Collier Bankruptcy Case Update June-9-03
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 9, 2003
§ 503(b)(1)(A) Claim
for payments under creditor's employment
and severance agreements with debtor was
not entitled to priority administrative
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.)
§ 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.)
§ 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.)
§ 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.)
§ 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.)
§ 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)
§ 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.)
§ 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)
§ 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.)
§ 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
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]
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]
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]
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]
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,
Collier on Bankruptcy, 15th Ed. Revised 4:523.08 [back to top]
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]
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]
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,
Collier on Bankruptcy, 15th Ed. Revised 4:523.01 [back to top]
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]
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,
Collier on Bankruptcy, 15th Ed. Revised 3:365.01 [back to top]
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
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,
Collier on Bankruptcy, 15th Ed. Re