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 23, 2003

CASES IN THIS ISSUE
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3d Cir.

§ 365 License agreements with franchisees were executory contracts which could be rejected by debtor.
In re HQ Global Holdings, Inc. (Bankr. D. Del.)

§ 547(c)(2) Trustee could not avoid payment made by debtor clothier for prepetition shipment of sweaters pursuant to the ordinary course of business exception.
Bohm v. Golden Knitting Mills, Inc. (In re Forman Enters.) (Bankr. W.D. Pa.)

Collier Bankruptcy Case Summaries

Injunction proceeding stayed where plaintiff had commenced an involuntary bankruptcy proceeding against an indispensable party. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff sellers moved pursuant to Fed. R. Civ. P. 65 for an injunction ordering the delivery of a certain number of free-trading shares of a corporation by defendant companies and individuals. OVERVIEW: The corporation was an indispensable party under Fed. R. Civ. P. 19(a). Thus, the court could not reach the merits of the seller’s claim ; the seller’s could not show the likelihood of success on the merits or serious questions going to the merits. The court assumed the corporation had acquiesced to the jurisdiction of the court, as the corporation submitted papers and appeared before the court. Further, there was no evidence that the corporation would destroy diversity jurisdiction. Thus, the corporation met the jurisdictional requirements of Rule 19. The corporation was also a necessary party, as complete relief could not be accorded in the absence of the corporation, which was the principal in a principal/agent relationship with two defendants and had given its agents limited ability to provide the relief requested. Further, the sellers appeared to acknowledge that the corporation should be a party to this action; however, they did not join the corporation because they had initiated an involuntary bankruptcy petition against the corporation under 11 U.S.C. § 303. Because the resulting automatic stay, the court had to stay this action until the corporation could be joined. Boat Basin Investors, LLC v. First Am. Stock Transfer, Inc., 2003 U.S. Dist. LEXIS 1838, — B.R. — (S.D.N.Y. February 7, 2003) (Sweet, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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License agreements with franchisees were executory contracts which could be rejected by debtor. Bankr. D. Del. PROCEDURAL POSTURE: A debtor and its related entities (the debtors) filed chapter 11 petitions and the cases were jointly administered. The debtors later moved to reject certain license agreements with certain franchisees. The franchisees’ committee and the individual franchisees opposed the motion and claimed that the agreements were not executory contracts subject to 11 U.S.C. § 365. OVERVIEW: The agreements in issue were related to the exclusive use of the proprietary marks in certain territories. Under the agreements the debtors could not use the proprietary marks in the territories it granted to the franchisees. The court found that the debtors’ agreement to forbear from using the proprietary marks in the exclusive franchisee territories was an ongoing material obligation as of the bankruptcy petition date. The court concluded that the agreements were executory contracts subject to the provisions of 11 U.S.C. § 365. The court used the business judgment standard to determine that the debtors’ rejection of the agreements was made to benefit the estate and not done in bad faith. The franchisees were not protected by 11 U.S.C. § 365(n). In re HQ Global Holdings, Inc., 2003 Bankr. LEXIS 146, 290 B.R. 507 (Bankr. D. Del. February 25, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01 [back to top]

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Trustee could not avoid payment made by debtor clothier for prepetition shipment of sweaters pursuant to the ordinary course of business exception. Bankr. W.D. Pa. PROCEDURAL POSTURE: Plaintiff, chapter 7 trustee in bankruptcy, sought to avoid as a preference a payment made by debtor clothier to defendant creditor, made five weeks prior to the filing of debtor’s bankruptcy petition for a shipment of sweaters the debtor had previously received from the creditor. The creditor asserted the payment was made within the “ordinary course” of business, and was not avoidable under 11 U.S.C. § 547(c)(2). OVERVIEW: The creditor sold the merchandise to the debtor after receiving a favorable credit report, on NET 30-day terms. The two had never done business before. The court determined that the transfer to the creditor qualified as a preference under 11 U.S.C. § 547(b), because the debtor was insolvent at the time it made the payment. The creditor argued that the transfer nonetheless fell within the scope of the “ordinary course” exception set forth in 11 U.S.C. § 547(c)(2). It was undisputed that the transfer debtor made for the first shipment of sweaters was on account of a debt incurred in the ordinary course of the business affairs of the debtor and the creditor. The creditor presented testimony describing the relevant industry, that payments routinely were made after the due date on “NET 30” terms. The court agreed that no unusual conduct occurred during the period between when the creditor had shipped the sweaters and the debtor had sent the payment that would have taken the payment out of the ordinary course of business. Although the payment was a preference, it could not be avoided under the ordinary course of business exception. Bohm v. Golden Knitting Mills, Inc. (In re Forman Enters.), 2003 Bankr. LEXIS 543, — B.R. — (Bankr. W.D. Pa. June 3, 2003) (Markovitz, B.J.).

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

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Attorney’s fees and late charges denied as court could not determine reasonableness of agreed flat fee without time records. Bankr. W.D. Va. PROCEDURAL POSTURE: Previously, the chapter 7 trustee liquidated property in which movant, a secured creditor, held a security interest. The trustee paid the secured debt from the sale proceeds, and the secured creditor moved for the payment of attorney fees and late charges pursuant to 11 U.S.C. § 506. The trustee objected to the motion. OVERVIEW: The secured creditor sought payment of attorney’s fees in the amount of $1,225.00 and late charges of $50.95. The trustee objected. At hearing on the objection, counsel for the secured creditor presented no evidence to support allowance of attorney’s fees under 11 U.S.C. § 506(b) or the late charges. Subsequently, in response to an order of the court, the secured creditor’s attorney filed documentation supporting the fee request and late charges. In that documentation, counsel revealed that the matters covered by the request for attorney’s fees arose as a result of a flat fee arrangement between counsel and the secured creditor. Counsel did not maintain time records. Without time records, the court has no basis for determining the reasonableness of the fees counsel requested. Also, counsel again failed to justify the late charge fee of $50.95. Countrywide Home Loans, Inc. v. Poff (In re Poff), 2003 Bankr. LEXIS 507, — B.R. — (Bankr. W.D. Va. May 27, 2003) (Krumm, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04 [back to top]

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Debtor who agreed to waive discharge of claim in first bankruptcy could not seek discharge of the same claim in subsequent filing. Bankr. N.D. Miss. PROCEDURAL POSTURE: In a prior bankruptcy, defendant debtor agreed to a waiver of discharge on obligations owed to plaintiff creditor. Subsequently, the debtor filed for bankruptcy, seeking to discharge the creditor’s obligations to which the debtor waived discharge. The creditor filed an adversary proceeding seeking a determination that the debts were nondischargeable pursuant to 11 U.S.C. § 523(a)(10). The creditor moved for summary judgment. OVERVIEW: After the waiver in the prior bankruptcy, the creditor obtained a state court judgment against the debtor. The debtor submitted an affidavit that although at the time of the waiver, he felt it was a conscious and fully informed judgment, he subsequently discovered the total ramifications of such a waiver. If he had known the full ramifications, he would never have agreed to this waiver of discharge. The bankruptcy court was unsympathetic, calling the debtor’s actions a blatant effort to abuse the bankruptcy process. The debtor could not manufacture a disputed material issue of fact by simply submitting a second sworn affidavit that was directly adverse to the earlier affidavit that he submitted in the prior bankruptcy. The bankruptcy court held that the debtor was judicially estopped from attempting to take his current legal position which was completely inconsistent with the position that he took in the prior bankruptcy. Glover v. Herzog (In re Herzog), 2003 Bankr. LEXIS 501, — B.R. — (Bankr. N.D. Miss. May 5, 2003) (Houston, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.16 [back to top]

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Plan confirmation denied due to separate classification of unsecured student loans which were given more favorable treatment than general unsecured debt. Bankr. N.D. Tex. PROCEDURAL POSTURE: Debtors moved for confirmation of their proposed final chapter 13 plan. The chapter 13 trustee objected to the plan, arguing that it unfairly discriminated against unsecured creditors. OVERVIEW: Debtors’ plan was a 60-month plan providing for payments of $440 per month, resulting in a 5.6 percent return to unsecured creditors. The plan separately classified the two student loans and provided for direct payments of $200 per month against the student loans. Debtors and the trustee stipulated that, if the student loan debts were not separately classified (and hence no discrimination) and thus paid pro rata with other unsecured creditors, the dividend to unsecured creditors under a hypothetical 36-month plan would increase to approximately 12 percent. The parties further stipulated that the $200 direct payment on the student loans was the regular payment on the loans and that such payment will continue for a period of 10 years. The trustee argued that the plan violated 11 U.S.C. § 1322(b)(1), by treating nondischargeable unsecured student loan obligations more favorably than dischargeable general unsecured debt. The court adopted a formula described in another bankruptcy case in the district and, based on that formula, debtors’ plan did violate section 1322(b)(1). Paragraph (b)(5) did not save the plan, as it did not constitute an exception to paragraph (b)(1). In re Gilley, 2003 Bankr. LEXIS 520, — B.R. — (Bankr. N.D. Tex. June 3, 2003) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05 [back to top]

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Venue of dispute between debtor and customer changed to district where bankruptcy was pending in the interests of justice and efficient administration of the estate. E.D. La. PROCEDURAL POSTURE: Plaintiff seller filed a voluntary petition for relief under chapter 11 in the Bankruptcy Court for the Northern District of Texas. The seller commenced an action in state court against defendant buyer, seeking money for steel allegedly purchased by the buyer. The buyer removed the case and moved to transfer venue. The seller moved for abstention and/or remand. OVERVIEW: The case was removed to the district court on the grounds that it was arising in or related to the seller’s bankruptcy case, under 28 U.S.C. §§ 1334(b), 1452(a). The buyer contended that it was entitled to a setoff and/or recoupment. There was a strong presumption in favor of placing venue in the district where the bankruptcy proceedings were pending. The court found that the considerations behind the presumption were heightened because the determination under 28 U.S.C. § 157(b)(3) was required in order to decide the seller’s motion for abstention and/or remand. This determination was for the bankruptcy judge. Thus, the interests of justice and the efficient administration of the bankruptcy estate strongly favored transfer. Moreover, it likely would have been more convenient for the parties to litigate both the seller’s claim and the buyer’s counterclaim in the same forum-particularly if both claims arose out of the same transaction. Thus, whether the buyer’s claim was ultimately classified as a setoff or not, the buyer was restricted to the bankruptcy court in its pursuit of that claim until the bankruptcy court determined otherwise. Bayou Steel Corp. v. Boltex Mfg. Co., LP, 2003 U.S. Dist. LEXIS 9395, — B.R. — (E.D. La. May 30, 2003) (Englehardt, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:4.04 [back to top]

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Creditor’s lien in debtor’s insurance proceeds which was perfected postpetition was avoidable by trustee. Bankr. E.D. Tenn. PROCEDURAL POSTURE: The chapter 7 trustee sought to avoid the creditor’s security interest in the debtor’s car under Tenn. Code § 55-3-126 and 11 U.S.C. §§ 544 and 550, and argued that perfection after the bankruptcy violated 11 U.S.C. § 362 and that insurance proceeds paid to the creditor were subject to turnover under 11 U.S.C. § 542. On cross motions for summary judgment, the creditor argued it was entitled to equitable subrogation. OVERVIEW: The exclusive method for obtaining a perfected security interest on the car was by having such lien noted on the certificate of title as provided by Tenn. Code § 55-3-126. Although the creditor had refinanced the debtor’s car and paid off the prior lienor, the creditor’s security interest was not perfected for two years. The security interest in the car was not perfected until the Tennessee Department of Title and Registration received the creditor’s application for the notation of the lien on the certificate of title, which was after the bankruptcy. Any equitable principals under Tenn. Code § 47-1-103, such as subordination, had to give way to the requirements of Tenn. Code §§ 47-9-311 and 55-3-126. Perfection occurred in violation of the automatic stay of 11 U.S.C. § 362(a)(4) and was voided. The trustee, as a hypothetical judicial lien creditor under 11 U.S.C. § 544(a)(1), was entitled to avoid the creditor’s lien in the insurance proceeds received from the insurance company and to recover the same under 11 U.S.C. § 550(a)(1). Farmer v. LaSalle Bank (In re Morgan), 2003 Bankr. LEXIS 327, 291 B.R. 795 (Bankr. E.D. Tenn. March 18, 2003) (Stair, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.05 [back to top]

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