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 20, 2002

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Debtor could not void tax return filing extension in order to place tax obligation outside of three-year nondischargeability period. D. Mass. The debtor appealed the bankruptcy court's dismissal of an adversary proceeding seeking to discharge his prepetition income tax liability. The debtor had previously sought a four-month automatic extension to file his tax return. Because the date of the extension was within three years of the date the debtor filed his petition, the IRS contended that the tax obligation was nondischargeable. The debtor argued that the extension was invalid because of misrepresentations he made when filing the request for an extension. The bankruptcy court granted the IRS's motion to dismiss and held that the debtor taxpayer could not receive the benefit of the extension and then argue that it was invalid because of misrepresentations that he had made. The district court affirmed, holding that the debtor's tax liability was not discharged because the three-year period of section 507(a)(8)(A)(1) was measured from the date of the filing extension requested by the debtor. The debtor taxpayer did not have the power to seek an invalidation of the automatic extension independently of the IRS. Kimball v. United States (In re Kimball), 2002 U.S. Dist. LEXIS 4470, - B.R. - (D. Mass. February 27, 2002) (Keeton, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10

Fraudulent conveyance action commenced against debtor's wife was void. S.D.N.Y. The debtor's wife moved to dismiss the fraudulent conveyance action brought against her by the liquidator of an insurance company in district court, arguing that the commencement of the action violated the automatic stay. The liquidator sought to recover the value of certain residential property conveyed from the debtor to his wife. However, it did not seek relief from the automatic stay or intervention by the trustee. The district court granted the motion to dismiss without prejudice, holding that the action against the debtor's wife was commenced in violation of the automatic stay. The fraudulent conveyance action was a prohibited action to recover a claim against the debtor and was void. Serio v. DiLoreto, 2002 U.S. Dist. LEXIS 4473, - F. Supp.2d - (S.D.N.Y. March 19, 2002) (Swain, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03

Creditors' claims required to be discounted to present value as of petition date. Bankr. D. Del. After filing for chapter 11 relief, the debtors filed two motions seeking to fix the amounts of certain proofs of claim and scheduled claims related to the debtors' obligations under some promissory notes. Each claim at issue was asserted or scheduled in an amount equal to the aggregate nominal amount of all outstanding payments due under the applicable promissory note as of the date the debtors filed for bankruptcy. Some of the claims also included amounts for postpetition interest, late fees, attorneys' fees and other charges. In its motion, the debtor sought entry of an order pursuant to section 502(b), reducing the claims to present value as of the petition date and reducing the claims by the amount of any postpetition interest, fees or charges. Certain creditors objected, arguing that their claims should be allowed in the full amount asserted. The bankruptcy court ruled that the language of section 502(b) required that the disputed claims be discounted to their present value as of the petition date. The court reasoned that, under the principles established in section 502(b), interest stops accruing at the date of the filing of the petition because any claim for unmatured interest is disallowed under this section. Further, the court noted that the debtors' bankruptcies operated to accelerate the principal amount due on the claims because the discounting factor for claims after the commencement of a case is generally equivalent to the contractual interest rate on the claim. However, the court reserved for a later date a determination as to the proper discount factor to be applied to calculate the present value of the claims in this case. In re Loewen Group Int'l, Inc., 2002 Bankr. LEXIS 199, 274 B.R. 427 (Bankr. D. Del. February 19, 2002) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03

Denial of creditor's request for administrative expense claim was affirmed on appeal. D. Md. The creditor holding a purchase money security interest in the chapter 13 debtor's furniture appealed the bankruptcy court's order denying its request for payment as an administrative expense. The debtor had purchased the furniture prepetition and pledged it as collateral for any monies unpaid. Although the debtor's confirmed plan proposed to pay the creditor in full, she failed to pay any of the installments due under the plan for over a year. At no time before, during or after the debtor's default did the creditor move for relief from the automatic stay or for adequate protection. The bankruptcy court denied the creditor's request for payment as an administrative expense to recover the decline in the value of its collateral during the pendency of the debtor's case. On appeal, the creditor argued that the debtor's postpetition use of the furniture conferred a concrete benefit upon her estate. The district court affirmed, holding that section 503(b) was not the appropriate remedy for the prepetition secured lender whose collateral diminished in value due the debtor's postpetition possession and use. The debtor's furniture was a consumer purchase used for personal purposes, and was not employed in an effort to operate or reestablish a business, or make an economic profit for the debtor or her estate. Having failed to request adequate protection as the appropriate remedy, the creditor could not use section 503(b) as an alternative means to accomplish the same end. Tidewater Fin. Co. v. Henson, 2002 U.S. Dist. LEXIS 7284, - B.R. - (D. Md. April 18, 2002) (Blake, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06

Chapter 11 trustee's conduct did not rise to level of gross negligence. N.D. Tex. In May 1996, several creditors filed an involuntary bankruptcy petition against the debtor. Shortly thereafter, a chapter 11 trustee was appointed. Between May 1996 and January 1997, the trustee disbursed over $1.3 million. In January 1997, the bankruptcy court confirmed the debtor's joint plan of reorganization and discharged the trustee from his duties, releasing him from all further authority, duties and responsibilities related to the bankruptcy case. The plan named the trustee as disbursing agent for the proceeds of a $2.5 million letter of credit, which was to be placed in a claims reserve account to pay allowed claims. Instead of depositing the proceeds of the letter of credit into a claim reserve account, the trustee deposited the proceeds into the trustee operating account. The debtor then filed an adversary proceeding against the trustee, asserting, in part, breach of fiduciary duty for commingling the funds from the claim reserve account with funds from the operating account. After a hearing, the bankruptcy court ruled that, although the trustee was inattentive to detail, the conduct did not breach his fiduciary duty and that the trustee had been discharged from all duties and responsibilities as of the date the commingling occurred. On appeal, the district court rejected the trustee's argument that he could not be liable because his trustee duties had been discharged and found that a trustee retains a continuing duty of loyalty even after discharge. Nevertheless, the district court affirmed the bankruptcy court's ruling because it found that the bankruptcy court did not clearly err in finding that the trustee's conduct did not amount to an intentional failure to perform his duties or reckless disregard of the consequences of his actions. U.S. Metro Line Servs. v. Litzler (In re VVCI Acquisition Corp.), 2002 U.S. Dist. LEXIS 4317, - B.R. - (N.D. Tex. March 14, 2002) (Lindsay, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:323.02
 

Debtor's attorney was denied award of compensation for postpetition services. Bankr. S.D. Ohio The chapter 7 debtor reopened her case and moved for sanctions against her former attorney for attempting to collect outstanding legal fees subsequent to her discharge. The debtor sought disallowance of all compensation on the bases that the creditor failed to adequately disclose the nature of the fee arrangement and that the charges for the services were unreasonable. Prior to filing for bankruptcy, the debtor received a subpoena for a judgment debtor examination and subsequently met with the attorney and paid him a $500 retainer for his services. The parties executed a fee agreement that generally referred to 'debt problems' and stated that work was to be performed at specific hourly rates. The debtor and her attorney later concluded that filing a chapter 7 petition was in the debtor's best interest. The compensation statement filed at the time of the petition referred to an attached copy of the previously executed agreement, but did not disclose what the bankruptcy charges would be, the amount of any retainer or any balance due. The bankruptcy court granted judgment to the debtor, holding that postpetition compensation was disallowed due to the inadequacy of the attorney's disclosure of compensation. The postpetition charges were not unreasonable under section 329(b), but the attorney's disclosure of the charges specific to the bankruptcy filing was inadequate. The court noted that the purpose of the compensation disclosure requirement was to enable the court and the United States Trustee to monitor and examine the compensation paid by the debtors to protect them from overreaching and to make sure assets were not shielded from creditors. In re McNickle, 2002 Bankr. LEXIS 197, 274 B.R. 477 (Bankr. S.D. Ohio February 19, 2002) (Caldwell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.03; 9:2016.17

Creditor failed to state section 523(a)(2)(A) claim where relevant allegations related to oral representations of insider's financial condition. Bankr. N.D. Ill. An alleged creditor of the chapter 7 debtor filed a complaint seeking a denial of the debtor's discharge under various subsections of section 727(a). The complaint also sought a determination of the nondischargeability of the particular alleged debt owed to the creditor pursuant to various subsections of section 523(a). The debtor moved for summary judgment. The bankruptcy court granted the debtor's motion, in part, and denied the motion, in part. Among other things, the court held that to the extent that the creditor alleged causes of action under section 523(a)(2)(A), he failed to state a claim upon which relief could be granted because virtually all of the relevant allegations related to oral representations regarding the financial condition of an insider of the debtor and, as such, were actionable only under section 523(a)(2)(B), which requires that misrepresentations concerning financial condition be in writing. Jeffrey M. Goldberg & Assocs. v. Holstein (In re Holstein), 2001 Bankr. LEXIS 1833, 272 B.R. 463 (Bankr. N.D. Ill. September 27, 2001) (Sonderby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1]

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Defendant in fraudulent transfer action denied summary judgment because trustee might establish that limitations period was subject to equitable tolling. Bankr. N.D. Ill. In connection with his prepetition purchase of real property from the chapter 7 debtor, an individual granted the debtor's wife at the time a nine-year option to repurchase the property. According to the purchaser, the wife contemporaneously assigned the option to the debtor at the time of the sale. Years later, after the debtor and his wife divorced and the debtor's bankruptcy discharge was granted and his case was closed, the purchaser moved to reopen the chapter 7 case based on the debtor's alleged failure to schedule the option as an asset. The purchaser offered to purchase the trustee's interest in the property for a flat fee in an apparent effort to resolve a pending state court action brought by the former wife to enforce the purchase option, which she claimed had been reassigned to her by the debtor. The trustee rejected the purchase offer, and instead brought an adversary proceeding against the purchaser to recover the property. The trustee alleged that the debtor's initial transfer of the property to the trustee was a fraudulent transfer pursuant to section 544 and the state (Illinois) fraudulent transfer statute. The purchaser moved for summary judgment and alleged, among other things, the trustee's fraudulent transfer claims were time-barred. It was undisputed that the trustee's causes of action under section 544(b) were brought beyond the two-year statute of limitations of section 546(a); thus, the issue for decision was whether the doctrine of equitable tolling applied to the limitations period. The bankruptcy court denied the purchaser's motion for summary judgment. The court held that, among other things, that the purchaser failed to establish that the trustee actually knew of the property sale or that he failed to exercise due diligence in investigating the debtor's financial affairs; therefore, the trustee might be able to establish that the statute of limitations was subject to equitable tolling. Heyman v. Dec (In re Dec), 2001 Bankr. LEXIS 1835, 272 B.R. 218 (Bankr. N.D. Ill. September 6, 2001) (Sonderby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:546.02

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Court sustained trustee's objections to exemptions claimed by debtor for IRA and college fund. Bankr. W.D. Ark. The chapter 7 trustee objected to exemptions claimed by the debtor for an IRA and a 'college fund.' The trustee did not dispute that the debtor was entitled to exempt a portion of the funds using the section 522(d)(5) 'wildcard' exemption. However, the trustee objected to the debtor's claim of exemption for the remaining value of the funds under section 522(d)(10)(E). The bankruptcy court held that the debtor was not entitled to claim exemptions under section 522(d)(10)(E) for either the IRA or the college fund because the funds were not payments received pursuant to a pension, annuity or 'similar plan or contract' within the meaning of section 522(d)(10)(E). The court determined that there is no per se exemption under section 522(d)(10)(E) for IRAs that qualify for tax exempt status under section 408 of the Internal Revenue Code; rather, Congress intended to exempt section 408 IRAs to the extent they are 'similar plans or contracts' payable 'on account of illness, disability, death, age or length of service' and 'reasonably necessary for the support of the debtor and any dependent of the debtor.' In this case, based on the evidence presented, the court found that both accounts were simply savings accounts set up to pay for the college education of the debtor's son. The court also held that the debtor was not entitled to the exemption claimed because his right to payment from the funds was not on account of illness, disability, death, age or length of service, and because the funds were not reasonably necessary for the support of the debtor or a dependent. In re Skipper, 2002 Bankr. LEXIS 189, 274 B.R. 807 (Bankr. W.D. Ark. February 12, 2002) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10]

Arizona debtor could not avoid condominium association's lien. Bankr. D. Ariz. The chapter 13 debtor moved to avoid a lien asserted by a condominium association on the grounds that it impaired his homestead exemption. The lien was based on a judgment obtained by the association in connection with an action brought against the debtor to enforce and collect a previously asserted lien for the debtor's unpaid condominium assessments. The bankruptcy court noted that in order to prevail on his motion, the debtor had to establish the following four factors: (1) he had an interest in his homestead property; (2) he was entitled to a homestead exemption; (3) the condominium association's lien impaired the exemption; and (4) the lien was judicial rather than statutory. The parties did not dispute the existence of the first three factors; thus, the dispositive issue before the court was whether the lien asserted by the association was statutory. The bankruptcy court held that the condominium association's lien was a statutory lien as defined by section 101(53); therefore, the lien could not be avoided for impairing the debtor's homestead exemption. The court rejected the debtor's argument that the lien was judicial because the condominium association obtained a judgment in an enforcement action and the lien was not truly created or choate until that judgment was entered. The court also rejected the debtor's assertion that since the definitions of judicial lien in both the state (Arizona) condominium statute and the Code contained the word 'levied,' the original assessment by the association was a judicial lien even prior to the commencement of the enforcement action. Reece v. Parkview Villas of Scottsdale Owners' Ass'n (In re Reece), 2001 Bankr. LEXIS 1820, 274 B.R. 515 (Bankr. D. Ariz. August 24, 2001) (Curley, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11

Debtor who willfully failed to comply with court order was enjoined from refiling chapter 13 case. Bankr. D. Wyo. The court directed the 13 debtor, who was 'seriously in default,' to submit a plan modification, make payments on the default and provide information to the chapter 13 trustee by a date certain. Although a modification was submitted, the debtor did not comply with any other terms of the order and, two months after the deadlines established by the order, the court dismissed the chapter 13 case. Soon thereafter, the debtor received a federal income tax refund with which she paid the arrearage on her home mortgage and purchased auto insurance. When she filed her second chapter 13 petition, she failed to disclose the payment on her mortgage. Upon a creditor's motion to dismiss for the willful failure to abide by a court order, the bankruptcy court held that the debtor was ineligible for chapter 13 due to her intentional failure to comply with a court order. The debtor deliberately and voluntarily failed to provide information to the trustee and cure her default, even though she knew she would soon receive a large income tax refund. She deliberately waited for the court to dismiss her case and, thus, further delayed her creditors. In light of the calculated nature of her actions and her lack of good faith, the debtor was enjoined from filing a chapter 11 or 13 case for 180 days. In re Basse, 2001 Bankr. LEXIS 1813, 272 B.R. 16 (Bankr. D. Wyo. November 8, 2001) (McNiff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2;109.08