Collier Bankruptcy Case Update June-24-02

Collier Bankruptcy Case Update June-24-02

 


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

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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

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2d Cir.

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
 

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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

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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

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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]

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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]

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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

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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

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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

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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

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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]

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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

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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

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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]

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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]

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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

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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]

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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

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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

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D.C. Cir.

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

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