Collier Bankruptcy Case Update March-5-01
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 5, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 554(d) Real property unscheduled by the debtor could not be deemed abandoned after the closing of the estate.
In re Haralambous (Bankr. D. Conn.)
2d Cir.
§ 502(a) District court denied debtor’s motion to dismiss claim asserted by broker against chapter 11 debtor/funds.
Familienstifung v. Askin (S.D.N.Y.)28 U.S.C. § 157(d) Bankruptcy court sua sponte recommended withdrawal of reference.
Breeden v. Sphere Drake Insurance PLC (In re Bennett Funding Group, Inc.) (Bankr. N.D.N.Y.)
3d Cir.
§ 105(a) Court had power to reopen case sua sponte.
Diaz v. Chrysler Financial Co. (In re Diaz) (E.D. Pa.)§ 502(b)(7) Section 507(a)(7) limits all damages arising from breach of employment contract.
In re Mid-American Waste Systems, Inc. (Bankr. D. Del.)§ 541(c) Debtor’s annuities held exempt from estate property.
In re Schuster (Bankr. D.N.J.)§ 547(b) Garnished wages received by creditor during preference period on a prior garnishment were voidable transfers.
In re White (Bankr. D.N.J.)28 U.S.C. § 1334(c) Upon reconsideration, abstention was still warranted.
In re Omna Medical Partners, Inc. (Bankr. D. Del.)
4th Cir.
Rule 4007(c) Equitable powers did not permit court to grant untimely motion to extend time to object to dischargeability.
In re Dishman (Bankr. E.D. Va.) 031046Rule 9006(b)(1) Granting extension of time to file proof of claim hinged on issue of prejudice to debtor whose chapter 11 plan was already confirmed.
In re National Spa & Pool Inst. (Bankr. E.D. Va.)
5th Cir.
§ 343 Debtor’s president was compelled to appear.
In re Muy Bueno Corp. (Bankr. W.D. Tex.)§ 541(d) INS user fees held by the debtor constituted a valid constructive trust claim.
United States v. McConnell (N.D. Tex.)
6th Cir.
§ 523(d) Creditor was substantially justified in bringing nondischargeability action based on documents suggesting debtors’ untruthfulness.
Colabianchi v. Thomas (In re Thomas) (Bankr. N.D. Ohio)§ 1325(a)(5) Partially secured creditor retained its lien after payment of the secured portion of its claim.
In re Woods (Bankr. W.D. Tenn.)
7th Cir.
§ 524(c) Action for violation of section 524(c) can be brought only as contempt action.
Cox v. Zale Delaware, Inc. (7th Cir.)28 U.S.C. § 158(d) Court had jurisdiction over appeal of sanctions order.
Golant v. Levy (In re Golant) (N.D. Ill.)
8th Cir.
§ 105(a) Adversary defendants had standing to object to motion for substantive consolidation.
In re Balanced Plan, Inc. (Bankr. W.D. Mo.)§ 506(a) Exempt status of tax refund overrode IRS secured status, precluding setoff.
In re Pace (Bankr. W.D. Mo.)§ 522(b)(2)(A) Debtor domiciled in Missouri could not claim exemptions under Arizona or California law.
In re Moss (Bankr. W.D. Mo.)
9th Cir.
§ 523(a)(8) Educational loans were discharged.
Hurley v. Student Loan Acquisition Auth. of Arizona (In re Hurley) (Bankr. D. Mont.)28 U.S.C. § 1334(b) Removal of state court action to bankruptcy court was proper because of related to jurisdiction.
Eyecare of So. California v. Urrea (In re Eyecare of So. California) (Bankr. S.D. Cal.)28 U.S.C. § 1334(c) Bankruptcy court lacked jurisdiction to deny motion for abstention.
Krasnoff v. Marshack (In re General Carriers Corp.) (B.A.P. 9th Cir.)
10th Cir.
§ 305(a) Bankruptcy court applied broader interpretation of section 305(a) in dismissing involuntary petition.
In re Spade (Bankr. D. Colo.)§ 524(a)(2) Sanctions denied although debtor prevailed on claim that plan provided for IRS’s unasserted priority tax claim.
In re White (Bankr. D. Wyo.)§ 1322(b)(2) Antimodification provision of section 1322(b)(2) held inapplicable to wholly unsecured subsequent or junior lien.
In re German (Bankr. E.D. Okla.)28 U.S.C. § 157(e) Defendants in trustee’s fraudulent transfer proceeding waived jury trial right.
Mather v. Cellxion, L.L.C. (In re Mobile Int’l Co.) (Bankr. E.D. Okla.) 031038
11th Cir.
§ 106(a)(2) Bankruptcy court had jurisdiction to determine dischargeability of student loan debt owed to governmental entity. Wilson v. South Carolina State Education Assistance Authority (In re Wilson) (Bankr. S.D. Ga.) 031003
§ 506(a) Unsecured creditor had standing to require chapter 13 debtor to strip junior mortgagee’s lien.
In re Barrios (Bankr. S.D. Fla.) 031012§ 522(c) Personal injury settlement claimed as exempt with no timely objections could not be treated as disposable income.
In re Graham (Bankr. M.D. Fla.) 031015§ 547(b) Debtor held funds in implied trust.
Tidwell v. Hendricks (In re McDowell) (Bankr. M.D. Ga.) 031027§ 707(b) Debtor’s consumer debt, and ability to pay, established substantial abuse.
In re Hall (Bankr. M.D. Fla.) 031030
Collier Bankruptcy Case Summaries
1st Cir.
Real property unscheduled by the debtor could not be deemed abandoned after the closing of the estate. Bankr. D. Conn. The debtor filed a chapter 7 petition, listing no real property in her schedule A. The trustee conducted the section 341 meeting and in June 1998, filed a report of no distribution after concluding that the estate contained no assets for distribution to unsecured creditors. Soon thereafter a creditor supplied the trustee with a copy of a deed showing that, in October 1995, the debtor’s father conveyed to the debtor an interest in real property located in Greece. The bankruptcy court granted the debtor a discharge and, in May 1999, the case was closed. After receiving an offer to buy the property interest, the trustee, in May 2000, filed a motion to reopen the case, which was granted. The debtor filed an objection to the order reopening the case, arguing that the case should not be reopened because the trustee was aware of the existence of the property, chose not to administer the property prior to the case being closed, and that the property was thus abandoned to the debtor. The trustee argued that, since the debtor failed to schedule the property, it was not abandoned but remained property of the estate, pursuant to sections 554(c) and 554(d). The court held that the debtor’s interest in the real property was not abandoned and remained property of the estate. The court reasoned that the property must be properly scheduled before it could pass to the debtor through abandonment, and that the trustee’s intent to abandon could not be inferred from his failure to administer the property prior to the closing of the estate (citing Collier on Bankruptcy, 15th Ed.).In re Haralambous, 2001 Bankr. LEXIS 56, – B.R. – (Bankr. D. Conn. January 5, 2001) (Krechevsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:554.03
2nd Cir.
District court denied debtor’s motion to dismiss claim asserted by broker against chapter 11 debtor/funds. S.D.N.Y. Securities brokers, as defendants in seven related securities fraud actions, moved for summary judgment as to various claims filed in the chapter 11 case. In one of the related actions, chapter 11 debtor/funds sought dismissal of a claim that had been asserted by a broker. The district court held that the broker’s claim could not be dismissed as a matter of law on the theories asserted by the funds. The court noted that as the party objecting to the claim, the funds, had the burden of putting forth evidence sufficient to negate the prima facie validity of the claim, but that the ultimate burden of persuasion to prove the loss claimed remained with the broker.Familienstifung v. Askin, 2001 U.S. Dist. LEXIS 944, – B.R. – (S.D.N.Y. February 5, 2001) (Sweet, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:5.02[2]
Bankruptcy court sua sponte recommended withdrawal of reference. Bankr. N.D.N.Y. Chapter 11 trustee filed an adversary proceeding seeking damages from related debtors, debtors’ officers, and numerous third parties who allegedly abetted in debtors’ criminal securities fraud. The trustee’s motion to file a third amended complaint to name insurance companies and brokers, whose transactions gave illusory credence to the Ponzi schemes, as well as the unknown defrauded investors, as party defendants. Subsequent to the filing of the adversary proceeding, but before the motion to file the third amended complaint, the defrauded investors filed suit against the defendants in the trustee’s action. The bankruptcy court held that withdrawal of reference and transfer of the proceeding was warranted because many of the causes of action were noncore, jury trial had been demanded, the proceedings before the bankruptcy court and the district court in the Southern District of New York had identical parties and actions so that there was a danger of a waste of judicial resources as well as the possibility of conflicting results. Accordingly, the bankruptcy court, after notice and hearing, submitted an order to the district court for the Northern District of New York, recommending that the district court withdraw the reference and thereafter transfer the proceeding to the Southern District of New York.Breeden v. Sphere Drake Insurance PLC (In re Bennett Funding Group, Inc.), 2000 Bankr. LEXIS 1658, – B.R. – (Bankr. N.D.N.Y. June 20, 2000) (Gerling, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.04[1]
3rd Cir.
Section 507(a)(7) limits all damages arising from breach of employment contract. Bankr. D. Del. Chapter 11 debtor’s former principal filed a claim for nearly six million dollars, based upon breach of an employment contract and to recover golden parachute benefits. The administrator of the confirmed plan objected to the claim and sought equitable subordination based upon the principal’s admitted criminal conduct. The administrator asserted that section 502(b)(7) capped the claim for damages. In response, the former principal argued that section 502(b)(7) applied only to limit damages flowing from the filing of the chapter 11 petition, rather than all damages from a breach of employment contract. Upon the administrator’s motion for summary judgment, the bankruptcy court held that section 502(b)(7) applied to limit all damages in the breach of employment contract action. There was no distinction, as urged by the principal, between the termination of an employment contract and the termination of employment so that the statute applied regardless of whether the employment contract was terminated prepetition or postpetition. Further, even if the contract itself was not terminated until after the filing of the petition, the debtor’s rejection of the contract rendered the claim a prepetition breach pursuant to section 365(g). Finally, the principal’s claim for attorney’s fees was subject to section 507(b)(7) because the right to attorney fees arose incident to the employment contract.In re Mid-American Waste Systems, Inc., 2001 Bankr. LEXIS 54, – B.R. – (Bankr. D. Del. January 3, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03[8]
Debtor’s annuities held exempt from estate property. Bankr. D.N.J. In the context of an adversary proceeding brought against him by the trustee, the chapter 7 debtor cross-moved for a declaration that certain annuities were not property of the bankruptcy estate. The trustee argued that the annuities were property of the estate because there were no restrictions on alienation and the debtor could surrender the annuities. The bankruptcy court granted the debtor’s cross-motion and declared that the annuities were exempt from the debtor’s estate. The court held that the annuities satisfied all of the requirements of section 541(c)(2), they qualified as trusts, contained restrictions on the transfer of the debtor’s interests, and contained restrictions enforceable under applicable nonbankruptcy state law. The court noted that for purposes of section 541(c)(2), the restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law need not be an absolute restriction. The court also rejected the trustee’s claim that section 541(c)(2) only applied to spendthrift trusts, and held that the absence of a restriction on alienation was not a basis for finding that the annuities were property of the debtor’s estate.In re Schuster, 2000 Bankr. LEXIS 1662, – B.R. – (Bankr. D.N.J. December 21, 2000) (Ferguson, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.24
Garnished wages received by creditor during preference period on a prior garnishment were voidable transfers. Bankr. D.N.J. The chapter 7 debtor filed a motion seeking to set aside payments to the creditor as a preferential transfer pursuant to section 547(b). The payments in question were funds garnisheed from the debtor’s wages during the preference period, but pursuant to an order of garnishment issued prior to the preference period. The bankruptcy court began its section 547(b) analysis with a determination of two threshold issues: (1) that the garnishment constituted a transfer of property and (2) that a debtor’s property right to future wages attached only after the wages were earned, and that here the garnished wages were earned during the preference period. The court then concluded that the wages earned during the preference period on the prior garnishment were voidable transfers within the purview of elements set forth in section 547(b). The court noted that its holding followed the majority view, but that a minority of courts still held that wage garnishment occurring during the preference period but which was ordered prior to that period did not constitute a voidable preference (citing Collier on Bankruptcy 15th Ed. Revised).In re White, 2001 Bankr. LEXIS 67, – B.R. – (Bankr. D.N.J. January 25, 2001) (Stripp, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
Upon reconsideration, abstention was still warranted. Bankr. D. Del. The bankruptcy court granted the defendants’ motion for permissive abstention, believing that the debtor had commenced an action in the state court. Upon being advised in a motion for reconsideration that so such action had been filed by the debtor in state court, the bankruptcy court held that permissive abstention was warranted despite the fact that the pending state court action was not initiated by the debtor plaintiff. Administration of the bankruptcy case would not be impaired or disrupted by the litigation in state court, state law issues predominated, jurisdiction in federal court existed only because of the existence of the bankruptcy, forum shopping was not an issue, numerous nondebtors were involved in the litigation, and the interests of comity indicated the state court should hear the matter. The fact that a party other than the debtor initiated the state court action did not alter the result or the analysis.In re Omna Medical Partners, Inc., 2000 Bankr. LEXIS 1657, – B.R. – (Bankr. D. Del. December 14, 2000) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1::3.05[1]
4th Cir.
Equitable powers did not permit court to grant untimely motion to extend time to object to dischargeability. Bankr. E.D. Va. Due to inclement weather and mail delays, creditor’s complaint objecting to the dischargeability of a debt was filed two days past the deadline. Upon the debtor’s motion to dismiss, the creditor moved for an extension of time to file the complaint. Declining to rely upon the excusable neglect standard of Rule 9006(b)(1), the creditor urged that general equitable principles and its good faith warranted an extension of the deadline. The bankruptcy court held that the bankruptcy court had no equitable power to depart from the strictures of Rule 4007(c) so that the motion to extend the deadline, filed after the deadline, could not be granted. Rule 9006(b)(3) expressly restricts the bankruptcy court’s authority to extend the deadline to those situations in which the motion is filed before the expiration of the time for filing the complaint. Since the motion was filed after the deadline, it could not be granted. Since the complaint was untimely, it was required to be dismissed (citing Collier on Bankruptcy, 15th Ed. Revised).In re Dishman, 2000 Bankr. LEXIS 1660, – B.R. – (Bankr. E.D. Va. December 12, 2000) (Tice, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:4007.04[3][a]
Granting extension of time to file proof of claim hinged on issue of prejudice to debtor whose chapter 11 plan was already confirmed. Bankr. E.D. Va. In 1991 an individual, then 16 years old, dove into a low area of a swimming pool. His head struck the pool’s floor, rendering him a quadriplegic. Seeking compensation, he filed suit against the debtor, which developed and published voluntary safety standards for the design and construction of swimming pools that were relied upon in the construction of the pool where the injury was sustained. A state (Washington) court entered judgment against the debtor for $6.6 million. The debtor appealed the judgment but also filed a chapter 11 petition. On March 21, 2000, the bankruptcy court entered an order confirming a chapter 11 plan, which provided for a lien in favor of the individual on all the debtor’s assets to ensure that his judgment, if sustained on appeal, would be fully paid. Meanwhile, in early 1998, the creditor, then 17 years old, suffered a similar accident that the first individual had sustained. The creditor filed suit against the debtor in May 2000. The debtor had not previously been aware of the claim and had not scheduled this creditor. The debtor asserted that this claim had been discharged by the confirmation of the chapter 11 plan. The bar date for filing proofs of claim was March 10, 1999. The creditor, unaware of the pendency of the chapter 11 case, did not file a proof of claim, and now filed a motion for an extension of time within which to file. The court focused on two issues: whether there was excusable neglect under Rule 9006(b) that permitted a late filed proof of claim and, if no excusable neglect existed, whether the creditor was being deprived of a property right without due process. The court found that the first issue turned on the question of prejudice to the debtor if the late claim was allowed, and concluded that the record was unclear as to whether the debtor could satisfy another large tort judgment within the confines of the confirmed plan. For this reason, the court stated a necessity for an evidentiary hearing on that factual issue. Accordingly, the court would reach the due process issue only if the extension of time were denied. In re National Spa & Pool Inst., 2001 Bankr. LEXIS 60, – B.R. – (Bankr. E.D. Va. January 22, 2001) (Mayer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9006.06[3]
5th Cir.
Debtor’s president was compelled to appear. Bankr. W.D. Tex. The chapter 7 trustee moved for reconsideration of the bankruptcy court’s order granting the debtor’s motion for protection. The debtor’s president and sole shareholder designated a corporate representative to act as the debtor’s agent. After the agent appeared at several meetings of creditors and was unable to provide sufficient information regarding the debtor’s financial affairs, the trustee insisted that the debtor’s president appear. The debtor filed a motion for protection, arguing that the agent was the duly appointed representative of the debtor. The court granted the motion and the trustee moved for reconsideration. The debtor argued that the proper way to extract information from the debtor’s president would be by way of a Rule 2004 examination. The bankruptcy court granted the trustee’s motion for reconsideration, holding that the fact that the trustee could conduct a Rule 2004 examination did not establish good cause for excusing the debtor’s president from appearing at the meeting of creditors. A Rule 2004 examination could never be a substitute for a section 341 meeting of creditors (citing Collier on Bankruptcy, 15th Ed. Revised).In re Muy Bueno Corp., 2001 Bankr. LEXIS 69, – B.R. – (Bankr. W.D. Tex. January 8, 2001) (Clark, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:343.02[3]
INS user fees held by the debtor constituted a valid constructive trust claim. N.D. Tex. In 1999, an involuntary chapter 7 petition was filed against the debtor, an airline travel provider. Thereafter, the USDA filed a proof of claim for user fees and the INS filed a proof of claim for international inspection user fees. Both creditors alleged that the fees were collected and held in trust by the debtor for the benefit of the agencies. The trustee objected to the claims. The bankruptcy court sustained the objection to the INS’s trust claim, holding that the fees were not held in express or constructive trust. But he court denied the objection to the USDA claim, holding that the user fees were held by the debtor in express trust for the USDFA. The court also held that the USDA adequately traced those trust funds into the debtor’s accounts by application of the lowest intermediate balance test. The court finally stated that, despite its ruling, the IRS had similarly satisfied its tracing obligation. The United States appealed, arguing that the court erred in finding that the INS user fees were not held in trust. The trustee cross- appealed, disputing the accounts taken into consideration in determining the lowest intermediate balance test, and argued that certain foreign accounts should not have been factored into the test. The district court affirmed the holding with respect to the USDA and reversed the holding regarding the INS. The court found that, for the purposes of determining trust status under section 541(d), the INS user fees constituted a constructive trust under federal common law. The court also rejected the trustee’s argument regarding foreign accounts, stating that the determinative fact was that those accounts contained user fees, albeit not collected in the United States, and that the trustee’s attempt to make a geographical distinction was not persuasive. United States v. McConnell, 2001 U.S. Dist. LEXIS 1093, – B.R. – (N.D. Tex. February 2, 2001) (Lynn, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.26
6th Cir.
Creditor was substantially justified in bringing nondischargeability action based on documents suggesting debtors’ untruthfulness. Bankr. N.D. Ohio After the debtors filed a chapter 7 petition, the creditor filed an adversary proceeding seeking a determination of dischargeability of rents due to him by the debtors. The creditor proceeded under section 523(a)(2)(A) and (a)(2)(B). The bankruptcy court ruled for the debtors, who then filed a motion for an award of attorney’s fees and costs against the creditor. The bankruptcy court, in determining the recovery of fees and costs under section 523(d), narrowed the issue to whether the creditor was substantially justified in bringing the action. The court found that, through the discovery process, the creditor obtained documents and statements that, although ultimately insufficient to meet his burden under section 523(a)(2), would reasonably call into question the debtors’ truthfulness. The court concluded that the creditor was substantially justified in filing the action, and denied the debtors’ motion. Colabianchi v. Thomas (In re Thomas), 2001 Bankr. LEXIS 68, – B.R. – (Bankr. N.D. Ohio February 6, 2001) (Baxter, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.27
Partially secured creditor retained its lien after payment of the secured portion of its claim. Bankr. W.D. Tenn. Although the chapter 13 debtor’s proposed plan provided that the creditor secured by the debtor’s vehicle would retain its lien only until the secured portion of the claim was paid in full, the confirmed plan, inexplicably, omitted this caveat. After the secured portion was paid through the plan, the debtor wrecked the automobile and sought to use the insurance proceeds to purchase a new vehicle. The creditor objected, asserting entitlement to the proceeds to satisfy the remainder of its claim.The bankruptcy court held that since the plan did not expressly provide for release of the lien upon payment of the secured portion, the creditor was entitled to the insurance proceeds. The general rule that a creditor retains its lien applied and, since the plan did not provide to the contrary, the creditor retained its lien. Since the lien attached to the insurance proceeds, the creditor was entitled to the proceeds to satisfy its claim.The rationale for this was protection of the creditors interest in the event the case was dismissed. In re Woods, 2000 Bankr. LEXIS 1656, – B.R. – (Bankr. W.D. Tenn. December 14, 2000) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.06[3][a]
7th Cir.
Action for violation of section 524(c) can be brought only as contempt action. 7th Cir. After paying off a reaffirmed debt in full, the chapter 7 debtor reopened his case and filed a class action proceeding on behalf of himself and all others similarly situated seeking to rescind a reaffirmation agreement and to recover amounts paid under the agreement after the bankruptcy court entered its order discharging his listed debts. The debtor argued that the reaffirmation agreements at issue were unenforceable because they were not filed with the bankruptcy courts. The bankruptcy court held that section 524(c) does not create a private right of action, and dismissed the debtor’s reopened case. The bankruptcy court reasoned that the debtor’s exclusive remedy was to file a motion in the reopened bankruptcy case seeking to hold the creditor in contempt of court for violating the discharge order by trying to collect a discharged debt and seeking sanctions. The district court affirmed. The debtor appealed. The United States Court of Appeals for the Seventh Circuit affirmed. The court held that a suit for violation of section 524(c) can be brought only as a contempt action under section 524(a)(2) (citing Collier on Bankruptcy 15th Ed. Revised).Cox v. Zale Delaware, Inc., 2001 U.S. App. LEXIS 1847, – F.3d – (7th Cir. September 12, 2000) (Posner, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.04
Court had jurisdiction over appeal of sanctions order. N.D. Ill. The chapter 7 debtor appealed the district court’s order affirming the bankruptcy court’s default judgment against the debtor as a discovery sanction under Rule 7037. The debtor was twice ordered to comply with the bankruptcy court’s production order in an adversary proceeding filed by a creditor. In spite of a warning regarding the severity of possible sanctions, the debtor failed to turn over required documents and was denied a discharge. The Court of Appeals for the Seventh Circuit found that it had jurisdiction over the appeal, holding that the bankruptcy and district courts’ decisions were final and appealable. Because the sanction completely eliminated the possibility of a decision on the merits, the lower courts’ orders were final for the purpose of appeal.Golant v. Levy (In re Golant), 2001 U.S. App. LEXIS 2057, – F.3d – (N.D. Ill. February 12, 2001) (Cudahy, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.07
8th Cir.
Adversary defendants had standing to object to motion for substantive consolidation. Bankr. W.D. Mo. Defendants in a preference and fraudulent transfer action objected to the trustee’s motion to substantively consolidate the debtors’ estates with a nondebtor. The trustee had sought to recover a substantial transfer that the defendants allegedly received from either the debtor or the nondebtor entity. The trustee contended that the defendants did not have standing to object to the substantive consolidation motion. The bankruptcy court rejected the trustee’s position, holding that the defendants had standing to object to the trustee’s motion because they had a financial stake in the outcome of the trustee’s substantive consolidation motion and adversary proceeding. The court determined that the financial injury to which the defendants were exposed was within the zone of interest protected by the equitable nature of section 105(a).In re Balanced Plan, Inc., 2001 Bankr. LEXIS 62, – B.R. – (Bankr. W.D. Mo. January 30, 2001) (Koger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105
Exempt status of tax refund overrode IRS secured status, precluding setoff. Bankr. W.D. Mo. Chapter 13 debtor’s plan, confirmed without objection, provided for payment of their priority tax debt in the approximate amount of $1,200. The schedules claimed a federal income tax refund of a like sum as exempt. In contrast, the IRS proof of claim reflected a priority debt of only $740 but a general unsecured debt of $27,000. The United States moved for relief from stay in order to setoff the prepetition tax claim against the refund. The debtors objected, asserting that the setoff should be applied to the priority claim only and not to any general unsecured tax claim because they had claimed the refund as exempt. The United States argued that it was secured to the extent of the refund and thus, was entitled to offset the entire amount. The bankruptcy court held that setoff rights were required to yield to exemption rights even though the creditor was secured by possession of the funds. Since the setoff rights of section 553 were required to yield to the exemption rights of section 522, the security provided in section 506, which is based upon the setoff rights under section 553, must also yield to the exemption rights. The overpayments were completely subsumed by the exemptions so that the United States was not secured.In re Pace, 2000 Bankr. LEXIS 1655, – B.R. – (Bankr. W.D. Mo. December 18, 2000) (Koger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03[c][ii]
Debtor domiciled in Missouri could not claim exemptions under Arizona or California law. Bankr. W.D. Mo. The trustee objected to the debtor’s amended claim of exemptions on the following three grounds: they were filed in bad faith and prejudiced the debtor’s creditors; most of the listed property was fraudulently transferred or concealed by the debtor and could not be claimed as exempt; and the debtor failed to use the proper exemption statutes. The bankruptcy court found ample grounds to reject the debtor’s amended claims of exemption based upon her bad faith and concealment of the assets she sought to exempt, but denied the debtor’s amended claims of exemption on the ground that she failed to assert proper exemption statutes. Specifically, the court held that based upon the debtor’s unambiguous attestation that Missouri was her domicile, she was not entitled to exemptions claimed under Arizona and California law. The court also noted that the issue of whether the debtor was entitled to claim an exemption in any property directly or indirectly traceable to a personal injury settlement had already been adjudicated and decided against the debtor by a California bankruptcy court; the California judgment was entitled to full faith and credit.In re Moss, 2001 Bankr. LEXIS 74, – B.R. – (Bankr. W.D. Mo. February 7, 2001) (Venters, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.02[2], .06
9th Cir.
Educational loans were discharged. Bankr. D. Mont. The chapter 7 debtors commenced an adversary proceeding seeking a determination that educational loans owed by the debtor wife were dischargeable on grounds of undue hardship. The debtor was 60 years old, in poor health, had no medical insurance and could not pay for her medicines. She never earned any income as a result of her associate’s degree and was unable to perform her cleaning job due to her health problems. The bankruptcy court entered judgment in favor of the debtor, holding that the debtor proved that excepting the educational loans from her discharge would impose an undue hardship. The debtor satisfied the test set forth in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987), and established that she could not maintain a minimal standard of living and repay her student loans and that her state of affairs was likely to persist for a significant portion of the repayment period. The debtor further satisfied the good faith prong because the forces preventing repayment were truly beyond her reasonable control.Hurley v. Student Loan Acquisition Auth. of Arizona (In re Hurley), 2001 Bankr. LEXIS 63, – B.R. – (Bankr. D. Mont. January 31, 2001) (Kirscher, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14[2]
Removal of state court action to bankruptcy court was proper because of related to jurisdiction. Bankr. S.D. Cal. The debtor was an association of 24 physicians. The debtor brought a prepetition state (California) action against one of the physicians, alleging that he and his corporation engaged in unfair competition and committed related violations. Various cross-complaints were filed, including one against the debtor’s major shareholder. In June 2000 that shareholder filed an involuntary chapter 7 petition against the debtor. The next day the shareholder removed the state court action to bankruptcy court. The physician being sued in state court challenged the removability of the state court action and the jurisdiction of the bankruptcy court. The court held that removal of the adversary proceeding was proper, pursuant to section 1334(a). The court reasoned that the petition filing, whether voluntary or involuntary, was sufficient basis to confer jurisdiction over the state court action on the bankruptcy court, and that the action became a related proceeding upon the petition filing, since the litigation, having a potential bearing on the debtor’s rights and the administration of the estate, was related to the chapter 11 case.Eyecare of So. California v. Urrea (In re Eyecare of So. California), 2001 Bankr. LEXIS 95, – B.R. – (Bankr. S.D. Cal. January 25, 2001) (Bufford, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01[4]
Bankruptcy court lacked jurisdiction to deny motion for abstention. B.A.P. 9th Cir. The debtor filed a chapter 7 petition in January 1992. In 1995 the trustee filed a report of no assets and the case was closed. In August 1996 the case was reopened upon the trustee’s motion to allow the trustee to file an adversary proceeding allowing him to pursue certain fraudulent transfer claims. The various parties against whom the trustee sought to recover the transfers filed a motion for summary judgment on the grounds that the trustee had abandoned the estate’s claims against them when he filed the no-asset report. The motion was granted and the adversary proceeding dismissed. In 1998 a creditor filed a motion for leave to sue the former trustee for negligence and breach of fiduciary duty in connection with his prosecution of the fraudulent conveyance proceeding. Shortly thereafter the trustee withdrew as trustee, and was replaced. The replacement trustee then filed suit in state (California) court against the former trustee, without leave of the bankruptcy court, alleging breach of fiduciary duty and negligence. Neither party removed that action to bankruptcy court, but in November 1999 the replacement trustee filed a motion for abstention, which the former trustee opposed. The court ruled that it would exercise its discretion in refusing to abstain, reasoning that the merits of the action involved either a core matter or were substantially intertwined with the chapter 7 case. The replacement trustee appealed. The B.A.P. for the Ninth Circuit vacated the order denying the abstention motion, holding that, for the purposes of section 1334(c), the bankruptcy court lacked jurisdiction. The B.A.P. found that the claims were never placed before the bankruptcy court and that the motion for abstention lacked the essential elements of a justiciable controversy. The B.A.P. concluded that because there was no adversary proceeding before the bankruptcy court, the court consequently lacked jurisdiction over the motion for abstention. Krasnoff v. Marshack (In re General Carriers Corp.), 2001 Bankr. LEXIS 78, – B.R. – (B.A.P. 9th Cir. January 22, 2001) (Marlar, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3:05[1],[2]
10th Cir.
Bankruptcy court applied broader interpretation of section 305(a) in dismissing involuntary petition. Bankr. D. Colo. Certain creditors filed an involuntary chapter 7 petition against the alleged debtor, who denied all the allegations of the petition and asserted that the debts were contingent or subject of bona fide dispute. The debtor also moved the bankruptcy court to abstain on the basis that he was a party in two state (Colorado) district court cases involving the same debts and creditors. The court dismissed the involuntary chapter 7 petition filed by certain creditors against the debtor, pursuant to the abstention provision set forth in section 305(a). On appeal, the district court reversed and remanded, finding that the bankruptcy court had made insufficient findings of fact to support a decision to abstain. On remand, the court again dismissed the petition. The court visited the issue of whether a strict or broad interpretation of section 305 was warranted, and found that the plain language of the statute allowed for its broad interpretation and the consideration of a wider variety of factors. The court then took into account several of these factors: (1) the motivation of the petitioning creditors; (2) the availability of another forum; (3) the economy and efficiency of administration; and (4) the prejudice to the parties. The court concluded that the petitioning creditors were acting in self interest, that the case was little more than debt collection, which could be resolved in the state court and where the dispute could be more efficiently administered, and that other, nonpetitioning creditors, as well as the debtor, could be prejudiced by the bankruptcy court allowing the petition to proceed. In re Spade, 2001 Bankr. LEXIS 66, – B.R. – (Bankr. D. Colo. January 22, 2001) (Cordova, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:305.02
Golden parachute claim was disallowed. Bankr. D. Del. Chapter 11 debtor’s former principal filed a claim for nearly six million dollars, based upon breach of an employment contract and to recover golden parachute benefits. The administrator of the confirmed plan objected to the claim and sought equitable subordination based upon the principal’s admitted criminal conduct. Upon the administrator’s motion for summary judgment, the bankruptcy court held that as a matter of law, the filing of the chapter 11 case was not a change in control of the corporation entitling the former principal to the contractual golden parachute benefits. The contract required that there exist a change in control prior to his termination. Even if the debtor’s liquidation or the filing of the chapter 11 case constituted a change in control, that change occurred after his termination. Accordingly, summary judgment was appropriate as to that claim. Summary judgment was denied, however, as to the claim for breach of contract because the resignation did not bar his claim as a matter of law. In re Mid-American Waste Systems, Inc., 2001 Bankr. LEXIS 54, – B.R. – (Bankr. D. Del. January 3, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02
Antimodification provision of section 1322(b)(2) held inapplicable to wholly unsecured subsequent or junior lien. Bankr. E.D. Okla. The United States Department of Housing and Urban Development ('HUD') held a second mortgage on the debtors’ principal residence. The value of the mortgaged property did not exceed the balance due on the first mortgage; thus, the HUD mortgage was wholly unsecured. The issue before the bankruptcy court was whether HUD’s wholly unsecured second mortgage was subject to the antimodification clause set forth in section 1322(b)(2). The bankruptcy court adopted the view of the majority of courts that have considered the issue, and held that the antimodification provision of section 1322(b)(2) does not apply to a wholly unsecured subsequent or junior lien. The court noted that the majority view on this issue is based upon United States Supreme Court’s direction, expressed in Nobelman v. American Savings Bank, 508 U.S. 324 (1993) that 'it is correct to look to section 506(a) for a judicial valuation of the collateral to determine the status of the bank’s secured claim,' and the conclusion that Court’s reference to section 506(a) would be meaningless unless some portion of the claim had to be secured pursuant to section 506(a) for section 1322(b)(2) to apply.In re German, 2001 Bankr. LEXIS 94, – B.R. – (Bankr. E.D. Okla. February 7, 2001) (Cornish, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.06
Defendants in trustee’s fraudulent transfer proceeding waived jury trial right. Bankr. E.D. Okla. The chapter 7 trustee filed an adversary complaint seeking to recover a fraudulent transfer from the defendants. In their answer, the defendants asserted a counterclaim and affirmative defense, and requested a jury trial. The bankruptcy court denied the defendant’s request for a jury trial. The court held that since the counterclaim, which sought both the return of value and a determination of the defendants’ interests in certain property, involved a determination of the priority of the creditors’ claims and also invoked the claims allowance process, the defendants waived their right to a jury trial. The court noted that by asserting the counterclaim, the defendants invoked the bankruptcy court’s equitable jurisdiction.Mather v. Cellxion, L.L.C. (In re Mobile Int’l Co.), 2001 Bankr. LEXIS 91, – B.R. – (Bankr. E.D. Okla. January 24, 2001) (Cornish, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.08
11th Cir.
Bankruptcy court had jurisdiction to determine dischargeability of student loan debt owed to governmental entity. Bankr. S.D. Ga. After the debtor filed a chapter 7 petition, the state (South Carolina) education authority, the creditor to whom the debtor owed a student loan debt, did not file a proof of claim. The debtor filed an adversary proceeding seeking a determination that the debt was dischargeable due to undue hardship. The creditor filed a motion to dismiss, arguing that it was protected from suit as a result of the Eleventh Amendment and that the bankruptcy court accordingly lacked subject matter jurisdiction.The court first determined that the adversary proceeding was a suit for the purposes of the sovereign immunity issue, but denied the creditor’s motion, holding that, despite the purview of the Eleventh Amendment, the bankruptcy court had jurisdiction to hear and determine the issue of dischargeability. The court reasoned that Congress was empowered to grant debtors the privileges and immunities of bankruptcy by way of the Fourteenth Amendment, which created private rights of action against the states. The court concluded that section 106(a) prevented governmental units from ignoring the Code and thereby violating those privileges and immunities.Wilson v. South Carolina State Education Assistance Authority (In re Wilson), 2001 Bankr. LEXIS 57, – B.R. – (Bankr. S.D. Ga. January 19, 2001) (Dalis, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:106.02[2]
Unsecured creditor had standing to require chapter 13 debtor to strip junior mortgagee’s lien. Bankr. S.D. Fla. Chapter 13 debtors proposed to pay their partially unsecured first mortgage and the wholly unsecured second mortgage outside the plan. The plan addressed only unsecured nonpriority claims. A general unsecured creditor objected to confirmation of the plan on the grounds that the lien of the second mortgagee should be stripped and the funds made available for distribution to all unsecured creditors. The debtor asserted that the creditor did not have standing to require the debtor to strip the junior mortgagee’s lien. Sustaining the objection, the bankruptcy court held that the unsecured creditor could require debtor to strip the lien of the wholly unsecured junior mortgagee. Under circuit precedent, the wholly unsecured junior mortgage’s rights could be modified and section 506(a), unlike section 506(c) contained no language specifying who could seek modification under section 506. Moreover, the unsecured creditor had actively pursued protection of its interest and had a sufficient interest at stake since modification would increase the amount payable to unsecured creditors by over $600 per month.In re Barrios, 2000 Bankr. LEXIS 1659, – B.R. – (Bankr. S.D. Fla. November 30, 2000) (Friedman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.02; 4:506.03[c][ii]; 8:1322.06[2]
Personal injury settlement claimed as exempt with no timely objections could not be treated as disposable income. Bankr. M.D. Fla. In April 1998, the debtors filed a chapter 13 petition. In May 1998, one of the debtors suffered severe injuries in an automobile accident, and shortly thereafter the debtors filed an addendum to their schedules indicating as new personal property a contingent and unliquidated personal injury claim, valuing the claim at one dollar, and declaring an exemption in the personal injury claim pursuant to state (Florida) law. No party objected to the claim of exemption within 30 days of the section 341 meeting. The debtors then filed an amended chapter 13 plan, which did not require them to place all their disposable income into the plan, and which paid unsecured creditors six percent of their claims over 36 months. The bankruptcy court confirmed the plan, and thereafter the debtors filed the personal injury suit in state court. In August 2000, the trustee filed a motion to modify, asserting that unsecured creditors could be fully repaid if only $10,575 from an impending $46,000 settlement of the personal injury claim was applied to the plan. The debtors settled that claim for the proposed amount, and filed objections to the trustee’s motion. The trustee argued that the personal injury settlement, or some part of it, should be treated as disposable income under section 1325(b). The debtors argued that the settlement became exempt upon the expiration of the thirty day period pursuant to Rule 4003(b) and thus could not be tapped for repayment for creditors pursuant to section 522(c) and 522(l).The court recognized the difficulty of reconciling section 522 with the disposable income requirement, and pointed out the division of opinion on the issue. The court finally followed the line of opinion holding that once property was conclusively established as exempt, it was removed from the estate and could not be treated as disposable income, reasoning that the settlement was released completely into the custody, use and enjoyment of the debtors without qualification. The court noted that the lack of a timely objection to the claim of exemption was determinative in the holding that the settlement was conclusively exempt.In re Graham, 2001 Bankr. LEXIS 59, – B.R. – (Bankr. M.D. Fla. January 26, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.05
Debtor held funds in implied trust. Bankr. M.D. Ga. The chapter 7 trustee filed a proceeding seeking to avoid an $80,000 payment made by the debtor to his ex-wife’s father as a preferential transfer. The payment was made to satisfy a loan that the father-in-law made to the debtor. The father-in-law made the loan to ensure that the debtor would be able to make a court-ordered payment mandated by his divorce judgment. If the payment was not made, both the debtor and his ex-wife would be subject to contempt proceedings. The debtor claimed that the payment to the father-in-law was not a 'transfer of an interest of the debtor in property' within the meaning of section 547 because the funds were 'earmarked' or because the $80,000 was held by the debtor in an 'implied trust.' The court rejected the 'earmarking' argument, but agreed with the debtor that the funds were held in an implied trust. The court concluded that the earmarking doctrine did not apply because the payment resulted in a diminution of the estate and no other creditor was substituted in the father-in-law’s place when the payment was made. The court found that an implied trust existed because the father- in-law loaned the debtor the funds to be applied to a particular purpose, the debtor deposited the funds into a checking account that was opened for the sole purpose of satisfying the obligation to the ex-wife, and the debtor understood that he could not use the funds for other purpose. The court also noted that the debtor’s balance in the checking account always exceeded $80,000 before he made the payment (citing Collier on Bankruptcy 15th Ed. Revised).Tidwell v. Hendricks (In re McDowell), 2001 Bankr. LEXIS 95, – B.R. – (Bankr. M.D. Ga. February 8, 2001) (Hershner, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.
Debtor’s consumer debt, and ability to pay, established substantial abuse. Bankr. M.D. Fla. The United States trustee filed a motion to dismiss the debtor’s chapter 7 petition, alleging that the filing constituted substantial abuse because the debts to be discharged were primarily consumer debts and because the debtor had the present and future ability to pay creditors. The debtor argued that her debts were primarily business debts, rendering section 707(b) inapplicable, and that her recent divorce precipitated her petition filing and militated against a dismissal. The bankruptcy court followed majority opinion in making the initial determination that the debtor’s scheduled secured debt, unscheduled alimony debt, and credit card debt must all be considered in determining the amount of consumer debt, and found that the debtor’s debt was primarily classifiable as consumer debt. The court then examined the issue of substantial abuse and found that, because the debtor had a potential disposable income of $927 per month, the debtor was able to pay her debts. The trustee, the court concluded, had met his burden of establishing substantial abuse. The court also rejected the debtor’s argument regarding the recent divorce, stating that the divorce resulted in expensive obligations because the debtor had the ability to pay them.In re Hall, 2001 Bankr. LEXIS 58, – B.R. – (Bankr. M.D. Fla. January 24, 2001) (Corcoran, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:707.04