Collier Bankruptcy Case Update November-12-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
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 12, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 362(h) Motion to take deposition of debtor did not violate stay.
In re Carlson (Bankr. D.R.I.)
§ 365(f)(1) Debtor, a sublessee, could invoke protections of section 365(f) to invalidate assignment restrictions in settlement agreement with primary landlord.
Shoppers World Cmty. Ctr., L.P. v. Bradlees Stores, Inc. (In re Bradlees Stores, Inc.) (S.D.N.Y.)
§ 362(a) Petition did not stay prior sale.
In re Moore (Bankr. E.D. Pa.)
§ 348(f) Upon conversion, funds returned to chapter 13 trustee by refusing creditor were to be paid pursuant to the confirmed plan, not to debtor.
In re Pegues (Bankr. D. Md.)
Rule 9019 Bankruptcy court granted the motion of defendants, former employees, to compel arbitration of all issues raised by debtor’s complaint.
Hydro-Action, Inc. v. Craig (In re Hydro-Action, Inc.) (Bankr. E.D. Tex.)
§ 365(a) Debtor’s employment contracts with optometrists were executory and could be assumed and assigned.
In re Visionamerica, Inc. (Bankr. W.D. Tenn.)
§ 523(a)(2)(A) Credit card debt held dischargeable based on debtor’s subjective intent to repay.
Chase Manhattan Bank v. Pantelias (In re Pantelias) (Bankr. E.D. Tenn.)
§ 523(a)(6) Debtor’s failure to return collateral to secured creditor was a willful and malicious injury and was nondischargeable.
Telcom Credit Union v. Leslie (In re Leslie) (Bankr. E.D. Mich.)
§ 547(c)(4) Creditor permitted to set off value of shipped goods against preferential payments.
Swallen’s, Inc. v. Corken Steel Prods. (In re Swallen’s, Inc.) (Bankr. S.D. Ohio)
28 U.S.C. § 157(d) Trustee failed to establish right to jury trial as basis for withdrawal of reference.
Blurton v. Fesmire (In re S. Indus. Mech. Corp.) (W.D. Tenn.)
§ 523(a)(2)(A) Bank’s motion for entry of default judgment on dischargeability complaint after debtor’s default and entry of default order denied.
Park Nat’l Bank & Trust of Chicago v. Paul (In re Paul) (Bankr. N.D. Ill.)
§ 727(a)(4)(A) Court of Appeals affirmed denial of discharge.
In re Carlson (7th Cir.)
§ 548(a)(1)(B) Bankruptcy court erred in finding a lack of reasonably equivalent value.
Pummill v. Greensfelder, Hemker, & Gale, P.C. (In re Richards & Conover Steel, Co.) (B.A.P. 8th Cir.)
§ 328 Broker’s fee was properly denied.
Harry M. Weiss & Assocs. v. Eric Nelson Auctioneering (In re Sunrise Suites, Inc.) (D. Nev.)
28 U.S.C. § 158(d) Court of Appeals affirmed holding that debtor was not required to pay interest at default rate on seven defaulted loans.
Beal Bank v. Crystal Props., LTD. (In re Crystal Props.) (9th Cir.)
§ 105(a) Motion for substantive consolidation was denied.
In re Horsley (Bankr. D. Utah)
§ 105(a) Court had power to overrule creditor’s objection to exemption claims.
In re Grau (Bankr. S.D. Fla.)
§ 106(b) State waived immunity against proceeding.
Drivas v. Intuition, Inc. (In re Drivas) (Bankr. M.D. Fla.)
§ 522(b)(2)(A) Court overruled objections to Florida debtor’s claimed homestead exemption for portion of property upon which he maintained palm tree nursery.
In re McLachlan (Bankr. M.D. Fla.)
§ 1141(d)(1) Court retained jurisdiction over issues raised by settlement agreement.
Cavazos v. Mid-State Trust II (In re Hillsborough Holding Corp.) (Bankr. M.D. Fla.)
Rule 7001 Creditor who failed to comply with state statute did not hold a valid lien.
Bakst v. Johns (In re Johns) (Bankr. S.D. Fla.)
Collier Bankruptcy Case Summaries
Motion to take deposition of debtor did not violate stay. Bankr. D.R.I. In June 1999, an oil company, of which the debtor was the president and majority shareholder, filed a chapter 7 petition. In 2000, the debtor also filed a chapter 7 petition. One of the attorneys who represented the oil company in its chapter 7 case appeared at the debtor’s 341 meeting and informed the debtor of his possible fraud action against her. Soon thereafter, an attorney who represented a creditor of the oil company filed a notice of motion in the oil company’s chapter 7 case to take the debtor’s deposition with regard to her prepetition sale of real property and the resulting proceeds. The oil company filed a motion to quash the attorney’s notice of motion on the ground that he failed to confer prior to filing the request and that the scope of the examination was unclear and too broad. The debtor then filed a motion to hold the two attorneys in contempt. The bankruptcy court denied the debtor’s motion, holding that, for the purposes of section 362(h), the requested examination was not an action against the debtor but a discovery proceeding in the oil company’s case. The court concluded that the debtor was an appropriate person to be examined in that case and that, consequently, the attorneys had not violated the stay. In re Carlson, 2001 Bankr. LEXIS 1012, 265 B.R. 346 (Bankr. D.R.I. July 25, 2001) (Votolato, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
Debtor, a sublessee, could invoke protections of section 365(f) to invalidate assignment restrictions in settlement agreement with primary landlord. S.D.N.Y. The chapter 11 debtor, as a sublessee, moved before the bankruptcy court for an order authorizing its sale of certain lease designation rights and the disposition of related leases. The primary landlord for premises occupied by the debtor objected. The bankruptcy court overruled the objection, and the landlord appealed. On appeal, the debtor argued, among other things, that it could freely assign its rights to the premises under section 365(f) because a settlement agreement between the parties that was entered into in the debtor’s prior chapter 11 case was an 'executory contract,' and assignment restrictions contained in the settlement agreement and related documents constituted 'antiassignment provisions' under section 365(f)(1). The district court agreed and held that the debtor was entitled to invoke the protections of section 365(f) to invalidate the assignment restrictions in the settlement agreement. The court noted that the bankruptcy court analyzed the settlement agreement under both the stringent Countryman test (i.e., a contract is executory if the obligation of both the debtor and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other) and under the less stringent functional approach (which focuses on whether or not the estate will benefit from the assumption or rejection of the contract). The court found no error in the bankruptcy court’s conclusion that the agreement met the more stringent Countryman test and, therefore, did not review the bankruptcy court’s application of the more lenient functional approach. The court also held that the debtor was not judicially estopped from seeking to assign its rights to occupy the premises based on assertions relating to the settlement agreement made in its prior chapter 11 case and that the debtor did not waive its right to invoke the protections of section 356(f) in the settlement agreement.Shoppers World Cmty. Ctr., L.P. v. Bradlees Stores, Inc. (In re Bradlees Stores, Inc.), 2001 U.S. Dist. LEXIS 14755, – B.R. – (S.D.N.Y. September 20, 2001) (Scheindlin, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.08
Petition did not stay prior sale. Bankr. E.D. Pa. The secured creditor filed a motion for relief from the automatic stay to complete the sheriff sale process in relation to the chapter 13 debtor’s real property. The debtor filed a petition hours after the completion of the sheriff’s sale and argued that the petition stayed the sale. The bankruptcy court granted the motion for relief, holding that section 362(a) did not provide a basis for staying the sheriff’s sale that occurred on the same date of the filing because the petition was filed after the sale was completed. The court noted that if Congress had intended for the automatic stay to arise on the 'date of the filing of the petition,' it would have drafted section 362(a) to make the stay effective on the date of the filing of the petition. The automatic stay instead took effect as of the time the petition was filed.In re Moore, 2001 Bankr. LEXIS 1149, – B.R. – (Bankr. E.D. Pa. September 14, 2001) (Carey, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
Upon conversion, funds returned to chapter 13 trustee by refusing creditor were to be paid pursuant to the confirmed plan, not to debtor. Bankr. D. Md. In January 1999, the debtor filed a chapter 13 petition and proposed a 60-month plan to be funded by automatic payroll deductions. In February 2001, the trustee filed a motion for disallowance of claim, asserting that the debtor’s mortgage creditor had refused to accept distributions under the plan. But before any disposition on the motion, the case was converted to chapter 7 and the trustee’s motion was denied. Nonetheless, the trustee filed a motion for reconsideration, arguing that the conversion should not prevent redisbursement to other creditors, which was sought by the motion to disallow the abandoned claim. The United States trustee argued that the undisbursed funds should be disbursed by the chapter 13 trustee pursuant to the confirmed plan, notwithstanding the conversion. Conversely, the United States trustee opposed the motion, asserting that the chapter 13 trustee’s authority had terminated upon conversion. Implicitly, the United States trustee’s position was that monies not yet disbursed by the chapter 13 trustee should be disbursed under the plan, but monies refunded by a refusing creditor should be returned to the debtor. The bankruptcy court identified the two lines of reasoning established by case precedent: (1) undisbursed funds under a confirmed plan and set aside for creditors must be paid to those creditors, and (2) undisbursed funds should be refunded to the debtor upon conversion. The court went on to rule that, for the purposes of section 348(f), the debtor had no right to postconfirmation plan payments except where excess funds remained after all distributions. Instead, those funds should be distributed according to the terms of the confirmed plan. The court reasoned that the chapter 13 trustee’s request was nothing more than a request for permission to disburse the returned funds in accordance with plan provisions, and that one of the residual duties of the trustee was to wind up the chapter 13 case by paying out remaining funds.In re Pegues, 2001 Bankr. LEXIS 1120, 266 B.R. 328 (Bankr. D. Md. August 21, 2001) (Keir, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:348.07
Bankruptcy court granted the motion of defendants, former employees, to compel arbitration of all issues raised by debtor’s complaint. Bankr. E.D. Tex. The chapter 11 debtor corporation filed a postpetition action in the bankruptcy court against several former employees. The debtor’s complaint alleged that the defendants were engaged in continuous violations of various covenants of their respective employment agreements with the debtor, which were designed to protect the trade secrets, customer lists, proprietary processes and other valuable assets of the debtor corporation. The defendants moved to compel the arbitration of the dispute pursuant to arbitration provisions contained in their employment agreements. The debtor objected, arguing that the adversary proceeding was a core proceeding and that the court’s interest in exercising its core jurisdiction superseded any prepetition contractual provision that mandated arbitration. The debtor also argued that its complaint primarily sought permanent injunctive relief and that the arbitration process was not equipped to resolve such equitable disputes. The bankruptcy court granted the defendants’ motion to compel arbitration. The court found that a valid and enforceable arbitration agreement existed and that the claims asserted fell within the scope of the agreement. The court then held that it lacked discretion to refuse to enforce the contracts’ arbitration provisions, because the debtor made no showing that enforcement of the provisions would conflict in any way with the purpose or provisions of the Bankruptcy Code. The court explained that once it was demonstrated that the claims asserted in the adversary proceeding were actually within the scope of the applicable arbitration provisions, the debtor had the burden of demonstrating that the enforcement of the arbitration provisions would conflict with the actual text or underlying purposes of the Code. The court also concluded that there was no basis for the debtor’s contention that the equitable relief it sought was unavailable in the arbitration process.Hydro-Action, Inc. v. Craig (In re Hydro-Action, Inc.), 2001 Bankr. LEXIS 1132, 266 B.R. 638 (Bankr. E.D. Tex. August 31, 2001) (Parker, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9019.04
Debtor’s employment contracts with optometrists were executory and could be assumed and assigned. Bankr. W.D. Tenn. The chapter 11 debtor and related debtor companies moved for authority to assume employment agreements between the debtor and two optometrists. The debtor sought to assume and assign the contract to an entity that purchased several of the debtors’ optometry clinics. Upon the sale of the practices, the optometrists’ employment terminated by their own choices. However, the terms of their contracts provided that upon such termination the optometrists had continuing obligations to refrain from competition throughout a one-year period. The bankruptcy court held that at the time of the debtor’s chapter 11 filing, the employment contracts at issue were executory contracts, and they could be assumed and assigned by the debtor. The court found that the contracts were executory under the definition of mutuality of obligations articulated by Professor Countryman, as well as under the 'functional' approach. The court noted that assumption of the contracts would add to the value of the bankruptcy estate by retaining the optometrists’ noncompetition agreements and found that assumption in this case met the flexible 'business judgment' test that some courts have adopted. However, the court’s order did not determine any other issues related to the assigned contracts, and the court expressly reserved the parties’ rights to litigate disputes concerning the enforceability of the assigned noncompetition agreements in state court (citing Collier on Bankruptcy 15th Ed. Revised).In re Visionamerica, Inc., 2001 Bankr. LEXIS 1142, – B.R. – (Bankr. W.D. Tenn. September 12, 2001) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.02, .03
Credit card debt held dischargeable based on debtor’s subjective intent to repay. Bankr. E.D. Tenn. A bank that issued a credit card to the chapter 7 debtor prepetition brought an adversary proceeding to determine the dischargeability of a portion of the debtor’s credit card debt. The bank alleged that the debtor charged about $4,900 when she did not have the intent to repay the charges and that the resulting debt could not be discharged in the debtor’s chapter 7 case. The bankruptcy court found that the debtor in this case intended to pay the charges, or at the least, she intended to continue paying her debt to the bank whether she ever paid it in full or not; thus, the debt was dischargeable. The court explained that although the court or the creditor might think the debtor’s financial expectations at the time she made the charges were unrealistic, this did not mean that the debtor’s expectations could be ignored, because the court had to determine the debtor’s subjective intent. The court also noted, however, that the degree to which the debtor’s expectations were supported by objective facts had to be considered, and that with less support, it would have been more difficult for the court to believe that the debtor had the intent to pay.Chase Manhattan Bank v. Pantelias (In re Pantelias), 2001 Bankr. LEXIS 1115, 265 B.R. 788 (Bankr. E.D. Tenn. August 13, 2001) (Stinnett, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Debtor’s failure to return collateral to secured creditor was a willful and malicious injury and was nondischargeable. Bankr. E.D. Mich. Following the dismissal of the debtor’s second chapter 13 case, the bankruptcy court entered an order requiring her to turn over collateral (an automobile) to a secured creditor. The debtor failed to comply with this and subsequent orders, and the court ultimately issued a warrant for her arrest. The creditor finally obtained possession of the vehicle following the debtor’s arrest, and the bankruptcy court thereafter entered an order against her for damages, costs, expenses, attorney’s fees and depreciation in collateral as a result of her failure to comply with the court’s orders. Several months later, the debtor filed a chapter 7 petition. The creditor filed an adversary proceeding against her, objecting to her discharge and asking for a determination of the dischargeability of the debt under section 523(a)(6). The creditor moved for summary judgment, which the court granted, holding that the debtor’s obligation to the creditor was for a willful and malicious injury and was nondischargeable under section 523(a)(6). Based on the debtor’s deposition testimony, the court concluded that the debtor knew that a judgment against her for costs, expenses, attorney’s fees and depreciation to the vehicle was substantially certain to occur as a result of her failure to comply with the court’s order to return the vehicle; thus, her actions were willful. The court also concluded that the debtor acted maliciously (i.e., in conscious disregard of her duties or without just cause or excuse) when she consciously disregarded court orders to return the vehicle with the excuse that she needed the vehicle for transportation.Telcom Credit Union v. Leslie (In re Leslie), 2001 Bankr. LEXIS 1140, – B.R. – (Bankr. E.D. Mich. May 11, 2001) (Rhodes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
Creditor permitted to set off value of shipped goods against preferential payments. Bankr. S.D. Ohio The debtor was a retailer of consumer products. The creditor was a wholesale distributor that provided the debtor with equipment for sale in the debtor’s retail operation. The products were purchased by the debtor under an open line of credit. In early 1995, the creditor shipped goods to the debtor for payment in April, May and June 1995, but the debtor was unable to make the payments. Consequently, in July 1995 the parties agreed that the creditor would continue to ship goods on open account, and be paid for those shipments the following month. Additionally, the debtor would make a second payment, which would be applied to arrearages. The debtor made payments in August, September and October 1995. Within 90 days of the payments, the debtor filed a chapter 11 petition, and thereafter brought an adversary proceeding seeking recovery of the payments as preferences. The creditor filed a motion for summary judgment, asserting the defenses of (1) ordinary course of business, (2) new value and (3) subsequent value. The bankruptcy court rejected the ordinary course of business defense, holding that both the current and arrearage payments were a marked departure from prior practice between the parties. The court also ruled that there was no evidence of a contemporaneous exchange. But the court held that, pursuant to section 547(c)(4), the creditor was entitled to set off the new value against current payments, since new goods were shipped, in contemplation of payment, which replenished the estate (citing Collier on Bankruptcy 15th Ed. Revised).Swallen’s, Inc. v. Corken Steel Prods. (In re Swallen’s, Inc.), 2000 Bankr. LEXIS 1884, 266 B.R. 807 (Bankr. S.D. Ohio December 19, 2000) (Perlman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.04
Trustee failed to establish right to jury trial as basis for withdrawal of reference. W.D. Tenn. After the debtors filed a chapter 7 petition, the trustee filed an adversary proceeding seeking to compel turnover of certain property from the creditor. The creditor was the successor in interest to promissory notes signed by one or both of the debtors. These notes all contained a jury trial waiver. The trustee then amended the complaint twice to add other defendants. All the complaints allegedly referenced the trustee’s desire for a jury trial in bankruptcy court. The creditor refused to consent to a jury trial, and the trustee filed a motion for withdrawal of reference to the district court, mainly in order to receive a jury trial. The district court held that no grounds existed to warrant either mandatory or permissive withdrawal under section 157(d). Specifically, the court found that mandatory withdrawal requirements were not met because the case turned primarily on bankruptcy law with only a de minimis consideration of nonbankruptcy statutes. The court also held that no cause existed to compel permissive withdrawal. The trustee argued that the right to a jury trial represented cause for withdrawal, but the court determined that no such right existed. In determining that the creditor had made a voluntary and knowing waiver of its rights to a jury trial, the court used a test consisting of four factors and found that there was no evidence, with regard to the waiver provision in the notes, that (1) a gross disparity existed in the bargaining power between the parties; (2) the debtor had limited business experience; (3) the debtor had no opportunity to negotiate; and (4) the waiver provision was inconspicuous. Blurton v. Fesmire (In re S. Indus. Mech. Corp.), 2001 U.S. Dist. LEXIS 14727, 266 B.R. 827 (W.D. Tenn. September 12, 2001) (Donald, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.04,
Bank’s motion for entry of default judgment on dischargeability complaint after debtor’s default and entry of default order denied. Bankr. N.D. Ill. After the debtor’s default and the entry of a default order, a bank moved for a default judgment on its adversary complaint seeking to prevent the debtor from discharging a debt for overdrawn checks on a corporate checking account. The bank argued that the debt was nondischargeable under the fraud and willful damage to property exceptions of sections 523(a)(2)(A) and 523(a)(6). The bankruptcy court denied the bank’s motion and held that a default judgment could not be entered because the bank’s pleadings and affidavits failed to establish that the debt owed to it was nondischargeable under either section 523(a)(2)(A) or 523(a)(6). The court noted, among other things, that the bank failed to show that the debtor intentionally sought to harm it or that the debtor intentionally made a misrepresentation that the bank justifiably relied upon. The court concluded that absent a further showing of evidence to warrant an exception to the policy of allowing debtors to discharge their debts in bankruptcy, abrogation of the Bankruptcy Code’s 'fresh start' policy was not warranted in this case. The court ordered that the proceeding be set for trial to determine whether the debt was dischargeable.Park Nat’l Bank & Trust of Chicago v. Paul (In re Paul), 2001 Bankr. LEXIS 1136, 266 B.R. 686 (Bankr. N.D. Ill. September 14, 2001) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08, .12
Court of Appeals affirmed denial of discharge. 7th Cir. The debtor, an attorney, and his friend, also an attorney, formed a practice merger agreement, purporting to merge their two practices and entitling the friend to a share of the fees in cases the debtor assigned to him. Soon after they entered into this agreement, the debtor handled a case that settled for $58,000. Under the agreement, the debtor was entitled to one-third of the fee, which was remitted a few weeks after the debtor filed his petition. The friend received the check, paid the client, and deposited the fee into his own bank account but, in the months that followed, paid the fee out to the debtor and his designees, including the debtor’s former spouse. The debtor did not schedule the fee, contending that a contingent fee was not property of the estate. After the bankruptcy court denied his discharge pursuant to section 727(a)(4)(A), the debtor appealed. The Court of Appeals for the Seventh Circuit affirmed, holding that the debtor earned his entire fee prepetition, so that the trustee’s entitlement to the fee would not interfere with legal representation of the debtor’s client. The court determined that the debtor concealed property from the trustee, causing the rightful denial of a discharge. The court also directed the two attorneys to show cause why they should not be disciplined for professional misconduct.In re Carlson, 2001 U.S. App. LEXIS 19411, 263 F.3d. 748 (7th Cir. August 31, 2001) (Posner, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.04
Bankruptcy court erred in finding a lack of reasonably equivalent value. B.A.P. 8th Cir. In 1999, the debtor, with the cooperation of one of its secured creditors, began a liquidation process. A representative of the creditor was placed on site to effectuate liquidation of the secured creditor’s collateral. In order to maximize the value of the debtor’s assets, the creditors formed an unofficial unsecured creditors’ committee, which in turn employed an attorney. It was determined that the debtor would be asked to pay the attorney’s fees, but that the committee would be responsible should the debtor fail to make payment. When the attorney billed the committee, the committee sent a letter to the debtor requesting that the debtor make payment. The debtor eventually wrote a check to the largest unsecured creditor for reimbursement of legal expenses that the creditor had satisfied. The debtor also made direct payments to the attorney. In 2000, the debtor filed a chapter 7 petition. The trustee filed adversary proceedings seeking to recover the payments made to the attorney and the creditor, who argued that they were not creditors because the attorney’s efforts had been made on behalf of unsecured creditors. The parties eventually agreed that the transfers to the creditor represented reimbursement. At the hearing, the creditor’s and attorney’s witnesses testified that all the work performed had been for the committee’s benefit, not the debtor’s, thereby proving that they were not creditors of the debtor. But the trustee contended that this testimony provided proof of the lack of reasonably equivalent value, an essential element of a fraudulent conveyance claim pursuant to section 548(a)(1)(B). The bankruptcy court held that the elements of a fraudulent conveyance had been established. The creditor and the attorney appealed the bankruptcy court’s grant of the amendment to conform to the evidence, which had allowed the section 548 cause of action although it was not part of the trustee’s original complaint, and the finding that the debtor did not receive reasonably equivalent value. The B.A.P. for the Eighth Circuit reversed, in part, holding that the bankruptcy court erred in holding that no reasonably equivalent value was conferred on the debtor. Specifically, as a direct result of the attorney’s efforts, the debtor maximized its assets by collecting receivables and reducing its debts, thereby receiving services just as it would have if the attorney was hired directly. But the B.A.P. affirmed the allowance of the amendment to conform, because the attorney and creditor were not prejudiced and had the opportunity to present evidence on the issue of reasonable equivalence.Pummill v. Greensfelder, Hemker, & Gale, P.C. (In re Richards & Conover Steel, Co.), 2001 Bankr. LEXIS 1164, 267 B.R. 602 (B.A.P. 8th Cir. September 28, 2001) (Dreher, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.05[b]
Broker’s fee was properly denied. D. Nev. The representative of the successful bidder at the auction of the chapter 11 debtor’s assets appealed the bankruptcy court order for summary judgment in favor of the auctioneer. The court had approved procedures whereby a buyer’s participating broker could receive a one percent commission from the auctioneer upon completion of the registration process. Despite having failed to fulfill the requirements of the registration process, the bidder’s representative sought payment of the fee. After the auctioneer refused to pay, the representative filed a complaint alleging breach of contract. The district court affirmed, holding that as a result of the representative’s failure to comply with the court-imposed requirements for a broker’s commission, summary judgment in favor of the auctioneer was appropriate. Because the representative failed to substantially comply with the registration process approved by the bankruptcy court or gain court approval of any waiver of such requirements, no contract was formed. Without a contract, no breach could have occurred.Harry M. Weiss & Assocs. v. Eric Nelson Auctioneering (In re Sunrise Suites, Inc.), 2001 U.S. Dist. LEXIS 15221, 266 B.R. 895 (D. Nev. September 20, 2001) (Hunt, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:328
Court of Appeals affirmed holding that debtor was not required to pay interest at default rate on seven defaulted loans. 9th Cir. A creditor appealed a district court order that affirmed the bankruptcy court’s grant of summary judgment in favor of the debtor and its holding that the debtor was not required to pay interest at the default rate on seven defaulted loans that the creditor acquired from the FDIC. The Court of Appeals for the Ninth Circuit affirmed. The court held that under well-established authority, the default interest rate did not apply to the debtor’s loans until the creditor first took affirmative action to put the debtor on notice that it intended to exercise its option to accelerate (i.e., when it recorded notices of default) and thus invoke the default rate under the loan contract. The court rejected the creditor’s argument that the default interest rate was triggered the moment that the debtor’s predecessors failed to make interest payments to its predecessors.Beal Bank v. Crystal Props., LTD. (In re Crystal Props.), 2001 U.S. App. LEXIS 20885, – F.3d – (9th Cir. September 25, 2001) (Wardlaw, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02
Motion for substantive consolidation was denied. Bankr. D. Utah The chapter 7 trustee filed a motion pursuant to section 105(a), seeking to substantially consolidate the debtor’s estate with the assets and liabilities of the title company controlled by the debtor. The debtor had taken funds prepetition from the title company’s escrow trust account for his own personal use. The trustee sought nunc pro tunc relief to allow him to timely reach the recipients of alleged preferences and fraudulent conveyances. The bankruptcy court denied the trustee’s motion, holding that substantial consolidation pursuant to the broad equitable power of section 105(a) was not appropriate. Although the title company had been managed by the debtor, it had an economic existence independent from the debtor. Additionally, the court noted that granting relief nunc pro tunc would circumvent the time limitations on avoiding powers in section 546.In re Horsley, 2001 Bankr. LEXIS 1156, – B.R. – (Bankr. D. Utah August 17, 2001) (Boulden, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.09
Court had power to overrule creditor’s objection to exemption claims. Bankr. S.D. Fla. A creditor filed an objection to the chapter 7 debtor’s claimed exemptions. The trustee eventually filed his own objection to the exemptions, but then the debtor and trustee entered a stipulation of settlement disposing of the objection. The creditor filed an objection to the trustee’s motion to approve the settlement, arguing that the bankruptcy court did not have the authority to bind an objecting creditor who filed a separate objection to exemption and that the settlement was not in the best interests of the estate. The court held that it was within its powers to overrule the creditor’s objection pursuant to section 105(a), which conferred the broad mandate to afford debtors a fresh start and to distribute funds equitably among creditors. The court reasoned that such authority was analogous to the court’s power to enjoin creditor suits and thereby facilitate settlements (citing Collier on Bankruptcy, 15th Ed.). In re Grau, 2001 Bankr. LEXIS 1180, – B.R. – (Bankr. S.D. Fla. July 23, 2001) (Hyman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.04
State waived immunity against proceeding. Bankr. M.D. Fla. The state (Florida) department of education moved to dismiss the debtor’s complaint for hardship discharge, arguing that it had sovereign immunity under the Eleventh Amendment against the section 523(a)(8) adversary proceeding. The original student loan creditor had filed proofs of claim in the debtor’s case and assigned the loans to the department. The department argued that the filing of the proofs of claim did not waive the state’s sovereign immunity from adversary proceedings. The bankruptcy court denied the motion to dismiss, holding that the filing of the proofs of claim for the student loans constituted a waiver of the state’s Eleventh Amendment immunity against the adversary proceeding to determine dischargeability of those student loans under section 523(a)(8). When the state filed the proofs of claim, it did not waive its immunity against suits brought by the debtor that were merely related to the case. The state had, nevertheless, waived its immunity to contested matters or adversary proceedings related to the size, status, enforceability or collectability of the claims.Drivas v. Intuition, Inc. (In re Drivas), 2001 Bankr. LEXIS 1162, 266 B.R. 515 (Bankr. M.D. Fla. August 28, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14; 2:106.06
Court overruled objections to Florida debtor’s claimed homestead exemption for portion of property upon which he maintained palm tree nursery. Bankr. M.D. Fla. The chapter 7 trustee and a creditor objected to the Florida debtor’s claimed homestead. The debtor acquired the two contiguous parcels that he claimed as his homestead at different times. The trustee and creditor argued that the later acquired parcel, upon which the debtor maintained a palm tree nursery, could not be exempt as a homestead under the state (Florida) constitution. The bankruptcy court overruled the objections and held that the debtor could claim a homestead exemption under the state constitution, notwithstanding his use of the property under the facts presented. The court noted that the sole basis for the objections was the existence of an income-producing grove on the property and explained that no legal authority supported sustaining an objection to homestead because of income-producing activity by the debtor. The court stated that the mere allowance of a license, lease, profit or granting of an incorporeal hereditament, which allows for a consistent occupation of the homestead property without negating the debtor’s residency, should not be a basis for denying a homestead exemption.In re McLachlan, 2001 Bankr. LEXIS 1121, 266 B.R. 220 (Bankr. M.D. Fla. August 23, 2001) (Baynes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
Court retained jurisdiction over issues raised by settlement agreement. Bankr. M.D. Fla. The chapter 11 debtors operated as debtors in possession. One debtor was in the business of constructing semi-finished residences and another debtor serviced all the relative mortgages. Finance charges on the mortgages were reported to the IRS using the straight-line method of accounting. The IRS challenged that method, but the bankruptcy court ruled that this method was appropriate for repossessed homes. Eventually, certain creditors commenced adversary proceedings, and most of that group filed proofs of claim. In 1995, the debtors and creditors entered into a settlement agreement to resolve those claims and certain other suits pending in state courts, and the agreement was approved by the Bankruptcy Court for the Middle District of Florida. The agreement provided that the adversary proceedings be dismissed with prejudice and that the bankruptcy court retain jurisdiction for the purposes of interpretation and enforcement of the settlement. The debtors’ plan of reorganization was confirmed. In 1999, the creditors filed suit in state (Texas) court alleging breach of the settlement agreement and, thereafter, removed the litigation to the Bankruptcy Court for the Southern District of Texas. The debtors raised affirmative defenses that included assertions that (1) the cause of action had been discharged and (2) the alleged claims were disposed of by the settlement agreement. The debtors filed a motion in the Texas bankruptcy court seeking to transfer venue back to the Florida bankruptcy court. The creditors filed an objection to jurisdiction and a motion for remand, arguing that the claims alleged arose after the effective date of the settlement agreement. The Texas bankruptcy court granted the motion to transfer venue. The creditors then filed a motion to retransfer. The debtors filed a motion for summary judgment, asserting that the terms of the settlement agreement should be enforced and that the creditors were estopped from relitigating their claims, which were barred by the section 1141 discharge injunction. The Florida court denied the motion to remand, holding that it possessed jurisdiction because a federal court retains jurisdiction to enforce and interpret settlement agreements entered to settle litigation before that court and approved by it. The court also found that the creditors’ participation in the chapter 11 cases conferred jurisdiction and that the creditors were barred by res judicata, since their claims were raised or could have been raised in an earlier proceeding. Specifically, the issue of accounting methods could have been asserted at the time the settlement was made.Cavazos v. Mid-State Trust II (In re Hillsborough Holding Corp.), 2001 Bankr. LEXIS 1181, 267 B.R. 882 (Bankr. M.D. Fla. September 28, 2001) (Williamson, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1141.02, .05
Creditor who failed to comply with state statute did not hold a valid lien. Bankr. S.D. Fla. In 1996, the creditor obtained a judgment against the debtor and, in an attempt to obtain a lien on the debtor’s real property, filed in the county land records a certified copy of the judgment that did not contain the creditor’s address. After the debtor filed a chapter 11 petition in 1998, which was later converted to chapter 7, the creditor filed a secured claim based on a perfected security interest and a judgment lien on the debtor’s real property. The trustee filed an adversary proceeding to determine the validity, priority and amount of the creditor’s interest in the property pursuant to Rules 7001(1), 7001(7) and 7001(9). Subsequently, the trustee filed a motion for summary judgment, asserting that the creditor possessed no valid security interest because the creditor failed to comply with the state (Florida) statute requiring that a filed judgment must either contain the lienholder’s address or be filed simultaneously with an affidavit containing that address. The bankruptcy court granted the motion, holding that the creditor, having failed to comply with the plain and obvious requirements of the state statute, did not properly attach a lien to the debtor’s property.Bakst v. Johns (In re Johns), 2001 Bankr. LEXIS 1177, 267 B.R. 901 (Bankr. S.D. Fla. August 21, 2001) (Hyman, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7001.02, .03, .10