Collier Bankruptcy Case Update June-24-02
- West's
Bankruptcy Newsletter
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
June 24, 2002
CASES IN THIS ISSUE
(scroll down to read the full
summary)
1st Cir.
§ 105(a) Expert witness not disqualified.
Commerce Indus. Ins. Co. v. E.I. Du Pont De Nemours & Co. (In re
Malden Mills Indus.) (Bankr. D. Mass.)
28 U.S.C. § 157(d) Defendants' motion to withdraw reference was
denied without prejudice.
Official Comm. of Unsecured Creditors v. Blease (In re Envisionet
Computer Servs.) (D. Me.)
2d Cir.
§ 330(a)(1) Creditors' application for attorney's fees and
costs as sanction award were allowed, in part.
Kelsey v. Great Lakes Higher Educ. Corp. (In re Kelsey) (Bankr.
D. Vt.)
§ 507(a)(1) Counsel for creditors' committee could only receive
payment of fees from unencumbered assets.
In re Hotel Syracuse, Inc. (Bankr. N.D.N.Y.)
Rule 8002(c)(2) Claimant's untimely appeal was dismissed for lack of
jurisdiction.
Bogaerts v. Shapiro (S.D.N.Y.)
3d Cir.
§ 547(c)(2) Creditors' committee entitled to recover
preferential transfers.
Official Comm. of Unsecured Creditors of the Estate of CCG 1355, Inc.
v. CRST, Inc. (In re CCG 1355, Inc.) (Bankr. D.N.J.)
4th Cir.
§ 522(b)(2)(A) Maryland debtor entitled to exemption claimed
for proceeds from policy that insured life of deceased wife.
In re Kleinman (Bankr. D. Md.)
§ 707 Debtor's case dismissed after court discovered that she
had received discharge in district within past six years.
In re Boland (Bankr. D.S.C.)
5th Cir.
§ 523(a)(4) Bankruptcy court's finding of nondischargeability
was upheld on appeal.
Pool v. Johnson (N.D. Tex.)
§ 727(a) Chapter 7 trustee not allowed to settle section 727
complaint against debtor.
Lindauer v. Traxler (In re Traxler) (Bankr. E.D. Tex.)
6th Cir.
§ 105(a) Grant of preferred status to claimants affirmed
where they 'substantially complied' with court-ordered notice
requirements.
Mayor & City Council of Baltimore v. West Virginia (In re
Eagle-Picher Indus.) (6th Cir.)
§ 523(a)(2)(A) Bankruptcy court's decision determining debt
nondischargeable based on application of collateral estoppel doctrine
reversed.
Sill v. Sweeney (In re Sweeney) (B.A.P. 6th Cir.)
7th Cir.
§ 553(a) State was allowed to set off Medicaid overpayments
and taxes.
In re Doctors Hosp. of Hyde Park, Inc. (Bankr. N.D. Ill.)
Rule 9023 Secured creditor's motion for new trial in proceeding that
determined value of collateral denied.
In re Adams (Bankr. N.D. Ill.)
8th Cir.
§ 106(b) Bankruptcy court dismissed debtor's dischargeability
complaint against state higher education board based on board's
sovereign immunity.
Haag v. Sallie Mae (In re Haag) (Bankr. W.D. Mo.)
9th Cir.
§ 328(a) Committee's application to retain financial advisor denied because committee failed to establish that provisions in engagement agreement were reasonable.
In re Metricom, Inc. (Bankr. N.D. Cal.)
§ 506(a) Debtors allowed to bifurcate value of income-producing property into secured and unsecured claims.
Enewally v. Wash. Mut. Bank (In re Enewally) (Bankr. C.D. Cal.)
28 U.S.C. § 1334(b) Confirmation of plan did not terminate jurisdiction of bankruptcy court over related disputes.
Goldin v. Montana (In re Pegasus Gold Corp.) (Bankr. D. Nev.)
Rule 8005 Stay pending appeal of bankruptcy court's order was denied.
WCI Cable, Inc. v. Alaska R.R. Corp. (D. Or.)
11th Cir.
§ 523(a)(8) District court reversed bankruptcy court's
decision that repayment of student loan debt constituted 'undue
hardship.'
In re Mallinckrodt (S.D. Fla.)
D.C. Cir.
§ 347(a) Motion to recover unclaimed funds denied where
claimant failed to establish that debt had not been previously
satisfied.
In re Acker (Bankr. D.D.C.)
Collier Bankruptcy Case Summaries
1st Cir.Expert witness not disqualified. Bankr. D. Mass. After
a catastrophic fire destroyed the debtor's manufacturing facilities, the
debtor's insurer sought to have the fire investigated. The insurer hired
a consultant to conduct the fire investigation and the consultant
contacted a laboratory to conduct standardized tests on certain fire
material. After receiving the testing results, the insurer commenced a
state (Massachusetts) court action against one of the debtor's
creditors, who had supplied goods that the debtor used in its
manufacturing process. The debtor subsequently filed for chapter 11
relief and removed the litigation to the bankruptcy court. In the
interim, the creditor retained its own expert witness, who worked for
the laboratory that had done the initial standardized tests on the fire
material. The insurer moved to disqualify the creditor's expert witness,
in order to prevent confidential information from being transmitted to
the creditor. The bankruptcy court applied a two-part test to consider
whether the expert witness should be disqualified based on the expert
switching sides, and found that (1) there was nothing in the insurer's
opposition to support a reasonable belief that a confidential
relationship existed between the insurer and the expert witness or his
laboratory, since the laboratory had actually been hired by the
insurer's consultant; and (2) there was nothing in any communications to
suggest that the consultant told the expert witness, or anyone else at
the laboratory, that the laboratory would be working for the debtor or
the insurer. The court also found it significant that the testing was
'blind' and standardized, and that the expert witness offered affidavit
testimony that he did not believe that he or his laboratory had been
retained as experts by the debtor or the insurer. The court then
exercised its powers under section 105(a) and granted the creditor's
motion to prevent disqualification. Commerce Indus. Ins. Co.
v. E.I. Du Pont De Nemours & Co. (In re Malden Mills Indus.),
2002 Bankr. LEXIS 372, 275 B.R. 670 (Bankr. D. Mass. April 18, 2002)
(Rosenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.01
ABI Members, click here to get the full opinion.
Defendants' motion to withdraw reference was denied
without prejudice. D. Me. The directors of the chapter 11
debtor filed a motion to withdraw the reference of the adversary
proceeding initiated by the unsecured creditors' committee. The
committee brought claims against the directors for alleged negligence
and breach of fiduciary duty. The directors contended that the
committee's claims were noncore state law causes of action, and that
they had not consented to the bankruptcy court's entry of final orders
on the claims. The committee opposed the motion to withdraw the
reference because the complaint alleged core claims. The district court
denied the motion without prejudice, holding that the directors
failed to carry their burden of establishing cause for withdrawal of the
reference. Because the determination of whether the proceeding fell
within the bankruptcy court's jurisdiction was necessary to determine
the motion for withdrawal of the reference, the district court remanded
the case to the bankruptcy court for such a determination.
Official Comm. of Unsecured Creditors v. Blease (In re Envisionet
Computer Servs.), 2002 U.S. Dist. LEXIS 6424, 276 B.R. 7 (D.
Me. April 11, 2002) (Carter, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.04,
.02
Creditors' application for attorney's fees and costs as sanction
award were allowed, in part. Bankr. D. Vt. The creditor
defendants in an adversary proceeding initiated by the chapter 7 debtor
to obtain a discharge of her student loans filed fee applications in
support of the bankruptcy court's award of sanctions due to the debtor's
spoliation of evidence. The sanction included an award of reasonable
attorney's fees and costs incurred for preparing motions based upon the
loss of evidence, as well as discovery directly associated with the
circumstances of the debtor's loss of the original documents. The debtor
argued that the award should be limited to the preparation of the
creditors' sanction motions. The bankruptcy court entered judgment
against the debtor and her counsel, holding that the creditors were
entitled to fair and reasonable attorney's fees, in light of the
complexities of the proceeding. The court considered the amount of
time spent on each task, as documented by time records of the creditors'
attorneys, and the prevailing rates in the community for similar
services by lawyers of reasonably comparable skills, experience and
reputation. Fees related to matters that were beyond the scope of the
sanction award were disallowed. Kelsey v. Great Lakes Higher Educ.
Corp. (In re Kelsey), 2002 Bankr. LEXIS 339, 272 B.R. 830 (Bankr. D.
Vt. January 29, 2002) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.04
ABI Members, click here to get the full opinion.
Counsel for creditors' committee could only receive
payment of fees from unencumbered assets. Bankr. N.D.N.Y. The
attorneys for the chapter 11 unsecured creditors' committee filed an
interim fee application for services performed on behalf of the
committee. The debtor's mortgage-holder objected to the firm's
application on the basis that its representation did not benefit the
estate. The creditor further contended that its mortgage lien was
undersecured and there was no unencumbered property from which the
firm's fees and expenses could be paid. The creditor had not consented
to payment of any professional fees from its collateral other than the
fees of debtor's counsel, which had been 'carved out' of the proceeds of
its collateral. The committee's counsel asserted that permitting the
debtor's counsel to be paid by means of a 'carve out' from the
creditor's cash collateral, while other section 507(a)(1) claimants
remained uncertain of any payment, reordered the Code's distribution
priorities. The bankruptcy court approved the fee application but denied
payment, holding that permitting the undersecured creditor to 'carve
out' from its collateral counsel fees exclusively for the debtor's
counsel, without making similar provision for committee counsel's fees,
did not violate the Code's priority scheme. The court noted that
administrative and priority creditors, including the committee's
counsel, would receive no distribution unless there were unencumbered
assets in the estate. In re Hotel Syracuse, Inc., 2002 Bankr.
LEXIS 340, 275 B.R. 679 (Bankr. N.D.N.Y. February 13, 2002) (Gerling,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.03
ABI Members, click here to get the full opinion
Claimant's untimely appeal was dismissed for lack of
jurisdiction. S.D.N.Y. The claimant appealed the bankruptcy
court's order dismissing all claims or cross-claims asserted by him. The
claimant was a defendant in an adversary proceeding initiated by the
chapter 11 trustee to determine the extent and priority of competing
liens held by the claimant and another creditor. In response to the
claimant's numerous failures to comply with discovery requests or
respond to court directives, the bankruptcy court dismissed all of his
claims and cross-claims. The claimant filed his notice of appeal 29 days
after the entry of the order and did not make a request to extend the
time period for submitting a notice of appeal until four months later.
The creditor with the competing lien moved to dismiss the appeal for
lack of jurisdiction. The magistrate recommended dismissal of the
appeal, holding that the claimant's time to file the notice of appeal
could not be extended, absent a timely request for extension. The
notice of appeal was not filed within 10 days of the entry of the
bankruptcy court's order and a written extension was not filed within 30
days of the entry of the order. Because the notice of appeal was not
timely filed, the district court did not have jurisdiction to review the
order at issue. There was no reason for the court to reach the question
of whether the claimant's failure to submit a timely notice of appeal
was the result of excusable neglect. Bogaerts v. Shapiro, 2001
U.S. Dist. LEXIS 23544, - B.R. - (S.D.N.Y. September 24, 2001) (Katz,
M.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:8002.10
3d Cir.
Creditors' committee entitled to recover preferential
transfers. Bankr. D.N.J. On June 3, 1999, the debtor, who had
been in the business of selling office furniture and related partitions
and equipment, filed a chapter 11 petition. After the petition was
filed, the creditors' committee filed an adversary proceeding against
one of the debtor's unsecured creditors, seeking to have three payments
made by the debtor to the creditor within 90 days preceding the petition
date deemed preferential transfers. The creditor that received the
alleged preferential transfers was a trucking company that had picked up
the debtor's product and delivered it to the debtor's customers for over
four years. The allegedly preferential checks were issued on 3/5/99 for
$2,000.00 (payment 1), 3/12/99 for $21,505.60 (payment 2) and 3/22/99
for $16,835.00 (payment 3). The payment 1 and payment 2 checks
identified on their stubs the invoices that were being paid, and all
invoices paid by payment 1 and payment 2 were at least 80 days old. The
payment 3 check was not produced, but testimony showed that the payment
was for 10 invoices that were 80 days and older at the time of the
payment. Payment 3 also included a prepayment of $6,050.00 for certain
important shipments, which the debtor made after informing the creditor
that the debtor was about to be sold and that payments would cease. The
court concluded that all of the payments, except the portion related to
the advance payment, were made (1) on account of an antecedent debt; (2)
while the debtor was insolvent; and (3) within the 90-day preference
period. The court also found that the creditor received 100 percent
satisfaction on its invoices, while it would have received essentially
nothing in a bankruptcy distribution. The creditor contended that it
satisfied the requirements of the ordinary course of business defense
under section 547(c)(2)(B). The creditor proffered testimony that, in
1995, the creditor could get the debtor's business only by agreeing that
payment terms would be in the 60-90 day range. However, the court found
that, throughout the creditor's entire business relationship with the
debtor, the average payment interval was 66.47 days. The average payment
interval during 1999, the year that the debtor filed its petition, was
84.40 days. During the preference period, the payment interval was 89.09
days and in the two months prior to the petition date it was 79.50 days.
Additionally, before the preference period, and throughout the totality
of the relationship between the debtor and the creditor, only about 16
percent of the debtor's payments were made against invoices that had
aged 80 days or more. In the last nine months before the preference
period, nearly 43 percent of the debtor's payments were against 80-day
or older invoices and all payments made during the preference period,
except for the advance payments, were for invoices that were 80 days old
or more. Based on the payment history information, the court found
that the 80-day and older payments were not usual or ordinary, and
determined that this factor, more than any other, defeated the
creditor's section 547(c)(2) defense. Official Comm. of
Unsecured Creditors of the Estate of CCG 1355, Inc. v. CRST, Inc. (In re
CCG 1355, Inc.), 2002 Bankr. LEXIS 355, 276 B.R. 377 (Bankr. D.N.J.
April 16, 2002) (Stern, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
5:547.04[1]-[2]
4th Cir.
Maryland debtor entitled to exemption claimed for proceeds from
policy that insured life of deceased wife. Bankr. D. Md. The
chapter 7 debtor properly scheduled his interest in certain life
insurance policy proceeds in his bankruptcy schedules. The debtor's
claim to the life insurance proceeds arose because the debtor was named
as the beneficiary under two life insurance policies that insured the
life of his deceased wife. The debtor claimed an exemption for his
interest in the policies as 'monies payable in the event of death of any
person' pursuant to Maryland law (Md. Cts. & Jud. Proc. Art. §
11-504(b)(2)). The bankruptcy court held that the debtor was entitled
to the exemption claimed for the life insurance proceeds. The court
evaluated the language of the applicable state statute and case law in
deciding that the debtor was entitled to the exemption claimed. The
court also concluded that the state legislature had acted, since 1983,
to limit certain exemptions; thus, the legislature could have amended
the scope of the applicable statutory provision if it intended for the
exemption provided by section 11-504(b)(2) not to apply to life
insurance proceeds.In re Kleinman, 2001 Bankr. LEXIS 1850, 272
B.R. 339 (Bankr. D. Md. October 12, 2001) (Derby, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
4:522.10[5]
ABI Members, click here to get the full opinion.
Debtor's case dismissed after court discovered that
she had received discharge in district within past six years.
Bankr. D.S.C. Through routine system checks, the clerk of the
bankruptcy court and the United States discovered that a debtor in a
joint chapter 7 case had previously filed a chapter 7 case and received
a discharge in the same district within six years prior to filing the
present case. The bankruptcy court issued a Rule to Show Cause, which
required the debtor to show cause why she should be granted a discharge,
and the debtor requested that her case be dismissed. The bankruptcy
court granted the debtor's request to dismiss her case. The court
noted that the dismissal would be accomplished by separating the joint
case into two cases and then dismissing the debtor's separated case. The
court also cautioned that its order served to warn the bar and
subsequent debtors that the court would not, in the future, be placed in
the position of 'ferreting the truth from inaccurate and misleading
information supplied by debtors and their counsel.' The court also
stated that the United States Trustee, the clerk, creditors and other
parties in interest should not be placed at a similar disadvantage.
In re Boland, 2001 Bankr. LEXIS 1848, - B.R. - (Bankr. D.S.C.
May 24, 2001) (Bishop, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:707.03
5th Cir
Bankruptcy court's finding of nondischargeability was upheld on
appeal. N.D. Tex. The debtor appealed the bankruptcy
court's judgment that the obligation to his former business partner was
nondischargeable. The business partner and the debtor had entered into a
joint venture to provide a fund to be used at the discretion of the
debtor's pawn shop business. The partner provided the capital for the
fund, but vested the debtor with full and independent discretion to
manage the assets of the venture. After the pawn shop closed, the debtor
neither returned the venture capital to the partner nor provided an
accounting of the disposition of the funds. The bankruptcy court found
the debt nondischargeable under section 523(a)(4), because it was
incurred through embezzlement or defalcation by the debtor while acting
in a fiduciary capacity. The district court affirmed, holding that
the bankruptcy court did not err in concluding that the debtor
committed embezzlement or defalcation while acting in a fiduciary
capacity. The court rejected the debtor's argument that the
bankruptcy court erred in concluding that he committed embezzlement,
even though it found an absence of sufficient evidence to support a
finding of larceny, because both were alternative theories of recovery
under section 523(a)(4). Additionally, the power of attorney, as set
forth in the joint venture agreements, created a relationship imposing
trust-type obligations under state (Texas) law, and therefore satisfied
the requirements of a fiduciary relationship. Since the bankruptcy court
found that the debtor acted as a fiduciary and that the obligation arose
because of his failure to pay his partner the entrusted funds, the
burden of proof shifted to the debtor to render an accounting to show
that he complied with his fiduciary duties. His failure to do so
supported the conclusion that the debtor committed defalcation while
acting in a fiduciary capacity. Pool v. Johnson, 2002 U.S.
Dist. LEXIS 6613, - B.R. - (N.D. Tex. April 15, 2002) (Lindsay,
D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
ABI Members, click here to get the full opinion.
Chapter 7 trustee not allowed to settle section 727
complaint against debtor. Bankr. E.D. Tex. The debtor filed
for chapter 7 relief, and the date for filing objections to the debtor's
discharge or to the dischargeability of particular debts was extended to
June 22, 2000 on motion of the chapter 7 trustee. A creditor filed a
complaint objecting to the debtor's discharge under section 727, but the
adversary proceeding was dismissed in October 2000. The chapter 7
trustee also objected to the debtor's discharge, based on allegations
that the debtor transferred assets from his business to his spouse's
business prior to bankruptcy, that the debtor had not provided adequate
records concerning his financial affairs and that the debtor had
received substantial sums of money in the years preceding the filing of
the complaint but that the funds were unaccounted for. The complaint
also recited that the debtor claimed a lack of knowledge of his wife's
business affairs and accounts, and that the debtor's schedules and
statement of financial affairs did not disclose his wife's ownership
interest in her jewelry business, her four-carat diamond ring, her
Mercedes or the debtor's transfer of property to his spouse. The debtor
answered, offering explanations with respect to the allegations, as well
as denials. After numerous continuances of the adversary trial, the
chapter 7 trustee and the debtor filed a motion for approval of a
settlement agreement. The settlement agreement called for the complaint
to be dismissed with prejudice, but provided that the debts of certain
debtors would be excepted from discharge so that those creditors could
pursue their rights under nonbankruptcy law. The settlement agreement
also provided that any creditor who objected to the settlement would
have its debt excepted from discharge by agreement or be allowed to
pursue the existing objection on behalf of the estate. Further, the
motion for approval of the settlement stated that, although the chapter
7 trustee objected to the debtor's discharge, she had not been able to
locate any assets of substantial value to distribute to the creditors
and did not believe that any such assets would be found. Additionally,
the chapter 7 trustee was of the opinion that the cost of proceeding
with the complaint would increase the administrative burden on the
estate, and that the increase would not likely be recovered from assets.
The United States Trustee objected to the proposed settlement, arguing
that any settlement or compromise of an action brought under section 727
would be against public policy. The bankruptcy court noted that there
are three approaches taken by courts when considering the issue of
whether or not to approve settlement of adversary proceedings asserting
both section 727 and 523 claims, including the approach that rejects all
settlements of section 727 complaints. Turning to the proposed
settlement agreement, the bankruptcy court found that the case at bar
could not serve as the 'exemplar of a case' in which it would be
appropriate to rule in favor of a section 727 action, and sustained the
United States Trustee's objection and denied the settlement motion.
The court also noted that, since the chapter 7 trustee's testimony made
it abundantly clear that the trustee did not believe her case had merit
or likelihood of success, she should move to withdraw her complaint.
Lindauer v. Traxler (In re Traxler), 2002 Bankr. LEXIS 353,
277 B.R. 699 (Bankr. E.D. Tex. February 14, 2002) (Sharp, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.03,
10:9019.02
6th Cir.
Grant of preferred status to claimants affirmed where they
'substantially complied' with court-ordered notice requirements.
6th Cir. Claimants appealed from a district court order that
affirmed the bankruptcy court's grant of preferred status to them in the
disposition of a settlement trust corpus funded by the chapter 11
debtor. The bankruptcy court ordered the claimants to give notice to
three entities as a prerequisite to preferred status, but the claimants
only notified two of the three entities. Notwithstanding this failure,
the bankruptcy court determined that the claimants were entitled to
preferred status in the trust dispensation because they had
substantially complied with the notice requirements. The district court
affirmed. On further appeal, the Court of Appeals for the Sixth Circuit
affirmed. The court rejected the appellants' argument that the claimants
failed to comply with Rule 9006(b)(1) because they never claimed or
established that their failures were the result of excusable neglect, or
that substantial prejudice would result from the bankruptcy court's
decision. The court of appeals held that the 'substantial compliance'
doctrine can properly be applied to find timeliness despite technical
noncompliance, even in situations where a deadline extension would be
subject to Rule 9006(b)'s requirement of 'excusable neglect.' The
court also held that the bankruptcy court did not abuse its discretion
in applying the substantial compliance doctrine. Mayor & City
Council of Baltimore v. West Virginia (In re Eagle-Picher Indus.),
2002 U.S. App. LEXIS 6003, 285 F.3d 522 (6th Cir. April 4, 2002)
(Russell, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.02
ABI Members, click here to get the full opinion.
Bankruptcy court's decision determining debt
nondischargeable based on application of collateral estoppel doctrine
reversed. B.A.P. 6th Cir. After the debtor's chapter 13 case
was converted to one under chapter 7, the creditors filed an adversary
complaint against the debtor under section 523(a)(2)(A), alleging the
nondischargeability of a judgment debt owed to them as a result of an
Ohio lawsuit. The bankruptcy court, applying the principles of
collateral estoppel and the Rooker-Feldman doctrine, granted summary
judgment in favor of the creditors. The debtor appealed, asserting in a
sworn affidavit that he was absolutely unaware of the state lawsuit and,
therefore, had no opportunity to file an answer or to litigate the
merits of the dispute. The B.A.P. for the Sixth Circuit found that the
state court litigation had its origins in a contract dispute related to
construction deficiencies in the creditor's house. The B.A.P. also found
that service of process of the complaint was by certified mail at one of
the debtor's business addresses, and the return receipt was signed by an
employee of the business. The debtor had not answered the creditors'
complaint and, in due course, the creditors took default judgment
against the debtor. At a hearing on the default judgment, the creditors
testified and presented three witnesses. At the close of the hearing,
the state court entered judgment against the debtor, individually, and
two other defendants, jointly and severally, in the sum of $197,000, of
which $100,000 was for punitive damages related to a fraud count
contained in the complaint. However, the judgment itself simply listed
the damages of the complaint count by count, without reciting any
findings of fact or conclusions of law. On the facts, the B.A.P.
concluded that, based on Ohio law, the debtor had been entitled to an
evidentiary hearing on whether he had, in fact, received service of
process and that, in the absence of such a hearing, the bankruptcy court
had committed reversible error in granting summary judgment. The
B.A.P. further ruled that the prerequisites for applying collateral
estoppel, and thus for granting summary judgment, also were not
satisfied because there were no findings of fact or conclusions of law
in the state court's ruling that would enable a court to determine that
the state fraud case was decided on its merits, and not as a mere
procedural default. Sill v. Sweeney (In re Sweeney), 2002
Bankr. LEXIS 358, 276 B.R. 186 (B.A.P. 6th Cir. April 22, 2002) (Cook,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised
4:523.08[1]
7th Cir.
State was allowed to set off Medicaid overpayments and taxes.
Bankr. N.D. Ill. The State of Illinois Departments of Public Aid,
Revenue and Employment Security filed a motion to lift the automatic
stay to allow setoff of the taxes and overpayments the debtor owed
against the amount owed to the debtor for Medicaid reimbursement. The
chapter 11 debtor operated a hospital and long-term care units, both of
which were licensed as Medicaid providers. As of the petition date, the
debtor owed the state various taxes for the operation of its businesses,
as well as overpayments of Medicaid reimbursements. The state also owed
the debtor for providing services reimbursable under the Medicaid
program. The bankruptcy court granted the motion for relief, holding
that the state met the requirements for setoff under section 553.
Most, if not all, of the obligations of the state and the debtor arose
prepetition. The different agencies of the state were considered a
single entity for purposes of setoff, making the claims and debts
mutual. The court presumed, without deciding, that the debts and claims
were valid and enforceable. The stay was lifted to allow setoff of the
overpayments and taxes only to the extent that the debtor's accounts
receivable were not attached by the lender's security interest (citing
Collier on Bankruptcy, 15th Ed. Revised). In re Doctors
Hosp. of Hyde Park, Inc., 2002 Bankr. LEXIS 334, 272 B.R. 677
(Bankr. N.D. Ill. January 25, 2002) (Doyle, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:553.03
ABI Members, click here to get the full opinion.
Secured creditor's motion for new trial in proceeding
that determined value of collateral denied. Bankr. N.D. Ill.
A secured creditor filed its secured claims on the chapter 13 debtors'
vehicles four months after the confirmation of their plan. The creditor
ultimately repossessed the vehicles after the debtors defaulted, and
relief from the stay was obtained. The bankruptcy court treated the
debtors' subsequent motion to disallow the creditor's secured claims as
one to value collateral at zero, and reconsider and recalculate the
remaining balances owed to the creditor. Although the creditor argued
that the debtors were estopped from challenging its claims after
confirmation, the court held that the creditor could not invoke the
doctrine of collateral estoppel under applicable Seventh Circuit
authority because it had not filed its claims prior to confirmation, and
the debtors' plan did not value its collateral. The bankruptcy court
determined the amount the creditor received from sale of the repossessed
vehicles and payments to it from the chapter 13 trustee, reduced the
creditor's claims by those amounts and designated the remainder of its
claims as unsecured. The creditor moved for a new trial. The bankruptcy
court denied the motion. The court held that the creditor offered no
argument showing that the court's earlier judgment was due to legal
error, which would justify a new trial, and offered no new evidence.
The court found that much of the creditor's argument for a new trial was
a restatement or recasting of its earlier arguments. With respect to
these arguments, the court found that: (1) section 506(a) did not
preclude reconsideration of the creditor's claim after plan
confirmation; (2) the debtors were not restricted to valuation of the
vehicles as of the bankruptcy petition filing date or confirmation date;
(3) the balance of equities did not favor the creditor; and (4) the
deficiency price received from the sales of the vehicles did not
establish retrospectively that the creditor was not adequately protected
prior to the sales or its entitlement to a superpriority claim to
recover the deficiency (citing Collier on Bankruptcy 15th Ed.
Revised). In re Adams, 2002 Bankr. LEXIS 259, 275 B.R. 274
(Bankr. N.D. Ill. March 26, 2002) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9023.01
ABI Members, click here to get the full opinion.
8th Cir.
Bankruptcy court dismissed debtor's dischargeability complaint
against state higher education board based on board's sovereign
immunity. Bankr. W.D. Mo. The chapter 7 debtor filed an
adversary proceeding seeking to have a debt owed to Sallie Mae and the
Missouri Coordinating Board for Higher Education discharged, pursuant to
her claim of 'undue hardship' under section 523(a)(8). Sallie Mae did
not file an answer to the complaint or appeal at trial; thus, the court
entered a default judgment against Sallie Mae and discharged the
debtor's obligations to Sallie Mae. The court also considered, sua
sponte, the issue of whether dismissal of the debtor's complaint against
the state higher education board was warranted based upon principles of
Eleventh Amendment sovereign immunity. The court searched the court file
and found no proof of claim filed either by the board or by its
predecessor in interest. Therefore, the court held that the board had
not waived its sovereign immunity; therefore, dismissal of the debtor's
complaint against the board, without prejudice, was warranted. The
court reasoned that the debtor would be entitled to raise the
dischargeability question if and when the board sought to enforce her
obligations to it in a state court proceeding. Haag v. Sallie Mae
(In re Haag), 2002 Bankr. LEXIS 291, 274 B.R. 833 (Bankr. W.D. Mo.
March 26, 2002) (Koger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
2:106.06[2]
9th Cir.
Committee's application to retain financial advisor denied because
committee failed to establish that provisions in engagement agreement
were reasonable. Bankr. N.D. Cal. The official bondholders'
committee in the chapter 11 debtor's case filed an application for
approval of its employment of a financial advisor. The United States
Trustee objected to the application to the extent that it sought to
provide certain protections to the financial advisor and others.
Specifically, the United States Trustee objected to the provisions for
indemnity, contribution and exculpation contained in the financial
advisor's 'engagement letter,' which were to apply to the advisor's
employment by the committee. Based on the record before it, the
bankruptcy court held that the bondholders' committee failed to
satisfy its burden of establishing the reasonableness of the indemnity,
contribution and exculpation provisions as required by section 328(a);
therefore, the application was denied. The court noted that neither
the Code nor binding bankruptcy case law provides a basis for a per se
rule against indemnity, contribution and exculpation provisions, and
cautioned that it was not adopting a per se rule against such
provisions. Rather, the court's holding was based on the committee's
failure to establish the reasonableness of the subject provisions in the
context of the case. In re Metricom, Inc., 2002 Bankr. LEXIS
297, 275 B.R. 364 (Bankr. N.D. Cal. March 31, 2002) (Weissbrodt,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised
3:328.02[1]
ABI Members, click here to get the full opinion.
Debtors allowed to bifurcate value of
income-producing property into secured and unsecured claims.
Bankr. C.D. Cal. The chapter 13 debtors owned three pieces of
real property, including two rental- producing properties in Long Beach.
The debtors filed an adversary proceeding, seeking to value one of the
rental properties at $210,000.00, and to have the creditor's secured
claim on the property divided into secured and unsecured portions
pursuant to section 506(a). The complaint also sought to require the
creditor to credit all postpetition and postdischarge payments to the
secured balance of the loan, and to have the $30,744.33 unsecured
portion of the creditor's loan made subject to the debtors' chapter 13
discharge. The creditor objected to the proposed treatment of its claim,
arguing that the debtors' plan impermissibly modified its secured claim.
The court found that modification of the secured creditor's rights was
authorized by section 1322(b)(2), which provides that a chapter 13 plan
may modify the rights of secured creditors as long as (1) the
contemplated payments be made during the life of the plan; (2) the claim
is not secured only by a security interest in the debtors' principal
residence; and (3) the plan meets the requirements of section 1325 for
plan confirmation. The court also found that the debtors were entitled
to use section 1322(b)(5) to maintain the monthly payments on their
secured claim at the original contractual amount until the secured claim
was paid in full, and that the creditor's secured claim was limited to
the value of the collateral, which was $210,000.00. The payments were to
extend for the life of the debtors' chapter 13 plan, and for further
time, as necessary, to pay the $210,000.00 claim in full. The court
then ruled that as long as the debtor completed the chapter 13 plan and
received a discharge, the mortgage would be deemed 'paid in full' when
the debtors finished making payments on the debt, plus interest at the
contract rate. The court further ordered that the creditor's
unsecured claim of $30,744.33 be given the same treatment as other
unsecured debts in the debtors' chapter 13 plan (which was 17 percent),
and that the claim be discharged upon completion of the chapter 13 plan.
Enewally v. Wash. Mut. Bank (In re Enewally), 2002 Bankr.
LEXIS 370, 276 B.R. 643 (Bankr. C.D. Cal. April 12, 2002) (Bufford,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03, .06
ABI Members, click here to get the full opinion.
Confirmation of plan did not terminate jurisdiction
of bankruptcy court over related disputes. Bankr. D. Nev. The
Montana Department of Environmental Quality moved to dismiss the
complaint brought by the chapter 11 liquidating trustee. Pursuant to
negotiations between the debtors and the department, a new entity was
created preconfirmation, which was to use the debtors' employees to
perform postconfirmation reclamation and water treatment services at two
mines for an interim period. As part of the agreement, the debtors and
the creditors' committee paid the department over $1,000,000 to fund the
interim work. The agreement was incorporated into the confirmed plan.
Less than six months after plan confirmation, billing disputes arose and
the department terminated the newly-formed entity and hired a new
company. The liquidating trustee commenced an adversary proceeding for,
among other things, breach of the plan and related agreement. The
department moved to dismiss and argued that the bankruptcy court was
divested of subject matter jurisdiction once the plan was confirmed. The
bankruptcy court denied the motion to dismiss, holding that the
trustee's claims against the department were 'related to' the debtors'
case pursuant to 28 U.S.C. § 1334, and the court had subject matter
jurisdiction. Each of the disputes (1) had a close nexus to the
bankruptcy case; (2) involved administration, compliance, enforcement or
implementation of the plan; and (3) impacted the potential distribution
to the unsecured creditors. Jurisdiction was specifically retained in
the plan to resolve such disputes. The department further waived any
Eleventh Amendment immunity it could have had by filing proofs of claim
and by its pervasive participation in the case. Goldin v. Montana
(In re Pegasus Gold Corp.), 2002 Bankr. LEXIS 337, 275 B.R. 902
(Bankr. D. Nev. March 29, 2002) (Zive, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01[4]
ABI Members, click here to get the full opinion.
Stay pending appeal of bankruptcy court's order was
denied. D. Or. The defendants in an adversary proceeding
initiated by the chapter 11 debtor filed a motion for stay pending
appeal of the bankruptcy court's denial of their motion to dismiss. The
defendants had previously moved to dismiss the complaint, asserting
immunity under the Eleventh Amendment. The bankruptcy court found that
the defendants waived their immunity by invoking the court's
jurisdiction during an earlier request for affirmative relief in the
form of adequate protection. Because the district court had withdrawn
the reference with respect to the adversary proceeding, the defendants
contended that their appeal of the bankruptcy court order denying their
motion to dismiss automatically divested the district court of
jurisdiction and required a stay of all proceedings pending resolution
of the appeal. The district court denied the defendants' motion, holding
that the defendants failed to establish their entitlement to a stay
pending appeal of the bankruptcy court's denial of the motion to
dismiss. The defendants did not demonstrate that they were likely to
succeed in the merits of their sovereign immunity claim, nor did the
balance of hardships tip in the defendants' favor, because only a
limited time was required for the district court to rule on the appeal
of the sovereign immunity issue. WCI Cable, Inc. v. Alaska R.R.
Corp., 2002 U.S. Dist. LEXIS 6556, - B.R. - (D. Or. March 22, 2002)
(Brown, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:8005.07
11th Cir.
District court reversed bankruptcy court's decision that repayment
of student loan debt constituted 'undue hardship.' S.D. Fla.
A student loan creditor appealed from a bankruptcy court decision that
held that the repayment of the chapter 7 debtor's student loan
obligation would constitute an 'undue hardship' within the meaning of
section 523(a)(8). The district court reversed the bankruptcy court's
decision. The court expressly adopted the Brunner test for determining
'undue hardship;' thus, the debtor had to establish that (1) he could
not maintain a 'minimal' standard of living if forced to repay the
loans; (2) additional circumstances existed indicating that his current
state of affairs was likely to persist for a significant portion of the
repayment period; and (3) he had made good faith efforts to repay the
loans. The court applied the Brunner test and held that the
debtor's financial condition was insufficient to constitute 'undue
hardship' under section 523(a)(8). Specifically, the court found
that the although repayment of his loans would require him to fall below
a minimal standard of living, the debtor failed to establish that his
current state of financial affairs would be long-term, or that he had
made a good faith effort to repay the loan. In re
Mallinckrodt, 2002 U.S. Dist. LEXIS 5827, 274 B.R. 560 (S.D. Fla.
February 28, 2002) (Moreno, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Motion to recover unclaimed funds denied where
claimant failed to establish that debt had not been previously
satisfied. Bankr. D.D.C. On behalf of the successor in
interest to the chapter 13 debtors' mortgagee, an entity moved to
recover unclaimed funds held in the bankruptcy court's registry. The
chapter 13 trustee had distributed funds in a check payable to the
mortgagee's predecessor in interest, but the check remained unpaid 90
days after the final distribution, and pursuant to section 347(a), the
trustee deposited the funds into the court's registry. The bankruptcy
court denied the motion for payment of the unclaimed funds, because the
claimant failed to establish that the mortgage debt had not been
previously satisfied, either by the proceeds of a foreclosure sale or
otherwise. The court acknowledged that the record demonstrated that
the claimant was at one time entitled to the funds, but refused to grant
the relief sought, because the claimant failed to demonstrate a present
entitlement. The court entered an order directing the withdrawal of
funds and payment to the claimant only upon a demonstration by the
claimant of a present right to the funds. In order to demonstrate such a
right, the court required the claimant to file with the court an
affidavit stating whether the claim that was the basis for the issuance
of the distribution had or had not been satisfied, either from the
proceeds of a foreclosure sale or otherwise, and to provide further
evidence, if any, of the claimant's present entitlement to the unclaimed
funds.In re Acker, 2002 Bankr. LEXIS 294, 275 B.R. 143 (Bankr.
D.D.C. April 2, 2002) (Teel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:347.02