Collier Bankruptcy Case Update November-17-03
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 17, 2003
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.)
§ 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.)
§ 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.)
§ 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.)
§ 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.)
§ 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)
§ 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.)
§ 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.)
§ 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.)
§ 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
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]
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]
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]
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]
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]
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]
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]
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)
Collier on Bankruptcy, 15th Ed. Revised 5:542.03 [back to top]
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]
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)
Collier on Bankruptcy, 15th Ed. Revised 4:523.07 [back to top]
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]
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]
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]
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]
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]
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]
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]
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]
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 [back to top]