed legal malpractice action to state court. Bankr. M.D. Fla. The chapter 11 debtor and its former debtor/principal filed a state court legal malpractice action against a law firm they had hired to prosecute a defamation claim. The complaint also named another attorney who was selected by the law firm to serve as local counsel and assist with the prosecution of the defamation claim as a defendant. The malpractice action was removed to the bankruptcy court (apparently by the law firm) and both the debtor and the local counsel moved for remand. The bankruptcy granted the motion and held, after considering the totality of the circumstances, that the entire lawsuit should be remanded to the state court, where it was originally filed. The court noted that there was no diversity between the plaintiffs and the local counsel and that the lawsuit was based solely on alleged state law malpractice claims. Moreover, the malpractice claims asserted by the plaintiffs in no way related to the debtor’s chapter 11 case and did not involve any bankruptcy issues. Finally, the court concluded that it would not be appropriate to bifurcate the lawsuit to retain the proceeding against the law firm but remand the proceeding against the local counsel. Bonati v. Morrison Cohen Singer & Weinstein (In re Gulf Coast Orthopedic Ctr.), 2000 Bankr. LEXIS 1739, – B.R. – (Bankr. M.D. Fla. August 30, 2000) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.07[5]

Motion to open default on credit card debt was denied. Bankr. M.D. Ga. The chapter 7 debtor made an oral motion at trial to set aside a default entered against him due to his failure to answer the creditor’s nondischargeability complaint. The debtor proffered that the adversary proceeding caused him psychological distress, he suffered marital difficulties as a result of his bankruptcy, and he coped with his problems by ignoring them. The bankruptcy court denied the motion to open the default, holding that the debtor failed to establish "good cause" to set aside the entry of default. The court found that debtor did not move to open the default within a reasonable time and did not offer any evidence of extraordinary hardship. Additionally, because the debtor alleged no meritorious defense, the expense of prosecuting the suit made the delay prejudicial to the creditor. American Express Travel Related Servs., Inc. v. Jawish (In re Jawish), 2000 Bankr. LEXIS 1751, 260 B.R. 564 (Bankr. M.D. Ga. November 20, 2000) (Walker, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7055.03

Sanctions were warranted against debtor and attorneys who filed a chapter 11 petition in bad faith. Bankr. M.D. Fla. Upon the dismissal of the chapter 11 case, the bankruptcy court had before it a creditor’s motion for sanctions against the president of the debtor and debtor’s attorneys for the filing of a chapter 11 petition which was "riddled with factual inaccuracies" and filed without justification. The motion was based upon Rule 9011 and the court’s inherent authority. The bankruptcy court held that sanctions under Rule 9011 and the court’s inherent authority, against the debtor’s principal and the law firm were warranted for filing the chapter 11 petition. Since the petition was filed solely to have litigation pending in Virginia decided by the bankruptcy court in Florida, it was filed for improper purpose within the meaning of Rule 9011. Further, the debtor was a holding company which conducted no business, could pay all of its outstanding obligations, and had no need for reorganization. However, sanctions were not warranted against the junior associate who signed the petition because she had no meaningful role in the decision-making with regard accepting the case and filing the petition. Rather, she had merely signed the petition at the direction of her superior. Sanctions in the amount of all fees and expenses resulting from the improper filing, including the previous appeals, were awarded. In re Singer Furniture Acquisition Corp., 2001 Bankr. LEXIS 397, 260 B.R. 622 (Bankr. M.D. Fla. February 21, 2001) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9011.04