Collier Bankruptcy Case Update November-25-02
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 25, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 522(d)(1) Issue of whether property was an exempt
'residence' or non-exempt 'domicile' required factual
In re Marsico (Bankr. D.N.H.)
§ 522(f) Deficiency judgments arising out of mortgage foreclosure were not liens and therefore not avoidable.
People’s Heritage Bank v. Hart (In re Hart) (B.A.P. 1st Cir.)
§ 362(a)(1) Depositions in post-filing personal injury
action not subject to automatic stay.
Rodriguez v. Biltoria Realty (E.D.N.Y.)
§ 541 Debtor’s occupancy rights as a non-purchasing tenant in an apartment converted to condominium were property of the estate.
In re Stein (Bankr. S.D.N.Y.)
Rule 7012 Trustee properly brought adversary complaint against accounting firm for departure from accepted standards.
In re Sharp Int’l Corp. (Bankr. E.D.N.Y.)
§ 523(a)(2)(A) Debt excepted from discharge due to
debtor’s knowingly false representation intended to deceive
Mitchell v. Barnette (In re Barnette) (Bankr. W.D. Pa.)
§ 547(b)(5) Creditor could not use court’s order authorizing employment of the creditor to prove creditor had not previously received preferential payments.
PHP Liquidating LLC v. PricewaterhouseCoopers LLP (In re PHP Healthcare Corp.) (Bankr. D. Del.)
28 U.S.C. § 1334(c) Bankruptcy court exercised discretionary abstention with regard to adversary proceeding based on state law.
Lehigh Valley Prof’ Sports Clubs, Inc. v. Northhamption County Indus. Dev. (In re Lehigh Valley Prof’l Sports Clubs, Inc.) (Bankr. E.D. Pa.)
§ 365 Trustee’s power to accept or reject
executory real estate contract does not preclude exercise of avoidance
Turoff v. Sheets (In re Sheets) (Bankr. N.D. Tex.)
§ 524(a)(3) Creditor could not collect against postpetition property co-owned by debtor and nondebtor spouse.
First La. Bus. and Indus. Dev. Corp. v. Dyson (In re Dyson) (Bankr. M.D. La.)
§ 524(e) Discharge injunction did not bar creditor’s suit against debtor’s insurer.
Chapman v. Coho Res., Inc. (In re Coho Res., Inc.) (N.D. Tex.)
§ 1112(b) Motion to dismiss filed by entity claiming stock ownership in debtor was denied as not in best interests of creditors or estate.
In re Cadiz Props. (Bankr. N.D. Tex.)
28 U.S.C. § 1334 Bankruptcy court properly exercised jurisdiction over claims of former refinery owners as related to bankruptcy of current owner.
Refinery Holding Co., LP v. TRMI Holdings, Inc. (In re El Paso Ref., LP) (5th Cir.)
§ 523(a)(2)(A) Objection to discharge sustained based on
state court default judgment of fraud.
Henson v. Henderson (In re Henderson) (Bankr. S.D. Ohio)
§ 506 Creditor’s general financing statement
provided sufficient notice to maintain first priority secured
Grabowski v. Deere & Co. (In re Grabowski) (Bankr. S.D. Ill.)
§ 541(a)(6) Postpetition crop disaster payments were property of the estate and subject to lenders’ liens.
FarmPro Servs. v. Brown (D.N.D.)
28 U.S.C. § 1334(c)(1) Discretionary abstention was appropriate where 1,250 claimants filed claims based upon exposure to hexavalent chromium from debtor’s facilities.
In re Pacific Gas & Elec. Co. (Bankr. N.D. Cal.)
Rule 4003(b) Trustee’s objection to debtor’s claim of exemption filed within 30 days of filing of amended schedule was timely and properly sustained.
In re Schafler (N.D. Cal.)
§ 329(a) Attorney’s undisclosed practice of securing payment of fees by acquiring liens on clients’ homes resulted in sanctions.
In re Cohagan-Deubel (Bankr. D. Colo.)
§ 350(b) Purchaser of assets of joint debtors was not adversely affected by denial of motion to reopen and lacked standing to appeal.
GMX Res. v. Kleban (In re Petroleum Prod. Mgmt.) (B.A.P. 10th Cir.)
§ 329 Debtor’s attorney violated duties under the bankruptcy code in not disclosing additional fees paid after conversion from chapter 13 to chapter 7.
In re Whaley (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries
Issue of whether property was an exempt 'residence' or non-exempt 'domicile' required factual hearing. Bankr. D.N.H. PROCEDURAL POSTURE: Two creditors objected to the debtor’s 11 U.S.C. § 522(d)(1) homestead exemption in property located in New Hampshire. The creditors argued that, although section 522(d)(1) referred to an exemption in a residence as opposed to referring to domicile, the term residence should be equated with domicile, and thus the debtor could not claim the exemption because the court had previously ruled that the debtor was not domiciled in New Hampshire. OVERVIEW: The court found that to qualify as a residence, the property needed only to be where the debtor lived on more than a transient basis. Under N.H. Rev. Stat. Ann. section 21:6-a (2001), the debtor could establish the property as his residence, for 11 U.S.C. § 522(d)(1), if he physically occupied it for a significant period of time as his principal home. What was 'significant' had to be made on a case by case basis. The court had previously found that even if the debtor had established domicile in New Hampshire while he lived there during 2000, his return to his New Jersey residence at the end of his operation of a seasonal business evidenced a domicile change back to New Jersey. The same conclusion would be reached for 'residence.' Thus, the prior ruling established that as of the end of 2000, the debtor either had not established the property as his residence or had abandoned it as his residence. But, the record was not clear as to whether he may have established a residence at the property for section 522(d)(1) between March 2001, and the June 22, 2001, bankruptcy filing. The prior ruling did not preclude the debtor from claiming the exemption under section 522(d)(1). A hearing was needed.In re Marsico, 2002 Bankr. LEXIS 518, 278 B.R. 1 (Bankr. D.N.H. April 26, 2002) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.09
Deficiency judgments arising out of mortgage
foreclosure were not liens and therefore not avoidable.
B.A.P. 1st Cir. PROCEDURAL POSTURE: The
bankruptcy court granted the debtors’ motion to avoid liens,
including the deficiency judgment lien of creditor bank, pursuant to 11
U.S.C. § 522(f). The bank appealed the order avoiding its lien.
OVERVIEW: The appeal raised two legal issues. The first
was whether, in general, mortgage deficiency judgments were excluded
from avoidance under 11 U.S.C. § 522(f) by virtue of 11 U.S.C.
§ 522(f)(2)(C); and, if so, whether state foreclosure law governed
whether a particular mortgage deficiency judgment fit within section
522(f)(2)(C). The second issue was whether the Massachusetts judgment
was void ab initio as against debtor male, as it was obtained by the
bank after he had filed bankruptcy without the bank having first
obtained relief from stay. On the first issue, the court held that 11
U.S.C. § 522(f) described liens that were subject to avoidance, and
that 11 U.S.C. § 522(f)(2)(C) clarified that judgments arising out
of a mortgage foreclosure were not liens and, hence, were never
avoidable under 11 U.S.C. § 522(f). On the second issue, the
Massachusetts judgment, domesticating a Maine judgment, was entered
almost a month after entry of an order for relief in debtor male’s
bankruptcy case. The Massachusetts judgment was void ab initio as an
action taken in violation of the automatic stay, at least as to debtor
male and his interest in the Massachusetts property.
People’s Heritage Bank v. Hart (In re Hart),
2002 Bankr. LEXIS 879, 282 B.R. 70 (B.A.P. 1st Cir. August 15, 2002)
Collier on Bankruptcy, 15th Ed. Revised 4:522.11
Depositions in post-filing personal injury action not subject to automatic stay. E.D.N.Y. PROCEDURAL POSTURE: Plaintiff victims sued defendant manufacturer for personal injuries they sustained when scaffolding constructed by the manufacturer collapsed. The manufacturer filed an application to adjourn the deposition requested by the victims, which was treated as a request for a protective order. OVERVIEW: The party whose early deposition was at issue asserted a loss of services claim against the manufacturer and was present in the country on an emergency visa. The manufacturer sought to prevent the deposition by asserting the proceeding should have been adjourned based on an automatic stay issued pursuant to 11 U.S.C. § 362, the short lapse of time since the receipt of the notice of the deposition, and the absence of an initial discovery conference pursuant to Fed. R. Civ. P. 16(b). The trial court initially noted proceedings or claims that arose after a bankruptcy petition was filed were not subject to the automatic stay of 11 U.S.C. § 362(a)(1), thus the automatic stay was unavailable to the manufacturer as a basis to oppose the deposition. The trial court held for the convenience of the parties and witnesses, and in the interest of justice, a court could modify the sequence of discovery and the interest of justice would be served by preserving her testimony prior to the expiration of her visa and her return to her country. Rodriguez v. Biltoria Realty, 2002 U.S. Dist. LEXIS 8050, 203 F. Supp.2d 290 (E.D.N.Y. May 7, 2002) (Boyle, M.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
Debtor’s occupancy rights as a
non-purchasing tenant in an apartment converted to condominium were
property of the estate. Bankr. S.D.N.Y.
PROCEDURAL POSTURE: In a chapter 7 bankruptcy case, the
trustee applied, pursuant to 11 U.S.C. § 363(b), to sell the
debtor’s apartment occupancy rights — an entitlement to
continued occupancy based on rights granted to non-purchasing tenants
under New York law — over the debtor’s objection,
effectively causing the debtor to be evicted. OVERVIEW:
The debtor occupied an apartment pursuant to a residential lease, but
declined to purchase it in response to a non-eviction condominium
conversion plan. After the plan was declared effective and his lease
terminated, the debtor asserted an entitlement to continued occupancy
based on rights granted to non-purchasing tenants under New York law.
Since the trustee could only sell property of the estate under 11 U.S.C.
§ 363(b), the threshold question was whether the occupancy rights
were property of the estate. The court concluded that the rights were
property of the debtor at that the time the case was commenced, and
therefore, became property of the estate under 11 U.S.C. § 541. The
debtor further contended that even if the rights were estate property,
the trustee could not transfer them. Since 11 U.S.C. § 363(b)
allowed the trustee to sell property of the estate, the debtor had to
identify a provision of the Bankruptcy Code or other federal law that
barred their sale. He pointed to 11 U.S.C. §§ 365(h), 363(f).
Neither, however, applied to the proposed transaction. The court
rejected the debtor’s other arguments, and found that the sale was
in the estate’s best interest. In re
Stein, 2002 Bankr. LEXIS 880, 281 B.R. 845 (Bankr.
S.D.N.Y. August 16, 2002) (Bernstein, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.01
Trustee properly brought adversary complaint
against accounting firm for departure from accepted standards.
Bankr. E.D.N.Y. PROCEDURAL POSTURE: The
trustee filed an action alleging defendant accounting firm was negligent
and reckless in failing to conduct the debtor’s audits in
accordance with generally accepted auditing standards, and in failing to
detect that the debtor’s financial reporting was not in conformity
with generally accepted accounting principles. The firm moved to dismiss
alleging failure to state a claim for relief and lack of standing under
U.S. Const. art. III. OVERVIEW: The complaint alleged
the firm had confirmed only three accounts receivable, had failed to
verify customer addresses for confirmations, failed to investigate
discrepancies between the customers list and the vendors list, failed to
notice inconsistencies in the accounts receivable aging, failed to
examine sales invoices, and failed verify representations as to a rapid
growth of accounts receivable. There were allegations of failure to
investigate or uncover a disparity between reported and actual
inventory. The complaint was sufficient to allege accounting violations
and to avoid the sole actor rule. There was an innocent shareholder and
director, a person who could have brought an end to the fraudulent
activity. The trustee had standing, under U.S. Const. art. III, to
invoke the adverse interest exception as to conduct that was adverse to
the debtor’s interest, because the managers had funded their
looting in whole or in part through fraud that was not adverse to the
debtor’s interest. They looted monies over and above the sums they
fraudulently raised from creditors. There was no real possibility that
the managers, as shareholders, would receive any funds obtained in a
judgment. In re Sharp Int’l Corp., 2002
Bankr. LEXIS 521, 278 B.R. 28 (Bankr. E.D.N.Y. May 20, 2002) (Craig,
Collier on Bankruptcy, 15th Ed. Revised 10:7012.01
Debt excepted from discharge due to debtor’s knowingly
false representation intended to deceive creditor. Bankr.
W.D. Pa. PROCEDURAL POSTURE: Defendant debtor
filed a petition for relief under chapter 7 of the U.S. Bankruptcy Code.
Plaintiff creditor filed an adversary action against the debtor and
sought a determination that the debt owed to him was excepted from
discharge by 11 U.S.C. § 523(a)(2)(A). OVERVIEW:
The creditor claimed that the debtor made false representations to
induce him to enter into an agreement with the debtor to promote the
creditor’s invention and would received a fee. The debtor claimed
that the debt was dischargeable, but admitted that he failed to perform
as he had promised the creditor. The debtor claimed that it was a
contract breach and not fraud. The court found that the debtor obtained
money from the creditor by falsely representing that he would identify
potential licensees and manufacturers, with a goal towards marketing the
invention. The creditor justifiably relied upon this misrepresentation
and suffered a monetary loss as a result of his reliance. The debtor
denied that he knew this representation was false when he made it and
denied that he intended to deceive the creditor when he made it. The
court found that section 523(a)(2)(A) applied and that the debtor knew
when he made the representation that it was false and he made it with
intent to deceive the creditor. His objective was to entice clients to
pay him a promotion fee while not performing. Mitchell v.
Barnette (In re Barnette), 2002 Bankr. LEXIS 877, 281 B.R. 869
(Bankr. W.D. Pa. August 16, 2002) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Creditor could not use court’s order
authorizing employment of the creditor to prove creditor had not
previously received preferential payments. Bankr. D.
Del. PROCEDURAL POSTURE: Defendant accounting firm
moved for summary judgment asking the court to enter judgment in its
favor in an adversary proceeding, filed by plaintiff company, to avoid
and recover allegedly preferential transfers. During the bankruptcy, the
firm was appointed to represent the debtors as accountants and financial
advisors. The company was granted the authority to pursue avoidance
actions when the debtor’s plan of liquidation was confirmed.
OVERVIEW: The company alleged the firm received a
preferential payment, which was not disclosed in the firm’s
affidavit of disinterestedness. The firm alleged that res judicata
prevented the company from raising that issue. The firm argued that in
entering the orders appointing the firm and approving its fee, the court
implicitly recognized that the firm could not have received a preference
because, otherwise, the firm would not have been disinterested. There
were three factors determinative of a res judicata question: (1) a final
judgment on the merits, (2) an identity of parties or their privities,
and (3) a subsequent action based on the same cause of action as in the
first case. The court found that the third requirement was not met.
Because the issues in the order of appointment and the order approving
fees did not involve the elements of a preference under 11 U.S.C. §
547 or 11 U.S.C. § 550, res judicata was inapplicable. The court
found that it was no longer possible to litigate, in a motion to retain
or in an application for final fees, the question of whether the firm
received a preference, but the adversary proceeding seeking to prove the
preference would go forward. PHP Liquidating LLC v.
PricewaterhouseCoopers LLP (In re PHP Healthcare Corp.), 2002
Bankr. LEXIS 449, — B.R. — (Bankr. D. Del. May 7, 2002)
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
Bankruptcy court exercised discretionary
abstention with regard to adversary proceeding based on state
law. Bankr. E.D. Pa. PROCEDURAL
POSTURE: In bankruptcy proceedings, plaintiff debtor, and its
business partners, sued defendant company, seeking a declaratory
judgment against the company. The company counterclaimed for fraud, and
declaratory relief. Debtor moved for dismissal of the company’s
counterclaim, or, in the alternative, for mandatory or discretionary
abstention, or in the alternative dismissal of the counterclaims
sounding in fraud. OVERVIEW: Debtor claimed that the
company was liable to debtor in connection with a joint venture created
to develop property as a sport and entertainment facility. Debtor
alleged that the company breached a contract and breached its fiduciary
duty for not providing the funding for the facility, and entering into
negotiations to replace debtor as developer. The court held that
debtor’s complaint failed to distinguish between the plaintiffs,
each count being pled as a wrong against all plaintiffs. However, it was
clear that some of the alleged injuries simply could not have been
incurred by all the plaintiffs. As to debtor’s motion to dismiss,
even though one of the company’s counterclaims sounded in tort and
fraud, theories not encompassed in the company’s filed proof of
claim, the filed proof of claim made clear that it was intended to
preserve the company’s rights in the face of an anticipated suit.
When that suit was filed asserting theories that the company could not
anticipate, its counterclaim acted as a timely amendment and preserved
its claim. However, the company’s counterclaims should have been
adjudicated in state court since it was better equipped to decide state
law issues. Lehigh Valley Prof’ Sports Clubs, Inc. v.
Northhamption County Indus. Dev. (In re Lehigh Valley Prof’l
Sports Clubs, Inc.), 2002 Bankr. LEXIS 451, — B.R.
— (Bankr. E.D. Pa. February 4, 2002) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05
Trustee’s power to accept or reject executory real
estate contract does not preclude exercise of avoidance
powers. Bankr. N.D. Tex. PROCEDURAL
POSTURE: Debtor filed a petition for bankruptcy under chapter
11 of the Bankruptcy Code. Plaintiff trustee initiated an adversary
proceeding against defendants (debtor, debtor’s partners, and
others). The trustee moved for partial summary judgment pursuant to 11
U.S.C. § 544(a)(3). The partners moved for summary judgment under
11 U.S.C. § 365(i). OVERVIEW: Debtor was a real
estate broker and entered into a contract for deed with defendant Urban
One Holding. The trustee’s motion sought to avoid the contract for
deed. The trustee sought partial summary judgment pursuant to section
544(a)(3) avoiding any interest in the property. The partners sought
summary judgment claiming that the trustee must either assume or reject
the contract for deed under section 365(i). The court rejected the
partners’ claim that section 365 renders section 544 inoperative,
noting that Congress did not include such language in the Bankruptcy
Code. The court rejected the argument that section 544 did not apply
because a contract for deed was not effective as a conveyance of land,
and stated that section 544 allowed the trustee to avoid certain
transfers, and also granted the trustee his strong-arm powers through
bona fide purchaser status. A transfer to the partners was not necessary
as of the commencement of the bankruptcy case. The court held that if
the trustee was a bona fide purchaser, his status would trump the
partners’ contract for deed. Finally, the court found that there
remained fact questions regarding whether the trustee’s bona fide
purchaser status was defeated by implied notice. Turoff v.
Sheets (In re Sheets), 2002 Bankr. LEXIS 440, 277 B.R. 298
(Bankr. N.D. Tex. April 4, 2002) (McGuire, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.01
Creditor could not collect against postpetition
property co-owned by debtor and nondebtor spouse. Bankr.
M.D. La. PROCEDURAL POSTURE: Plaintiff bankruptcy
creditor brought an adversary proceeding against defendant debtor and
his non-filing wife, alleging that 11 U.S.C. § 524(a)(3) did not
apply to a judgment debt owed to the creditor by both the debtor and the
wife, and thus that the debt was excepted from discharge with regard to
the wife. The creditor moved for default judgment after the debtor and
the wife failed to answer the complaint. OVERVIEW: The
creditor obtained a judgment against the debtor and the wife for
conversion of funds of the creditor’s assignor, and sought a
declaration that any discharge granted to the debtor did not preclude
collection of the community debt against postpetition community property
of the debtor and the wife, or any separate property of the wife. The
bankruptcy court held however that, if the debtor was granted a
discharge, the debt was not excepted from the application of the section
524(a)(3) injunction on collection against the community property of the
debtor and the wife acquired after the filing of the petition for
relief. The debt was provided for in the debtor’s chapter 13 plan
and was thus subject to discharge, and the debt was not one which would
otherwise be excepted from discharge in a hypothetical chapter 13 case
against the non-filing wife, as required to preclude application of
section 524(a)(3). While the hypothetical case against the wife could
preclude discharge under other chapters, section 524(a)(3) required that
the hypothetical case involving the non-filing wife be analyzed as if
the wife had joined the bankruptcy case of the debtor. First
La. Bus. and Indus. Dev. Corp. v. Dyson (In re Dyson), 2002
Bankr. LEXIS 436, 277 B.R. 84 (Bankr. M.D. La. April 29, 2002)
Collier on Bankruptcy, 15th Ed. Revised 4:524.02
Discharge injunction did not bar
creditor’s suit against debtor’s insurer. N.D.
Tex. PROCEDURAL POSTURE: Appellant injured
employee sought reversal of the bankruptcy court’s order denying
his motion to collect and/or execute on a state court judgment and from
an order denying his motion to reconsider. OVERVIEW:
Under a services contract, the contractor agreed to indemnify debtor for
claims brought against it by any employees. The contractor had an
umbrella policy and a general liability policy through defendant
indemnity insurer. Debtor was insured under a policy through defendant
general liability insurer. A judgment was entered in the personal injury
action against debtor who filed for bankruptcy. The injured employee did
not file a proof of claim. A remittitur was entered in state court, and
the employee appealed. Subsequently, the employee filed garnishment
actions against the insurers. When the employee asked for authority to
go after the insurance proceeds, the bankruptcy court held that the
remitted judgment violated the automatic stay and was void or voidable.
On review, the court concurred that since the employee had not filed a
timely proof of claim, he could not proceed against debtor, which meant
that any indemnification obligations were likewise discharged. However,
the employee could proceed against the general liability insurer,
because the injunction did not extend to efforts to recover from other
entities which might be liable for the discharged debt.
Chapman v. Coho Res., Inc. (In re Coho Res., Inc.),
2002 U.S. Dist. LEXIS 9395, — F. Supp.2d — (N.D. Tex. May
24, 2002) (Solis, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.05
Motion to dismiss filed by entity claiming stock
ownership in debtor was denied as not in best interests of creditors or
estate. Bankr. N.D. Tex. PROCEDURAL
POSTURE: Movant creditor sought to have the bankruptcy case of
debtor property company dismissed under 11 U.S.C. § 1112(b). The
property company and debtor in possession warehouse company opposed the
motion. Two secured creditors, bank and realtor, also opposed the
motion. OVERVIEW: The warehouse company borrowed money
from the movant and used stock in the property company as collateral.
The bankruptcy petition was filed after default. However, the escrow
agent had not yet delivered the stock to movant. Presumptively,
therefore, the warehouse company was the owner of the stock, making the
bankruptcy filing facially authorized. However, the court found that the
presumption was rebuttable. If the warehouse company did not own the
stock when the petition was filed, the filing was not authorized. The
determination of ownership had to be resolved in an adversary proceeding
according to Fed. R. Bankr. P. 7001(2) and (9). Such a proceeding had
already been initiated. However, since the petition appeared facially
authorized, the court examined the statutory standard for considering a
motion to dismiss under 11 U.S.C. § 1112(b). Movant contended that
the bank was protected by its foreclosure rights under non-bankruptcy
law and that the stock ownership issue could have been resolved in state
court. The court found that the availability of those remedies was
outweighed by the advantages to the creditors of the prospect of full
payment of their claims under chapter 11. In re Cadiz
Props., 2002 Bankr. LEXIS 524, 278 B.R. 744 (Bankr. N.D. Tex.
May 16, 2002) (Felsenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1112.04
Objection to discharge sustained based on state court default
judgment of fraud. Bankr. S.D. Ohio PROCEDURAL
POSTURE: A creditor filed a complaint objecting to the
debtor’s discharge under 11 U.S.C. § 523(a)(2), asserting
that the creditor entered a partnership agreement with the debtor based
on the debtor’s willful and fraudulent misrepresentations that
induced the creditor to extend credit and invest in the business. The
creditor asserted his state court default judgment was entitled to full
faith and credit under 28 U.S.C. § 1738. OVERVIEW:
The court found the state court judgment was a valid judgment in which a
court had concluded that the debtor made willful false representations
that were relied on by the creditor and that the debtor’s
fraudulent conduct was the proximate cause of the damages. The findings
by the state court met the elements of fraud under 11 U.S.C. §
523(a)(2). The debtor testified he knew of the state court trial date,
but made the voluntary decision not to appear. Thus, he had a full and
fair opportunity to defend himself in state court. The state court had
made detailed findings which indicated the court decided the case on the
merits based on the evidence submitted by the creditor and, thus, the
decision was an 'express adjudication.' The state court had found that
the debtor made willful and fraudulent misrepresentations to induce the
creditor into the partnership agreement, that the creditor relied upon
the misrepresentations, and as a direct and proximate result of the
reliance the creditor executed the partnership agreement and invested in
the business. The bankruptcy court found that the issues were actually
litigated in the state court and the judgment was given preclusive
effect. Henson v. Henderson (In re Henderson), 2002
Bankr. LEXIS 517, 277 B.R. 889 (Bankr. S.D. Ohio May 13, 2002) (Clark,
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Creditor’s general financing statement provided
sufficient notice to maintain first priority secured status.
Bankr. S.D. Ill. PROCEDURAL POSTURE: In a
priority dispute between defendant first lender and defendant second
lender regarding their security interests in three items of farm
equipment owned by plaintiff bankruptcy debtors, the debtors filed a
complaint to determine validity, priority, and extent of the
lenders’ liens. OVERVIEW: Both lenders filed
financing statements. The first lender, the first to file, described its
collateral in general terms and listed the debtors’ business
address, rather than their home address where the collateral was
located. The second lender described the collateral more specifically
and included the debtors’ home address. The second lender
contended that the first lender’s description was ineffective to
perfect its security interest in the equipment. Despite the generality
of the first lender’s description, it was sufficient to notify
subsequent creditors that a lien existed on the debtors’ property
and that further inquiry was necessary to determine the extent of the
lien. Thus, the court found no merit in the second lender’s
argument that the description of the first lender’s collateral was
too general to fulfill the notice function of a financing statement
under the Uniform Commercial Code. The debtors’ business, address
was not part of the lender’s description of its collateral and,
thus, did not serve to limit the collateral subject to the lien. In
addition, the financing statement listed the names of the debtors, and
not the name of the debtors’ business. Grabowski v.
Deere & Co. (In re Grabowski), 2002 Bankr. LEXIS 454, 277
B.R. 388 (Bankr. S.D. Ill. April 23, 2002) (Meyers, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01
Postpetition crop disaster payments were
property of the estate and subject to lenders’ liens.
D.N.D. PROCEDURAL POSTURE: Appellant farm
company appealed the judgment of the bankruptcy court which held that
the appellee debtors’ crop disaster relief payments were subject
to the security interests of appellee corporation and the farm company
but that the corporation held a first priority lien on the payments. The
debtors also appealed. The corporation moved to strike portions of the
farm company’s appendix. OVERVIEW: The debtors
were farmers who filed a chapter 12 bankruptcy petition. While the case
was pending the debtors borrowed money from the corporation. In exchange
the corporation took a security interest int existing and future crops,
governmental agricultural program payments, and their proceeds. The
corporation perfected its security interest. About a year later the
debtors received an operating loan from the farm company. The bankruptcy
approved the loan and specifically stated that any security interest the
farm company had was secondary to any previously granted security
interest to the corporation. The debtors received disaster relief
payments. All parties laid claim to the payments. The court held that
the bankruptcy filing did not defeat the security interests of the
creditors in the crop disaster payments because the payments were
proceeds of the bankruptcy estate. Since the corporation perfected its
security interest first, it had the superior interest in the crop
disaster payments. FarmPro Servs. v. Brown, 2002
U.S. Dist. LEXIS 9522, 276 B.R. 620 (D.N.D. April 22, 2002) (Webb,
Collier on Bankruptcy, 15th Ed. Revised 5:541.17
Discretionary abstention was appropriate where
1,250 claimants filed claims based upon exposure to hexavalent chromium
from debtor’s facilities. Bankr. N.D. Cal.
PROCEDURAL POSTURE: Claimants, approximately 1,250
individuals, filed proofs of claim in this chapter 11 case. Other
claimants filed a motion for abstention. OVERVIEW: The
claimants alleged personal injury and wrongful death claims purportedly
caused by exposure to hexavalent chromium from facilities owned or
operated by the debtor. The debtor argued that pursuant to 28 U.S.C.
§ 157(b)(2)(B), (b)(5), the bankruptcy judge could not decide the
abstention motion. The court held that it was in a better position to
analyze the factors relevant to the abstention analysis, particularly
when the most important factor necessarily involved an examination of
the effect of litigating the personal injury claims on the
reorganization of the debtor. Moreover, 28 U.S.C. § 1334(c)(1) did
not prohibit the judge from deciding the abstention motion; neither did
28 U.S.C. § 157(d)(5) or any other statute or rule. Next, the court
concluded that abstention was appropriate, reasoning that the following
factors weighed heavily in favor of abstention: the impact on efficient
administration of the bankruptcy estate, the extent to which state law
issues predominated over bankruptcy issues, the presence of a related
proceeding commenced in state court, and the degree of relatedness or
remoteness of the proceeding to the main bankruptcy case. In
re Pacific Gas & Elec. Co., 2002 Bankr. LEXIS 884, 279 B.R.
561 (Bankr. N.D. Cal. January 8, 2002) (Montali, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05
Trustee’s objection to debtor’s
claim of exemption filed within 30 days of filing of amended schedule
was timely and properly sustained. N.D. Cal.
PROCEDURAL POSTURE: Debtor appealed an order of the
bankruptcy court, which allowed the trustee to sell stock certificates
previously found to be assets of the bankruptcy estate, and an order
denying debtor’s claim that certain stock certificates were exempt
from the bankruptcy estate. OVERVIEW: Debtor conceded
that her appeal from the order approving the sale was moot. As to the
other order, the trustee argued that the instant court lacked
jurisdiction to review it. The court, however, found that it had
jurisdiction, as the appeal was not premature. Debtor argued that the
claim of exemption was not properly filed and noticed under the relevant
rules of bankruptcy procedure. The court found that the trustee’s
objection was filed within 30 days of debtors filing of an amended
schedule. Thus, the objection was properly filed under Fed. R. Bankr. P.
4003(b). Further, there was no indication that debtor could have offered
new evidence relevant to the issue of fraudulent concealment had a
separate hearing been scheduled. Thus, there was no due process
deprivation resulting from the bankruptcy court’s refusal to
schedule an evidentiary hearing to consider what it had previously
adjudicated. In re Schafler, 2002 U.S. Dist. LEXIS
15496, — F. Supp.2d — (N.D. Cal. August 13, 2002) (Chesney,
Collier on Bankruptcy, 15th Ed. Revised 9:4003.03
Attorney’s undisclosed practice of securing payment of
fees by acquiring liens on clients’ homes resulted in
sanctions. Bankr. D. Colo. PROCEDURAL
POSTURE: United States trustee moved for a review of the fees
charged by respondent debtors’ counsel under 11 U.S.C. § 329
and for sanctions under Fed. R. Bankr. P. 9011(b), alleging failures to
disclose that lien statements were obtained on clients’ homes, and
in some cases, title was acquired title and the homes were sold at a
profit. The counsel argued that his failures to disclose were due to
oversight, misunderstanding, or negligence. OVERVIEW:
The court found that counsel did not accidentally, innocently, or
through lack of knowledge fail to disclose the matters. Counsel had over
$1 million in unencumbered assets and was a seasoned bankruptcy lawyer.
He failed to meet the requirements of 11 U.S.C. § 329, and Fed. R.
Bankr. P. 2016(b), by not disclosing the lien statements he was taking
and not listing himself as a creditor. He never timely supplemented the
disclosures as to the lien statements or the foreclosures, redemptions
and/or sales of his clients’ homes until after he was forced to do
so. His practice of having his clients sign a prepetition letter
directing the chapter 13 trustee to pay any monies held to him, and then
deducting his unpaid fee before returning the balance to a debtor, was
an improper circumvention of the Bankruptcy Code. A penalty, and
depriving counsel of his ill-gotten compensation and the profits derived
from his sales of his clients’ homes, were appropriate, as was
continuing education. Counsel had altered the nature of his relationship
with his clients, becoming an undisclosed secured creditor whose debt
was not subject to the homestead exemption under the lien statements.
In re Cohagan-Deubel, 2002 Bankr. LEXIS 516,
— B.R. — (Bankr. D. Colo. May 17, 2002) (Brooks, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:329.03
Purchaser of assets of joint debtors was not
adversely affected by denial of motion to reopen and lacked standing to
appeal. B.A.P. 10th Cir. PROCEDURAL
POSTURE: Appellant purchaser filed a motion seeking to reopen
appellee debtors’ jointly administered chapter 11 cases under 11
U.S.C. § 350(b) and Fed. R. Bankr. P. 5010. The debtors objected on
a standing issue and the court denied the motion. The purchaser appealed
from an order of the bankruptcy court denying its motion to reopen the
debtors’ jointly administered chapter 11 cases.
OVERVIEW: The debtors continued operating postpetition
as debtors-in-possession and eventually entered into an agreement for
the sale of substantially all of their assets to the purchaser. The
bankruptcy court approved the sale free and clear of liens pursuant to
11 U.S.C. § 363(f) and Fed. R. Bankr. P. 6004. The bankruptcy
appellate panel noted that neither party challenged on appeal the
bankruptcy court’s conclusion that the purchaser had standing to
move to reopen, but the panel had an independent obligation to review
the purchaser’s appellate standing as a jurisdictional
prerequisite. The bankruptcy court addressed whether the purchaser had
standing to file the motion to reopen under 11 U.S.C. § 350(b) and
Fed. R. Bankr. P. 5010. The panel found that the bankruptcy
court’s order denying the motion to reopen did not directly and
adversely affect the purchaser’s pecuniary interests. The
purchaser did not have standing to maintain the appeal and the
bankruptcy court did not abuse its discretion. GMX Res. v.
Kleban (In re Petroleum Prod. Mgmt.), 2002 Bankr. LEXIS 882,
282 B.R. 9 (B.A.P. 10th Cir. August 16, 2002) (Cordova, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:350.03
Debtor’s attorney violated duties under the bankruptcy code in not disclosing additional fees paid after conversion from chapter 13 to chapter 7. Bankr. M.D. Fla. PROCEDURAL POSTURE: The debtor filed a petition for relief under chapter 13 of the Bankruptcy Code. The debtor was unable to make plan payments and the case was converted to chapter 7. The trustee filed a motion to examine the debtor’s transactions with her bankruptcy counsel and challenged the validity of the payments. OVERVIEW: The counsel received a retainer and additional fees for work performed on the debtor’s behalf while the matter was a chapter 13 case. The counsel filed the required statement of compensation, which listed the fees he had received and would receive. After the case was converted to chapter 7, the counsel requested additional money. He received additional money, but did not report this money as required. The trustee claimed that these additional fees were unreasonable and should be disgorged. The court found that the counsel had violated his duty under 11 U.S.C. § 329 and Fed. R. Bankr. P. 2016 by not reporting the additional fees that he received after the case was filed. The court rejected the counsel’s late attempt to disclose the unreported payments. The intentional failure to timely disclose the fees received could not be fixed later by filing a statement of compensation, particularly after a party in interest objected. The court required the counsel to return the unreported amount that he received. The court warned the counsel that further failures to disclose fees would result in disgorgement of all fees in this case. In re Whaley, 2002 Bankr. LEXIS 881, 282 B.R. 38 (Bankr. M.D. Fla. August 6, 2002) (Jennemann, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:329.00