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 30, 2003

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

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3d Cir.

§ 544(a)(3) Postpetition assignee of properly perfected municipal liens was entitled to same rights as municipality and the liens were not avoidable.
Jackson v. Capital Asset Research Corp. (In re Jackson) (Bankr. M.D. Pa.)

§ 544(b) District court erred in denying derivative standing to creditors’ committee to pursue fraudulent transfer claim on behalf of the estate.
Official Comm. of Unsecured Creditors of Cybergenics, Corp. v. Chinery (3d Cir.)

§ 547(c)(2) Payments made by debtor to creditor according to ordinary business terms were not preferential transfers.
Fulcrum Direct, Inc. v. Associated Footware, Inc. (In re Fulcrum Direct, Inc.) (Bankr. D. Del.)

Collier Bankruptcy Case Summaries

Bankruptcy court declined to exercise discretion to stay discovery in state court action brought by third party. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In an adversary proceeding, third party accounting firm sought, by letter request, to be heard in opposition to the form of an order to be entered by the court to implement its decision on a motion for emergency relief staying discovery in a state court action. OVERVIEW: The firm opposed provisions in the proposed order that would permit documentary discovery in the state court action from the firm and other third parties. The court concluded that the firm had the requisite standing, though the firm was not a party in either action; the firm was a prospective target in the state court action and was thus in the class of persons intended to be protected by the Private Securities Litigation Reform Act (“PSLRA”). The court also concluded that it had the power to stay document discovery from the firm and other non-parties under 15 U.S.C § 78u-4(b)(3)(D) and 11 U.S.C § 105(a). However, the court found that it should not exercise that power in this case. The court’s own needs and concerns were not impacted by the envisioned document discovery. The court clarified that, although it was staying document discovery in the state case, it also was not authorizing such discovery. Adelphia Communs. Corp. v. Rigas (In re Adelphia Communs. Corp.), 2003 Bankr. LEXIS 587, — B.R. — (Bankr. S.D.N.Y. June 12, 2003) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.04 [back to top]

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Accountants’ prior representation of certain creditors required that notice be given to all creditors prior to approval of employment by trustee. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In a chapter 7 action, the trustee made application for the appointment of accountants for the estate. OVERVIEW: With the trustee’s application, one of the directors of the proposed accountants submitted an affidavit which acknowledged that the firm had previously provided services to the trustee individually, to various of the creditors in this case, and to the New York State Attorney General with respect to its investigation of debtor’s activities. However, the court concluded that no consequence attached to the accountants’ prior representation of the case trustee individually. Prior service to the Attorney General would allow for continuity of function. Without more, that relationship did not establish a necessary conflict of interest. The greater concern arose from the accountants’ representation of other creditors. It was proper to give notice to all creditors prior to approval of the trustee’s employment of the proposed accountants. In re Builders Capital and Servs., Inc., 2003 Bankr. LEXIS 313, 291 B.R. 258 (Bankr. S.D.N.Y. April 2, 2003) (Bucki, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:327.01 [back to top]

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Debtor’s attorney not entitled to receive compensation from the estate as an administrative expense absent prior consent of trustee. Bankr. W.D.N.Y. PROCEDURAL POSTURE: Chapter 7 debtor’s attorney filed an application for compensation for legal services. A compensation order was entered. The United States trustee filed an objection to the application for compensation. The chapter 7 trustee filed an objection and a motion for reconsideration. OVERVIEW: The United States trustee and the chapter 7 trustee claimed that the debtor’s attorney was not entitled to receive compensation for legal services from the debtor’s estate. 11 U.S.C § 330 permitted the court to award a professional person, such as an attorney, reasonable compensation for services rendered. However, the attorney was required to show that he was appointed under 11 U.S.C § 327; the attorney must have obtained the pre-consent of the trustee; and the pre-consent needed to be attached to the application as an exhibit. Here, the court was not prepared to find that 11 U.S.C § 330 permitted compensation for an attorney to be paid as an administrative expense from the chapter 7 debtor’s estate. In re Burch, 2003 Bankr. LEXIS 522, 292 B.R. 490 (Bankr. W.D.N.Y. April 9, 2003) (Ninfo, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.01 [back to top]

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Creditors who contracted to supply natural gas to debtor were entitled to administrative expense at contract rate as reasonable value of goods and services. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In a bankruptcy case, the debtors, a corporation and its subsidiaries, and two creditors filed motions for summary judgment with respect to contracts for the purchase and sale of natural gas used as fuel in the debtors’ steel plants. OVERVIEW: The debtors asserted that the creditors were entitled to administrative expense payments at the prevailing market rate for natural gas and not the rates set forth in the contracts. The creditors contended that the debtors waived their rights and were estopped from contesting the contract price. The court agreed with the creditors. The debtors, in support of their request for the utility order with injunctive provisions, represented that the gas deliveries under the contracts were essential to the debtors’ business operations and that any interruption in service would have substantially diminished or eliminated the debtors’ chances for a successful reorganization. The creditors reasonably relied on the utility order and representations made by the debtors that they would be adequately protected through administrative expense designation for payments on the same basis as those made prepetition (prompt and full payment of outstanding utility bills). Accordingly, the court agreed with the creditors that the debtors were estopped from arguing against the contract rate. Bethlehem Steel Corp. v. BP Energy Co. (In re Bethlehem Steel Corp.), 2003 Bankr. LEXIS 310, 291 B.R. 260 (Bankr. S.D.N.Y. March 19, 2003) (Lifland, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.04 [back to top]

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Postpetition assignee of properly perfected municipal liens was entitled to same rights as municipality and the liens were not avoidable. Bankr. M.D. Pa. PROCEDURAL POSTURE: Plaintiff bankruptcy debtors brought an adversary proceeding against defendant assignee of municipal liens authorized by the Municipal Claims and Tax Liens Act (“MCTLA”), 53 Pa. Stat. § 7101 et. seq., for the debtors’ unpaid utility charges, alleging that the liens were avoidable under 11 U.S.C. §§ 544(a)(3) and 545(2) as not perfected at the time the debtors’ bankruptcy petition was filed. OVERVIEW: The municipality recorded the liens and, after the debtors filed their bankruptcy petition, assigned the liens to the assignee. The assignee did not record lien documents, but the municipality filed a praecipe stating that the liens were assigned to the assignee. The debtors contended that the praecipe was not effective to perfect the municipal liens with regard to the assignee, and thus the liens were avoidable. The bankruptcy court held, however, that the postpetition assignment of the liens entitled the assignee to the same rights as the municipality under the MCTLA, and therefore the liens were not avoidable. Jackson v. Capital Asset Research Corp. (In re Jackson), 2003 Bankr. LEXIS 217, 290 B.R. 527 (Bankr. M.D. Pa. March 19, 2003) (France, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.08 [back to top]

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District court erred in denying derivative standing to creditors’ committee to pursue fraudulent transfer claim on behalf of the estate. 3d Cir. PROCEDURAL POSTURE: Plaintiff committee of unsecured creditors appealed an order of the District Court For the District of New Jersey, which denied the committee derivative standing, setting aside an order of the bankruptcy court authorizing the committee to sue on the bankruptcy estate’s behalf to avoid a fraudulent transfer in a chapter 11 proceeding. OVERVIEW: The question was whether the United States Supreme Court’s Hartford decision, which interpreted 11 U.S.C. § 506(c) to foreclose anyone other than a trustee from seeking to recover administrative costs on its behalf, operated to prevent the bankruptcy court from authorizing the suit. The district court’s decision of exclusivity relied on the Hartford decision, in which the Supreme Court determined that language of section 506(c), which was identical to language found in section 544(b), foreclosed the right of any non trustee to prosecute that action. The district court found that there was no principled basis under which it could apply different meanings to the words “the trustee may” in separate sections of the Bankruptcy Code. The court concluded, however, that 11 U.S.C. §§ 1109(b), 1103(c)(5), and 503(b)(3)(B) evinced Congress’s approval of derivative avoidance actions by creditors’ committees, and bankruptcy courts’ equitable powers enabled them to authorize such suits as a remedy in cases where a debtor in possession unreasonably refused to pursue an avoidance claim. Derivative standing was a valuable tool for creditors and courts alike in chapter 11 proceedings. Official Comm. of Unsecured Creditors of Cybergenics, Corp. v. Chinery, 2003 U.S. App. LEXIS 10703, 330 F.3d 548 (3d Cir. May 29, 2003) (Becker, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09 [back to top]

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Payments made by debtor to creditor according to ordinary business terms were not preferential transfers. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiff debtor filed suit, seeking to avoid certain payments to defendant creditor as preferential transfers. The creditor asserted certain affirmative defenses and filed a counterclaim, and the debtor moved for summary judgment. OVERVIEW: As to the alleged preference payments of $60,000, the transfers were not avoidable. The record established that there was no material variation in their relationship pre- and post-filing. Thus, the payments at issue were according to ordinary business terms and qualified under 11 U.S.C. § 547(c)(2) as an exception to preference payments. As to the allegedly abandoned shoes, there was insufficient evidence to establish that the goods were abandoned. Silence was insufficient to demonstrate abandonment. The creditor acknowledged that it agreed to store the goods for the debtor for a storage fee and that it agreed to try to sell the goods on behalf of the debtor. Moreover, the creditor did not file a motion seeking to have the goods abandoned as required by 11 U.S.C. § 554. As to the unpaid invoice issued by the debtor to the creditor, the defense of new value was not available and the debtor had established that it was owed $98,064.55. However, whether the creditor was entitled to offset any of that amount against its alleged damages for the debtor’s alleged breach of contract required further evidence. Therefore, entry of a judgment on that issue was deferred. Fulcrum Direct, Inc. v. Associated Footware, Inc. (In re Fulcrum Direct, Inc.), 2003 Bankr. LEXIS 318, — B.R. — (Bankr. D. Del. April 14, 2003) (Fitzgerald, C.B.J.).

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

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Bankruptcy court erred in granting undue hardship discharge of student loans despite debtor’s increased income and failure to establish good faith effort to pay. 4th Cir. PROCEDURAL POSTURE: Appellant lenders appealed an order of the United States District Court for the Southern District of West Virginia, affirming the bankruptcy court’s order discharging appellee debtor’s student loan debts pursuant to 11 U.S.C. § 523. OVERVIEW: The bankruptcy court clearly erred in finding that the debtor met his burden of establishing the Brunner factors and, therefore, erred in discharging the student loan obligations based upon the record before it. By the time of the trial, the debtor’s income was nearly double the income upon which the plan was originally based. The evidence of the debtor’s projected income and expenses was simply too speculative to substantiate the findings made by the bankruptcy court on the issue. Also, it was inappropriate for the bankruptcy court to consider a purported obligation to pay a foreign support order which was not legally enforceable and which was not being fulfilled in order to relieve the debtor of a legally enforceable obligation to pay student loan debts guaranteed by the federal government. Further, the debtor failed to prove that he had made good faith efforts to repay the loans, and the bankruptcy court clearly erred in finding otherwise. The debtor filed the adversary proceeding to discharge the student loan debt in its entirety within a mere three months of obtaining confirmation of the plan. Ekenasi v. Education Res. Inst. (In re Ekenasi), 2003 U.S. App. LEXIS 7157, 325 F.3d 541 (4th Cir. April 16, 2003) (Traxler, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Bankruptcy court refused to withdraw reference of creditor’s fraud action that had been asserted as a nondischargeability claim. W.D.N.C. PROCEDURAL POSTURE: In an adversary proceeding arising from defendant debtors’ chapter 11 bankruptcy proceeding, plaintiff creditor sued the debtors. Pursuant to 28 U.S.C § 157(d) and (e), the creditor moved to have the district court withdraw its reference of the matter to the bankruptcy court. OVERVIEW: The creditor argued that since it would not consent to a jury trial before the bankruptcy court and because the bankruptcy court was prohibited by 28 U.S.C § 157(e) from conducting a jury trial without its consent, no jury trial of the adversary proceeding could be held absent withdrawal of the reference by the district court. Thus, it contended, cause for withdrawal existed. It also argued that cause existed in that the matter was state law-dominated and not dependent on other matters being considered by the bankruptcy court in its administration of the case. The creditor’s argument had force only if it was entitled to a jury trial. In bringing the dischargeability action, the creditor did not have the right to a jury trial with respect to any common law claims on which its claim of nondischargeability was based. The court was unpersuaded by the creditor’s argument that it had brought a fraud action seeking money damages, and thus its cause of action was legal, rather than equitable, in nature. The fraud claim was asserted as a nondischargeability claim over which the bankruptcy court exercised equitable jurisdiction. MC Contractors, Inc. v. Fink (In re Fink), 2003 U.S. Dist. LEXIS 9380, — B.R. — (W.D.N.C. June 5, 2003) (Voorhees, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04 [back to to