Collier Bankruptcy Case Update May-12-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Updates
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 12, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 109(g) Motion to dismiss was denied.
In re Estrella (Bankr. D.P.R.)
§ 365(g) Rejection of franchise agreement was not a termination of agreement.
Sir Speedy, Inc. v. Morse (D. Mass.)
§ 502(b) Bankruptcy court properly offset claim of debtor’s principal.
Haseotes v. Cumberland Farms, Inc. (D. Mass.)
28 U.S.C. § 1334(b) Bankruptcy court lacked jurisdiction over postconfirmation complaint alleging violation of federal and state debt collection statutes.
Steele v. Ocwen Federal Bank (In re Steele) (Bankr. D.N.H.)
§ 304(c) Bahamian law was not substantially in accord with U.S. law so that turnover was inappropriate.
Treco v. Bank of New York (In re Treco) (2d Cir.) 032002
§ 362(b) Automatic stay did not prohibit creditor from repossessing property in which the debtor had no interest.
In re Rodio (Bankr. D. Conn.) 032009
§ 523(a)(1) Income tax liability was excepted from discharge.
Shrenker v. United States (In re Shrenker) (Bankr. E.D.N.Y.) 032019
§ 547(b) Trustee established interest of debtor in funds applied by bank to account held by debtor.
Pereira v. Summit Bank (S.D.N.Y.) 032030
§ 502(b)(7) Court affirmed order approving settlement agreement.
In re Integrated Health Servs., Inc. (Bankr. D. Del.) 032012
§ 327(a) Real estate agency could not obtain retroactive appointment.
Binswanger Cos. v. Merry-Go-Round Enterprises (D. Md.) 032003
§ 506(a) Bankruptcy court’s decision to avoid creditor’s lien except for $100 value assigned to debtor’s property was impermissible stripping down of lien.
Darden v. Blankenship (In re Blankenship) (E.D. Va.) 032014
28 U.S.C. § 158 Order overruling objection to employment was interlocutory.
In re Babcock & Wilcox Co. (E.D. La.) 032041
28 U.S.C. § 1334(b) Bankruptcy court could exercise jurisdiction on dispute regarding insurance proceeds mistakenly paid postpetition.
In re Elizabeth Jeffers Appeal (E.D. La.) 032043
28 U.S.C. § 1452(b) Case was remanded to state court.
Whitney Nat’l Bank v. Bunch (E.D. La.) 032044
§ 522(d)(10) Order holding that section 522(d)(10)(E) exempts only present right to receive payments from IRA affirmed.
Dale v. Puerner (W.D. Mich.) 032016
§ 506(a) Cramdown chapter 13 plan was allowed.
In re Townsend (Bankr. N.D. Ill.) 032015
§ 548(a)(1)(A) Trustee was entitled to judgment.
Fogel v. Chevrie (In re Chevrie) (Bankr. N.D. Ill.) 032034
Rule 7056 News article disapproving of the principal’s use of the new value exception was not libelous.
Wilkow v. Forbes, Inc. (7th Cir.) 032048
§ 329 Bankruptcy court had authority to order attorney to disgorge fees sua sponte.
In re Zepecki (B.A.P. 8th Cir.) 032004
§ 523(a)(2)(A) B.A.P. declined to impose vicarious liability on individual debtor who individually made no false representations. Tobin v. Sans Souci Limited Partership (In re Tobin) (B.A.P. 9th Cir.) 032021
§ 523(a)(2)(A) Marital relationship was not basis for imputing fraud from one spouse to the other.
Tsurukawa v. Nikon Precision, Inc. (In re Etsuko Tsurukawa) (B.A.P. 9th Cir.) 032020
§ 523(a)(2)(A) Complaint was dismissed.
Sparks v. King (In re King) (Bankr. D. Mont.) 032022
§ 547(c)(2) Judgment in favor of trustee was affirmed.
Ganis Credit Corp. v. Anderson (In re Jan Weilert R.V., Inc.) (B.A.P. 9th Cir.) 032033
Rule 8002 Failure to appeal allowance of claim barred relitigation.
Morales v. United States (In re Morales) (D. Nev.) 032050
§ 330(a)(1) Debtor’s financial advisor was reimbursed for attorney’s fees.
In re Geneva Steel Co. (Bankr. D. Utah) 032007
§ 544(a)(1) Bankruptcy court did not err in determining lien priority.
Parker v. Elkins Welding & Constr., Inc. (In re Elkins Welding & Constr., Inc.) (B.A.P. 10th Cir.) 032029
§ 350(b) Court declined to reopen chapter 13 case to include postconfirmation tort claim.
In re Carter (Bankr. S.D. Ga.) 032008
§ 522(f) Debtor retained interest in property he conveyed postpetition for purposes of determining lien avoidance.
Carroll v. Memorial Medical Center, Inc. (In re Carroll) (Bankr. S.D. Ga.) 032018
§ 523(a)(6) State court judgment finding willful injury did not have preclusive effect on bankruptcy court’s determination of dischargeability under section 523(a)(6).
Fowler v. Jenkins (In re Jenkins) (Bankr. N.D. Ala.) 032024
§ 524(a)(2) Taxing authority violated discharge injunction by attempting collection of discharged obligations.
Burke v. State of Georgia Department of Revenue (In re Burke) (Bankr. S.D. Ga.) 032026
Collier Bankruptcy Case Summaries
Motion to dismiss was denied. Bankr. D.P.R. The creditor moved to dismiss the debtor’s chapter 13 petition pursuant to section 109(g)(1). The debtor’s previously filed case was dismissed due to the debtor’s failure to appear at the section 341 meeting and make payments to the trustee as proposed in the chapter 13 plan. The debtor opposed the motion, arguing that the confirmed plan in the current case was res judicata to all justiciable issues that were or could have been decided at the confirmation hearing. The bankruptcy court denied the motion to dismiss, holding that the creditor was barred by the res judicata effect of the confirmed chapter 13 plan. The court noted that the creditor received notice of the confirmation hearing, failed to object to the plan and to appeal the order of confirmation. The creditor could not collateral attack the confirmation process on the ground that the debtor was ineligible to file under section 109(g)(1) when its claim was provided from in the plan and would be paid in full (citing Collier on Bankruptcy, 15th Ed. Revised).In re Estrella, 2000 Bankr. LEXIS 1669, – B.R. – (Bankr. D.P.R. November 29, 2000) (LaMoutte, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.08
Rejection of franchise agreement was not a termination of agreement. D. Mass. The movant, a franchisor of printing and copying centers, appealed the bankruptcy court’s determination that it was not entitled to relief from the automatic stay to enforce a noncompete clause between itself and the chapter 7 debtor. One week before filing bankruptcy, the debtor, which had entered into a franchise agreement with the movant, removed all of the franchise signs from his store and began operating under a different name. Because the trustee had not taken any action to assume or reject the franchise agreement it was deemed rejected. The bankruptcy court concluded that the rejection of the franchise agreement constituted a termination of all obligations under that agreement. The district court reversed the bankruptcy court order, holding that the noncompete provision remained effective, notwithstanding the rejection of the franchise agreement within which the provision was contained. The franchisor was entitled to seek appropriate injunctive relief under that provision.Sir Speedy, Inc. v. Morse, 2000 U.S. Dist. LEXIS 19719, – B.R. – (D. Mass. December 29, 2000) (Gorton, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.09
Bankruptcy court properly offset claim of debtor’s principal. D. Mass. Chapter 11 debtor’s CEO filed a proof of claim for debt on promissory notes. The debtor objected, asserting a right to setoff inasmuch as the CEO had breached his fiduciary obligations. Specifically, the CEO, in contravention of subordination agreements, had caused his wholly owned corporation to repay debts to the CEO rather than to the debtor. The bankruptcy court permitted the offset so that the CEO was determined to owe the estate nearly three million dollars. The district court affirmed, holding that the bankruptcy court properly held that the CEO breached his fiduciary duties to the debtor and that the statute of limitations had been tolled. Principles of fundamental fairness as well as contractual and fiduciary obligations required the CEO to subordinate his personal interests to the interests of the debtor. By causing his corporations to repay himself, rather than the debtor, he breached his duty of loyalty to the debtor corporation. Moreover, the confirmed plan of reorganization contained a provision tolling the relevant statutes of limitation which was binding upon the CEO.Haseotes v. Cumberland Farms, Inc., 2001 U.S. Dist. LEXIS 1356, – B.R. – (D. Mass. January 31, 2001) (Harrington, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03
Bankruptcy court lacked jurisdiction over postconfirmation complaint alleging violation of federal and state debt collection statutes. Bankr. D.N.H. The chapter 13 debtor’s plan was confirmed in October 1997 timely completed the plan and received a discharge in April 2000. In September 2000 the debtor filed a motion to reopen the case to bring an adversary proceeding against a mortgage creditor, alleging that the creditor violated the discharge injunction and federal and state fair debt collection statutes. The debtor also alleged that he owed no arrearages to the creditor, who in turn filed a motion to dismiss based on lack of subject matter jurisdiction. The bankruptcy court granted the creditor’s motion, holding that it lacked jurisdiction because the debtor’s claims were not sufficiently related to to chapter 13 proceeding. The court reasoned that any recovery to the debtor would be his alone and would not inure to the benefit to the estate, and that consequently the claim held no potential to impact on the handling and administration of the estate. Steele v. Ocwen Federal Bank (In re Steele), 2001 Bankr. LEXIS 88, – B.R. – (Bankr. D.N.H. January 25, 2001) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01[c]
Bahamian law was not substantially in accord with U.S. law so that turnover was inappropriate. 2d Cir. Liquidators of a bankrupt Bahamian bank sought turnover of funds from a New York bank in a proceeding under section 304(a). On the liquidator’s motion for summary judgment, the bankruptcy court directed turnover and the district court affirmed, both courts holding that turnover was required even if the New York bank’s claim was secured. On appeal, the parties did not dispute the application of first three factors set forth in section 304(c). The liquidators urged, however, that the interests of comity overrode the consideration that the bank would be materially disadvantaged under Bahamian law. Requiring that all statutory factors be considered, the United States Court of Appeals for the Second Circuit reversed, holding that if the bank was secured, distribution under Bahamian law would not be substantially in accord with United States law so that turnover could be improper. Under Bahamian law, the secured creditor’s interest was primed by administrative expenses, which, in this particular case would mean little or no distribution to the secured creditor. In contrast, United States bankruptcy law recognized secured interests as property rights and afforded them special protection. The court appeared concerned that the administrative expenses in the Bahamian bankruptcy had consumed 8 million of the 10 million dollars in receivables, the liquidators were being paid at a rate fifty percent above their usual rates, and were paid without notice to creditors. Since the difference in treatment of secured creditors in the two jurisdictions was so dramatically different, it was important to determine whether the bank was secured. Accordingly, the matter was remanded to the bankruptcy court for that determination. Finally, the court rejected the banks argument that a forum selection clause in its agreement with the debtor required application of New York law because the scope of the agreement was too limited to include the issues in the turnover litigation, section 304 was intended to provide for litigation in a single forum when the factors of section 304(c) supported that deference, and the interests of comity overrode the forum selection clause (citing Collier on Bankruptcy, 15th Ed. Revised).Treco v. Bank of New York (In re Treco), 2001 U.S. App. LEXIS 2161, – F.3d – (2d Cir. February 14, 2001) (Sack, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:304.08, 
Automatic stay did not prohibit creditor from repossessing property in which the debtor had no interest. Bankr. D. Conn. Chapter 13 debtor owned all of the shares of a limited liability company which, in turn, owned a tractor. The debtor possessed the tractor, used it in the business, and had guaranteed the debt on the tractor. When he filed his chapter 13 petition, the debtor listed the tractor as his asset and sought a determination pursuant to section 506(a) of the nature and extent of the secured creditor’s interest in the tractor. The creditor sought relief from stay asserting that the debtor had no interest in the tractor. The debtor argued that he had equitable rights in the tractor because he used it to produce revenue for the company and he intended to use those revenues to fund his chapter 13 plan. The bankruptcy court held that the automatic stay did not apply because the debtor had no interest in the property. Since the debtor had no interest in the property and section 506(a) did not apply to preclude the creditor from pursuing its state (Connecticut) law remedies, an order granting relief from stay was appropriate.In re Rodio, 2001 Bankr. LEXIS 102, – B.R. – (Bankr. D. Conn. January 17, 2001) (Krechevsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Income tax liability was excepted from discharge. Bankr. E.D.N.Y. The chapter 7 debtor filed an adversary proceeding seeking to discharge his 1991 income tax liabilities and the IRS objected. The debtor filed his form 1040 for the year in question more than two years before filing his bankruptcy petition, but only after the IRS had already made an independent assessment of his tax liability. The IRS argued that after a taxpayer was assessed a deficiency, a form 1040 submitted by the taxpayer to the IRS no longer qualified as a return under section 523(a)(1)(B). The bankruptcy court dismissed the adversary proceeding, holding that the debtor’s tax liability was not dischargeable under section 523(a)(1)(B) because the tax form submitted by the debtor was not a tax return for dischargeability purposes as it served no tax purpose and could not constitute an honest and reasonable effort to satisfy the tax law. The court further noted that the debtor never submitted an income tax form that fully disclosed all of his income. Shrenker v. United States (In re Shrenker), 2001 Bankr. LEXIS 107, – B.R. – (Bankr. E.D.N.Y. February 9, 2001) (Feller, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07
Trustee established interest of debtor in funds applied by bank to account held by debtor. S.D.N.Y. The chapter 11 trustee filed an adversary proceeding against a bank seeking to avoid as a preference a bank’s application of approximately $17,000,000 in third-party deposits and wire transfers against overdrafts in an account maintained by the chapter 11 debtor, a check cashing and payroll distribution business. The bank’s application of the funds was made in connection with a massive check kiting scheme that precipitated the debtor’s chapter 11 filing. The bank argued, among other things, that the trustee failed to establish all of the elements necessary for avoidance of a preference under section 547(b). Specifically, the bank argued that the trustee failed to establish an interest of the debtor in the transferred property. The bankruptcy court disagreed, and entered judgment in favor of the trustee and against the bank in the amount of $7,851,000. The court explained that when a customer of the debtor initiated a wire transfer to the debtor’s account, that customer transferred a credit balance from its account to the bank for the benefit of the debtor. The bank, in turn, owed an obligation to credit the debtor’s account as a result of its acceptance of funds. The court concluded that the debtor had an interest in property which was lost to the debtor when the bank applied the credits against the bank’s overdrawn account (citing Collier on Bankruptcy 15th Ed. Revised).Pereira v. Summit Bank, 2001 U.S. Dist. LEXIS 1712, – B.R. – (S.D.N.Y. February 21, 2001) (Pauley, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
Court affirmed order approving settlement agreement. Bankr. D. Del. The chapter 11 debtors filed an application seeking an order approving a settlement agreement reached with its president and chief executive officer (CEO). The agreement provided that the president/CEO would resign all positions with the debtors and that his employment agreement would be modified. The United States objected to the reasonableness of the settlement, claiming that even the amount of a cash payment to president/CEO exceeded the amount of any claim he would have pursuant to section 502(b)(7) if he were simply terminated by the debtors. The bankruptcy court concluded that it was reasonable and should be approved. The court noted that there was at least an issue as to whether some of the president/CEO’s claims were subject to the section 502(b)(7) cap or the amount provided in the settlement agreement.In re Integrated Health Servs., Inc., 2001 Bankr. LEXIS 100, – B.R. – (Bankr. D. Del. January 3, 2001) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03
Real estate agency could not obtain retroactive appointment. D. Md. A real estate agency sought authorization from the bankruptcy court for payment of a commission on a sale of real property formerly owned by the chapter 7 debtor. Neither the debtor nor the trustee ever applied for court approval to employ the agency under section 327(a). Instead the trustee obtained approval for the employment of another brokerage firm. Nonetheless, the purchaser originally procured by the agency eventually made the purchase, but the court denied any payment of commission to the agency. The agency appealed, arguing that the court erred in refusing to appoint it nunc pro tunc as a broker for the estate. The district court affirmed, holding that, for the purposes of section 327(a), the agency failed to establish circumstances justifying its performing first and requesting retroactive appointment later. The court found that the agency could not even meet the lenient excusable neglect test, having been aware of the statutory requirement and that it had not satisfied that requirement, and choosing to continue serving the estate despite that omission. Binswanger Cos. v. Merry-Go-Round Enterprises, 2001 U.S. Dist. LEXIS 1406, – B.R. – (D. Md. February 13, 2001) (Motz, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:327.03
Bankruptcy court’s decision to avoid creditor’s lien except for $100 value assigned to debtor’s property was impermissible stripping down of lien. E.D. Va. A judgment lien creditor held a lien against the debtor’s realty. The creditor appealed a bankruptcy court order that held that the realty was worth only $100 and avoided the creditor’s lien. On appeal, the creditor argued that the property had value and that the bankruptcy court’s decision was clearly erroneous. The district court reversed the bankruptcy court decision, and remanded the matter to the bankruptcy court for additional findings of fact to determine the value of the property and, then, whether either section 506 or section 522(f) was applicable. The court held that the bankruptcy court’s decision to avoid all of the judgment lien creditor’s lien except for the $ 100 value assigned to the property by the bankruptcy court constituted an impermissible stripping down of the lien under section 506. The court explained that the $100 value assigned to the property by the bankruptcy court, while not precise and clearly nominal, caused the lien to be stripped down rather than stripped off, which, in turn, was fatal to lien avoidance under section 506. The court also held that that the bankruptcy court’s $100 valuation was clearly erroneous, and that the avoidability of the lien under section 522(f) had to be reassessed based on a new valuation of the property.Darden v. Blankenship (In re Blankenship), 2001 U.S. Dist. LEXIS 1725, – B.R. – (E.D. Va. February 20, 2001) (Friedman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03
Order overruling objection to employment was interlocutory. E.D. La. Chapter 11 debtors sought to employ attorneys and a creditors, asbestos claimants, objected on the grounds of a conflict of interest. The asbestos claimants asserted that the debtor potentially held a claim in litigation against another client of their attorneys, although the debtors would merely be members of a class against the other client. The bankruptcy court approved the employment and the asbestos claimants sought leave to appeal. The district court held that the bankruptcy court order approving the chapter 11 debtor’s employment of counsel was interlocutory in nature. Binding precedent established that orders denying motions to disqualify counsel in civil and bankruptcy cases were interlocutory in nature so that appeal would not lie. The claimants failed to demonstrated that there existed a substantial ground for a difference of opinion on an issue of controlling law or that an immediate appeal would materially advance the termination of the litigation.In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 1316, – B.R. – (E.D. La. January 29, 2001) (Vance, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.07; 10:8003.07
Bankruptcy court could exercise jurisdiction on dispute regarding insurance proceeds mistakenly paid postpetition. E.D. La. The debtor filed a chapter 13 petition in December 1998. Her spouse, who died in November 1998, was insured by a policy issued by the creditor. Shortly after her spouse’s death, the debtor applied to the creditor for the policy benefits. The creditor transferred $150,000 to a checking account opened in the debtor’s name, which was their typical procedure. But the debtor requested that the funds be sent to her directly in the form of a check. The creditor did so, along with a directive to the bank revoking the initial transfer. That directive was apparently never effectuated, because the initial payment was released to the debtor in March 1999. After the creditor attempted unsuccessfully to rectify its error, it commenced an adversary proceeding. The bankruptcy court held that it did not have jurisdiction over the dispute because the March 1999 payment was neither insurance proceeds nor property of the estate at the time of the petition filing. This appeal followed. The district court ruled for the creditor, holding that the bankruptcy court could have exercised jurisdiction pursuant to section 1334(b). The court reasoned that, even though the March 1999 payment was not part of the estate, it was conceivable that a judgment for the creditor in the disputed amount, particularly in light of the debtor’s representation that the money was already spent, could have an affect on the estate.In re Elizabeth Jeffers Appeal, 2001 U.S. Dist. LEXIS 1435, – B.R. – (E.D. La. February 2, 2001) (Berrigan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01
Case was remanded to state court. E.D. La. The bank filed a complaint in state (Louisiana) court, alleging that ten defendants engaged in a fraudulent check kiting scheme. Three of the defendants had bankruptcies pending in Louisiana and three had bankruptcies pending in Mississippi. The trustee for two of the Mississippi bankruptcies removed the case to the Louisiana district court, seeking to have it transferred to the district court in Mississippi. The bank argued that the case should be remanded to state court on equitable grounds. The district court granted the bank’s motion for remand, holding that judicial economy was better served by having one court determine the state law fraud issue as to all ten defendants. The court noted that bankruptcies were pending in more than one district and several of the defendants were not involved in any type of bankruptcy.Whitney Nat’l Bank v. Bunch, 2001 U.S. Dist. LEXIS 1424, – B.R. – (E.D. La. January 30, 2001) (Barbier, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.07
Order holding that section 522(d)(10)(E) exempts only present right to receive payments from IRA affirmed. W.D. Mich. The chapter 7 debtors appealed a bankruptcy court order that upheld the trustee’s objection to their claimed exemption and concluded that their five individual retirement accounts (IRAs) were not exempt under section 522(d)(10)(E). On appeal, the debtors argued that the bankruptcy court erroneously interpreted section 522(d)(10)(E) to mean that their right to receive payment from an IRA had to be an immediate right before they could exempt their interest in the IRAs. Both the debtor and the trustee noted a split of authority on this issue in the bankruptcy courts in the Eastern and Western Districts of Michigan, and among the Circuit Courts of Appeals. The United States District Court of the Western District of Michigan affirmed the bankruptcy court’s decision, and held that section 522(d)(10)(E) exempts only a present right to receive payments from an IRA. The court based its decision on a reading the relevant Code provisions as mandated in statutory construction, as well as the decision on the issue reached by other bankruptcy and appellate courts. The court concluded that if Congress intended to exempt the right to receive future payments from an IRA, this intention is not clearly expressed in section 522(d)(10)(E).Dale v. Puerner, 2001 U.S. Dist. LEXIS 1766, – B.R. – (W.D. Mich. February 12, 2001) (Enslen, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
Cramdown chapter 13 plan was allowed. Bankr. N.D. Ill. The undersecured creditor which held a lien on the debtor’s vehicle objected to confirmation of the chapter 13 plan. The plan provided that unsecured creditors would receive ten percent of their claims and upon completion of payment of the secured portion of any claim, the property would vest in the debtor free and clear of any lien. The creditor claimed that the plan improperly stripped its lien prior to the completion of all plan payment. The bankruptcy court overruled the creditor’s objection, holding that the plan appropriately provided that the debtor’s vehicle would vest free and clear of the creditor’s lien after the debtor had satisfied the secured portion of the indebtedness. The court interpreted the words allowed secured claim in section 1325(a)(5) to mean an amount equal to the value of the secured portion of the claim, in accordance with section 506(a).In re Townsend, 2001 Bankr. LEXIS 99, – B.R. – (Bankr. N.D. Ill. January 5, 2001) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03[c]
Trustee was entitled to judgment. Bankr. N.D. Ill. The chapter 7 trustee filed an adversary proceeding seeking to recover a number of alleged fraudulent transfers made by the debtor to his former wife. The debtor contributed the funds necessary to construct or purchase the parties’ marital residence and rental properties. The judgment for dissolution of marriage was entered one month prior to the debtor’s bankruptcy filing and when a creditor was attempting to collect on a judgment against the debtor. The marital settlement agreement transferred to the debtor’s wife any interest that the debtor might have had in the properties, leaving the debtor with an exempt retirement account worth about one-tenth of the value of property awarded his wife. The bankruptcy court entered judgment in favor of the trustee, holding that the transfer of the properties to the debtor’s former spouse pursuant to the divorce decree was made with actual intent to defraud his creditors. The court concluded that the divorce was collusive, noting that the debtor’s spouse was content to proceed pro se in the divorce, and the parties remained friends and continued to live in the same residence after the divorce.Fogel v. Chevrie (In re Chevrie), 2001 Bankr. LEXIS 97, – B.R. – (Bankr. N.D. Ill. February 13, 2001) (Sonderby, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.04
News article disapproving of the principal’s use of the new value exception was not libelous. Ct. App. 7th Cir. Forbes Magazine ran an article covering the grant of certiorari in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999). The coverage in the article was unflattering to the principals and their actions in the conduct of the chapter 11 prompted one of the principals to sue for libel. The district court granted Forbes Magazine’s motion for summary judgment and dismissed the action. The United States Court of Appeals for the Seventh Circuit affirmed, holding that The district court did not err in dismissing the liable action arising from the description of the principal’s conduct in asserting the new value exception to the absolute priority rule. Although the article clearly disapproved of the business ethics involved in taking advantage of the new value exception to the absolute priority rule, the magazine’s opinion was not defamatory under state (Illinois) law. As a matter of law, descriptions which imply greed are not defamatory. Accordingly, summary judgment was appropriate.Wilkow v. Forbes, Inc., 2001 U.S. App. LEXIS 2423, – F.3d. – (Ct. App. 7th Cir. February 20, 2001) (Easterbrook, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7056
Bankruptcy court had authority to order attorney to disgorge fees sua sponte. B.A.P. 8th Cir. Prior to filing his chapter 7 petition, the debtor, with an attorney’s assistance, sold real property and transferred the proceeds to the attorney in order to facilitate a sham tax transaction. The attorney submitted a bill for $ 40,000 to the debtor and the debtor’s corporation for past, present and future legal services. When the debtor filed his chapter 7 petition, he neglected to report these transactions on his schedules. Accordingly, a trial was held after which the debtor’s discharge was denied for his false oaths in failing to disclose the transfers. The evidence at trial prompted the bankruptcy court to sua sponte direct the attorney to account for the funds he received. After hearings, the bankruptcy court permitted the attorney to retain $7,160 for documented prepetition services, and ordered the attorney to disgorge $12,840 in fees paid for prepetition services and $20,000 for postpetition fees to the estate. On appeal, the attorney argued that the bankruptcy court did not have authority to sua sponte order disgorgement of the fees. The bankruptcy appellate panel affirmed, holding that the bankruptcy court had authority to sua sponte order the attorney to disgorge excessive fees. In re Zepecki, 2001 Bankr. LEXIS 71, – B.R. – (B.A.P. 8th Cir. February 12, 2001) (Schermer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:329.05
B.A.P. declined to impose vicarious liability on individual debtor who individually made no false representations. B.A.P. 9th Cir. The debtor was an agent in a real estate development business owned by his father, whose practice was to form a separate corporation for each building development. The creditor agreed to provide financing secured by a second deed of trust on three lots owned by one of the corporations. After the creditor extended the funds, the debtor’s father shut down all his companies, claiming he had run out of capital. The deeds of trust were not recorded, leaving the creditor’s loans unsecured and unsatisfied. The creditor filed suit in state (California) court and obtained judgment against the debtor, his father and other defendants for breach of contract, intentional misrepresentation, promissory fraud, negligent misrepresentation and concealment. The state court made no findings against the debtor individually but imposed liability on him as an alter ego, finding that there was a unity of interest among him, his father and the corporations. The debtor filed a chapter 7 petition in 1998 and the creditor filed an adversary proceeding requesting that the state court judgment be deemed nondischargeable pursuant to section 523(a)(2)(A). The creditor thereafter moved for summary judgment, invoking the doctrine of collateral estoppel, and the bankruptcy court entered summary judgment, determining that there was no genuine issue that the state court judgment established the requisite elements of section 523(a)(2)(A). The debtor appealed. The B.A.P. for the Ninth Circuit reversed and remanded, holding that, for the purposes of section 523(a)(2)(A), the requirement that there be a representation by the debtor had not been met. The B.A.P. followed the Ninth Circuit’s disinclination to apply a strict agency principle and declined to impose vicarious liability. The B.A.P. concluded that the state court’s findings were consistent with the debtor’s declaration that he neither knowingly participated in the fraudulent scheme nor made representations to the creditor regarding the loan, and that summary judgment had been improper.Tobin v. Sans Souci Limited Partership (In re Tobin), 2001 Bankr. LEXIS 81, – B.R. – (B.A.P. 9th Cir. January 22, 2001) (Brandt, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08[d]
Marital relationship was not basis for imputing fraud from one spouse to the other. B.A.P. 9th Cir. The debtor’s spouse formed a business corporation in the debtor’s name, claiming that he was unable to do so because he was not yet a permanent United States resident. The spouse was employed by the creditor, a business selling and servicing semiconductor manufacturing equipment, and began a pattern of directing repair work to the corporation formed in the debtor’s name. The debtor did not participate in the core operations of the business or have any decision making authority. In 1997 the creditor filed suit in state (California) court against the debtor and her spouse and a stipulated judgment was entered in favor of the creditor on the claims of fraud and deceit, conversion, and misappropriated trade secrets. Thereafter the debtor filed a chapter 7 petition. The creditor filed a motion for summary judgment, seeking to have the judgment declared nondischargeable. The bankruptcy court granted the motion, determining that the debtor participated significantly in the operations of the corporation, had reason to suspect that her spouse was engaged in wrongful conduct, enjoyed the benefits of that conduct, and had no highly unusual pressures that excused her own conduct. The debtor appealed, arguing that the court erred in holding the judgment nondischargeable without a factual finding that she knowingly participated in her spouse’s wrongful conduct. The B.A.P. for the Ninth Circuit accepted the debtor’s argument, reversing and remanding. The B.A.P. held that, for the purposes of section 523(a), a marital union alone, without a finding of a partership or other agency relationship between spouses, could not serve as a basis for imputing fraud from one spouse to the other.Tsurukawa v. Nikon Precision, Inc. (In re Etsuko Tsurukawa), 2001 Bankr. LEXIS 80, – B.R. – (B.A.P. 9th Cir. January 22, 2001) (Ryan, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Complaint was dismissed. Bankr. D. Mont. The chapter 7 debtor’s landlord filed an adversary complaint seeking to have her claims for rent and damage done to her property while the debtor was a tenant excepted from the debtor’s discharge. After the landlord requested that the debtor vacate the premises, the debtor promised to pay the overdue rent, as well as clean and repair the premises. Although the landlord gave the debtor additional time, he neither completed the clean up nor paid the overdue rent. The landlord claimed that the debtor falsely represented his ability to pay overdue rent and thereby obtained an extension of time from her. The bankruptcy court dismissed the complaint, holding that the landlord failed to establish that the debtor knowingly made false representations, with the intent of deceiving her. The court found that it was as likely as not that the debtor intended to pay the overdue rent at the time he said he would.Sparks v. King (In re King), 2001 Bankr. LEXIS 106, – B.R. – (Bankr. D. Mont. February 9, 2001) (Kirscher, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Judgment in favor of trustee was affirmed. B.A.P. 9th Cir. The creditor appealed the bankruptcy court’s judgment in favor of the chapter 7 trustee. The trustee sought to recover two payments made by the debtor as preferential transfers under section 547(b). The debtor, a recreational vehicle dealer, received two trade-in vehicles in which the creditor held security interests. The debtor resold the vehicles and deposited the proceeds in its general account. The checks issued to the creditor to pay off the liens cleared the debtor’s bank account 21 and 41 days after the sales, and 91 and 51 days after the trade-ins, respectively. The bankruptcy court rejected the creditor’s ordinary course of business defense under section 547(c)(2) and found that the transfers would have met the ordinary course standard if payoff was within 45 days of trade-in or 20 days of receipt of funds from the third-p