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 5, 2003

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

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3d Cir.

§ 362 Doctors violated stay by paying expenses with receivables that were property of debtor employer’s estate.
In re United States Physicians (E.D. Pa.)

§ 362 Debtor entitled to damages and attorneys’ fees due to creditor’s commencement of state court collection action in violation of stay.
Montgomery Ward, LLC v. Wiseknit Factory, Ltd. (In re Montgomery Ward, LLC) (Bankr. D. Del.)

§ 365 Debtor’s motion to assume sublease granted without requiring payment of interest and fees requested by landlord due to landlord’s failure to mitigate.
In re Rowland (Bankr. E.D. Pa.)

Collier Bankruptcy Case Summaries

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Bank’s notations regarding attorneys’ fees incurred, which were not communicated to the debtor, creditors, court or others, did not violate stay. 1st Cir. PROCEDURAL POSTURE: Plaintiff debtors sued defendant creditor bank for violating the Bankruptcy Code’s automatic stay, 11 U.S.C. § 362. The United States District Court for the District of Rhode Island directed summary judgment against the debtors, dismissing their claim the bank violated the automatic stay, and denied their motions to amend the complaint. The debtors appealed. OVERVIEW: The bank’s postpetition bookkeeping entries did not implicate Bankruptcy Code § 362(a)(3), since such unilateral accruals of amounts assertedly due, but in no manner communicated to the debtor, the debtor’s other creditors, the bankruptcy court, nor any third party, plainly were not the sort of “act” Congress sought to proscribe. Absent any overt attempt to recover attorneys’ fees from the chapter 13 estate in the future, as by instituting collection proceedings which the debtors or the chapter 13 estate would be forced to defend against, or by transmitting “harassing” communications, the bookkeeping entries represented mere unilateral notations regarding attorneys’ fees which it assertedly incurred, thereby according it no identifiable legal advantage over other creditors. Nor did these mere bookkeeping entries, albeit effected postpetition and preconfirmation, violate Bankruptcy Code § 362(a)(5). The trial court denied leave to amend, as a matter of law, since the proposed amendment would not cure the deficiencies in the original complaint. Mann v. Chase Manhattan Mortg. Corp., 2003 U.S. App. LEXIS 656, 316 F.3d 1 (1st Cir. January 17, 2003) (Cyr, Sr. C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03 [back to top]

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Settlement agreement calling for sale of assets and allocation of proceeds upheld on appeal in which United States claimed insufficient funds to satisfy tax liability. B.A.P. 1st Cir. PROCEDURAL POSTURE: Appellees, a bankruptcy trustee and a receiver, agreed to a sale of bankruptcy and receivership assets and subsequently entered into a settlement allocating proceeds from the sale between the trustee and the receiver. Appellant United States sought review of the order of the United States Bankruptcy Court for the District of Massachusetts which denied the United States’ motion for reconsideration of approval of the sale and the settlement. OVERVIEW: Although the United States was not an interested party at the times the sale and settlement orders were issued, the United States contended that the sale of assets gave rise to taxable income of the estate and that the settlement unfairly failed to provide sufficient funds to satisfy the estate’s tax liability. The United States asserted that relief from the orders was warranted based on newly discovered evidence of the estate’s actual tax liability. The bankruptcy appellate panel first held that the United States was not entitled to relief with regard to the order permitting the sale of assets since the portion of the order which the United States found objectionable, providing for escrow of proceeds pending resolution of disputes between the trustee and the receiver, was not a final appealable order. Further, the United States showed no exceptional circumstances to warrant relief from the order approving the settlement. The trustee, in entering into the settlement and settling the amount to be paid to the receiver, had a good faith belief that the trustee’s portion of the proceeds from the sale of the assets would be sufficient to satisfy all allowed claims in full. Indian Motocycle Co. v. Sterling Consulting Corp., 2003 Bankr. LEXIS 10, 289 B.R. 269 (B.A.P. 1st Cir. January 8, 2003) (Kornreich, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.01 [back to top]

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Debtors’ attorneys’ fees ordered disgorged due to failure of attorneys to disclose all fees paid. Bankr. D. Vt. PROCEDURAL POSTURE: The United States trustee filed a motion to determine if fees paid by the debtors to their attorneys were excessive pursuant to 11 U.S.C. § 329(a), (b), and Fed. R. Bankr. P. 2016, 2017, and to compel disclosure of the fees and to disgorge excessive fees. The trustee argued that the debtors had paid the attorneys $6,300, not the $1,000 that was disclosed on the Fed. R. Bankr. P. 2016(b) disclosure statement. OVERVIEW: During the one-year period prior to the bankruptcy, the attorneys received more than the $1,000 revealed on the Fed. R. Bankr. P. 2016(b) disclosure statement. All of counsels’ services were either in contemplation of or in connection with their bankruptcy case under 11 U.S.C. § 329(a), as evidenced by the reference line of the retainer letter that read “Bankruptcy,” and similar references on invoices. Those services included preparation of security interest documents in connection with the debtors’ daughter loaning the debtors funds for the retainer. Due to concealment, the court’s exercised its discretion to examine the payment of the $3,500 retainer, paid more than one year prior to the bankruptcy filing, and any payments made prior to the one-year look-back period of section 329(a). An “excusable neglect” standard was not applicable. The attorneys did not comply with the disclosure requirements of section 329(a) and Fed. R. Bankr. P. 2016, 2017. Hence, all fees received by the attorneys were subject to disgorgement. The attorneys did not show any extraordinary circumstances that warranted excusing them from complying with the stringent disclosure standards. In re Laferriere, 2002 Bankr. LEXIS 1571, 286 B.R. 520 (Bankr. D. Vt. November 13, 2002) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.03 [back to top]

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Doctors violated stay by paying expenses with receivables that were property of debtor employer’s estate. E.D. Pa. PROCEDURAL POSTURE: Appellant doctors challenged an order of the bankruptcy court, holding that disputed assets were estate property, awarded compensatory damages for conversion, declined to impose a constructive trust over a portion of the converted funds, and declined to award fees for the doctors’ collection efforts. OVERVIEW: The doctors’ employer and the purchaser of the assets of the doctors’ old professional corporation, the debtors, took bankruptcy. Under their employment agreement, the doctors were obligated to deposit fees that they earned into their employer’s account. After the bankruptcy filing, the doctors deposited certain receivables into an old account and used the funds to pay employee salaries and bills. The doctors delayed in remitting the receivables into the estate as ordered. In affirming the bankruptcy court, the court held that: (1) the assets were estate property; (2) since the doctors had no interest in refunds due to patients, they lacked standing to seek a constructive trust over the refunds; (3) the doctors’ control over the receivables was not passive and they violated the automatic stay by expending funds belonging to the estate; (4) while the bankruptcy court erred in awarding counsel fees as damages for conversion, the error was harmless since the fees were available under 11 U.S.C. § 362(h) for violating the automatic stay; (5) punitive damages were not recoverable; and (6) a fee for collection expenses under 11 U.S.C. § 506(c) was properly denied to the doctors. In re United States Physicians, 2002 U.S. Dist. LEXIS 25265, — B.R. — (E.D. Pa. December 20, 2002) (Waldman, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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Debtor entitled to damages and attorneys’ fees due to creditor’s commencement of state court collection action in violation of stay. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiffs, related debtors, filed chapter 11 petitions and the cases were jointly administered. The debtors commenced an adversary action against defendant creditor for alleged willful violations of the automatic stay provisions of 11 U.S.C. § 362. The debtors moved for summary judgment and the creditor cross-moved for summary judgment. OVERVIEW: The creditor brought a cross-motion for summary judgment alleging that its claim against the debtors arose postpetition and that its lawsuit was not subject to the automatic stay provisions of 11 U.S.C. § 362. The court analyzed the facts that led to the claim in issue and found that under Illinois law, the creditor’s claim occurred prepetition when it tendered delivery to the debtors and had a right of payment. The creditor sought to recover its claim, despite the bankruptcy petition and the automatic stay in effect, in a state court. The bankruptcy court agreed with the debtors that the state court action was void ab initio. The court found that where the creditor’s violation of the stay to pursue the claim was willful, the debtors were entitled to damages and attorneys’ fees. Montgomery Ward, LLC v. Wiseknit Factory, Ltd. (In re Montgomery Ward, LLC), 2003 Bankr. LEXIS 344, — B.R. — (Bankr. D. Del. April 17, 2003) (Lyons, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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Debtor’s motion to assume sublease granted without requiring payment of interest and fees requested by landlord due to landlord’s failure to mitigate. Bankr. E.D. Pa. PROCEDURAL POSTURE: A debtor filed a chapter 11 petition under the Bankruptcy Code. The debtor filed a motion to assume a sublease under 11 U.S.C. § 365. The debtor’s landlord objected and moved to include interest and legal fees as additional components of the amount required to cure the debtor’s monetary default. The debtor and the trustee objected to the landlord’s motion. OVERVIEW: The bankruptcy court examined the record and concluded that the landlord failed to satisfy its common law duty of mitigation by the failure to provide a notice of default as required by agreement. The party to whom the default notice was to have been sent was a bank with a substantial mortgage lien on the leasehold estate and improvements. The court believed that if proper notice had been provided as required, the bank would have paid the taxes in issue. The court held that the landlord’s out of pocket expenses resulted from its own inaction. Because the landlord failed to take steps to mitigate it possible damages, the landlord was not entitled to the requested fees and interest as part of the default cure amount. In re Rowland, 2003 Bankr. LEXIS 341, — B.R. — (Bankr. E.D. Pa. April 10, 2003) (Raslavich, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01 [back to top]

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Appeal of discharge order dismissed due to creditor’s failure to comply with bankruptcy rules or court orders. W.D. Va. PROCEDURAL POSTURE: Appellant creditor sought review from an order of the bankruptcy court, which partially discharged the debts of appellee debtor. The appeal was dismissed. The creditor filed a motion to alter or amend the judgment of the court under Fed. R. Civ. P. 59(e), and to substitute a party for the debtor, who was deceased. OVERVIEW: The creditor was advised that counsel for the debtor had filed a suggestion of death, and that the creditor would be required to file a motion for substitution of a party within 90 days of that date. The creditor failed to substitute a party or to provide any evidence to rebut the suggestion of death within the 90 day period. Thus, the court dismissed the creditor’s appeal. The creditor timely filed a motion to alter or amend the judgment, claiming that she never received a copy of the previous order. However, the creditor’s appeal was properly dismissed. From the beginning, the creditor had failed to comply with any of the rules of Bankruptcy Procedure or orders of the courts, directing her on how to proceed with her appeal. Furthermore, the creditor failed to present any credible reason why the court should have excused her failure to substitute a party. Even if the creditor had substituted the proper party, she failed to heed the rules and orders governing the case, and there was no record on appeal to assist the court in reviewing the Bankruptcy Court’s decision. Nathan v. Thomas (In re Thomas), 2003 U.S. Dist. LEXIS 522, — B.R. — (W.D. Va. January 13, 2003) (Wilson, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:8001.02 [back to top]

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Allowed claim to be paid under confirmed plan was not excepted from discharge and adversary proceedings related thereto are properly heard by bankruptcy court. Bankr. N.D. Tex. PROCEDURAL POSTURE: In a chapter 11 bankruptcy case, in a protracted adversary proceeding, defendant moved to withdraw the reference. The motion was before the bankruptcy court for a report and recommendation as to disposition. OVERVIEW: Seeking withdrawal of the reference of the adversary proceeding to the bankruptcy court, defendant argued that the proceeding did not fall within the bankruptcy court’s core jurisdiction, that the bankruptcy court’s prior decisions exhibited bias for debtor, that defendant’s bankruptcy claim was not discharged, and that defendant had not waived its right to a jury trial. The bankruptcy court rejected each of those arguments. It had stated in an earlier order why the adversary proceeding fell within its jurisdiction. Its prior rulings did not evince an institutional bias. Rather, the record showed that the court had repeatedly given defendant the opportunity to demonstrate that it had a valid cause of action against debtor. Regarding defendant’s second argument, debtor’s confirmed plan of reorganization called for all claims, including those dischargeable under 11 U.S.C. § 524 and 11 U.S.C. § 1141(d), to be paid in full. Contrary to defendant’s argument, claims to be paid in full could be and were discharged. The plan and the confirmation order provided for discharge, and section 1141(d)(1)(A) made the claim dischargeable. Finally, defendant had no right to a jury trial. Denton County Elec. Coop. v. Eldorado Ranch, Ltd. (In re Denton County Elec. Coop.), 2003 Bankr. LEXIS 298, — B.R. — (Bankr. N.D. Tex. April 8, 2003) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1141.05 [back to top]

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Claims asserted in adversary proceeding which attack chapter 11 debtor’s ordinary manner of conducting business are within bankruptcy court’s core jurisdiction. Bankr. N.D. Tex. PROCEDURAL POSTURE: Before the court was plaintiff debtor’s motion for summary judgment on declaratory judgment complaint filed by the debtor in an adversary proceeding against defendant developer regarding which party had to bear the cost of the infrastructure required to provide electric service to a portion of a real estate development. OVERVIEW: Because of the substantial increase in the costs of line extension over that for earlier phases of the development, the developer challenged the amount it was invoiced by the debtor, an electric cooperative. The court determined that the adversary proceeding fell within its core jurisdiction. On the merits, the court determined that the developer failed to support a necessary element (i.e. the existence of a promise upon which it foreseeably relied) of its promissory estoppel counterclaim, and the motion was granted as to this claim. The motion was also granted with respect to the counterclaims of economic duress, and breach of the duties of good faith and fair dealing. The court granted the motion with respect to the developer’s counterclaim under section 1 of the Sherman Act, but denied it as to section 2 of the Act. To the extent the debtor sought an affirmative declaration that it qualified for immunity under the state action doctrine the motion was denied. It was granted with respect to the debtor’s request for a declaration that it did not violate the franchise agreement, and that it did not violate the tariff, and was denied as to the parties competing “takings” claims. Denton County Elec. Coop. v. Eldorado Ranch, Ltd. (In re Denton County Elec. Coop.), 2003 Bankr. LEXIS 302, — B.R. — (Bankr. N.D. Tex. February 13, 2003) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02 [back to top]

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Attorney, barred by court order from representing debtor who instead filed with substitute counsel, violated stay by attempting to collect prepetition fees after reversal of order on appeal. Bankr. W.D. Mich. PROCEDURAL POSTURE: The United States trustee filed a motion requesting review and disgorgement of attorney compensation under 11 U.S.C. § 329(b) and Fed. R. Bankr. P. 2017, and seeking sanctions against an attorney under 11 U.S.C. § 362. OVERVIEW: A judge determined that the attorney was not authorized to practice bankruptcy law. While an appeal was pending, the attorney and another attorney entered into an arrangement concerning clients. The client was initially represented by the other attorney. When the ruling concerning the attorney’s ability to practice was reversed, the attorney sent the client a bill for legal fees stating that he was the attorney in the case. The trustee sought to prohibit the attorney from collecting the fee. The trustee contended that in order for the attorney to prevail he first had to show privity with the client. The trustee further asserted that the prepetition attorneys’ fees were discharged with the fil