Collier Bankruptcy Case Update June-25-01
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 25, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- D.C. Cir.
§ 553(a)(2) 'First-tier' subcontractor had right of setoff against debtor/'second-tier' subcontractor’s right to payment, but setoff right was defeated to extent of federal tax liens.
M & T Elec. Contractors, Inc. v. Capital Lighting & Supply, Inc. (In re M & T Elec. Contractors, Inc.) (Bankr. D.D.C.) 064038
1st Cir.
§ 362(d) Relief was granted conditionally.
In re Stockwell (Bankr. D. Vt.) 064008§ 363(c)(2) Court permitted debtor to use rent as cash collateral to fund chapter 13 plan, overruling objections of mortgagee who held an assignment of rent.
Cavros v. Fleet Nat’l Bank (In re Cavros) (Bankr. D. Conn.) 064012§ 503(b)(1)(A) Chief financial officer seeking postpetition wages as an administrative expense was limited to an award on a quantum meruit basis.
In re Kaber Imaging, Inc. (Bankr. D.N.H.) 064013§ 523(a)(8) Student loan debt discharged under 'undue hardship' provision.
Anelli v. Sallie Mae Servicing Corp. (In re Anelli) (Bankr. D. Mass.) 064024
2d Cir.
§ 108(c) Claims were properly dismissed.
Asbestosis Claimants v. U.S. Lines Reorganization Trust (In re U.S. Lines, Inc.) (S.D.N.Y.) 06400418 U.S.C. § 152(1) Court of Appeals affirmed denial of two-level sentence enhancement for violation of 152(1).
United States v. Berg (2d Cir.) 064044
3d Cir.
§ 105(a) No public interest in granting stay.
Carroll v. Unicom AP Chem. Corp. (In re MGL Corp.) (Bankr. E.D. Pa.) 064002§ 362(a) Plaintiffs’ motion to remove class action proceedings against debtor and non-debtor defendants from district court’s 'civil suspense docket' denied.
In re Loewen Group, Inc. (E.D. Pa.) 064005§ 362(a)(1) Mortgage assignee’s acknowledgment and delivery of sheriff’s were 'ministerial acts' and did not violate automatic stay.
Chase Manhattan Bank v. Pulcini (In re Pulcini) (Bankr. W.D. Pa.) 064006§ 523(a)(1) Debtor failed to demonstrate honest and reasonable attempt to comply with tax law, rendering tax debt nondischargeable.
Hetzler v. United States (In re Hetzler) (Bankr. D.N.J.) 064017§ 553(a) Section 553 held inapplicable to recoupment because recoupment lacks the ingredient of mutuality.
Clemens v. West Milton State Bank (In re Clemens) (Bankr. M.D. Pa.) 064036§ 706(a) Court reviewed 'totality of the circumstances' and held that chapter 7 debtor could not, after discharge, convert case to chapter 13.
In re Pakuris (Bankr. E.D. Pa.) 064039
4th Cir.
§ 506(d) Lien could not be stripped off.
Ryan v. Homecomings Fin. Network (4th Cir.) 064015
5th Cir.
§ 1129(b)(2) Absolute priority rule did not apply preconfirmation.
Clyde Bergemann, Inc. v. Babcock & Wilcox Co. (In re Babcock & Wilcox Co.) (5th Cir.) 064042
6th Cir.
§ 106 Section 106 abrogated Tennessee Student Assistance Corporation’s sovereign immunity in student loan dischargeability proceeding.
Hood v. Tenn. Student Assistance Corp. (In re Hood) (B.A.P. 6th Cir.) 064003§ 362(a)(7) Violation of stay did not preclude right of offset.
In re Bourne (Bankr. E.D. Tenn.) 064007§ 523(a)(4) Magistrate’s finding of conversion was not entitled to preclusive effect.
Helfrich v. Thompson (In re Thompson) (B.A.P. 6th Cir.) 064022§ 523(a)(5) Assumed debts were not in nature of support.
Crawford v. Osborne (In re Osborne) (Bankr. E.D. Tenn.) 064023§ 544(a)(1) Creditor failing to establish validity of lien after inadvertently releasing deed of trust was denied relief from stay. AmSouth Bank v. Tate (In re Tate) (E.D. Tenn.) 064030
Rule 4007(c) Motion to dismiss was denied.
Erie Ins. Co. v. Romano (In re Romano) (Bankr. N.D. Ohio) 064046Rule 9019(a) Compromise was approved.
In re Victoria Alloys, Inc. (Bankr. N.D. Ohio) 064048
7th Cir.
§ 522(h) Section 522(h) did not authorize debtor to seek declaration that mortgage was invalid as a result of forgery.
Myers v. Household Fin. Corp. III (In re Myers) (Bankr. N.D. Ind.) 064016§ 551 Debtor could not exempt equity in a vehicle that was created by the trustee’s lien avoidance.
In re Witt (Bankr. W.D. Wis.) 064035
8th Cir.
§ 362(h) Creditor’s knowledge of petition prior to repossession was a genuine issue of fact that defeated summary judgment motion for violation of stay.
Johnson v. Credit Acceptance Corp. (D. Minn.) 064011§ 523(a)(8) One of the debtor’s two HEAL loan obligations and remaining (non-HEAL) student loan obligation held dischargeable. Soler v. United States ex rel. U.S. Dep’t of Health & Human Servs. (In re Soler) (Bankr. D. Minn.) 064025
9th Cir.
§ 523(a)(8) Debtors seeking to discharge student loan failed to establish undue hardship.
Naranjo v. Educ. Credit Mgmt. Corp. (In re Naranjo) (Bankr. E.D. Cal.) 064026§ 1129(b)(2) Absolute priority rule applied to individual, nonbusiness chapter 11 debtors; plan confirmation denied for failure to satisfy 'new value' exception.
In re Davis (Bankr. D. Ariz.) 064043
Collier Bankruptcy Case Summaries
DC. Cir.
'First-tier' subcontractor had right of setoff against debtor/'second-tier' subcontractor’s right to payment, but setoff right was defeated to extent of federal tax liens. Bankr. D.D.C. The chapter 11 debtor, a 'second-tier' electrical subcontractor, brought an adversary proceeding against various contractors, subcontractors and their sureties, asserting claims arising out of a construction project that involved the expansion of the main terminal at Washington-Dulles International Airport. Various parties filed motions seeking partial summary judgment and summary judgment. The bankruptcy court held, among other things, that with respect to breach of contract claims asserted by the debtor against the 'first-tier' electrical subcontractor for non-payment under a purchase order, the 'first-tier' electrical subcontractor had a right of setoff against the debtor’s right to payment under the parties’ contract, that this right of setoff was unaffected by a 'pay-when-paid' provision contained in a purchase order or by section 553(a)(2), but that the setoff right was defeated to the extent of the federal tax liens. The court found that under applicable state (Virginia) law, the first tier subcontractor had a right to set off payments against any sums owed to the debtor through restitution and subrogation to the third-tier subcontractor’s claims against the debtor (citing Collier on Bankruptcy 15th Ed. Revised).M & T Elec. Contractors, Inc. v. Capital Lighting & Supply, Inc. (In re M & T Elec. Contractors, Inc.), 2001 Bankr. LEXIS 450, – B.R. – (Bankr. D.D.C. April 9, 2001) (Teel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:553.03
1st. Cir.
Relief was granted conditionally. Bankr. D. Vt. After the secured creditor discovered that the chapter 13 debtors had a bankruptcy case pending, it moved for relief from the automatic stay nunc pro tunc. The creditor was a successor in interest to a creditor of record, and without actual knowledge of the debtors’ case, obtained a foreclosure judgment by default. The creditor of record failed to notify the bankruptcy clerk’s office of the transfer of the claim, and the debtors never notified the successor creditor of the pending bankruptcy during the foreclosure proceedings. The bankruptcy court granted the motion in part, holding that the automatic stay was lifted retroactively to the commencement of the state foreclosure proceedings conditioned upon each party providing protection of the other’s interest. The creditor was required to reinstate the six-month redemption period, and the debtors were required to make timely monthly payments during the same period.In re Stockwell, 2001 Bankr. LEXIS 508, – B.R. – (Bankr. D. Vt. May 15, 2001) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Court permitted debtor to use rent as cash collateral to fund chapter 13 plan, overruling objections of mortgagee who held an assignment of rent. Bankr. D. Conn. After filing a chapter 13 petition, the debtor filed a motion for authority to use cash collateral pursuant to section 363(c)(2). Specifically, the debtor, who owned real property, sought to apply the rents collected from the property to fund his chapter 13 plan. The creditor holding the mortgage on the property objected, arguing that under the mortgage instruments, the debtor made an absolute assignment to it of all interests in the rents and that the debtor, as of the petition date, retained no interest in the rents. The debtor argued that the rents were cash collateral in which both the debtor and the creditor held an interest and that the creditor’s interest was adequately protected by the value of the property. The bankruptcy court granted the debtor’s motion. The court held that, under state (Connecticut) law, when an assignment of rents was intended as security for a debt, the rents constituted cash collateral under section 363. The court concluded that the agreement was a mortgage of rents. Consequently, while the agreement transferred legal title to the rents to the creditor, the debtor retained the equitable title or equity of redemption, which survived until extinguished by a foreclosure action.Cavros v. Fleet Nat’l Bank (In re Cavros), 2001 Bankr. LEXIS 516, – B.R. – (Bankr. D. Conn. April 26, 2001) (Krechevsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.03[3]
Chief financial officer seeking postpetition wages as an administrative expense was limited to an award on a quantum meruit basis. Bankr. D.N.H. The debtor and its chief financial officer entered an employment agreement whereby the officer would be paid an annual salary of $150,000. Thereafter, in February 1999, the debtor filed a chapter 11 petition, and the officer continued to work for the debtor until he submitted his resignation in July 1999. The employment agreement was never assumed or otherwise approved by the bankruptcy court. The officer received approximately $29,000 in postpetition wages from the debtor, but moved seeking additional postpetition wages of approximately $23,000 as an administrative expense pursuant to section 503(b)(1)(A). The creditors’ committee objected, principally arguing that the officer failed to make a showing that the administrative expense was an actual and necessary cost of preserving the estate. The court denied the motion, holding that the wages already received by the officer were fair consideration for the actual and necessary benefits received by the debtor as a result of his employment. The court reasoned that the officer was or should have been familiar with the financial position of the debtor and elected to continue to perform services he know he might not be paid for and to work without the benefit of a contract, thereby warranting payment of wages only on a quantum meruit basis. In re Kaber Imaging, Inc., 2001 Bankr. LEXIS 514, – B.R. – (Bankr. D.N.H. April 30, 2001) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.06[1]
Student loan debt discharged under 'undue hardship' provision. Bankr. D. Mass. The chapter 7 debtor filed an adversary proceeding seeking a discharge of her student loan debt. The debtor argued that under the totality of the circumstances (i.e., a medical condition that prevented her from obtaining and maintaining employment, her lack of health insurance to meet expected medical expenses, and the fact that she was totally dependent on fixed alimony payments received from her ex-husband), repayment of her student loan debt constituted an 'undue hardship' within the meaning of section 523(a)(8). Without accepting one test for determining 'undue hardship' to the exclusion of the others, the court adopted the totality of the circumstances approach in this case and considered several factors in determining 'undue hardship,' including whether the debtor could meet necessary living expenses for herself if forced to repay the loans; whether the debtor made good faith efforts to repay the loans; whether the debtor filed for bankruptcy for the sole reason of discharging student loan debt; and whether additional facts and circumstances, such as a medical condition, employability and the like weighed in favor of a hardship discharge. The court rejected the debtor’s claim that section 523(a)(8) was inapplicable to the loans at issue, which were made under the auspices of a federally funded program, the Federal Stafford Loan Program, and then held, under the circumstances presented, that requiring the debtor to repay her student loans would impose an undue hardship upon her. The court found that the debtor’s unrebutted testimony and evidence regarding her various medical conditions (which included Chronic Fatigue Syndrome, arthritis, fibromyalgia, and depression) were sufficient to sustain her burden of proof on the dischargeability issue. Moreover, by stipulating to the various medical letters and records introduced into evidence by the debtor at trial and by failing to offer medical evidence or testimony of its own, the creditor all but conceded the point that the debtor was medically disabled from finding or obtaining employment that would enable her to repay her student loans. The court also found that the debtor made a bona fide attempt to repay the loans, and that the creditor/defendant neither produced evidence nor argued that the debtor filed her chapter 7 case in bad faith.Anelli v. Sallie Mae Servicing Corp. (In re Anelli), 2000 Bankr. LEXIS 1759, – B.R. – (Bankr. D. Mass. December 18, 2000) (Feeney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
2nd. Cir.
Claims were properly dismissed. S.D.N.Y. A group of asbestos claimants appealed an order of the bankruptcy court that expunged numerous claims of seamen exposed to asbestos on the chapter 11 debtor’s ships. Years earlier, a trust had been set up to process the asbestos claims and the injunction against litigation of the asbestos claims was lifted. Instead of filing complaints, the claimants continued to file claims. The bankruptcy court granted the trust’s motion to expunge the claims for failure to meet the deadline for filing complaints. The district court affirmed, holding that the bankruptcy court did not abuse its discretion by expunging the claims because the 30-day grace period of section 108(c)(2) could not have been expanded. The claimants also failed to establish grounds for equitable tolling of the limitations period.Asbestosis Claimants v. U.S. Lines Reorganization Trust (In re U.S. Lines, Inc.), 2001 U.S. Dist. LEXIS 6612, – B.R. – (S.D.N.Y. May 17, 2001) (Sweet, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:108.04
Court of Appeals affirmed denial of two-level sentence enhancement for violation of 152(1). 2d Cir. In 1996 the debtor corporation filed a chapter 7 petition. In 1999 the United States filed a one-count felony information in the district court, alleging that the debtor’s president knowingly and fraudulently concealed from the trustee monies taken from a bank account belonging to the debtor, in violation of section 152(1). The president entered a plea of guilty on this count. Thereafter the district court held a hearing to determine whether a two-level sentence enhancement should be imposed on the president for violation of judicial process pursuant to the United States Sentencing Guidelines. The United States argued that the president’s concealment of assets amounted to an abuse of the bankruptcy process. The president argued that he had used the monies in question to move certain of the debtor’s machinery in order to prevent its disposal by a new landlord., and that he had repaid the balance of missing funds prior to sentencing. The district court declined to impose the enhancement, principally reasoning that the president had not hidden an asset but utilized assets that did not belong to him because they were property of the estate. The United States then appealed the denial of the two-level enhancement. The Court of Appeals for the Second Circuit affirmed the sentence. The Court of Appeals analyzed the district court’s reason for denying the enhancement, namely the lack of evidence that the president had acted with aggravated criminal intent, and in doing so examined the contexts in which courts had imposed the enhancement. One of these contexts is the disobedience of a court or agency order and another is a false statement in bankruptcy court. A third context is more controversial among the circuits, as the Fifth, Seventh and Eleventh Circuits have held that a defendant’s simple concealment of assets in bankruptcy also violates a judicial order. Conversely, the First and Second Circuits have contended that by such concealment, the defendant may have failed to follow a general set of instructions in a bankruptcy rule, which does not rise to the level of violating a judicial order. The Court of Appeals also examined the recent amendment (effective November 1, 2000) to the sentencing guidelines, which requires, in part, a two-level enhancement if the offense involved (1) a misrepresentation or other fraudulent action during a bankruptcy proceeding; or (2) a violation of any order, injunction, decree or process not addressed elsewhere in the guidelines. The Court of Appeals concluded that the president’s offense fit into none of those categories in that it involved neither the hiding of assets not the making of false statements, and was not comparable to any of the crimes enumerated in the amended guidelines. Thus, the Court of Appeals affirmed the district court’s finding that there was not enough evidence of aggravated criminal intent in this case to impose the two-level enhancement for violation of the judicial process.United States v. Berg, 2001 U.S. App. LEXIS 9252, – F.3d. – (2d Cir. May 14, 2001) (Cardamone, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:7.02[1],[2]
3rd. Cir.
No public interest in granting stay. Bankr. E.D. Pa. The chapter 11 trustees of the consolidated estates filed a complaint against a corporation and its officer for turnover, conversion and fraudulent transfer of the debtors’ inventory proceeds. The defendants moved for a protective order and for stay of discovery. The defendants asserted that they were the subject of a criminal investigation and, absent the requested relief, had the unfair choice of maintaining their constitutional privilege against self-incrimination or defending the civil case. The bankruptcy court denied the defendants’ request, holding that an unlimited stay of discovery was not warranted. The defendants were not yet the subjects of a criminal prosecution. The court noted that the public interest in the expeditious administration of the cases would be impaired by obstructing the trustees’ efforts to collect, liquidate and distribute assets to creditors.Carroll v. Unicom AP Chem. Corp. (In re MGL Corp.), 2001 Bankr. LEXIS 497, – B.R. – (Bankr. E.D. Pa. May 2, 2001) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105
Plaintiffs’ motion to remove class action proceedings against debtor and non-debtor defendants from district court’s 'civil suspense docket' denied. E.D. Pa. Prepetition securities class action proceedings were filed against the debtor and a number of its individual officers and directors in federal district court. After the debtor filed its chapter 11 case, the district court placed the class actions in the 'civil suspense docket.' The class action plaintiffs then moved to remove the actions from suspense in order to permit them to proceed against only the individual defendants. The district court denied the motion and held that the plaintiffs could not do indirectly what the bankruptcy laws prohibited them from doing directly; i.e., they could not bring suit against a corporation in reorganization merely by substituting the officers and directors that they claimed were responsible for the corporation’s alleged misconduct. In deciding that the matter could not be allowed to proceed without the chapter 11 debtor, the court considered the following factors: (1) the plaintiffs’ interest in having a forum and whether or not the plaintiffs had a satisfactory alternative forum, (2) whether the defendants might wish to avoid multiple litigation or inconsistent relief or sole responsibility for liability shared with another, (3) the interest of the absent party and the extent to which the judgment might, as a practical matter, impair or impede the absent party’s ability to protect his/her interest, and (4) the interest of the courts and the public in the complete, consistent and efficient settlement of controversies. The court relied on one of its prior decisions, in which it stated that the automatic stay provisions of section 362(a) do not apply to non-bankrupt codefendants except under 'unusual circumstances.' Such circumstances would exist, the court concluded, if there was such identity between the debtor and the codefendant that the debtor was the 'real' party defendant and a judgment against the codefendant was effectively a judgment against the debtor, or if the protection of a stay was essential to the debtor’s reorganization efforts.In re Loewen Group, Inc., 2001 U.S. Dist. LEXIS 6482, – B.R. – (E.D. Pa. May 16, 2001) (O’Neill, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
Mortgage assignee’s acknowledgment and delivery of sheriff’s were 'ministerial acts' and did not violate automatic stay. Bankr. W.D. Pa. The assignee of the debtors’ residential mortgage obligation purchased the debtors’ property at a prepetition sheriff’s sale. After the commencement of the debtors’ chapter 7 case, the assignee moved for relief from the automatic stay, for cause, and sought permission to receive and record the sheriff’s deed to the property and to bring an ejectment action against debtors in state court. The bankruptcy court held that the assignee was entitled to relief from stay to perfect its legal title to the property and to initiate ejectment proceedings against debtors in state court. The court found that the assignee had both the equitable interest and legal title to the property; thus, the property was not included in the debtors’ bankruptcy estate. The court also held, among other things, that the postpetition acknowledgment and delivery of the sheriff’s deed to the assignee did not violate section 362(a)(1) because ministerial acts (even if undertaken postpetition) within the context of a judicial or other court proceeding do not violate the automatic stay. The court also stated that even if the postpetition acknowledgment and delivery of the sheriff’s deed had violated the automatic stay, this posed no obstacle to granting relief from the stay to the assignee on a nunc pro tunc basis.Chase Manhattan Bank v. Pulcini (In re Pulcini), 2001 Bankr. LEXIS 452, – B.R. – (Bankr. W.D. Pa. May 7, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3][e]
Debtor failed to demonstrate honest and reasonable attempt to comply with tax law, rendering tax debt nondischargeable. Bankr. D.N.J. After filing a chapter 7 petition in December 1999, the debtor sought to discharge the federal income taxes scheduled as due to the IRS for 1988 through 1992 and the tax year 1996. When the debtor had failed to file tax returns for the disputed years, the IRS sent written inquiries in June and July 1993. Finally, the IRS prepared substituted tax returns for the years 1988 through 1991. The debtor did not participate in this process and did not sign the returns. Subsequently, in 1997, the debtor filed 1040 forms purporting to be his delinquent tax returns. The parties’ dispute regarding dischargeability turned on whether those filings could be considered returns for the purposes of section 523(a)(1). Specifically, the parties disagreed on one factor: whether the documents represented an honest and reasonable attempt on the debtor’s part to satisfy the requirements of the tax law. The bankruptcy court held that such a dispute hinged on a good faith inquiry, and determined that the debtor failed to provide a sufficient factual basis to overcome the IRS’s prima facie case that the debtor failed to make an honest and reasonable attempt to comply with the tax law. Specifically, the court found that the only explanation offered by the debtor for his failure to file returns was that he was confused about what he must do to meet his tax obligations. The court also noted that the installment payment agreement eventually entered into by the debtor was the result not of self-assessment but of collection efforts.Hetzler v. United States (In re Hetzler), 2001 Bankr. LEXIS 485, – B.R. – (Bankr. D.N.J. March 12, 2001) (Wizmur, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07[3]
Section 553 held inapplicable to recoupment because recoupment lacks the ingredient of mutuality. Bankr. M.D. Pa. During its chapter 11 case, the debtor obtained a judgment on a complaint that alleged various lender liability issues against a bank. Prior to turning the judgment funds over to the debtor, the bank asserted that use of the funds was subject to adequate protection under section 506(a). The bank argued that its original loan to the debtor was subject to setoff with regard to the verdict entered against it by the bankruptcy court and, therefore, should be secured to that extent by virtue of section 506(a). The bankruptcy court denied the bank’s motion to the extent that it asserted a secured interest in the fund created by the bankruptcy court’s judgment. The court noted that the debtor’s lender liability claim arose from the very same lending agreements that supported the bank’s claim against the debtor, and that in any other federal forum (besides bankruptcy), the bank would have been required to plead the claim as a defense to the debtor’s lender liability suit. The court further noted that instead of attempting to link its payment of the judgment to the debtor with any claims litigation that it could have initiated, the bank relied on sections 506(a) and 553 as authority in guaranteeing that its scheduled claim against the debtor was satisfactorily secured. The court also held that section 553 does not apply to recoupment because, unlike setoff, recoupment lacks the ingredient of mutuality, and, therefore, the provisions of section 506(a) do not apply (citing Collier on Bankruptcy 15th Ed. Revised).Clemens v. West Milton State Bank (In re Clemens), 2001 Bankr. LEXIS 427, – B.R. – (Bankr. M.D. Pa. March 9, 2001) (Thomas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:553.03[3]
Court reviewed 'totality of the circumstances' and held that chapter 7 debtor could not, after discharge, convert case to chapter 13. Bankr. E.D. Pa. After the debtor received a discharge in her 'no asset' chapter 7 case, the trustee was advised of the debtor’s alleged failure to list all of her assets in her schedules and statement of financial affairs. In particular, it was alleged that the debtor failed to list her interest in a pending equitable property distribution that was being determined by a state court in connection with the debtor’s pending divorce proceeding. The chapter 7 case was reopened, and the chapter 7 trustee pursued the property distribution claim and eventually reached an agreement with the debtor’s husband. Thereafter, the debtor moved, among other things, to convert her bankruptcy case to one under chapter 13. The trustee objected. The bankruptcy court held that a review of the facts was appropriate when considering any objection to a 706(a) motion, and, based on the 'totality of the circumstances' presented, the debtor was not permitted to convert her case to one under chapter 13. The court found that in this case, the timing of the filing of the conversion motion and the debtor’s testimony indicated that the debtor was seeking to convert her case to chapter 13 to regain control of the equitable property distribution litigation. The court determined that after having accepted the benefits of her chapter 7 case, the debtor’s attempt to avoid the consequences of that filing by converting to chapter 13 demonstrated a failure to meet the good faith filing requirement.In re Pakuris, 2001 Bankr. LEXIS 491, – B.R. – (Bankr. E.D. Pa. May 11, 2001) (Carey, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:706.02
4th. Cir.
Lien could not be stripped off. 4th Cir. The chapter 7 debtors appealed the district court’s affirmance of a bankruptcy court order dismissing their complaint against a creditor. The debtors sought to use section 506(d) to strip off a junior lien on their residence in which the senior lien exceeded the fair market value of the real property. The Court of Appeals for the Fourth Circuit affirmed, holding that the chapter 7 debtors could not use section 506(d) to strip off the allowed, wholly unsecured consensual junior lien from their real property. The court rejected the debtors’ arguments that Dewsnup v. Timm, 502 U.S. 410 (1992), controlled only 'strip down' of a partially secured lien, not a 'strip off' of a wholly unsecured lien.Ryan v. Homecomings Fin. Network, 2001 U.S. App. LEXIS 11378, – F.3d – (4th Cir. June 1, 2001) (Thornburg, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.06
5th. Cir.
Absolute priority rule did not apply preconfirmation. 5th Cir. The unsecured creditor of one of the chapter 11 debtors appealed the district court’s affirmance of the bankruptcy court’s order authorizing a postpetition financing agreement between the related debtors and the secured creditor. The agreement provided that any funds borrowed under the line of credit would give rise to a claim against the assets of all debtors, which claim would be accorded super-priority administrative expense status against all unsecured creditors of each debtor. The creditor argued that the financing order was invalid because it violated the absolute priority rule in section 1129(b)(2)(B). The Court of Appeals for the Fifth Circuit affirmed, holding that the bankruptcy court did not err in failing to apply the absolute priority rule. The court noted that the absolute priority rule was a confirmation standard which did not apply to the preconfirmation contested matter involving the debtors’ request to obtain senior credit.Clyde Bergemann, Inc. v. Babcock & Wilcox Co. (In re Babcock & Wilcox Co.), 2001 U.S. App. LEXIS 10528, – F.3d – (5th Cir. May 23, 2001) (Smith, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1129.05[3]
6th. Cir.
Section 106 abrogated Tennessee Student Assistance Corporation’s sovereign immunity in student loan dischargeability proceeding. B.A.P. 6th Cir. The chapter 7 debtor filed an adversary proceeding seeking a determination that her student loan debt to the Tennessee Student Assistance Corporation ('TSAC') was nondischargeable. TSAC filed a motion to dismiss, asserting that the adversary proceeding was barred by sovereign immunity. The bankruptcy court denied the motion to dismiss, and held that Bankruptcy Code section 106 properly abrogated TSAC’s sovereign immunity. TSAC appealed. The Sixth Circuit B.A.P. affirmed, and held that as a part of the plan of the Constitutional Convention, which granted Congress the authority to enact 'uniform' bankruptcy laws, the states ceded to Congress their sovereignty over bankruptcy discharge matters. The B.A.P. expressly concluded that while it was required to remain faithful to the Supreme Court’s Constitutional analysis in Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), nothing in the Court’s holding (construed by the bankruptcy court as relating narrowly to the issue of state sovereignty in the Indian commerce context) precluded its finding. The bankruptcy court also concluded that its decision was not inconsistent with subsequent Supreme Court cases in which the Court applied the doctrine that Congress may not abrogate state sovereignty in circumstances involving specific Article I powers.Hood v. Tenn. Student Assistance Corp. (In re Hood), 2001 Bankr. LEXIS 504, – B.R. – (B.A.P. 6th Cir. February 7, 2001) (Rhodes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:106.02
Violation of stay did not preclude right of offset. Bankr. E.D. Tenn. In 1990 the debtor and her adult daughter secured a loan in the approximate amount of $65,000 for the purchase of a manufactured house for the daughter. The loan was guaranteed by the Department of Housing and Urban Development ('HUD'). When the debtor and her daughter defaulted, HUD repaid the loan and succeeded to the lender’s interest. Under the tax refund offset program, the IRS had intercepted tax refunds due to the debtor and applied those amounts to the indebtedness to HUD. In 2000, the debtor filed a chapter 7 petition. The debtor failed to schedule HUD as a creditor, but scheduled an expected federal tax refund, which was claimed as an exemption. Subsequently, the IRS applied the tax refund to the HUD debt. Thereafter, the debtor amended her schedules to include HUD as a creditor, and a discharge order was entered on August 4, 2000. On September 28, 2000, the IRS filed a motion for relief from the automatic stay to validate the previous offset. The debtor objected and requested that the court order the return of the tax refund. The debtor argued that the IRS had no right to setoff because it had violated the automatic stay. The bankruptcy court ackowledged the divided opinion on this issue, and finally held that the IRS’s violation of the stay did not preclude its right to a setoff. The court reasoned that the violation was inadvertent, attributable to the debtor’s failure to schedule HUD as a creditor for notice purposes, and concluded that there were no other creditors which would be prejudiced by the allowance of the setoff.In re Bourne, 2001 Bankr. LEXIS 510, – B.R. – (Bankr. E.D. Tenn. March 2, 2001) (Parsons, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[9]
Magistrate’s finding of conversion was not entitled to preclusive effect. B.A.P. 6th Cir. The creditor filed suit against the debtor in the court of Common Pleas (Ohio), and a magistrate of that court found that the creditor and debtor entered into an arrangement under which the debtor agreed to write checks for the creditor, who agreed to deposit sufficient funds into the debtor’s account to cover those checks. The debtor was leasing property from the creditor, who decided to compensate the debtor for this arrangement by reducing her monthly rent. The debtor’s credit union began placing holds on the third party checks which the creditor deposited into the account, and the creditor deposited funds to cover the checks and also delivered cashier’s checks to the debtor. The magistrate rendered a decision granting a judgment against the debtor for the amount of the deposited checks and cashier’s checks. No state trial court judge entered a judgment following the magistrate’s decision. The debtor thereafter filed a chapter 7 petition, and the creditor filed an adversary proceeding to determine the dischargeability of the debt, based on an alleged judgment debt resulting from the magistrate’s decision. The bankruptcy court held that the debt was nondischargeable pursuant to section 523(a)(4) based on the judgment, and its findings of fact stated that the creditor had obtained judgment against the debtor based on conversion, which was entitled to preclusive effect, but also stated that the magistrate had not in fact made a finding of fraud or actual malice. The court concluded that the judgment of conversion amounted to embezzlement for the purposes of section 523(a)(4). This appeal followed. The B.A.P. for the Sixth Circuit reversed and remanded, holding that the magistrate’s decision was not a final judgment entitled to preclusive effect. Specifically, the B.A.P. determined that there were no factual findings regarding what property was entrusted to and misappropriated by the debtor or the amount of the debt. The B.A.P. concluded that the essential elements for a finding of embezzlement had not been established and that the bankruptcy court’s findings of fact were insufficient to support a determination of nondischargeability.Helfrich v. Thompson (In re Thompson), 2001 Bankr. LEXIS 476, – B.R. – (B.A.P. 6th Cir. May 17, 2001) (Howard, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Creditor failing to establish validity of lien after inadvertently releasing deed of trust was denied relief from stay. E.D. Tenn. The creditor sought modification of the automatic stay to permit it to foreclose its interest in real property of the chapter 11 debtors. The creditor had inadvertently released a deed of trust it had obtained on the property prior to the petition filing. Before the filing, the creditor and debtors executed and recorded three instruments, each entitled 'Modification Agreement of Note and Deed of Trust.' The creditor argued that the modifications were recorded before the petition filing and, therefore, that its lien was restored prior to the date on which the debtors in possession obtained the status of judgment lien creditors or creditors unsatisfied after execution under section 544(a). The bankruptcy court denied the motion, and this appeal followed.The district court dismissed the appeal, holding that the bankruptcy court had properly relied on state (Tennessee) law in determining that the creditor had not carried its burden of establishing the validity of the lien upon which it based its request for relief from the stay.AmSouth Bank v. Tate (In re Tate), 2000 U.S. Dist. LEXIS 20660, – B.R. – (E.D. Tenn. December 15, 2000) (Jarvis, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Motion to dismiss was denied. Bankr. N.D. Ohio The chapter 7 debtor moved to dismiss the creditor’s complaint objecting to the dischargeability of its debt as time-barred. After the debtor received his discharge, the creditor discovered that the debtor may have been responsible for the forged signatures of the debtor’s co-obligor on an indemnity agreement. The creditor then initiated the adversary proceeding pursuant to section 523(a)(2)(A) over a year after the deadline for filing complaints. The bankruptcy court denied the debtor’s motion to dismiss, holding that the Rule 4007(c) deadline for filing complaints objecting to the dischargeability of debts in the debtor’s case was equitably tolled and the creditor’s complaint was timely filed. The court noted that the creditor did not learn of the debtor’s alleged fraud until after the deadline and nothing indicated that the creditor should have learned of the alleged fraud any earlier than it did.Erie Ins. Co. v. Romano (In re Romano), 2001 Bankr. LEXIS 546, – B.R. – (Bankr. N.D. Ohio May 23, 2001) (Shea-Stonum, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:4007.04
Compromise was approved. Bankr. N.D. Ohio The chapter 11 debtor filed a motion for approval of compromise and settlement with its secured creditors. The parties resolved an ongoing dispute with regard to the debtor’s use of cash collateral and the applicability of marshaling of assets. The creditors’ committee argued that the settlement was not in the bests interests of the creditors. The bankruptcy court granted the motion, holding that the compromise and settlement was in the best interest of the debtor’s estate. The court further found that the compromise was fair and equitable and was an appropriate exercise of the debtor’s business judgment.In re Victoria Alloys, Inc., 2001 Bankr. LEXIS 496, – B.R. – (Bankr. N.D. Ohio May 5, 2001) (Baxter, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9019.02
7th. Cir.
Section 522(h) did not authorize debtor to seek declaration that mortgage was invalid as a result of forgery. Bankr. N.D. Ind. The chapter 7 debtor and his nondebtor spouse owned real property as tenants by the entirety. The debtor filed an adversary proceeding seeking a declaration that the mortgage on the property held by the creditor was invalid, claiming that the nondebtor’s signature on the mortgage was a forgery. The debtor based his complaint on section 522(h). The creditor argued that the debtor did not fulfill the conditions of that provision because it was only the nondebtor’s signature that was alleged to be a forgery and that the transfer by the debtor was voluntary. The bankruptcy court dismissed the complaint, holding that the debtor’s complaint stated no claim under section 522(h). The court reasoned that section 522(h) only allowed a debtor to prosecute actions designed to avoid a transfer of property and did not authorize suits seeking a declaratory judgment that the mortgage was invalid as a result of forgery.Myers v. Household Fin. Corp. III (In re Myers), 2001 Bankr. LEXIS 515, – B.R. – (Bankr. N.D. Ind. March 27, 2001) (Grant, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
Debtor could not exempt equity in a vehicle that was created by the trustee’s lien avoidance. Bankr. W.D. Wis. The chapter 7 trustee prevailed in an adversary proceeding seeking to avoid a lien on the debtor’s vehicle because it had not been properly perfected. The trustee then filed a motion requesting that the debtor surrender the vehicle so that the value of the avoided lien could be realized for the benefit of the estate. The debtor objected, arguing that the trustee’s failure to timely contest the exemption she had claimed insulated the vehicle from any interest of the estate. The bankruptcy court granted the trustee’s motion, holding that section 551 did not exclude exempt property from preservation and that an avoided lien encumbering exempt property was automatically preserved for the benefit of the estate. The court reasoned that the exemption, although valid by default, attached only to the debtor’s interest in the vehicle on the petition date. The equity later created by the trustee’s lien avoidance did not exist on the effective date of the exemption, which could only be claimed by the debtor pursuant to section 522(g). The court concluded that section 522(g) was unavailable to the debtor, since that provision prohibited a debtor from exempting equity created by avoiding a voluntary lien.In re Witt, 2000 Bankr. LEXIS 1761, – B.R. – (Bankr. W.D. Wis. October 13, 2000) (Martin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:551.02
8th. Cir.
Creditor’s knowledge of petition prior to repossession was a genuine issue of fact that defeated summary judgment motion for violation of stay. D. Minn. The debtor entered a retail installment and security agreement with the creditor for the purchase of a vehicle. After becoming delinquent in payments, the debtor filed a chapter 13 petition and alleged that she informed the creditor by telephone. Thereafter, on two occasions, the creditor’s repossession agent visited the debtor, whereupon the debtor informed the agent that she had filed a petition. She also asserted that she showed him supporting documentation, but the agent claimed that he was never shown any documentary proof of the filing. On a subsequent occasion the agent repossessed the vehicle. The debtor subsequently filed motions for summary judgment in district court, arguing that the creditor violated the automatic stay and had committed wrongful repossession and conversion. The district court held that there was a genuine issue of fact as to whether the creditor was given actual notice of the debtor’s petition prior to the repossession, and that, consequently, the debtor’s motion had to be denied.Johnson v. Credit Acceptance Corp., 2001 U.S. Dist. LEXIS 6262, – B.R. – (D. Minn. March 20, 2001) (Davis, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
One of the debtor’s two HEAL loan obligations and remaining (non-HEAL) student loan obligation held dischargeable. Bankr. D. Minn. The chapter 13 debtor filed an adversary proceeding seeking a determination that her student loan debt was dischargeable under section 523(a)(8). At the time of her chapter 13 filing, the debtor, a dentist, owed over $285,000 based on student loan obligations held by three creditors. The loans held by two of the creditors were made under the federal Higher Education Assistance Loan ('HEAL') program and were guaranteed by that HEAL program. The Student Loan Marketing Association (Sallie Mae) was the original lender of the loan held by the third creditor. The parties stipulated that the dischargeability of the HEAL loan obligations was to be determined exclusively under 42 U.S.C. section 292f(g), and that the dischargeability of the remaining loan was governed by Bankruptcy Code section 523(a)(8). The bankruptcy court then held, on the evidence presented, that one of the debtor’s HEAL loan obligations and the remaining (non-HEAL) loan obligation were dischargeable. The court found that the nondischarge of one of the HEAL loans would be unconscionable under 42 U.S.C. section 292f(g), that the nondischarge of the other HEAL loan would not be unconscionable under 42 U.S.C. section 292f(g), and that excepting the remaining loan obligation from discharge would impose an undue hardship on the debtor within the meaning of Bankruptcy Code section 523(a)(8). With respect to the HEAL loans, the court opined that the 'unconscionable' standard for loan dischargeability was created by Congress to prevent borrowers who, unlike the debtor in this case, obtained medical degrees with HEAL loans and were on the threshold of prestigious, high paying medical careers from easily discharging their loans in bankruptcy. With respect to the non-HEAL loan, the court noted that the debtor was not an abusive debtor, but an honest debtor who made more than a good faith effort to minimize her expenses, maximize her income, and repay her student loan obligations.Soler v. United States ex rel. U.S. Dep’t of Health & Human Servs. (In re Soler), 2001 Bankr. LEXIS 449, 261 B.R. 444 (Bankr. D. Minn. April 26, 2001) (Kressel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
9th. Cir.
Debtors seeking to discharge student loan failed to establish undue hardship. Bankr. E.D. Cal. The chapter 7 debtors filed an adversary proceeding determine the dischargeability of one codebtor’s student loan obligation. The debtors were registered nurses, and the codebtor obligated under the to loan had sustained serious injuries to her shoulder as a result of her nursing duties and began to receive short term disability, resulting in her inability to continue working as a nurse. The debtors sought a discharge of the student loan obligation based on undue hardship pursuant to section 523(a)(8). The bankruptcy court held that the loan was nondischargeable because the debtors had failed to meet all elements supporting a finding of undue hardship. Specifically, the court found that the debtors had failed to prove that repayment would prevent them from maintaining a minimal standard of living. In its analysis, the court considered that the debtors’ living expenses revealed attributes of a relatively comfortable lifestyle, that the debtors had reaffirmed certain other debts, and concluded that the $251 per month student loan repayment would not materially diminish the debtors’ standard of living.Naranjo v. Educ. Credit Mgmt. Corp. (In re Naranjo), 2001 Bankr. LEXIS 517, 261 B.R. 248 (Bankr. E.D. Cal. April 10, 2001) (Lee, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14[2]
Absolute priority rule applied to individual, nonbusiness chapter 11 debtors; plan confirmation denied for failure to satisfy 'new value' exception. Bankr. D. Ariz. A judgment creditor who held the largest claim against the individual chapter 7 debtors’ estate objected to confirmation of the debtors’ plan and to their motion to extend the 180-day exclusivity period under section 1121(c)(3). The proposed plan provided that after all appeals were exhausted, the judgment creditor’s claim, if upheld, would share pro rata with other unsecured creditors. If the full amount of the judgment were upheld on appeal, it was undisputed that the claim would not be paid in full. The plan also provided that if the court deemed it necessary for confirmation, the debtors would make a contribution of new value from non-estate property. The plan stated that the purpose of the new value would be to ensure timely performance of obligations under the plan and to avoid adverse tax consequences which might arise from the sale or disposition of estate property. The plan did not address the source or means of funding the new value. Additionally, there was no provision in the plan permitting competing plans or providing any other mechanism for entities to compete with the new value proposed by the debtors. The bankruptcy court sustained the judgment creditor’s objection to the debtors’ plan and denied the debtors’ motion to extend the exclusivity period. The court held that that the absolute priority rule, which provides, in essence, that a junior class of creditors or interest holders may not receive or retain any property on account of their claims or interests unless the claims or interests of an objecting senior class are satisfied in full, applies to individual, nonbusiness chapter 11 debtors. The court also held that the debtors’ plan could not be confirmed because the need to satisfy the 'new value' exception was definite; the source and nature of the proposed new value had to be disclosed so that a determination could be made as to whether it was truly from a 'new source'; and the plan failed to use a 'market' or 'non-exclusive' approach to the source of new value. The court scheduled a status conference, noting that the judgment creditor should be given the opportunity to propose a competing plan and/or to object to confirmation of the debtors’ plan should the debtors choose to propose a modified plan which continued to vest in themselves the exclusive right to provide new value (citing Collier on Bankruptcy 15th Ed. Revised).In re Davis, 2001 Bankr. LEXIS 501, – B.R. – (Bankr. D. Ariz. March 14, 2001) (Case, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1129.04[4][c]