Collier Bankruptcy Case Update March-24-03

Collier Bankruptcy Case Update March-24-03

 

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    Collier Bankruptcy Case Update

    The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.

    March 24, 2003

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

     

    1st Cir.

    § 522(d)(10)(E) Although debtor was entitled to an exemption for disability insurance payments, insurer was entitled to withhold payments to offset previous overpayment.
    In re Lord (Bankr. D. Mass.)


    2d Cir.

    § 105(a) Attorneys for creditors sanctioned for bad faith in seeking relief from stay to foreclose where debtor had not defaulted on the mortgages in question.
    In re Gorshtein (Bankr. S.D.N.Y.)

    § 362(a) Shareholders’ claim against company that withdrew from merger with debtor was separate and distinct from claim of debtor against company and was not subject to stay.
    In re Enron Corp. (S.D.N.Y.)

    § 523(a) Arbitration award to creditor for securities fraud by debtor was nondischargeable.
    Smith v. Gibbons (In re Gibbons) (Bankr. S.D.N.Y.)

    § 523(a)(3)(A) Judgment excepted from discharge due to debtors’ reckless failure to provide proper notice of conversion to chapter 7 or schedule postpetition unpaid debts.
    In re Nephew (Bankr. W.D.N.Y.)

    § 1109(b) Owner of bonds in debtor corporation could not intervene in appeal by unsecured creditors committee, of which it was a member, since the matter had settled.
    Official Comm. of Unsecured Creditors v. Morgan (In re Sunbeam Corp.) (S.D.N.Y.)

    28 U.S.C. § 1452(a) District court either lacked jurisdiction or exceeded jurisdiction in issuing injunction barring debtor from bringing adversary proceeding against lessor.
    Covanta Onondaga Ltd. v. Onondaga County Res. Recovery Agency (2d Cir.)


    3rd Cir.

    § 544 Fraudulent transfer claim against former officers and directors of debtor could be properly brought only by the trustee or debtor in possession.
    Official Comm. of Unsecured Creditors v. Kemeny (In re Teu Holdings, Inc.) (Bankr. D. Del.)

    § 550 Payments to insurance company which acted as fiduciary for debtor’s 401(k) plan were not recoverable as insurance company was not initial transferee and could not exert dominion and control over funds.
    Official Comm. of Unsecured Creditors v. Guardian Ins. (In re Parcel Consultants, Inc.) (Bankr. D.N.J.)

    § 1123(a) Approval granted to plan which designated classes of claims and interests, provided adequate means for completion and regulated issuance of stock.
    In re NII Holdings, Inc. (Bankr. D. Del.)


    4th Cir.

    28 U.S.C. § 157(b)(2) Reference to bankruptcy court of debtor’s prepetition, state law breach of contract action withdrawn.
    Millennium Studios, Inc. v. Man Roland, Inc. (In re Millennium Studios, Inc.) (D. Md.)


    5th Cir.

    § 101(2)(A) Two debtor holding companies were affiliates of debtor, justifying transfer of affiliates’ Delaware bankruptcies to Texas where that of debtor was pending.
    In re Interlink Home Health Care, Inc. (Bankr. N.D. Tex.)


    6th Cir.

    § 544(b) Transaction in which debtor purchased 100 percent of acquired corporation was not fraudulent.
    Official Comm. of Unsecured Creditors v. ASEA Brown Boveri, Inc. (In re Grand Eagle Cos., Inc.) (Bankr. N.D. Ohio)


    7th Cir.

    § 727(a) Discharge denied due to material errors and omissions on schedules of debtors, one of whom was an experienced attorney.
    Bostrom v. Stathopoulos (In re Bostrum) (Bankr. N.D. Ill.)


    8th Cir.

    § 1325(a) Plan denied and case dismissed where debtor’s schedules were inconsistent, failed to make full disclosure and feasibility of plan was seriously in doubt.
    In re Soost (Bankr. D. Minn.)

    28 U.S.C. § 1408 Bankruptcy court erred in dismissing bankruptcy sua sponte for improper venue without providing debtor with notice and an opportunity for a hearing to the debtor.
    Wilson v. Reed (In re Wilson) (B.A.P. 8th Cir.)


    9th Cir.

    § 106(a) Although section 106(a) is an unconstitutional abrogation of sovereign immunity, state did partially waive sovereign immunity with regard to debtors’ claim of tax setoff.
    In re MicroAge Corp. (Bankr. D. Ariz.)

    § 502(b)(2) Termination damages due under “swap agreements” were part of an integrated transaction with term loan and did not constitute disallowed unmatured interest.
    Thrifty Oil Co. v. Bank of Am. (9th Cir.)

    § 502(d) Debtor could not use recovery of preference as prerequisite to payment of administrative fees unless raised as a timely affirmative defense.
    MicroAge, Inc. v. Viewsonic Corp. (In re MicroAge, Inc.) (B.A.P. 9th Cir.)

    § 547(b) Credits used by debtors to reduce obligation to manufacturer had no cash value and did not favor manufacturer over other debtors.
    MicroAge, Inc. v. Mitsubishi Elec. & Elecs. USA, Inc. (In re MicroAge Corp.) (Bankr. D. Ariz.)


    11th Cir.

    § 548(c) District court erred in barring broker from asserting defense that alleged fraudulent transfer was made in good faith for value.
    Orlick v. Kozyak (In re Fin. Federated Title & Trust, Inc.) (11th Cir.)


    Collier Bankruptcy Case Summaries

    1st Cir.

    Although debtor was entitled to an exemption for disability insurance payments, insurer was entitled to withhold payments to offset previous overpayment. Bankr. D. Mass. PROCEDURAL POSTURE: The debtor filed a voluntary chapter 7 petition and claimed an exemption for the right to receive disability payments under an insurance policy. An insurance company filed an objection to the exemption and withheld payments subject to a dispute. The debtor filed a motion to determine that the insurance company’s withholding of postpetition benefits was a set-off which violated the automatic stay. OVERVIEW: The objection related to the debtor’s exemption under 11 U.S.C. § 522(d)(10)(E). The insurance company responded to the debtor’s claim and argued that its recovery of overpayments was recoupment and was not covered by the automatic stay. Before the bankruptcy petition was filed, the insurance company contacted the debtor concerning overpayments that resulted from the receipt of both long-term disability benefits and social security disability insurance. The insurance company informed the debtor that she could either reimburse the insurance company in a lump sum for the overpayments or the insurance company would withhold payments on future disability benefit payments until the overpayments had been recouped. The insurance company withheld payments and credited them towards the overpayments. The court found that the insurance company was correct in its approach because both the overpayments and the withheld payments were related to the same transaction. The debtor had a right to payment in the event of disablement during the policy period, but the insurance company had the right to reduce future payments in the event of overpayment due to non-reported payments from other sources. In re Lord, 2002 Bankr. LEXIS 1177, 284 B.R. 179 (Bankr. D. Mass. December 16, 2002) (Rosenthal, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10][b] [back to top]

    ABI Members, click here to get the full opinion.


    2d Cir.

    Attorneys for creditors sanctioned for bad faith in seeking relief from stay to foreclose where debtor had not defaulted on the mortgages in question. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In three bankruptcy cases, the court issued orders to show cause why the creditors and/or its attorneys, should not be sanctioned under 11 U.S.C. § 105(a), or Fed. R. Bankr. P. 9011, for seeking relief from stay alleging postpetition defaults under the debtors’ mortgages when in fact the debtors were current in their postpetition payments. The creditors and the attorneys argued the mistakes were not in bad faith. OVERVIEW: Each debtor had been required to oppose a baseless motion. Each debtor was at risk of a foreclosure without just cause and in violation of the Bankruptcy Code. The creditors conceded that there were no defaults. In one case, neither defects in the servicing agent’s accounting or computer system, nor the inability of its staff to add the monthly payments could justify the filing of a baseless motion to lift the stay, let alone two motions. In another case, an insurance carrier’s mistake resulted in an increased premium being charged. The cases did not fall within the safe harbor of good faith mistake or zealous advocacy within the bounds of law and ethics under Rule 9011. Each certification of default was false. Reasonable investigation of its own records could and did reveal or confirm to each creditor that the payments in question had all been made or tendered. It did not matter if the certifications were labeled as intent to deceive, gross negligence, incompetence, or mere inadvertence, because the result was victimization of the debtors if for any reason a debtor had failed to respond to a baseless motion. Under 11 U.S.C. § 105(a), the court would enter sanctions. In re Gorshtein, 2002 Bankr. LEXIS 1280, 285 B.R. 118 (Bankr. S.D.N.Y. November 4, 2002) (Hardin, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 2:105.05 [back to top]

    ABI Members, click here to get the full opinion.

    Shareholders’ claim against company that withdrew from merger with debtor was separate and distinct from claim of debtor against company and was not subject to stay. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff shareholders of the debtor company brought suit against defendant, claiming that defendant breached a merger agreement. The debtor company filed bankruptcy and the bankruptcy court enjoined the shareholders’ suit pursuant to the automatic stay provision of 11 U.S.C. § 362 (a), finding that the shareholders did not have standing to sue and their claims were derivative and belong to the debtor company. OVERVIEW: As the debtor company was sliding into financial trouble, it signed a merger agreement with defendant. Before the merger was completed, defendant withdrew from the agreement, claiming that its withdrawal was permitted by the agreement because of the occurrence of a materially adverse condition in the debtor company’s financial affairs. The debtor company then entered bankruptcy. The shareholders brought suit against defendant, and the issue for the court was whether the shareholders’ claims were derivative and thereby possessed by the debtor company, or whether the shareholders’ claims were separate and independent, so that only the shareholders could vindicate the rights provided to them in the merger agreement. The court found that the shareholders’ claims were separate and independent. The settlement addressed the injuries sustained by the debtor company in not having defendant assume its debts. The settlement agreement did not address the injuries that were particular to the shareholders in being deprived of their right to become shareholders of defendant. Therefore, the agreement did not release the shareholders’ claims. In re Enron Corp., 2002 U.S. Dist. LEXIS 19987, — B.R. — (S.D.N.Y. October 22, 2002) (Hellerstein, D.J.).

    Collier on Bankruptcy, 15th Ed. Revised 3:362.03 [back to top]

    ABI Members, click here to get the full opinion.

    Arbitration award to creditor for securities fraud by debtor was nondischargeable. Bankr. S.D.N.Y. PROCEDURAL POSTURE: A creditor filed a complaint to declare a judgment enforcing an arbitral award issued against the debtor for securities fraud nondischargeable under 11 U.S.C. § 523(a)(2)(A), (6). Moving for summary judgment, the creditor also invoked 11 U.S.C. § 523(a)(19). The debtor argued against retroactive application of section 523(a)(19), which was adopted on July 30, 2002, after the complaint was filed, and after the discharge of other debts was entered. OVERVIEW: The arbitral award specifically stated that the debtor committed fraud in connection with trading in the creditor’s securities account. A section-by-section analysis read into the Congressional Record demonstrated that to the maximum extent possible, section 523(a)(19) was to be applied to existing bankruptcies. Any prejudicial effect on the debtor was insufficient. Congress had prescribed, with “requisite clarity,” the temporal reach of section 523(a)(19). The right to relief from a debt was not a matured or unconditional property right until a final decision was made on dischargeability. There was no “manifest injustice.” The debtor acquired no vested right to the discharge of the debt. Applying section 523(a)(19) attached no new liability on the debtor. Applying section 523(a)(19) did not implicate issues of fairness or notice. The debtor did not argue that his conduct as a principal of the brokerage firm that bore his last name would have been any different had he known section 523(a)(19) would be applicable. Securities fraud was already subject to monetary liability. The complaint was deemed amended accordingly. The arbitration award was entitled to preclusive effect. Smith v. Gibbons (In re Gibbons), 2003 Bankr. LEXIS 161, — B.R. — (Bankr. S.D.N.Y. March 7, 2003) (Gropper, B.J.).

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

    ABI Members, click here to get the full opinion.

    Judgment excepted from discharge due to debtors’ reckless failure to provide proper notice of conversion to chapter 7 or schedule postpetition unpaid debts. Bankr. W.D.N.Y. PROCEDURAL POSTURE: Married debtors filed a chapter 13 petition and the court approved the debtors’ chapter 13 plan. The debtors later voluntarily converted to chapter 7 after a default and received a discharge. The debtors later moved to: (1) reopen their chapter 7 case; (2) request a temporary restraining order against a judgment creditor; and (3) determine that a related judgment was void. OVERVIEW: The court found that the clerk’s office mistakenly mailed out the wrong conversion notice to the debtors and their counsel. After conversion from chapter 13 to chapter 7, the court docket showed that the debtors failed to file: (1) an amended schedule of creditors; (2) an amended matrix of creditors; or (3) a schedule of postpetition unpaid debts as required by Fed. R. Bankr. P. 1019(5). The court found that the debtors should have been aware of their obligation under Rule 1019(5) because they were represented by experienced bankruptcy attorneys. The court found that the failures of the debtors to: (1) respond to the unpaid statements and demands during their chapter 7 case by specifically advising the judgment creditor and its attorneys of their pending chapter 7 bankruptcy case; or (2) to meet their obligations under Fed. R. Bankr. P. 1019(5) constituted a sufficiently reckless failure to schedule the judgment creditor so that the debtors did not qualify for the nondischargeability provisions of 11 U.S.C. § 523(a)(3)(A). In re Nephew, 2003 Bankr. LEXIS 165, — B.R. — (Bankr. W.D.N.Y. March 6, 2003) (Ninfo, C.B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:523.09[3][a] [back to top]

    ABI Members, click here to get the full opinion.

    Owner of bonds in debtor corporation could not intervene in appeal by unsecured creditors committee, of which it was a member, since the matter had settled. S.D.N.Y. PROCEDURAL POSTURE: In an adversary proceeding in a chapter 11 bankruptcy, an owner of bonds in the debtor corporation moved to intervene in plaintiff unsecured creditors committee’s appeal of an order of bankruptcy court dismissing equitable subordination, fraudulent conveyance, negligence, and aiding and abetting claims of the estate against the debtor’s primary pre-and postpetition lenders. OVERVIEW: During pendency of the appeal, the committee and lenders settled the matter and sought to dismiss the appeal. In the settlement, the committee was to receive stock in the reorganized debtor. The owner was a member of the committee and benefited from the settlement. Nevertheless, the owner sought to intervene and prosecute the committee’s appeal in the district court. In denying the motion to intervene, the district court noted that the owner sought not only intervention, but the right, in essence, to take ownership of the committee’s causes of action — claims that derived from the estate itself. The owner was actually seeking review on the merits of the bankruptcy court’s dismissal of the underlying adversary proceeding. The district court found that the owner’s objections were properly directed at the confirmation order, which provided for the settlement of the committee’s claims. Since the possessors of the cause of action — the estate and the committee — released their claims, the owner sought to intervene in a dispute that no longer existed. It had no standing to appeal the dismissal of the claim without the approval of the bankruptcy court, which it did not receive. Official Comm. of Unsecured Creditors v. Morgan (In re Sunbeam Corp.), 2003 U.S. Dist. LEXIS 944, 287 B.R. 861 (S.D.N.Y. January 22, 2003) (Chin, D.J.).

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

    ABI Members, click here to get the full opinion.

    District court either lacked jurisdiction or exceeded jurisdiction in issuing injunction barring debtor from bringing adversary proceeding against lessor. 2d Cir. PROCEDURAL POSTURE: Appellant debtor sued appellee lessor in state court seeking a declaration that the lessor could not terminate the parties’ lease. The debtor subsequently filed a bankruptcy reorganization petition, and then removed the state action. The United States District Court for the Northern District of New York remanded the state action and, subsequently, enjoined the debtor from its adversary proceeding in its bankruptcy action. The debtor appealed. OVERVIEW: The court vacated the district court’s injunction holding that the district court either lacked jurisdiction to issue the injunction, or, if jurisdiction was available, issuance of the injunction exceeded the district court’s discretion. The court found that the injunction did not derive jurisdictional validity from continuing jurisdiction under 28 U.S.C. § 1651(a) because the lessor did not plead either diversity or federal question jurisdiction as the jurisdictional basis for the injunction it obtained, and the district court’s injunction was not issued to prevent any interference with the order it had previously issued. The court further found that the district court’s preclusion rationale failed because, having remanded the removed case that it had subject matter jurisdiction over pursuant to 28 U.S.C. § 1452(a) that had not been adjudicated on the merits, it did not retain continuing authority under 28 U.S.C. § 1452(b) to enforce what it believed was the preclusive effect of its remand decision. Covanta Onondaga Ltd. v. Onondaga County Res. Recovery Agency, 2003 U.S. App. LEXIS 1410, 318 F.3d 392 (2d Cir. January 29, 2003) (Newman, C.J.).

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

    ABI Members, click here to get the full opinion.


    3rd Cir.

    Fraudulent transfer claim against former officers and directors of debtor could be properly brought only by the trustee or debtor in possession. Bankr. D. Del. PROCEDURAL POSTURE: A creditors’ committee filed claims against defendants, the debtors’ former officers and directors, alleging breach of fiduciary duty, corporate waste, and fraudulent transfers under 11 U.S.C. §§ 544, 548 and 550. Breach of contract and negligence claims were asserted against defendants distribution company and logistics company. Defendants moved to dismiss. The logistics company moved to compel arbitration under 9 U.S.C. § 1 et seq. OVERVIEW: The selection and engagement of the logistics company were alleged to have been done in a grossly negligent manner by the officers and directors, ignoring a steering committee’s recommendation. The engagement and subsequent failure of the logistics company was sufficiently unusual to allow the claim to proceed. The distribution company was dismissed for lack of a signed contract. The claims against the logistics company were non-core proceedings under 28 U.S.C. § 157, based on state common law claims. Thus, the court enforced the arbitration clauses in the contracts between the debtors and the distribution company. Five of the six contracts provided for arbitration. The committee argued that since the five contracts were terminated before becoming effective, the sixth contract, an interim agreement, was controlling. But, all of the agreements were fully integrated, and the sixth contract only governed payment until the relationship evolved. The arbitration provisions in the remaining contracts were applicable to disputes between the parties. Because only the trustee or a debtor in possession could assert fraudulent transfer claims, the court sua sponte dismissed those claims. Official Comm. of Unsecured Creditors v. Kemeny (In re Teu Holdings, Inc.), 2002 Bankr. LEXIS 1539, 287 B.R. 26 (Bankr. D. Del. November 1, 2002) (Newsome, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 5:544.01 [back to top]

    ABI Members, click here to get the full opinion.

    Payments to insurance company which acted as fiduciary for debtor’s 401(k) plan were not recoverable as insurance company was not initial transferee and could not exert dominion and control over funds. Bankr. D.N.J. PROCEDURAL POSTURE: Four debtors filed a chapter 11 petition and the cases were jointly administered pursuant to Fed. R. Bankr. P. 1015(b). Plaintiff creditors’ committee was appointed and filed an adversary action against defendant insurance company. The committee sought to avoid and recover payments made to the company pursuant to 11 U.S.C. § 547, and 549-550. Both parties moved for summary judgment. OVERVIEW: The insurance company was the investment vehicle for a 401(k) plan, and it received payments as a fiduciary under the 401(k) plan and allocated all funds to accounts for employee/participants in the 401(k) plan. The court framed the issue as whether the committee could avoid the payments previously made pursuant to 11 U.S.C. §§ 547 and 549, and if avoidable, whether or not the property was recoverable pursuant to 11 U.S.C. § 550. The court held that even if the property at issue was property of the estate, the property was not recoverable from the insurance company. The insurance company could not exert dominion and control over the funds because it was bound by the contract terms, which granted control to the individual employees participating in the plan. The insurance company was also not capable of using the funds, but was obligated to deposit the funds at the direction of the employee participants, and not at its own discretion. The insurance company was not an initial transferee pursuant to 11 U.S.C. § 550. Official Comm. of Unsecured Creditors v. Guardian Ins. (In re Parcel Consultants, Inc.), 2002 Bankr. LEXIS 1477, 287 B.R. 41 (Bankr. D.N.J. December 23, 2002) (Lyons, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 5:550.01 [back to top]

    ABI Members, click here to get the full opinion.

    Approval granted to plan which designated classes of claims and interests, provided adequate means for completion and regulated issuance of stock. Bankr. D. Del. PROCEDURAL POSTURE: Debtors sought confirmation of a revised third amended joint plan of reorganization in their bankruptcy action. OVERVIEW: The court concluded the plan satisfied the requirements of 11 U.S.C. § 1129(a)(1), which required compliance with 11 U.S.C. §§ 1122 and 1123. Pursuant to sections 1122(a) and 11223(a)(1), the plan designated classes of claims and interests, other than administrative claim, priority tax claims, and fee claims. Each class of claims or interests contained only claims or interests that were substantially similar to the other claims or interests within that class. The plan satisfied section 1123(a)(5) by providing adequate means for implementing the plan. The plan complied with section 1123(a)(6), as it prohibited the issuance of nonvoting equity securities to the extent required under section 1123(a), and authorized issuance of new common stock. Further, all interests issued by or relating to either debtor and outstanding immediately prior to the petition date would be canceled. The manner of selection of initial directors and officers of debtors was consistent with the interests of the holders of claims and interests and public policy; accordingly, the plan satisfied section 1123(a)(7). Inter alia, the plan satisfied section 1129(d), as its primary purpose was not the avoidance of taxes or securities law requirements. In re NII Holdings, Inc., 2002 Bankr. LEXIS 1662, — B.R. — (Bankr. D. Del. October 28, 2002) (Walrath, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 7:1123.01 [back to top]

    ABI Members, click here to get the full opinion.


    4th Cir

    Reference to bankruptcy court of debtor’s prepetition, state law breach of contract action withdrawn. D. Md. PROCEDURAL POSTURE: Plaintiff, a debtor involved in chapter 11 bankruptcy proceedings, brought suit against defendant manufacturer based on breach of contract and related claims. The manufacturer moved to withdraw reference to bankruptcy court and to dismiss based on a forum selection clause. OVERVIEW: The debtor entered into a contract for a used printing press from the installer. The contract contained a forum selection clause which designated a forum for the resolution of disputes. During the period while installer was installing the press, the installer assigned its rights under the promissory notes to its parent corporation. The press never operated effectively. Later, the parent company declared the debtor in default and accelerated the balance due under the notes. The debtor filed a petition under chapter 11. The court held that the debtor’s claims against the installer, while not clearly “core,” were also not obviously “non-core” to the bankruptcy case either. Because of the prepetition, state-based subject matter of the debtor’s claims against the installer and despite the possible significance of those claims to the administration of the bankruptcy estate, reference of the debtor’s adversary proceeding to bankruptcy court was withdrawn. It followed therefore that since the debtor’s claims would not be heard in the bankruptcy court where its chapter 11 proceeding was pending, the public policy favoring the enforcement of the forum selection prevailed. Millennium Studios, Inc. v. Man Roland, Inc. (In re Millennium Studios, Inc.), 2002 U.S. Dist. LEXIS 23653, 286 B.R. 300 (D. Md. November 22, 2002) (Chasanow, D.J.).

    Collier on Bankruptcy, 15th Ed. Revised 1:3.02[3] [back to top]

    ABI Members, click here to get the full opinion.


    5th Cir

    Two debtor holding companies were affiliates of debtor, justifying transfer of affiliates’ Delaware bankruptcies to Texas where that of debtor was pending. Bankr. N.D. Tex. PROCEDURAL POSTURE: A creditor moved under Fed. R. Bankr. 1014(b) to transfer the bankruptcy cases of two entities pending in the Delaware bankruptcy court to the Texas bankruptcy court where the debtor’s case was pending, arguing the entities were the debtor’s affiliates under 11 U.S.C. § 101(2)(A). The debtor requested transfer under 11 U.S.C. § 105, Fed. R. Bankr. P. 1014(a). The two entities argued control of the debtor had to be decided first. OVERVIEW: 11 U.S.C. § 105 did not provide a basis for directing another court to transfer a case under Fed. R. Bankr. P. 1014(a). Thus, only Fed. R. Civ. P. 1014(b) could apply, and only if the two entities were the debtor’s affiliates. Under 11 U.S.C. § 101(2)(A), an entity owning 20 percent or more of the debtor’s voting securities was an affiliate, whether or not it could vote the securities. The debtor’s principal had pledged his stock to another creditor, but had sold his stock to one of the entities. That entity was the debtor’s affiliate. The debtor’s assets and businesses centered on Texas, where administration of the debtor’s and its subsidiaries’ cases would be more economical. The court was familiar with the debtor’s case. The two entities’ principal place of business was in Texas, as were 7 of its 20 largest creditors. One entity’s only creditor was the debtor. The two entities were holding companies with no direct operations. Nothing had occurred in the Delaware bankruptcy court that would complicate transfer. At least one of the entities’ case was intertwined with the debtor’s case. The presence of so many interested parties in Texas supported Texas as a proper venue. In re Interlink Home Health Care, Inc., 2002 Bankr. LEXIS 1243, 283 B.R. 429 (Bankr. N.D. Tex. September 12, 2002) (Lynn, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 1:101.02 [back to top]

    ABI Members, click here to get the full opinion.


    6th Cir.

    Transaction in which debtor purchased 100 percent of acquired corporation was not fraudulent. Bankr. N.D. Ohio PROCEDURAL POSTURE: Plaintiff, the committee of unsecured creditors in a chapter 11 bankruptcy (committee), alleged that the debtor made fraudulent transfers under 11 U.S.C. § 544(b) in connection with a transaction in which the debtors purchased 100 percent of defendant acquired corporation. The committee’s complaint against defendant bank alleged fraudulent and preferential transfers. Both defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6). OVERVIEW: The acquired corporation contended that 11 U.S.C. § 546(e) applied to the cash payment it received from the debtor because it was a “settlement payment” to complete a securities transaction and the cash came from a financial institution and not directly from the debtors. The bankruptcy court rejected this interpretation of 11 U.S.C. § 546(e), noting that this was a sale of privately held stock. Further, the committee’s complaint satisfied the pleading requirements of Fed. R. Civ. P. 9(b) because, as an outsider, the committee was not privy to all of the facts regarding the transactions. As to the bank, the committee made no allegations that the bank’s receipt of some form of security for the exchange of its old notes was for less than reasonably equivalent value, and thus these transfers were not fraudulent. However, payments made to the bank within relevant preference periods may have been avoidable. Given the bank’s pre-existing lender relationship and the bankruptcy court’s finding that there was no fraudulent transfer, the bankruptcy court rejected the request that the bank’s claims should have been equitably subordinated. Official Comm. of Unsecured Creditors v. ASEA Brown Boveri, Inc. (In re Grand Eagle Cos., Inc.), 2003 Bankr. LEXIS 43, — B.R. — (Bankr. N.D. Ohio January 14, 2003) (Shea-Stonum, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 5:544.09 [back to top]

    ABI Members, click here to get the full opinion.


    7th Cir.

    Discharge denied due to material errors and omissions on schedules of debtors, one of whom was an experienced attorney. Bankr. N.D. Ill. PROCEDURAL POSTURE: The creditors objected to the debtors’ discharge under 11 U.S.C. § 727(a)(4)(A) and (5), alleging omissions of property and income from the schedules and statement of financial affairs, and an inadequate explanation of the shortage, loss, or disappearance of assets. The debtors claimed inadvertence, reliance on counsel’s advice, and that losses were due to gambling, business entertainment expenses, a penchant for fine dining and high living. OVERVIEW: The schedules omitted three parcels of real property, a fur coat, three televisions, and a stereo, and were too substantial to overlook or attribute to inadvertence. The first statement of financial affairs did not list the debtor wife’s income for one year. The schedules conflicted with tax returns. Amending the schedules did not bar a denial of discharge. The debtor wife was an experienced attorney, which weighed against the testimony that she signed the documents without checking their accuracy. The statement of financial affairs listed gambling losses of $60,000, but the debtor husband testified that the amount was closer to $200,000. The statement of financial affairs was not amended to reflect the higher amount. The debtors could not rely on the advice of counsel defense regarding the errors, or on the lag time between the signing and the filing of the documents. The errors and omissions were material for purposes of 11 U.S.C. § 727(a)(4)(A). Under 11 U.S.C. § 727(a)(5), the court would not sift through bank and credit card records to determine the loss of assets or categorize how more was spent than was earned. Testimony regarding gambling was vague and uncorroborated. Bostrom v. Stathopoulos (In re Bostrum), 2002 Bankr. LEXIS 1384, 286 B.R. 352 (Bankr. N.D. Ill. November 27, 2002) (Squires, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 6:727.01 [back to top]

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    8th Cir.

    Plan denied and case dismissed where debtor’s schedules were inconsistent, failed to make full disclosure and feasibility of plan was seriously in doubt. Bankr. D. Minn. PROCEDURAL POSTURE: The debtor sought confirmation of his fifth modified chapter 13 plan. A creditor objected, arguing that it was the debtor’s second bankruptcy in two years and that the debtor’s inability to avoid the creditor’s judgment lien in the prior chapter 7 prompted the chapter 13. The creditor argued that the plan was not proposed in good faith or feasible under 11 U.S.C. §§ 1325(a)(3) and (6). The creditor also sought dismissal if confirmation was denied. OVERVIEW: Unsecured claims were to receive nothing. The debtor had taken different positions in several proceedings as to the amount of the debt against the property to which the creditor’s lien attached and the value of the debtor’s interest in it. The debtor made any averment necessary to serve the strategy he had adopted. In the chapter 7, the debtor’s mother’s secured claim against the property tripled from the amount stated 13 months earlier, making it seem that the creditor’s lien was valueless. The mother’s claim was then reduced in the chapter 13, to reduce the payments on the mother’s claim. The several values were never explained. The debtor was intelligent due to experience in his own construction business, yet failed to disclose spousal earnings and his status as a part-time employee subject to withholding, which evidenced a lack of good faith under 11 U.S.C. § 1325(a)(3). The property was not necessary for everyday life or the debtor’s trade. As to feasibility under 11 U.S.C. § 1325(a)(6), there was nothing on which to base a finding as to performance under a plan. The schedules were seriously inconsistent. There was no evidence of an ability to finance balloon payments. In re Soost, 2003 Bankr. LEXIS 164, — B.R. — (Bankr. D. Minn. March 6, 2003) (Kishel, C.B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 8:1325.01 [back to top]

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    Bankruptcy court erred in dismissing bankruptcy sua sponte for improper venue without providing debtor with notice and an opportunity for a hearing to the debtor. B.A.P. 8th Cir. PROCEDURAL POSTURE: The chapter 7 debtor appealed an order of the United States Bankruptcy Court for the Western District of Missouri that denied her motion to reinstate her bankruptcy case. The court had, sua sponte, dismissed the case because the debtor filed the bankruptcy in the improper district under 28 U.S.C. § 1408 and Fed. R. Bankr. P. 1014(a)(2). OVERVIEW: The debtor argued that for a case to be dismissed or transferred because it was filed in the improper district, there had to first be a timely motion filed by a party in interest, that the bankruptcy court lacked the authority to proceed sua sponte. The debtor also argued that she was entitled to a hearing before her case was dismissed. The appellate panel held that under 11 U.S.C. § 105(a), the bankruptcy court had the authority to proceed sua sponte. But, section 105(a) did not dispense with the requirement of notice and a hearing. Citing to 11 U.S.C. § 102(1), the panel held that although the term “after notice and hearing,” as used in Fed. R. Bankr. P. 1014(a)(2), did not always require an actual hearing to occur, it did require appropriate notice and an appropriate opportunity for a hearing. Such notice and an opportunity for a hearing would have allowed the debtor to present evidence to show that venue was proper, to try to convince the court to exercise its discretion to keep venue in the Western District of Missouri, and to argue whether a transfer of the case was preferable. Wilson v. Reed (In re Wilson), 2002 Bankr. LEXIS 1176, 284 B.R. 109 (B.A.P. 8th Cir. October 21, 2002) (Kressel, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 1:4.01 [back to top]

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    9th Cir.

    Although section 106(a) is an unconstitutional abrogation of sovereign immunity, state did partially waive sovereign immunity with regard to debtors’ claim of tax setoff. Bankr. D. Ariz. PROCEDURAL POSTURE: The debtors filed a motion for a determination of the debtors’ right to a tax refund from a creditor, the State of Arizona, as a result of changes to Arizona’s enterprise zone employment tax credit program under Ariz. Rev. Stat. § 43-1161 et. seq. The state disputed the amount of the refund, but also argued that the state was immune from the proceeding under the Eleventh Amendment despite 11 U.S.C. § 106(a). OVERVIEW: 11 U.S.C. § 106(a) was unconstitutional and did not waive sovereign immunity. While both the transaction privilege taxes under Ariz. Rev. Stat. § 42-5008 and the enterprise zone credits involved a calculation of taxes, that alone was insufficient to find that they arose out of the same transaction or occurrence. The state’s claim for 1999 income taxes also did not arise out of the same transaction or occurrence with respect to 1996 enterprise zone credits. The offset provision of Ariz. Rev. Stat. § 42-1118(A) did not “unequivocally” expresses an intent to waive immunity. Thus, 11 U.S.C. § 106(b) did not provide the debtors with relief. The state’s appearance did not waive immunity. A setoff under 11 U.S.C. § 106(a) was permitted only to the extent of the state’s filed claims. No affirmative recovery was permitted. Any other allowed postpetition tax claims under 11 U.S.C. §§ 101(5) and 106(c), could be offset against the allowed refund, if any remained. The bankruptcy court was the proper forum for litigating the amount of the setoff, which was limited by the amount of the state’s section 106(c) claims and by the debtors’ offer to limit any relief to application of refunds. In re MicroAge Corp., 2003 Bankr. LEXIS 73, — B.R. — (Bankr. D. Ariz. January 7, 2003) (Case, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 2:106.02[2] [back to top]

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    Termination damages due under “swap agreements” were part of an integrated transaction with term loan and did not constitute disallowed unmatured interest. 9th Cir. PROCEDURAL POSTURE: The United States District Court for the Southern District of California affirmed a bankruptcy court order rejecting debtor’s objections; allowing creditor’s claim, which sought to collect $5.4 million in termination damages due under three swap agreements (the swap claim); and granting summary judgment in creditor’s favor. Debtor appealed. OVERVIEW: As its main argument on appeal, debtor claimed the bankruptcy court erroneously concluded that creditor’s swap claim did not constitute unmatured interest disallowed by 11 U.S.C. § 502(b)(2). Debtor contended the interest rate swaps converted a floating-rate term loan into the equivalent of a fixed-rate loan, thereby transforming the swap payments and termination damages into interest. The court, unconvinced that the swap payments constituted interest, rejected debtor’s argument that the swaps and term loan, viewed together, formed an “integrated transaction,” and found that the “integrating” characteristics of the transaction irrelevant as to whether swap payments constituted interest. Further, there was no identifiable bankruptcy policy that justified treating creditor’s claim for termination damages distinctly from a claim filed by a non-lending swap dealer, an almost identical situation that did not implicate 11 U.S.C. § 502(b)(2). Thus, the bankruptcy court properly rejected debtor’s 11 U.S.C. § 502(b)(2) objection. Thrifty Oil Co. v. Bank of Am., 2002 U.S. App. LEXIS 23756, 310 F.3d 1188 (9th Cir. November 19, 2002) (Hall, C.J.).

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

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    Debtor could not use recovery of preference as prerequisite to payment of administrative fees unless raised as a timely affirmative defense. B.A.P. 9th Cir. PROCEDURAL POSTURE: A creditor moved to compel payment of its allowed reclamation administrative priority claim under 11 U.S.C. § 546(c). The debtor filed a preferential transfer action against the creditor and opposed the motion to compel, arguing that under 11 U.S.C. § 502(d), the claim was not payable until the preference was recovered. The United States Bankruptcy Court for the District of Arizona held that section 502(d) did not apply. The debtor appealed. OVERVIEW: In adopting section 502(d), Congress was presumed to have known that courts had interpreted its predecessor as applicable to administrative claims. In the absence of a clear expression from Congress that it intended to alter existing law in that area, section 502(d) was given a similarly broad application under the Bankruptcy Code. The bankruptcy court erred when it held that section 502(d) did not apply to administration claims generally. But it correctly concluded that section 502(d) was unavailable on the specific facts of the case. The debtor raised this argument too late. It should have been raised as an affirmative defense before the bankruptcy court entered an order allowing the creditor’s claim. Since that claim was allowed, the debtor could not raise section 502(d) as a bar to payment. If the preferential transfer analysis was not complete when the debtor stipulated to the creditor’s claim, it should have reserved the right to assert section 502(d). It did not do so. Instead, the debtor expressly agreed that the creditor’s administrative claim would be allowed for a certain amount, and the court entered an order approving the allowance. The debtor thus waived any right to raise section 502(d). MicroAge, Inc. v. Viewsonic Corp. (In re MicroAge, Inc.), 2002 Bankr. LEXIS 1253, 284 B.R. 914 (B.A.P. 9th Cir. October 23, 2002) (Bluebond, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 4:502.05 [back to top]

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    Credits used by debtors to reduce obligation to manufacturer had no cash value and did not favor manufacturer over other debtors. Bankr. D. Ariz. PROCEDURAL POSTURE: Defendant manufacturer sought partial summary judgment on the debtors’ claims of preferences and setoffs under 11 U.S.C. §§ 547(b) and 553(b)(1), regarding the debtors’ use of credits to reduce their obligations to the manufacturer, arguing that: (1) the credits were not an interest of the debtors in property; (2) the credits did not benefit the manufacturer; and (3) the credits were not setoffs under the parties’ cooperative advertising agreement. OVERVIEW: The advertising agreement did not allow the credits to be redeemed for cash except under specific conditions; they had no traditional “value” for purposes of 11 U.S.C. § 547(b). The debtors had to submit an “advertising claim” for approval by the manufacturer. The advertising claims could not be deducted from invoices directly, only subsequently awarded credits could be. There were no allegations that the debtors’ earned credits were not properly approved and applied. Using the credits did not reduce amounts available to pay others. The pay down of the debtors’ invoices by using the credits preserved more assets from which other creditors could be paid. Using the credits did not favor the manufacturer over other creditors. The credits were not redeemable for cash and could not be used toward payment to another creditor. The debtors had applied the credits to effectuate a setoff, not the manufacturer. The manufacturer’s acceptance of the credits and procedural application to reduce the invoice did not translate into a finding that it actually exercised a legal right to offset a mutual debt under 11 U.S.C. § 553(b). And, there was no mutual debt owing between the parties. MicroAge, Inc. v. Mitsubishi Elec. & Elecs. USA, Inc. (In re MicroAge Corp.), 2003 Bankr. LEXIS 74, 288 B.R. 855 (Bankr. D. Ariz. February 3, 2003) (Case, B.J.).

    Collier on Bankruptcy, 15th Ed. Revised 5:547.03 [back to top]

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    11th Cir.

    District court erred in barring broker from asserting defense that alleged fraudulent transfer was made in good faith for value. 11th Cir. PROCEDURAL POSTURE: Appellee trustee filed suit against appellant broker to recover money that had been transferred by the debtor to the broker in an alleged fraudulent scheme that involved viaticated life insurance policies. The United States District Court for the Southern District of Florida affirmed a bankruptcy court final judgment in favor of the trustee for $1,167,037.19, on three counts of avoidance of payments as fraudulent transfers. The broker appealed. OVERVIEW: The trustee’s original complaint against the broker sought to void a transfer made to her for $10,000. In her initial answer, the broker did not request a jury trial. Three months later the trustee increased the demand against the broker from $10,000 to $1,017,647. In her answer to the amended complaint, the broker demanded a jury trial. The appellate court found that the addition of a claim for over $1 million more than the original complaint was certainly a new factual issue and alleged a new theory of recovery as to the broker. Thus, the broker’s right to a jury trial was revived, and her initial waiver of a jury did not preclude her from making an effective jury demand with respect to the new issues and new claims. The district court erred in determining that the broker was barred from asserting her affirmative defense under 11 U.S.C. § 548(c) of “for value and in good faith” because it relied on a case that eliminated the element of culpable intent and failed to instead focus on the value of the goods and services provided rather than on the impact that the goods and services had on the bankrupt enterprise when it made a determination of whether value was given. Orlick v. Kozyak (In re Fin. Federated Title & Trust, Inc.), 2002 U.S. App. LEXIS 22000, 309 F.3d 1325 (11th Cir. October 21, 2002) (Hill, C.J.).

    Collier on Bankruptcy, 15th Ed. Revised 5:548.07[2] [back to top]

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