Collier Bankruptcy Case Update May-6-02

Collier Bankruptcy Case Update May-6-02

 


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 6, 2002

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

 

1st Cir.

§ 1325(a) Oversecured creditor entitled to prepetition and postpetition interest on claim.
In re Chang (Bankr. D. Mass.)


2d Cir.

§ 502(a) Court denied debtor's motion to expunge claim filed by loan servicing company on behalf of mortgagee.
In re Viencek (Bankr. N.D.N.Y.)

Rule 9024 Creditor's motion to vacate order sustaining debtor's objection to its claim was denied.
Ameriquest Mortg. Co. v. Leary (In re Leary) (Bankr. D. Conn.)


4th Cir.

§ 523(a)(2)(A) Prepetition settlement of fraud and tort claims extinguished creditors' subsequent nondischargeability claims.
Archer v. Warner (In re Warner) (4th Cir.)

28 U.S.C. § 1452(a) Court of Appeals affirmed dismissal of complaint against debtor corporation's president and CEO in proceeding removed to district court.
ADCS, Inc. v. Kimbrough (4th Cir.)

Rule 8005 District court properly dismissed appeal due to creditor's failure to obtain stay pending appeal.
MAC Panel Co. v. Va. Panel Corp. (4th Cir.)


5th Cir.

§ 523(a)(8) Portion of debtor's student loan obligations spent on living and social expenses was nondischargeable.
Murphy v. Pa. Higher Educ. Assistance Agency (In re Murphy) (5th Cir.)


6th Cir.

§ 1123(b)(3) Summary judgments in favor of law firm sued by debtor's shareholders and successor in interest were affirmed on appeal.
Browning v. Levy (6th Cir.)

Rule 9024 Ministerial act to correct court's order to reflect court's intent ruled permissible.
Pruzinsky v. Gianetti (In re Walter) (6th Cir.)


7th Cir.

§ 502(j) Secured creditor entitled to reconsideration of claim.
In re Van Dyke (Bankr. C.D. Ill.)


8th Cir.

§ 506 Lien held by class of unsecured creditors was subordinated to secured creditor's lien.
Gen. Elec. Cap. Corp. v. Dial Bus. Forms, Inc. (In re Dial Bus. Forms, Inc.) (Bankr. W.D. Mo.)

28 U.S.C. § 1452(b) Unanimity rule applied to removal action where federal subject matter jurisdiction was based on related-to jurisdiction.
Ross v. Thousand Adventures of Iowa, Inc (S.D. Iowa) .


9th Cir.

§ 506(c) Bankruptcy court's denial of chapter 11 trustee's requested surcharge was upheld on appeal.
Golden v. Chicago Title Ins. Co. (In re Choo) (B.A.P. 9th Cir.)

§ 1325(a)(2) No express preemption of nonbankruptcy law permitted debtor's attempt to preempt numerous state laws through plan confirmation.
In re Pac. Gas & Elec. Co. (Bankr. N.D. Cal.)


10th Cir.

§ 502(b) IRS allowed to submit a Summary Record of Assessment in support of proof of claim.
March v. IRS (In re March) (D.N.M.)

§ 1322(c) Debtor's plan failed to adequately protect creditor's secured interest in real property.
In re Duran (Bankr. D. Wyo.)

§ 1325(b) Confirmation of debtors' plan was denied because proposed amount of monthly tithe was unreasonable.
In re Davis (Bankr. D. Wyo.)


11th Cir.

§ 329(a) Court halted local custom which violated Code provisions regarding professional compensation.
In re Tri-State Plant Food, Inc. (Bankr. M.D. Ala.)

§ 362(a) Wage garnishment creditor did not violate stay when garnishee withheld funds from debtor's paycheck postpetition.
Buchanan v. First Family Fin. Servs. (In re Buchanan) (Bankr. M.D. Ga.)


D.C. Cir.

28 U.S.C. § 157 District court proceeding against purchaser of debtors' assets stayed until resolution of issues by bankruptcy court.
Nat'l Shopmen Pension Fund v. Folger Adam Sec., Inc. (D.C.)


Collier Bankruptcy Case Summaries

1st Cir.

Oversecured creditor entitled to prepetition and postpetition interest on claim. Bankr. D. Mass. The debtor filed her own chapter 13 petition. The petition was accompanied by incomplete schedules and an incomplete creditor matrix. One of several creditors not included on the debtor's creditor matrix was a Florida county, to whom the debtor owed property taxes. The debtor also failed to serve this creditor when she filed her proposed original plan. Additionally, although the debtor's proposed plan contained a provision to pay the creditor, the plan only provided for payment of the face amount of the creditor's scheduled claim and did not provide for any payment of interest on the taxes. After the debtor's plan was confirmed, several motions were brought, including a motion to dismiss, which was filed by the creditor. Following a hearing on the matter, the bankruptcy court denied the creditor's motion to dismiss the debtor's petition. However, the court ruled that the debtor's confirmed chapter 13 plan was not binding on the creditor to the extent that the confirmation order was entered in violation of the creditor's due process rights and that the creditor was entitled to full payment on its claim, plus interest. As to the amount of interest owed, the court found that the creditor was entitled to both prepetition and postpetition interest. Prepetition interest was to be at the rate provided for under nonbankruptcy law. Under Florida law, delinquent taxes were assessed at 18 percent interest; therefore, the court ordered that the prepetition portion of the creditor's claim be paid at this rate. Since the creditor's claim was oversecured, interest on the creditor's postpetition claim was determined based on two separate periods. First, under section 506(b), the court determined that the creditor was entitled to interest at the federal judgment interest rate from the chapter 13 petition date to the date of confirmation. Then, from the time of confirmation and until the debtor made her last plan payment, the creditor was entitled to the 'cram-down' interest rate as provided for in section 1325(a)(5)(B). The court determined that the cram-down interest rate should be determined by using the 'market rate plus' approach. Because the debt at issue involved real estate, the court took judicial notice of the annual rate of interest for a 30-year fixed-rate mortgage at the time of confirmation and added an additional 1 percent due to the debtor's default history, thus arriving at a cram-down interest rate of 8.135 percent. In re Chang, 2002 Bankr. LEXIS 170, 274 B.R. 295 (Bankr. D. Mass. March 1, 2002) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1325.06[3]

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2d Cir.

Court denied debtor's motion to expunge claim filed by loan servicing company on behalf of mortgagee. Bankr. N.D.N.Y. The chapter 13 debtor objected to a proof of claim filed by a loan servicing company. The debtor argued that the proof of claim should be expunged because the company that filed the proof of claim did not own the mortgage on the debtor's residence and was not a creditor. The debtor did not dispute the loan servicing company's right, as a servicing agent, to file a proof of claim on behalf of the mortgagee. However, the debtor argued that the proof of claim was not valid because it failed to identify the actual owner of the claim. The bankruptcy court denied the debtor's motion seeking expungement of the claim. First, the court held that the loan servicing company was a party in interest because of its pecuniary interest in the mortgages it serviced (including the mortgage on the debtor's residence), and, as such, had standing to object to the debtor's motion to expunge the claim. Next, the court held that the loan servicing company was authorized to file the proof of claim as the agent of either the owner or the mortgagee, and to allow the debtor to expunge the claim based on the company's failure to disclose its principal would elevate form over substance. The court allowed the loan servicing company 15 days from the entry of its order to amend its proof of claim to identify the actual creditor. In re Viencek, 2002 Bankr. LEXIS 167, 273 B.R. 354 (Bankr. N.D.N.Y. February 15, 2002) (Gerling, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.02[2][c]

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Creditor's motion to vacate order sustaining debtor's objection to its claim was denied. Bankr. D. Conn. The creditor filed a motion to vacate the bankruptcy court's order sustaining the chapter 13 debtor's objection to its proof of claim. The creditor, which had neither filed a response to the debtor's objection to claim nor appeared at the hearing, contended that its failure to attend the hearing was due to excusable neglect. The creditor acknowledged that it received a copy of the debtor's objection to claim and notice of hearing because the certified mail return receipt was signed by an agent of the creditor. The specialist in charge of handling the debtor's file, however, never received the notice of hearing or objection. The bankruptcy court denied the motion to vacate the order, holding that the creditor did not establish that its failure to attend the hearing on the debtor's objection to its claim was due to excusable neglect. Proper notice was given and received by the creditor, and for unexplained reasons, the creditor's agent responsible for taking the necessary action did not receive the notice. No claim was made that the agent who received the certified mail was not an agent of the creditor. The court considered the standards set forth in Pioneer Inv. Serv. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380 (1993), and concluded that the creditor did not show a basis for finding excusable neglect. Ameriquest Mortg. Co. v. Leary (In re Leary), 2002 Bankr. LEXIS 181, 274 B.R. 314 (Bankr. D. Conn. February 20, 2002) (Krechevsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:9024

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4th Cir.

Prepetition settlement of fraud and tort claims extinguished creditors' subsequent nondischargeability claims. 4th Cir. The creditors appealed the district court's order affirming the bankruptcy court's decision that upheld the chapter 7 debtor's affirmative defense to their nondischargeability action. The debtor and her husband had sold the assets of a corporation they owned to a corporation formed by the creditors. The creditors filed suit in state (North Carolina) court for fraud, intentional misrepresentation and intentional infliction of emotional distress due to the debtor's alleged misconduct arising out of the sale. The parties entered into a settlement agreement that released the claims against the debtor in exchange for $200,000 cash and a $100,000 promissory note. After the debtor defaulted on the note and sought bankruptcy protection, the creditors filed an adversary proceeding seeking a judgment for the amount due under the promissory note and a determination that such indebtedness was nondischargeable under sections 523(a)(2)(A) and (a)(6). The bankruptcy court upheld the debtor's affirmative defense that the releases and settlement agreement created a novation, substituting a dischargeable contract debt for a fraud-based tort claim, which may not have been dischargeable, and the district court affirmed. The Court of Appeals for the Fourth Circuit affirmed, holding that the prepetition settlement of claims involving alleged fraud and intentional tort extinguished the creditors' subsequent nondischargeability claim under section 523(a) when the debtor filed for bankruptcy without having paid the entire amount of the settlement. The court noted a split among the circuits and followed the novation theory, under which courts need only address the validity and completeness of the bargained-for agreement and release. The parties' prepetition settlement completely released the debtor from potential nondischargeability claims. Archer v. Warner (In re Warner), 2002 U.S. App. LEXIS 3678, 283 F.3d 230 (4th Cir. March 8, 2002) (Widener, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.06, .08[1]

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Court of Appeals affirmed dismissal of complaint against debtor corporation's president and CEO in proceeding removed to district court. 4th Cir. A subcontractor filed a prepetition breach of contract action against the debtor, an incorporated contractor, and its president, who was also its CEO. The complaint alleged causes of action for breach of contract, unjust enrichment, conversion, fraud and constructive fraud, and sought damages, quantum meruit recovery, declaratory relief and specific performance. After the debtor's chapter 11 petition was filed, the debtor filed a suggestion for a stay and a notice of removal to the bankruptcy court. The district court ordered the proceeding stayed as to the debtor pending the disposition of the bankruptcy proceeding. Following the stay, the subcontractor filed a notice of dismissal, without prejudice, as to the debtor. The debtor's president and CEO then moved to dismiss the remaining claims against him, and this motion was granted, in part. Thereafter, the district court issued a final order that granted summary judgment to the president and CEO and dismissed the proceeding. The district court found that the subcontractor failed to present sufficient evidence to show that the president and CEO was personally liable on the subcontractor's claims. The subcontractor appealed. The Court of Appeals for the Fourth Circuit affirmed. The court agreed with the district court that although the subcontractor might have a claim for monies due under the contract with the contractor, that matter was for the bankruptcy court to decide; the contractor's filing of a bankruptcy case did not make the contractor's officer liable. ADCS, Inc. v. Kimbrough, 2002 U.S. App. LEXIS 3710, - F.3d - (4th Cir. March 8, 2002) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised
1:3.07

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District court properly dismissed appeal due to creditor's failure to obtain stay pending appeal. 4th Cir. The creditor appealed the dismissal of its appeal of the bankruptcy court's order confirming the debtor's chapter 11 plan. The creditor had obtained a judgment against the debtor for patent infringement and had initiated an action against the debtor's president and former president prepetition. The debtor's proposed plan called for a voluntary contribution from the principals sufficient to pay all creditors in full, in exchange for a permanent injunction enjoining the creditor from pursuing its suit against the principals individually. The bankruptcy court confirmed the plan over the creditor's objection. Although the creditor applied to the bankruptcy court for a stay of the confirmation order, its request was denied, and it chose neither to appeal to the district court nor to seek an independent stay in the district court. Pursuant to the plan, the principals' funds were transferred to the estate and the debtor paid many of its creditors, entered into new leases, incurred new debt with trade creditors and had taken new orders from customers. The district court dismissed the creditor's appeal of the confirmation order on the grounds of equitable mootness, concluding that any reversal of the order would require the undoing of financial transactions involving third parties and would create an unmanageable situation for the bankruptcy court. The Court of Appeals for the Fourth Circuit affirmed, holding that because judicial relief on appeal could not, as a pragmatic matter, be granted, the district court properly applied the doctrine of equitable mootness. The factors the court considered included: (1) whether the creditor had sought and obtained relief from the confirmation order; (2) whether the plan had been substantially consummated; (3) the extent to which the relief requested would affect the success of the reorganization; and (4) the extent to which the relief requested would affect the interests of third parties. The court concluded that granting the creditor relief on appeal would have undone the success of the reorganization plan and would have adversely affected third parties who had already been paid and who had relied on the implementation of the plan. MAC Panel Co. v. Va. Panel Corp., 2002 U.S. App. LEXIS 3544, 283 F.3d 622 (4th Cir. March 6, 2002) (Niemeyer, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:8005.02

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5th Cir.

Portion of debtor's student loan obligations spent on living and social expenses was nondischargeable. 5th Cir. The chapter 7 debtor appealed the ruling of the district court that affirmed the bankruptcy court's order barring him from discharging his student loans. The lender had disbursed the loans to the schools based upon the debtor's purported needs, and the schools withheld tuition and expenses and gave the debtor the remainder for discretionary spending. The debtor used the money to pay for a car, housing and food, as well as to pay fraternity dues and other ordinary living expenses. The debtor contended that the portion of the student loans spent on living expenses was nondischargeable. The bankruptcy court held that section 523(a)(8) barred the debtor from discharging any of the loans because he obtained them to finance his education and signed promissory notes reflecting that purpose, and the district court affirmed. The Court of Appeals for the Fifth Circuit affirmed, holding that because the student loans were made available for educational purposes, no part of the loans could be discharged, regardless of the actual use of the funds. It was the purpose, not the use, of the loans that controlled, and the debtor had taken out the loans to support his full-time attendance at school. Because Congress had defined living expense allowances as serving an educational purpose in the student loan statutes, the court assumed it also interpreted those living expense allowances as having an educational purpose in relation to the Bankruptcy Code. Murphy v. Pa. Higher Educ. Assistance Agency (In re Murphy), 2002 U.S. App. LEXIS 3415, 282 F.3d 868 (5th Cir. March 5, 2002) (Smith, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.14

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6th Cir

Summary judgments in favor of law firm sued by debtor's shareholders and successor in interest were affirmed on appeal. 6th Cir. The chapter 11 debtor's successor in interest and its minority shareholders appealed the district court's grant of summary judgments in favor of a law firm they had sued for breach of fiduciary duty and legal malpractice. The firm had represented the debtor's majority shareholder and had successfully negotiated a settlement agreement and release of the debtor's claims against its client. The minority shareholders and successor alleged that the firm procured the settlement by fraud, and its actions contributed to the financial distress and resulting bankruptcy of the debtor. The district court held that their claims against the firm were barred by res judicata because they failed to raise or reserve their claims before the confirmation of the debtor's plan of reorganization. The Court of Appeals for the Sixth Circuit affirmed, holding that the district court did not err in concluding that the claims of the debtor's successor in interest and minority shareholders were barred by the res judicata effect of the confirmation order. The confirmation order was a final judgment for the purposes of res judicata. The court noted that the claims should have been raised or reserved prior to confirmation because they were 'related to' the bankruptcy case, since any recovery would have been available for the debtor's creditors and shareholders. The successor's blanket reservation of rights to enforce causes of action against any entity did not defeat the application of res judicata to its claims against the law firm. Browning v. Levy, 2002 U.S. App. LEXIS 3768, 283 F.3d 761 (6th Cir. March 12, 2002) (Gilman, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
7:1123.02[3]

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Ministerial act to correct court's order to reflect court's intent ruled permissible. 6th Cir. Prior to filing for bankruptcy, the debtor and her husband at the time allegedly embezzled funds from the creditor. After the creditor obtained a default judgment against the couple, the parties entered into a settlement agreement in satisfaction of the judgment. Under the terms of the agreement, the debtor and her husband agreed to surrender their interest in certain real property to the creditor. The agreement further provided that each of the parties retained a contingent lien, such that if the value of the property was greater than the judgment, the creditor would refund the difference. Conversely, if the value of the property was not sufficient to cover the judgment, the creditor would have a lien on all other assets owned by the couple. Before the property could be valued, the debtor and her husband divorced, and the debtor filed for chapter 7 relief. After the creditor filed a claim in the bankruptcy case, the chapter 7 trustee reached an agreement with the creditor to settle the claim. However, because the debtor was divorced by this time, her former spouse was not a party to, and did not participate in, the trustee's settlement negotiations. When the debtor's former spouse received notice of the proposed settlement, he objected to language contained in two paragraphs of the proposed order that discharged any of the former spouse's claims against the creditor. At a hearing on the objections, counsel for the debtor's former spouse stated that the order would be acceptable if the objectionable language was modified to remove the reference to the debtor's former spouse, and the court stated that it would sign an order to this effect. However, when the proposed order was modified, only one reference was deleted, while a second reference remained. The court did not notice the error, and the order was signed. The debtor's former spouse then brought a motion for clarification, requesting that he be removed from the force of the order. The bankruptcy court granted the motion and modified the order based on Fed. R. Civ. P. 60(b)(6), which allows the court to give a party relief from a final judgment in certain circumstances, such as mistake. The creditor appealed the modification, and the district court reversed the bankruptcy court's ruling, finding that the extraordinary remedy provided by Fed. R. Civ. P. 60(b)(6) was not warranted under the circumstances. The debtor's former spouse then appealed the issue to the Sixth Circuit. On review, the Sixth Circuit found that the discrepancy in the bankruptcy court's order was not sufficiently exceptional or extraordinary to trigger the application of Fed. R. Civ. P. 60(b)(6). However, since the order that was signed did not reflect the bankruptcy court's intent, the Sixth Circuit reversed the district court's order, finding that the district court should have permitted the error to be corrected pursuant to Fed. R. Civ. P. 60(a), which is made applicable through Rule 9024 and provides that denial mistakes may be corrected. The court further found that the creditor would suffer no prejudice from the correction because the relief sought was the very same relief that would have been granted by the court but for the redaction error. Pruzinsky v. Gianetti (In re Walter), 2002 U.S. App. LEXIS 3365, 282 F.3d 434 (6th Cir. March 4, 2002) (Jones, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:9024.01-.03

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7th Cir.

Secured creditor entitled to reconsideration of claim. Bankr. C.D. Ill. The chapter 11 debtor's liquidating agent moved for approval of an interim distribution and for disallowance of various claims. Among the claims at issue was a claim held by a secured creditor that the liquidating agent acknowledged as valid, but contested in amount. The court file reflected that the liquidating agent's objection to the secured creditor's claim was mailed to the secured creditor, and was ultimately sustained based upon the secured creditor's failure to file a response. The secured creditor objected to the liquidating agent's proposed distribution. The creditor alleged, among other things, that it did not receive entry of the order that denied its claim, and that it had numerous contacts with the liquidating agent after the denial of its claim, and no mention was ever made of the claim's disallowance. The bankruptcy court sustained the secured creditor's objection to the proposed distribution, recharacterized the relief sought by the secured creditor as reconsideration of a claim under section 502(j), and held that the claim was entitled to reconsideration. The court noted that the length of the creditor's delay in seeking relief in this case was tempered by its continued contact with the liquidating agent and his attorney during the relevant period, that the liquidating agent had not alleged any prejudice and the court could discern none, and that there was no evidence of the secured creditor's lack of good faith. The court also noted that since the liquidating agent objected to other claims in his proposed distribution, the claims allowance/disallowance process was not yet complete. The deciding factor for the court, however, involved the secured creditor's assertion that it never received notice of the liquidating agent's objection to its claim or the court order that disallowed its claim. In re Van Dyke, 2001 Bankr. LEXIS 1808, - B.R. - (Bankr. C.D. Ill. July 24, 2001) (Altenberger, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.11

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8th Cir.

Lien held by class of unsecured creditors was subordinated to secured creditor's lien. Bankr. W.D. Mo. A secured creditor filed an adversary proceeding to determine, among other things, the priority of its lien on equipment owned by the chapter 11 debtor vis-a-vis a class of unsecured creditors. The specific issue before the court was whether the secured creditor's security interest, which remained attached to the equipment even though it became unperfected under state (Missouri) law upon the lapse of the creditor's financing statements, retained its priority against the junior lien of the unsecured creditor class. The bankruptcy court held that the lien held by the class of unsecured creditors was subordinated to the secured creditor's lien. The court noted that the trustee had full knowledge of the secured creditor's lien and did not extend new credit to the debtor based on the lapse of perfection. In addition, both the secured creditor and the unsecured creditor class participated in the plan confirmation process and agreed, as participants, that the secured creditor would have a secured interest and that the unsecured creditor class would have a secured interest subordinated to that of the secured creditor. The court concluded that as between the parties, the plan was controlling. Thus, no perfection was necessary, and the secured creditor held a security interest in the equipment that was prior to that of the unsecured creditor class. The court also found that the debtor was in default to both the unsecured creditors and the secured creditor; thus, the unsecured creditor class had the right to foreclose its interest as long as it satisfied the secured creditor's claim. Gen. Elec. Cap. Corp. v. Dial Bus. Forms, Inc. (In re Dial Bus. Forms, Inc.), 2002 Bankr. LEXIS 158, 273 B.R. 594 (Bankr. W.D. Mo. February 5, 2002) (Federman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:506.01

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Unanimity rule applied to removal action where federal subject matter jurisdiction was based on related-to jurisdiction. S.D. Iowa After a state court action was filed against several defendants, one of the defendants removed the action to federal court based on federal question jurisdiction and related-to jurisdiction because one of the other defendants had already petitioned for bankruptcy. Several other defendants joined the notice of removal within the allowed 30-day joinder period. However, two defendants joined after their 30-day window had expired and three defendants did not join the notice of removal. Some other defendants were excused from the joinder as the record reflected that they were not served at the time the moving defendant filed its notice of removal. Following the filing of the notice of removal, the plaintiffs in the action filed a motion to remand the case back to state court, arguing that the district court lacked personal and subject matter jurisdiction over the matter. After a hearing, the district court ruled that the defendants claiming federal subject matter jurisdiction based on related-to jurisdiction had the burden of establishing that the joinder requirement for removal had been satisfied. Focusing on the unanimity rule, the court noted that all defendants were required to join the removal petition in order to effect removal, unless one of three exceptions applied. Based on the facts, the court determined that it lacked subject matter jurisdiction over the case because none of the exceptions to the unanimity rule applied to the three nonjoining defendants and, accordingly, granted the plaintiffs' motion to remand the case to state court. Ross v. Thousand Adventures of Iowa, Inc., 2001 U.S. Dist. LEXIS 22965, 178 F. Supp.2d 996 (S.D. Iowa September 20, 2001) (Longstaff, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
1:3.07[4]-[5]

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9th Cir.

Bankruptcy court's denial of chapter 11 trustee's requested surcharge was upheld on appeal. B.A.P. 9th Cir. The chapter 11 trustee appealed the bankruptcy court's denial of his motion to surcharge a secured creditor's collateral under section 506(c). The creditor had obtained notices of levy and writs of execution against the debtor's parcels of real estate, but the debtor filed his petition before the execution sale. The trustee disputed the validity of the creditor's lien and subsequently sold the parcels free and clear of encumbrances. The bankruptcy court granted the creditor's counterclaim for turnover of the sale proceeds, and the trustee filed a surcharge motion, asking for fees and costs, as well as attorney's fees and costs, that he incurred in preserving and selling the parcels. The bankruptcy court denied the motion on the grounds that the services and costs of the trustee and his counsel did not provide a quantifiable benefit to the creditor. The B.A.P. affirmed, holding that the trustee failed to prove that his services provided a benefit to the secured creditor. Although the trustee argued that the creditor benefited from the sale of the properties because it did not have to incur any of the costs of sale, he failed to prove what it would have cost the creditor to restart the sheriff's sales and dispose of the properties. Without proof of what the creditor's disposal costs would have been, the benefit to the creditor was merely hypothetical. Golden v. Chicago Title Ins. Co. (In re Choo), 2002 Bankr. LEXIS 159, 273 B.R. 608 (B.A.P. 9th Cir. February 8, 2002) (Brandt, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:506.05

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No express preemption of nonbankruptcy law permitted debtor's attempt to preempt numerous state laws through plan confirmation. Bankr. N.D. Cal. The chapter 11 debtor and its corporate parent proposed an amended plan and disclosure statement that sought to preempt certain state and local laws and regulations through confirmation. The plan proponents asserted, among other things, that the preemptive effect of their proposed plan extended to statutes, rules, orders and decisions of the state (California) Public Utilities Commission that were applicable to particular restructuring transactions and the implementation of the debtor's plan. According to the plan proponents, the relevant statutes, rules, orders and decisions were preempted under the plan, regardless of whether they were specifically identified in the plan. The state (California), its attorney general, the Commission and various other parties objected to the proposed plan and disclosure statement. The objectors argued that the plan was facially invalid based on impermissible federal preemption and/or sovereign immunity. The bankruptcy court held that there was no express preemption of nonbankruptcy law that permitted a wholesale unconditional preemption of numerous state laws, some of which were identified in the debtor's disclosure statement and some of which were obscured by the phrase 'including but not limited to.' However, the court concluded that the plan could be confirmed if its proponents were able to establish with particularity the requisite elements of 'implied preemption.' The court also held that to the extent that the plan proponents sought injunctive and declaratory relief against both the Commission and the state through the plan, they would have to prove that there had been a waiver of sovereign immunity. The court explained that since the proponents failed to show a real threat or an ongoing violation of federal law, Ex parte Young was not available to support injunctive relief through confirmation, and the plan, as drafted, could not overcome the objectors' sovereign immunity objection. In re Pac. Gas & Elec. Co., 2002 Bankr. LEXIS 122, 273 B.R. 795 (Bankr. N.D. Cal. February 7, 2002) (Montali, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1325.03

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10th Cir.

IRS allowed to submit a Summary Record of Assessment in support of proof of claim. D.N.M. After the debtor filed for bankruptcy relief, the IRS filed a proof of claim for unpaid taxes for various years. The proof of claim was supported by several 'Summary Record of Assessments' or '4340' computer data reports, which were certified and showed the assessment or '23C' dates. The debtor objected to the IRS's proof of claim, arguing that the claim was invalid absent production of the actual, signed underlying '23C' forms. The bankruptcy court overruled the debtor's objection and allowed the proof of claim to stand. The debtor appealed, arguing that the 4340 forms submitted by the IRS could not be used as substitutes for the 23C forms because the 4340 reports were not 'duly certified by the seal of the district director' as required by 26 C.F.R. Part 301.7514. The magistrate court found that the debtor's argument was without merit because, in addition to being waived because it had not been raised before the bankruptcy court, the copies of the certification pages for the 4340 exhibits contained the required seal. The magistrate court then recommended that the bankruptcy court's ruling be affirmed and the appeal be dismissed. March v. IRS (In re March), 2002 U.S. Dist. LEXIS 3448, - B.R. - (D.N.M. January 2, 2002) (Molzen, M.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.03[1]

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Debtor's plan failed to adequately protect creditor's secured interest in real property. Bankr. D. Wyo. The secured creditor, who held a security interest in the chapter 13 debtor's principal residence, moved for relief from the automatic stay. Whether or not the creditor's interest in the property was adequately protected depended on whether the debtor's plan was confirmable. The debtor's plan proposed to bifurcate the creditor's claim into a $20,000 allowed secured claim, to be paid with interest over the term of the plan, with an unsecured balance of over $27,000. The debtor claimed that modification was permissible under section 1322(b)(2) because the creditor's collateral included other property in addition to the real property. The note contained standard mortgage provisions stating that it was secured by the real property, as well as property incidental to that real estate, such as improvements, rents and mineral rights. The debtor also claimed that the exception to antimodification in section 1322(c)(2) was applicable because when the creditor accelerated the note in anticipation of foreclosure, it transformed the note into a single payment obligation due before the final payment under the plan was due. The bankruptcy court deferred ruling on the motion for relief pending the filing of an amendment to the plan, holding that the creditor's claim was secured only by a lien on the debtor's principal residence and the debtor could not modify the creditor's rights under the mortgage and note. Because the enumerated collateral in the note was associated with real property ownership and part of the bundle of real estate rights, no exception to section 1322(b)(2) existed. Additionally, the acceleration of the note in anticipation of foreclosure did not create a single obligation debt as intended by section 1322(c)(2). In the event the debtor failed to amend his plan in accordance with the Code, the creditor was entitled to relief from the automatic stay. In re Duran, 2001 Bankr. LEXIS 1806, 271 B.R. 888 (Bankr. D. Wyo. December 3, 2001) (McNiff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1322.16, .06[1][a]

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Confirmation of debtors' plan was denied because proposed amount of monthly tithe was unreasonable. Bankr. D. Wyo. The chapter 13 debtors sought confirmation of their second amended plan. Budgeted in the plan was a tithe of $390 per month, which constituted approximately nine percent of their adjusted gross income, or $14,040 over the term of 36 months. The plan proposed a return to unsecured creditors of 31.4 percent, or $14,500 over the term of the plan. The debtors contended that the tithe proposed was reasonable because it was below the 15 percent charitable contribution limit of section 1325(b)(2)(A). They further argued that, pursuant to the Code, a charitable contribution of up to 15 percent of a debtor's income was per se reasonable. The court denied confirmation of the amended plan, holding that because the amount the debtors budgeted for a monthly charitable contribution was not reasonable, the proposed plan did not satisfy the 'reasonably necessary' test for disposable income under section 1325(b)(2). The amended charitable contribution provision of section 1325(b)(2)(A) was not meant to function as a rigid rule qualifying an automatic 15 percent allowance for charitable contributions, but was rather the maximum amount that could be considered reasonable. The court noted that the debtors' prior history of charitable giving, which was less than three percent of their income, was an amount reasonably necessary for their maintenance and support. In re Davis, 2001 Bankr. LEXIS 1817, 272 B.R. 5 (Bankr. D. Wyo. July 19, 2001) (McNiff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1325.08[4][b][iii]

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11th Cir.

Court halted local custom which violated Code provisions regarding professional compensation. Bankr. M.D. Ala. Eight professionals employed by the chapter 11 debtor in possession billed and received over $200,000 for services without applying for approval or disclosing the payments. When the bankruptcy court issued an order to show cause, the bankruptcy attorney returned the funds to the debtor, but argued that so long as an 'award' of fees was ultimately made, receipt during the case was proper. The attorney also argued that local custom permitted billing and receipt of funds during the case without court approval. Following an in-depth discussion of the policies and obligations set forth in the Code and Rules, and in an effort to halt the apparently widespread 'local custom,' the bankruptcy court held that sanctions for violation of numerous fee disclosure and application procedures were warranted. Even if a local custom existed by which professionals could, without court approval, bill and receive payments from debtors, the custom could not override the Code. Moreover, the attorneys hired for a special purpose pursuant to section 329(e) had an independent duty to comply with the Code and could not merely claim reliance upon the advice of the bankruptcy attorney. Their assertion, however, could be considered in the sanctions phase of the proceeding. To rectify the purported custom, the court required that all funds paid to professionals without court approval be turned over to the clerk of the court; full disclosure be made; and the professionals properly apply for payment whereupon the court would consider, on a case-by-case basis, appropriate sanctions. In re Tri-State Plant Food, Inc., 2002 Bankr. LEXIS 118, 273 B.R. 250 (Bankr. M.D. Ala. February 6, 2002) (Sawyer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised

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Wage garnishment creditor did not violate stay when garnishee withheld funds from debtor's paycheck postpetition. Bankr. M.D. Ga. Approximately two months before the debtor filed his chapter 7 petition, a creditor filed a state court garnishment action against him. After the debtor's case was commenced, the creditor served a notice of stay in the garnishment proceeding on the garnishee and filed the notice of stay with the state court. Nevertheless, the garnishee subsequently withheld funds from the debtor's paycheck on at least two separate occasions. The debtor filed a motion for contempt against the creditor and argued that the creditor violated the automatic stay by refusing to dismiss the garnishment. The creditor moved for summary judgment. The bankruptcy court found that the creditor was entitled to judgment as a matter of law on the issue of its liability for violation of the automatic stay. The court held that the undisputed facts showed that the creditor made a good faith effort to stop the garnishment and took careful and deliberate steps to do so; thus, the creditor satisfied its obligation to comply with section 362(a). The court noted that the creditor attempted to stay the garnishment by filing a notice of stay with the state court and serving the notice on the garnishee and that, upon learning that the notice of stay had been ineffective, the creditor repeatedly communicated with the garnishee, informed the garnishee that the automatic stay prohibited further deductions under the garnishment and instructed the garnishee to cease making deductions. Buchanan v. First Family Fin. Servs. (In re Buchanan), 2002 Bankr. LEXIS 157, 273 B.R. 749 (Bankr. M.D. Ga. January 28, 2002) (Walker, B.J.).

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

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D.C. Cir.

District court proceeding against purchaser of debtors' assets stayed until resolution of issues by bankruptcy court. D.C. A pension fund and its trustees filed a complaint in federal district court against the purchaser of substantially all of the chapter 11 debtors' assets. The complaint alleged that the asset purchaser assumed the debtors' pension fund withdrawal liabilities when it purchased the debtors' assets. The purchaser argued that the bankruptcy court order that approved the asset sale specifically stated that the transfer of assets did not include the transfer of any liability owed to the fund or its trustees by the debtors. Prior to the filing of the district court proceeding, the fund and its trustees reopened the bankruptcy proceedings for a determination of the amount of the debtors' actual liability to the plaintiffs. The purchaser moved to stay the district court proceeding pending resolution of the issues by the bankruptcy court. The district court granted the purchaser's motion to stay the proceedings. The court stated that the bankruptcy court could provide the best interpretation and enforcement of its own order, and that litigating essentially the same issues in two separate forums was not in the interest of judicial economy or in the best interests of the parties regarding time, cost and effort. Nat'l Shopmen Pension Fund v. Folger Adam Sec., Inc., 2002 U.S. Dist. LEXIS 3079, 274 B.R. 1 (D.C. February 11, 2002) (Urbina, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
1:3.02

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