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 31, 2003

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

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4th Cir.

§ 362(b)(4) Enforcement actions of state department of labor were subject to automatic stay.
In re Midway Airlines Corp. (E.D.N.C.)

§ 503(b)(1)(B) Prepetition taxes could not be allowed as administrative expenses.
In re Pasta Café Corp. (Bankr. D. Md.)

§ 507(a)(8) Tax claim treated as secured under state law was not entitled to unsecured priority treatment.
In re Pasta Café Corp. (Bankr. D. Md.)

Collier Bankruptcy Case Summaries

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Bankruptcy court erred in denying trustee’s claim of avoidable preference when there was evidence that debtor had insufficient assets at the time of transfer. N.D.N.Y. PROCEDURAL POSTURE: Appellant chapter 7 trustee challenged a decision of the bankruptcy court that found the trustee failed to present sufficient evidence to carry his burden of demonstrating that a prebankruptcy petition payment to appellee creditor should have been deemed an avoidable preference pursuant to 11 U.S.C. § 547. OVERVIEW: The bankruptcy court specifically stated that the trustee failed to provide any factual analysis or legal support for his conclusion that the debt was unsecured or that the creditor received a disproportionate share. The court found that the issue presented was whether the bankruptcy court properly found that the trustee failed to sustain his burden of demonstrating that the payment to the creditor was avoidable as a preferential payment under section 547. The court had to determine whether the creditor was a secured creditor, and if so, whether there would have been less than a 100 percent payout to unsecured creditors in a chapter 7 distribution. The court found that it could not determine whether the creditor was secured or unsecured, and therefore it proceeded with the assumption that the creditor was unsecured. There was evidence on the record that the debtors had insufficient assets to cover their liabilities and, if so, other unsecured creditors would not have been able to recover 100 cents on the dollar and any payments to them during the preference period would have been avoidable. Goldberg v. Such (In re Keplinger), 2002 U.S. Dist. LEXIS 20300, 284 B.R. 344 (N.D.N.Y. October 7, 2002) (Hurd, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.01 [back to top]

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Creditors’ committee could not maintain an action against third parties without first obtaining approval of court. Bankr. S.D.N.Y. PROCEDURAL POSTURE: The debtor filed a chapter 11 petition. Plaintiff, the debtor’s unsecured creditors’ committee, filed an action against defendants, a financial company and various bank lenders. The financial company filed a motion to dismiss, as did one lender. Both motions sought dismissal for lack of standing to pursue an action, pursuant to Fed. R. Civ. P. 12(b)(6). The debtor supported the two motions to dismiss. OVERVIEW: The committee’s amended complaint sought to equitably subordinate the claims of the financial company and all lenders: (1) to avoid and recover for the estate the lenders’ claims and liens as fraudulent conveyances; (2) to recover damages for the financial company’s alleged gross negligence; and (3) for the financial company’s alleged act of aiding and abetting fraud. The committee argued that the corporate veil should be pierced because of the financial company’s purported control and dominance over its affiliate. The court found that there was no evidence that the financial company used an affiliate to shield itself from potential liability. The committee failed to overcome the reluctance to disregard the corporate structure. The court found that were no facts alleged in the amended complaint to support a finding that the lenders had either actual or constructive knowledge that the debtor was insolvent at the time of, or would be rendered insolvent by, the purchase of the acquisitions in issue. The committee failed to meet the standards for obtaining the court’s approval to pursue any claim the estate might have against the financial company. Official Comm. of Unsecured Creditors v. Morgan Stanley & Co., Inc. (In re Sunbeam Corp.), 2002 Bankr. LEXIS 1183, 284 B.R. 355 (Bankr. S.D.N.Y. October 18, 2002) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1103.05[1][f] [back to top]

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Bankruptcy court exercised equitable powers to reset fraud action for trial despite Third Circuit holding in Cybergenics II that would deny plaintiff creditors’ committee standing. Bankr. D. Del. PROCEDURAL POSTURE: Defendants in an action under 11 U.S.C. § 544 moved for dismissal. The debtor and the equity holders committee moved for the appointment of an examiner under 11 U.S.C. § 1106(b) or “limited trustee” to prosecute. The personal injury claimants committee requested appointment of a trustee under 11 U.S.C. § 1104(a). The property damage claimants committee requested that the trial be reset and that the debtor be barred from participating. OVERVIEW: The court had authorized the committees to pursue the action under 11 U.S.C. § 544. The debtor intervened and litigated in concert with the defendants. Just prior to trial, the United States Court of Appeals for the Third Circuit ruled that an official chapter 11 creditors committee lacked derivative capacity to sue under 11 U.S.C. § 544. The bankruptcy court found that examiners had no power to prosecute under 11 U.S.C. § 544. Under 11 U.S.C. § 1104(a), where the impetus for a trustee stemmed from the single issue of the fraudulent conveyance action, a trustee was a last resort. The unique circumstances of the case required it to go forward, regardless of the Third Circuit’s holding, due to the need to protect the parties’ investment in the case. Emphasizing that the case was on the eve of a very complex trial, and drawing on the court’s equitable powers and the powers under 11 U.S.C. § 105, the court state the Third Circuit’s rule should be relaxed and the case reset for trial. The Third Circuit’s mandate had not yet issued and a petition for rehearing en banc had been filed. The debtor could participate. An interlocutory appeal under 28 U.S.C. § 1292(b) was proper. Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 2002 Bankr. LEXIS 1241, 285 B.R. 148 (Bankr. D. Del. October 24, 2002) (Wolin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.01 [back to top]

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Debtor’s ninth bankruptcy, filed during refilling bar imposed upon dismissal of eight bankruptcy, was filed in bad faith without a valid purpose other than to impede a tax lien sale. Bankr. E.D. Pa. PROCEDURAL POSTURE: A mortgage creditor filed a motion to dismiss the debtor’s chapter 13, and to nullify a tax lien sale, arguing the debtor was not eligible under 11 U.S.C. § 109(g)(1) due to a bar order and dismissal of the debtor’s eighth bankruptcy, and that the tax lien sale was in violation of the automatic stay of 11 U.S.C. § 362. Another creditor, the holder of a tax lien that was satisfied at the sale, objected. The debtor did not answer or appear. OVERVIEW: It was the debtor’s ninth bankruptcy, filed during the pendency of a refiling bar, prompted by the scheduled tax sale. At the tax sale, the debtor’s son bought the property free of the mortgage creditor’s mortgage. The debtor then moved to dismiss the bankruptcy. The debtor’s actions were in bad faith. To the extent the previous bar was supported by findings under 11 U.S.C. § 109(g)(1), the debtor was not an authorized debtor under 11 U.S.C. § 301, and the stay did not apply. There was no showing of a valid bankruptcy purpose. The court inferred from the repeated filings to stay foreclosure that the debtor would have used the automatic stay if the son had not bought the property. The eight prior bankruptcy cases were all dismissed. The case had been pending for six weeks with no prosecution. The court found the requisite willfulness under section 109(g)(1). The automatic stay of 11 U.S.C. § 362(a) did not attach when debtor filed his new petition after dismissal of the bankruptcy case for willful failure to comply with court orders to filed documents and prosecute the prior case. This case was dismissed with a bar toward refiling for 180 days. The tax lien sale was not nullified. In re Lami, 2003 Bankr. LEXIS 97, — B.R. — (Bankr. E.D. Pa. January 2, 2003) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.08 [back to top]

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Order rejecting unexpired leases and executory contracts vacated due to mistaken inclusion of leases and contracts which debtor did not wish to reject. Bankr. D. Del. PROCEDURAL POSTURE: The debtors moved to vacate an order authorizing them to reject certain unexpired leases and executory contracts pursuant to 11 U.S.C. § 365. OVERVIEW: The debtors had filed a motion for an order authorizing them to reject certain unexpired leases and executory contracts pursuant to 11 U.S.C. § 365. However, on that same day, the debtors discovered that the exhibit to the original motion contained several executory contracts which the debtors did not, in fact, want to reject. The debtors’ counsel contacted the clerk’s office and chambers in an effort to prevent the entry of the order. The clerk’s office changed the docket entry for the certificate of no objection to indicate that it had been “entered in error.” However, an order was entered granting the motion. It was clear that the order could have been vacated under Fed. R. Civ. P. 60(a)(1) since it was entered by mistake or inadvertence. However, the court also noted that counsel used inappropriate means of attempting to prevent entry of the order. In re Sleepmaster Fin. Corp., 2002 Bankr. LEXIS 1196, 284 B.R. 411 (Bankr. D. Del. October 23, 2002) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01 [back to top]

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Creditor’s claim for environmental clean-up estimated based on costs already incurred but not reimbursed, excluding any claim for future costs. Bankr. D. Del. PROCEDURAL POSTURE: The debtors filed a motion to estimate, under 11 U.S.C. § 502(c), a creditor’s claim for recovery of past and future costs related to cleanup of environmental contamination under 42 U.S.C. §§ 9607(a) and 9613(f), of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). The creditor argued that, as a state school, it was an arm of the state and had sovereign immunity under the Eleventh Amendment. OVERVIEW: The creditor has waived any Eleventh Amendment sovereign immunity by filing a proof of claim and consenting to determination of the amount of its claim in the bankruptcy court. The creditor could not proceed under 42 U.S.C. § 9607 solely by virtue of its status as a governmental entity. Where both parties were potentially responsible parties (“PRP”), any claim that would reapportion costs between the parties was a claim for contribution. The environmental enforcement role was undertaken by the government, not by the creditor. The creditor was a contributor to the contamination as a sponsor of research at the site. It had stated that all research materials left at the site by sponsors contained hazardous substances and contributed to the harm. The creditor was an operator under section 101(20)(A)(ii) of CERCLA and was limited to a claim for contribution under 42 U.S.C. § 9613. The claim had to be disallowed under 11 U.S.C. § 502(e)(1) as to future costs. Under the debtors’ plan, the creditor would receive only 9.6 percent of any claim allowed. The claim was estimated in the full amount of the costs already incurred for which the creditor had not received reimbursement. In re Kaiser Group, Int’l, Inc., 2003 Bankr. LEXIS 98, — B.R. — (Bankr. D. Del. February 7, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.04 [back to top]

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Enforcement actions of state department of labor were subject to automatic stay. E.D.N.C. PROCEDURAL POSTURE: Appellant, the North Carolina Department of Labor (“NCDOL”), issued a letter that appellee debtor airline had violated the North Carolina Wage and Hour Act with respect to prepetition vacation wages. The debtor filed an emergency motion to determine the extent of the automatic stay under 11 U.S.C. § 362. The bankruptcy court granted the motion, and the NCDOL appealed. OVERVIEW: The letter stated that payment of the wages was due within 14 days and that unless an appeal was requested within 14 days, the amount due for vacation wages would become final. The NCDOL claimed that the bankruptcy court lacked jurisdiction over the motion because of sovereign immunity, that its enforcement actions were excepted from the automatic stay under 11 U.S.C. § 362(b)(4), and that the automatic stay did not extend to the individuals. The court disagreed, holding that: (1) the Eleventh Amendment was not implicated because the NCDOL was not a named defendant in the motion, the court had jurisdiction over debtors and their estates so sovereign immunity was not implicated, and the automatic stay applied automatically; and (2) the state was not acting within its police powers as the NCDOL was not seeking to recover money to benefit the state, so the pecuniary purpose test was satisfied, and the NCDOL’s claim did not seek to promote public policies but was a suit seeking to recover wages for individuals; and (3) the automatic stay applied as to the claims against the individuals as the debtor’s estate could be diminished as the individuals were covered by corporate insurance. In re Midway Airlines Corp., 2002 U.S. Dist. LEXIS 20855, 283 B.R. 846 (E.D.N.C. October 3, 2002) (Boyle, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5] [back to top]

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Prepetition taxes could not be allowed as administrative expenses. Bankr. D. Md. PROCEDURAL POSTURE: After the debtor’s chapter 11 was converted to chapter 7, a tax creditor county, moved for allowance and payment of personal property taxes for the year 2000 as an administrative expense under 11 U.S.C. §§ 503(b)(1)(B) and (C). Alternatively, the creditor argued that the claim, assessed and due under Md. Code, Tax-Prop. §§ 6-202, 10-102(a) and 14-804, was entitled to priority under 11 U.S.C. § 507(a)(8). OVERVIEW: The debtor filed bankruptcy in September, 2000. Under Md. Code, Tax-Prop. § 10-102(a), the property taxes were due on July 1 in each taxable year. The year 2000 taxes were not incurred postpetition. Only taxes incurred postpetition could be allowed as administrative expenses under 11 U.S.C. § 503(b)(1)(B)(i). The county held a liquidated claim on July 1, and held an unliquidated and contingent claim from the date of assessment, January 1. Therefore, the taxes were incurred on January 1 and were prepetition. 11 U.S.C. § 507(a)(8) only provided priority treatment to unsecured tax claims. Under Md. Code, Tax-Prop. § 14-804, the tax claim was a secured claim. If the tax claim was a secured claim under section 14-804, then it was not entitled to unsecured priority treatment under 11 U.S.C. § 507(a)(8). As the tax was computed upon the value of personal property and formed a statutory priming first lien upon such property, it appeared that it was a secured claim on the petition date. No evidence was offered to demonstrate that the claim was other than secured. Therefore, the alternative treatment under section 507(a)(8) was also denied. In re Pasta Café Corp., 2002 Bankr. LEXIS 1188, 284 B.R. 564 (Bankr. D. Md. September 26, 2002) (Keir, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.07 [back to top]

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Tax claim treated as secured under state law was not entitled to unsecured priority treatment. Bankr. D. Md. PROCEDURAL POSTURE: After the debtor’s chapter 11 was converted to chapter 7, a tax creditor county, moved for allowance and payment of personal property taxes for the year 2000 as an administrative expense under 11 U.S.C. §§ 503(b)(1)(B) and (C). Alternatively, the creditor argued that the claim, assessed and due under Md. Code, Tax-Prop. §§ 6-202, 10-102(a) and 14-804, was entitled to priority under 11 U.S.C. § 507(a)(8). OVERVIEW: The debtor filed bankruptcy in September, 2000. Under Md. Code, Tax-Prop. § 10-102(a), the property taxes were due on July 1 in each taxable year. The year 2000 taxes were not incurred postpetition. Only taxes incurred postpetition could be allowed as administrative expenses under 11 U.S.C. § 503(b)(1)(B)(i). The county held a liquidated claim on July 1, and held an unliquidated and contingent claim from the date of assessment, January 1. Therefore, the taxes were incurred on January 1 and were prepetition. 11 U.S.C. § 507(a)(8) only provided priority treatment to unsecured tax claims. Under Md. Code, Tax-Prop. § 14-804, the tax claim was a secured claim. If the tax claim was a secured claim under section 14-804, then it was not entitled to unsecured priority treatment under 11 U.S.C. § 507(a)(8). As the tax was computed upon the value of personal property and formed a statutory priming first lien upon such property, it appeared that it was a secured claim on the petition date. No evidence was offered to demonstrate that the claim was other than secured. Therefore, the alternative treatment under section 507(a)(8) was also denied. In re Pasta Café Corp., 2002 Bankr. LEXIS 1188, 284 B.R. 564 (Bankr. D. Md. September 26, 2002) (Keir, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10 [back to top]

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Transfers by debtors to other ministries were made for value and in good faith. 5th Cir. PROCEDURAL POSTURE: Appellee bankruptcy trustee brought an adversary proceeding to recover money paid by debtors to appellant ministries. The United States District Court for the Middle District of Louisiana reversed the bankruptcy court’s determination in favor of the ministries regarding certain transfers under 11 U.S.C. § 548. The ministries appealed. OVERVIEW: The trustee argued and the ministries contested that transfers under an option agreement for the purchase of certain real estate could be avoided as actual and/or constructive fraudulent conveyances under 11 U.S.C. § 548(a). The ministries additionally claimed the “good faith” defense of 11 U.S.C. § 548(c). The court of appeals found that the bankruptcy court’s findings were comprehensive, cogent, and entitled to the respect due them under the clear error standard. It was undisputed that the ministries took for value and section 548(c) allowed a transferee who took for value to retain the transfer to the extent that he gave value to the debtor in exchange. The call option had value, their values were determined at the time of origination and the debtor’s practical inability to exercise his option was irrelevant to its valuation under section 548(c). Therefore, the ministries did not part with a right worth less than what the debtor had paid for it. The court rejected the finding of bad faith on the part of the ministries. The transaction was not outside the scope of La. Civ. Code art. 2040. Jimmy Swaggart Ministries v. Hayes (In re Hannover Corp.), 2002 U.S. App. LEXIS 22490, 310 F.3d 796 (5th Cir. October 29, 2002) (Jones, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.01 [back to top]

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Disgorgement of attorneys’ fees required in order to achieve a pro rata disbursement among administrative claimants. Bankr. W.D. Mich. PROCEDURAL POSTURE: A debtor filed a chapter 11 petition, and the debtor’s counsel was paid a retainer that the court approved. The United States trustee moved to convert the case to chapter 7, which was granted. The court later entered an order that approved a proposed distribution and disgorgement of the debtor’s counsel’s fees. The debtor moved for reconsideration, and the United States trustee and two creditors objected to the debtor’s motion. OVERVIEW: The debtor’s counsel argued that disgorgement of attorneys’ fees after conversion from chapter 11 was discretionary under 11 U.S.C. § 331, and the court agreed that disgorgement was discretionary under section 331 because the allowance of compensation was always discretionary. The court disagreed with the counsel’s position and found that 11 U.S.C. § 726(b) required the disgorgement of interim compensation in every case of administrative insolvency in order to achieve a pro rata disbursement. To allow the debtor’s counsel to collect more than the other administrative claimants was a violation of the equality of distribution required under 11 U.S.C. § 726(b). The amount of fees subject to review at the end of a case was not only the balance due at the end but all compensation sought, including the interim fees and the retainer already received. The entire amount of the fees, and not just the amount the attorney sought over and above the retainer, was subject to review and award. In re Specker Motor Sales Co., 2003 Bankr. LEXIS 163, — B.R. — (Bankr. W.D. Mich. February 26, 2003) (Stevenson, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:726.03 [back to top]

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Creditor’s pursuit of contempt proceedings against debtor was a willful violation of stay justifying award of attorneys’ fees. Bankr. N.D. Ill. PROCEDURAL POSTURE: The debtor filed a motion for damages, costs, and attorneys’ fees under 11 U.S.C. § 362(h), arguing the creditor’s actions in proceeding with post-judgment debt collection activity in state court violated the automatic stay imposed by 11 U.S.C. § 362(a). The creditor filed a motion seeking a declaration that the automatic stay did not apply to its state court actions, or alternatively, seeking relief from the stay under 11 U.S.C. § 362(d). OVERVIEW: The state court’s finding that the stay did not apply was not a final judgment and did not implicate Rooker-Feldman. The erroneous state court decision as to the applicability of the stay was void ab initio. The creditor was not a governmental unit. The pursuit of civil contempt proceedings was a private pursuit of individual interests in enforcing a court order to assist in collecting a judgment. The police power exception of 11 U.S.C. § 362(b)(4) did not apply. The creditor’s actions were subject to the stay. The contempt proceedings were pursued with knowledge of the bankruptcy. It was a deliberate action, a willful violation of the stay. 11 U.S.C. § 362(h) did not require a specific intent to violate the stay. The debtor was awarded actual damages, including attorneys’ fees and costs caused by the stay violation. The attorneys’ fees were reduced to those entries reflecting damages actually caused by the violation. Punitive damages were not justified. Retroactive relief from the stay was not proper under equitable standards. The state court proceeding sought records that were property of the estate under 11 U.S.C. § 541(a) which were more properly examined by the trustee. In re Banalcazar, 2002 Bankr. LEXIS 1240, 283 B.R. 514 (Bankr. N.D. Ill. August 15, 2002) (Wedoff, B.J.).

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

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Bankruptcy court properly denied motion to avoid judicial lien on bank accounts as government proceeds deposited therein were not exempt. S.D. Ill. PROCEDURAL POSTURE: Appellant debtor filed a bankruptcy petition under the Bankruptcy Code and filed a motion pursuant to 11 U.S.C. § 522(f)(1)(A) to avoid a judicial lien of appellee creditor. The creditor objected to the motion. The court ruled against the debtor and the debtor appealed the decision of the bankruptcy court. OVERVIEW: The debtor alleged that the balances of the subject bank accounts were traceable to specific monthly deposits that were subject to state exemption law. No objection to the claimed exemptions was filed within 30 days of the creditors’ meeting. The bankruptcy court determined that the debtor’s claim of exemption was without merit. In lien avoidance proceedings, the dispute over exempt proceeds concerned only the lien creditor and the debtor, not the estate. Only the debtor’s entitlement to avoid the lien was at issue. The district court agreed with the bankruptcy court and rejected the debtor’s argument that certain government payments were exempt under 11 U.S.C. § 522. The district court found no clear error in the bankruptcy court’s decision. The debtor failed to overcome the burden necessary on the lien avoidance action. Schoonover v. Karr, 2002 U.S. Dist. LEXIS 21595, 285 B.R. 695 (S.D. Ill. August 20, 2002) (Gilbert, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11 [back to top]

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Claim for legal fees relating to modification of child support and judgment as to amount of child support arrearage was entitled to priority status. Bankr. E.D. Mo. PROCEDURAL POSTURE: A chapter 13 trustee objected to the priority status of a proof of claim filed by a creditor. The trustee alleged that the claim did not appear to be entitled to priority and that the claim failed to specify the priority of the claim as required. OVERVIEW: The creditor stated that his claim was based on fees for legal services related to the modification of child support and a judgment as to the amount of arrearage owed. He requested that the claim be paid as a priority child support claim and not as a general unsecured claim. Upon a review of the information provided on the face of the proof of claim, and the documents attached thereto, the court agreed that the creditor had identified himself as the holder of a prepetition claim for maintenance, alimony, or support, and that the proof of claim adequately specified its priority as based on child support. The claim was thus entitled to priority status under 11 U.S.C. § 507(a)(7). Although the debtor intended to treat the claim as a general unsecured clam, neither the debtor’s listing of a claim in the chapter 13 schedules, nor the terms of a confirmed plan controlled or changed the status of an otherwise allowable proof of claim. The allowed proof of claim was controlling. Although the creditor was bound by the terms of the confirmed plan, his allowed priority claim was not provided for by the plan, and was not subject to discharge. In re Fiore, 2003 Bankr. LEXIS 171, — B.R. — (Bankr. E.D. Mo. February 13, 2003) (Barta, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.09 [back to top]

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