Collier Bankruptcy Case Update June-30-03
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 30, 2003
Debtor, unable to utilize
law degree due to corroborated
mental illness was entitled to
undue hardship discharge of student
Boots v. New Hampshire Higher Educ. Assistance Found. (In re Boots) (Bankr. D.N.H.)
§ 1307(c) Debtor’s petition dismissed with prejudice, having been filed in bad faith with sole intention of defeating claim of ex-spouse.
In re Fleury (Bankr. D. Mass.)
§ 105(a) Bankruptcy court declined to exercise discretion to stay discovery in state court action brought by third party.
Adelphia Communs. Corp. v. Rigas (In re Adelphia Communs. Corp.) (Bankr. S.D.N.Y.)
§ 327 Accountants’ prior representation of certain creditors required that notice be given to all creditors prior to approval of employment by trustee.
In re Builders Capital and Servs., Inc. (Bankr. S.D.N.Y.)
§ 330 Debtor’s attorney not entitled to receive compensation from the estate as an administrative expense absent prior consent of trustee.
In re Burch (Bankr. W.D.N.Y.)
§ 503(b) Creditors who contracted to supply natural gas to debtor were entitled to administrative expense at contract rate as reasonable value of goods and services.
Bethlehem Steel Corp. v. BP Energy Co. (In re Bethlehem Steel Corp.) (Bankr. S.D.N.Y.)
§ 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.)
Bankruptcy court erred
in granting undue hardship discharge
of student loans despite debtor’s
increased income and failure to
establish good faith effort to
Ekenasi v. Education Res. Inst. (In re Ekenasi) (4th Cir.)
28 U.S.C. § 157(d) Bankruptcy court refused to withdraw reference of creditor’s fraud action that had been asserted as a nondischargeability claim.
MC Contractors, Inc. v. Fink (In re Fink) (W.D.N.C.)
§ 362(a) Limited modification of stay granted to allow divorce court to determine debtor’s eligibility for state homestead exemption in proceeds from sale of home.
In re Forsberg (Bankr. N.D. Tex.)
§ 521(1) Former debtor’s EEOC complaint precluded due to failure to disclose the pending administrative complaint in bankruptcy.
Kamont v. West (S.D. Miss.)
28 U.S.C. § 1334 Court exercised discretionary abstention to remand state medical malpractice action related to bankruptcy of defendant practice group.
Crawford v. Paris Primary Care Group (E.D. Tex.)
§ 547 Recovery of fabricated steel from debtor’s construction site by supplier was not an avoidable preference.
Spradlin v. Jarvis (In re Tri-city Turf Club, Inc.) (6th Cir.)
§ 1303 Debtors had standing to pursue state cause of action to set aside judgment of foreclosure in bankruptcy court.
York v. Bank of Am. (In re York) (Bankr. E.D. Tenn.)
§ 365 Agreement between debtor and credit card sales processor was an executory contract, not a financial accommodation, that could be assumed without any additional assurances.
In re UAL Corp. (Bankr. N.D. Ill.)
§ 327 Bankruptcy court properly exercised discretion in approving reasonable fees for trustee’s own law firm, acting as trustee’s attorneys.
Henricksen v. Manty (In re Henricksen) (B.A.P. 8th Cir.)
§ 327 Law firm that actively represented second largest creditor disqualified from representing trustee due to actual conflict of interest.
In re Am. Energy Training, Inc. (Bankr. W.D. Mo.)
§ 503(b)(1)(A) Bankruptcy court erred in denying administrative expense where creditor’s actions clearly benefited the estate.
Agriprocessors, Inc. v. Iowa Quality Beef Supply Network, LLC (In re Tama Beef Packing, Inc.) (B.A.P. 8th Cir.)
§ 522(b) Bankruptcy court properly held that debtors did not act fraudulently in converting non-exempt property to exempt homestead.
Williams v. Bradley (In re Bradley) (B.A.P. 8th Cir.)
§ 523(a)(6) Debt to assignee of note secured by 100 head of cattle and two trailers was not excepted from discharge where unauthorized sale of collateral was willful but without malice.
Johnson v. Logue (In re Logue) (B.A.P. 8th Cir.)
§ 106(b) Bankruptcy court properly ruled that state agency had waived sovereign immunity and could not pursue collection of discharged debt.
California v. Harleston (In re Harleston) (B.A.P. 9th Cir.)
§ 523(a)(1)(C) Debtor’s tax debt excepted from discharge due to willful evasion efforts, including the creation of a three-tiered trust.
Rowen v. United States (In re Rowen) (Bankr. D. Alaska)
§ 523(a)(2)(A) Post-divorce support payments made to debtor by former spouse were recoverable and nondischargeable due to debtor’s fraudulent misrepresentation that former spouse was the father of her children.
Lang v. Lang (In re Lang) (B.A.P. 10th Cir.)
Collier Bankruptcy Case Summaries
Debtor, unable to utilize law degree due to corroborated mental illness was entitled to undue hardship discharge of student loans. Bankr. D.N.H. PROCEDURAL POSTURE: The debtor filed an adversary proceeding seeking a discharge of her student loan obligations. OVERVIEW: The debtor received her law degree later in life. She took the student loans at issue in order to obtain that degree. She passed the bar and practiced as an attorney for six years. However, her mental health did not allow her to continue practicing law. She had, instead, taken a job as a mail carrier. The court applied the Brunner test to determine whether the loans were dischargeable. The debtor’s schedules indicated that she did not have any surplus income. The debtor chose to spend more on her phone expenses rather than other types of discretionary spending, and the court did not fault with that. The debtor’s testimony indicated that she expected her health problems to continue into the future. Her testimony was collaborated by the medical reports from her mental health providers. The creditor did not provide any evidence that the debtor’s medical condition would improve in the immediate future. The parties stipulated on the record that the debtor had made a good faith effort towards repayment of the loan. The court therefore found that the three prongs of the Brunner test were met, and the loans were dischargeable under 11 U.S.C. § 523(a)(8). Boots v. New Hampshire Higher Educ. Assistance Found. (In re Boots), 2003 Bankr. LEXIS 321, — B.R. — (Bankr. D.N.H. March 26, 2003) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]
petition dismissed with prejudice,
having been filed in bad faith
with sole intention of defeating
claim of ex-spouse.
Bankr. D. Mass. PROCEDURAL
POSTURE: Debtor filed
a chapter 13 petition. The court
issued an order to show cause
why it should not dismiss the
petition for lack of good faith
in filing. That matter was before
the court. OVERVIEW:
The court concluded debtor failed
to show cause. Debtor had the
single-minded intent to avoid
payment to creditor. Debtor
had dissipated over $350,000
over the year and a half between
this and previous bankruptcy
filing. She received $244,000
from a judgment and $107,416.19
after refinancing her home between
the two petitions. She only
intended to defeat a divorce
decree. Debtor was singular
in her desire to discharge creditor’s
claim in the judgment, and the
paucity of unsecured assets
compared to debtor’s equity
underscored her intent. In the
first petition, debtor expressly
listed her interest in the judgment
as to not include creditor’s
claim, yet listed creditor’s
claim on a promissory note.
Conversely, in the second petition,
she listed creditor’s
claim in the judgment as contested
because the claim was discharged
in the first petition. However,
because creditors share of the
judgment was expressly not included
in the first petition, and was
not discharged, debtor could
not assert that the claim was
discharged in this petition.
Debtor was not making an honest
effort to repay her debts to
the best of her abilities, and
her actions appeared purposeful
and planned. In
re Fleury, 2003 Bankr.
LEXIS 586, — B.R. —
(Bankr. D. Mass. June 6, 2003)
Collier on Bankruptcy, 15th Ed. Revised 8:1307.01 [back to top]
court declined to exercise discretion
to stay discovery in state court
action brought by third party.
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.
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]
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]
attorney not entitled to receive
compensation from the estate as
an administrative expense absent
prior consent of trustee. Bankr.
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.
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]
who contracted to supply natural
gas to debtor were entitled to
administrative expense at contract
rate as reasonable value of goods
and services. Bankr.
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]
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),
LEXIS 217, 290 B.R. 527 (Bankr.
M.D. Pa. March 19, 2003) (France,
Collier on Bankruptcy, 15th Ed. Revised 5:544.08 [back to top]
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]
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
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
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 [back to top]
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)
Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]
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
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
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