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 25, 2002

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Collier Bankruptcy Case Summaries

Dismissal of case was affirmed on appeal due to debtor's failure to make sufficient plan payments. 1st Cir. The chapter 13 debtors appealed the B.A.P. decision affirming the bankruptcy court's dismissal of their case. After their plan had been confirmed, the IRS submitted supplemental claims asserting that the debtor husband had continued to incur additional income tax obligations after their case was commenced. The plan provided for a set monthly amount to be paid to the trustee, as well as a 10 percent dividend on all allowed unsecured claims. The bankruptcy court subsequently granted the trustee's motion to dismiss the case due to the debtors' failure to make payments sufficient to fund the confirmed plan. The debtors argued that they were entitled to a discharge because they had paid the trustee the entire amount required under their confirmed plan. The Court of Appeals for the First Circuit affirmed, holding that the bankruptcy court's dismissal of the case was not an abuse of discretion. The completion of the payment schedule in their confirmed plan did not relieve the debtors of their responsibility to comply with the other provisions of the plan, including their obligation to pay all priority tax claims and a 10 percent dividend on allowed unsecured claims. The court further noted that the plan provision requiring a fixed percentage return to unsecured creditors took precedence over a companion provision prescribing the aggregate payments to be made to the trustee. Roberts v. Boyajian (In re Roberts), 2002 U.S. App. LEXIS 2000, 279 F.3d 91 (1st Cir. February 8, 2002) (Cyr, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1307.04[6]

B.A.P. affirmed bankruptcy court's finding of no "excusable neglect" with respect to creditor's late-filed proof of claim. B.A.P. 1st Cir. A creditor filed a motion in the bankruptcy court asking that his proof of claim, filed four days after the applicable bar date, be considered timely. The bankruptcy court denied the creditor's motion, and also denied the creditor's motion for reconsideration of its decision. The creditor appealed. On appeal, the creditor argued that the bankruptcy judge erred and applied the wrong legal standard in evaluating the creditor's assertion that his tardy filing was occasioned by "excusable neglect." The B.A.P. for the First Circuit affirmed. The court held that the creditor's pleadings clearly demonstrated that his tardiness was borne of calculation rather than neglect; thus, the bankruptcy court did not abuse its discretion in ruling against him on his "excusable neglect" claim. The court acknowledged that the Supreme Court's decision in Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship made it clear that Rule 9006(b)(1) and the excusable neglect standard can operate to permit late filings in cases of inadvertence, mistake or carelessness, as well as in cases involving intervening circumstances beyond a party's control. However, the Court did not go so far as to equate "neglect" with conscious disregard of the bar date. In this case, the creditor's pleadings clearly stated that he withheld filing his proof of claim because of the parties' longstanding business relationship and because he was reluctant to file a proof of claim based upon malpractice and conflict of interest against the debtor without "proof." Jacobson v. Official Comm. of Unsecured Creditors (In re Mahoney Hawkes), 2002 Bankr. LEXIS 58, 272 B.R. 19 (B.A.P. 1st Cir. January 25, 2002) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 10:9006.06[3]

State agency that entered housing fraud discrimination judgment against debtors had standing as plaintiff in proceeding to determine dischargeability of judgment debt. Bankr. D. Conn. The state (Connecticut) Commission on Human Rights and Opportunities ("CHRO") entered a prepetition judgment against the chapter 7 debtors after a contested hearing in which it was determined that the debtors committed housing discrimination fraud. The judgment awarded damages and attorney's fees to two individuals aggrieved by the debtors' conduct. The debtors neither appealed the CHRO's award nor complied with it. Therefore, the individual judgment creditors and the CHRO filed an adversary complaint in the debtors' case seeking a determination that the CHRO's award was a nondischargeable debt pursuant to section 523(a)(6). The debtors moved to dismiss the complaint as to CHRO. The debtors claimed that CHRO lacked standing since it was not a creditor of their bankruptcy estate. The bankruptcy court denied the debtors' dismissal motion. The court held that since CHRO was created to enforce state public policies and had statutory authority to enforce obligations contained in its orders, CHRO had an institutional interest and standing as a plaintiff in adversary action brought against the debtors. Cooper v. Gorski (In re Gorski), 2002 Bankr. LEXIS 57, 272 B.R. 59 (Bankr. D. Conn. January 11, 2002) (Krechevsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

District court affirmed bankruptcy court's dismissal of debtor's breach of contract claim against Republic of Ghana. S.D.N.Y. The trustee appealed a bankruptcy court decision that dismissed a claim asserted by the debtor against the Republic of Ghana for breach of contract damages in connection with the parties' fuel and crude oil purchase and transport agreements. The trustee argued that because the agreement between the parties was essentially an agreement for the provision of services, as opposed to an agreement primarily for the sale of goods, the bankruptcy court erred in applying Article 2 of the U.C.C. The trustee further argued that even if the U.C.C. was applicable, it was not properly applied by the court. The district court affirmed. The court held that the facts clearly supported the bankruptcy court's finding that the parties' agreement was predominantly one for the sale of goods and was governed by the U.C.C., and the court correctly applied the applicable provision of the U.C.C. The court found, among other things, that the bankruptcy court's determination that it was commercially reasonable for the Republic of Ghana to demand adequate assurances, and to suspend performance pending such assurances, was not clearly erroneous. The court also found that the bankruptcy court correctly applied the applicable U.C.C. provision (section 2-609) in finding that a letter was an appropriate demand for adequate assurances and that the debtor's failure to provide such assurances within a reasonable time constituted a repudiation of the contract. Reich v. Republic of Ghana, 2002 U.S. Dist. LEXIS 1541, - B.R. - (S.D.N.Y. January 31, 2002) (Jones, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02[2]

Bankruptcy petition preparer engaged in unauthorized practice of law. Bankr. W.D. Pa. The chapter 7 debtors paid a bankruptcy petition preparer $195 to prepare their bankruptcy documents for filing. The debtors first learned about the petition preparer on their computer, and provided information to him via a questionnaire that was mailed to them. The petition preparer classified the debtors' obligations as secured, priority or unsecured on the debtors' bankruptcy schedules, selected which chapter of bankruptcy the debtors should elect, inaccurately selected and classified debtors' exemptions, and determined that the debtors had no executory contracts or codebtors. The bankruptcy court held a hearing to consider the extent to which the bankruptcy petition preparer should be enjoined from engaging in the unauthorized practice of law, the extent to which he prepared documents for filing in other bankruptcy cases in the state and the amount of monetary sanctions, if any, to be imposed for his failure to comply with the requirements of section 110. The bankruptcy court held that the petition preparer had engaged in the unauthorized practice of law and permanently enjoined him and persons or entities acting in concert with him from filing or assisting any persons in filing bankruptcy cases. The court also permanently enjoined the petition preparer and related persons or entities from charging any persons for assisting them in filing bankruptcy cases, and from advertising and marketing services in the Western District of Pennsylvania. The court explained that a petition preparer is only authorized to type information exactly as provided by potential debtors. In this case, the petition preparer's preparation of documents, which required familiarity with legal principals beyond the ken of the ordinary layman, constituted the unauthorized practice of law. In re Dunkle, 2002 Bankr. LEXIS 53, 272 B.R. 450 (Bankr. W.D. Pa. January 30, 2002) (Bentz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:110.12

Creditor's failure to timely perfect security interest precluded relation back of transfer to initial loan date. Bankr. N.D. W. Va. The chapter 7 trustee filed a motion seeking to avoid a creditor's security interest in a vehicle as a preference. The security interest, which was obtained in connection with a refinancing loan made to the debtors, was perfected within 90 days of the debtors' bankruptcy filing and more than four months after the interest was obtained. The creditor raised three defenses to the trustee's motion: (1) the "substantially contemporaneous exchange" exception of section 547(c)(1); (2) the state law doctrine of equitable subrogation; and (3) the "earmarking" doctrine. The bankruptcy court granted the trustee's motion to avoid the security interest as a preference. The court held that the creditor's failure to timely perfect its security interest within 10 days as required by section 547(e)(2)(B) precluded the relation back of the transfer to the initial loan date. Since the lien perfection was a transfer that occurred during the preference period, the court held that it could be avoided by the trustee. The court refused to adopt a more lenient standard under the section 547(c)(1) "contemporaneous exchange" defense for the perfection of nonpurchase money liens than the standard established for purchase money security loans under the enabling loan defense, and concluded that the creditor's perfection of its nonpurchase money security interest was not "substantially contemporaneous" with the loan transaction that occurred four months previously. The court also held that equitable subrogation was not appropriate where, but for the creditor's own delay, its lien would have been perfected within the relation-back period or at least outside of the preference period. Finally, the court found that the earmarking doctrine was inapplicable under the facts presented (citing Collier on Bankruptcy 15th Ed. Revised). Sheehan v. Valley Nat'l Bank (In re Shreves), 2001 Bankr. LEXIS 1729, 272 B.R. 614 (Bankr. N.D. W. Va. June 12, 2001) (Friend, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.05

Vendor's award of administrative expense claim was upheld on appeal. N.D. Miss. The chapter 11 debtor's postpetition lender appealed an order of the bankruptcy court granting an administrative expense claim to a postpetition vendor. The debtor, a furniture wholesaler, placed a postpetition order with the vendor, a furniture component dealer, to purchase three lots of custom-sized furniture components. As requested by the vendor, the debtor furnished a letter of credit from its bank in favor of the vendor to cover the total purchase price of the components. Although the vendor ordered the components from Hong Kong and took delivery, the debtor instructed the bank not to pay for the shipments because its customer that had ordered the custom-sized components had cancelled the sale. The bankruptcy court granted the vendor's motion for allowance of an administrative expense claim for the costs of the components and their storage. On appeal, the postpetition lender argued that the vendor's claim was not entitled to administrative priority because the vendor had failed to establish that its goods or services enhanced the ability of the debtor to function as a going concern. The district court affirmed, holding that the vendor established under section 503(b)(1) that it was entitled to an administrative expense claim. The shipments enhanced the debtor's ability to function as a going concern because the vendor supplied the debtor with the means necessary for it to secure an order from its customer. The fact that the customer subsequently cancelled the order did not negate the fact that the debtor received a benefit from the placing of the order. BNY Fin. Corp. v. Lifestyle Enters., Inc. (In re River Oaks Furniture, Inc.), 2001 U.S. Dist. LEXIS 22692, - B.R. - (N.D. Miss. October 30, 2001) (Davidson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06

The bankruptcy court's denial of confirmation of the debtors' plan was reversed on appeal. 6th Cir. The chapter 13 debtors appealed the judgment of the district court that affirmed the bankruptcy court's decision denying confirmation of their plan. The plan proposed to pay the creditor with a second mortgage on their homestead only as an unsecured claimant because the property's value was less than the debtors' secured obligation to a first mortgagee. The bankruptcy court determined that it was not permissible for the plan to modify the rights of the unsecured creditor, and the district court affirmed. The Court of Appeals for the Sixth Circuit reversed, holding that modification of the rights of the totally unsecured homestead mortgagee was permitted by section 1322(b)(2). The court noted that section 1322(b)(2) prohibited modification of the rights of a holder of a secured claim if the security consisted of a lien on the debtor's principal residence. Whether or not the lien claimant was the holder of a secured claim or an unsecured claim depended upon whether the claimant's security interest had any actual value under section 506(a). Pursuant to Nobelman v. American Savs., 508 U.S. 324 (1993), if the lien had a positive value, the claimant's contractual rights under the loan documents were not subject to modification. The court declined to read Nobelman as placing the rights of lienholders asserting purely unsecured claims in the class of claimants whose rights were entitled to special protection under section 1322(b)(2) (citing Collier on Bankruptcy, 15th Ed. Revised). Lane v. Western Interstate Bancorp (In re Lane), 2002 U.S. App. LEXIS 1823, 280 F.3d 663 (6th Cir. February 7, 2002) (Nelson, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.06

Debtor required to pay prerejection, postpetition rent as an administrative expense. Bankr. N.D. Ill. The debtor leased two properties from the creditor, one located in Oregon and the other located in California. When the debtor filed for chapter 11 relief, it elected to reject the leases for both properties. As to the Oregon property, the debtor filed a motion requesting that the rejection be effective on the petition date. As to the California property, the debtor sought to reject the lease on 10 days' notice. Despite having notice of the motion and hearing date, the Oregon landlord did not oppose the motion and the court entered its order approving the rejection approximately three weeks after the motion was filed. The Oregon landlord then sought rent payments on the Oregon property as an administrative expense from the filing date to the date of the court's order, arguing that the effective date of the rejection should have been the date the court's order was entered. The Oregon landlord also argued that the debtor, in fact, occupied the premises after the petition date and that the automatic stay prevented it from regaining possession until after the bankruptcy court's order authorizing the rejection of the Oregon lease was entered. Similarly, the California landlord sought administrative expense treatment of the rental payment owed on the California property. However, because rent for the California property was due after the debtor filed for bankruptcy but before the effective date of rejection, the California landlord argued that it was entitled to receive payment for the full monthly rent amount, rather than merely a prorated rent based upon the number of days between the notice date and the rejection date. Regarding the Oregon property, the court ruled that the Oregon landlord was not entitled to a postpetition administrative expense claim because, under the terms of the Oregon lease, no postpetition rent came due prior to the rejection of the lease. Regarding the California property, however, the court ruled that, under section 365(d)(3), the debtor was obligated to pay the California property's rent as a postpetition administrative expense because, under the terms of the California property lease, the rent came due during the period between the debtor's bankruptcy filing and the effective rejection date given by the debtor. The court also ruled that the debtor was not entitled to prorate the rent owed to the California landlord because the lease required that rent be paid in advance and section 365(d)(3) requires payment of current lease obligations notwithstanding any language in section 503(b)(1) requiring that expenses be "actual" and "necessary." In re Comdisco, Inc., 2002 Bankr. LEXIS 62, 272 B.R. 671 (Bankr. N.D. Ill. January 14, 2002) (Barliant, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.05

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Creditor not entitled to summary judgment on nondischargeability claim where material issues of fact existed regarding fraudulent intent. Bankr. N.D. Ill. The creditor, an individual, met the debtor, a martial arts instructor, when the creditor was taking lessons at the debtor's studio. The debtor approached the creditor about becoming involved in owning a martial arts school with him. The creditor, who had investing experience, refused to invest in the school until he received written information detailing the proposed business transaction. However, before the creditor received this information, he wrote and tendered three checks to the debtor totaling $22,500. After he received and reviewed the business information he had requested, the creditor decided against investing in the school. He informed the debtor of his decision and requested the return of his three checks. The debtor did not return the checks and filed for chapter 7 relief. The creditor then initiated an adversary proceeding, seeking to have the debt represented by the checks deemed nondischargeable due to fraud because, according to the creditor, at the time he gave the checks to the debtor, the creditor believed the debtor would not cash the checks since the creditor was still waiting for written information regarding the proposed business and had not yet decided whether to invest. After the debtor moved for summary judgment on the creditor's complaint, the bankruptcy court found that significant factual issues still remained regarding the element of "actual fraud" as it related to nondischargeability under section 523(a)(2)(A) and denied the debtor's motion. Califf v. Park (In re Park), 2002 Bankr. LEXIS 61, - B.R. - (Bankr. N.D. Ill. January 29, 2002) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08

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District court affirmed "undue hardship" discharge of debtor's student loans. N.D. Iowa The United States Department of Education appealed a bankruptcy court decision that held that the chapter 7 debtor satisfied her burden of proving "undue hardship" and that her student loan obligations were dischargeable. The district court affirmed. The court held that the totality of the circumstances supported the bankruptcy court's conclusion that repayment of the debtor's student loans would create an undue hardship on the debtor. The district court rejected the Department of Education's argument that the bankruptcy court erred in discharging all of the debtor's unconsolidated loans without making a separate determination as to each loan. The court found that the bankruptcy court's determination regarding the debtor's poor financial prospects was supported in the record, particularly in light of the debtor's mental illness, the severity of it, and the impact it had on her lifestyle. The court also found that the debtor's listed expenses were reasonable, and that the record supported the bankruptcy court's finding that the debtor acted with the requisite amount of good faith. United States Dep't of Educ. v. Meling, 2002 U.S. Dist. LEXIS 1377, - B.R. - (N.D. Iowa January 22, 2002) (Melloy, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14

Attorney who delegated his obligations to unsupervised nonlawyer was ordered to return a portion of fees received for his services. Bankr. D. Idaho The United States trustee filed a motion to review the attorney's fees of a lawyer who provided legal services to several debtors for a flat fee of $245 per case. The majority of the legal services rendered by the attorney's office to the debtors was provided by the attorney's legal assistant. The assistant met with the debtors, drafted all pleadings, explained those pleadings to the debtors, filed the paperwork at the courthouse and attended the meeting of creditors with the debtors as an observer. The attorney spent approximately one hour reviewing drafts of the papers and never met personally with any of the debtors. The bankruptcy court granted the motion to review the fees, holding that due to the attorney's objectionable manner in which he approached his obligations to his clients, he was allowed compensation only at a rate charged by nonprofessional petition preparers. The court noted that the attorney could have prejudiced his clients' interests by leading them to believe that an attorney had thoughtfully reviewed their cases and assisted them in securing appropriate relief, when no legal analysis or exercise of professional judgment had occurred. The attorney was directed to return any amounts received for services in excess of $125 per case. In re Henderson, 2001 Bankr. LEXIS 1737, - B.R. - (Bankr. D. Idaho July 30, 2001) (Pappas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.04