Collier Bankruptcy Case Update November-17-03

Collier Bankruptcy Case Update November-17-03

 


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 17, 2003

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

 

1st Cir.

28 U.S.C. § 158 Debtor lacked standing to appeal settlement of claims due to failure to object to inclusion of disputed claim and inability to demonstrate affect of successful appeal on bankruptcy administration.
Beaulac v. Tomsic (In re Beaulac) (B.A.P. 1st Cir.)


2nd Cir.

§ 503 Claim by subsidiaries of incumbent local exchange carrier for fees for postpetition telecommunications service fees provided to debtor required evidentiary hearing.
In re Adelphia Bus. Solutions, Inc. (Bankr. S.D.N.Y.)

§ 523(a)(8) Private lender that guaranteed law school loan deemed to have “funded” the loan which was therefore nondischargeable.
O’Brien v. First Marblehead Educ. Res., Inc. (In re O’Brien) (Bankr. S.D.N.Y.)

§ 1113 Collective bargaining agreements could be rejected in part as determined by bankruptcy court in order to improve likelihood of successful reorganization.
In re Horsehead Indus., Inc. (Bankr. S.D.N.Y.)

§ 1328(a)(2) Student loans cannot be discharged through chapter 13 plan.
Educational Credit Mgmt. Corp. v. Whelton (In re Whelton) (Bankr. D. Vt.)


3rd Cir.

§ 328(a) Fee cap imposed on accounting firm retained by equity security holders’ committee vacated pending bankruptcy court explanation.
Committee of Equity Sec. Holders v. Official Comm. Of Unsecured Creditors (In re Federal-Mogul, Inc.) (3d Cir.)

§ 506(a) Undersecured mortgage creditor was entitled to same distribution of unsecured debt from chapter 12 debtors as other general unsecured creditors.
In re Baker (Bankr. W.D. Pa.)

§ 542(b) Turnover proceedings are not the appropriate vehicle for debtor to liquidate disputed contract claims.
VP Energy, Inc. v. Williams Energy Mktg. & Trading Co. (In re VP Energy, Inc.) (Bankr. W.D. Pa.)


4th Cir.

§ 350 Debtor could not reopen chapter 11 case to determine if undisclosed lawsuits were estate assets after substantial completion of plan.
In re Coastline Care, Inc. (Bankr. E.D.N.C.)

§ 523(a)(1)(A) Taxes that were unassessed prior to discharge were nondischargeable and could be assessed postdischarge.
Johnson v. Commissioner (D.S.C.)


5th Cir.

§ 523(a)(4) Attorney-client relationship alone was insufficient to create fiduciary duty that would render malpractice claim nondischargeable.
Armstrong v. Jenkins (In re Jenkins) (Bankr. N.D. Tex.)

6th Cir.

§ 350(b) Bankruptcy reopened to allow debtor to add employer who sought to recover overpayment of disability payments as creditor.
In re Delacruz (Bankr. E.D. Mich.)

§ 1328 Discharge of student loan debt upon completion of plan was without effect due to debtor’s failure to bring required adversary proceeding.
In re Ruehle (Bankr. N.D. Ohio)


7th Cir.

§ 105 Bankruptcy court did not have jurisdiction to approve overbroad injunction against any entity with asbestos claims against debtor.
Official Comm. of Unsecured Creditors v. Artra Group, Inc. (In re Artra Group, Inc.) (Bankr. N.D. Ill.)

§ 105 Substantive consolidation of multiple debtors’ estates denied as not ensuring equitable treatment of all creditors.
R2 Invs., LDC v. World Access, Inc. (In re World Access, Inc.) (Bankr. N.D. Ill.)

§ 348(f)(1)(B) Value of secured claim in chapter 7 was value as set forth in chapter 13 plan prior to conversion.
In re Davis (Bankr. N.D. Ill.)


8th Cir.

§ 502 Law firm that represented multiple officers and directors of debtor could be paid as part of chapter 11 plan.
On-Line Servs. Ltd., LLC v. Bradley & Riley PC (In re Internet Navigator, Inc.) (B.A.P. 8th Cir.)


9th Cir.

§ 362 Motion to lift stay to allow lease dispute to proceed in tribal court was moot after removal to bankruptcy court.
In re Emerald Outdoor Adver., LLC (Bankr. E.D. Wash.)


11th Cir.

§ 1325(a)(5)(B) Default interest rate, rather than “zero percent” specified in financing agreement, applied to unsecured claim for car payments.
Ford Motor Credit Co. v. Olson (In re Olson) (Bankr. S.D. Ga.)


Collier Bankruptcy Case Summaries

 

1st Cir.

Debtor lacked standing to appeal settlement of claims due to failure to object to inclusion of disputed claim and inability to demonstrate affect of successful appeal on bankruptcy administration. B.A.P. 1st Cir. PROCEDURAL POSTURE: Appellant debtor filed a chapter 11 petition that was later converted to a chapter 7 petition. Appellee chapter 7 trustee sought court approval of a settlement of claims that included co-appellee creditor, and the debtor objected. The Bankruptcy Court for the District of Massachusetts later approved the settlement and the debtor appealed. OVERVIEW: The debtor’s position on appeal was that the bankruptcy court erred when it allowed an unsecured claim to the creditor where the creditor never filed a proof of claim in the debtor’s bankruptcy case. The bankruptcy appellate panel found that although the debtor strongly objected to the settlement’s approval, the debtor previously failed to raise the creditor’s lack of a proof of claim as the reason why the claim should have been rejected. The panel found that the trustee correctly attempted to compromise a lengthy dispute in order to effect an immediate, substantial benefit to the estate. The bankruptcy court did not abuse its discretion in the approval of the settlement. A chapter 7 debtor qualified as a person aggrieved for purposes of appellate standing only where he could demonstrate that defeat of the order on appeal would result in a surplus distribution to him or would affect his bankruptcy discharge. The panel found that the debtor failed to show standing in this appeal. Beaulac v. Tomsic (In re Beaulac), 2003 Bankr. LEXIS 703, 294 B.R. 815 (B.A.P. 1st Cir. July 2, 2003) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02 [back to top]

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2ndCir.

Claim by subsidiaries of incumbent local exchange carrier for fees for postpetition telecommunications service fees provided to debtor required evidentiary hearing. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In two separately administered, but related chapter 11 proceedings, subsidiaries of an incumbent local exchange carrier (“ILEC”) moved under 11 U.S.C. § 503 for payment as administrative expenses for telecommunication services provided under contracts with one of two chapter 11 debtors and rendered in the postpetition period. Each of the two debtors objected and argued that the other debtor was the responsible entity for payment. OVERVIEW: One of the debtors (“ACC”) acquired 17 business markets from the other debtor (“ABIZ”). The telecommunications services provided by the ILEC were used by ACC for its 17 markets. It appeared that ABIZ and/or ACC failed to notify the ILEC of the acquisition of the 17 markets, as the ILEC contended was required. The contracts continued to show ABIZ as the entity in contractual privity with the ILEC. The 17 markets were managed by ABIZ pursuant to management services agreements between ABIZ and ACC. Regarding the payment of administrative expenses, ABIZ argued that, because the telecommunication services provided by ILEC were provided for the benefit of ACC, ACC was responsible for payment. ACC countered that it was not responsible for payment because it was not in contractual privity with the ILEC. The court opined that if both debtors’ contentions were to be accepted, the ILEC would have supplied millions of dollars of postpetition services for which no debtor was responsible. Finding it hard to believe that such a conclusion was reachable, the court determined that an expedited evidentiary hearing was necessary in order for certain information to be presented. In re Adelphia Bus. Solutions, Inc., 2003 Bankr. LEXIS 928, 296 B.R. 656 (Bankr. S.D.N.Y. August 1, 2003) (Gerber, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.01 [back to top]

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Private lender that guaranteed law school loan deemed to have “funded” the loan which was therefore nondischargeable. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff debtor brought an action to determine the nondischargeability of her law school student loan pursuant to 11 U.S.C. § 523. The creditor moved for summary judgment as the dispute involved a question of law. The issued presented was whether the creditor, as a nonprofit institution that had guaranteed a Law Access Loan made by a private financial institution, had “funded” the loan within the meaning of 11 U.S.C. § 523(a)(8). OVERVIEW: The debtor argued that the use of the disjunctive “or” in 11 U.S.C. § 523(a)(8) meant that a program guaranteed by a nonprofit institution such as the creditor fell outside the exception to discharge found in 11 U.S.C. § 523(a)(8), because in order to “fund” a loan, the creditor was required to actually provide or disburse funds directly to the borrower and not merely guarantee those funds. However, 11 U.S.C. § 102(5) provided that the word “or,” as used in the Bankruptcy Code, was not exclusive. Thus, the term “guaranteed” could not be assumed to have been intentionally omitted from the second part of 11 U.S.C. § 523(a)(8), because the first and second clauses of 11 U.S.C. § 523(a)(8) were not mutually exclusive under 11 U.S.C. § 102(5). Without the creditor’s guarantee, the private lender would not have loaned the funds to the debtor. Thus, this guarantee of the loan constituted a meaningful part in providing funds and the creditor could be considered to have “funded” the educational loan. Finally, the bankruptcy court rejected the debtor’s public policy argument that her work as a public interest lawyer favored a discharge. O’Brien v. First Marblehead Educ. Res., Inc. (In re O’Brien), 2003 Bankr. LEXIS 1436, 299 B.R. 725 (Bankr. S.D.N.Y. October 10, 2003) (Morris, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Collective bargaining agreements could be rejected in part as determined by bankruptcy court in order to improve likelihood of successful reorganization. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Related debtors filed chapter 11 petitions and the cases were jointly administered. Debtors moved to reject collective bargaining agreements and terminate retiree benefits, pursuant to 11 U.S.C. §§ 1113, 1114, and unions objected. OVERVIEW: The Bankruptcy Code allowed debtors in possession to reject their collective bargaining agreements and terminate their obligations to pay retiree benefits, pursuant to 11 U.S.C. § 1113, 1114, provided that debtors’ satisfied the procedural and substantive requirements. The parties conceded that debtors faced serious financial difficulties and needed to cut costs in order to survive. The court found that unions did not contest the quality or quantity of the financial information that debtors relied on, nor did unions claim that debtors sought to have unions shoulder a disproportionate burden. The court found that the modification or termination of the obligations would not guarantee successful reorganizations, or necessarily make debtors’ reorganizations likely. It would, however, make reorganizations more likely where it permitted debtors to operate for additional time. It was undeniable to all that debtors must cut their labor costs if they are to have any chance to avoid an immediate shut down and liquidation. The court determined which agreements could be rejected. In re Horsehead Indus., Inc., 2003 Bankr. LEXIS 1435, — B.R. — (Bankr. S.D.N.Y. November 5, 2003) (Bernstein, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1113.01 [back to top]

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Student loans cannot be discharged through chapter 13 plan. Bankr. D. Vt. PROCEDURAL POSTURE: Student loan creditor brought an adversary action against defendant debtor, pursuant to 28 U.S.C. §§ 157 and 1334, challenging the debtor’s chapter 13 confirmation order that purported to effect a discharge of his student loan. The creditor argued that the loan could not be discharged by the confirmation order alone, where the chapter 13 debtor had not brought an adversary action. OVERVIEW: The creditor was the successor in interest to Sallie Mae, which had consolidated the male debtor’s eight student loans. The debtors filed a chapter 13 petition, listing the creditor as the holder of a unsecured non-priority claim for an educational loan, which constituted the majority of the couple’s unsecured debt. The debtors’ confirmation plan stated that the confirmation would constitute a finding that excepting the debtor’s educational loans from discharge would impose an undue hardship upon the debtors. The debtors never filed an adversary proceeding, and the creditor or its predecessor in interest never objected to the plan confirmation. Following the discharge, the creditor brought its adversary action, challenging the discharge. The debtors argued that the claim was barred by res judicata, but the court adopted the minority position, reasoning that 11 U.S.C. § 1328(a)(2) stated unequivocally that a chapter 13 plan cannot discharge a student loan, and that a provision with no proper place in a chapter 13 plan has no eligibility for res judicata status. Educational Credit Mgmt. Corp. v. Whelton (In re Whelton), 2003 Bankr. LEXIS 1427, 299 B.R. 306 (Bankr. D. Vt. September 9, 2003) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1328.02[3[d] [back to top]

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3rd Cir.

Fee cap imposed on accounting firm retained by equity security holders’ committee vacated pending bankruptcy court explanation. 3d Cir. PROCEDURAL POSTURE: Appellant, the official committee of equity security holders (equity committee) in debtor’s chapter 11 bankruptcy, appealed from an order of the United States District Court for the District of Delaware that affirmed a bankruptcy court order that granted the equity committee’s application to retain an accounting firm, but limited the amount the accounting firm could charge for its services, on motion of appellee creditors’ committee. OVERVIEW: The official unsecured creditors’ committee objected to the appointment of the accounting firm, which the equity committee claimed was for the purpose of giving it advice during the debtor’s reorganization. The bankruptcy court was concerned that the debtor was likely insolvent and that the equity committee, which in that case would be unlikely to recover anything, should rely on financial information compiled by the debtor’s advisors, already available, and ordered the accounting firm’s fees to be capped at $30,000 per month. The equity committee argued that the cap on fees was not authorized under 11 U.S.C. § 328(a), was unsupported by the evidence before the bankruptcy court, and that 11 U.S.C. § 1103(b) precluded the court ordering it to rely upon the debtor’s financial data. The court of appeals held that the bankruptcy court had the authority to cap the fees, and could modify the terms of a professional’s proposed employment under 11 U.S.C. § 328(a). However, the record was insufficient to determine whether the cap was necessary in order to satisfy the statutory requirement of reasonableness. The bankruptcy court had not clearly stated the grounds for the limitation. Committee of Equity Sec. Holders v. Official Comm. Of Unsecured Creditors (In re Federal-Mogul, Inc.) 2003 U.S. App. LEXIS 22786, — F.3d — (3d Cir. October 31, 2003) (Alito, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.02 [back to top]

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Undersecured mortgage creditor was entitled to same distribution of unsecured debt from chapter 12 debtors as other general unsecured creditors. Bankr. W.D. Pa. PROCEDURAL POSTURE: Debtors moved to establish and authorize the payoff in full of allowed claims in their chapter 12 bankruptcy case. Creditor held a second-position mortgage lien against both of the properties as well as a first-position security interest in livestock and equipment. The creditor was undersecured. The creditor objected to the proposed distribution because the debtors made no provision for payment of the unsecured portion of its allowed claim. OVERVIEW: The debtors offered no valid reason for failing to include the creditor in the distribution. The debtors claimed that the creditor was not entitled to an unsecured claim because it took no step to establish a deficiency claim. However, they offered no authority for the proposition that the creditor was required to do so in light of the clear language of 11 U.S.C. § 506(a). The bankruptcy court also rejected the debtors’ claim that the precise amount that the creditor received from a sheriff’s sale of their property was not known. Given that the debtors proposed paying other general unsecured creditors with allowed claims in full, the creditor was entitled to the same treatment. In re Baker, 2003 Bankr. LEXIS 1439, — B.R. — (Bankr. W.D. Pa. October 31, 2003) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.02 [back to top]

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Turnover proceedings are not the appropriate vehicle for debtor to liquidate disputed contract claims. Bankr. W.D. Pa. PROCEDURAL POSTURE: In a bankruptcy case, debtor filed an adversary complaint bringing three turnover actions, a successor liability claim for the relief sought in the turnover actions and an objection to the successors’ two proofs of claim. In their answer, the successors raised three counter claims that mirrored their proofs of claim. The successors moved for summary judgment. OVERVIEW: Inter alia, debtor sought a reduction in the initial purchase price that it paid to the successor’s pursuant to a stock purchase agreement. The court concluded that the price reduction was pointless and not authorized by the purchase agreement. In count 2, debtor sought recovery for various post-closing transactions, including costs and expenses debtor paid after the closing date that debtor claimed the successors should have paid before the closing date, various “balancing adjustments,” accounts receivable, and customer credits allegedly received by the successor but not turned over to debtor. The court could not grant summary judgment regarding the costs and expenses because, inter alia, the parties disputed, and the court could not resolve contractual ambiguities regarding whether the Stock Purchase Agreement and the Operating Agreement supported debtor’s position. As to the successors’ indemnification counterclaim against debtor regarding the claims of an individual for unissued stock, the court could not determine whether the individual advanced his state court action so as to redress debtor’s failure or refusal to fulfill a stock purchase agreement obligation. VP Energy, Inc. v. Williams Energy Mktg. & Trading Co. (In re VP Energy, Inc.), 2003 Bankr. LEXIS 1411, — B.R. — (Bankr. W.D. Pa. October 28, 2003) (McCullough, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:542.03 [back to top]

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4th Cir.

Debtor could not reopen chapter 11 case to determine if undisclosed lawsuits were estate assets after substantial completion of plan. Bankr. E.D.N.C. PROCEDURAL POSTURE: Debtor filed a chapter 11 petition. Based on debtor’s representations the court entered a final decree related to the chapter 11 plan of reorganization and found that the plan was substantially consummated. The case was closed, however, debtor moved to reopen the case, pursuant to 11 U.S.C. § 350, and asked the court to determine whether two lawsuits filed postconfirmation were estate assets. Two creditors objected. OVERVIEW: The court found that it was undisputed that neither lawsuit was disclosed as an asset of the estate in debtor’s schedules, statements, disclosure statement, or the chapter 11 plan of reorganization. Debtor’s motion to reopen was filed after the substantial consummation of its confirmed chapter 11 plan of reorganization. Less than a month after debtor’s plan was confirmed, debtor was a plaintiff in two separate lawsuits that advanced claims that appeared to have existed prepetition, but were not disclosed. The debtor’s petition, schedules and statements, disclosure statement, and plan did not mention these claims and creditors were given no notice of their existence. Exactly one year after confirmation, and more than seven months after substantial consummation of the plan, debtor then filed a motion to reopen the case to permit the administration of these assets. The court concluded that debtor’s motion to reopen pursuant to 11 U.S.C. § 350 must be denied because the court no longer had the ability to modify or revoke debtor’s confirmed chapter 11 plan of reorganization. In re Coastline Care, Inc., 2003 Bankr. LEXIS 1442, 299 B.R. 373 (Bankr. E.D.N.C. September 24, 2003) (Leonard, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3.350.01 [back to top]

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Taxes that were unassessed prior to discharge were nondischargeable and could be assessed postdischarge. D.S.C. PROCEDURAL POSTURE: In the bankruptcy court, the plaintiff debtor filed an action alleging the Internal Revenue Service had violated 11 U.S.C. § 362 and 11 U.S.C. § 524. The bankruptcy court granted summary judgment for defendant, the Commissioner of the Internal Revenue Service. Debtor appealed. The matter was referred to a magistrate judge for a report and recommendation. OVERVIEW: Before debtor filed for bankruptcy, the IRS had sent to a partnership in which debtor was a limited partner a notice of deficiency. The partnership had a case pending in the United States Tax Court when debtor filed for chapter 7 bankruptcy relief. After debtor received a discharge of his debts, the partnership’s case was resolved, and the IRS assessed taxes against debtor for the partnership’s unpaid taxes. Debtor returned to the bankruptcy court, alleging the tax assessment violated 11 U.S.C. § 362 and 11 U.S.C. § 524. The bankruptcy court granted summary judgment for the Commissioner. The debtor appealed, arguing that the bankruptcy court erred by holding that the IRS’s claims against debtor were not discharged in his bankruptcy case. The magistrate judge found no error. While the automatic stay was in effect, the IRS did not attempt to collect or assess taxes against debtor, and debtor himself did not have a case pending in the United States Tax Court. Together, 11 U.S.C. § 523(a)(1)(A) and 11 U.S.C. § 507(a)(8)(iii) exempted unassessed taxes from the discharge. The IRS had not assessed the partnership’s taxes against debtor before he filed his bankruptcy petition. Johnson v. Commissioner, 2003 U.S. Dist. LEXIS 19691, — B.R. — (D.S.C. August 5, 2003) (McCrorey, U.S.M.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.07 [back to top]

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5th Cir.

Attorney-client relationship alone was insufficient to create fiduciary duty that would render malpractice claim nondischargeable. Bankr. N.D. Tex. PROCEDURAL POSTURE: Plaintiff creditor sued defendant debtor, an attorney, in district court alleging claims for legal malpractice, breach of fiduciary duty, and other claims. In the bankruptcy court, the creditor alleged that the judgment he would obtain in the district court was nondischargeable under 11 U.S.C. §§ 523(a)(2), (4), and (6). The attorney moved to dismiss under Fed. R. Bankr. P. 7012, which was converted to a motion under Fed. R. Bankr. P. 7056. OVERVIEW: Because the creditor alleged malpractice in the handling of a prior litigation, under Texas law, the creditor was required to establish, through expert testimony, both the standard of care and causation. The creditor, a layperson, stated in his affidavit that he provided the attorney with certain specified cases and statutes that she failed to argue to the state courts. This was insufficient. Even assuming that the creditor satisfied the causal connection between the attorney’s alleged malpractice and his damages, he failed to submit any evidence that the attorney’s alleged false representations were made with the requisite intent to deceive. As to the creditor’s of breach of fiduciary duty, his reliance on attorney-client relationship, without more, was insufficient to create the fiduciary capacity required to state a proper claim under 11 U.S.C. § 523(a)(4). The creditor’s allegations stated, at most, a malpractice claim against the attorney, not a claim for breach of fiduciary duty. Finally, the creditor conceded that there was no evidence to support his contentions that the attorney committed malpractice with the subjective motive to inflict injury upon him. Armstrong v. Jenkins (In re Jenkins), 2003 Bankr. LEXIS 1447, — B.R. — (Bankr. N.D. Tex. November 5, 2003) (Houser, B.J.).

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

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6th Cir.

Bankruptcy reopened to allow debtor to add employer who sought to recover overpayment of disability payments as creditor. Bankr. E.D. Mich. PROCEDURAL POSTURE: Debtor husband went on sick leave from his employer and received disability benefits (“DB”) and Social Security (“SS”) benefits. He filed a grievance and was reinstated to work. Debtors sought and got a chapter 7 discharge. The employer withheld funds from his paycheck to recover an alleged overpayment of DB because the SS benefits had overlapped his DB. Debtors moved to reopen their bankruptcy case to add the employer as an omitted creditor. OVERVIEW: The issue of dischargeability was central to the case. The parties disagreed whether the amount of the overpayment, assuming that there was a balance due, was a debt and, if so, whether or not it was discharged. The bankruptcy court held in sum: (1) it had core jurisdiction to determine the existence of a debt and whether, such debt was subject to the discharge injunction; (2) cause existed to reopen the case for entry of an order memorializing the court’s findings; (3) debtors did not meet their burden of proving that the disposition of the return to work grievance resolved the overpayment issue; (4) the employer was authorized to recover $31,791 of the $32,101 assumed award of SS benefits; (5) the employer had both a right to recoup against future disability benefits and a right to setoff against wages under the employer’s disability plan; (6) the employer’s right to setoff against wages created a right to payment and thus liability on a claim, and a debt which was discharged; and (7) the employer’s right to recoup against future benefits did not create a right to payment, thus it did not create liability on a debt and was not dischargeable under the Bankruptcy Code. In re Delacruz, 2003 Bankr. LEXIS 1425, — B.R. — (Bankr. E.D. Mich. October 31, 2003) (Shefferly, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:350.03 [back to top]

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Discharge of student loan debt upon completion of plan was without effect due to debtor’s failure to bring required adversary proceeding. Bankr. N.D. Ohio PROCEDURAL POSTURE: Debtor sought and was granted discharge of her student loan debt upon confirmation of her chapter 13 reorganization plan. More than a year later, creditor student loan lender moved pursuant to Fed. R. Civ. P. 60(b)(4) and (6), incorporated by Fed. R. Bankr. P. 9024, for relief from the discharge. OVERVIEW: Debtor did not file an adversary proceeding to determine the dischargeability of her student loan debt in the chapter 13 case or her previous chapter 7 case but rather confirmed and completed a chapter 13 plan containing a clearly illegal student loan provision. The plan provided for discharging the student loan without an adversary proceeding. The lender did not object or appeal. Upon completion of her plan, debtor received her discharge, including a “discharge by declaration” of the remainder of her student loan debt. Inter alia, the court held that plan provision had no res judicata effect because debtor failed to institute an adversary proceeding that was necessary to discharge the debt based on hardship; the only grounds upon which a student loan debt could be discharged. Institution of an adversary proceeding would have ensured that the lender was given notice that its debt was subject to dischargeability at confirmation. However, because the lender did not receive a summons, it did not receive adequate notice. Thus, the lender did not receive due process of law and the order discharging the debt was void. In re Ruehle, 2003 Bankr. LEXIS 920, 296 B.R. 146 (Bankr. N.D. Ohio July 17, 2003) (Kendig. B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1328.01 [back to top]

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7th Cir.

Bankruptcy court did not have jurisdiction to approve overbroad injunction against any entity with asbestos claims against debtor. Bankr. N.D. Ill. PROCEDURAL POSTURE: Defendant debtor filed a chapter 11 petition. Plaintiff unsecured creditors’ committee, (the committee) filed an adversary action against the debtor and defendant corporation. The committee moved for authority to settle action and approval of the proposed settlement agreement. Creditor objected to the proposed settlement due to the release and injunction language used. OVERVIEW: The court found that the settlement language contained an important release that was really the issue of this matter. The proposed settlement that the committee offered for approval sought to bind any entity that might have any sort of asbestos related claim whatsoever against the corporation, its insiders, or subsidiaries if such claim was in anyway connected with the debtor or its subsidiaries. The committee asserted that the amount of the settlement was commensurate with the present value that the bankruptcy estate would receive if the committee prevailed in its complaint and substantively consolidated the corporation with the debtor. The injunction proposed raised serious jurisdictional concerns for the court. The proposed injunction attempted to prohibit litigation over which the court lacked jurisdiction. It was not within the court’s jurisdiction to prevent an action that would have no effect whatsoever on the bankruptcy estate and would not be related to the bankruptcy case. The court advised the parties to revise the settlement agreement, narrow their proposed injunction, and request the court’s approval. Official Comm. of Unsecured Creditors v. Artra Group, Inc. (In re Artra Group, Inc.), 2003 Bankr. LEXIS 1441, — B.R. — (Bankr. N.D. Ill. September 30, 2003) (Hollis, B.J.).

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

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Substantive consolidation of multiple debtors’ estates denied as not ensuring equitable treatment of all creditors. Bankr. N.D. Ill. PROCEDURAL POSTURE: Debtors and official committee of unsecured creditors moved for substantive consolidation of debtors’ estates. One creditor (creditor A) filed a second amended adversary complaint, seeking a declaration that substantive consolidation was unlawful and inequitable, that a master bank account was owned by a specific debtor (debtor A), and that sums deposited into the account by another debtor (debtor B) were capital contributions to debtor A. OVERVIEW: The issue of ownership of the account was determined by state law. The court did not engage in a conflict of laws analysis, as it could not identify a meaningful difference between the relevant state laws. The court concluded the parent of debtors was the owner of the account. Other than the first of the rebuttal factors (i.e., which party opened the account) all relevant considerations weighed in favor of the parent. The name on the account was the prior name of debtor A, but after a 1998 reorganization the name belonged to the parent. Inter alia, the officer of the parent, who had approval authority, was not an officer of debtor A until after the chapter 11 petitions were filed. Next, the court concluded that substantive consolidation was not proper under either the Eastgroup Properties test or Augie/Restivo test (which the court considered truer to the principles giving rise to the doctrine). Inter alia, the court found insufficient entangling of affairs, despite the fact that, inter alia, debtors published consolidated financial statements and tax returns, there were intercorporate guaranties and a centralized cash management system, and there were overlapping officers. R2 Invs., LDC v. World Access, Inc. (In re World Access, Inc.), 2003 Bankr. LEXIS 1424, — B.R. — (Bankr. N.D. Ill. October 3, 2003) (Sonderby, B.J.).

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

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Value of secured claim in chapter 7 was value as set forth in chapter 13 plan prior to conversion. Bankr. N.D. Ill. PROCEDURAL POSTURE: Debtor filed a chapter 13 petition and a chapter 13 plan was confirmed with creditor’s secured claim. The case was later converted to chapter 7 and debtor moved to redeem his vehicle, pursuant to 11 U.S.C. § 722, and creditor objected. OVERVIEW: The court framed the issue as whether creditor’s allowed secured claim was valued in the chapter 13 case before conversion. The court found that the secured claim was valued and this valuation amount was the amount that debtor was required to pay to redeem the vehicle from creditor, pursuant to 11 U.S.C. § 722. The court noted that this was the first reported case where the application of 11 U.S.C. § 348(f)(1)(B) benefited a creditor in general. The value of the secured claim in the chapter 7 case was the value described in the chapter 13 plan. The chapter 13 plan was both filed and confirmed after creditor filed its proof of claim. The fact that the plan valued creditor’s secured claim differently than the proof of claim was tantamount to a challenge to the secured claim. The plan stated that as compared to proofs of claim, it controlled the amount of secured claims. While 11 U.S.C. § 506(a) directed the court to value secured claims by taking the purpose of the valuation into account, judicial interpretation that developed on the statute led to a direct conflict with the plain language of 11 U.S.C. § 348(f)(1)(B). In re Davis, 2003 Bankr. LEXIS 1428, — B.R. — (Bankr. N.D. Ill. October 27, 2003) (Hollis, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:348.04
[back to top]

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8th Cir.

Law firm that represented multiple officers and directors of debtor could be paid as part of chapter 11 plan. B.A.P. 8th Cir. PROCEDURAL POSTURE: Debtor filed a chapter 11 petition. Debtor filed a chapter 11 plan that proposed to pay the legal fees of former directors and officers to appellee law firm and appellant creditor objected. The court agreed with the law firm and creditor appealed from the Bankruptcy Court for the Northern District of Iowa. OVERVIEW: Creditor claimed that the attorneys’ fees of debtor’s officers and directors could only be paid if the officers and directors were wholly successful in the underlying litigation, which creditor asserted that they were not because debtor incurred liability. Creditor also asserted that the law firm’s representation constituted a conflict of interest and any fees should be disgorged as such representation was contrary to Iowa law. The bankruptcy appellate panel found that the bankruptcy court correctly determined that the law firm’s fees were payable pursuant to the mandatory indemnification provision in former Iowa Code § 490.852. The bankruptcy appellate panel rejected creditor’s claim that debtor simply had no meaningful existence without the actions of the officers and directors. The panel found that in the failure to pierce debtor’s corporate veil, the individual officers and directors were wholly successful on the merits or otherwise in the litigation. The claim for attorneys’ fees was allowed under 11 U.S.C. § 502 where the bankruptcy court determined that the law firm disclosed the potential conflict of interest inherent in multiple representation, which was waived. On-Line Servs. Ltd., LLC v. Bradley & Riley PC (In re Internet Navigator, Inc.), 2003 Bankr. LEXIS 1440, — B.R. — (B.A.P. 8th Cir. November 6, 2003) (Venters, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.01 [back to top]

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9th Cir.

Motion to lift stay to allow lease dispute to proceed in tribal court was moot after removal to bankruptcy court. Bankr. E.D. Wash. PROCEDURAL POSTURE: Debtor filed a chapter 11 petition and moved to assume certain executory contracts, which included certain leases that were the subject of a Puyallup Tribal Court action. A motion was filed to lift the automatic stay in order to continue with the second Tribal Court action. The Tribal Court action was removed and then transferred to the district court. OVERVIEW: This dispute involved the competing interests of a leaseholder and a lienholder in Indian trust land. Creditor maintained that its nonjudicial foreclosure under state law terminated the lessee’s interest. Debtor, who held the lessee’s interest, maintained that due to defects in the recording and processing of title documents, lienholder’s interests were inferior to those of debtor and the foreclosure had no effect on debtor’s interests in the property. The conclusion that substantive state law controlled this priority dispute resulted from the application of 25 U.S.C. § 483(a). The court determined that leaseholder’s interest under the deed of trust was superior to the interest of lienholder, and foreclosure terminated and extinguished lienholder’s junior interest in the real property. The deed of trust was effective when approval was obtained and the failure to record that deed of trust with United States Bureau of Indian Affairs (“BIA”) did not delay its effective date. The earliest recording, whether with BIA or the Washington State county auditor, was the notice that determined the priority of the interest granted in the recorded document. In re Emerald Outdoor Adver., LLC, 2003 Bankr. LEXIS 1426, — B.R. — (Bankr. E.D. Wash. October 31, 2003) (Williams, C.B.J.).

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

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11th Cir.

Default interest rate, rather than “zero percent” specified in financing agreement, applied to unsecured claim for car payments. Bankr. S.D. Ga. PROCEDURAL POSTURE: Creditor held a security interest in debtor’s vehicle. The creditor objected to the debtor’s proposed chapter 13 plan on the grounds that the proposed rate of interest did not adequately protect its interest in the vehicle. The original financing contract provided for a “zero percent” interest, and in his proposed plan, the debtor argued that this interest was the appropriate rate. OVERVIEW: The debtor argued for enforcement of the “zero percent” contract interest rate because it was the bargained for rate that the creditor accepted when the debtor purchased the vehicle. However, the creditor also bargained to receive a certain amount a month in car payments and to be paid the debt in full. Because the Debtor was in chapter 13, the creditor would not receive the monthly payments in full, would not receive interest on its allowed unsecured claim, and would not receive payment in full. Accordingly, the then-current interest rate necessary for the creditor to have received the present value of the collateral controlled, not the contract interest rate. The debtor presented no evidence at the confirmation hearing to establish the appropriate interest rate. Because no evidence was presented, S.D. Ga. Bankr. R. 3001-2 specified a default rate of 12 percent. Ford Motor Credit Co. v. Olson (In re Olson), 2003 Bankr. LEXIS 1446, 300 B.R. 96 (Bankr. S.D. Ga. September 17, 2003) (Dalis, C.B.J.).

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

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