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.

March 10, 2003

CASES IN THIS ISSUE
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4th Cir.

§ 522(b)(2)(B) Joint debtors allowed homestead exemptions in property owned as tenants by entirety.
Bunker v. Peyton (In re Bunker) (4th Cir.)

Collier Bankruptcy Case Summaries

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Debtor’s bad faith and breach of contract action against insurer was non-core and withdrawal of reference to bankruptcy court was appropriate. N.D.N.Y. PROCEDURAL POSTURE: Plaintiff debtor commenced an adversary proceeding in bankruptcy court against defendant insurance company alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing arising out of an insurance policy. The insurance company moved pursuant to 28 U.S.C. § 157(d) and Fed. R. Bankr. P. 5011(a) for an order withdrawing the reference of this matter to the bankruptcy court. OVERVIEW: The insurance company insured the debtor against loss occasioned by employee dishonesty. An employee of the debtor misdirected and diverted certain funds and employee contributions and as a result the debtor failed to make certain payments. The debtor filed a claim to recover the loss, which was denied. The insurance company insisted that any recovery under the insurance policy would merely augment the general bankruptcy estate, and therefore, did not have a sufficient nexus to the administration of the bankruptcy estate to render the matter “core.” The bankruptcy court agreed. The instant matter involved ordinary state-law claims on a first-party insurance contract and did not otherwise implicate the debtor’s rights under the bankruptcy code. The only relationship this action had to the bankruptcy proceedings was that determination of the action would affect the ultimate size of the estate. Accordingly, this was a non-core matter. Taking into consideration the insurance company’s potential rights to a jury trial, judicial economy, delay, uniformity of bankruptcy administration, and the prevention of forum shopping, the reference should be withdrawn. Lawrence Group, Inc. v. Hartford Cas. Ins. Co. (In re Lawrence Group, Inc.), 2002 U.S. Dist. LEXIS 22782, 285 B.R. 784 (N.D.N.Y. November 15, 2002) (Hurd, D.J.).

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

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Matter filed ancillary to foreign proceeding was a core proceeding and not subject to mandatory withdrawal. S.D.N.Y. PROCEDURAL POSTURE: The movants, the United States, with the concurrence of the Superintendent of Banks for the State of New York, filed a motion under 28 U.S.C. § 157(d) for mandatory withdrawal of the reference of the action to the bankruptcy court. The motion was opposed by a banking rehabilitation agency on behalf of the debtors in foreign proceedings. The court granted a stay pending its decision on the merits of the United States’ motion. OVERVIEW: The claim sought to be withdrawn from the reference to the bankruptcy court was filed by a foreign representative pursuant to 11 U.S.C. § 304. Upon consideration of the United States’ motion, the court denied the motion to withdraw the reference, lifted the stay, and directed that the matter may proceed in the bankruptcy court. The court held that the case did not qualify for mandatory withdrawal under 28 U.S.C. § 157(d) because it raised no conflict between Title 11 and other federal laws. The court further held that permissive withdrawal under section 157(d) was inappropriate. The court stated that the claim brought by the foreign representative under 11 U.S.C. § 304 would appear to be a core proceeding under the bankruptcy laws. Moreover, neither judicial efficiency nor uniformity of bankruptcy administration would be materially advanced by a withdrawal of the reference in the instant case because there were no related cases pending before the court. The court stated that counsel for the banking agency made a convincing showing that forum shopping was not involved in the case. The court further stated that it found no other compelling reason to withdraw the reference. In re Agency for Deposit Ins., 2002 U.S. Dist. LEXIS 24838, — B.R. — (S.D.N.Y. December 30, 2002) (Rakoff, D.J.).

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

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Remand of claims against joint venture and partnership debtors on equitable grounds would be contrary to the interests of justice. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff creditor moved to remand to state court two of its seven causes of action — claims it asserted against the two of the four defendants which, at the time of filing of the motion, were not chapter 11 debtors: a joint venture and a partnership. OVERVIEW: The creditor argued in favor of remand that: (1) the court lacked subject matter jurisdiction under the relevant jurisdictional statute, 28 U.S.C. § 1334(b); (2) the court should abstain from hearing those claims, based on the jurisdictional statute’s permissive and mandatory abstention provisions, 28 U.S.C. §§ 1334(c)(1) and (c)(2); and (3) the court should remand on equitable grounds, under 28 U.S.C. § 1452(b). The court concluded that it had subject matter jurisdiction over the claims against the joint venture where the property sought was property of the joint venture, its claims would have had more than a “conceivable effect” on two debtors, and its claims were “related to” two chapter 11 cases. The court also found jurisdiction over the partnership where the requisite conceivable effect existed. Second, the court concluded that it should hold that mandatory abstention was inapplicable in cases where a state court action was removed to the bankruptcy court, and there was no other similar state court action currently pending. Third, reviewing “Drexel factors,” it found that remand on equitable grounds was unwarranted, and would be contrary to the interests of justice. ML Media Partners, LP v. Century/ML Cable Venture (In re Adelphia Communications Corp.), 2002 Bankr. LEXIS 1326, 285 B.R. 127 (Bankr. S.D.N.Y. November 8, 2002) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.07 [back to top]

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Where debtor’s illness impeded completion of original plan, IRS could not claim interest and penalties accumulated prior to second good faith petition. Bankr. M.D. Pa. PROCEDURAL POSTURE: Respondent United States, for the Internal Revenue Service (“IRS”) filed a proof of claim in the second chapter 13 petition filed by objectant debtor, which included interest and penalties that has accrued after the debtor stopped making payments pursuant to his first bankruptcy plan. The debtor objected to the imposition of the interest and penalties in the proof of claim. OVERVIEW: The debtor filed his first bankruptcy petition and the IRS filed a proof of claim for $17,216. Petitioner was able to make payments through the approved plan of some $7,000, but then became sick and was not able to make the plan payments. Petitioner filed a second chapter 13 petition for bankruptcy on August 3, 1999 and voluntarily dismissed the first petition on October 14, 1999. The IRS filed a proof of claim in the second petition that included the remaining balance plus interest and penalties that had accrued up to August 3, 1999. The debtor objected, contending that 11 U.S.C. § 502(b)(2) precluded the inclusion of interest and penalties that had not matured because of the stay imposed by the first bankruptcy filing. The court held that the debtor’s second petition was not made in bad faith, and the brief existence of two chapter 13 petitions for a short period of overlap did not result in an abuse of the Bankruptcy Code. The court noted that the issue of two petitions was contemplated by Fed. R. Bankr. P. 1015(a). The court held that the filing of the second petition did not have a nullifying effect on the first petition. Kepner v. United States (In re Kepner), 2002 Bankr. LEXIS 1303, — B.R. — (Bankr. M.D. Pa. October 16, 2002) (Thomas, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03[3] [back to top]

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Oversecured creditor’s claim for attorneys’ fees allowed with reduction for unnecessary litigation given low risk of loss. Bankr. W.D. Pa. PROCEDURAL POSTURE: The debtor filed a voluntary chapter 11 petition under the Bankruptcy Code. A bank filed an application for final payment of professional fees and expenses. OVERVIEW: The bank was at all times an oversecured creditor. The value of its collateral was many times the amount of its claim. The court found that there was never any question as to the validity of the bank’s secured claim. The bank had little, if any, risk of loss where the debtor operated profitably during the case. The bank’s claim was steadily reduced as the debtor made regular monthly payments. The court found that it was not reasonable for the bank to expend an amount in legal fees to oppose the distribution to the shareholder to pay income taxes incurred as a result of the debtor’s profitability. The debtor was scheduled to pay the bank in full in only a few months with regular monthly payments, which the debtor had timely paid to date. The bank’s election to spend legal fees to oppose the distribution was an unwarranted expenditure the court would not approve. In re Precision Tool & Die Mfg. Co., 2002 Bankr. LEXIS 1293, 285 B.R. 621 (Bankr. W.D. Pa. November 19, 2002) (Bentz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.01 [back to top]

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Loan servicer allowed to maintain nondischargeability claim against debtor based on alleged misrepresentations in an environmental indemnity agreement. Bankr. D.N.J. PROCEDURAL POSTURE: Plaintiff, the special servicer of a trust fund, initiated an adversary proceeding seeking a finding of nondischargeability pursuant to 11 U.S.C. § 523(a)(2)(A). Defendant debtor moved for summary judgment. OVERVIEW: The original lender made a loan to the debtor, and the debtor executed a mortgage and security agreement on real property. The loan documents included an environmental indemnity agreement (“EIA”). The loan was purchased and then sold to a trustee. The special servicer sought denial of the debtor’s discharge based on alleged misrepresentations made by the debtor in the EIA. The special servicer alleged that the debtor knew the property was environmentally contaminated and misrepresented the extent of the contamination in obtaining the loan. The court determined that the debtor was not entitled to summary judgment. The special servicer provided evidence that, if proven true, would dispute the debtor’s contention that he did not misrepresent the extent of any contamination on the property. Also, additional discovery was necessary to determine whether each successor in interest to the original lender justifiably relied on the alleged misrepresentations. Finally, the entire controversy doctrine did not collaterally estop the special servicer from bringing the action, because the special servicer’s action was under the exclusive jurisdiction of the bankruptcy court. Criimi Mae Servs. Ltd. P’ship v. Hurley (In re Hurley), 2002 Bankr. LEXIS 1309, 285 B.R. 871 (Bankr. D.N.J. November 22, 2002) (Gindin, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1] [back to top]

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Joint debtors allowed homestead exemptions in property owned as tenants by entirety. 4th Cir. PROCEDURAL POSTURE: In two separate cases, appellee debtors sought to exempt their homes, which they held as tenants by the entirety. The bankruptcy court sustained appellant bankruptcy trustee’s objections. The debtors appealed, and the District Court for the Eastern District of Virginia, at Alexandria reversed, concluding that the debtors should have been allowed to claim their homes as exempt under 11 U.S.C. § 522(b)(2)(B). The trustee appealed. OVERVIEW: The trustee could not unite the entireties interests of spouses in a joint case and dispose of the property if the spouses asserted valid claims of exemption under 11 U.S.C. § 522(b)(2)(B). In the case of the first pair of debtors, none of the unsecured creditors was a joint creditor of the husband and wife; each of those creditors was an individual creditor with a claim against either the husband or the wife. The governing exemption provision, 11 U.S.C. § 522(b)(2)(B), pointed the court to Virginia law, which shielded entireties property from the claims of the individual creditors of either spouse. Thus, those debtors could exempt their home under 11 U.S.C. § 522(b)(2)(B) to the extent of their equity. As to the other pair of debtors, their innocent practice of commingling their finances did not convert their individual creditors into joint creditors under Virginia entireties law. An individual creditor of one of those debtors could not reach their entireties property under Virginia law. The property was exempt from process under applicable nonbankruptcy law, and those debtors could also claim the entireties exemption with respect to their home to the extent of the equity. Bunker v. Peyton (In re Bunker), 2002 U.S. App. LEXIS 23908, 312 F.3d 145 (4th Cir. November 21, 2002) (Michael, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.08[4] [back to top]

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Postpetition rents and late fees due on washing machines were priority administrative expenses. Bankr. E.D. Mich. PROCEDURAL POSTURE: Debtor filed for relief under chapter 11, operated under chapter 11 for some time, and remained in the chapter 11 proceeding as a non-operating entity for approximately five months. Then debtor converted to chapter 7. The trustee did not assume or reject creditor lessor’s lease, so it was deemed rejected as a matter of law. The lessor moved for allowance and payment of administrative expense claims. OVERVIEW: Debtor had leased two washing machines from the lessor for use in its commercial laundry business. Neither the lessor nor the chapter 7 trustee made any effort to remove the washers from debtor’s former business premises after the lease was rejected. The issue before the court was whether the lessor could recover the actual postpetition rents and late fees due under the lease agreement which arose prior to its rejection. Inter alia, the court concluded that the lessor could file an administrative costs claim, since the unpaid rents and late fees were expenses entitled to administrative priority under 11 U.S.C. § 503(b)(1). When debtor entered into the lease, it acquired the right to possess and use the washers for the term of that lease notwithstanding the lessor’s ownership interest. This right became property of the estate. The “cost” of preserving this right was the continued payment of the rent which debtor had agreed to pay for the leasehold interest. The estate’s obligation to pay the rent ceased only when the lease was deemed rejected. The court refused, however, to order that the chapter 7 trustee pay the lessor’s administrative claims immediately. In re Palace Quality Servs. Indus., Inc., 2002 Bankr. LEXIS 1288, 283 B.R. 868 (Bankr. E.D. Mich. October 9, 2002) (Hughes, B.J.).

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

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Excess fees returned by petition preparer to trustee could be exempted by debtor. Bankr. N.D. Ohio PROCEDURAL POSTURE: The United States trustee filed a motion under 11 U.S.C. § 110 to fine the debtor’s bankruptcy petition preparer and for an order requiring the refund of excessive fees collected by the preparer. In his response, the preparer requested that the court enjoin the trustee from continuing to attempt to prevent debtors from using the services of a petition preparer. OVERVIEW: The debtor gave $300 to the preparer, of which $200 was a money order payable to the court clerk for the filing fee. A postpetition balance $258 was being collected by a collection agency. The practice of law, as defined by the Ohio Supreme Court under Ohio Const. art. IV, § 5, was expansive. The court did not find that the preparer’s oversight of the physical filing of the petition was a separate, sanctionable violation of 11 U.S.C. § 110(g)(1). But accepting and handling checks payable to the court clerk violated section 110(g)(1). By controlling the filing fee, even though it was not deposited in his account, he received the benefit of having a captive client without practical recourse to do anything differently. A $20 fine was assessed under 11 U.S.C. § 110(g)(2). That the preparer’s fees may have been approved by other judges was not binding. The debtor’s case was routine. A fee of $200 was the maximum value of the permitted services provided by the preparer to the debtor. Any amount collected by the preparer greater than $200, other than the filing fee, had to be paid to the trustee. The debtor could exempt that amount under 11 U.S.C. § 522(b). In re Haney, 2002 Bankr. LEXIS 1252, 284 B.R. 841 (Bankr. N.D. Ohio September 23, 2002) (Whipple, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.02 [back to top]

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Debtor’s breach of contract claim against insurer completely setoff by insurer’s claim for indemnification. Bankr. S.D. Ohio PROCEDURAL POSTURE: The debtor filed a breach of contract adversary proceeding against creditor insurer under a commercial crime policy. The insurer claimed amounts due from the debtor under bonds the insurer issued in favor of the debtor, and claimed that the debtor’s breach of contract claim was prepetition and would be completely setoff by the insurer’s prepetition indemnification claim under 11 U.S.C. § 553. The insurer filed a motion for summary judgment. OVERVIEW: It was agreed that any indemnification owed by the debtor was a prepetition claim. Under the conduct test, almost all of the conduct relating to the crime policy claim, the signing and issuance of the insurance contract, the debtor’s knowledge of the theft rings, and the debtor’s formal claim, were prepetition. Under the relationship test, the relationship between the debtor and the insurer was formed prepetition. The bonds and the insurance policy were issued prepetition. The thefts occurred prepetition. Under the foreseeability test, it was to be expected that a prepetition theft ring would lead to potential liability under insurance coverage. The debtor’s postpetition filing of a proof of loss did not change the prepetition nature of the debtor’s claim. Ohio law provided that the cause of action (the claim) accrued at the time of the loss. The time of the loss occurred prepetition. Both the bond indemnification claim and the debtor’s breach of contract claim were prepetition claims. Mutuality was not disputed and the action involved the same parties and insurance contract that existed prepetition. The bond payments were made as required by the indemnity agreements. Roberds, Inc. v. Lumbermen’s Mutual Cas. Co. (In re Roberds, Inc.), 2002 Bankr. LEXIS 1323, 285 B.R. 651 (Bankr. S.D. Ohio October 10, 2002) (Waldron, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.01 [back to top]

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Automatic stay did not extend to debtor’s joint venurer that was also debtor’s co-defendant in state lawsuit. Bankr. N.D. Ill. PROCEDURAL POSTURE: Plaintiff, a joint venturer with bankruptcy debtor, brought an adversary action pursuant to 11 U.S.C. §§ 362 and 105, seeking to stay a civil lawsuit filed in Texas against both the venturer and the debtor. OVERVIEW: The joint venturer argued that its interests were so intertwined with the debtor’s that allowing the suit against it to continue constituted a suit against the debtor, and that the court should enjoin the Texas proceeding against it because the outcome could threaten property of the estate and debtor’s successful reorganization. The court noted that the automatic stay already protected the debtor, and there was no need or justification for extending the stay to the venturer. The fact that the venturer would have to defend the suit by itself was not a factor the court would consider regarding the stay. It and the debtor did not share sufficient identity of interest to do so, and there was no indemnification agreement under the joint venture contract between them. Indemnification against debtor’s assets must be a necessary consequence, and not merely a possible claim. The Texas case plaintiff agreed to stipulate that it would not any findings derived from the Texas trial against the debtor. El Puerto de Liverpool v. Servi Mundo Llantero U.S.A., Inc. (In re Kmart Corp.), 2002 Bankr. LEXIS 1308, 285 B.R. 679 (Bankr. N.D. Ill. November 15, 2002) (Schmetterer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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Debtor could redeem foreclosed mortgage through chapter 13 plan where foreclosure sale was not completed until the day after the petition was filed. Bankr. W.D. Ark. PROCEDURAL POSTURE: A creditor, the debtor’s mortgagor, filed an objection to confirmation of the debtor’s chapter 13 plan and a motion for relief from the automatic stay on the grounds that the debtor’s home had been sold at a foreclosure sale concluded before the date the petition for bankruptcy had been filed. The creditor argued that 11 U.S.C. § 1322(c) precluded the debtor from curing the default through his plan. OVERVIEW: The debtor had filed bankruptcy on March 19. The foreclosure decree provided in part that upon the sale of the property all the right, title, claim, equity, interest, and estate of the debtor would be forever barred and foreclosed, including all legal or equitable rights of redemption. The sale was conducted on March 12. The state court appointed commissioner filed his report of sale and commissioner’s deed with the county clerk on March 20. Also on March 20 the state court issued an order of confirmation confirming the sale. The bankruptcy court noted that under Arkansas law, a judicial foreclosure sale was complete upon confirmation of the sale by the court. In the debtor’s case, which involved a judicial foreclosure, the bankruptcy petition was filed the day before the order confirming the sale was entered. Therefore, the debtor was not precluded by 11 U.S.C. § 1322(c)(1) from curing the default since the judicial foreclosure sale was not complete until after the petition was filed. The entry of the order confirming the sale occurred after the bankruptcy case was filed and thus resulted in a technical violation of the automatic stay. That order was thus void and of no effect. In re Brown, 2002 Bankr. LEXIS 1185, 282 B.R. 880 (Bankr. W.D. Ark. August 23, 2002) (Mixon, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.01 [back to top]

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IRS required to pay refunds directly to trustee where debtors specifically committed refunds to their respective plans. Bankr. W.D. Wash. PROCEDURAL POSTURE: In separate cases, a debtor filed a chapter 7 petition which was later converted to chapter 13, and a second debtor filed a chapter 13 petition. The chapter 13 trustee filed motions for orders requiring the Internal Revenue Service (“IRS”) to send the debtors’ tax refunds to the trustee and the IRS objected. Because the issues presented in the matters were similar, the court resolved both matters in a single decision. OVERVIEW: The IRS was served with a notice and motion for an order requiring the IRS to send the debtors’ tax refunds to the chapter 13 trustee. The bankruptcy court found that the debtors in both cases voluntarily agreed to commit all or a portion of their tax refunds to their respective chapter 13 plans. In its objection, the IRS claimed that: (1) the trustee failed to show that tax refunds were projected disposable net income; (2) the Assignment of Claims Act, 31 U.S.C. § 3727, prohibited the IRS from remitting the refunds to the trustee; and (3) a requirement that the IRS was to remit the refunds to the trustee imposed an unfair administrative burden on the IRS. The court identified the controlling case where a party objects to plan confirmation on the basis that the debtor refused to commit actual, as opposed to projected, future income to the plan, which the IRS asserted. However, in these matters the debtors had already volunteered their refunds. The court noted that the principals its decision only applied to chapter 13 cases where a debtor’s plan specifically committed tax refunds to the plan. In re McMillan, 2002 Bankr. LEXIS 1290, 285 B.R. 480 (Bankr. W.D. Wash. October 22, 2002) (Snyder, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.09 [back to top]

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