Collier Bankruptcy Case Update May-12-03
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.
May 12, 2003
§ 362 District
court lacked authority to rule on debtor’s
summary judgment motion in employment discrimination
case until bankruptcy resolved or stay lifted.
Place v. California Webbing Indus. (D.R.I.)
§ 1328(a)(3) State court judgment enforcing debtor’s criminal restitution obligation was nondischargeable.
Bova v. St. Vincent De Paul Corp. (In re Bova) (1st Cir.)
§ 365(d)(2) Debtors required to assume or reject executory agreement with joint venturer within 90 days.
In re Adelphia Commun. Corp. (Bankr. S.D.N.Y.)
§ 1322 Purchase money mortgage had priority over larger first recorded mortgage and could not be modified or avoided.
In re Smith (Bankr. W.D.N.Y.)
28 U.S.C. § 1334 Suit brought by secured creditors against president of debtor, who removed to bankruptcy court, was related to bankruptcy and not appropriate for abstention.
Blackacre Bridge Capitol LLC v. Korff (In re River Ctr. Holdings, LLC) (Bankr. S.D.N.Y.)
§ 547 Bankruptcy code preempted provisions of Michigan law that would have prevented recovery of preferential transfers.
Hechinger Inv. Co. of Del., Inc. v. M.G.H. Home Improvement, Inc. (Bankr. D. Del.)
§ 1325 Plan confirmation denied for lack of good faith due to excessive housing expense involved in debtors’ retention of current residence.
In re Leone (Bankr. W.D. Pa.)
28 U.S.C. § 1334 Adversary proceeding for turnover of funds was related to bankruptcy and bankruptcy court declined to exercise permissive abstention in the interests of judicial economy.
Valley Media, Inc. v. Toys R Us, Inc. (In re Valley Media, Inc.) (Bankr. D. Del.)
§ 326(a) Chapter
7 trustee in a no-asset case was not entitled
to receive statutory compensation where
no creditors filed proofs of claim and no
creditors were paid.
In re Meadows (Bankr. W.D. Va.)
§ 1125 Partial stay pending appeal of plan confirmation denied as a partial stay would effectively serve as an unauthorized modification.
In re Convenience USA, Inc. (Bankr. M.D.N.C.)
§ 548 Transfers by officers of debtor real estate management company to themselves were made with intent to hinder and delay creditors and could be avoided by trustee.
Sherman v. FSC Realty LLC (In re Brentwood-Lexford Partners, LLC) (Bankr. N.D. Tex.)
§ 1325 Plan confirmation denied without prejudice pending removal of provision requiring release of lien prior to completion of plan.
In re Day (Bankr. N.D. Tex.)
§ 330(a) Application for payment of attorneys’ fees from the estate, filed after conversion from chapter 11 to chapter 7, denied.
In re TLI, Inc. (Bankr. W.D. Mich.)
§ 363(f) Debtor’s insurance policies could be sold but only if adequate protection provided to parties with claims against the policies.
In re Allied Prods. Corp. (Bankr. N.D. Ill.)
§ 550 Dismissal denied as debtor was found to be insolvent from the date it determined to file bankruptcy, although it had been a going concern prior to that date.
Silverman Consulting, Inc. v. Hitachi Power Tools, U.S.A., Ltd. (Bankr. W.D. Mo.)
§ 1112(b) Debtor’s third bankruptcy in less than three years dismissed with prejudice due to lack of good faith and abuse of bankruptcy court system.
In re Adams (Bankr. E.D. Ark.)
§ 1222 Plan containing extended payment provisions on secured claims and interest rates based on the Doud formula confirmed over creditors’ objections.
In re Elk Creek Salers, Ltd. (Bankr. W.D. Mo.)
§ 106(a) Debtors’ action against United States trustee for negligent and fraudulent supervision barred by sovereign immunity.
Balser v. Department of Justice (9th Cir.)
§ 727(a)(2)(A) Debtor’s sale of only major asset and use of proceeds to increase homestead exemption was not sufficient evidence of fraud to deny discharge.
Murphey v. Crater (In re Crater) (Bankr. D. Ariz.)
§ 348(f)(1)(A) Proceeds of sale of assets pursuant to chapter 13 plan remained property of chapter 13 trustee after conversion to chapter 7 and could be used to pay debtor’s attorney’s fees.
In re Simmons (Bankr. D. Kan.)
§ 1225(a)(3) Plan confirmation denied without prejudice due to confusing and misleading budgets, improper duration and proposed payment of attorneys’ fees directly from debtors.
In re Sorrell (Bankr. D. Utah)
§ 727(a)(2)(A) Absent fraudulent intent, debtor’s loss of money through gambling was not sufficient grounds for denial of discharge.
Butler v. Liu (In re Liu) (Bankr. N.D. Ga.)
Rule 8002 Debtors’ appeal of bankruptcy court judgment dismissed for lack of subject matter jurisdiction due to late filing of notice of appeal.
Landi v. United States (In re Landi) (M.D. Fla.)
Collier Bankruptcy Case Summaries
District court lacked authority to rule on debtor’s summary judgment motion in employment discrimination case until bankruptcy resolved or stay lifted. D.R.I. PROCEDURAL POSTURE: Defendants, two former CEOs of the former employer, filed a motion for summary judgment pursuant to Fed. R. Civ. P. 56 on plaintiff former employee’s claim that the former employer discriminated against her in violation of R.I. Gen. Laws. § 42-112-1. OVERVIEW: Defendant one was president, chief executive officer, and chairman of the board of directors from 1991 through 1998, and defendant two was the CEO from 1999 to 2001. The former employee filed a charge of discrimination with the Equal Employment Opportunity Commission (“EEOC”) and the Rhode Island Commission for Human Rights (“RICHR”) against both defendants. Counts VIII and IX accused both defendants of violating the Rhode Island Civil Rights Act (“RICRA”), R.I. Gen. Laws § 42-112-1. The court noted that regarding defendant two, it was without authority to pass on defendant two’s motion for summary judgment until either his bankruptcy case was resolved or the bankruptcy court lifted the stay. None of the parties had identified the statute of limitations applicable to RICRA claims. The court found that Rhode Island Fair Employment Practices Act complainants had to file a charge of discrimination with the RICHR within one year of the occurrence of the allegedly discriminatory practice. The court held the same statute of limitations period should apply in the action and found that the former employee did not comply with the statute of limitations. Place v. California Webbing Indus., 2003 U.S. Dist. LEXIS 5847, — B.R. — (D.R.I. April 3, 2003) (Lagueux, Sr. D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]
court judgment enforcing debtor’s
criminal restitution obligation was nondischargeable.
1st Cir. PROCEDURAL
POSTURE: Appellant debtors appealed
a decision of the Bankruptcy Appellate Panel
(“BAP”) holding that a state
court judgment enforcing one of the debtor’s
outstanding criminal restitution obligation
was nondischargeable under the Bankruptcy
Code. OVERVIEW: 730 Ill.
Comp. Stat. 5/5-5/6(f) did not set forth
an expiration date for criminal restitution
orders. Rather, it acted to ensure that
sentencing judges did not set unduly long
schedules for satisfying restitution obligations.
Also, while an Illinois restitution judgment
operated like a judgment lien created in
a civil proceeding, 730 Ill. Comp. Stat.
5/5-5/6(m)(4), it did not lose its criminal
character through the passage of time. The
debtor’s restitution obligation was
part of his criminal sentence. Because the
creditor sought only to enforce the Illinois
restitution order in its state action, judicial
estoppel did not bar the creditor from asserting
that the order at issue was nondischargeable
in bankruptcy. The BAP therefore properly
concluded that the state judgment was nondischargeable
pursuant to 11 U.S.C. § 1328(a)(3).
Bova v. St. Vincent De Paul
Corp. (In re Bova), 2003
U.S. App. LEXIS 7507, — F.3d —
(1st Cir. April 22, 2003) (Howard, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1328.02[f] [back to top]
required to assume or reject executory agreement
with joint venturer within 90 days.
Bankr. S.D.N.Y. PROCEDURAL
POSTURE: Bankruptcy debtors, a
cable television company and a subsidiary,
settled an action by creditor, a joint venturer
with the subsidiary in certain cable systems,
under an agreement providing that debtors
would redeem the joint venturer’s
interest in the systems and retain the right
to manage the systems. The joint venturer
moved to compel debtors to assume or reject
the executory agreement and to appoint the
joint venturer to manage the systems. OVERVIEW:
The joint venturer contended that debtors
should be required to immediately assume
or reject the executory agreement and, if
the agreement was not assumed by the date
upon which payment to the joint venturer
was due under the agreement, that the joint
venturer should assume management of the
cable systems. Debtors asserted that they
were properly managing the systems and that
they required sufficient time to make a
reasoned judgment concerning the substantial
payment to the joint venturer. The bankruptcy
court first held that, while the date for
payment under the agreement passed without
payment from the debtors, the agreement
remained executory since it included ongoing
consequences and the joint venturer itself
sought to invoke rights under the agreement.
Further, while debtors were entitled to
additional time to make an election concerning
the agreement in view of debtors’
newly appointed interim management, such
time was limited to avoid prejudice to the
joint venturer from continued uncertainty,
especially since rejection of the agreement
was likely. However, the joint venturer
failed to show sufficient grounds for enforcing
the joint venturer’s alleged management
rights. In re Adelphia Commun.
Corp., 2003 Bankr. LEXIS
286, 291 B.R. 283 (Bankr. S.D.N.Y. March
31, 2003) (Gerber, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04 [back to top]
money mortgage had priority over larger
first recorded mortgage and could not be
modified or avoided. Bankr.
W.D.N.Y. PROCEDURAL POSTURE:
A debtor moved to avoid a prior mortgage
on his residence. OVERVIEW:
The debtor’s property was encumbered
by two mortgages, both of which were dated
January 7, 1999. The larger of the mortgages
was given to secure a note and was recorded
on January 12, 1999. The smaller of the
mortgages was given to the previous owners
by the debtor and was recorded on January
22, 1999. The smaller note was accepted
as partial consideration for the transfer
of title. The debtor argued that the first
recorded mortgage was a prior lien and that
the second recorded mortgage should have
been avoided. However, the smaller mortgage
was presumed to have priority over the larger
mortgage because it was a true purchase
money mortgage. Debtor carried the burden
to show the inferiority of the mortgage
that he sought to avoid. The debtor presented
no evidence of a subordination agreement
or of any other basis to disregard the usual
rules of priority. In re Smith,
2003 Bankr. LEXIS 91, 288 B.R. 675 (Bankr.
W.D.N.Y. January 31, 2003) (Bucki, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.01 [back to top]
brought by secured creditors against president
of debtor, who removed to bankruptcy court,
was related to bankruptcy and not appropriate
for abstention. Bankr. S.D.N.Y.
PROCEDURAL POSTURE: A lender’s
suit was brought by plaintiffs, secured
creditors, against defendant, the debtor’s
president, in state court, and then removed
by him. It was under the umbrella of the
chapter 11 case of the debtor, to whom they
made a second-lien mortgage loan. The creditors
moved to remand. OVERVIEW:
The creditors moved to remand to state court
on essentially three grounds: (1) the court
lacked subject matter jurisdiction over
its claims against debtor’s president
under the relevant jurisdictional statute,
28 U.S.C. § 1334(b); (2) the court
should abstain from hearing their claims,
based on the jurisdictional statute’s
permissive and mandatory abstention provisions,
28 U.S.C. §§ 1334(c)(1) and (c)(2);
and (3) the court should remand the adversary
proceeding, under the “equitable remand”
provision of the relevant removal statute,
28 U.S.C. § 1452(b). The court held
that (1) with regard to “related to”
jurisdiction, it had subject matter jurisdiction
over the action because the creditors’
assertion of claims against the debtor’s
president plainly would have had the requisite
“conceivable effect” on the
debtor’s estate necessary to confer
jurisdiction; (2) mandatory abstention was
inapplicable in cases, like this one, where
a state court action was removed to the
bankruptcy court, and there was no other
similar state court action currently pending;
and (3) based on its analysis of the Drexel
factors, remand on equitable grounds was
inappropriate. Blackacre Bridge
Capitol LLC v. Korff (In re River Ctr. Holdings,
LLC), 2003 Bankr. LEXIS 39, 288
B.R. 59 (Bankr. S.D.N.Y. January 6, 2003)
Collier on Bankruptcy, 15th Ed. Revised 1:3.01 [back to top]
code preempted provisions of Michigan law
that would have prevented recovery of preferential
transfers. Bankr. D. Del. PROCEDURAL POSTURE:
Debtors filed an adversary proceeding against
defendant for avoidance and recovery of
allegedly preferential transfers pursuant
to 11 U.S.C. §§ 547 and 550. Defendant
moved to dismiss under Fed. R. Civ. P. 12(b)(6)
on the grounds that debtors failed to comply
with Michigan state law, which defendant
asserted controlled. Defendant also moved
for a transfer of venue to the Eastern District
of Michigan. OVERVIEW:
Defendant was a sub-contractor to a general
contractor debtor. Defendant argued that
various sections of the Michigan Construction
Lien Act protected its property rights in
bankruptcy, including payment for work performed
and the waiving of its construction lien.
The bankruptcy court rejected defendant’s
argument, finding that, as application of
Michigan state law would have potentially
precluded the bankruptcy estate’s
recovery of preferential transfers under
federal bankruptcy law, Michigan law was
an obstacle to the accomplishment and execution
of the full purposes and objectives that
Congress had in enacting the Bankruptcy
Code. As such, the Michigan provisions cited
by defendant were preempted by 11 U.S.C.
§ 547. The court found that the debtors
stated an avoidance claim under section
547(b). The court denied defendant’s
motion to dismiss. As for defendant’s
motion to change venue, the court found
that defendant had not met its burden of
proving that a change of venue to the Eastern
District of Michigan was warranted. As there
was a strong presumption against disturbing
the venue chosen by the plaintiff, the court
denied defendant’s motion. Hechinger
Inv. Co. of Del., Inc. v. M.G.H. Home Improvement,
Inc., 2003 Bankr.
LEXIS 33, 288 B.R. 398 (Bankr. D. Del. January
21, 2003) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.01 [back to top]
confirmation denied for lack of good faith
due to excessive housing expense involved
in debtors’ retention of current residence.
Bankr. W.D. Pa. PROCEDURAL
POSTURE: Debtors sought confirmation
of their chapter 13 bankruptcy plan. OVERVIEW:
Debtors residence was valued at $138,380.
The plan proposed that the debtors would
keep the residence and pay the principal
balance of $205,796 to a bank over time
on a second mortgage on the residence. The
plan also proposed full payment of delinquent
real estate taxes in the amount of $6,792.79
plus interest. Unsecured creditors would
have received a dividend of approximately
11 percent, and debtors contemplated a monthly
housing expense of $2,347.88. The court
was unable to find that the proposed plan
was filed in good faith. Debtors had an
ability to make significant distributions
to unsecured creditors. A good faith effort
would have required that debtors find replacement
housing for themselves and their two adult
children at a cost of less than $2,347 per
month, or that debtors give up the idea
of paying more than $205,000 for a $138,000
house; neither of which would have imposed
a significant burden. If debtors elected
to maintain their property, it is they that
should have had to bear cost of the unusual
and improvident expenses, which unfairly
discriminated against unsecured creditors.
In re Leone, 2003 Bankr.
LEXIS 376, — B.R. — (Bankr.
W.D. Pa. April 28, 2003) (Bentz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.01 [back to top]
proceeding for turnover of funds was related
to bankruptcy and bankruptcy court declined
to exercise permissive abstention in the
interests of judicial economy. Bankr.
D. Del. PROCEDURAL POSTURE:
Defendant filed a motion requesting that
the court abstain from hearing an adversary
proceeding filed by the chapter 11 debtor.
Defendant asserted that, pursuant to 28
U.S.C. § 1334, the court lacked subject
matter jurisdiction because the adversary
proceeding focused on a “non-core”
state contract law claim. OVERVIEW:
The debtor claimed that defendant held money
belonging to the debtor, and that the money
was property of the estate and was subject
to turnover pursuant to 11 U.S.C. §
542. In addition, the debtor contended that
defendant’s failure to remit the payments
resulted in a breach of contract. Defendant
alleged that the adversary proceeding was
a non-core proceeding because the debtor’s
claims were governed by state law and no
interpretation of the Bankruptcy Code was
required. The court found that abstention
would have detrimentally impacted the efficient
administration of the debtor’s estate.
Abstention would likely have caused delay
in the resolution of the disputes. There
was no basis for concluding that the dispute
might have involved a novel or difficult
question of state law. Neither party filed
an action in state court prior to the debtor’s
voluntary petition. The turnover claim and
preference claim were obviously related
to the bankruptcy case. Although the debtor’s
turnover claim did not satisfy the Halper
test, and the breach of contract claim could
have been severed from the other claims,
on balance the factors weighed against granting
defendant’s motion to abstain. Valley
Media, Inc. v. Toys R Us, Inc. (In re Valley
Media, Inc.), 2003 Bankr. LEXIS
34, 289 B.R. 27 (Bankr. D. Del. January
21, 2003) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01 [back to top]
7 trustee in a no-asset case was not entitled
to receive statutory compensation where
no creditors filed proofs of claim and no
creditors were paid. Bankr.
W.D. Va. PROCEDURAL POSTURE:
Debtor filed for bankruptcy and the debtor’s
case was closed as a no-asset case. The
chapter 7 trustee subsequently located assets,
the case was reopened, and the chapter 7
trustee liquidated assets. No creditors
filed proofs of claim. Accordingly, the
chapter 7 trustee applied for fees and remitted
the remainder to the debtor. The United
States trustee objected to the fee request.
OVERVIEW: The objection
of the United States trustee rested on 11
U.S.C. §§ 330(a)(1) and 326(a).
The objection essentially argued that because
the chapter 7 trustee did not pay any creditors,
he was not entitled to compensation. Although
the bankruptcy court noted that the provisions
of the Bankruptcy Code would have been best
served by granting compensation, it held
that it could not depart from applying the
literal reading of 11 U.S.C. § 326(a).
The end result was that the trustee performed
his duties well, the creditors were apathetic,
the debtor received a windfall and the trustee
an empty pocket. The bankruptcy court held
that the chapter 7 trustee was not entitled
to receive statutory compensation under
11 U.S.C. § 326(a). In
re Meadows, 2003 Bankr. LEXIS 21,
— B.R. — (Bankr. W.D. Va. January
6, 2003) (Krumm, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:326.02 [back to top]
stay pending appeal of plan confirmation
denied as a partial stay would effectively
serve as an unauthorized modification. Bankr.
M.D.N.C. PROCEDURAL POSTURE:
A debtor and related entities filed chapter
11 petitions and the cases were jointly
administered. The court confirmed the debtors’
amended joint plan of reorganization and
various creditors appealed from the confirmation.
The creditors moved for a stay pending an
appeal. OVERVIEW: The creditors
filed a notice of appeal in which they appealed
from the court’s confirmation order,
but only related to 15 stores leased from
the creditors that were part of the 143
stores covered by the debtors’ plan.
The creditors sought a partial stay related
to these 15 stores until a decision was
rendered on appeal. The court found that
a partial stay was not appropriate where
the debtors’ chapter 11 plan was confirmed.
The court applied the hardship-balancing
test to determine whether the creditors
were entitled to a stay pending appeal.
In the Fourth Circuit the creditors were
required to show that: (1) they would suffer
irreparable injury if the stay was denied;
(2) other parties would not be substantially
harmed by the stay; (3) they would likely
prevail on the merits of the appeal; and
(4) the public interest would be served
by the stay. The court found that the risk
that the appeal from the confirmation order
could become moot did not constitute irreparable
injury. The creditors failed to obtain the
stay pending appeal. In re Convenience
USA, Inc., 2003 Bankr. LEXIS 380,
— B.R. — (Bankr. M.D.N.C. March
6, 2003) (Stocks, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1125.01 [back to top]
by officers of debtor real estate management
company to themselves were made with intent
to hinder and delay creditors and could
be avoided by trustee. Bankr.
N.D. Tex. PROCEDURAL POSTURE:
A debtor filed a chapter 7 petition. Plaintiff
chapter 7 trustee filed an action against
defendant, various individuals and entities,
and sought to recover certain transfers.
The trustee alleged claims of fraudulent
transfers under 11 U.S.C. § 548 and
Tex. Bus. & Com. Code § 24.001
et seq., for breach of fiduciary duty, breach
of contract, and conspiracy. OVERVIEW:
The trustee sought to recover alleged fraudulent
transfers to the debtor’s law firms,
in addition to another transfer. The trustee
invoked 11 U.S.C. §§ 548 and 550
and Tex. Bus. & Com. Code §§
24.005 and 24.006, which were made applicable
by 11 U.S.C. § 544(b). The trustee
alleged that the transfers were made with
the intent to hinder, delay or defraud the
debtor’s creditors, or had been made
for less than reasonably equivalent value
when the debtor was insolvent. The court
found that the trustee could not avoid one
payment under 11 U.S.C. § 548, but
could avoid two other payments. The court
inferred that the debtor, through the acts
of its officers, intended to hinder and
delay a creditor’s collection on the
note in order to force the creditor to enter
negotiations to restructure the note, which
was accomplished by a fraudulent transfer.
The court determined that the trustee should
have a judgment under 11 U.S.C. § 544(b),
which avoided certain transfers pursuant
to Tex. Bus. & Com. Code § 24.005(a)(1).
The court found that two officers did not
breach their fiduciary duties. Sherman
v. FSC Realty LLC (In re Brentwood-Lexford
Partners, LLC), 2003 Bankr. LEXIS
379, — B.R. — (Bankr. N.D. Tex.
February 12, 2003) (Felsenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.01 [back to top]