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
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Collier Bankruptcy Case Summaries

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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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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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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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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