Collier Bankruptcy Case Update June-9-03

Collier Bankruptcy Case Update June-9-03

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    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 9, 2003

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

    1st Cir.

    § 503(b)(1)(A) Claim for payments under creditor's employment and severance agreements with debtor was not entitled to priority administrative status.
    Mason v. Official Comm. of Unsecured Creditors (In re FBI Distrib. Corp.) (1st Cir.)

    § 523(a)(5) Divorce decree cash awards to debtor's former spouse based on past bonuses and stock awards were in the nature of alimony or support and nondischargeable.
    Werthen v. Werthen (In re Werthen) (1st Cir.)


    2d Cir.

    § 303 Bankruptcy court properly dismissed involuntary petition where creditor's claims were either subject to bona fide disputes or secured by liens.
    Key Mech., Inc. v. BDC 56 LLC (In re BDC 56 LLC) (2d Cir.)

    § 525(a) Eviction of debtor for prepetition rent obligation by landlord controlled by municipality was subject to stay.
    In re Marcano (Bankr. S.D.N.Y.)

    3d Cir.

    § 523(a)(2) Credit card balance transfer, encouraged by creditor bank, was dischargeable.
    Citibank, S.D. v. Rossiter (In re Rossiter) (Bankr. E.D. Pa.)

    § 1109(b) Court-appointed legal representative for asbestos claims against debtor allowed to intervene as party in interest in avoidance action against debtor's principal stockholder.
    In re G-I Holdings, Inc. (Bankr. D.N.J.)


    4th Cir.

    § 1322(b)(5) Chapter 13 plan that proposed a cure of default on debt secured by debtor's primary residence was not an impermissible modification.
    Litton v. Wachovia Bank (In re Litton) (4th Cir.)


    5th Cir.

    § 523(a) Debt relating to cotton sale transactions was dischargeable where debtor owed no fiduciary duty to creditor and reasonably believed contract had been cancelled.
    Hollingsworth & Co v. Nored (In re Nored) (Bankr. N.D. Miss.)


    6th Cir.

    § 544(a)(3) Mortgage containing incorrect deed book reference provided sufficient notice to creditors and bona fide purchasers and could not be avoided by trustee.
    Terlecky v. Beneficial Ohio, Inc. (In re Key) (Bankr. S.D. Ohio)


    7th Cir.

    § 365 Licensing agreement was an executory contract but no cause existed for shortening deadline for assumption or rejection.
    In re Kmart Corp. (Bankr. N.D. Ill.)

    § 502 Attorney barred from claiming fees after confirmation of chapter 13 plan which failed to provide for attorney's fees and expenses.
    In re Lasica (Bankr. N.D. Ill.)

    § 522(b)(2) Trustee substituted in place of debtor as payee on patent license royalties where application was active at time of filing and debtor has exceeded available exemptions.
    Keen, Inc. v. Gecker (N.D. Ill.)


    8th Cir.

    § 363(m) Creditors committee could not overturn release of company that provided financing to debtors which was integral to court ordered sale of assets.
    Official Comm. of Unsecured Creditors v. Trism, Inc. (In re Trism, Inc.) (8th Cir.)

    § 365(a) Bankruptcy court abused its discretion in refusing to alter or amend denial of lease assumption where circumstances had changed and assumption would benefit the estate.
    Crystalin, LLC v. Selma Props., Inc. (In re Crystalin, LLC) (B.A.P. 8th Cir.)

    § 547 Testimony of experts regarding calculation of delinquencies in utility payments and business terms in the utility industry would assist in analysis of preference claim.
    Shalom Hospitality, Inc. v. Alliant Energy Co. (Bankr. N.D. Iowa)


    9th Cir.

    § 106(a) Native American tribe was a domestic government as to which sovereign immunity was abrogated by the bankruptcy code and against which discharge was effective.
    Russell v. Fort McDowell Yavapai Nation (In re Russell) (Bankr. D. Ariz.)

    § 108(c) Bankruptcy court erred in holding that creditors timely renewed prepetition state court judgment where the renewal was filed prematurely.
    In re Smith (B.A.P. 9th Cir.)

    § 303(i) Involuntary debtor's spouse, as third party, could not seek post-dismissal damages against petitioning creditors.
    Miles v. Okun (In re Miles) (B.A.P. 9th Cir.)

    § 303(i)(2) Creditors did not have standing to recover damages from bad faith involuntary petitioner.
    Franklin v. Four Media Co. (In re Mike Hammer Prods., Inc.) (B.A.P. 9th Cir.)


    11th Cir.

    § 1327 Mortgage company could not collaterally attack confirmed plan that understated claim, but the balance of the claim would survive debtor's bankruptcy.
    Universal Am. Mortg. Co. v. Bateman (In re Bateman) (11th Cir.)


    Collier Bankruptcy Case Summaries

    1st Cir.

    Claim for payments under creditor’s employment and severance agreements with debtor was not entitled to priority administrative status. 1st Cir. PROCEDURAL POSTURE: Appellant creditor, a former officer of bankruptcy debtors, sought payment under her employment and severance agreements with the debtors as priority administrative claims, but appellee committee of unsecured creditors asserted that the claims were not entitled to priority. The officer appealed the order of the District Court for the District of Massachusetts which affirmed a grant of summary judgment to the committee. OVERVIEW: The officer and the debtor executed prepetition agreements providing for the officer’s salaried employment and severance compensation if the officer were terminated without cause. After the debtors’ bankruptcy petition was filed, the officer continued to provide services to the debtor in possession and was paid her normal salary until the trustee elected to reject the executory employment contract and the officer was terminated. The officer contended that her termination benefits under both agreements were entitled to first priority as administrative expenses. The appellate court held, however, that the officer had no priority administrative claim. The consideration supporting the severance benefits was the officer’s prepetition agreement to forego her previous position, and thus the benefits were not part of her compensation for services rendered. Therefore, the officer’s postpetition services were fully compensated by her salary under the employment agreement, and the severance agreement was merely a non-executory prepetition contract, the claim under which was enforceable against the estate as an unsecured claim but was not entitled to administrative priority. Mason v. Official Comm. of Unsecured Creditors (In re FBI Distrib. Corp.), 2003 U.S. App. LEXIS 10443, — F.3d — (1st Cir. May 27, 2003) (Stahl, C.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:503.06 [back to top]

    ABI Members, click here to get the full opinion.

    Divorce decree cash awards to debtor’s former spouse based on past bonuses and stock awards were in the nature of alimony or support and nondischargeable. 1st Cir. PROCEDURAL POSTURE: Appellant debtor-husband appealed the decision of the Bankruptcy Appellate Panel, which affirmed the bankruptcy court’s determination that two obligations of the husband to appellee ex-wife incurred in their state-court divorce proceeding were alimony or support rather than property division, and were nondischargeable under 11 U.S.C. § 523(a)(5). OVERVIEW: In the divorce action, the ex-wife was awarded as child support and alimony, one-third of the husband’s future bonuses and $450 a week in child support. The divorce decree also awarded to the ex-wife under the rubric of property division two cash awards based on past bonuses and stock awards, which were to be paid in yearly installments of $50,000 for 9 years, with the balance due in two separate payments in the 10th and 11th years. The husband filed for chapter 7 bankruptcy and the ex-wife claimed that the bonus and stock awards were not subject to discharge. The court of appeals found that there was no basis to disturb the conclusion of the bankruptcy court. Just how much deference was due to its assessment was debatable, but there was substantial reason to believe that the state court in some measure intended the property division to assure adequate support for the ex-wife and her children. The raw numbers, the uncertainty of future bonus payments, and the lengthy payout period all supported this conclusion. The property division label seemed most likely to have reflected no more than the mechanical fact that the payments were to come from identified existing resources. Werthen v. Werthen (In re Werthen), 2003 U.S. App. LEXIS 10444, — F.3d — (1st Cir. May 27, 2003) (Boudin, C.C.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.11 [back to top]

    ABI Members, click here to get the full opinion.


    2d Cir.

    Bankruptcy court properly dismissed involuntary petition where creditor’s claims were either subject to bona fide disputes or secured by liens. 2d Cir. PROCEDURAL POSTURE: One creditor appealed from a judgment of the District Court for the Southern District of New York that affirmed orders of the bankruptcy court dismissing an involuntary petition filed by three creditors, later joined by six additional creditors, against an alleged debtor under 11 U.S.C. § 303(b)(1), and denying a motion for reconsideration. The creditors were all subcontractors who performed work on the alleged debtor’s hotel. OVERVIEW: The requirement under section 303(b)(1) that a claim not be subject to a bona fide dispute was jurisdictional. The evidence showed a preexisting dispute as to the first creditor’s performance. While the creditor argued that after any offsets it was still owed $35,000, damages could exceed any recovery. When the alleged debtor assumed the general contractor’s contract, it succeeded to the contractor’s rights and could require the second creditor to first pursue a lien even though the alleged debtor was the property owner. Thus, the second creditor’s claim had not matured and was subject to a bona fide dispute. There was a factual dispute as to whether the third creditor’s tiling contractor was paid in full, thus, the third creditor’s claim was also subject to a bona fide dispute. The six other creditors were ineligible to join as petitioning creditors under 11 U.S.C. § 303(c) because none held unsecured claims, due to their liens under N.Y. Lien Law §§ 3 and 4, and they had not waived their liens by the time the bankruptcy court resolved the alleged debtor’s motion to dismiss. There was no abuse of discretion in denying the motion for reconsideration, as nothing new had been presented. Key Mech., Inc. v. BDC 56 LLC (In re BDC 56 LLC), 2003 U.S. App. LEXIS 10242, — F.3d — (2d Cir. May 21, 2003) (Parker, C.J.).

    Collier on Bankruptcy, 15th Ed. Revised 2:303.01 [back to top]

    ABI Members, click here to get the full opinion.

    Eviction of debtor for prepetition rent obligation by landlord controlled by municipality was subject to stay. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Creditors filed motions for relief from the automatic stay in two separate cases, which were consolidated for purposes of this decision only. Debtors objected to the motions. OVERVIEW: Creditors were landlords, each seeking to enforce an eviction of debtor that was pending on the date the relevant case was filed. Debtors argued that creditors’ attempt to evict them for nonpayment of dischargeable prepetition rent obligations were violative of 11 U.S.C. § 525(a). At issue was whether creditors were “governmental units” within the meaning of 11 U.S.C. § 525(a). The court concluded that one creditor was a governmental unit. Creditor was controlled by a city. Creditor was required to submit monthly reports, and the city could inspect the leases, records, and bills without prior notice to a lessee. Most or all of the rent arrearage that was payable under a stipulation whose breach prompted the eviction accumulated before creditor was formed; this was an arrearage owing to the city, and there was nothing in the record indicating that creditor paid the city for it. As to the other creditor, the court concluded that there were no grounds upon which to base a finding that it was a governmental unit; to the extent it had a relationship to the state, it was not an active one in which it actually was carrying out some government function. In re Marcano, 2003 Bankr. LEXIS 65, 288 B.R. 324 (Bankr. S.D.N.Y. January 31, 2003) (Gropper, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:525.02 [back to top]

    ABI Members, click here to get the full opinion.


    3d Cir

    Credit card balance transfer, encouraged by creditor bank, was dischargeable. Bankr. E.D. Pa. PROCEDURAL POSTURE: A creditor bank filed a complaint seeking a determination, under 11 U.S.C. § 523(a)(2)(A), that the debt owed to it by the debtor, representing a credit card balance transfer that paid off other debts, and one other charge, was nondischargeable. The debtor argued that she intended to repay the debt at the time it was incurred. OVERVIEW: The was no evidence that, at the time she obtained the balance transfer, the debtor knew that she would have to stop working a second job due to surgery, or that she anticipated not making any payments and, instead, filed bankruptcy. Filing bankruptcy slightly in excess of the 60th day after she met with her bankruptcy attorney was not a manipulation to avoid the presumption of 11 U.S.C. § 523(a)(2)(C), because the debtor had met with her bankruptcy attorney months before and opted not to file but to pay her debts as long as she could. At the time of the balance transfer, she had paid off the prior charges in full and had called the bank to cancel the credit card. The bank convinced her to do the balance transfer. The debtor intended to repay her debt by continuing to work two jobs, seven days a week. But, that plan was interrupted by surgery. The bank had only considered the debtor’s income in extending credit; it did not justifiably rely upon a continuing representation of the debtor’s intent to repay for purposes of 11 U.S.C. § 523(a)(2)(A). Without investigating the debtor’s credit situation, the bank urged the debtor to consolidate other debt and transfer it to the bank. Citibank, S.D. v. Rossiter (In re Rossiter), 2002 Bankr. LEXIS 1622, — B.R. — (Bankr. E.D. Pa. December 27, 2002) (Sigmund, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.08 [back to top]

    ABI Members, click here to get the full opinion.

    Court-appointed legal representative for asbestos claims against debtor allowed to intervene as party in interest in avoidance action against debtor’s principal stockholder. Bankr. D.N.J. PROCEDURAL POSTURE: A debtor and a subsidiary filed voluntary chapter 11 bankruptcy petitions and the cases were jointly administered. The court appointed a legal representative for the asbestos related claims against the debtor. The legal representative moved for authority to seek intervention as co-plaintiff in the official asbestos claimant’s committee’s suit against the debtor’s principal stockholder in district court. The debtor objected to the intervention. OVERVIEW: The court granted the debtor’s request and used its powers under 11 U.S.C. §§ 105(a), 524(g) to appoint the legal representative. The representative later sought authority to move to intervene in a derivative section 544(b) action commenced by a committee. The representative had standing as a party in interest to be heard on every matter relevant to the interests of certain demand holders in the debtor’s chapter 11 case. The debtor argued that 11 U.S.C. § 524(g) only permitted the representative’s intervention on chapter 11 plan issues only. The representative responded that he represented both past and future asbestos claim holders, and these claim holders were the largest asbestos related personal injury constituency in this case. The court recognized the financial interest of the future claim holders. Where the court already appointed the representative and empowered him as a party in interest, the application of a two-part test was not required. The representative had standing pursuant to 11 U.S.C. § 1109(b). In re G-I Holdings, Inc., 2003 Bankr. LEXIS 452, — B.R. — (Bankr. D.N.J. May 8, 2003) (Gambardella, C.B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 7:1109.02 [back to top]

    ABI Members, click here to get the full opinion.


    4th Cir.

    Chapter 13 plan that proposed a cure of default on debt secured by debtor’s primary residence was not an impermissible modification. 4th Cir. PROCEDURAL POSTURE: The District Court for the Western District of Virginia, at Abingdon dismissed a debtor’s chapter 13 bankruptcy petition. The debtor appealed the district court’s decision. OVERVIEW: The debtor maintained that the district court erred in ruling that her proposed plan was an impermissible modification of a debt that she and her husband owed to a creditor. The district court concluded that because the order contained its no-modification provision, the plan’s proposed alterations of the order were impermissible. Because the debt was secured by an interest in the debtor’s primary residence, 11 U.S.C. § 1322 would ordinarily have prohibited a modification of a bankruptcy order. However, 11 U.S.C. § 1322(b)(5) provided that the debtors were entitled to cure the default. The court held that the debtor’s did not seek modification of the order because the plan did not propose a reduction of installment of payments, an extension of the final maturity date of the debt, or propose an alteration of any other terms of the order. Rather, the court held that the plan constituted a cure in that it sought to restore the status quo ante. Litton v. Wachovia Bank (In re Litton), 2003 U.S. App. LEXIS 10488, — F.3d — (4th Cir. May 27, 2003) (King, C.J.).

    Collier on Bankruptcy, 15th Ed. Revised 8:1322.09 [back to top]

    ABI Members, click here to get the full opinion.


    5th Cir.

    Debt relating to cotton sale transactions was dischargeable where debtor owed no fiduciary duty to creditor and reasonably believed contract had been cancelled. Bankr. N.D. Miss. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition. Plaintiff creditor commenced an adversary action against the debtor and defendant trustee. The complaint sought to determine the nondischargeability of certain debt pursuant to 11 U.S.C. § 523(a)(2), (4). The debtor filed an answer. OVERVIEW: The dispute involved whether the debtor acted in a fiduciary capacity for the creditor related to certain cotton sale transactions. The court was not persuaded by the creditor’s evidence that the debtor was contractually bound to sell the creditor’s cotton at the prices set forth in the two fixation notices. The court believed that the debtor reasonably believed that the sales transactions in dispute were cancelled, which was the explanation for the failure to perform. The creditor’s claim based upon 11 U.S.C. § 523(a)(4) for breach of fiduciary duty failed. The court found that the creditor was an innocent party, but that it could have done more to protect its interests. This included verification that the anticipated cotton sales were contractually binding. The creditor failed to show that the debtor had an undisclosed intention not to purchase or sell the creditor’s cotton when the two notices that fixed the cotton prices were executed. The creditor’s claim based upon 11 U.S.C. § 523(a)(2) for fraud also failed. Hollingsworth & Co v. Nored (In re Nored), 2003 Bankr. LEXIS 465, — B.R. — (Bankr. N.D. Miss. May 8, 2003) (Houston, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.01 [back to top]

    ABI Members, click here to get the full opinion.


    6th Cir.

    Mortgage containing incorrect deed book reference provided sufficient notice to creditors and bona fide purchasers and could not be avoided by trustee. Bankr. S.D. Ohio PROCEDURAL POSTURE: On cross motions for summary judgment, the trustee sought to avoid mortgage liens on the debtor’s property under 11 U.S.C. § 544, asserting that the creditor’s mortgages were defective. The creditor argued that it was intended that the mortgages be conveyed, that a bona fide purchaser for value would have been put on notice as to the existence of the mortgages, and that the mortgages should be reformed to reflect the proper legal description. OVERVIEW: The mortgages contained an incorrect deed book reference number. The total contents of the mortgages would have put a hypothetical lien creditor or potential bona fide purchaser on constructive notice. The mortgages contained a real estate address, the parcel identification number, and the owner-mortgagor’s name. Title searches were normally conducted by cross-referencing all of the items of information. The creditor’s mortgages provided constructive notice under Ohio law upon a reasonable search of the related real estate records. Thus, trustee did not hold a defeating interest in the real property under 11 U.S.C. § 544(a)(3). The trustee and the creditor had stipulated that the debtor intended to convey mortgage interests in the real estate and that the creditor intended to take mortgage interests in the real estate. Under those undisputed facts, the creditor was entitled to reformation of the mortgages to include the correct deed book reference number. Terlecky v. Beneficial Ohio, Inc. (In re Key), 2003 Bankr. LEXIS 444, — B.R. — (Bankr. S.D. Ohio May 5, 2003) (Calhoun, B.J.).

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

    ABI Members, click here to get the full opinion.


    7th Cir.

    Licensing agreement was an executory contract but no cause existed for shortening deadline for assumption or rejection. Bankr. N.D. Ill. PROCEDURAL POSTURE: Movant, an assignee of payments and related rights under a license agreement, sought a court order compelling the debtor in possession to assume or reject a licensing agreement, and allowing an administrative claim. OVERVIEW: The debtor argued that the agreement was not an executory contract subject to assumption or rejection. Whether there was cause for relief compelling the debtor to assume or reject the agreement depended upon whether it was an executory contract. The court concluded that since substantial obligations and duties remained incumbent on both parties, it was executory for purposes of 11 U.S.C. § 365. The next issue was whether the debtor should have been compelled to assume or reject the agreement before plan confirmation. The assignee did not convince the court that cause existed to shorten the time for the debtor to determine whether the assumption or rejection of the agreement would have been beneficial to an effective reorganization. Finally, the assignee requested that the court allow an administrative claim in its favor pursuant to 11 U.S.C. § 503(b), which would have resulted in the claim being entitled to first priority distribution under 11 U.S.C. § 507. The assignee failed to meet its burden to show clear entitlement, as it did not introduce evidence which would have demonstrated any concrete, actual postpetition benefits conferred upon the estate as a whole. In re Kmart Corp., 2003 Bankr. LEXIS 68, 290 B.R. 614 (Bankr. N.D. Ill. January 23, 2003) (Sonderby, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 3:365.01 [back to top]

    ABI Members, click here to get the full opinion

    Attorney barred from claiming fees after confirmation of chapter 13 plan which failed to provide for attorney’s fees and expenses. Bankr. N.D. Ill. PROCEDURAL POSTURE: Debtor filed a chapter 13 petition and debtor’s plan was later confirmed. Debtor’s attorney filed an application for attorneys’ fees and the reimbursement of expenses, and the chapter 13 trustee objected. OVERVIEW: Debtor’s confirmed chapter 13 plan provided for payments to the trustee and the plan estimated the trustee’s fees. Debtor’s attorney used a chapter 13 model plan, but failed to provide any payments for priority claims of debtor’s attorney. The court inferred from the omission that the attorney represented debtor without charge. The court agreed with the trustee’s objection that all versions of the plan provided zero payments for debtor’s attorneys’ fees and expenses. The court found that the chapter 13 confirmation order had res judicata effect. The court held that the postconfirmation application for attorneys’ fees and expenses could not be allowed when the creditors were advised in the confirmed plan that no amount would be allocated to attorneys’ fees and expenses. The attorney and all creditors were bound by the terms of the confirmed plan. The attorney was not entitled to the requested fees and expenses. In re Lasica, 2003 Bankr. LEXIS 468, — B.R. — (Bankr. N.D. Ill. May 19, 2003) (Squires, B.J.).

    Collier on Bankruptcy, 15th Ed. Re