Collier Bankruptcy Case Update May-13-02

Collier Bankruptcy Case Update May-13-02

 


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 13, 2002

CASES IN THIS ISSUE
(scroll down to read the full summary)

 

1st Cir.

§ 502(a) Court sustained, in part, and overruled, in part, debtor's objections to proofs of claim filed by IRS and state (Massachusetts) revenue department.
In re Callery (Bankr. D. Mass.)


2d Cir.

§ 108(b) Debtor lost interest in property because redemption period following strict foreclosure lapsed without redemption.
Canney v. Merchants Bank (In re Canney) (2d Cir.)

§ 554(b) Court granted motion brought by trustee for judgment creditor/chapter 7 debtor seeking abandonment of the fraudulent transfer claims of another chapter 7 trustee.
In re Faraldi (Bankr. E.D.N.Y.)


3d Cir.

§ 363(b)(1) Bankruptcy court's order approving stalking horse bidder's termination fee was upheld on appeal.
DDJ Capital Mgmt., LLC v. Fruit of the Loom, Inc. (In re Fruit of the Loom, Inc.) (D. Del.)

Rule 9019(a) Bankruptcy court instructed to analyze fairness, reasonableness and adequacy of proposed settlement.
Fry's Metals, Inc. v. Gibbons (In re RFE Indus., Inc.) (3d Cir.)


4th Cir.

§ 547(b)(5) Trustee could avoid prepetition monetary transfers from debtor to partially secured creditor.
Guttman v. Assocs. Commercial Corp. (In re Furley's Transp., Inc.) (Bankr. D. Md.)


5th Cir.

§ 348(a) Chapter 13 debtor allowed to assign postpetition funds to chapter 7 attorney for conversion-related services.
In re Zamora (Bankr. W.D. Tex.)

§ 502(a) Debtor not liable for employment taxes owed by general partner that also served as debtor's independent management company.
In re Sewickley Hospitality, Ltd. (Bankr. S.D. Tex.)


6th Cir.

§ 365 Debtor's sale of mortgage servicing rights to third party pursuant to parties' agreement was fully executed and was not subject to rejection.
In re DMR Fin. Servs. (Bankr. E.D. Mich.)

§ 524(a)(1) Court affirmed sanctions against creditor for violating discharge injunction.
Miller v. Chateau Cmtys., Inc. (In re Miller) (6th Cir.)

Rule 8001 B.A.P.'s decision was reversed because shareholders lacked standing to appeal bankruptcy court's order.
Harker v. Troutman (In re Troutman Enters., Inc.) (6th Cir.)


7th Cir.

§ 522(b)(2)(A) Illinois debtor's claim of exemption for whole life insurance policy under provision that exempted interests in retirement plans denied.
In re Ellis (Bankr. S.D. Ill.)


8th Cir.

§ 101(51C) B.A.P. affirmed bankruptcy court's decision finding debtors' small business election void.
Coleman Enters. v. QAI, Inc. (In re Coleman Enters.) (B.A.P. 8th Cir.)


9th Cir.

§ 349(a) Disallowed claim from previous failed bankruptcy not automatically disallowed in refiled bankruptcy case.
Mirzai v. Kolbe Foods, Inc. (In re Mirzai) (C.D. Cal.)

10th Cir.

§ 108(b) Trustee's motion to assume executory contract was denied.
In re Durability, Inc. (Bankr. N.D. Okla.)

§ 362(h) Pro se debtor awarded compensatory damages for creditor's willful violation of stay.
In re Cain (Bankr. D. Wyo.)


11th Cir.

§ 365(d)(3) Trustee ordered to pay full postpetition rent for months debtor was holdover tenant.
Trizechahn 1065 Ave. of the Ams., L.L.C. v. Thomaston Mills, Inc. (M.D. Ga.)


Collier Bankruptcy Case Summaries

1st Cir.

Court sustained, in part, and overruled, in part, debtor's objections to proofs of claim filed by IRS and state (Massachusetts) revenue department. Bankr. D. Mass. The individual chapter 11 debtor objected to proofs of claim for income taxes filed by the IRS for 1987 and 1991 through 1997. The debtor also objected to proofs of claim filed by the state (Massachusetts) department of revenue for 1993 through 1997. The bankruptcy court held that the debtor's tax liability to the IRS for 1987, 1991, 1992 and 1993 was as set forth in the IRS's proofs of claim, and his tax liability to the IRS for the remaining tax years could be calculated using the taxable income calculations made by the court. In addition, the debtors' tax liability to the state for 1993 and 1997 was as set forth in the revenue department's proofs of claim, and the debtor's tax liability to the state for 1994 through 1996 could be calculated using the court's taxable income calculations. The court found, among other things, that an amended proof of claim filed by the IRS was a timely amendment to its original proof of claim, and not a new claim as the debtor alleged. In re Callery, 2002 Bankr. LEXIS 173, 274 B.R. 51 (Bankr. D. Mass. March 1, 2002) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.02[2]

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2d Cir.

Debtor lost interest in property because redemption period following strict foreclosure lapsed without redemption. 2d Cir. The chapter 7 trustee appealed from an order of the district court that reversed the decision of the bankruptcy court denying the creditor relief from the automatic stay. After the debtor defaulted on several loans secured by mortgages on his property and business, the secured creditor obtained a strict foreclosure judgment from state (Vermont) court that specified the amounts due and a deadline for the debtor to cure his default. Days prior to the redemption deadline, the debtor filed a petition. The bankruptcy court denied the creditor's motion for relief from the automatic stay and held that the equity of redemption period was stayed by section 362. The district court reversed and concluded that the timing provisions of section 108(b) took precedence over section 362(a) tolling because no affirmative act triggering the indefinite stay provisions of section 362 could be found. The Court of Appeals for the Second Circuit affirmed the district court, holding that the time limitations of section 108(b), not the automatic stay provisions of section 362(a), governed the tolling of the period of equitable redemption. The strict foreclosure judgment vested full legal and equitable title to the property with the creditor, subject only to the mortgagor's equity of redemption, which was a contingent equitable interest in the property. The period of equitable redemption was not stayed when the debtor filed his petition, but was merely extended by 60 days. Since the redemption period subsequently lapsed without redemption, the debtor and the trustee no longer had a legally cognizable right or interest in the property that justified encumbrance by the bankruptcy laws. The court further concluded that neither the recording of the certificate of nonredemption nor the issuance of the writ of possession was stayed by section 362(a) (citing Collier on Bankruptcy, 15th Ed. Revised). Canney v. Merchants Bank (In re Canney), 2002 U.S. App. LEXIS 3663, 284 F.3d 362 (2d Cir. March 7, 2002) (Parker, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:108.03; 3:362.03; 5:541.04

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Court granted motion brought by trustee for judgment creditor/chapter 7 debtor seeking abandonment of the fraudulent transfer claims of another chapter 7 trustee. Bankr. E.D.N.Y. Before the debtor's chapter 7 filing, a party obtained a default judgment against him in the amount of almost one million dollars. The judgment creditor was a debtor in chapter 7 when the default judgment was obtained. On the day before trial of a special proceeding brought in state (New York) court by the judgment creditor's trustee to enforce the judgment, the debtor commenced his chapter 7 case. The trustee in the debtor's case commenced litigation to avoid the debtor's prepetition transfers of a house and a condominium as fraudulent transfers. The trustee for the judgment creditor moved to compel the debtor's trustee to abandon to him the fraudulent transfer claims. The IRS, as the holder of a federal tax lien, joined in the motion. The movants argued that the fraudulent conveyance litigation being prosecuted by the chapter 7 trustee was burdensome and of inconsequential value to the debtor's estate by virtue of section 554(b) and Rule 6007(b). The bankruptcy court granted the motion to compel the debtor's trustee to abandon the fraudulent conveyance claims. The court noted that the IRS's lien and the amount of the creditor's judgment far exceeded the value of the properties that were the subject of the fraudulent conveyance claims and that there was no nonexempt equity in those properties. Thus, there would be no distribution to general unsecured creditors in a hypothetical chapter 7 liquidation. The court also noted that the judgment creditor's trustee had spent time preparing his own case to enforce the judgment creditor's lien and was ready for trial when the debtor filed his chapter 7 petition. The court concluded that there was no purpose to be served by the debtor's trustee's 'starting fresh,' and that litigation by the debtor's trustee seeking to recover the alleged fraudulent conveyances would be burdensome to the estate. In re Faraldi, 2002 Bankr. LEXIS 185, - B.R. - (Bankr. E.D.N.Y. February 1, 2002) (Bernstein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:554.02[4]

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3d Cir.

Bankruptcy court's order approving stalking horse bidder's termination fee was upheld on appeal. D. Del. An appeal was taken from the bankruptcy court's order approving a termination fee negotiated between the chapter 11 debtors and a prospective purchaser of the debtors' assets. The purchaser committed, as a 'stalking horse,' to purchase substantially all of the debtors' assets pursuant to an agreement that provided that the closing of the sale was contingent upon the confirmation of a plan of reorganization incorporating the agreement. The debtors agreed to pay the stalking horse the termination fee if its bid was topped by another bidder at the auction or if a plan of reorganization incorporating the sale to the stalking horse failed to achieve confirmation. The appellants contended that the order approving the termination fee had a coercive effect on creditors voting to accept or reject the proposed plan, and constituted an improper intrusion on the plan confirmation process. The district court affirmed the order, holding that the termination fee negotiated between the debtors and the prospective purchaser of their assets was a reasonable accommodation of the interests involved and promoted the plan confirmation process. The proposed sale of the debtors' assets to the stalking horse bidder and the reorganization consequences thereof were fully disclosed and subject to the creditors' approval through the confirmation process. DDJ Capital Mgmt., LLC v. Fruit of the Loom, Inc. (In re Fruit of the Loom, Inc.), 2002 U.S. Dist. LEXIS 4255, 274 B.R. 631 (D. Del. March 12, 2002) (Robinson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:363.02[2]

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Bankruptcy court instructed to analyze fairness, reasonableness and adequacy of proposed settlement. 3d Cir. After the debtor filed for relief under chapter 11, it received authorization to sell one of its divisions, which processed and refined metals, to Company A. Company A agreed to make an up-front payment of approximately $400,000 and to pay royalties to the debtor for three years. The royalty payments were expected to be a minimum of $360,000 per year. During the pendency of the chapter 11 bankruptcy, Company A later agreed to sell the assets of the metals division to Company B and Company C for at least $950,000. After the sale, Company A failed to remit any royalty payments to the debtor, so the chapter 11 trustee sued Company A, Company B and Company C for breach of contract and certain state torts. After discovery, Company B and the chapter 11 trustee agreed to a settlement of the estate's claims against company B. The estate's claims against Company A and Company C were unaffected by the proposed settlement with Company B. Meanwhile, because the debtor was able to pay all its creditors in full, the chapter 11 trustee and the debtor moved to dismiss the chapter 11 case. Company B objected, arguing that the settlement had not yet been approved by the bankruptcy court. To satisfy Company B's objection, the dismissal order stipulated that the bankruptcy court would retain limited jurisdiction to 'enforce and consummate a previously agreed-upon settlement between some of the parties thereto.' Notice of the settlement was sent to all parties. At a hearing on the matter, the debtor objected to the settlement, but the bankruptcy court approved the settlement, holding that the debtor had previously waived any objections to the settlement. On rehearing, the bankruptcy court vacated its prior order and entered an order denying approval of the settlement. The district court affirmed the bankruptcy court's rehearing order and Company B appealed. As an initial matter, the Court of Appeals for the Third Circuit found that the bankruptcy court had jurisdiction over the settlement and that the debtor had standing to object to the settlement even though it was not a party to the agreement. Turning to the merits of the settlement issue, the Third Circuit found that the bankruptcy court had failed to make any findings of fact regarding the four factors used to assess whether a settlement should be approved or disapproved, including: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors. The district court then remanded the matter back to the bankruptcy court for an examination of the fairness, reasonableness and adequacy of the settlement in light of the four factors listed above. Further, because the circumstances had changed drastically since the chapter 11 trustee had first negotiated the settlement, the circuit court directed the bankruptcy court to examine the four factors in light of the present circumstances. Fry's Metals, Inc. v. Gibbons (In re RFE Indus., Inc.), 2002 U.S. App. LEXIS 3676, 283 F.3d 159 (3d Cir. March 8, 2002) (Cudahy, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:9019.02

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4th Cir.

Trustee could avoid prepetition monetary transfers from debtor to partially secured creditor. Bankr. D. Md. The chapter 7 trustee filed a complaint against the creditor to recover monetary transfers made by the debtor. The debtor had purchased several tractors and trailers from different companies, and the creditor financed all of the transactions. Within 90 days of the petition, the debtor wrote seven checks to the creditor to pay off amounts it owed under the six security agreements and conditional sale contracts. Because the creditor held perfected security interests in only a portion of the collateral, it was partially secured and partially unsecured as of the date of the petition. The creditor argued that it did not receive more than it would have received under a hypothetical liquidation because the alleged transfers were allocated to the secured portion of its claim. The bankruptcy court granted judgment in favor of the trustee, holding that the trustee established the avoidability of the transfers under section 547(b). Although the debtor and creditor entered into six different contracts with separate terms and conditions, the agreements were cross-collateralized, resulting in a single overall claim for purposes of section 547. The claim was thus divided into secured and unsecured components, with a presumption that the creditor applied the transfers to the unsecured portion of the claim. Because the creditor did not give up any interest in the collateral in which it held perfected security interests, the amount it received within the preference period was greater than it would have received in a hypothetical liquidation (citing Collier on Bankruptcy, 15th Ed. Revised). Guttman v. Assocs. Commercial Corp. (In re Furley's Transp., Inc.), 2001 Bankr. LEXIS 1810, 272 B.R. 161 (Bankr. D. Md. September 6, 2001) (Derby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:547.03

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5th Cir

Chapter 13 debtor allowed to assign postpetition funds to chapter 7 attorney for conversion-related services. Bankr. W.D. Tex. The debtor converted her chapter 13 case to one under chapter 7. At the time of conversion, the chapter 13 trustee had funds on hand and had received funds after the conversion from the debtor's employer. Since the debtor did not have money available to pay attorney's fees for the chapter 7 conversion and representation, she assigned the funds held by the chapter 13 trustee to her chapter 7 attorney. The chapter 13 trustee refused to tender the funds to the debtor's chapter 7 attorney and objected to the assignment. The debtor then filed a motion to authorize payment of her chapter 7 attorney's fees and sought declaratory relief regarding the procedures that could be used to pay the fees. The bankruptcy court found that the debtor's postpetition earnings were not property of the estate and belonged to the debtor. As such, the court found that, after conversion, the chapter 13 trustee was obligated to return the money to the debtor after deducting certain administrative expenses and costs. The court then ruled that, absent an express prohibition in the law, a debtor could assign her right to payment from the chapter 13 trustee to the debtor's chapter 7 attorney for services to be rendered in the converted case. The court found that the equities favored allowing such an assignment because the chapter 7 attorney faced a substantial likelihood of nonpayment unless the funds on account with the chapter 13 trustee were applied to pay for the attorney's services in the conversion and filing of the chapter 7 petition. Additionally, the court noted that any inconvenience the trustee might experience regarding internal accounting procedures did not form a sufficient basis for prohibiting the assignment of benefits. Rather, the court suggested that appropriate notations on the check, accompanied by appropriate notations on the final report filed by the chapter 13 trustee, would be sufficient to notify interested parties of exactly where the money went. In re Zamora, 2002 Bankr. LEXIS 177, 274 B.R. 268 (Bankr. W.D. Tex. January 3, 2002) (Clark, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:348.02, .06-.07

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Debtor not liable for employment taxes owed by general partner that also served as debtor's independent management company. Bankr. S.D. Tex. The debtor, a Texas limited partnership, was formed in 1996 for the purpose of owning and holding real estate, including a hotel, located in Pennsylvania. From the time of the formation of the debtor until August 1999, the debtor's hotel operations were managed by the debtor's general partner. The general partner had contracted with the debtor to be the independent hotel management company in exchange for a monthly management fee. As manager for the hotel, the general partner solicited job applications from employees, retained and compensated employees, negotiated a collective bargaining agreement with the employees, and executed and filed 941 tax returns in its own name covering the compensation it paid these employees. The general partner had the power and sole responsibility for retention of employees, compensation of employees and payment of 941 withholding taxes. After the debtor filed for chapter 11 relief, the IRS filed a proof of claim for unpaid withholding taxes, arguing that the debtor was jointly liable with the general partner for the unpaid taxes. The debtor objected to the IRS's proof of claim, asserting that the general partner was solely liable for the taxes at issue. The bankruptcy court found that the Texas Revised Limited Partnership Act explicitly provided that when a limited partnership transacts business with one of its partners, it is as if the transaction were with a nonpartner. The bankruptcy court then granted summary judgment in favor of the debtor, ruling that the general partner was not acting as the agent of the debtor and, accordingly, the debtor was not liable for the claimed taxes. In re Sewickley Hospitality, Ltd., 2002 Bankr. LEXIS 179, - B.R. - (Bankr. S.D. Tex. January 22, 2002) (Schmidt, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.02

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6th Cir.

Debtor's sale of mortgage servicing rights to third party pursuant to parties' agreement was fully executed and was not subject to rejection. Bankr. E.D. Mich. Before it ceased business operations, the chapter 11 debtor was in the business of servicing mortgages. Prior to the debtor's bankruptcy filing, one of its largest secured creditors sought to negotiate a deal to protect its security interests. The secured creditor procured a third party interested in purchasing certain mortgage servicing rights from the debtor, and the debtor and the third party entered into a purchase agreement. Thereafter, the debtor liquidated its other assets outside of bankruptcy and filed a chapter 11 petition to complete the liquidation. The debtor then filed a motion in the bankruptcy court seeking to reject the agreement with the third party. The bankruptcy court denied the debtor's motion. The court held that the debtor's sale of the servicing rights to the third party under the agreement was fully executed and was not subject to rejection under section 365. In finding the contract not executory, the court considered the agreement under the 'Countryman' definition (which defines executory contract as a contract under which the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach excusing the other's performance) and the 'functional approach' (which looks backward from an examination of the purposes to be accomplished by rejection and, if they have already been accomplished, concludes that the contract cannot be executory). In re DMR Fin. Servs., 2002 Bankr. LEXIS 175, 274 B.R. 465 (Bankr. E.D. Mich. January 28, 2002) (Shapero, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:365.02[1]

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Court affirmed sanctions against creditor for violating discharge injunction. 6th Cir. After the debtor filed for chapter 7 bankruptcy, she listed on her schedules a secured debt for a mortgage on her mobile home. She also listed a debt to the creditor for rent on the lot where her mobile home sat. Because the mortgage on the mobile home exceed the value of the home, the debtor indicated on her statement of intentions her intent to surrender the home. The debtor and the creditor stipulated to an order for relief from the automatic stay to allow the creditor to pursue its state court remedies against the debtor, including issuance of an order of eviction. On the same day that the bankruptcy court entered the debtor's order of discharge, the creditor asked the debtor to pay $1,242.80, which was the amount the debtor owed for rent and lot charges from the date of her bankruptcy petition to the date the mobile home was foreclosed upon. The debtor asserted that the debt had been discharged and that she was not liable for the charges because she had not lived in the home during this period. The creditor filed a motion in state court for money damages and obtained a judgment on its lot rent claim. The debtor then filed a motion with the bankruptcy court, seeking to have the creditor held in contempt for violation of the discharge injunction. The bankruptcy court found in favor of the debtor and assessed $3,989.98 in costs and fees against the creditor, and the district court affirmed. On appeal, the creditor argued that the debtor owed the postpetition rent and lot charges because she had failed to remove her mobile home from the property, thereby renewing her month-to-month tenancy. The creditor also argued that the debtor's discharge effectively abandoned the property to her personally, thereby making her liable for rental payments until the lease was terminated. The Court of Appeals for the Sixth Circuit agreed with the conclusions of the bankruptcy and district courts that there was no renewal of the debtor's tenancy in the postpetition period and that, under section 365, any debt owed by the debtor was deemed prepetition and was discharged. The court specifically noted that, under section 365, the debtor's lease was deemed rejected 60 days after the petition was filed and that the rejection was to be treated as a breach that occurred immediately prior to the filing of the bankruptcy petition. This breach then created a prepetition unsecured debt that was discharged under section 727(b). The court also rejected the creditor's argument that a new tenancy was created by the debtor's failure to remove the mobile home postpetition, as the debtor vacated the premises prior to filing her petition for relief and, upon her filing, the debtor's assets, including the mobile home, became property of the estate. The creditor, therefore, was not entitled to look to the debtor for any obligations associated with the mobile home as it was no longer the debtor's personal property. Miller v. Chateau Cmtys., Inc. (In re Miller), 2002 U.S. App. LEXIS 3715, 282 F.3d 874 (6th Cir. March 11, 2002) (Norris, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:524.02[1]

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B.A.P.'s decision was reversed because shareholders lacked standing to appeal bankruptcy court's order. 6th Cir. The chapter 7 trustee appealed the decision of the B.A.P. awarding life insurance proceeds to the shareholders of the reorganized debtor. The debtor corporation had purchased prepetition a life insurance policy on one of its shareholders and officers, and named itself as owner and beneficiary. Although the debtor later filed a chapter 11 petition and the bankruptcy court confirmed its plan of reorganization, the debtor never disclosed the insurance policy in its schedules, in the plan or at any time during the proceedings. The case was subsequently converted to chapter 7, and after the insured officer's death, the reorganized debtor disclosed its interest in the policy. The trustee then instituted an adversary proceeding against the insurer of the policy, seeking turnover of the life insurance proceeds. The shareholders intervened as third-party defendants and asserted entitlement to the proceeds. The bankruptcy court granted the trustee's complaint for turnover, reasoning that the debtor's failure to disclose the insurance policy during the chapter 11 proceedings estopped its shareholders' claim to the insurance proceeds. Finding that the trustee failed to demonstrate all of the requisite elements of judicial estoppel, the B.A.P. reversed the bankruptcy court and awarded the policy proceeds to the shareholders. The Court of Appeals for the Sixth Circuit vacated the decision of the B.A.P. and affirmed the decision of the bankruptcy court, holding that the shareholders of the reorganized debtor lacked standing to appeal the decision of the bankruptcy court. The court noted that under the 'shareholder standing rule,' shareholders were generally prohibited from initiating actions to enforce rights of the corporation unless the corporation's management had refused to pursue the same action for reasons other than good faith business judgment. The shareholders could not appeal the bankruptcy court decision because they asserted only a derivative interest, not a personal or direct interest in the insurance proceeds. Without a direct interest in the life insurance policy, the shareholders could not invoke the exception to the shareholder standing rule.Harker v. Troutman (In re Troutman Enters., Inc.), 2002 U.S. App. LEXIS 4193, - F.3d - (6th Cir. March 15, 2002) (Martin, Jr., C.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:8001, 7024

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7th Cir.

Illinois debtor's claim of exemption for whole life insurance policy under provision that exempted interests in retirement plans denied. Bankr. S.D. Ill. Based upon a state (Illinois) exemption provision that exempts a debtor's interest in a retirement plan, the chapter 7 debtor claimed an exemption for a whole life insurance policy that provided for the payment of an annuity when she reached the age of 65. The trustee objected to the exemption claim and argued that the policy at issue was an insurance policy, not an annuity, and, as such, failed to qualify under the Illinois 'retirement plan' exemption. The bankruptcy court sustained the trustee's objection and held that the debtor's policy constituted not a retirement annuity but a policy of insurance. The court examined the policy and found that despite an annuity settlement option selected by the debtor, the policy created an 'insurance risk' for the insurer rather than an 'investment' on behalf of the debtor. The court also noted that there was no showing that the debtor intended her policy to qualify as a retirement plan under the Internal Revenue Code; therefore, the debtor failed to show that the policy constituted a retirement plan exempt under applicable state law (735 Ill. Comp. Stat. 5/12-1006(a)). In re Ellis, 2002 Bankr. LEXIS 176, 274 B.R. 782 (Bankr. S.D. Ill. March 4, 2002) (Meyers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:522.10[5]

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8th Cir.

B.A.P. affirmed bankruptcy court's decision finding debtors' small business election void. B.A.P. 8th Cir. The jointly-administered chapter 11 debtors appealed from an order of the bankruptcy court nullifying their small business election. The debtors filed separate petitions and elected to proceed as a 'small business' under the Code, which permitted a debtor to proceed as a small business if it had less than $2 million in noncontingent and liquidated debt. The debtors' two largest creditors subsequently filed proofs of claim totaling more than $5 million, and the debtors did not object to the claims. The creditors filed their own plan of reorganization and moved to abrogate the small business election, under which only the debtors were allowed to file a plan for the first 100 days after the cases were filed. The bankruptcy court held that the debtors were not a small business, based upon the amount of debt, and annulled the small business election. The B.A.P. affirmed, holding that the small business election was void ab initio because the debtors were not small businesses under the Code. The finding did not nullify the chapter 11 filing itself, just the small business election. The B.A.P. rejected the debtors' argument that the debts to its largest creditors were disputed and subject to a lawsuit in state court, noting that the definition of aggregate and liquidated debt included disputed debt (citing Collier on Bankruptcy, 15th Ed. Revised). Coleman Enters. v. QAI, Inc. (In re Coleman Enters.), 2002 Bankr. LEXIS 242, - B.R. - (B.A.P. 8th Cir. March 27, 2002) (Federman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:101.51C; 7:1121.07

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9th Cir.

Disallowed claim from previous failed bankruptcy not automatically disallowed in refiled bankruptcy case. C.D. Cal. At the time the debtor filed his chapter 11 petition in 1993, the creditor had already filed a state court fraud case against the debtor. The bankruptcy court approved a stipulation between the parties granting relief from the automatic stay, thus allowing the state court case to continue. The order allowed for entry of judgment, but precluded the creditor from executing or collecting on any judgment that might be obtained in the state court action. The creditor ultimately prevailed in the state court action and obtained a judgment for $134,547.43, including $25,000.00 in punitive damages. The state appellate court affirmed the judgment except for the punitive damages award and, thereafter, the creditor dismissed its punitive damages claim. The creditor then filed a proof of claim with the bankruptcy court. The debtor objected to the proof of claim on the basis that the creditor was a suspended corporation and, therefore, had no standing to assert a claim in bankruptcy court. The bankruptcy court sustained the objection and disallowed the creditor's claim. The debtor later dismissed his bankruptcy case without discharge or approval of a plan of confirmation. The debtor refiled his chapter 11 petition in 2000, and filed an adversary complaint seeking declaratory relief and injunctive relief in a continued attempt to overturn the creditor's unfavorable judgment against him. The bankruptcy court granted the debtor's application for a temporary restraining order, but subsequently denied his request for a preliminary injunction that would have barred the creditor from seeking to enforce the state judgment against him or his personal sureties. In denying the debtor's motion, the bankruptcy court concluded that its prior order disallowing the creditor's proof of claim did not have a res judicata effect so as to establish the invalidity of the creditor's judgment. On appeal, the district court found that because the debtor's 1993 chapter 11 case was dismissed prior to confirmation of a plan or discharge, section 349 operated to 'undo' the bankruptcy court's order that had disallowed the creditor's proof of claim. The district court further found that the creditor's proof of claim had been denied based on the creditor's suspended corporate status and that this procedural disallowance of the claim did not act as a judgment on the merits of the claim. Accordingly, the order could not be given preclusive effect in any event. The district court then affirmed the bankruptcy court's refusal to grant a preliminary injunction. Mirzai v. Kolbe Foods, Inc. (In re Mirzai), 2001 U.S. Dist. LEXIS 23030, 271 B.R. 647 (C.D. Cal. November 5, 2001) (Carter, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:349.02-.03

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10th Cir.

Trustee's motion to assume executory contract was denied. Bankr. N.D. Okla. The chapter 7 trustee filed a motion to assume an insurance policy insuring the life of the debtor's principal. Shortly after a monthly insurance premium draft was dishonored due to insufficient funds in the debtor's account and the policy lapsed, an involuntary chapter 7 petition was filed against the debtor. The policy permitted reinstatement, provided that the insured was insurable by the insurance company's standards. Because the insurer had an internal corporate policy of waiving the continuing insurability condition for reinstatement of lapsed policies for 75 days following the last premium due date, the company sent a mailgram to the debtor one month after its petition date, offering to reinstate the policy without evidence of insurability if past-due premiums were paid by a date certain. No money was received by the insurer within the time provided. Because the principal had recently been diagnosed with terminal cancer, one week after the reinstatement period had lapsed, the trustee attempted to tender to the insurer all past-due premium payments. The insurer refused to reinstate the policy without proof of the principal's insurability. In support of his motion to assume the insurance policy, the trustee contended that, under section 108(b), the mailgram's option to renew gave him 60 days from the date of the involuntary petition to pay all past-due premiums. The bankruptcy court denied the trustee's motion, holding that because the policy had already lapsed prepetition and the option to reinstate expired without any attempt by the estate to extend the option, the trustee had no continuing rights under the contract to extend under section 108(b). The court adopted the narrow construction of section 108(b) and concluded that when the trustee or debtor failed to exercise or renew the option by timely paying the past-due premiums, there was no contractual default to be cured. In re Durability, Inc., 2002 Bankr. LEXIS 196, 273 B.R. 647 (Bankr. N.D. Okla. February 15, 2002) (Michael, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:108.03

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Pro se debtor awarded compensatory damages for creditor's willful violation of stay. Bankr. D. Wyo. The pro se chapter 7 debtor moved for an order to show cause with respect to her allegation that two creditors violated the automatic stay. The debtor claimed that both creditors made collection contacts after she filed her bankruptcy petition in violation of the automatic stay. The bankruptcy court held that one creditor did not willfully violate the automatic stay, but the debtor was entitled to recover compensatory damages for the other creditor's willful violation of the stay. With respect to the first creditor, the court noted that although an offending collection call was made postpetition, the creditor did not receive notice of the debtor's bankruptcy until after the date of the offending call, and no subsequent collection efforts were made. Since the creditor made the offending call without knowledge of the debtor's bankruptcy case, it was not willful as a matter of law. In contrast, the court found that the second creditor had knowledge of the automatic stay approximately two weeks before it notified a court in which collection proceedings were pending of the debtor's bankruptcy filing. During that two-week period, the collection court set a hearing on a summary judgment motion made by the creditor. The bankruptcy court stated that the creditor had an affirmative obligation and was in the best position to notify the collection court of the debtor's bankruptcy, and concluded that by obtaining an order setting the hearing on its summary judgment motion, the second creditor willfully violated the automatic stay. In re Cain, 2001 Bankr. LEXIS 1815, 272 B.R. 304 (Bankr. D. Wyo. May 15, 2001) (McNiff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:362.11[3]

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11th Cir.

Trustee ordered to pay full postpetition rent for months debtor was holdover tenant. M.D. Ga. Prior to filing for chapter 11 relief, the debtor entered into a lease with the creditor for commercial space located in New York, New York, which the debtor used as a show room. The lease called for regular monthly rent payments of $63,358.23, which included an electricity charge and an operating expense installment. Following the filing of its chapter 11 petition, the debtor filed a motion for an order authorizing rejection of the lease on July 31, 2001. The bankruptcy court approved the rejection of the lease on August 29, 2001 and the debtor vacated the premises and turned over the keys on September 26, 2001. The debtor paid only a prorated portion of the August 2001 rent and real estate taxes through August 22, 2001. The creditor then filed a motion seeking full payment, as an administrative expense, for rent for August and September 2001, as well as real estate taxes in the amount of $16,603.10, which were billed on August 1, and a fuel adjustment charge of $6,616.80 billed on September 1, 2001. The bankruptcy court ruled in favor of the debtor, holding that the creditor was not entitled to 100 percent of the regular monthly rent for the period in question because the property was no longer being used as a show room, as contemplated by the lease. On appeal, the district court reversed the bankruptcy court's ruling and ordered the trustee to immediately pay the creditor, as an administrative expense, the remainder of the rent not paid for August 2001, the full amount for September 2001, and the real estate taxes and fuel charges as billed. The court's ruling was based on the fact that, under the terms of the lease, rent payments were to be paid for the whole month in advance. Since the debtor was in possession on August 1 and September 1, 2001, the debtor owed full rent for each of those months. Further, and contrary to the debtor's contentions, the court found that the normal requirements imposed on administrative expenses by section 503(b)(1) did not apply in this case because section 365(d)(3) provides that the debtor's obligations were to be paid by the trustee, notwithstanding section 503(b)(1). The court also noted that the legislative history of section 365(d) demonstrated that the section was promulgated due to the apparent need to protect lessors in this type of case. However, the court further ruled that, in the event that sufficient funds were not available to pay all administrative claims, the trustee retained the right to seek recovery of all or part of the ordered payments and that, in such a case, the payment should be paid pro rata with the other administrative expenses and in priority (citing Collier on Bankruptcy, 15th Ed. Revised). Trizechahn 1065 Ave. of the Ams., L.L.C. v. Thomaston Mills, Inc., 2002 U.S. Dist. LEXIS 4008, 273 B.R. 284 (M.D. Ga. February 14, 2002) (Owens, Jr., D.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:365.04[f]

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