Collier Bankruptcy Case Update November-10-03

Collier Bankruptcy Case Update November-10-03

 


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.

November 10, 2003

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

 

2nd Cir.

§ 1322 Debtor’s motion to avoid mortgage as wholly unsecured denied as not supported by facts.
In re Dziendziel (Bankr. W.D.N.Y.)

Rule 1015 Chapter 13 bankruptcy, filed while prior chapter 7 filing remained open, dismissed as an attempt to manipulate bankruptcy process.
In re Lord (Bankr. E.D.N.Y.)


3rd Cir.

§ 510 Claim of equity holder for breach of agreement to repurchase ownership interest in debtor subordinated.
In re Alta Cast, LLC (Bankr. D. Del.)

§ 727 Postpetition legal fees, which were not scheduled, were not discharged.
In re Retort (Bankr. W.D. Pa.)


4th Cir.

§ 524(a)(2) Debtors not entitled to litigation costs stemming from alleged IRS violation of discharge injunction.
In re Graham (Bankr. E.D. Va.)


5th Cir.

§ 105 Court issued preliminary injunction against Federal Energy Regulatory Commission to protect debtors’ rights to reject executory contracts with power companies.
Mirant Corp. v. Potomac Elec. Power Co. (In re Mirant Corp.) (Bankr. N.D. Tex.)

§ 327 Professional fees for required initial conflicts checking disallowed.
In re Sterling Chems. Holdings, Inc. (Bankr. S.D. Tex.)


6th Cir.

§ 523(a)(3)(B) Dischargeability complaint ordered dismissed unless properly amended to account for untimeliness due to lack of notice.
Consolidated Mortg., Inc. v. Gentry (In re Gentry) (Bankr. E.D. Ky.)


7th Cir.

§ 362(a) Employee’s claim for intentional infliction of emotional distress could not be remanded or dismissed due to stay in employer’s bankruptcy.
Equal Empl. Opportunity v. Outsourcing Solutions, Inc. (N.D. Ill.)


8th Cir.

§ 362(a) Sheriff’s deputy who seized debtor’s car pursuant to writ of execution did not willfully violate automatic stay.
Westman v. Andersohn (In re Westman) (Bankr. D. Minn.)

§ 1110 Debtor airline’s settlements with creditors who supplied aircraft parts approved as avoiding complex litigation and substantial attorneys’ fees.
Vanguard Airlines, Inc. v. Sarah & William Hambrecht Found., Inc. (In re Vanguard Airlines, Inc.) (Bankr. W.D. Mo.)

§ 1129(a)(9)(C) Order to show cause as to why federal tax payments were not being made pursuant to debtor’s plan issued.
In re Weaver Potato Chip Co. (Bankr. D. Neb.)


9th Cir.

§ 362 Bankruptcy court properly refused retroactive relief from stay to judgment creditor.
Stinson v. Bi-rite Rest. Supply, Inc. (In re Stinson) (B.A.P. 9th Cir.)

§ 362(d)(1) Bankruptcy court correctly refused to annul stay to allow debtor to pursue state court action which properly belonged to the estate.
In re Mannie (N.D. Cal.)

Rule 9011(c)(1)(A) Counsel sanctioned for filing chapter 11 petition with improper purpose of delaying commercial litigation.
Dressler v. Seeley Co. (In re Silberkraus) (9th Cir.)


10th Cir.

§ 707(b) Motion to dismiss bankruptcy for substantial abuse denied using totality of the circumstances test.
In re Pollard (Bankr. W.D. Okla.)


11th Cir.

§ 106(a) State could not claim sovereign immunity as defense to dischargeability action because sovereign immunity in bankruptcy was surrendered upon ratification of the U.S. Constitution.
Roberts v. Georgia Dep’t of Revenue (In re Roberts) (Bankr. M.D. Ga.)

§ 341(a) Debtor’s sixth bankruptcy dismissed on grounds of bad faith due to lack of income and intent to avoid creditors.
In re Lesane (Bankr. M.D. Ga.)

§ 362 Criminal prosecution of fraud claim commenced after debtor stopped making restitution payments and filed bankruptcy did not violate stay.
Smith v. Goode (In re Smith) (Bankr. M.D. Ga.)


Collier Bankruptcy Case Summaries

 

2nd Cir.

Debtor’s motion to avoid mortgage as wholly unsecured denied as not supported by facts. Bankr. W.D.N.Y. PROCEDURAL POSTURE: The chapter 13 bankruptcy debtors moved for a determination that a mortgage was totally unsecured, and to therefore avoid the lien pursuant to Pond. The debtors also sought to have the allowed secured claim for a car valued at $14,357, pursuant to Rash. OVERVIEW: The debtors bought the residence secured by the mortgage for $109,000, in 1997. The court found that property values were rising, and the residence had a fair market value of at least $103,500, which exceeded the outstanding balance due on the mortgage of $103,417. Therefore, the mortgage could not be avoided under and Pond. The replacement value of the car, based in part upon testimony and in part upon valuation information the court has obtained in other motor vehicle valuation hearings, was $16,673. This represented a retail value of $18,523, less a $200 reconditioning cost, a $900 repair cost, a $250 cost for a dealer warranty, and a $500 profit, which was one-half of a used car dealer anticipated profit of $1,000 per vehicle. The court believed that the debtors would be able to sell the car privately for that amount, or obtain a similar car for that price in a private sale. In re Dziendziel, 2003 Bankr. LEXIS 907, 295 B.R. 184 (Bankr. W.D.N.Y. June 18, 2003) (Ninfo, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.01 [back to top]

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Chapter 13 bankruptcy, filed while prior chapter 7 filing remained open, dismissed as an attempt to manipulate bankruptcy process. Bankr. E.D.N.Y. PROCEDURAL POSTURE: Debtor had previously filed a joint chapter 7 case in which a discharge was granted but remained open pending the resolution of debtor’s personal injury action. After receiving his chapter 7 discharge, debtor filed a chapter 13 case. The chapter 13 trustee moved to dismiss the chapter 13 case. OVERVIEW: The chapter 13 trustee asserted that the bankruptcy court should adopt the majority rule that simultaneous cases relating to the same debtor could not be maintained (even if under different chapters of the Bankruptcy Code). Debtor contended that his chapter 13 case was filed in good faith, after the discharge of his unsecured debt in the chapter 7 case, in order to permit him to cure and reinstate his home mortgage, pursuant to 11 U.S.C.§ 1322(b)(5). The bankruptcy court found that it agreed with the majority rule with regard to Fed. R. Bankr. P. 1015. Debtor was attempting to manipulate the bankruptcy process to obtain the benefit of the automatic stay while evading the requirements of chapter 13, which would have required him to pay all the mortgage payments. The chapter 7 case was not being kept open simply for administrative reasons. Rather, the case remained open because the personal injury action could result in a recovery to creditors in the chapter 7 estate. There was no reason why the debtor’s unsecured creditors in the chapter 7 case should receive different treatment than the unsecured debt receives under the debtor’s chapter 13 plan. In re Lord, 2003 Bankr. LEXIS 712, 295 B.R. 16 (Bankr. E.D.N.Y. June 27, 2003) (Craig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:1015.01
[back to top]

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3rdCir.

Claim of equity holder for breach of agreement to repurchase ownership interest in debtor subordinated. Bankr. D. Del. PROCEDURAL POSTURE: Before the court was the debtor’s objection to and motion to subordinate the claim of an equity holder. The debtor asserted that the claim must be subordinated pursuant to 11 U.S.C. § 510(a), (b). OVERVIEW: The debtor asserted that the claim must be subordinated under 11 U.S.C. § 510(a), (b), as it was based on breach of an agreement to repurchase the equity holder’s ownership interest in the debtor. The equity holder asserted that his claim was not based on a contract to purchase equity, but was instead based on damages stemming from the debtor’s breach of his employment contract. That agreement provided that a note would be subordinated to any debt owed by the debtor to any banks or trade creditors. The equity holder asserted that the employment agreement’s subordination provision did not govern because the note was never issued. The court concluded that if the debtor had issued the note, the equity holder would have had a subordinated claim in the amount of the value of his membership interest. A jury verdict awarding him a claim for the debtor’s failure to perform had to similarly be subordinated. Thus, the claim was subordinated pursuant to the agreement and section 510(a). Alternatively, as an equity holder, whose interest was tied to his employment, he assumed the risk of business failure and a decrease in stock value. Thus, his claim was properly subordinated under section 510(b). In re Alta+Cast, LLC, 2003 Bankr. LEXIS 1374, — B.R. — (Bankr. D. Del. October 24, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.01 [back to top]

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Postpetition legal fees, which were not scheduled, were not discharged. Bankr. W.D. Pa. PROCEDURAL POSTURE: Debtor filed a chapter 7 petition and failed to include a debt owed to creditor for legal services on the bankruptcy schedules. The case was closed and debtor received a discharge. Debtor later moved to reopen the case and moved to amend the schedules to include creditor and debt. Creditor objected to both motions. OVERVIEW: The court found conflicted testimony related to the issue of debtor’s signature on the fee contract. The court found that creditor’s testimony as a witness of debtor’s signature on the contract was dispositive. The court rejected debtor’s claim that the failure to sign the fee contract for five months after service commenced created a contract issue. Pursuant to the common law of Indiana the validity of a contract was not dependent upon signature of the parties, unless it was made a condition of the agreement. There was no provision in the fee contract that required that the agreement between debtor and creditor was conditioned upon either party’s signature on the document. For 11 U.S.C. § 727 discharge purposes, the critical issue here was the point in time when creditor’s right to payment for the legal services rendered arose. State law determined right to payment, unless overridden by federal law. Debtor’s failure to pay the fees breached the contract between the parties, which in turn created the right to payment, which occurred postpetition. In re Retort, 2003 Bankr. LEXIS 1390, — B.R. — (Bankr. W.D. Pa. October 23, 2003) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.01 [back to top]

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4th Cir.

Debtors not entitled to litigation costs stemming from alleged IRS violation of discharge injunction. Bankr. E.D. Va. PROCEDURAL POSTURE: Debtors filed a chapter 7 petition and received a discharge. Debtors moved for litigation costs from Internal Revenue Service for alleged violations related to a tax debt and 11 U.S.C. § 524. OVERVIEW: The court found that debtors’ tax debt in question was discharged upon the closing of debtors’ bankruptcy case. Debtors sought litigation costs under 26 U.S.C. § 7433 of the Internal Revenue Code for a violation of 11 U.S.C. § 524. Debtors failed to distinguish which provision of 11 U.S.C. § 524 that was allegedly violated. The court found that the proper Internal Revenue Code section under which debtors could seek litigation costs was 26 U.S.C. § 7430. Debtors failed to qualify under section 7430 where debtors failed to exhaust all administrative remedies. Debtors did not comply with the provisions of 26 U.S.C. § 7430 and were not entitled to litigation costs. Debtors were entitled to recover the costs of the action under 26 U.S.C. § 7433. Debtors failed to show that they were entitled to litigation costs for Internal Revenue Service’s violation of 11 U.S.C. § 524(a)(2). However, debtors were entitled to recover from the IRS the costs of the action under 26 U.S.C. § 7433. In re Graham, 2003 Bankr. LEXIS 709, — B.R. — (Bankr. E.D. Va. April 14, 2003) (Adams, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10 [back to top]

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5th Cir.

Court issued preliminary injunction against Federal Energy Regulatory Commission to protect debtors’ rights to reject executory contracts with power companies. Bankr. N.D. Tex. PROCEDURAL POSTURE: Petitioners, related debtors, filed a chapter 11 petition and commenced a suit against defendants, a power company and the United States Federal Energy Regulatory Commission. The suit sought rejection under 11 U.S.C. § 365(a) the debtors’ obligation to perform an agreement. The court granted the debtors’ request for a temporary restraining order (“TRO”). The debtors sought to continue the TRO by a preliminary injunction. OVERVIEW: The debtors filed the complaint and the temporary restraining order (“TRO”) motion to protect their bankruptcy right of rejection of executory contracts under 11 U.S.C. § 365. The court also concluded that 11 U.S.C. § 362(b)(4) provided an exception from the automatic stay that permitted the United States Federal Energy Regulatory Commission to act with respect to the debtors in furtherance of its regulatory powers. 11 U.S.C. § 105 authorized the court to enjoin conduct otherwise excepted from the automatic stay and in this case the requirements for a section 105 injunction were met where: (1) the debtors had a strong likelihood of succeeding on the merits; (2) debtors would be irreparably harmed if injunctive relief was not granted; (3) defendants would suffer no irreparable harm if injunctive relief was granted; and (4) the public interest was served by such relief. The Commission was not insulated from injunctive relief. The contracts discussed in the complaint were clearly covered by 11 U.S.C. § 365(a) and subject to the debtor’s rejection. Mirant Corp. v. Potomac Elec. Power Co. (In re Mirant Corp.), 2003 Bankr. LEXIS 1375, 299 B.R. 152 (Bankr. N.D. Tex. September 23, 2003) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.01 [back to top]

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Professional fees for required initial conflicts checking disallowed. Bankr. S.D. Tex. PROCEDURAL POSTURE: The United States trustee (“UST”) filed objections to several fee applications submitted by various professional firms arising from their work in a debtor’s bankruptcy proceeding. The objections involved compensation requests for time spent conducting conflicts checks to demonstrate “disinterestedness” under 11 U.S.C. § 327 and for preparing retention applications and verified statements of connections pursuant to Fed. R. Bankr. P. 2014. OVERVIEW: The UST asserted that the obligation to determine whether a professional met the “disinterested” standard was not a benefit to the estate or a reasonable cost for the estate to bear and thus was not compensable. The firms responded that it was penurious to impose rigid application requirements as a condition of payment and not compensate them for time and effort spent complying with those requirements. The court allowed compensation for fees necessary to comply with the disclosure requirements of Fed. R. Bankr. P. 2014(a). However, the court disallowed compensation for conflicts checking that was mandated by state disciplinary rules as a condition of employment because if a firm determined that it could not represent a party, it would be improper to charge a never-to-be client for such a conclusion. The court also disallowed fees associated with conflicts checking or Rule 2014(a) disclosures that were made necessary by a merger of two of the firms. In re Sterling Chems. Holdings, Inc., 2003 Bankr. LEXIS 716, 293 B.R. 701 (Bankr. S.D. Tex. May 14, 2003) (Greendyke, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:327.01
[back to top]

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6th Cir.

Dischargeability complaint ordered dismissed unless properly amended to account for untimeliness due to lack of notice. Bankr. E.D. Ky. PROCEDURAL POSTURE: Defendants, debtors, filed a motion for judgment on the pleadings and to dismiss adversary proceeding. Plaintiff mortgage company had filed its complaint to determine dischargeability. OVERVIEW: The matter was before the court on a motion for judgment on the pleadings and to dismiss adversary proceeding filed by the debtors. The mortgage company had filed its complaint to determine dischargeability on April 6, 2003. The basis for the debtors’ motion was that the dischargeability proceeding under 11 U.S.C. § 523(a)(4) was brought outside the time limit for filing such a proceeding. The court stated that the complaint of the mortgage company was more properly filed under 11 U.S.C. § 523(a)(3)(B). Its section 523(a)(4) complaint was untimely and the untimeliness of that complaint could not be waived. It was the opinion of the court that the debtors’ motion for judgment on the pleadings and to dismiss adversary proceeding was well taken, and unless the complaint was amended, it should be dismissed. The mortgage company was permitted 10 days to amend its complaint to bring its action under section 523(a)(3)(B), failing which, the complaint would be dismissed. Consolidated Mortg., Inc. v. Gentry (In re Gentry), 2003 Bankr. LEXIS 713, — B.R. — (Bankr. E.D. Ky. July 7, 2003) (Howard, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.09[3][b] [back to top]

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7th Cir.

Employee’s claim for intentional infliction of emotional distress could not be remanded or dismissed due to stay in employer’s bankruptcy. N.D. Ill. PROCEDURAL POSTURE: Plaintiff-intervenor former employee alleged that she was forced to resign as a result of her involvement in a sexual harassment investigation. The court dismissed the employee’s two federal claims and her state conspiracy claim. The court denied the employee’s motion to remand her intentional infliction of emotional distress claim to state court or to voluntarily dismiss the claim without prejudice. The court reinstated the employee’s motion. OVERVIEW: After the court denied the employee’s motion, defendant former employers filed for bankruptcy protection. As a result, the employee’s litigation was automatically stayed pursuant to 11 U.S.C. § 362(a)(1). The bankruptcy judge lifted the automatic stay to allow the court to enter a consent decree. The parties were unable to reach a total agreement. If the court were to grant the employee’s motion by dismissing her claim or remanding it to state court, it would have clearly constituted judicial action in violation of section 362(a)(1). The judge’s order narrowly modified the automatic stay for the sole purpose of allowing the court to enter the proposed consent decree. By dismissing or remanding the employee’s claim, the court would have certainly exceeded the narrow scope of the judge’s order and would have frustrated the automatic stay’s purpose of channeling all prepetition claims against a debtor into a unified proceeding before a bankruptcy court. When the employers filed for bankruptcy protection, the bankruptcy court assumed jurisdiction over all prepetition claims against them. This included the employee’s claim for intentional infliction of emotional distress. Equal Empl. Opportunity v. Outsourcing Solutions, Inc., 2003 U.S. Dist. LEXIS 19104, — B.R. — (N.D. Ill. October 23, 2003) (Kocoras, C.D.J.).

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

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8th Cir.

Sheriff’s deputy who seized debtor’s car pursuant to writ of execution did not willfully violate automatic stay. Bankr. D. Minn. PROCEDURAL POSTURE: The chapter 7 debtor filed an action against defendants, a county sheriff, and the county, for violation of the automatic stay. She also requested permission to amend her complaint, to allege a violation of 11 U.S.C. § 362(a)(3) rather than section 362(a)(1). OVERVIEW: Before the debtor filed for bankruptcy, a sheriff’s deputy, in accordance with a writ of execution, seized the debtor’s car. Defendants correctly argued that Knaus required turnover to the trustee, not to the debtor. The sheriff was not free to release the car to the debtor. The sheriff was entitled to receive a release from the creditor, followed by instructions for turnover from the trustee. Failing either, he was entitled to a court order releasing him of his obligation under the writ of execution. It was inappropriate to place the burden on the sheriff to determine the creditor’s intent to seek or not seek relief from the bankruptcy court or to determine the nature of the debt. It was the debtor’s conduct, as directed by her counsel, that was unreasonable. Defendants did not exercise control over property of the estate since the sheriff could only act at the direction of others, and not of his own accord, except to the extent that as a custodian under 11 U.S.C. § 543 the sheriff attempted, although unsuccessfully, to turnover the property to the trustee. Therefore, there was no willful violation of the automatic stay. Westman v. Andersohn (In re Westman), 2003 Bankr. LEXIS 1379, — B.R. — (Bankr. D. Minn. October 24, 2003) (Dreher, B.J.).

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

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Debtor airline’s settlements with creditors who supplied aircraft parts approved as avoiding complex litigation and substantial attorneys’ fees. Bankr. W.D. Mo. PROCEDURAL POSTURE: Debtor, an airline in chapter 11 bankruptcy, moved to approve settlements to resolve certain secured and unsecured claims, with issues involving lien avoidance, equitable subordination, recharacterization, and fraudulent transfers. The official committee of unsecured creditors (Committee) opposed the settlements, arguing that the bankruptcy estate would realize a greater benefit if the debtor continued to litigate the matters. OVERVIEW: The bankruptcy court determined that the debtor’s probability of success on its claims was suspect. Success on the debtor’s lien avoidance arguments faced substantial difficulties in light of the extraordinary protections granted by 11 U.S.C. § 1110 to those creditors that supplied aircraft parts. The potential recovery based on a preference action was substantially compromised by defenses of new value and ordinary course payments. The success of the debtor’s declaratory judgment actions to alter contract language was dubious, especially considering the debtor’s burden in showing that syntax should have been added to a written agreement which would have materially limited the scope of the opposing party’s interest. The debtor’s claims of equitable subordination, recharacterization, preference and fraudulent conveyances were all fact intensive inquiries, and energetic prosecution of such claims would have cost the estate approximately $100,000 in attorneys’ fees not including fees for retained experts. Thus, the litigation, as a whole, was both legally and factually complex and would necessarily have been accompanied by significant attorneys’ fees. Vanguard Airlines, Inc. v. Sarah & William Hambrecht Found., Inc. (In re Vanguard Airlines, Inc.) 2003 Bankr. LEXIS 1396, — B.R. — (Bankr. W.D. Mo. October 28, 2003) (Venters, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1110.01 [back to top]

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Order to show cause as to why federal tax payments were not being made pursuant to debtor’s plan issued. Bankr. D. Neb. PROCEDURAL POSTURE: Debtor filed a chapter 11 petition. The United States moved for an order to show cause why chapter 11 plan payments were not made as required. OVERVIEW: The confirmed plan provided for the payment of federal government’s tax claims and all claims were to be paid in full by debtor’s successor entity. All of debtor’s assets were transferred to the new entity under the terms of the confirmed chapter 11 plan and pursuant to 11 U.S.C. § 1129. The Internal Revenue Service asserted that interest was due on the amount debtor paid, because it was paid over time. Debtor claimed that the plan disallowed postpetition interest and penalties on the tax claim. The court reviewed the chapter 11 plan and agreed with the IRS. Debtor did not have the option to choose to pay the amount of the claim over time rather than in a lump sum, with no related protection or benefit to the IRS by way of interest to give the IRS the present value of its claim. Debtor was directed to pay the allowed amount of the IRS’s claim plus interest. In re Weaver Potato Chip Co., 2003 Bankr. LEXIS 706, — B.R. — (Bankr. D. Neb. June 12, 2003) (Mahoney, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1129.03[9][c]
[back to top]

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9th Cir.

Bankruptcy court properly refused retroactive relief from stay to judgment creditor. B.A.P. 9th Cir. PROCEDURAL POSTURE: Appellant debtor filed a chapter 13 petition and appellee creditor later obtained a judgment against the debtor. The debtor’s petition was dismissed and he filed another petition and an action against the creditor for alleged violations of the automatic stay, pursuant to 11 U.S.C. § 362. The court entered judgment and the debtor appealed from the Bankruptcy Court for the Northern District of California. OVERVIEW: The bankruptcy appellate panel found that the debtor had his day in court on the attorneys’ fees issue and was provided with additional time to amend his fee application to comply with the court’s order, but he failed to do. The debtor had an actual hearing and he was not deprived of the to opportunity present evidence. The bankruptcy court had wide latitude to grant or deny annulment of the automatic stay under 11 U.S.C. § 362. The court properly balanced the equities when it refused to grant relief from the stay retroactively and it did not err in denying the annulment of the automatic stay. In order to be entitled to emotional distress damages, a showing of significant economic loss caused by the willful violation of the automatic stay was required as was an establishment that the loss caused emotional injury. Because the court did not apply this standard when it awarded the emotional distress damages, the bankruptcy appellate panel remanded to the bankruptcy court for a decision on whether emotional distress damages were appropriate. Stinson v. Bi-rite Rest. Supply, Inc. (In re Stinson), 2003 Bankr. LEXIS 701, 295 B.R. 109 (B.A.P. 9th Cir. June 12, 2003) (Ryan, B.J.).

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

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Bankruptcy court correctly refused to annul stay to allow debtor to pursue state court action which properly belonged to the estate. N.D. Cal. PROCEDURAL POSTURE: Debtor filed a complaint in state court against moving parties for legal malpractice and breach of fiduciary duty after filing bankruptcy. Subsequently, the bankruptcy trustee filed his own complaint asserting the same claims. The moving parties moved to annul the automatic stay, purportedly to validate the debtor’s state court action. The court denied the motion to annul the stay. The moving parties sought reconsideration of that order. OVERVIEW: The court concluded that the motion for reconsideration should be denied. No error of law had been established. The error of law, according to the moving parties, was that annulment of the stay would be futile. Although the court did make an error of fact in finding that the unsecured claims against the estate totaled $1.5 million, when the claims filed totaled only $700,000, the court’s decision to annul the stay was not altered by that correction of fact. The debtor would still be left with a substantial nondischargeable debt to the plaintiff in the case giving rise to the malpractice claim, to whom, under law, he should have owed nothing. However, since that judgment was a final, nondischargeable judgment, the enforceability of that judgment could not be avoided. If a court determined that the judgment was the result of the moving parties’ malpractice or breach of fiduciary duty, it did not seem unfair to place most of that burden on the moving parties. In re Mannie, 2003 U.S. Dist. LEXIS 19316, 299 B.R. 603 (N.D. Cal. July 21, 2003) (White, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3] [back to top]

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Counsel sanctioned for filing chapter 11 petition with improper purpose of delaying commercial litigation. 9th Cir. PROCEDURAL POSTURE: Appellants, a debtor, an attorney, and a law firm, appealed the imposition of sanctions upon counsel by the District Court for the Central District of California for filing a chapter 11 petition with the improper purpose of delaying state court litigation of a commercial dispute with appellee corporation. OVERVIEW: The debtor and the corporation entered into a five-year lease agreement for an industrial building, with the corporation holding an option to purchase the property at the end of the term. The corporation exercised the option; however, the debtor informed it that escrow would not close as scheduled. The corporation filed a state court complaint for breach of contract seeking to compel the sale. The debtor filed a chapter 11 bankruptcy petition, staying the state court proceedings. The bankruptcy court ruled that the state court litigation could proceed to judgment, but the stay remained in effect as to any money judgment. The corporation filed motions for sanctions after the debtor failed to file an amended reorganization plan. The bankruptcy court converted the case from a chapter 11 to a chapter 7. The appellate court found that the bankruptcy court did not abuse its discretion in imposing sanctions. The bankruptcy court made extensive factual findings as to the debtor’s solvency at the filing date, the improper motive of forum shopping, and the concession that reorganization was impossible over the corporation’s objection. Dressler v. Seeley Co. (In re Silberkraus), 2003 U.S. App. LEXIS 13836, 336 F.3d 864 (9th Cir. July 10, 2003) (O’Scannlain, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9011.06[1] [back to top]

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10th Cir.

Motion to dismiss bankruptcy for substantial abuse denied using totality of the circumstances test. Bankr. W.D. Okla. PROCEDURAL POSTURE: Debtor filed a chapter 7 petition. United States trustee moved to dismiss debtor’s chapter 7 petition for substantial abuse pursuant to 11 U.S.C. § 707(b). OVERVIEW: The court found that the term “substantial abuse” was not defined in the Bankruptcy Code. The Tenth Circuit has adopted a “totality of the circumstances test” for the determination whether there was substantial abuse. It noted that ability of debtor to repay her debts was the primary factor to consider; however, it was not the only consideration. Other considerations included the following: (1) whether debtor suffered unique hardships such as sudden illness, calamity, disability, or unemployment; (2) whether debtor’s cash advances and consumer purchases exceeded her ability to pay; (3) whether she enjoyed a stable income; (4) whether expenses could be reduced without depriving debtor and her family of the necessities of life like food and shelter; (5) whether debtor’s schedules accurately reflect her true financial condition; and (6) whether debtor demonstrated good faith in filing for chapter 7 relief. The court concluded that there was no substantial abuse and that any doubt should be resolved in favor of debtor. In re Pollard, 2003 Bankr. LEXIS 914, 296 B.R. 531 (Bankr. W.D. Okla. June 23, 2003) (Bohanon, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.04
[back to top]

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11th Cir.

State could not claim sovereign immunity as defense to dischargeability action because sovereign immunity in bankruptcy was surrendered upon ratification of the U.S. Constitution. Bankr. M.D. Ga. PROCEDURAL POSTURE: Plaintiff debtor filed a complaint to determine the dischargeability of state income tax liability against defendant Georgia Department of Revenue (Department). The Department filed a motion to dismiss the case on the ground that it was shielded from suit by state sovereign immunity. OVERVIEW: The bankruptcy court held that by ratifying the United States Constitution, the states surrendered their sovereign immunity with respect to bankruptcy. Because the states had no sovereign immunity, Congress’s attempt to abrogate it by 11 U.S.C. § 106(a) was not necessary, and whether 11 U.S.C. § 106(a) was constitutional was irrelevant. The states could not raise the sovereign immunity argument in bankruptcy because they had no such immunity. Roberts v. Georgia Dep’t of Revenue (In re Roberts), 2003 Bankr. LEXIS 1386, — B.R. — (Bankr. M.D. Ga. September 15, 2003) (Walker, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.02 [back to top]

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Debtor’s sixth bankruptcy dismissed on grounds of bad faith due to lack of income and intent to avoid creditors. Bankr. M.D. Ga. PROCEDURAL POSTURE: The court convened a hearing pursuant to its show cause order. The order required the chapter 13 debtor to show cause why her sixth bankruptcy case should not be dismissed as having been filed in bad faith. OVERVIEW: The debtor’s first four cases were dismissed because the debtor did not file a plan or schedules and did not attend the 11 U.S.C. § 341(a) meeting. The debtor’s fifth case was dismissed for failure to pay the filing fee. In the sixth case, the filing fee and schedules were filed after the show cause notice. The debtor stated that she would file a case when she would lose a job so as to give her time to find a new job and protect her from the adverse consequences of creditors’ recovery efforts. Such an objective had been repeatedly held to be one which would not support the good faith filing of a bankruptcy case. In order to file a chapter 13 case in good faith, the Bankruptcy Code required that a debtor have “regular income.” The debtor in this instance indicated no such regular income, and in fact, indicated the lack of such income as the reason for filing the case. In re Lesane, 2003 Bankr. LEXIS 1381, — B.R. — (Bankr. M.D. Ga. September 15, 2003) (Walker, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:341.02 [back to top]

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Criminal prosecution of fraud claim commenced after debtor stopped making restitution payments and filed bankruptcy did not violate stay. Bankr. M.D. Ga. PROCEDURAL POSTURE: Plaintiff debtor received, through fraud, excess unemployment benefits from defendant Georgia Department of Labor (Department). In lieu of prosecution, the debtor agreed to repay the excess benefits. He stopped making payments and filed for chapter 13 bankruptcy. The Department filed criminal charges pursuant to O.C.G.A. § 34-8-256(a), which the debtor argued violated the automatic stay. The Department moved for summary judgment. OVERVIEW: The bankruptcy court first held that 11 U.S.C. § 362 did not apply to criminal actions. Thus, regardless of the Department’s purpose in initiating the criminal process, that action did not violate the automatic stay. However, the bankruptcy court did have the power under 11 U.S.C. § 105 to enjoin the criminal action, but determined that under the circumstances, and injunction was not warranted. At the time the matter came for hearing, the debtor had not been convicted and there was no discharge order entered. Thus, any interference with the discharge was a distant and speculative event, rather than a great and immediate threat. The debtor contended that the prosecution was initiated in bad faith because the Department had agreed to allow the debtor to repay the debt in lieu of prosecution. Although he had ceased making payments, the debtor argued that his chapter 13 plan contemplated full repayment of the debt. The bankruptcy court determined that the debtor could raise this argument in the criminal proceeding. Finally, the debtor had no federal right to be protected from making restitution on a discharged debt. Smith v. Goode (In re Smith), 2003 Bankr. LEXIS 1382, — B.R. — (Bankr. M.D. Ga. October 24, 2003) (Walker, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01
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