Collier Bankruptcy Case Update May-26-03
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 26, 2003
§ 547 Distributions
of excess malpractice insurance proceeds
to guarantor of debtor’s health and
retirement plan payments which were to be
applied to debtor’s outstanding payments
were not preferential transfers.
Boston Reg’l Med. Ctr., Inc. v. Seventh Day Adventist Hosp. Retirement Fund, Trustee (In re Boston Reg’l Med. Ctr., Inc.) (Bankr. D. Mass.)
§ 546(a) Statute of limitations was equitably tolled with respect to debtor’s action against golf equipment company and its supplier previously dismissed by bankruptcy court without prejudice.
Family Golf Ctrs., Inc. v. Acushnet Co. (In re Randall’s Island Family Golf Ctrs., Inc.) (Bankr. S.D.N.Y.)
§ 548 Insolvency of debtor prohibited payment of dividends to preferred stockholders and dividends paid were subject to recovery by trustee.
Pereira v. Equitable Life Ins. Soc’y of the U.S. (In re Trace Int’l Holdings, Inc.) (Bankr. S.D.N.Y.)
§ 1103(b) Law firm approved as counsel for committee of unsecured creditors made full disclosure and structured finance transactions that predated representation were not grounds for disqualification.
Exco Res., Inc. v. Milbank, Tweed, Hadley & McCloy, LLP (In re Enron Corp.) (S.D.N.Y.)
28 U.S.C. § 1334(c)(2) State law breach of contract action purchased by plaintiff from creditor was subject to mandatory abstention.
Technology Outsource Solutions, LLC v. ENI Tech., Inc. (W.D.N.Y.)
§ 502(c) Case management order issued to allow orderly estimation of asbestos claims against debtor, including limiting estimation hearing to cancer claimants.
In re USG Corp. (Bankr. D. Del.)
Retention of financial advisor approved,
provided indemnification agreement modified
to exclude contractual disputes with debtor
and breaches of duty of loyalty.
In re Baltimore Emergency Servs. II, LLC (Bankr. D. Md.)
§ 1123(b)(6) Plan classifying claims arising from consigned goods separately from general unsecured claims confirmed due to sound business rationale.
In re Bernhard Steiner Pianos USA, Inc. (Bankr. N.D. Tex.)
§ 1129(a) Bankruptcy court recommended that district court confirm plan including issuance of discharges, releases and injunctions protecting debtor, reorganized debtor and personal injury trust.
In re Asbestos Claims Mgmt. Corp. (Bankr. N.D. Tex.)
§ 105 Suits claiming injuries from exposure to toxic chemicals in mattresses sold by debtor were appropriately stayed and referred to alternative dispute resolution by bankruptcy court.
Spierer v. Federated Dep’t Stores, Inc. (In re Federated Dep’t Stores, Inc.) (6th Cir.)
§ 348(a) Post-conversion claim for homestead exemption denied when entitlement did not exist as of date of filing of the original voluntary petition.
In re Lude (Bankr. S.D. Ohio)
§ 362(a) Title VII discrimination case was subject to bankruptcy stay.
Cress v. United Airlines, Inc. (N.D. Ill.)
§ 523(a)(8) Debtor who had ability to make reasonable monthly payments denied discharge of student loans incurred during attendance at truck driving school.
Hockett v. Educational Credit Mgmt. Corp. (In re Hockett) (Bankr. C.D. Ill.)
§ 544 Trustee’s interest in stock pursuant to strong-arm powers was superior to that of creditor with unperfected security interest.
In re Billingsley (Bankr. C.D. Ill.)
§ 1112(b) Motion to dismiss or convert, filed only one week after petition, denied absent showing of continuing loss to or diminution of estate.
In re 4C Solutions, Inc. (Bankr. C.D. Ill.)
§ 362 Attempt by former spouse’s attorneys to enforce divorce related contempt order against debtor did not violate stay or discharge injunction.
Lowery v. McIlroy (In re Lowery) (Bankr. E.D. Mo.)
§ 522(a) Nondebtor spouse not entitled to assert homestead exemption on debtor’s behalf where debtor had repeatedly failed to exempt the property.
Stephens v. Jensen-Carter (In re Alexander) (B.A.P. 8th Cir.)
§ 522(d)(1) Debtor entitled to claim homestead exemption in real property occupied by dependent child and former spouse and in which debtor held lien interest.
Keller v. Johnson (In re Johnson) (B.A.P. 8th Cir.)
§ 523(a)(8) Bankruptcy court erred in granting undue hardship discharge of student loans to debtor whose monthly income exceeded expenses and who qualified for income contingent repayment plan.
Long v. Educational Credit Mgmt. Corp. (In re Long) (B.A.P. 8th Cir.)
§ 110 Petition preparer sanctioned for failing to file sworn statement of compensation and for unauthorized practice of law in preparing and filing petition on behalf of non-English speaking debtors.
Tighe v. Mora (In re Nieves) (Bankr. C.D. Cal.)
§ 1129 Plan that was approved by less than two-thirds of general unsecured creditors was not confirmable.
In re MJ Metal Prods., Inc. (Bankr. D. Wyo.)
§ 1305(a) Postpetition debt to medical creditors could be added to plan only if the creditors elected to do so and participation in modified plan could not be required.
In re Sims (Bankr. M.D. Ala.)
Rule 3001(e) Distribution to debtor’s former spouse subject to garnishment judgments in favor of debtor and former spouse’s attorney as substituted creditors.
In re Brickell (Bankr. S.D. Fla.)
Collier Bankruptcy Case Summaries
Distributions of excess malpractice insurance proceeds to guarantor of debtor’s health and retirement plan payments which were to be applied to debtor’s outstanding payments were not preferential transfers. Bankr. D. Mass. PROCEDURAL POSTURE: Plaintiff debtor filed a chapter 11 petition and the debtor’s liquidation plan of reorganization was later confirmed. The debtor filed an action against defendant retirement fund and sought to recover alleged preferential transfers pursuant to 11 U.S.C. § 547. OVERVIEW: The debtor was a Massachusetts nonprofit corporation that operated a hospital. The retirement fund administered a retirement and health insurance plan in which the debtor participated. The debtor later failed to make required contributions for retirement and health insurance contributions. The court rejected the debtor’s position, that 11 U.S.C. § 547 treatment for preferences applied where the court found that the property used to make a payment was not an interest of the debtor in property, because the debtor failed to establish by a preponderance of the evidence that it had a direct interest in the distribution. The court rejected the debtor’s other claims that the third party lacked the ultra vires power to grant a guaranty and found that there was sufficient consideration to support the guaranty pursuant to Massachusetts law. The debtor also failed to establish by a preponderance of the evidence that the guaranty was invalid. Boston Reg’l Med. Ctr., Inc. v. Seventh Day Adventist Hosp. Retirement Fund, Trustee (In re Boston Reg’l Med. Ctr., Inc.), 2003 Bankr. LEXIS 416, — B.R. — (Bankr. D. Mass. April 22, 2003) .
Collier on Bankruptcy, 15th Ed. Revised 5:547.01
of limitations was equitably tolled with
respect to debtor’s action against
golf equipment company and its supplier
previously dismissed by bankruptcy court
without prejudice. Bankr. S.D.N.Y.
Plaintiff was one of a family of debtors
under a chapter 11 bankruptcy. The debtor
sued defendants, a golf equipment company
and its subsidiary, pursuant to 11 U.S.C.
§ 546(a) to recover certain transfers.
The defendants moved to dismiss alleging
that the statute of limitations had expired.
The debtor previously filed this action
against the defendants, within the statute
of limitations, which the bankruptcy court
dismissed without prejudice. OVERVIEW:
The bankruptcy court determined that equitable
tolling applied. The debtor did not sit
on its rights. In its first action, the
debtor commenced a timely preference action
against the defendants. The bankruptcy court
dismissed the debtor’s first action
because of improper joinder under Fed. R.
Civ. P. 20(a). The defendants thus knew
that the debtor intended to pursue the claims,
and were not prejudiced by the need to defend
the adversary proceeding instead of the
first action. The defect in the debtor’s
first complaint was not a fatal one. Dismissing
the defendants from the first action without
prejudice was effectively a severance under
Fed. R. Civ. P. 21 that granted the debtor
the right to file a new, separate action.
Moreover, since the statute of limitations
had already run after the first action was
dismissed, the dismissal without prejudice
implied that the new complaint would relate
back to the date of the original complaint.
Finally, the defendants did not contest
the dismissal without prejudice, and even
drafted and submitted the order to the bankruptcy
court dismissing the claims without prejudice.
Family Golf Ctrs., Inc. v. Acushnet
Co. (In re Randall’s Island Family
Golf Ctrs., Inc.), 2003
Bankr. LEXIS 64, 288 B.R. 701 (Bankr. S.D.N.Y.
February 3, 2003) (Bernstein, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised: 5:546.02 [back to top]
of debtor prohibited payment of dividends
to preferred stockholders and dividends
paid were subject to recovery by trustee.
PROCEDURAL POSTURE: Plaintiff chapter
7 trustee filed an adversary action against
defendant debtor, seeking to avoid and recover
actual and constructive fraudulent transfers
allegedly made by defendant holding company.
Defendant insurance company and financial
company moved for judgment on the pleadings
or for summary judgment. OVERVIEW:
At issue was whether an insolvent corporation
could pay dividends to its preferred stockholders.
The trustee alleged that the holding company
paid the dividends with the actual intent
to hinder, delay, and defraud its creditors.
The trustee’s claims based on actual
fraud failed to pass muster; he pleaded
only legal conclusions and did not, as Fed.
R. Civ. P. 9(b) required, allege facts that
gave rise to a strong inference of fraudulent
intent. Thus, the insurance company and
financial company were entitled to judgment
on the pleadings as to those claims. Those
companies defendant against the constructive
fraud claim on grounds that they were contractually
entitled to the payment of dividends under
the holding company’s charter or by
virtue of contract. The court, however,
concluded that even if they were contractually
entitled to such payment, the holding company’s
insolvency would have prohibited it from
performing that contract and rendered any
dividends paid subject to recovery by the
trustee. An insolvent holding company’s
unlawful repurchase of stock or the payment
of dividends did not trigger an enforceable
obligation to pay additional unlawful dividends.
Pereira v. Equitable Life Ins.
Soc’y of the U.S. (In re Trace Int’l
Holdings, Inc.), 2003
Bankr. LEXIS 63, 289 B.R. 548 (Bankr. S.D.N.Y.
January 29, 2003) (Bernstein, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.01 [back to top]
firm approved as counsel for committee of
unsecured creditors made full disclosure
and structured finance transactions that
predated representation were not grounds
for disqualification. S.D.N.Y.
Debtors filed voluntary petitions for relief
under chapter 11. The bankruptcy court approved
appellee law firm as counsel for the committee
of unsecured creditors. Appellant creditor
later objected to the law firm’s monthly
fee statement and moved to disqualify the
law firm as counsel for the committee. The
bankruptcy court denied the motion. The
creditor appealed the decision. OVERVIEW:
The creditor had standing to bring the appeal
because as an unsecured creditor, it would
have been directly and pecuniarily affected
if the law firm’s interests were adverse
to the committee’s interests and if
the law firm had failed to disclose its
relationships. The bankruptcy court’s
order denying the disqualification motion
was a final, appealable order as a footnote
related to the law firm’s future involvement
did not suggest that the bankruptcy court
would have reconsidered its decision on
the disqualification motion. Moreover, the
creditor’s failure to name the committee
as an appellee did not warrant dismissal
as it had named itself as required under
Fed. R. Bankr. P. 8001(a). On the merits,
the law firm’s disclosures complied
with Fed. R. Bankr. P. 2014 as they fully
disclosed the relevant facts concerning
its relationships and its relevant connections
to potential parties. The law firm had not
violated 11 U.S.C. § 1103(b) as its
alleged adverse interests relating to structured
finance transactions pre-dated the firm’s
representation of the committee. The law
firm also satisfied 11 U.S.C. § 101(14)
because it was disinterested and did not
hold an adverse interest. Exco
Res., Inc. v. Milbank, Tweed, Hadley &
McCloy, LLP (In re Enron Corp.),
2003 U.S. Dist. LEXIS 1442, — B.R.
— (S.D.N.Y. January 28, 2003) (Jones,
Collier on Bankruptcy, 15th Ed. Revised 7:1103.04 [back to top]
law breach of contract action purchased
by plaintiff from creditor was subject to
mandatory abstention. W.D.N.Y.
PROCEDURAL POSTURE: Plaintiff
filed a complaint in state court, alleging
nine causes of action against defendant
based primarily on allegations of breach
of contract. In its complaint, plaintiff
alleged that, through the bankruptcy court,
it purchased all of another corporation’s
surviving claims and causes of action. Plaintiff
filed a motion to remand or abstain, and
defendant filed a cross-motion to transfer
venue to the Southern District of New York.
OVERVIEW: The court held
that it had jurisdiction under 28 U.S.C.
§ 1334(b) since a determination that
plaintiff concealed assets, as defendant
alleged, could have a “conceivable
effect” on the bankruptcy proceeding.
The court then held that remand was required
pursuant to the mandatory abstention provision
of 28 U.S.C. § 1334(c)(2). The court
found that the plaintiff met all six criteria
for remanding a case, including: (1) the
fact that plaintiff filed the motion for
remand and abstention as its first response
to defendant’s notice of removal;
(2) the suit was based on state law claims,
primarily sounding in breach of contract;
(3) the action did not arise under the Bankruptcy
Code; (4) the sole basis of jurisdiction
was section 1334; (5) the case had been
commenced in state court; and (6) the state
action was capable of being timely adjudicated.
In addition to mandatory abstention, the
court also found that it should abstain
under section 1334(c)(1), as the sale of
the assets to plaintiff was made free and
clear of any lien from the bankruptcy. Furthermore,
the only issues pending for adjudication
by the state court involved state law contract
issues. Technology Outsource
Solutions, LLC v. ENI Tech., Inc.,
2003 U.S. Dist. LEXIS 1475, — B.R.
— (W.D.N.Y. January 23, 2003) (Siragusa,
Collier on Bankruptcy, 15th Ed. Revised 1:3.05 [back to top]
management order issued to allow orderly
estimation of asbestos claims against debtor,
including limiting estimation hearing to
Bankr. D. Del. PROCEDURAL
POSTURE: Debtors were
various entities filing under chapter 11
entities and the cases were jointly administered.
The debtors filed for certain case management
initiatives related towards estimation hearings
of the approximately 190,000 asbestos personal
injury claims pending pursuant to 11 U.S.C.
§ 502(c). The debtors sought to challenge
the validity of the claims in an estimation
The debtors asserted that that they had
substantive defenses to many of the current
and future asbestos claims. The asbestos
claimants’ committee rejected the
debtors’ request for a merits-based
estimation hearing for valid claimants only
as unnecessary and unduly burdensome. The
committee asserted that an estimation of
the debtors’ present and future asbestos
liability could be made on the basis of
prepetition settlements and the litigation
history of asbestos-related personal injury
claims and lawsuits. The debtors argued
that a large number of claimants were actual
“unimpaired” claimants that
had no valid claims. The court decided to
excluded the unimpaired claimants and have
a cancer-only bar date in order to process
claims. The court intended to later conduct
an estimation hearing under 11 U.S.C. §
502(c). The court established the medical
criteria for cancer and the related claim
form to be used. In
re USG Corp., 2003
Bankr. LEXIS 420, 290 B.R. 223 (Bankr. D.
Del. February 19, 2003) (Wolin, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.04 [back to top]
of financial advisor approved, provided
indemnification agreement modified to exclude
contractual disputes with debtor and breaches
of duty of loyalty. Bankr.
D. Md. PROCEDURAL POSTURE:
Debtors filed for bankruptcy under chapter
11. Debtors sought to retain a financial
advisor to assist in its reorganization.
The issue for the bankruptcy court was what,
if any, indemnification provision was a
reasonable term of employment. OVERVIEW:
The financial advisor’s indemnification
agreement provided for indemnification for
bad faith. This constituted an unacceptable
expansion of debtors’ indemnification
obligation beyond that initially requested
and beyond acceptable bounds of public policy.
The indemnification agreement was worded
so broadly as arguably to require indemnification
for contractual disputes with debtors. Contractual
disputes needed to be expressly excluded
from the scope of the indemnification agreement.
Further, the terms of the engagement agreement
were unclear. The list of financial advisory
services to be provided were followed by
a disclaimer that seemed to undercut what
the financial advisor agreed to do. The
disclaimer provided that the financial advisor
had no responsibility for designing any
initiatives to improve debtors’ operating
profitability, cash management, or liquidity.
This was not an acceptable disclaimer. There
was no affirmative recognition that the
indemnity provision did not cover breaches
by the financial advisor of its duties of
loyalty, including the avoidance of conflicts
of interest and its obligation to be disinterested,
and of care. In re Baltimore
Emergency Servs. II, LLC, 2003
Bankr. LEXIS 426, — B.R. — (Bankr.
D. Md. March 6, 2003) (Derby, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:328.02 [back to top]
claims arising from consigned goods separately
from general unsecured claims confirmed
due to sound business rationale. Bankr.
N.D. Tex. PROCEDURAL POSTURE:
The debtor filed a chapter 11 petition.
The creditors obtained relief from the automatic
stay and repossessed their remaining collateral.
The creditors objected to the debtor’s
chapter 11 plan of reorganization where
the plan proposed to distinguish between
the types of unsecured creditors. OVERVIEW:
The debtor’s proposed plan separately
classified creditors whose claims arose
from consigned goods and general unsecured
claims, to which the creditors objected,
even where both classes of creditors were
unsecured creditors. The court found that
the debtor presented a good business reason
for the separate classification and treatment
of consignment creditors from the claims
of the general unsecured creditors. The
plan did not release any third parties.
The court found that the debtor’s
success or failure during reorganization
depended on the efforts, reputation, and
dedication of a third-party/guarantor. The
debtor would survive and the creditors would
receive payment under the plan only if the
third party was allowed to conduct the debtor’s
business without distraction. The court
found that the debtor and the third party
had an identity of interest such that the
creditors’ prosecution of the claims
or attempted collection of any judgments
against the third party would be equal to
prosecuting and/or seeking collection from
the debtor. In re Bernhard Steiner
Pianos USA, Inc., 2002 Bankr. LEXIS
1616, 292 B.R. 109 (Bankr. N.D. Tex. December
17, 2002) (Hale, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1123.02 [back to top]
court recommended that district court confirm
plan including issuance of discharges, releases
and injunctions protecting debtor, reorganized
debtor and personal injury trust.
Bankr. N.D. Tex. PROCEDURAL
POSTURE: The district court referred
to the bankruptcy court the matter of holding
a confirmation hearing and directed the
bankruptcy court to make a recommendation
relative to the entry of a confirmation
order and supplemental injunction under
11 U.S.C. § 524(g) in a chapter 11
case. OVERVIEW: This bankruptcy
action involved asbestos claims against
debtor. The court concluded that debtor
satisfied its burden of producing evidence
that the plan complied with 11 U.S.C. §§
1129(a), (b), 524(g). The court concluded
that the district court had inherent constitutional
and statutory authority to issue and enter
the discharges, releases, and injunctions
contained in the plan and confirmation order.
The releases, discharges, and injunctions
were an integral part of the plan and were
fair, equitable, reasonable, and in the
best interests of debtor and its estate,
the reorganized debtor, a bodily injury
trust, and holders of claims, demands, and
interests. The court concluded that 11 U.S.C.
§§ 103(a), 524(g)(1)(A), (3)(A),
(4)(B) justified the inclusion of debtor,
the reorganized debtor, and the bodily injury
trust within the protection of the supplemental
injunction, explaining that a chapter 11
debtor was the primary beneficiary of a
section 524(g) injunction. Further, the
inclusion of certain related parties, including
debtor’s representatives, subsidiaries,
and affiliates, and the creditors’
committee was a logical extension of that
protection. In re Asbestos Claims
Mgmt. Corp., 2003 Bankr. LEXIS
429, — B.R. — (Bankr. N.D. Tex.
May 6, 2003) (Felsenthal, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1129.03 [back to top]
claiming injuries from exposure to toxic
chemicals in mattresses sold by debtor were
appropriately stayed and referred to alternative
dispute resolution by bankruptcy court.
6th Cir. PROCEDURAL
POSTURE: Appellant individuals
sought to lift a stay imposed by the bankruptcy
court so that they could proceed directly
in state court and argued that the stay
should never have been imposed. The bankruptcy
court denied this motion, and the District
Court for the Southern District of Ohio
affirmed. Appellants challenged the decision
of the district court and appellee debtors
opposed the appeal. OVERVIEW:
Claiming that they had suffered injuries
as a result of exposure to toxic chemicals
in a mattress that they had obtained from
debtors, the individuals filed suit against
the department stores and the stores’
subsidiary companies in state court. The
department stores – the debtors in
the present case – filed for bankruptcy
protection. Later that year, having determined
that no global settlement of the claims
against the debtors was imminent, the bankruptcy
court lifted the automatic stay on all pending
litigation. The individuals argued that
the bankruptcy court had lacked the power
to send their claims to alternative dispute
resolution. However, the appellate court
held that the restriction at issue was minimal,
as it affected not the ability to enforce
private rights, but only the timing of that
enforcement. Granting bankruptcy courts
this power protected the court’s ability
to administer the estate efficiently and
other creditors’ ability to satisfy
their claims. Thus, the appellate court
concluded that the power to stay other pending
litigation involving the debtors or the
estate was within the bankruptcy court’s
constitutional jurisdiction. Spierer
v. Federated Dep’t Stores, Inc. (In
re Federated Dep’t Stores, Inc.),
2003 U.S. App. LEXIS 9194, — B.R.
— (6th Cir. May 14, 2003) (Moore,
Collier on Bankruptcy, 15t