Collier Bankruptcy Case Update May-19-03
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 19, 2003
§ 510(a) Bankruptcy
court properly authorized distribution of
assets to junior lien holders as senior
lien holders had no priority entitlement
to postpetition interest.
HSBC Bank USA v. Bank of New England Corp. (In re Bank of New England Corp.) (D. Mass.)
§ 523(a)(8) Debtor who had left practice of law could not establish entitlement to undue hardship discharge of student loans due to failure to pursue other career options, maximize income or minimize expenses.
Stern v. Education Res. Inst., Inc. (In re Stern) (Bankr. N.D.N.Y.)
§ 523(a)(8) Student loan debt that was in deferment, as debtor was still a student, was not dischargeable on grounds of undue hardship.
Lavoie v. United States Dep’t of Educ. (In re Lavoie) (Bankr. W.D.N.Y.)
§ 1144 Creditors barred from attacking confirmation order due to failure to appeal within 180 days.
Abrahams v. Kindred Healthcare, Inc. (In re Vencor, Inc.) (D. Del.)
28 U.S.C. § 157(b)(1) Court exercised discretionary abstention with regard to adversary proceeding for breach of fiduciary duty and waste of corporate assets pursuant to state law.
Official Comm. of Unsecured Creditors v. Elkins (In re Integrated Health Servs., Inc.) (Bankr. D. Del.)
28 U.S.C. § 1334(b) State law claim remanded to state court since debtor was no longer a party, there were no claims against the estate and the action was therefore not related to bankruptcy.
RGC Int’l Investors, LDC v. Tricord Sys., Inc. (In re Tricord Sys., Inc.) (Bankr. D. Del.)
28 U.S.C. § 1930(a)(6) Payments by debtor in possession to lender were disbursements for the purpose of calculating quarterly bankruptcy fees.
In re Fabricators Supply Co. (Bankr. D.N.J.)
§ 362 Foreign
creditor’s application of postpetition
payments to prepetition indebtedness was
contrary to court’s payment order
and in violation of stay.
Startec Global Communs. Corp. v. Videsh Sanchar Nigam Ltd. (Bankr. D. Md.)
§ 541 Bankruptcy court properly held that vehicle repossessed on the morning debtor filed bankruptcy was property of the estate as debtor retained equitable ownership rights under state law.
Tidewater Fin. Co. v. Moffett (In re Moffett) (E.D. Va.)
§ 330 Award of attorney’s fees for less than amount requested further reduced on rehearing where there was no apparent benefit to debtor in case dismissed prior to plan confirmation.
In re Phillips (Bankr. S.D. Tex.)
§ 106(a) Debtor’s application for hardship discharge of student loan from state agency allowed as section 106(a) abrogation of sovereign immunity was a proper exercise by Congress of bankruptcy powers ceded to it by states.
Hood v. Tennessee Student Assistance Corp. (In re Hood) (6th Cir.)
§ 109(g)(1) Bankruptcy dismissed with 180 day filing bar where petition was untimely filed and was third petition filed by debtor without proper statements and schedules.
In re Rankin (Bankr. E.D. Tenn.)
§ 523(a)(4) Judgment against debtor landlord for failure to return security deposit was nondischargeable.
Nelson v. McGee (N.D. Ill.)
§ 522(f)(2)(A) Hospital lien impaired debtor’s homestead exemption and was properly avoided in its entirety by bankruptcy appellate panel.
Kolich v. Antioch Laurel Veterinary Hosp. (In re Kolich) (8th Cir.)
§ 541 Cash collateral deposited by creditor with debtor securities trader had been commingled with other funds, could not be identified and was property of the estate.
Ferris, Baker, Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.) (Bankr. D. Minn.)
§ 1129 Confirmation of debtor’s plan denied in favor of competing plan which provided for payment of 100 percent of allowed claims.
In re Internet Navigator, Inc. (Bankr. N.D. Iowa)
§ 110(g)(1) Petition preparer fined and fees ordered disgorged due to collection of filing fees and use of courier to file petition and fees on behalf of debtor.
Tighe v. Scott (In re Buck) (Bankr. C.D. Cal.)
§ 362(a) No basis existed for reinstating stay lifted pursuant to oral stipulation between creditors and debtor.
In re Aico Rec. Props., LLC (Bankr. D. Idaho)
§ 507(a)(3) Purchaser of assets assumed both prepetition and postpetition paid personal time off obligations of debtor.
In re Condor Sys., Inc. (Bankr. N.D. Cal.)
§ 1225(a) Plan proposed by farmer who had consistently failed to meet projections denied for lack of feasibility.
In re Clark (Bankr. D. Kan.)
§ 1329 Interest rate on allowed secured claims in chapter 13 plan reduced to six percent where debtor was called to active military service after confirmation.
Baxter v. Watson (In re Watson) (Bankr. S.D. Ga.)
Collier Bankruptcy Case Summaries
Bankruptcy court properly authorized distribution of assets to junior lien holders as senior lien holders had no priority entitlement to postpetition interest. D. Mass. PROCEDURAL POSTURE: Appellants, senior debt holders, challenged an order of the bankruptcy court authorizing a distribution of assets from appellee debtor’s estate to the junior debt holders. The senior debt holders maintained that no such distribution could be made before they were paid postpetition interest. OVERVIEW: After the trustee of the debtor’s estate paid the principal of the senior debt in full, he sought permission to distribute $11 million from the estate to the junior debt holders. The senior debt holders objected, claiming priority entitlement to postpetition interest. The bankruptcy court authorized the distribution, holding that the language of the junior debt indentures guaranteeing the senior debt holders “payment in full” of “interest due and owing” did not include postpetition interest, i.e., the language used failed to satisfy the Rule of Explicitness, which prevented a senior creditor from recovering postpetition interest from junior creditors unless the subordination agreement articulated the obligation in unusually express language. The indenture contained a New York choice of law clause. Referring to language of the court of appeals regarding the Rule of Explicitness, the junior debt holders argued that it was clear that for a claim to postpetition interest to survive the Rule of Explicitness, a subordination agreement had to specifically reference the entitlement of the senior debt holders to such interest. Under de novo review, the court agreed. HSBC Bank USA v. Bank of New England Corp. (In re Bank of New England Corp.), 2003 U.S. Dist. LEXIS 1430, — B.R. — (D. Mass. February 3, 2003) (Stearns, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.03 [back to top]
who had left practice of law could not establish
entitlement to undue hardship discharge
of student loans due to failure to pursue
other career options, maximize income or
minimize expenses. Bankr. N.D.N.Y.
PROCEDURAL POSTURE: After filing
for chapter 7 bankruptcy relief, plaintiff
debtor filed an adversary proceeding against
defendant student loan creditors seeking
a discharge of student loans pursuant to
11 U.S.C. § 523(a)(8). Following a
trial, the court reserved its decision and
granted the parties the opportunity to file
additional memorandum of law. OVERVIEW:
The debtor argued that the amortization
of a nearly $150,000 debt over 50 years
would require him to pay approximately $14,000
per year and it would be impossible to do
so without imposing undue hardship upon
him. The debtor had used a part of the loan
money to obtain a law degree, and he had
practiced for several years when he could
no longer afford malpractice insurance and
left the practice to move with his wife
to France, where he could find no employment.
Applying the three-prong test in Brunner,
the court concluded that the debtor’s
current income prevented him from repaying
the loans at that time; but, the court was
not convinced that factors existed beyond
his reasonable control that would prevent
him from improving his financial situation.
It was unnecessary to consider the good
faith prong. The court, although it was
not requested, also considered whether a
partial discharge under 11 U.S.C. §
105 should be granted. The court found that
the debtor had failed to maximize his income
and minimize his expenses. Although the
debtor no longer wanted to practice law,
there were other career options available
to him given his education, training, and
experience. Stern v. Education
Res. Inst., Inc. (In re Stern), 2002
Bankr. LEXIS 1609, 288 B.R. 36 (Bankr. N.D.N.Y.
December 27, 2002) (Gerling, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]
loan debt that was in deferment, as debtor
was still a student, was not dischargeable
on grounds of undue hardship. Bankr.
W.D.N.Y. PROCEDURAL POSTURE:
Plaintiff debtor filed a chapter 7 petition
and commenced an adversary action against
defendants, a federal government department
(the government), a state government department,
and a corporation. The debtor sought to
determine the dischargeability of student
loans for undue hardship pursuant to 11
U.S.C. § 523(a)(8). The government
moved to dismiss the complaint for the failure
to state a claim. OVERVIEW:
The debtor filed the petition and the lawsuit
against the student loan creditors while
she was still a student enrolled in school.
The court examined the requirements of 11
U.S.C. § 523(a)(8) for an undue hardship
discharge of student loans and the Brunner
test for undue hardship. The debtor failed
the third and final prong of the Brunner
test, which required a debtor’s good
faith effort to repay the student loan debt.
Because the debtor was still a student,
the government’s loan at issue was
not due because of deferment when the debtor’s
petition and suit were filed. The debtor
admitted to this fact in a submitted affidavit.
The debtor made no effort to repay the loans
or explore any other payment options before
the petition was filed, and the student
loans were not subject to discharge. The
court evaluated the government’s motion
to dismiss for failure to state a claim
as a summary judgment motion where the court
found that the debtor could not succeed
and meet the required burden of proof. The
government was entitled to summary judgment
where the debtor failed to meet the Brunner
undue hardship test. Lavoie
v. United States Dep’t of Educ. (In
re Lavoie), 2003 Bankr.
LEXIS 383, — B.R. — (Bankr.
W.D.N.Y. April 18, 2003) (Bucki, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]
barred from attacking confirmation order
due to failure to appeal within 180 days.
PROCEDURAL POSTURE: Appellant
putative bankruptcy creditors, a relator
in a qui tam action and her attorney, appealed
the order of the bankruptcy court which
disallowed their proofs of claim and permitted
a federal district court (California) to
allow intervenor United States to settle
the qui tam action. Appellee reorganized
debtor moved to dismiss the appeal. OVERVIEW:
The creditors filed a qui tam action against
the debtor, alleging that the debtor knowingly
submitted false Medicare claims to the United
States, and the United States intervened
and settled the action with the debtor.
The creditors contended that the United
States lacked authority to settle the action
with regard to the creditors’ entitlement
to a share of the settlement proceeds, and
that their claims against the debtor thus
remained valid. The debtor asserted that
the creditors were barred from attacking
both the order confirming the debtor’s
reorganization plan and the California district
court’s approval of the qui tam settlement.
The presiding district court first held
that the creditors’ failure to seek
vacation of the order confirming the reorganization
plan, or appealing the order, within the
required statutory periods barred any modification
or appeal of the order with regard to their
disallowed claims. Further, the creditors
were precluded from collaterally attacking
the California district court’s order
since review of such order was vested exclusively
in the federal appellate court and the creditors
did not appeal the California court’s
order. Abrahams v. Kindred
Healthcare, Inc. (In re Vencor, Inc.), 2003
U.S. Dist. LEXIS 7163, — B.R. —
(D. Del. April 28, 2003) (Sleet, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1144.01 [back to top]
exercised discretionary abstention with
regard to adversary proceeding for breach
of fiduciary duty and waste of corporate
assets pursuant to state law. Bankr.
D. Del. PROCEDURAL POSTURE:
A debtor and related affiliates filed chapter
11 petitions and the cases were jointly
administered. Plaintiff unsecured creditors’
committee filed an adversary action against
defendants, the debtors’ officers
and directors, for alleged breach of fiduciary
duty. The committee moved for a determination
of whether the action was a core or non-core
proceeding. Defendants moved to abstain,
or alternatively, to dismiss. OVERVIEW:
An action was not a core proceeding in bankruptcy
because it fell within the broad language
of 28 U.S.C. § 157(b)(1). The court
found that the adversary proceeding was
not dependent on any provisions of the Bankruptcy
Code. Because the allegations of breach
of fiduciary duty and waste of corporate
assets were state law causes of action,
the related adversary proceeding was a non-core
proceeding. The found that it should abstain
where it applied 12 factors, which included:
(1) the effect on estate administration;
(2) the extent to which state law issues
predominated over bankruptcy issues; (3)
the difficulty of the applicable state law;
(4) the presence of a related proceeding;
(5) the jurisdictional basis; (6) the relation
of the proceeding to the main bankruptcy
case; (7) substance over form; (8) the feasibility
of severing state law claims from core bankruptcy
matters; (9) the burden of the court’s
docket; (10) the likelihood that the commencement
of the proceeding in bankruptcy court involved
forum shopping by one of the parties; (11)
the existence of a right to a jury trial;
and (12) the presence of nondebtor parties.
Official Comm. of Unsecured
Creditors v. Elkins (In re Integrated Health
Servs., Inc.), 2003 Bankr. LEXIS
393, 291 B.R. 615 (Bankr. D. Del. March
25, 2003) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:02 [back to top]
law claim remanded to state court since
debtor was no longer a party, there were
no claims against the estate and the action
was therefore not related to bankruptcy.
Bankr. D. Del. PROCEDURAL
POSTURE: Defendant directors sought
to transfer venue to the bankruptcy court
of an action asserting state law claims
brought by plaintiff investors. The investors
sought to remand the action to state court.
OVERVIEW: The investors
made an investment in the debtor. When the
debtor’s financial performance deteriorated,
the investors commenced an action in state
court against the debtor and the directors
consisting solely of claims under state
law for breach of contract, common law fraud,
breach of fiduciary duty, corporate waste,
injunctive relief, and the appointment of
a receiver. The debtor filed a voluntary
chapter 11 petition in the bankruptcy court,
and the state action was removed by the
debtor. The debtor and the investors subsequently
reached a settlement of their claims. The
court held that it lacked jurisdiction over
the action pursuant to 28 U.S.C. §
1334(b) because the action did not arise
under Title 11 since it was initially commenced
in state court prior to the filing of the
chapter 11 petition. Because the debtor
was no longer a party to the action, and
the investors had agreed to limit their
recovery to available insurance proceeds,
all claims against the bankruptcy estate
were eliminated. Thus, the action was not
related to a bankruptcy case because it
could have had no impact on the administration
of the debtor’s bankruptcy estate.
RGC Int’l Investors, LDC
v. Tricord Sys., Inc. (In re Tricord Sys.,
Inc.), 2003 Bankr. LEXIS 384, —
B.R. — (Bankr. D. Del. March 24, 2003)
Collier on Bankruptcy, 15th Ed. Revised 1:3.01 [back to top]
by debtor in possession to lender were disbursements
for the purpose of calculating quarterly
bankruptcy fees. Bankr. D.N.J.
PROCEDURAL POSTURE: A debtor
filed a chapter 11 petition and continued
as a debtor in possession. The debtor moved
to determine the amount of the quarterly
fees payable to the United States trustee
and the debtor sought a determination that
the payments made to its lender were not
disbursements pursuant to 28 U.S.C. §
1930(a)(6), which calculated quarterly fees
owed. The United States trustee opposed
the motion. OVERVIEW: The
court’s interim and final financing
orders, as well as the debtor’s loan
agreement, authorized and directed the debtor
to remit to a creditor all cash collateral.
The creditor was also authorized to apply
the funds collected to the outstanding balance
that the debtor owed. The debtor characterized
the loan agreement as a flow of dollars
against its credit line such that no disbursement
occurred, which would trigger 28 U.S.C.
§ 1930, when the creditor “swept”
the debtor’s blocked account. The
United States trustee rejected this position
and claimed that a disbursement occurred
when the creditor swept the blocked account.
The monthly operating reports revealed a
paydown of the debt to creditor. Where the
term “disbursements” was not
defined in 28 U.S.C. § 1930(a)(6),
the court agreed with the trustee that the
ordinary, everyday meaning of the term should
control. The process that the debtor used
to deposit its accounts receivable into
the blocked account which was then swept
by the creditor resulted in disbursements
to the creditor on which the quarterly fees
required calculation. In re
Fabricators Supply Co., 2003 Bankr.
LEXIS 386, — B.R. — (Bankr.
D.N.J. April 29, 2003) (Winfield, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:6.29 [back to top]
creditor’s application of postpetition
payments to prepetition indebtedness was
contrary to court’s payment order
and in violation of stay. Bankr.
D. Md. PROCEDURAL POSTURE:
Plaintiff bankruptcy debtors brought an
adversary proceeding against defendant foreign
creditor, alleging that the creditor misapplied
postpetition payments from the debtors and
improperly applied postpetition accounts
receivable against the prepetition indebtedness
owed to the creditor. The creditor moved
to dismiss the complaint and to compel arbitration
under the terms of the parties’ prepetition
contract. OVERVIEW: The
debtors contended that the creditor’s
misapplication of postpetition payments
to prepetition indebtedness violated the
court’s payment order, thus warranting
contempt relief, and violated the automatic
bankruptcy stay. The debtors also argued
that misapplied payments constituted avoidable
transfers and breaches of the parties’
postpetition contract. The creditor asserted
that the debtors’ claims were subject
to binding foreign arbitration under the
parties’ prepetition contract whereby
the parties provided international communication
services. The bankruptcy court held that
arbitration was not warranted since the
debtors’ claims did not arise from
the prepetition contract, but rather involved
postpetition disputes and alleged violations
which were properly within the bankruptcy
court’s jurisdiction. The bankruptcy
court had exclusive jurisdiction to enforce
compliance with the terms of its payment
order and the automatic stay, and the avoidance
of transfers and enforcement of the postpetition
contract were clearly within core bankruptcy
jurisdiction. Thus, the best interests of
the bankruptcy estate would be served by
bankruptcy litigation rather than arbitration.
Startec Global Communs. Corp.
v. Videsh Sanchar Nigam Ltd., 2003
Bankr. LEXIS 398, — B.R. — (Bankr.
D. Md. April 24, 2003) (Keir, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]
court properly held that vehicle repossessed
on the morning debtor filed bankruptcy was
property of the estate as debtor retained
equitable ownership rights under state law.
E.D. Va. PROCEDURAL
POSTURE: Appellant creditor appealed
from the decision of the bankruptcy court.
In that decision, the bankruptcy court concluded
that appellee debtor had property rights,
in excess of bare legal title, in a vehicle
that the creditor had repossessed in the
early morning hours on the day the debtor
filed her bankruptcy petition, and that
her property rights in the vehicle passed
to the bankruptcy estate. OVERVIEW:
The creditor’s appeal was strictly
limited to the issue of whether the bankruptcy
court correctly decided that upon repossession
of the vehicle, the debtor retained an ownership
interest in the vehicle. The court initially
found that the appeal presented a live case
and controversy despite jurisdictional standing
and mootness concerns. The creditor argued
that under state law after repossession,
a secured creditor obtained all the elements
of property ownership, except legal title
to the property and that the only thing
that passed to the bankruptcy trustee were
bare legal title and the right to redemption.
While it was true that contractual rights
of redemption were not property interests,
statutory rights of redemption were rights
to exercise a form of control over the property
itself. Because the debtor retained rights
in the property until such time as the right
to redeem was extinguished, the court could
not find that all equitable rights in the
vehicle passed to the creditor at the time
of repossession. The creditor only held
a secured interest in the vehicle, not an
equitable ownership interest. The debtor
had not transferred equitable ownership
rights in the vehicle. Tidewater
Fin. Co. v. Moffett (In re Moffett), 2003
U.S. Dist. LEXIS 7169, 289 B.R. 55 (E.D.
Va. February 3, 2003) (Caheris, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.01 [back to top]
of attorney’s fees for less than amount
requested further reduced on rehearing where
there was no apparent benefit to debtor
in case dismissed prior to plan confirmation.
Bankr. S.D. Tex. PROCEDURAL
POSTURE: Debtor’s counsel’s
first fee application was denied because
the United States trustee’s motion
to dismiss the debtor’s chapter 13
was pending. After the case was dismissed
prior to confirmation of a plan, counsel
filed a second fee application for attorney’s
fees as an administrative expense under
11 U.S.C. §§ 330 and 503(b)(2).
The court approved a fee as an administrative
expense that was less than the amount requested.
Counsel was given a rehearing. OVERVIEW:
Resolving an objection to plan confirmation
and a motion for relief from stay, and obtaining
an agreement on cramdown for a car, conferred
no continuing benefit to the debtor since
the plan was not confirmed and the case
was dismissed. No significant time was spent
in negotiations, drafting agreements, or
client counseling such as discussing compliance
with the agreed orders, or discussing responses
to the trustee’s motion to dismiss
and how to avoid dismissal. No attorney
time was recorded as to the motion to dismiss.
There was no evidence that counsel made
any material investigation concerning the
facts of the case. The debtor had $10,000
cash (but made no postpetition payments
to the mortgage lender), and defaulted on
most of the monthly payments to the trustee.
The initial fee application implied that
counsel knew early in the case that the
case would be dismissed prior to confirmation,
and because counsel represented to the court
that free use of the mortgage lender’s
home without confirmation of a plan was
a “typical situation,” the court
could not conclude that counsel’s
efforts were directed toward plan confirmation
and fees were denied under sections 330
and 503(b)(2). In re Phillips,
2003 Bankr. LEXIS 412, 291 B.R. 72 (Bankr.
S.D. Tex. March 5, 2003) (Steen, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.01 [back to top]