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

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

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3d Cir.

§ 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.)

Collier Bankruptcy Case Summaries

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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. 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]

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Student 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]

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Creditors barred from attacking confirmation order due to failure to appeal within 180 days. D. Del. 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]

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Court 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[2] [back to top]

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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. 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) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01[4] [back to top]

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Payments 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]

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Foreign 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]

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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. 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]

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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. 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]