Collier Bankruptcy Case Update March-4-02
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
March 4, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 362(a)Stay was not violated because creditor’s postpetition withholding was in the nature of recoupment.
Holyoke Nursing Home, Inc. v. Health Care Fin. Admin. (In re Holyoke Nursing Home, Inc.) (Bankr. D. Mass.)
§ 523(a)(2)(A)Adversary proceeding was remanded so that the bankruptcy court could apply proper causation standard.
Gem Ravioli, Inc. v. Creta (In re Creta) (B.A.P. 1st Cir.)
§ 541(a)(1)Estate’s contingent interest in withheld funds did not give it a right to profits from or interest on the funds.
Mid-Island Hosp., Inc. v. Empire Blue Cross & Blue Shield (In re Mid-Island Hosp., Inc.) (2d Cir.)
§ 541(a)(1)Art distributor was not improperly prevented from arguing that it owned certain artwork based on chapter 11 plan of entity whose assets it purchased.
Kaufman v. Chalk & Vermilion Fine Arts, LLC (2d cir.)
§ 542(e) Debtor’s motion for summary judgment granted in proceeding to compel counsel to turn over materials related to representation of debtor to third party.
American Metrocomm Corp. v. Duane Morris & Heckscher, LLP (In re American Metrocomm Corp.) (Bankr. D. Del.)
28 U.S.C. § 1334(b) Motion to dismiss properly denied as bankruptcy court had subject matter jurisdiction.
All Star Int’l Trucks, Inc. v. Burlington Motor Carriers, Inc. (In re Burlington Motor Holdings, Inc.) (D. Del.)
§ 502(b) IRS claim allowed despite amendments and admitted errors.
Moser v. United States (In re Moser) (4th Cir.)
§ 365(f)(1) Assignment of settlement agreement into a trust under debtor’s plan did not breach the agreement.
Certain Underwriters at Lloyd’s v. McDermott Int’l, Inc. (E.D. La.)
§ 303(b) Third party did not have asserted general partnership interest in partnership and lacked standing to file involuntary case.
In re Morgan Sangamon Partnership (N.D. Ill.)
§ 1325(a) Order confirming plan that imposed nonstatutory requirements on the debtors was reversed.
Petro v. Mishler (7th Cir.)
§ 523(a)(8) ) Bankruptcy court did not err in discharging mentally depressed debtor’s student loan.
Long v. Educ. Credit Mgmt. Corp. (In re Long) (B.A.P. 8th Cir.)
§ 524(f) Dismissal of debtors’ complaint against creditor for violation of discharge injunction was upheld on appeal because their postpetition payments were voluntary.
Dubois v. Ford Motor Credit Co. (8th Cir.)
§ 541(a)(1)) Estate had no interest in postpetition funds received by debtor because law authorizing payments postdated his petition date.
Drewes v. Vote (In re Vote) (8th Cir.)
§ 362(b)(2) Court of Appeals reversed denial of debtor’s former wife’s motion for relief from stay to modify spousal support award and appeal marital dissolution judgment.
Allen v. Allen (9th Cir.)
§ 506(c) Trustee could not recover surcharge for necessary expenses in preserving the estate, as a matter of law.
Poonja v. Alleghany Props. (In re Los Gatos Lodge) (9th Cir.)
§ 523(a)(2)(A) Debtor was not collaterally estopped by settlement with bank from denying bank’s allegations of fraud.
Bank of China v. Huang (In re Huang) (9th Cir.)
§ 523(a)(2)(A) Bankruptcy court erroneously granted summary judgment because debtor’s intent had not been actually determined in previous litigation.p>§ 1306(A) Tax refund received by chapter 13 trustee after discharge was entered and certification of completion was filed considered part of debtors’ disposable income.
Cobb v. Lewis (In re Lewis) (B.A.P. 10th Cir.)
Midkiff v. Dunivent (In re Midkiff) (B.A.P. 10th Cir.)
28 U.S.C. § 157(b) Court amended judgment to reflect that adversary proceeding was a core proceeding.
Mauer v. Mauer (In re Mauer) (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries1st Cir.
Stay was not violated because creditor's postpetition withholding was in the nature of recoupment. Bankr. D. Mass. The chapter 11 debtor nursing home filed an adversary proceeding against the Health Care Financing Administration to recover alleged unauthorized postpetition offsets. Pursuant to the parties’ Medicare provider agreement, the debtor performed services for its Medicare recipient residents and was reimbursed by the administration for the estimated costs of the services on a monthly basis. An audit revealed that the debtor had been overpaid and, subject to regulations covering the Medicare program, subsequent payments due the debtor on account of invoices submitted thereafter were withheld in order to recover the overpayments. After the debtor filed its petition, it continued to provide postpetition services under the provider agreement and submitted invoices for payment. The administration applied payments due on the postpetition invoices to the overpayments. The debtor claimed that the postpetition withholdings constituted offsets that violated the automatic stay.The administration contended that the withholdings were in the nature of recoupment, to which section 362(a) did not apply. The bankruptcy court granted the administration’s motion for summary judgment, holding that the withholding by the administration of amounts due the debtor postpetition, in order to recover prepetition overpayments, was in the nature of recoupment and did not violate the automatic stay. The court adopted the majority view and concluded that the continuous system of estimated payments, and subsequent adjustments required by the applicable statutory Medicare provisions, constituted the same transaction for purposes of recoupment. Holyoke Nursing Home, Inc. v. Health Care Fin. Admin. (In re Holyoke Nursing Home, Inc.), 2002 Bankr. LEXIS 25, - B.R. - (Bankr. D. Mass. January 11, 2002) (Boroff, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
Adversary proceeding was remanded so that the bankruptcy court could apply proper causation standard. B.A.P. 1st Cir. The creditor appealed the bankruptcy court’s order finding the chapter 7 debtor’s obligation dischargeable pursuant to section 523(a)(2)(A). After the debtor allegedly misrepresented that he had a license permitting him to engage in the business of refrigeration and air conditioning, the creditor entered into a contract with the debtor for the installation of two air conditioning units. The units ceased functioning a short time later and the creditor obtained a state (Rhode Island) judgment against the debtor. The bankruptcy court determined that the debtor was entitled to discharge its debt because the creditor has not established a causal connection between the fraudulent representations and the damages suffered. The B.A.P. reversed, holding that the bankruptcy court did not apply the correct legal standard and, therefore, erroneously concluded that the creditor had not established factual and legal causation. The creditor would have met its burden to set forth a prima facie case on the elements of proximate cause if it established that (1) the debtor made a fraudulent misrepresentation that went to the essence of the contract; (2) the creditor’s reliance upon the debtor’s false statement was a substantial factor in the retention of the debtor to install the air conditioner; and (3) the creditor’s contractual loss would reasonably have been expected to result from reliance on the misrepresentation. The matter was remanded for findings on causation, as well as the other elements of section 523(a)(2)(A). Gem Ravioli, Inc. v. Creta (In re Creta), 2002 Bankr. LEXIS 18, 271 B.R. 214 (B.A.P. 1st Cir. January 7, 2002) (per curiam).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Estate’s contingent interest in withheld funds did not give it a right to profits from or interest on the funds. 2d Cir. The chapter 11 debtor hospital and creditors’ committee appealed a district court order affirming the bankruptcy court’s grant of summary judgment in favor of the defendant insurance company. The debtor had commenced an adversary proceeding to recover interest or other profits arising from funds withheld by the insurance company, claiming that the interest was property of the estate. A state (New York) regulation required hospitals to make payments into various pools that were used to fund excess liability for emergency care physicians. Because the debtor hospital became delinquent on its obligations to the pools, the insurer withheld 10 percent of all payments due the debtor, as required by the state regulation. While the parties agreed to hold the withheld funds in escrow, the debtor and committee contended that the insurer was obligated to pay interest on the funds to the estate. The district court found that the withheld funds were not property of the estate because the debtor was not entitled to them as of the date it filed its petition and, consequently, any interest or profits did not belong to the estate. The Court of Appeals for the Second Circuit affirmed the district court, holding that although the debtor had a limited, contingent interest in the withheld funds when it filed its petition, the insurer had no obligation to pay the debtor interest or invest the funds for the debtor’s benefit. The debtor’s speculative interest in the funds, which was contingent on the satisfaction of its obligation to the state, was property of the estate. The insurer, nevertheless, had no obligation under state law to invest the funds for the debtor’s benefit or to pay interest on them.Mid-Island Hosp., Inc. v. Empire Blue Cross & Blue Shield (In re Mid-Island Hosp., Inc.), 2002 U.S. App. LEXIS 658, 276 F.3d 123 (2d Cir. January 15, 2002) (Pooler, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.05
Art distributor was not improperly prevented from arguing that it owned certain artwork based on chapter 11 plan of entity whose assets it purchased. 2d Cir. An artist obtained a judgment against an art distributor after a jury trial on a variety of claims involving breach of contract and conversion of artwork on consignment. The distributor appealed and argued, among other things, that it was improperly prevented from arguing at trial that it owned the artwork at issue based on the chapter 11 reorganization plan of the artist’s previous art distributor, whose assets the distributor had acquired at auction. The artist argued that his artwork never became part of the debtor/distributor’s bankruptcy estate because under applicable state (California) law (Cal. Civ. Code § 1738 et. seq.), the debtor/distributor had bare legal title while he retained the entire equitable beneficial interest in his consigned artwork. The debtor did not dispute the artist’s substantive claim, but argued that the artist was barred by estoppel and res judicata from litigating the issue because it could have properly been presented before the bankruptcy court. The Court of Appeals for the Second Circuit rejected the debtor’s arguments, and affirmed the decision of the district court. The Court of Appeals agreed that the dispute over whether the artist’s consigned art was part of the debtor’s estate could have been litigated in the bankruptcy court, where the artist would have won. However, the court rejected the debtor’s assertion that the artist, as the beneficiary of a trust, had to bring the claim in bankruptcy court so the trust res could be distinguished from nontrust property. The court noted that the property of the trust was clearly identified when the artwork was moved to a third-party storage facility before the bankruptcy proceedings began, and that it was clear to everyone involved that the artwork had been identified as the artist’s and returned to the debtor on consignment. The court also noted that the debtor’s estate representative expressly reserved the right to attempt to avoid prepetition transfers of artwork as preferential transfers, but declined to do so. The court concluded that in the absence of such an attempt at avoidance, the artist had no reason to begin litigation.Kaufman v. Chalk & Vermilion Fine Arts, LLC, 2002 U.S. App. LEXIS 621, — F.3d — (2d Cir. January 11, 2002) (Walker, C.J., Pooler, C.J, Katzmann, C.J. (summary order).
Collier on Bankruptcy, 15th Ed. Revised 5:541.06[b]
Debtor’s motion for summary judgment granted in proceeding to compel counsel to turn over materials related to representation of debtor to third party. Bankr. D. Del.In connection with an asset purchase agreement, the chapter 11 debtor assigned its interest in certain litigation claims and delegated the management of other litigation claims to a third party. The debtors then requested that their attorneys turn over all files, papers and property related to their representation of the debtor to the third party or its designee. The attorneys failed to turn over the requested materials, and asserted that they had statutory and/or common law liens on the materials because the debtor failed to fully pay for their services. In response, the debtor and the third party filed an adversary complaint against the attorneys seeking, among other things, turnover of the materials pursuant to section 542(e). The debtor and third party moved for summary judgment. The bankruptcy court granted the summary judgment motion. The court held that the attorneys were required to turn over the materials requested, whether given to them by the debtor or prepared for the debtor by them in the course of performing professional services for the debtor, and no adequate protection was required because none of the attorneys held valid, perfected and enforceable liens in the materials documents under applicable state (Louisiana and California) law. The court found that the debtor, as debtor in possession, was entitled to seek turnover of the materials, and that the addition of the third party as a plaintiff did not alter the fact that the debtor could seek turnover on its own behalf. The court also concluded that the estate would benefit from turnover of the materials, but that whether the materials constituted property of the estate was irrelevant to the court’s determination of whether turnover was proper under section 542(e). Finally, the court determined that turnover was not precluded by the debtor’s purported failure to waive its attorney-client privilege or by the work product privilege.American Metrocomm Corp. v. Duane Morris & Heckscher, LLP (In re American Metrocomm Corp.), 2002 Bankr. LEXIS 11, — B.R. — (Bankr. D. Del. January 7, 2002) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:542.06
Collier on Bankruptcy, 15th Ed. Revised 1:3.02-.03
IRS claim allowed despite amendments and admitted errors. 4th Cir. After the debtors filed for bankruptcy, the IRS filed a proof of claim for unpaid taxes, penalties and interest for the 1984 and 1988 tax years. The IRS later amended its claim three times, with the variances in the numbers among the several proofs of claim being due solely to differences in the IRS’s calculations of the penalties and interest owed for the 1984 tax year. The debtors objected to the claim, arguing that the IRS should not benefit from the presumption of correctness because the proof of claim had been amended three times and was more likely than not to be incorrect. (The IRS also admitted that even its third amended proof of claim contained mistakes, albeit mistakes in favor of the debtors). Over the debtors’ objection, the bankruptcy court allowed the claim and ruled that the debtor’s had failed to produce sufficient evidence to rebut the presumption of correctness that attached to the IRS’s proof of claim. The district court affirmed.On appeal, the Fourth Circuit affirmed the lower courts’ decisions and found that the IRS’s earlier failures to properly calculate the penalties and interest on the debtors’ 1984 tax deficiency were not be sufficient by themselves to prove that the IRS’s final, third amended proof of claim was arbitrary and excessive. Since the debtors had offered no additional proof of the incorrectness of the IRS’s claim, it was allowed to stand. Moser v. United States (In re Moser), 2002 U.S. App. LEXIS 463, - B.R. - (4th Cir. January 9, 2002) (per curiam).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03
Assignment of settlement agreement into a trust under debtor’s plan did not breach the agreement. E.D. La. The underwriters that provided liability coverage for asbestos-related claims to the chapter 11 debtor filed a complaint seeking declaratory judgment against the debtor. The underwriters and the debtor had entered into a prepetition settlement agreement resolving their differences about the availability and extent of coverage that the underwriters provided. After the debtor filed its petition, it submitted a plan of reorganization proposing to establish a trust into which asbestos claims would be channeled for administration and payment. The underwriters alleged that the debtor committed an anticipatory repudiation of the settlement agreement by proposing in the plan to assign the management of claims under the agreement to a trust. The district court granted summary judgment for the debtor, holding that because the trust provisions of the plan did not express the debtor’s unequivocal intent to cease performance of the settlement agreement, the debtor did not commit an anticipatory repudiation of the agreement. The Code allowed the debtor to freely assign its executory contracts, and the settlement agreement did not prohibit its own assignment.Certain Underwriters at Lloyd’s v. McDermott Int’l, Inc., 2002 U.S. Dist. LEXIS 874, - F. Supp.2d - (E.D. La. January 4, 2002) (Vance, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.08
Third party did not have asserted general partnership interest in partnership and lacked standing to file involuntary case. N.D. Ill. After one of three general partners in a partnership filed a voluntary chapter 7 petition, the bankruptcy court entered an order authorizing the sale of the debtor’s rights, title and interest in the partnership to a third party. Approximately three years later, the third party filed an involuntary chapter 7 case against the partnership. The third party claimed that he had standing to file the involuntary petition under section 303(b) as a general partner of the partnership. The partnership denied that the third party was a general partner. The partnership argued that based on the application of an 'ipso facto' clause contained in the partnership agreement, the partnership terminated and dissolved upon the debtor’s voluntary chapter 7 filing, and all the third party acquired was an economic interest, not an interest as a general partner. The district court agreed with the partnership, and granted its motion to dismiss the involuntary petition. The court held that the partnership agreement’s ipso facto clause was enforceable under applicable state (Illinois) law and the partnership dissolved upon the general partner’s voluntary bankruptcy filing; thus, the debtor did not transfer a general partnership interest to the third party. In re Morgan Sangamon Partnership, 2001 Bankr. LEXIS 1710, 269 Bankr. 652 (N.D. Ill. July 3, 2001) (Katz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:303.03
Order confirming plan that imposed nonstatutory requirements on the debtors was reversed.7th Cir. The chapter 13 debtors appealed the district court order that affirmed the bankruptcy court’s conditional confirmation of their plan. The trustee had objected to the debtors’ plan and requested that, as a condition of confirmation, every six months the debtors send him sworn affidavits with statements of their income and check stubs. Although the trustee did not raise any objection to confirmation of the plan pursuant to section 1325(b), and there was no evidence to demonstrate that the plan could not be confirmed, the bankruptcy court approved of the condition. The district court affirmed and concluded that the imposition of the reporting requirement was proper pursuant to the court’s powers under section 105(a). The Court of Appeals for the Seventh Circuit reversed, holding that because the plan met the specific and limited requirements enumerated in section 1325(a), it was improper to condition confirmation of the debtors’ plan on an additional reporting requirement. The plain language of the statute provided that if the trustee failed to object to the plan pursuant to section 1325(b), the plan 'shall' be confirmed. The court noted that the trustee retained separate statutory authority to move for modification of the plan in the event he discovered that the debtors’ income increased postconfirmation.Petro v. Mishler, 2002 U.S. App. LEXIS 370, 276 F.3d 375 (7th Cir. January 10, 2002) (Flaum, C.J.).
Collier on Bankruptcy15th Ed. Revised 8:1325; 2:105
Bankruptcy court did not err in discharging mentally depressed debtor’s student loan. B.A.P. 8th Cir. The chapter 7 debtor, a licensed Doctor of Chiropractic, was overcome by a malady that ultimately caused her to lose her license and compelled her to live with her parents. She obtained a job at a community college, working only part time. After filing a chapter 7 petition, she sought discharge of her $61,800 in student loans as an undue hardship. The bankruptcy court held that the obligations were dischargeable and the lender appealed, asserting that the court’s conclusions should be reviewed de novo and that the bankruptcy court clearly erred. Reviewing for clear error, the B.A.P. for the Eighth Circuit affirmed, holding that the bankruptcy court did not err in determining that the debtor’s mental illness was sufficiently debilitating to warrant discharge of the student loan obligations. Applying the totality of the circumstances test, the B.A.P. concluded that (1) the debtor was so constrained by her mental condition that it was unlikely her financial condition would improve; (2) although the debtor’s 10-year old daughter was in a private school and the debtor worked less than full time, she lived modestly and had significantly reduced her living expenses; and (3) it was unrealistic, in light of her burdens and difficulties, to believe that this debtor could pay the large sum owing.Long v. Educ. Credit Mgmt. Corp. (In re Long), 2002 Bankr. LEXIS 13, 271 B.R. 322 (B.A.P. 8th Cir. January 10, 2002) (Hill, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:523.14
Dismissal of debtors’ complaint against creditor for violation of discharge injunction was upheld on appeal because their postpetition payments were voluntary. 8th Cir. The chapter 7 debtors appealed the district court’s dismissal of their complaint against the creditor. At the time the debtors filed their petition, the debtors stated their intent to keep the vehicle and maintain payments under a lease that they had previously entered into with the creditor. Following their discharge, the debtors continued to make lease payments and eventually approached the creditor’s dealership to lease a new vehicle. During the negotiations for the second lease, the creditor informed the debtors that they owed for excess mileage and wear and tear fees under the first lease, and that the creditor would enter the second lease with them only if they agreed to either pay those fees or roll them into the second lease. The debtors agreed to roll the fees into the second lease. After making payments on the second lease for over two years, the debtors brought the action alleging, among other things, that the creditor violated the discharge injunction by requiring them to roll the excess usage charges into the second lease. The district court found that none of the payments violated the discharge injunction because they were voluntary and granted the creditor’s motion to dismiss the complaint. The Court of Appeals for the Eighth Circuit affirmed, holding that because the debtors voluntarily entered into the second lease and voluntarily agreed to pay the excess fees, they failed to state a claim for a violation of section 524. The court determined that the creditor’s requirement that the debtors pay fees stemming from their postdischarge use of the first vehicle before the creditor would agree to finance the second vehicle, without more, simply was not coercive (citing Collier on Bankruptcy, 15th Ed. Revised). Dubois v. Ford Motor Credit Co., 2002 U.S. App. LEXIS 668, 276 F.3d 1019 (8th Cir.January 16, 2002) (Hansen, C.J.)
Collier on Bankruptcy, 15th Ed. Revised 4:524.06
Estate had no interest in postpetition funds received by debtor because law authorizing payments postdated his petition date. 8th Cir.The chapter 7 trustee appealed the decision of the B.A.P. affirming the bankruptcy court’s ruling that the debtor could retain payments made to him under two farm loss compensation programs. The debtor, a farmer, had not planted a crop the year he filed his petition because the soil was saturated. Two years later, Congress enacted regulations to compensate farmers for losses related to crop disasters and the debtor received assistance funds. The bankruptcy court denied the trustee’s motion to compel the debtor to turn over those payments and the B.A.P. affirmed on appeal. The Court of Appeals for the Eighth Circuit affirmed the judgment, holding that the farm loss compensation payments were not property of the estate under section 541(a)(1) because the debtor did not have a legal or equitable interest in the payments at the time he filed his petition. The trustee could not assert more rights than the debtor had at the commencement of the case. When he filed his petition, the debtor only had a mere hope that his losses might generate revenue in the future. The court further noted that the payments were not an after-acquired interest of the estate pursuant to section 541(a)(7) because the losses themselves were not included as property of the estate.Drewes v. Vote (In re Vote), 2002 U.S. App. LEXIS 669, 276 F.3d 1024 (8th Cir. January 16, 2002) (Wollman, C.J.).Collier on Bankruptcy, 15th Ed. Revised 5:541.06
Court of Appeals reversed denial of debtor’s former wife’s motion for relief from stay to modify spousal support award and appeal marital dissolution judgment. 9th Cir. The debtor’s former wife sought relief from the automatic stay in order to pursue a modification of spousal support and an appeal of her marital dissolution judgment in state court. The bankruptcy court denied relief on the grounds that the former wife failed to show adequate cause pursuant to section 362(d)(1), and the district court affirmed. The Court of Appeals for the Ninth Circuit reversed because the bankruptcy court did not evaluate the former wife’s request for relief from the stay under section 362(b)(2)(A)(ii), which wholly exempts actions for 'the establishment or modification of an order for alimony, maintenance, or support' from the automatic stay regardless of 'cause.' The court concluded that to the extent that the former wife sought to modify her maintenance award (including an increase for medical expenses that arose as a consequence of an alleged assault by the debtor) or sought to challenge the state court’s calculation and award of maintenance, the proceedings fell within the section 362(b)(2)(A)(ii) exemption. The court also stated that whether the modification action and appeal encompassed claims that were unrelated to alimony, maintenance or spousal support was a factual question for consideration by the bankruptcy court on remand.Allen v. Allen, 2002 U.S. App. LEXIS 452, 275 F.3d 1160 (9th Cir. January 11, 2002) (McKeown, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.05
Trustee could not recover surcharge for necessary expenses in preserving the estate, as a matter of law. 9th Cir. The chapter 7 trustee appealed a judgment of the district court that reversed the bankruptcy court’s order awarding his a section 506(c) surcharge against the creditor. The creditor had a prepetition security interest in furniture, fixtures and equipment located at the lodge owned by the debtor’s principals. The principals subsequently transferred ownership of the personal property to the debtor and defaulted on the loan from the creditor. Both the debtor and the principals filed chapter 11 petitions and the trustee operated and managed the lodge. After the cases converted to chapter 7, the trustee and the creditor disputed what effect the principals’ transfer of ownership of the personal property had on the security agreement with the creditor. The parties ultimately reached a settlement whereby the creditor purchased from the estate all of the items potentially subject to the security agreement and, as part of the settlement, the bankruptcy court disallowed the creditor’s claims in their entirety. The trustee then filed an adversary proceeding to surcharge the collateral and recover the value of his services for the time that he operated the lodge. The bankruptcy court ruled in favor of the trustee and the district court reversed. The Court of Appeals for the Ninth Circuit affirmed the district court, holding that the trustee could not surcharge the creditor for necessary expenses in preserving property pursuant to section 506(c) after the creditor’s secured claim had been disallowed. The court rejected the trustee’s argument that a section 506(c) recovery was proper because the secured claim was 'deemed allowed' pursuant to section 502(a) at the time the preservation expenses were incurred. In order to have been eligible for a section 506(c) surcharge, the claim must have been an 'allowed secured claim' at the time the section 506(c) action was filed (citing Collier on Bankruptcy, 15th Ed. Revised). Poonja v. Alleghany Props. (In re Los Gatos Lodge), 2002 U.S. App. LEXIS 712, 278 F.3d 890 (9th Cir. January 17, 2002) (Thomas, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.05
Debtor was not collaterally estopped by settlement with bank from denying bank’s allegations of fraud. 9th Cir. A bank filed a prepetition federal district court action against the chapter 7 debtor asserting various causes of action, including breach of contract, fraud, breach of the covenant of good faith, fraudulent conveyance, intentional interference with contractual relations, constructive trust and RICO. A prepetition settlement was reached in which the debtor agreed not to file a voluntary bankruptcy case and that any debt that arose from the settlement agreement was, in any event, nondischargeable in bankruptcy. Fourteen months later, the debtor filed her chapter 7 petition, and the bank brought an adversary proceeding seeking to enforce the terms of the settlement agreement. The bankruptcy court granted the bank’s motion for summary judgment, but the district court reversed. The district court held that the settlement agreement’s provisions that the judgment and debt were nondischargeable and that the debtor would not enter bankruptcy were unenforceable. The district court further held that since the settlement, the parties’ stipulation, and the judgment did not include any of the underlying facts regarding the debtor’s allegedly fraudulent activities, the debtor’s fraud liability was not an essential part of the judgment and, on that basis, collateral estoppel did not apply to the bankruptcy proceeding. The Court of Appeals for the Ninth Circuit affirmed. The court held that the debtor was not collaterally estopped by her settlement with the bank from denying the bank’s allegations of fraud. Bank of China v. Huang (In re Huang), 2002 U.S. App. LEXIS 551, 275 F.3d 1173 (9th Cir. January 14, 2002) (Noonan, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Bankruptcy court erroneously granted summary judgment because debtor’s intent had not been actually determined in previous litigation. B.A.P. 10th Cir. The chapter 7 debtor appealed the order of the bankruptcy court that granted summary judgment for the creditors on the basis that his debt to the creditors was nondischargeable. Although the creditors had already hired an attorney to represent them in a personal injury action, the debtor told the creditors that their original attorney was merely an ambulance chaser and that he could recover a greater sum for them on their lawsuit. The creditors fired their old attorney and retained the debtor, who did nothing on the case other than finalize the paperwork with the insurance company and take one-third of the settlement as a contingency fee. On the advice of the debtor, the creditors disposed of their vehicle, despite the fact that their original attorney had planned to pursue a products liability claim against the manufacturer. The state (Kansas) supreme court suspended the debtor’s law license, finding that he had engaged in conduct involving dishonesty, and the bankruptcy court concluded that such finding established all the elements of section 523(a)(2)(A). On appeal, the debtor argued that the bankruptcy court erred when it found that it was collaterally estopped by the disciplinary hearing from reconsidering the issue of intent under section 523(a)(2)(A). The B.A.P. reversed, holding that because the factual issue of the debtor’s intent was in dispute, summary judgment was inappropriate. The supreme court’s finding of dishonest conduct did not necessarily incorporate the element of 'specific intent' required under section 523(a)(2)(A). Cobb v. Lewis (In re Lewis), 2002 Bankr. LEXIS 15, 271 B.R. 877 (B.A.P. 10th Cir. January 8, 2002) (McFeeley, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Tax refund received by chapter 13 trustee after discharge was entered and certification of completion was filed considered part of debtors’ disposable income. B.A.P. 10th Cir.The chapter 13 debtors’ confirmed plan and the order confirming the plan both provided that for purposes of determining disposable income, income tax refunds to which the debtors were entitled during the first 36 months of the plan would be deemed disposable income, unless otherwise ordered by the court. Such refunds were to be submitted to the chapter 13 trustee, subject to any setoff rights of the IRS. After the debtors’ plan was completed, and on the same date that the court entered their discharge, the chapter 13 trustee filed a revocation of her certification of completion based upon her receipt of the debtors’ 2000 tax refund. The bankruptcy court denied the debtors’ motion to reclaim the tax refund, but granted the trustee’s request to vacate the discharge order to allow her to collect and disburse the refund in accordance with the debtors’ plan. The debtors appealed. The B.A.P. for the Ninth Circuit affirmed. The court held that the right to the debtors’ income tax refund arose during the first 36 months of their plan and, therefore, the refund was includable as disposable income. The court noted that the tax refund dollars received were attributable to monies earned during the first 36 months of the debtors’ plan, and that the debtors would have paid this disposable income during the first 36 months if their estimated tax payments had been correct. The court also held that the bankruptcy court did not err in vacating the debtors’ discharge pursuant based on Bankruptcy Rule 9024.Midkiff v. Dunivent (In re Midkiff), 2002 Bankr. LEXIS 16, 271 B.R. 383 (B.A.P. 10th Cir. January 7, 2002) (Cornish, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1306.02
Court amended judgment to reflect that adversary proceeding was a core proceeding . Bankr. M.D. Fla.The plaintiffs filed an complaint against the debtors in state court seeking declaratory relief that certain life insurance proceeds were the subject of a trust for the benefit of the plaintiffs, and also seeking an equitable lien on any assets acquired by the debtors from the life insurance proceeds. When the state court action was stayed by the debtors’ bankruptcy, the plaintiffs filed an adversary proceeding with the bankruptcy court. Confirmation of the debtors’ chapter 13 plan was delayed pending a determination on the adversary proceeding because the debtors’ plan hinged on the amount, if any, owed to the plaintiffs and the extent to which that amount constituted a lien on the debtors’ homestead. After entering judgment in favor of the plaintiffs on the adversary complaint, the court, on its own motion, reconsidered its order entering judgment in order to correct an omission in the judgment. The court was prompted to reconsider its judgment because of a concern, raised by a split of authority, as to whether the absence of an explicit core finding under 11 U.S.C. § 157(b)(3) deprives the bankruptcy court of jurisdiction, even where the parties fail to make a timely request under section 157(b)(3) for a determination whether a proceeding is a core proceeding. Upon review of the facts, the court found that the matter at issue in the adversary proceeding was a core proceeding under section 157(b)(2)(K) because the relief sought by the plaintiffs required a determination regarding the validity and extent of an equitable lien. The court further found that the proceeding was a core proceeding under section 157(b)(2)(B) because it affected the debtors’ claimed homestead exemption. The court also found that a core proceeding existed under section 157(b)(2)(L) since the plaintiffs’ claim would be dealt with under the debtors’ chapter 13 plan, as well as under section 157(b)(2)(O) since the treatment of the judgment under the debtors’ plan of reorganization would potentially affect the liquidation of the debtors’ assets. The court then amended its Final Judgment to set forth its determination that the issues contained in the adversary complaint constituted a core proceeding under 28 U.S.C. § 157(b)(3) (citing 12 Moore’s Federal Practice, § 60.11[a] (Matthew Bender 3d Ed. 2001) Revised). Mauer v. Mauer (In re Mauer), 2002 Bankr. LEXIS 9, 271 B.R. 207 (Bankr. M.D. Fla. January 2, 2002) (Williamson, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.02,