Collier Bankruptcy Case Update March-18-02
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
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.
March 18, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 523(a)(8) Debtor's student loans were nondischargeable
because he failed to establish undue hardship.
McClain v. American Student Assistance (In re McClain) (Bankr. D.N.H.)
§ 547(b) Chapter 13 debtor could avoid order of attachment
against real property that arose from criminal restitution
Bova v. St. Vincent DePaul Corp. (In re Bova) (Bankr. D.N.H.)
§ 502(a) Lease's liquidated damages provision was not
In re Montgomery Ward Holding Corp. (D. Del.)
§ 523(a)(15) Debt arising from mortgage arrears payment made
by the debtor's former spouse was dischargeable.
Williams v. Williams (In re Williams) (Bankr. N.D.N.Y.)
28 U.S.C. § 158(d) Court of Appeals lacked appellate
jurisdiction over appeal from order that reversed bankruptcy court
decision to expunge creditor's claims against real property.
Fischer v. Crown Heights Jewish Community Council (In re Fischer) (2d Cir.)
Rule 9011 Reversal of sanctions award was affirmed on appeal
because sanctions were not warranted.
Klein v. Wilson, Elser, Moskowitz, Edelman & Dicker (In re Highgate Equities, Ltd.) (2d Cir.)
§ 1113 Pilots' postconfirmation rights under collective
bargaining agreement determined by confirmation order.
E. Pilots Merger Cmte. v. Cont'l Airlines, Inc. (In re Cont'l Airlines, Inc.) (3d Cir.)
§ 523(a)(6) Debt that arose from state court's apparent
sanctions award was not excepted from discharge.
Vehicle Removal Corp. v. Lopez (In re Lopez) (Bankr. N.D. Tex.)
§ 523(a)(8) Student loan held nondischargeable despite
debtor's 'undue hardship' claim.
Farrish v. United States Dep't of Educ. (In re Farrish) (Bankr. S.D. Miss.)
§ 523(a)(8) Debtor was granted a discharge of his student
Speer v. Educ. Credit Mgmt. Corp. (In re Speer) (Bankr. W.D. Tex.)
§ 502(b)(9) Trustee's objection to IRS's late-filed claim in
chapter 13 case sustained.
In re Brogden (Bankr. M.D. Tenn.)
§ 1122(a) Debtor's plan of reorganization did not treat
claims in the same class unequally.
Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.) (6th Cir.)
§ 727(a)(3) Debtors denied chapter 7 discharge for failing to
keep adequate books and records.
Union Planters Bank, N.A. v. Connors (In re Connors) (S.D. Ill.)
§ 547(c)(2) Court of Appeals affirmed decision that rejected
creditor's ordinary course of business defense.
Concast Canada, Inc. v. Laclede Steel Co. (In re Laclede Steel Co.) (B.A.P. 8th Cir.)
§ 328(a) Professional's retention that did not unambiguously
specify that it sought approval under section 328 was subject to review
under section 330.
Circle K Corp. v. Houlihan, Lokey, Howard & Zukin, Inc. (In re Circle K Corp.) (9th Cir.)
§ 365(b) Bankruptcy court's denial of relief from stay to
allow movant to continue with breach of contract action was affirmed on
Puget Sound Energy, Inc. v. Pac. Gas & Elec. Co. (In re Pac. Gas & Elec. Co.) (N.D. Cal.)
§ 523(a)(8) Debtor failed to meet burden of proving undue
hardship with respect to one student loan, but was entitled to partial
discharge of other student loan obligation.
East v. Educ. Credit Mgmt. Corp. (In re East) (Bankr. E.D. Cal.)
28 U.S.C. § 1409(d) Bankruptcy court did not err in
dismissing debtor's complaint for improper venue.
Etalco, Inc. v. AMK Indus., Inc. (In re Etalco, Inc.) (B.A.P. 9th Cir.)
§ 362(d) Bankruptcy court did not abuse its discretion in
denying motion for relief from stay.
Williams v. Aloisi (M.D. Fla.)
§ 506 Debtor could avoid security interests in vehicles where
lienholder failed to file required financing statements.
Carcorp, Inc. v. Bombardier Capital, Inc. (In re Carcorp., Inc.) (Bankr. S.D. Fla.)
§ 546(c) Georgia creditor denied administrative expense claim
after goods were sold despite reclamation demand.
In re Flooring Am., Inc. (Bankr. N.D. Ga.)
Collier Bankruptcy Case Summaries1st Cir.
Debtor's student loans were nondischargeable because he failed to establish undue hardship. Bankr. D.N.H. The chapter 7 debtor filed a complaint seeking the discharge of his student loans on the grounds of undue hardship. After the debtor received a juris doctor degree, he made numerous unsuccessful attempts to maintain a position in the legal field. He eventually obtained employment in the computer industry and received a salary sufficient to sustain a positive cash flow, after allocating for monthly 401k deductions, payments on a new car and recreational expenses. The debtor argued that because he suffered from depression, his ability to repay his student loans was impaired. The bankruptcy court entered judgment in favor of the creditors, holding that the debtor failed to meet his burden under section 523(a)(8). Compelling the debtor to pay his student loans would not cause his standard of living to fall below what was minimally necessary because the debtor had the ability to pay his loans as modified by the creditors' repayment terms. The debtor also failed to demonstrate that his depression would continue in the future to prevent him from repaying his loans because there was little evidence that his depression currently affected his ability to maintain employment. Based on the debtor's payment history, the court further concluded that he had not made a good faith effort to repay his loans. McClain v. American Student Assistance (In re McClain), 2002 Bankr. LEXIS 47, - B.R. - (Bankr. D.N.H. January 2, 2002) (Vaughn, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Chapter 13 debtor could avoid order of attachment against real property that arose from criminal restitution order. Bankr. D.N.H. The chapter 13 debtor and the trustee filed an adversary complaint to avoid a state court order of attachment obtained by a creditor against real property owned by the debtor. The complaint asserted that the attachment order, which arose out of a criminal restitution order that was reduced to judgment prepetition, was an avoidable preference under section 547. The bankruptcy court held that the attachment met all the requirements of a preference; thus, the attachment was avoided. The court rejected the creditor's claim that the date of the transfer was the date that the order of attachment was obtained, which was outside the 90-day window for preferences. Rather, the court concluded that the date of transfer was the date of service of the attachment order on the registry of deeds, which occurred within 90 days of the debtor's bankruptcy filing. The court also rejected the creditor's claim that there was a judicial exception to the use of section 547 avoiding powers for payments of criminal restitution. The court noted that it had already determined that the underlying debt was excepted from the debtor's discharge, and that the debtor had appealed that decision, and concluded that under the circumstances, there was no intrusion by the court on the state's right to enforce its criminal statutes. The court explained that the most important purpose of the preference section is to facilitate equality among creditors; thus, most of the defenses to a preference action are not based upon wrongdoing by the debtor, but instead reflect the commercial realities of the transaction. In this case, if the attachment were not avoided, the result would be a diminished return to unsecured creditors. Bova v. St. Vincent DePaul Corp. (In re Bova), 2002 Bankr. LEXIS 48, - B.R. - (Bankr. D.N.H. January 7, 2002) (Vaughn, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:547.03
Lease's liquidated damages provision was not reasonable. D. Del. When the chapter 11 debtor's subsidiary rejected a leveraged equipment lease, the lessor filed a proof of claim for damages. The lessor claimed damages under the contract of the unpaid rent, plus the value of the equipment subject to the lease. The debtor objected to the proof of claim, asserting that the lessor was entitled only to the unpaid rent because allowing liquidated damages would place the lessor in a better position than it would had the leases been fully performed and the equipment returned. The lessor asserted that the since it was the usual practice of lessees to renew the lease or purchase the equipment, the liquidated damages were reasonable. The bankruptcy court overruled the objection to the proof of claim, concluding that the debtor lessee would not terminate the lease at the end of the term, but would continue with the lease or purchase the equipment instead. Upon the debtor's appeal, the district court held that the bankruptcy court erred in assuming that the debtor lessee would renew its lease, so the liquidated damages clause was unreasonable. Since the lessee was not obligated to continue with the lease or purchase the equipment at the end of the lease term, allowance of liquidated damages, i.e., the value of the equipment, placed the lessor in a better position that it would have been had the leases been fully performed. Accordingly, the liquidated damages clause was, in effect, a penalty, unenforceable under state (Illinois) law, and the lessor was entitled only to damages in the amount of the unpaid rent. In re Montgomery Ward Holding Corp., 2001 U.S. Dist. LEXIS 22313, 269 B.R. 1 (D. Del. October 22, 2001) (Farnan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03, 
Debt arising from mortgage arrears payment made by the debtor's former spouse was dischargeable. Bankr. N.D.N.Y. The chapter 7 debtor's former husband filed an adversary proceeding seeking a determination that a debt owed to him was nondischargeable pursuant to section 523(a)(15). According to the terms of the parties' divorce decree, the debtor was required to pay the mortgage on the marital residence while she occupied it. She failed to do so and her former spouse was compelled to obtain a loan to pay the arrears. Although the debtor was employed, her reasonable and necessary expenses exceeded her income by $45 per month. The bankruptcy court dismissed the complaint, holding that the debt was dischargeable pursuant to section 523(a)(15)(A). The debtor met her burden of establishing that she had no ability to pay the debt in the reasonable future given her current circumstances and based on her current income and expenses. Williams v. Williams (In re Williams), 2001 Bankr. LEXIS 1699, 271 B.R. 449 (Bankr. N.D.N.Y. December 28, 2001) (Gerling, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.21
Court of Appeals lacked appellate jurisdiction over appeal from order that reversed bankruptcy court decision to expunge creditor's claims against real property. 2d Cir. Shortly after the debtor's chapter 7 case was commenced, the debtor and the trustee entered into a settlement agreement that provided for the transfer of certain real property to the bankruptcy estate. The sale was not to be effective until three days after the bankruptcy court issued an order expunging particular claims brought against the bankruptcy estate by a claimant who asserted an interest in the real property. The bankruptcy court entered summary judgment against the claimant and issued the expungement order. The court approved the debtor-trustee settlement agreement, and the real property was transferred to the trustee. Thereafter, the bankruptcy court issued a conditional order approving the sale of the property to a third party. The sale order provided that it was not to be entered until the earlier of the district court's denial of the claimant's request for a stay of the sale pending appeal or a date certain. The clerk of the bankruptcy court entered the sale order before either of the stated conditions occurred. The first condition never occurred, in fact, because the district court granted the claimant's motion for a stay of the sale. The district court then reversed the bankruptcy court's grant of summary judgment against the claimant and ordered reinstatement of the claimant's claims against the real property. The debtor and trustee appealed. The Court of Appeals dismissed the appeal for lack of appellate jurisdiction. The court also dismissed as moot the debtor and trustee's appeals from related orders. The court explained that since the effect of the district court's order reversing the bankruptcy court's grant of summary judgment to the trustee was to remand the matter for trial, the district court's order was not a final appealable order. The court rejected the debtor and trustee's claim that it had pendent jurisdiction over the expungement order based on an appeal in an allegedly related proceeding that was pending. The court also rejected the debtor and trustee's claim that its exercise of appellate jurisdiction was proper because the central issue was legal and resolution of the central issue would dispose of the case or materially aid the bankruptcy court on remand. The court found that a saving of judicial resources was less than likely to result if it exercised appellate jurisdiction. Fischer v. Crown Heights Jewish Community Council (In re Fischer), 2002 U.S. App. LEXIS 1471, - F.3d - (2d Cir. January 25, 2002) (Sack, C.J.; Parker, C.J.; Fletcher, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02
Reversal of sanctions award was affirmed on appeal because sanctions were not warranted. 2d Cir. The chapter 11 debtor's attorney appealed from a judgment of the district court reversing an award of sanctions in his favor pursuant to Rule 9011. The attorney for a bank that was not a creditor of the debtor but a creditor of the debtor's creditor sent a letter to the bankruptcy court in which he called to the bankruptcy court's attention the fact that the debtor's attorney had been suspended from practice in the state (New York) courts. The letter also stated that various creditors of the debtor had been frustrated over the years by the debtor's repeated and abusive procedural maneuvers. The debtor's attorney moved for sanctions against the creditor's attorney, arguing that the attorney violated the reasonable requirement of Rule 9011(b) by failing to ascertain that he was permitted to practice in the district court. The debtor's attorney also alleged that the letter had been sent for the improper purposes of harassment and undue delay. The bankruptcy court imposed sanctions on the creditor's attorney because it deemed inappropriate the attorney's communications with the court by letter. The district court reversed and held that Rule 9011 did not provide a jurisdictional basis for sanctioning the creditor's attorney because he was neither a party nor an attorney in the litigation before the bankruptcy court. The Court of Appeals for the Second Circuit affirmed the district court, holding that Rule 9011 did not provide a basis for the sanctions imposed by the bankruptcy court. The court first determined that the bankruptcy court abused its discretion by imposing sanctions without giving the creditor's attorney specific notice of the standard by which the alleged wrongful conduct would be assessed. The creditor's attorney had no notice that he could have been sanctioned simply because he had chosen to communicate with the court by letter. The court further noted that the letter served legitimate purposes by calling to the court's attention potential ethical violations and by alerting the court to the fact that various creditors of the debtor had been frustrated by the debtor's repeated procedural maneuvers. Klein v. Wilson, Elser, Moskowitz, Edelman & Dicker (In re Highgate Equities, Ltd.), 2002 U.S. App. LEXIS 1433, 279 F.3d 148 (2d Cir. January 31, 2002) (Katzmann, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9011
Pilots' postconfirmation rights under collective bargaining agreement determined by confirmation order. 3d Cir. The pilots' union and Eastern Airlines ratified a collective bargaining agreement that included certain labor protective provisions that gave seniority rights in the event of a merger between Eastern Airlines and another airline. The next day, the parent corporation of Continental Airlines acquired Eastern Airlines. Subsequently, Continental Airlines filed for chapter 11 reorganization. The pilots' union then filed proofs of claim in Continental Airlines' bankruptcy, contending that its members were entitled to specific performance of seniority rights under the collective bargaining agreement, along with money damages. In the court's order confirming the debtor's reorganization plan, the bankruptcy court clarified that any valid claims based on the collective bargaining agreement would give rise to a right of financial payment that would be dischargeable in bankruptcy. The order also provided that the pilots would not have any right to injunctive, equitable or other relief. The pilots' union appealed the order but eventually settled with the airlines. However, the pilots affected by the seniority provisions of the collective bargaining agreement continued the appeal. On the initial appeal, the circuit court determined that the pilots' claims could be converted to money damages. After the debtor's plan was confirmed, the pilots affected by the seniority provisions filed a separate federal court lawsuit related to the seniority rights issue. In response, the debtor sought a determination by the bankruptcy court that the new was barred by the bankruptcy court's confirmation order. After a hearing, the bankruptcy court found that all potential relief related to the seniority rights had been previously addressed in the bankruptcy court and by the district and circuit courts during the initial appeal. The pilots then appealed this determination to the district court and the circuit court. In the second appeal proceedings, the pilots argued that they had postconfirmation rights to specifically enforce the collective bargaining agreement because the airline failed to reject the agreement in accordance with the requirements of 11 U.S.C. § 1113. If the agreement had not been properly rejected, they argued, then the seniority rights continue to be an unsatisfied obligation on the reorganized debtor. The circuit court found that the pilots' argument was flawed because the agreement, in fact, had never been rejected. Rather, the seniority rights under the agreement gave rise to a right of payment such that the remedy constitutes a 'claim' dischargeable in bankruptcy. Because the seniority provisions provided a right of payment in lieu of injunctive relief and because the original appeal determined that the bankruptcy court's confirmation order provided for complete relief for past, present and future injury, the circuit court affirmed the denial of the pilots' request for specific performance. E. Pilots Merger Cmte. v. Cont'l Airlines, Inc. (In re Cont'l Airlines, Inc.), 2002 U.S. App. LEXIS 1008, 279 F.3d 226 (3d Cir. January 25, 2002) (Aldisert, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1113.02
Debt that arose from state court's apparent sanctions award was not excepted from discharge. Bankr. N.D. Tex. Before filing his bankruptcy petition, the debtor attorney obtained a prepetition judgment, on behalf of a client, against a vehicle towing company. The towing company posted money in the court registry to satisfy that judgment. Nevertheless, the debtor filed a second lawsuit in a different court against the towing company on behalf of the same client and arising out of the same towing incident. In the second lawsuit, the court entered a monetary judgment in the towing company's favor. The monetary judgment was apparently an award of sanctions and was based on a fee affidavit submitted by the towing company's attorney and on the fact that the certain state statutes and local regulations cited by the debtor were preempted by federal law. The towing company sought a determination that the debt arising from the monetary judgment was nondischargeable in the debtor's bankruptcy case under section 523(a)(6). The bankruptcy court found that the debt arising from the state court judgment was not excepted from discharge under section 523(a)(6). The court held that even if collateral estoppel applied to the state court judgment, the findings set forth therein did not rise to the level of a section 523(a)(6) offense. The court concluded that the state court's findings of 'unsupportable legal contentions' and 'failure to exercise due diligence' did not prove that the debtor acted with an objective substantial certainty of harm or a subjective motive to cause harm under section 523(a)(6). The court also stated that willful and malicious conduct was not a prerequisite for sanctions under applicable provisions of the Texas Civil Practice and Remedies Code. Vehicle Removal Corp. v. Lopez (In re Lopez), 2001 Bankr. LEXIS 1715, 269 B.R. 607 (Bankr. N.D. Tex. August 1, 2001) (McGuire, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
Student loan held nondischargeable despite debtor's 'undue hardship' claim. Bankr. S.D. Miss. The chapter 7 debtor filed an adversary proceeding seeking to have the dischargeability of his student loan debt determined under section 523(a)(8). The debtor claimed that his student loan obligation should be discharged because repayment of his student loan debt would cause him 'undue hardship.' The bankruptcy court disagreed, and held that the debtor's student loan obligations were nondischargeable under section 523(a)(8). The court found that the debtor - who was 41 years old, single, had no dependents, was in apparent good health, and presented no evidence of any health problems that prevented him from obtaining work - failed to establish that he could not earn sufficient income to maintain a minimal standard of living for himself and repay his student loan. The court found that while the debtor minimized his living expenses by having his parents, in essence, support him, he failed to maximize his income in attempting to find work. The court also found that the debtor failed to demonstrate that his financial condition was likely to exist for a significant portion of the repayment period, or that he made a good faith effort to repay his student loans. Farrish v. United States Dep't of Educ. (In re Farrish), 2001 Bankr. LEXIS 1730, 272 B.R. 456 (Bankr. S.D. Miss. December 27, 2001) (Ellington, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Debtor was granted a discharge of his student loan obligations. Bankr. W.D. Tex. The chapter 7 debtor filed an adversary proceeding seeking to have his student loan obligations deemed dischargeable. Although the debtor used the loans to attend a trade school, he was unqualified for employment in the field upon graduation. The debtor maintained employment as an unskilled laborer, had modest expenses and depended upon his parents to subsidize a substantial amount of his expenses. Because he was unable to make monthly payments on the loans, the debtor was granted deferments and a forbearance over the course of several years. The debtor ultimately filed a petition because he was unable to meet his everyday living expenses after the lender garnished his wages. The bankruptcy court granted judgment for the debtor, holding that excepting the student loan obligations from discharge would impose an undue hardship upon the debtor. The debtor satisfied the three-prong showing established in Brunner v. New York Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987). The court concluded that the debtor could not maintain a minimal standard of living if forced to repay the loans, his state of financial affairs was likely to persist for a significant period of time, and he made a good faith effort to repay the loans. The debtor's failure to make a single voluntary payment on the loans did not preclude a finding of good faith because he never possessed the requisite resources to make such payments. Speer v. Educ. Credit Mgmt. Corp. (In re Speer), 2001 Bankr. LEXIS 1722, 272 B.R. 186 (Bankr. W.D. Tex. September 6, 2001) (Monroe, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.1
Trustee's objection to IRS's late-filed claim in chapter 13 case sustained. Bankr. M.D. Tenn. The debtor did not list the IRS in its bankruptcy statement or schedules when he filed his chapter 13 case, nor was the IRS's claim provided for by the debtor's confirmed plan. The IRS learned of the debtor's chapter 13 filing during an audit of the debtor's tax return and filed a proof of claim almost two months after the bar date for the filing of timely proofs of claims. The chapter 13 trustee objected to the IRS's claim on the ground that it was untimely under section 502(b)(9). The IRS argued that the deadline for its filing should have been equitably tolled due to the failure of notice, and that 'fundamental fairness' precluded application of section 502(b)(9). The bankruptcy court sustained the trustee's objection to the IRS's claim. The court noted that in chapter 13 cases, the Code and Rules make no exception to the 180-day timeliness deadline when faulty notice or other circumstances prevent a governmental creditor from filing a timely claim. The court concluded that the lack of such an exception in chapter 13 cases was not inadvertent, since the Code explicitly allows tardy claims in chapter 7 cases when notice fails. Based on the careful language of section 502(b)(9) and Rules 3002 and 9006, the court rejected the IRS's suggestion that the court construct an equitable exception to the 180-day timeliness requirement. In re Brogden, 2001 Bankr. LEXIS 1719, - B.R. - (Bankr. M.D. Tenn. December 19, 2001) (Lundin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03
Debtor's plan of reorganization did not treat claims in the same class unequally. 6th Cir. Certain foreign claimants who voted against the chapter 11 debtor's plan of reorganization appealed the district court's order affirming the confirmation order of the bankruptcy court. The confirmed plan classified foreign claims related to silicone-implant products liability separately from domestic claims of a similar nature. Various groups of foreign claimants contended that their claims were more valuable than claims originating from other countries in their respective classes. The foreign claimants further argued that their claims were not worth less than those of the domestic tort claimants and should not have been classified separately from domestic claims. The Court of Appeals for the Sixth Circuit affirmed, holding that the plan's separate classification of foreign claimants met the Code's requirements. The bankruptcy court had considered quantitative evidence demonstrating that the highest tort awards in various other countries were significantly lower than in the United States. Evidence pertaining to the legal, economic and cultural factors supported the bankruptcy court's conclusion that the claims within each class were 'substantially similar.' Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 2002 U.S. App. LEXIS 1204, 208 F.3d 648 (6th Cir. January 29, 2002) (Martin, Jr., C.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1122.03
Debtors denied chapter 7 discharge for failing to keep adequate books and records. S.D. Ill. During a 13-month period, the debtors, a husband and wife, borrowed nearly $30 million from the predecessor in interest to the creditor bank. The money was obtained through a line of credit secured by shares of casino stock owned by the husband. Because the line of credit was adequately secured by the casino stock, the bank did not inquire for what purpose the money was being used. After the value of the stock fell drastically, the bank sought and was granted lien rights in nearly all of the debtors' real and personal property. When the debtors' financial situation did not improve, the bank made a demand for repayment of all the debtors' outstanding loans. The debtors were unable to pay and the bank foreclosed on the debtors' residence and a tennis club they owned. The debtors then filed for chapter 7 relief, listing aggregate debts in excess of $19 million and listing the bank as a creditor in the amount of $12 million. The bank noticed the deposition of the debtors and directed them to produce all relevant documentation concerning their business transactions and financial affairs. But at deposition, the debtors appeared with virtually no records. The debtors then testified that they did not keep many financial records and that some of the records they kept had been thrown away shortly after they filed for bankruptcy relief. The bank then filed a complaint objecting to the debtors' discharge under 11 U.S.C. § 727(a)(3). The bankruptcy court found the debtors' records wholly inadequate to allow their creditors to ascertain their financial condition and to satisfactorily explain their financial transactions dating back to a reasonable period in the past. Based on this finding, the bankruptcy court denied the debtors' discharge. On appeal, the district court noted that a discharge in bankruptcy is a privilege, not a right, and that, as a precondition to discharge, a debtor must produce records that provide creditors with enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period. Because the debtors failed to produce any records that would allow the bank or other creditors the opportunity to ascertain where the loan money went, the district court affirmed the bankruptcy court's denial of the debtors' discharge. Union Planters Bank, N.A. v. Connors (In re Connors), 2001 U.S. Dist. LEXIS 22377, - B.R. - (S.D. Ill. June 28, 2001) (Reagan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.03
Court of Appeals affirmed decision that rejected creditor's ordinary course of business defense. B.A.P. 8th Cir. When the chapter 11 debtor sought to avoid the payments made to a creditor as preferences, the creditor defended on the basis that the payments were made in the ordinary course of business. At trial before the bankruptcy court, the parties disputed only whether the payments were ordinary as between the parties and whether the payments were made according to ordinary business terms. The bankruptcy court concluded that although late payments were ordinary within the context of industry standards, the payment at issue, made 177 days beyond invoicing, was not in the ordinary course of the business affairs of the debtor and the transferee. Therefore, the court rejected the creditor's ordinary course of business defense. The creditor appealed and argued that the bankruptcy court improperly focused solely upon the fact that the payment was made so long after invoicing. The B.A.P. for the Eighth Circuit affirmed. The court noted that the general standard for determining whether a transaction is within the ordinary course of business articulated by the Court of Appeals for the Eighth Circuit requires a 'peculiarly factual analysis,' the cornerstone of which is the consistency of the transaction in question as compared to other, prior transactions between the parties. The court then held that the fact that the bankruptcy court determined that the payments were later than the pattern of dealing between the parties did not constitute a rejection of the appropriate standard. Instead, the bankruptcy court had properly applied the standard set forth by the Court of Appeals for the Eighth Circuit. The court stated that the creditor's assertion that the degree of lateness was not relevant was contradicted by case authority, as well as the policies behind the preference provisions. The court concluded that the 'excruciatingly late' payment in this case was clearly inconsistent with the practice between the parties prior to the preference period. Thus, the payment was not in the ordinary course of business between the parties, even though there was no other change in the course of conduct between the parties. Concast Canada, Inc. v. Laclede Steel Co. (In re Laclede Steel Co.), 2002 Bankr. LEXIS 45, - B.R. - (B.A.P. 8th Cir. January 2, 2002) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.04
Professional's retention that did not unambiguously specify that it sought approval under section 328 was subject to review under section 330. 9th Cir. The official debentures committee in the chapter 11 debtor's case sought approval from the bankruptcy court to retain a financial advisor pursuant to a retainer agreement. The retainer agreement, which provided for a fee of $100,000 per month plus reasonable out-of-pocket expenses, acknowledged that it was subject to the court approval. The bankruptcy court authorized the retention of a financial advisor and authorized payment of $100,000 per month plus expenses. However, the retention order expressly provided that payment of the financial advisor's fees was subject to review by the court in a final fee application to be submitted by the financial advisor on notice pursuant to relevant provisions of the Code. When the financial advisor submitted its first amended fee application, the bankruptcy court assessed the reasonableness of its fees under section 330, allowed half of the total fees requested, and denied the other half. On appeal, the district court determined that the financial advisor was employed pursuant to section 328, reversed the bankruptcy court's ruling and remanded the case with instructions for the bankruptcy court to award the fees requested unless the bankruptcy court found that the terms and conditions of the fee agreement were 'improvident in light of developments not capable of being anticipated at the time of the fixing of the terms and conditions' within the meaning of section 328. The debtor filed an unsuccessful interlocutory appeal to the Court of Appeals for the Ninth Circuit, and the bankruptcy court entered an order granting the financial advisor the full amount of fees and costs requested, as well as interest and attorney's fees. The district court affirmed, and the debtor appealed. The Court of Appeals for the Ninth Circuit reversed. The court held that unless a professional's retention application unambiguously specifies that it seeks approval under section 328, it is subject to review under section 330. In this case, the Court of Appeals concluded that the bankruptcy court only conditionally approved the financial advisor's retention, that section 328 did not apply and that the bankruptcy court was originally correct to review the financial advisor's fees for reasonableness under section 330. The court noted that as a matter of good practice, the bankruptcy court's retention order should specifically confirm that retention has been approved pursuant to section 328 so as to avoid any ambiguity. However, the court also noted that the absence of a specific reference to section 328 in the bankruptcy court's order would not, in and of itself, automatically override the retention application's invocation of section 328. Circle K Corp. v. Houlihan, Lokey, Howard & Zukin, Inc. (In re Circle K Corp.), 2001 U.S. App. LEXIS 28026, 279 F.3d 669 (9th Cir. December 5, 2001) (Fisher, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:328.02
Bankruptcy court's denial of relief from stay to allow movant to continue with breach of contract action was affirmed on appeal. N.D. Cal. A utility, which was a customer of the chapter 11 debtor utility company, filed an emergency motion for expedited appeal of the bankruptcy court's denial of its motion for relief from the automatic stay. The customer and the debtor had entered into a prepetition contract, whereby each party agreed to transmit energy to the other in correlation with the respective recipient utility's peak demand season. Due to state (California) regulatory declarations of emergency, the debtor failed to send the customer the power scheduled for delivery on numerous occasions. The customer's lawsuit against the debtor, seeking termination of the agreement and damages for breach of contract, was stayed by the debtor's petition. The customer contended that the bankruptcy court erred in refusing to lift the stay of the proceedings because the debtor committed incurable historical defaults. The district court affirmed, holding that because the debtor did not default under the parties' agreement and retained the right to assume the agreement, the bankruptcy court properly refused to lift the stay. The debtor acted within the agreement's provisions, which excused failure to deliver power due to emergencies. Under the contract, the purported defaults were curable by later delivery of curtailed power shipments. Puget Sound Energy, Inc. v. Pac. Gas & Elec. Co. (In re Pac. Gas & Elec. Co.), 2002 U.S. Dist. LEXIS 1350, 271 B.R. 626 (N.D. Cal. January 4, 2002) (Patel, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.05
Debtor failed to meet burden of proving undue hardship with respect to one student loan, but was entitled to partial discharge of other student loan obligation. Bankr. E.D. Cal. The chapter 7 debtor filed adversary proceedings to determine the dischargeability of student loan obligations owed to different creditors. The court held that the debtor failed to meet his burden of proving that it would be an undue hardship to repay the first obligation, but was entitled to a partial discharge of the second obligation. The court found that although that debtor's current income was insufficient for him to make significant inroads on the first obligation, he had not shown that additional circumstances existed that indicated that this state of affairs was likely to persist for a significant part of the repayment portion. However, with respect to the second obligation, which was far greater in amount, the court concluded that given the debtor's expected income and the expense of raising three sons on his own, it would be an undue hardship for him to repay the obligation in full. The court concluded that the debtor met his burden of proof on the 'additional circumstances' issue as to some, but not all, of the second obligation. The court noted that over the years, the debtor's income from teaching would increase and that as his children got older, he would be able to engage in two other occupations (as a lawyer or an engineer) if he chose to do so. East v. Educ. Credit Mgmt. Corp. (In re East), 2001 Bankr. LEXIS 1713, 270 B.R. 485 (Bankr. E.D. Cal. October 10, 2001) (Rimel, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Bankruptcy court did not err in dismissing debtor's complaint for improper venue. B.A.P. 9th Cir. The chapter 11 debtor appealed the bankruptcy court's dismissal of its complaint against the defendant for improper venue. The debtor, a Washington-based transport and lifting company, entered into a postpetition contract with the defendant, a Nevada- based company with its principal place of business in California, to deliver a shiploader to a buyer in Texas. The contract was executed in California and the debtor transported the defendant's shiploader from California to Texas. After the parties failed to reach an agreement as to additional transport charges, the debtor filed a complaint for breach of contract in the bankruptcy court in Washington. The bankruptcy court dismissed the debtor's complaint due to improper venue. The B.A.P. affirmed, holding that the debtor's alleged breach of contract complaint was not properly before the bankruptcy court in Washington under 28 U.S.C. §§ 1409(d) and 1391. The B.A.P. considered whether the debtor could have commenced the suit in the judicial district in the absence of its bankruptcy filing. Because the defendant did not purposefully avail itself of the privilege of conducting activities in Washington, it lacked the 'minimum contacts' with Washington necessary to satisfy the Due Process Clause of the Fourteenth Amendment (citing Collier on Bankruptcy, 15th Ed. Revised). Etalco, Inc. v. AMK Indus., Inc. (In re Etalco, Inc.), 2001 Bankr. LEXIS 1726, - B.R. - (B.A.P. 9th Cir. December 20, 2001) (Russell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:4.02
Bankruptcy court did not abuse its discretion in denying motion for relief from stay. M.D. Fla. The commissioner of insurance appealed the bankruptcy court's order denying its motion for partial relief from the automatic stay. As an officer of an insurance company, the chapter 7 debtor's former husband had stolen millions of dollars from the company. The debtor had also been awarded a condominium as part of the parties' dissolution of marriage, which she later sold to a third party. The debtor used the proceeds from the condominium sale to purchase a home. Due to the theft committed by the debtor's former husband, the commissioner filed suit against a number of individuals who allegedly received some of the stolen funds, including the debtor. The commissioner claimed that it was entitled to an equitable lien against the debtor's home in the amount of the proceeds from the sale of the condominium that the debtor received, since those funds were among the allegedly stolen monies and could be traced to the purchase of the debtor's home. After the debtor filed her petition, the bankruptcy court denied the commissioner's motion for relief from the automatic stay to continue its action against the debtor. The district court affirmed, holding that since the bankruptcy court could make a determination on the merits of the commissioner's claim for equitable relief against the debtor's home, there was no reason to lift the automatic stay. The only asset in which the commissioner sought to attach an equitable lien was the debtor's home, which had been claimed exempt under state (Florida) law. The district court remanded for further findings the bankruptcy court's determination that the commissioner was not entitled to an equitable lien on the home. Williams v. Aloisi, 2002 U.S. Dist. LEXIS 410, 271 B.R. 676 (M.D. Fla. January 15, 2002) (Presnell, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Debtor could avoid security interests in vehicles where lienholder failed to file required financing statements. Bankr. S.D. Fla. The chapter 11 debtor, an entity engaged in the business of selling and leasing vehicles to consumers, financed its prepetition operations primarily by selling leases to a third party. Under its agreement with the third party, once the debtor leased a vehicle from its inventory, the third party had the option of buying the lease from the debtor. If the third party exercised this option, it was to 'reimburse' the debtor for the purchase price of the vehicle and was authorized to note a lien on the vehicle at issue. In order to perfect the lien, the debtor was required to note the lien on the face of the vehicle's certificate of title. The third party did not, however, file UCC-1 financing statements with respect to its lien on any of the vehicles, and the vehicles were titled in the name of the debtor at all relevant times. After commencing its chapter 11 case, the debtor filed an adversary complaint against the third party seeking to set aside and invalidate liens asserted by the third party, to recover property, and for turnover of assets. The debtor moved for partial summary judgment seeking a determination that the third party was required to file a UCC-1 financing statement in order to properly perfect its security interest in the vehicles under state (Florida) law. The debtor claimed that the third party's failure to file the financing statements caused its asserted liens to be invalid as a matter of law. The bankruptcy court agreed with the debtor, and concluded that the applicable Florida statutes (Fla. Stats. §§ 319.27 and 679.302) required that the third party file UCC-1 financing statements in order to properly perfect its security interests in the vehicles. Since the third party failed to file the necessary financing statements, it did not have valid liens on the vehicles, and its security interest in the vehicles was voidable by the debtor. The court granted the debtor's motion for partial summary judgment and held that the third party did not have a valid security interest in the vehicles. Carcorp, Inc. v. Bombardier Capital, Inc. (In re Carcorp., Inc.), 2002 Bankr. LEXIS 52, 272 B.R. 365 (Bankr. S.D. Fla. January 22, 2002) (Hyman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01
Georgia creditor denied administrative expense claim after goods were sold despite reclamation demand. Bankr. N.D. Ga. Prior to the debtor and 22 of its affiliates filing for chapter 11 relief in Georgia, the debtor owned and operated a large floor covering network. The creditor supplied the debtor with floor covering goods. After the bankruptcy filing, the creditor delivered two written reclamation demands to debtor's counsel, demanding the return of certain goods shipped prior to and immediately after the debtor's petition date. The debtor ultimately paid for all goods shipped after the bankruptcy petitions were filed, and the creditor's claim then concerned only prepetition deliveries. As stipulated by the parties, during the prepetition period, the creditor delivered goods that became part of the debtor's inventory. The debtor purchased the goods on credit and was insolvent when the goods were delivered. Further, the creditor did not take a security interest in any of the delivered goods, and the debtor was in possession of the goods when it received the written reclamation demands. The debtor refused to return the goods because a lien creditor and a bank held first and second perfected security interests that existed prior to the delivery of the goods. The debtor then filed motions seeking court approval to sell its inventory and other assets, including the creditor's goods, but the creditor was not noticed. The court approved the sale of assets and the first priority lien creditor was paid off with proceeds from the sale. Payment was not made on the bank's claim because the trustee was challenging the claim. The creditor then filed a motion seeking to have its claim for prepetition goods treated as an administrative claim. In considering the creditor's motion, the court examined 11 U.S.C. § 546(c) in light of the statutory right to reclamation of goods found in section 2-702 of the UCC, which the state of Georgia had adopted. It found that section 546(c) was not intended to grant any additional rights to creditors and, under Georgia law, a reclaiming creditor cannot reclaim its goods if the goods are not worth more than the value of a secured claim covering the goods. The court then held that, if the bank's secured claim was undersecured and if there were no allegations of bad faith, then the creditor's reclamation claim would have no value and the creditor was not entitled to an administrative claim under section 546(c)(2)(A). In re Flooring Am., Inc., 2001 Bankr. LEXIS 1709, 271 B.R. 911 (Bankr. N.D. Ga. November 29, 2001) (Bihary, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:546.04