• West's Bankruptcy Newsletter
  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)

 

Collier Bankruptcy Case Summaries

---

2d Cir.

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[3]

ABI Members, click here to get the full opinion.

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

ABI Members, click here to get the full opinion.

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, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7012.01

ABI Members, click here to get the full opinion.

---

3d Cir.

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[1]

ABI Members, click here to get the full opinion.

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) (Fitzgerald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03[7]

ABI Members, click here to get the full opinion.

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

ABI Members, click here to get the full opinion.

---

5th Cir

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

ABI Members, click here to get the full opinion.

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) (Phillips, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[3]

ABI Members, click here to get the full opinion.

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

ABI Members, click here to get the full opinion.

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

ABI Members, click here to get the full opinion.

---

6th Cir.

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, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1]

ABI Members, click here to get the full opinion.

---

7th Cir.

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

ABI Members, click here to get the full opinion.

---

8th Cir.

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, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.17

ABI Members, click here to get the full opinion.

---

9th Cir.

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[1]

ABI Members, click here to get the full opinion.

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, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:4003.03

ABI Members, click here to get the full opinion.

---

10th Cir.

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

ABI Members, click here to get the full opinion.

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

ABI Members, click here to get the full opinion.

---

11th Cir.

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

ABI Members, click here to get the full opinion.

---