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

CASES IN THIS ISSUE
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3d Cir.

§ 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.)

Collier Bankruptcy Case Summaries

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State 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[3][f] [back to top]

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Debtors 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[2] [back to top]

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Purchase 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]

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Suit 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) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01 [back to top]

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Bankruptcy 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]

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Plan 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]

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Adversary 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]

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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. 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[3] [back to top]

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Partial 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]

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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. 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]

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