Collier Bankruptcy Case Update November-19-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Updates
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 19, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 552(b)(1) Security interest in law firm’s receivables survived firm’s dissolution and one partner’s bankruptcy and attached to postpetition payment of fees.
Cadle Co. v. Schlichtmann (1st Cir.)
2d Cir.
§ 522(g) Debtor entitled to exemption in wages garnished within 90 days prior to chapter 7 filing.
Price v. Mfrs. & Traders Trust Co. (In re Price) (Bankr. W.D.N.Y.)§ 524 Debtor precluded from asserting claims under Fair Debt Collection Practices Act premised on conduct remedied or governed by Bankruptcy Code.
Degrosiellier v. Solomon & Solomon, P.C. (In re DeGrosiellier) (N.D.N.Y.)§ 1129(a)(3) Debtor’s second chapter 11 case, filed after plan in prior case proved to be unfeasable, was not filed in good faith.
In re Tillotson (Bankr. W.D.N.Y.)
3d Cir.
§ 109(e) Based on amount of noncontingent, liquidated unsecured debt, debtor was not eligible for chapter 13 relief.
In re Heleva (E.D. Pa.)§ 506(a) Secured claim was limited to debtor’s interest in property.
Veneziale v. Midfirst Bank (In re Veneziale) (Bankr. E.D. Pa.)28 U.S.C. § 157(b) Dispute over insurance coverage was a core matter.
Northwestern Inst. of Psychiatry, Inc. v. Travelers Indemnity Co. (In re Northwestern Inst. of Psychiatry, Inc.) (Bankr. E.D. Pa.)
5th Cir.
§ 157(e) Court lacked jurisdiction because ancillary proceeding had not been commenced.
Blackwell v. Rio Mgmt., Inc. (In re Blackwell ex rel. I.G. Servs., Ltd.) (Bankr. W.D. Tex.)§ 541(a)(2) Chapter 7 trustee had the authority to deal with community property over the objection of the nondebtor spouse. McCloy v. Silverthorne (In re McCloy) (N.D. Tex.)
28 U.S.C. § 1334(b) Court of Appeals held that bankruptcy court lacked postconfirmation jurisdiction over causes of action that did not bear on the debtor’s plan.
Bank of La. v. Craig’s Stores of Texas, Inc. (In re Craig’s Stores of Texas, Inc.) (5th Cir.)
6th Cir.
§ 362(a) Automatic stay in individual debtor’s chapter 7 case did not affect garnishment proceeding against alleged 'alter ego' of corporation controlled by debtor.
NLRB v. M & V Painting, Inc. (E.D. Mich.)§ 362(d) Court granted first lienholders’ motion for relief from stay.
In re Franke (Bankr. W.D. Mich.)§ 365(a) Lessor of mobile homes could pursue state court remedies against debtors, but there was no basis for concluding that debtors assumed mobile home lease.
In re Werbinski (Bankr. E.D. Mich.)
7th Cir.
§ 362(d) Debtor held equitable interest in residence based on prebankruptcy resulting trust; tax purchaser’s efforts to obtain tax deed violated stay.
Davenport v. S.I. Secs. (In re Davenport) (Bankr. N.D. Ill.)Rule 7055 Motion for default judgment was granted.
Secs. Investor Prot. Corp. v. R.D. Kushnir & Co. (Bankr. N.D. Ill.)
8th Cir.
§ 330(a)(1) Motion for priority of claim was denied.
In re Ramey (Bankr. S.D. Iowa)§ 362(a) Violation of stay resulted in void tax deed.
In re Donovan (Bankr. S.D. Iowa)
9th Cir.
§ 362(b)(4) Governmental units allowed to continue litigation against debtor based on consumer protection statutes.
First Alliance Mortg. Co. v. First Alliance Mortg. Co. (In re First Alliance Mortg. Co.) (C.D. Cal.)§ 502(a) Usurious interest rate did not render creditor’s entire claim unallowable.
In re Rose (Bankr. N.D. Cal.)§ 522(c) Judgment creditor did not have right to lien on exempt property that had appreciated postpetition.
S & C Home Loans, Inc. v. Farr (In re Farr) (Bankr. N.D. Cal.)§ 525(a) Disciplinary proceedings against debtor attorney were not stayed.
Franceschi v. State Bar of California (In re Franceschi) (B.A.P. 9th Cir.)
11th Cir.
§ 506 Plaintiffs were entitled to equitable lien on insurance proceeds improperly retained by chapter 13 debtors.
Maurer v. Maurer (In re Maurer) (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.
Security interest in law firm’s receivables survived firm’s dissolution and one partner’s bankruptcy and attached to postpetition payment of fees. 1st Cir. The debtor, an attorney, was a partner in a law firm that represented plaintiffs in certain environmental litigation in the early 1990s. At that time, the law firm borrowed funds from a bank and granted the bank a security interest in its accounts receivable, which included a contingency fee agreement with the environmental litigation plaintiffs. The bank sold its assets, including its security interest in the law firm’s assets, to a third-party successor in interest. A settlement agreement was reached in the environmental litigation several months later. No final distribution of the litigation proceeds had been made when the debtor filed his chapter 7 petition and caused the law firm’s dissolution. After he received his chapter 7 discharge, the debtor continued to work on the environmental matter until its final resolution. Thereafter, the successor in interest filed a federal district action against the debtor and his former law partners seeking to enforce its security interest. Cross-motions for summary judgment were denied, and defendants other than the debtor were dismissed before trial. After trial, the jury returned a verdict for the debtor, and the successor in interest appealed. The Court of Appeals for the First Circuit reversed and remanded the matter to the district court for a determination of the amount of settlement proceeds that the debtor retained after he made payments to his former partners and before he received notice of the successor in interest’s claim. The court held that a security interest in a law firm’s accounts receivable, including an account arising from a contingent fee agreement, survives the firm’s dissolution and the bankruptcy of one of its partners and attaches to a postbankruptcy payment of the fee. The court concluded that the debtor’s claim to have performed work on the environmental litigation in his individual capacity after the firm dissolved could not defeat the successor in interest’s rights as a creditor with a security interest in the fee. The court also rejected the debtor’s argument that the postpetition fees from the litigation were after-acquired personal property free of the successor in interest’s security interest.Cadle Co. v. Schlichtmann, 2001 U.S. App. LEXIS 21534, 267 F.3d 14 (1st Cir. October 4, 2001) (Schwarzer, D.J. (sitting by designation)).
Collier on Bankruptcy, 15th Ed. Revised 5:552.02
2nd Cir.
Debtor entitled to exemption in wages garnished within 90 days prior to chapter 7 filing. Bankr. W.D.N.Y. The debtor filed an adversary proceeding to avoid an allegedly preferential transfer of funds obtained by a creditor through garnishment of the debtor’s wages within 90 days prior to his chapter 7 filing. The creditor moved to alter or amend the bankruptcy court’s previous order denying its motion for summary judgment, and for other relief. The creditor asserted, in support of its motion, that the debtor had no claim to an exemption for any portion of wages withheld by garnishment and/or that the debtor held no interest in the garnished funds to which he could assert a claim. The bankruptcy court denied the creditor’s motion, based upon the debtor’s entitlement to an exemption for the transferred asset pursuant to section 522(g). The court explained that because section 522(g) requires that transferred assets be treated as if no involuntary transfer has occurred, no consequence attached to the fact that the funds garnished in this case went to the creditor and were not cash in the debtor’s possession at the time of its chapter 7 filing. Moreover, to the extent that the creditor’s lien was avoided as a preference, the creditor could no longer usurp the debtor’s ownership interest, and the only remaining rights to the garnished funds were those of the debtor and his estate upon avoidance of the lien.Price v. Mfrs. & Traders Trust Co. (In re Price), 2001 Bankr. LEXIS 1147, 266 B.R. 572 (Bankr. W.D.N.Y. August 30, 2001) (Bucki, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.12[1]
Debtor precluded from asserting claims under Fair Debt Collection Practices Act premised on conduct remedied or governed by Bankruptcy Code. N.D.N.Y. A chapter 7 debtor filed a class action complaint in federal district court against a law firm. The complaint alleged that the law firm’s practices violated section 1692 of the Fair Debt Collection Practices Act ('FDCPA'), 15 U.S.C. § 1692, which prohibits debt collectors from engaging in abusive, deceptive and unfair debt collection practices. Specifically, the debtor alleged that language contained in a collection letter sent by the law firm to the debtor induced the debtor to pay money on a discharged debt and enter into a redemption agreement without seeking approval from the bankruptcy court. According to the complaint, the law firm’s actions were part of a larger scheme by its client, a creditor, to unlawfully obtain money for 'over-valued' personal household property from individuals like the debtor who held credit cards issued by the creditor and had sought protection from debt in bankruptcy. The law firm moved to dismiss the amended class action complaint filed against it for failure to state a cause of action. The district court granted the law firm’s dismissal motion. The court held that the plaintiff was precluded from asserting two of its claims for money damages pursuant to the FDCPA because they were premised on conduct (i.e., the law firm’s alleged violations of the Bankruptcy Code by seeking payment from the debtor on a debt discharged in bankruptcy) that was otherwise remedied or governed by provisions of the Bankruptcy Code. The court also dismissed for failure to state a claim the debtor’s claim that the law firm violated the FDCPA by failing to advise her that she had rights in connection with the creditor’s ability to repossess her property. Finally, the court found that the debtor’s claim, based on the law firm’s valuation of collateral pursuant to the creditor’s 'bogus valuation schedule,' did not state a claim under the FDCPA and was not supported by caselaw.Degrosiellier v. Solomon & Solomon, P.C. (In re DeGrosiellier), 2001 U.S. Dist. LEXIS 15254, – B.R. – (N.D.N.Y. September 27, 2001) (Mordue, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.01
Debtor’s second chapter 11 case, filed after plan in prior case proved to be unfeasable, was not filed in good faith. Bankr. W.D.N.Y. The chapter 11 debtor, a dairy farmer, had been a debtor in an earlier chapter 11 case in which a plan was confirmed. In the earlier case, the debtor and the bank agreed that the bank held a fully-secured claim of over $1.4 million and, on the basis of careful projections and detailed planning, also agreed that the debtor could retire the claim at the rate of $17,000 per month over the course of 20 to 25 years. Although the debtor made scheduled payments under the plan for about two years, the plan proved unfeasible, and on the eve of a foreclosure sale and replevin of his herd, the debtor filed his second chapter 11 petition. The plan proposed by the debtor in the new chapter 11 case provided for the stripping down of the creditor’s prior fully-secured claim to a claim of only $870,000. The claim would be fully paid over 30 years, with the balance allowed as an unsecured claim to be paid 20 cents on the dollar over the course of five years. The bank moved to dismiss the debtor’s second chapter 11 filing on the grounds that it was filed in bad faith. The bankruptcy court agreed and held that the debtor’s second filing was an impermissible effort to modify the prior plan to the substantial prejudice of the objecting creditor and without objective good faith in the form of fundamental fairness. The court acknowledged that the debtor demonstrated subjective good faith inasmuch as he was trying to save his family’s farm and had suffered some devastating reversals of fortune. Nevertheless, the court refused to grant the debtor permission to say to the creditor (albeit with subjective good faith), 'Now that your collateral has been eroded so substantially under the Court’s ’protection’ and my management and control, I am entitled to keep the property under my management and control because I get the benefit of the fact that I now am permitted to pay you less.' The court ordered that unless the debtor proposed a permissible plan within 20 days of its order, the case would be dismissed.In re Tillotson, 2001 Bankr. LEXIS 1148, 266 B.R. 565 (Bankr. W.D.N.Y. April 25, 2001) (Kaplan, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1129.02[3]
3d Cir.
Based on amount of noncontingent, liquidated unsecured debt, debtor was not eligible for chapter 13 relief. E.D. Pa. The debtor appealed a bankruptcy court order that granted a judgment creditor’s motion to reconvert the debtor’s case from chapter 13 to chapter 7. The bankruptcy court concluded that as of the date of her chapter 13 filing, the debtor owed a noncontingent, liquidated and unsecured debt in excess of the $250,000 statutory limit. On appeal, the debtor argued that the creditor’s judgment, which was subject to challenge by the debtors as a confessed judgment, was disputed and could not be categorized as final and, therefore, the amount owed was not ascertainable and the creditor’s claim was not liquidated. The district court affirmed the decision of the bankruptcy court. The court held that the debt in question was liquidated and noncontingent. The court explained that the possibility that a judgment or obligation may be canceled upon future legal determinations does not alter the noncontingent or liquidated nature of the obligation. The court also found that the debtor’s argument that the creditor’s judgment was not a final judgment was not supported by state (Pennsylvania) law.In re Heleva, 2001 U.S. Dist. LEXIS 15845, – B.R. – (E.D. Pa. October 2, 2001) (Waldman, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.06
Secured claim was limited to debtor’s interest in property. Bankr. E.D. Pa. The chapter 13 debtor filed an adversary proceeding to determine the validity and extent of the secured creditor’s lien on the debtor’s real property. The debtor’s plan provided for payment to the creditor in an amount equal to her one-half interest in the property. The debtor argued that the creditor’s allowed secured claim was limited to the value of her one-half interest in the property. The creditor contended that its allowed secured claim was equal to the value of the entire property. The bankruptcy court agreed with the debtor, holding that pursuant to section 506(a), the allowed secured claim was limited to the creditor’s interest in the debtor’s one-half interest in the property. In reaching its conclusion, the court considered the purpose of the valuation, which was to ensure that the plan’s treatment of the claim complied with the requirements of section 1325(a)(5).Veneziale v. Midfirst Bank (In re Veneziale), 2001 Bankr. LEXIS 1209, 267 B.R. 695 (Bankr. E.D. Pa. September 25, 2001) (Carey, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03
Dispute over insurance coverage was a core matter. Bankr. E.D. Pa. The chapter 11 debtor hospital’s premises were flooded and the debtor’s insurance company denied coverage. Because the debtor’s ability to formulate a plan was in jeopardy, it filed an adversary proceeding for declaratory judgment on the insurance coverage, as well as several other causes of action. The debtor requested a preliminary injunction and expedited trial on the coverage issue only. The court issued a scheduling order shortening discovery time and setting an early trial date on the coverage issue, reserving all other issues. The insurance company sought a modification of the scheduling order and a stay of the entire adversary proceeding on the grounds that it had filed a motion for withdrawal of reference with the district court. The insurance company asserted that jurisdiction over the matter rested solely with the district court and that, although it had not determined whether it would demand trial by jury, it had a right to a jury trial. In concluding that the insurance company was not entitled to a stay, the bankruptcy court focused upon the lack of probability that the insurance company would prevail upon the merits, i.e., that the district court would withdraw the reference. Limiting the issues to those set for expedited trial, the bankruptcy court held that the issue of whether the chapter 11 debtor’s insurance company was required to cover the flood damage was a core matter. Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed.2d 598, 6 C.B.C.2d 785 (1984) applied only to claims arising prepetition. In this case, since the contract was entered into postpetition and coverage was integral to the reorganization, the issue of insurance coverage was a core proceeding. Since the insurance company had declined to indicate whether it would demand jury trial and there was no concrete threat to a right to a jury trial, the arguments regarding the right to jury trial were rejected. Although the court concluded that the harm to the debtor in delaying the trial outweighed any harm to the insurance company, the discovery period was extended and trial continued for a short period (citing Collier on Bankruptcy, 15th Ed. Revised).Northwestern Inst. of Psychiatry, Inc. v. Travelers Indemnity Co. (In re Northwestern Inst. of Psychiatry, Inc.), 2001 Bankr. LEXIS 1244, – B.R. – (Bankr. E.D. Pa. August 29, 2001) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.02
5th Cir.
Court lacked jurisdiction because ancillary proceeding had not been commenced. Bankr. W.D. Tex. The joint official liquidator of the debtor in a foreign proceeding filed an adversary proceeding that sought to recover on promissory notes that the obligors executed in favor of an entity, which was also a debtor in a foreign proceeding. The debtor owned 74.39 percent of the entity’s shares. The obligors sought to dismiss the complaint for lack of subject matter jurisdiction and failure to state a claim. The liquidator argued that his intent to file such an ancillary proceeding should confer jurisdiction and that the court also had jurisdiction because any recovery on the entity’s claims would eventually benefit the debtor’s estate. The liquidator also argued that the adversary complaint constituted a section 304 petition on behalf of the debtor. The bankruptcy court held that it did not have 'arising under' jurisdiction because the liquidator had not yet filed an ancillary proceeding under section 304(a) in aid of the entity’s foreign liquidation proceeding. The court concluded that such filing was required before the court could exert jurisdiction. The court reasoned that a foreign estate could not commence a section 304 proceeding by asserting a claim in another foreign debtor’s adversary proceeding, in this case the debtor’s. The court also ruled that the potential recovery argument lacked merit because the estate was located in a foreign jurisdiction, not in the United States, and that a complaint alleging section 304 jurisdiction was not a substitute for the actual petition filing.Blackwell v. Rio Mgmt., Inc. (In re Blackwell ex rel. I.G. Servs., Ltd.), 2001 Bankr. LEXIS 1193, 267 B.R. 732 (Bankr. W.D. Tex. June 19, 2001) (Clark, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:304.03
Chapter 7 trustee had the authority to deal with community property over the objection of the nondebtor spouse. N.D. Tex. After their marriage, the debtors acquired several parcels of real property, one of which, although purchased with marital funds, was titled solely in the name of the husband. The husband subsequently mortgaged this property, and the wife did not sign either the note or the deed of trust. Shortly thereafter, the wife filed a chapter 12 petition, listing the property as community property. While the chapter 12 case was pending, the husband refinanced the note and, again, gave a deed of trust on the property. After the wife received her discharge in the chapter 12 case, the husband’s mortgage creditor foreclosed upon the real property, whereupon the husband sought to set aside that judgment, and the wife sought to intervene. Prior to trial of the state court case, the husband was placed into an involuntary chapter 7 proceeding. The chapter 7 trustee settled the state court litigation, including the rights of the nondebtor spouse, and the bankruptcy court approved that settlement on the basis that the property was the 'sole management community property' of the debtor husband. The debtor and wife appealed, asserting that the trustee did not have the authority to settle the entire litigation, including the rights of the wife. The district court affirmed, holding that under state (Texas) community property law, the community property was under the sole legal management of the debtor husband, so that the chapter 7 trustee succeeded to all rights to deal with that property as property of the estate. Under state law, since the property, although community property, was titled solely in the husband’s name, it was subject to the sole management and control of the husband, including a right to dispose of the property. Upon entry of the order for relief in the chapter 7 case, the chapter 7 trustee succeeded to those 'sole management' rights. Since the debtor had the right to encumber the property, the chapter 7 trustee was entitled to settle all claims regarding that property. Neither the wife’s chapter 12 case nor her community property rights had any effect upon the trustee’s rights in this regard. McCloy v. Silverthorne (In re McCloy), 2001 U.S. Dist. LEXIS 16805, – B.R. – (N.D. Tex. October 16, 2001) (Lourobinson, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.13
Court of Appeals held that bankruptcy court lacked postconfirmation jurisdiction over causes of action that did not bear on the debtor’s plan. 5th Cir. The chapter 11 debtor appealed the district court’s order reversing a bankruptcy court judgment in favor of the debtor for lack of jurisdiction. The debtor’s prepetition credit card program and financing contract with the bank was assumed as part of the debtor’s plan of reorganization. After the debtor’s plan was confirmed, it filed an adversary proceeding against the bank and asserted state law claims for damages that allegedly arose prepetition. Although the bank never questioned the bankruptcy court’s jurisdiction to award the judgment against it, the district court dismissed the case for lack of jurisdiction. On appeal, the debtor argued that the bankruptcy court had jurisdiction to resolve its dispute with the bank because the parties’ contract existed before confirmation, and the contract was assumed in the plan. The Court of Appeals for the Fifth Circuit affirmed the district court, holding that because the state law causes of action did not bear on the interpretation or execution of the debtor’s plan, the actions did not fall within the bankruptcy court’s postconfirmation jurisdiction. The court concluded that after the debtor’s reorganization plan had been confirmed, the debtor’s estate, and thus the bankruptcy jurisdiction, ceased to exist, other than for matters pertaining to the implementation or execution of the plan.Bank of La. v. Craig’s Stores of Texas, Inc. (In re Craig’s Stores of Texas, Inc.), 2001 U.S. App. LEXIS 21369, 266 F.3d 388 (5th Cir. October 3, 2001) (Jones, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01; 8:1142.04
6th Cir.
Automatic stay in individual debtor’s chapter 7 case did not affect garnishment proceeding against alleged 'alter ego' of corporation controlled by debtor. E.D. Mich. In early March 2001, the National Labor Relations Board ('NLRB') applied for a postjudgment writ of garnishment pursuant to the Federal Debt Collection Practices Act seeking to garnish funds owed by a contractor to a subcontractor. The NLRB argued that the subcontractor was the alter ego of an entity controlled by the chapter 7 debtor. Various writs of garnishment had already been issued on behalf of the NLRB against the entity that the debtor controlled. The debtor’s daughter, who was a principal of the subcontractor, requested a hearing and asked the district court to vacate the writ and enjoin the NLRB from further garnishments. The daughter challenged the NLRB’s alter ego claim and also argued that the filing of her father’s chapter 7 case on March 30, 2001 operated as a stay on the continuation of the garnishment proceeding. The district court held that the garnishment proceeding was not affected by the debtor’s bankruptcy, because the subcontractor’s assets were not protected by the bankruptcy petition filed by the debtor as an individual. The court explained that because the chapter 7 petition was filed on behalf of the debtor individually, only he received the benefit of the protection of the automatic stay. The court concluded that since the NLRB sought garnishment of the assets of the subcontractor as the alter ego of a corporate entity and not the individual debtor, the garnishment proceeding was not affected by the debtor’s bankruptcy.NLRB v. M & V Painting, Inc., 2001 U.S. Dist. LEXIS 14998, – B.R. – (E.D. Mich. June 15, 2001) (Goldman, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
Court granted first lienholders’ motion for relief from stay. Bankr. W.D. Mich. The first lienholders moved to lift the automatic stay in the chapter 7 debtors’ case. The first lienholders argued that the debtors lacked equity in the property and that the property was not necessary for an effective reorganization. The court noted that in all cases, the first lienholders had equity cushions but that junior lienholders might not. Therefore, the issue before the court was whether it had discretion to deny a first secured creditor’s request to lift the stay when it was actually the junior lienholder who stood to lose part or all of its security. The bankruptcy court adopted the majority view (which defines equity as the value, above all secured claims against the property, that can be realized from the sale of the property for the benefit of the unsecured creditors), and granted the creditors’ motion for relief from the stay. The court stated that the overall purpose and function of the Bankruptcy Code is to strike a balance between creditor protection and debtor relief; i.e., to balance as equally as possible all parties’ interests: debtors, junior lienholders, unsecured creditors and first secured lienholders alike. The court concluded that where, as here, there was no equity in the property, the stay must be lifted.In re Franke, 2001 Bankr. LEXIS 1152, 268 B.R. 133 (Bankr. W.D. Mich. September 20, 2001) (Stevenson, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Lessor of mobile homes could pursue state court remedies against debtors, but there was no basis for concluding that debtors assumed mobile home lease. Bankr. E.D. Mich. The debtors were renting lot space for their mobile home unit as month-to-month tenants at the time of their chapter 7 filing. The debtors’ discharge was entered and their case was closed. Thereafter, the case was reopened to determine whether the debtors had 'de facto' assumed their month-to-month tenancy by staying on the premises and indicating a desire to remain. The debtors’ lessor also sought authority to collect rents or pursue eviction proceedings. The debtors argued that any prepetition rent that they owed to the lessor was discharged and that they never reaffirmed that obligation or assumed any executory contract. The debtors acknowledged that they owed postpetition rent, although they noted that the lessor rejected their offers to pay that rent. The bankruptcy court denied the lessor’s motion. The court held that the debtors did not have standing to reject or assume the lease, but that it was deemed rejected when the trustee failed to assume or reject it within 60 days of the time the petition was filed. The court further held that the lease reverted back to the debtors upon rejection, and the lessor was free to pursue any state court remedies it might have, including eviction or the collection of postrejection rents. However, there was no basis for concluding that the debtors assumed the lease under section 365.In re Werbinski, 2001 Bankr. LEXIS 1144, – B.R. – (Bankr. E.D. Mich. May 25, 2001) (Rhodes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.03
7th Cir.
Debtor held equitable interest in residence based on prebankruptcy resulting trust; tax purchaser’s efforts to obtain tax deed violated stay. Bankr. N.D. Ill. The chapter 13 debtor filed an adversary complaint charging the tax sale purchaser of her property with violating the automatic stay by seeking a tax deed following the tax sale of the debtor’s residence. The tax sale purchaser asserted that it was not subject to the automatic stay because the debtor was not the record owner of the property that was the subject of its application for a tax deed. The purchaser also argued that even if the debtor owned the property, the tax purchaser was not a 'creditor' and therefore was not subject to the automatic stay. The debtor offered unrebutted evidence at trial to show that she had an equitable interest in the residence by virtue of a prebankruptcy resulting trust. Based on this interest, the debtor argued that the property was part of her estate and was protected by the automatic stay. The bankruptcy court held that based on unrebutted evidence presented by the debtor, a resulting trust arose in her favor at the time she conveyed an interest in the residence to a third party by quitclaim deed. Thus, the residence was property of her bankruptcy estate protected by provisions of the automatic stay, and the purchaser’s efforts to obtain a tax deed without first seeking modification of the stay were void. The court also held that there was a debtor-creditor relationship between the debtor and the tax sale purchaser as defined by the Bankruptcy Code.Davenport v. S.I. Secs. (In re Davenport), 2001 Bankr. LEXIS 1207, – B.R. – (Bankr. N.D. Ill. October 1, 2001) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
Motion for default judgment was granted. Bankr. N.D. Ill. The trustee for the liquidation of a securities broker-dealer moved for the entry of a default judgment against a registered representative employed by the broker-dealer. The trustee had filed an adversary proceeding against the employee for breach of duty and fraudulent misrepresentation due to the employee’s numerous unauthorized, highly speculative purchases and sales of options for his customers. Although the employee had been served with the summons and complaint at his residence, he failed to file an answer or other responsive pleading and never appeared in the case. The bankruptcy court granted the trustee’s motion, holding that because the employee failed to respond to the complaint, entry of a default judgment was warranted under Rule 7055. The court noted that the employee had invoked his Fifth Amendment privilege in response to other civil litigation commenced against him, which invited the inference that his testimony would have been adverse to his interests.Secs. Investor Prot. Corp. v. R.D. Kushnir & Co., 2001 Bankr. LEXIS 1196, – B.R. – (Bankr. N.D. Ill. September 28, 2001) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7055
8th Cir.
Motion for priority of claim was denied. Bankr. S.D. Iowa The chapter 7 debtor’s former attorney filed a motion for allowance of fees and expenses incurred defending the debtor against a nondischargeability cause of action as a priority administrative claim. The attorney contended that its successful representation of the debtor benefitted the estate by establishing that the creditor had no claim against the debtor. The trustee objected to the motion and argued that the services rendered benefitted only the debtor and did not benefit the estate. The bankruptcy court denied the motion, holding that section 330 did not authorize payment to the debtor’s attorney. The court noted a split of authority on the issue, but determined that the plain language of the statute compelled the court to deny the motion.In re Ramey, 2001 Bankr. LEXIS 1199, 266 B.R. 857 (Bankr. S.D. Iowa September 6, 2001) (Hill, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.03[3]
Violation of stay resulted in void tax deed. Bankr. S.D. Iowa The secured mortgage holder filed a motion to avoid a tax deed obtained in violation of the automatic stay. The debtor failed to schedule any debts for back property taxes owed on her residence, and her confirmed chapter 13 plan did not expressly provide for the payment of the taxes. While the debtor’s case was pending, the county treasurer offered the real estate for sale for unpaid taxes, and the tax creditor was the successful bidder. After the debtor failed to redeem the property, the tax creditor received a tax deed for the real estate. The bankruptcy court granted the mortgage holder’s motion, holding that because the tax deed was issued in violation of the automatic stay, it was void and conveyed no legal or equitable title to the tax creditor. The court further found that the circumstances in the case did not compel retroactive relief from the stay.In re Donovan, 2001 Bankr. LEXIS 1200, 266 B.R. 862 (Bankr. S.D. Iowa September 11, 2001) (Hill, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03, .11[1]
9th Cir.
Governmental units allowed to continue litigation against debtor based on consumer protection statutes. C.D. Cal. Four governmental units filed adversary proceedings seeking leave from the automatic stay based on the regulatory and police powers exception. The bankruptcy court ruled in favor of the debtor and found that the automatic stay barred the government from commencing or continuing lawsuits against the debtors for violations of consumer protection and fair lending laws. The bankruptcy court also decided that, even if the automatic stay did not apply, the governmental units should be enjoined from prosecuting the suits for 180 days. The governmental units appealed these rulings to the district court. On appeal, the district court noted that two tests are commonly used to determine whether a governmental action falls within the regulatory and police powers exception. Under the 'pecuniary purpose test,' the court determines whether the action primarily relates to the protection of the government’s pecuniary interest in the debtor’s property or to matters of public safety or welfare. Under the 'public policy test,' a determination is made as to whether the action effectuates public policy or just adjudicates private rights. In applying these tests, the stay will not be lifted if the government’s action is solely to advance pecuniary interests or pursue nonpolicy matters. After finding that the governments’ actions fell within the regulatory and police powers exception to the automatic stay and that the bankruptcy court abused its discretion in enjoining the governmental units from prosecuting their suits, the district court reversed the decision of the bankruptcy court. First Alliance Mortg. Co. v. First Alliance Mortg. Co. (In re First Alliance Mortg. Co.), 2001 U.S. Dist. LEXIS 13458, 264 B.R. 634 (C.D. Cal. April 19, 2001) (Carter, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 362.05[5]
Usurious interest rate did not render creditor’s entire claim unallowable. Bankr. N.D. Cal. After the debtors filed a chapter 7 petition, the creditor filed a proof of claim based on various loans made to one of the debtors. That debtor objected to the claim on the ground of usury, since the loans were made at a 24 percent interest rate. The creditor conceded that the loans were usurious and consented to a reduction of his claim. But the debtor argued that, pursuant to the state (California) lenders law and finance code, the usurious interest rate rendered the entire claim unenforceable. The bankruptcy court sustained the debtor’s objection only to the extent of the amount of interest paid and overruled the objection as to the allowance of the balance of the creditor’s claim. The court determined that the creditor was a commercial lender, not a consumer lender, which made the state statutes relied upon by the debtor inapplicable.In re Rose, 2001 Bankr. LEXIS 1183, 266 B.R. 192 (Bankr. N.D. Cal. July 3, 2001) (Jaroslovsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02[2][c]
Judgment creditor did not have right to lien on exempt property that had appreciated postpetition. Bankr. N.D. Cal. After the debtor filed a chapter 7 petition in 1997, the creditor filed an adversary proceeding to determine the dischargeability of its claim. The bankruptcy court entered judgment against the debtor, determining that the claim was nondischargeable pursuant to section 523(a)(2). The debtor had scheduled his residence as exempt and there were no objections to the exemption claim. The case was closed, and the estate property revested in the debtor. In 1998, the creditor sought to enforce its judgment against the debtor’s residence, alleging that the property had appreciated in value to an extent that created some equity above the amount allowed under state (California) homestead laws. The court ruled that the creditor was barred from enforcing the judgment, pursuant to section 522(c) which, the court reasoned, implied that exempted property was not liable after the bankruptcy for the type of debt not recited in the provision as a specific exception. Subsequently, the debtor discovered that the creditor had asserted a judgment lien against the property and filed a motion seeking a finding of contempt. The court declined to impose sanctions because its 1998 ruling was not decided on the merits, but it entered an order decreeing that the creditor had no right, title or interest in the debtor’s residence as a result of the judgment in the adversary proceeding or any claim that arose prepetition. S & C Home Loans, Inc. v. Farr (In re Farr), 2001 Bankr. LEXIS 1184, 266 B.R. 197 (Bankr. N.D. Cal. July 23, 2001) (Jaroslovsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10[2]
Disciplinary proceedings against debtor attorney were not stayed. B.A.P. 9th Cir. The chapter 7 debtor attorney appealed the bankruptcy court’s refusal, on grounds of sovereign immunity and abstention, to stay a state (California) bar disciplinary proceeding against him. After he filed his petition, the debtor continued to prosecute a lawsuit against former clients, asserting a lien for attorney’s fees on settlement proceeds of a personal injury case. The state court determined that the debtor did not have a valid lien because he had unjustifiably abandoned his clients, and awarded sanctions to the former clients. After the debtor received his discharge, the state bar filed disciplinary charges against the debtor, alleging that he failed to report the judicial sanctions, failed to obey a court order and maintained frivolous litigation against his former clients. The debtor argued that the disciplinary proceedings violated section 525(a) and he would not have an adequate opportunity to litigate the issue in the disciplinary proceedings. The B.A.P. affirmed, holding that the antidiscrimination provision of section 525(a) applied only if the sanctions were actually dischargeable and the disciplinary action was premised solely on the debtor’s failure to pay the sanction. The bankruptcy court properly abstained. The B.A.P. doubted that the debtor would be able to establish that section 525(a) was violated, although it noted that he would be able to present the issue in the state bar’s disciplinary proceeding.Franceschi v. State Bar of California (In re Franceschi), 2001 Bankr. LEXIS 1201, 268 B.R. 219 (B.A.P. 9th Cir. September 13, 2001) (Brandt, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:525.02
11th Cir.
Plaintiffs were entitled to equitable lien on insurance proceeds improperly retained by chapter 13 debtors. Bankr. M.D. Fla. Two children and their mother, as the next friend of her incompetent daughter, filed an adversary proceeding against the deceased father’s nephew and his wife, who were debtors in a chapter 13 case. The complaint sought a determination that certain life insurance proceeds that the debtors received as beneficiaries under the deceased father’s life insurance policy were to be held in trust for the plaintiffs. The bankruptcy court concluded that it was clear from the facts presented that the father intended for the life insurance proceeds to be held in trust by the nephew for the benefit of the plaintiffs, his children. Thus, the debtors’ retention of the proceeds constituted grounds for the imposition of an equitable lien on a homestead that they acquired and improved with the proceeds. The court noted that the only asset acquired from the policy proceeds that was still owned by the debtors as of the date of their bankruptcy filing was their new home. Thus, the court held that the plaintiffs were entitled to a secured claim in the amount of the proceeds used by the debtors for the purchase of the home (and home-related expenses) subject to a determination of the value of the home pursuant to section 506. The court also held that if the amount secured by the equitable lien was not satisfactorily provided for under the debtors’ chapter 13 plan, the home would be sold to pay the lien amount.Maurer v. Maurer (In re Maurer), 2001 Bankr. LEXIS 1166, 267 B.R. 639 (Bankr. M.D. Fla. September 27, 2001) (Williamson, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01