Collier Bankruptcy Case Update November-26-01
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 26, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 1301(c) Rescission of notes was valid, defeating motion for relief from stay.
United Companies Lending Corp. v. Skwozinski (In re Skwozinski) (Bankr. D.N.H.)
§ 327(a) Denial of counsel’s appointment was affirmed on appeal.
Lite Ray Realty Corp. v. Bernstein (S.D.N.Y.)
§ 542(b) Related debtor’s waiver of claim did not preclude trustee’s claim for contribution against partner.
Daly v. Testo (In re Richardson) (Bankr. D. Conn.)
§ 502(a) Claim for amounts paid under letter of credit and all changes and expenses related to purchase and sale of property allowed.
In re Planet Hollywood Int’l (Bankr. D. Del.)
§ 546(c) Debtor’s motion to dismiss creditor’s reclamation claim for failure to properly identify goods in demand letter denied. Scotts Co. v. Hechinger Co. (In re Hechinger Inv. Co. of Del.) (Bankr. D. Del.)
§ 1102(a)(1) Creditors committee, standing in debtors’ shoes, was in pari delicto with alleged fraud defendants’ and lacked standing to assert claims.
Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co. (3d Cir.)
§ 1103(a) Court granted unsecured creditors’ committee’s application to retain financial advisor nunc pro tunc but limited effective date of relief.
In re ICG Communs., Inc. (Bankr. D. Del.)
§ 1301(a) Codebtor stay was violated.
In re Patti (Bankr. E.D. Pa.)
§ 506(a) IRS’ tax lien follows and attaches to personal property acquired after taxpayer moves to another county.
In re Eschenbach (Bankr. N.D. Tex.)
§ 101(5) Court of Appeals ruled that a right to equitable relief for breach of noncompete covenant was not a 'claim' that could be discharged.
Kennedy v. Medicap Pharms., Inc. (6th Cir.)
§ 365(d)(10) Court refused to require immediate payment under leases.
In re Republic Techs. Int’l (Bankr. N.D. Ohio)
§ 503(b)(4) Law of the case doctrine defeated appeal of identical issue.
Vergos v. Hilburn’s Paint & Body Shop (In re Hilburn’s Paint & Body Shop) (B.A.P. 6th Cir.)
Rule 7004(b)(3) Trustee’s service of order to show cause on debtor’s mortgagee met satisfied requirements for due process and Rule 7004.
In re Chess (Bankr. W.D. Tenn.)
§ 544(b)(1) Court of Appeals for the Eighth Circuit held that transfer avoidance was barred by collateral estoppel.
Williams v. Marlar (In re Marlar) (8th Cir.)
§ 506(a) Creditor of stripped down claim from debtor’s previous chapter 7 bankruptcy deemed to have allowable claim in debtor’s subsequent chapter 13 case.
In re Chinayia & Grounder (Bankr. E.D. Cal.)
§ 523(a)(7) City’s civil judgment that enforced payment of criminal restitution found not dischargeable.
Warfel v. City of Saratoga (B.A.P. 9th Cir.)
§ 1325(b) Chapter 13 case was dismissed, subject to immediate plan amendments to trustee’s satisfaction.
In re Bohrer (Bankr. N.D. Cal.) 114033
§ 523(a)(3) Complaint was not time-barred.
Today Homes, Inc. v. Brown (In re Brown) (Bankr. W.D. Okla.)
§ 549(a) Transfers to lottery corporation were not property of the estate.
Suwannee Swifty Stores v. Ga. Lottery Corp. (In re Suwannee Swifty Stores, Inc.) (Bankr. M.D. Ga.)
Collier Bankruptcy Case Summaries
Rescission of notes was valid, defeating motion for relief from stay. Bankr. D.N.H. In order to obtain a loan from the creditor, the debtor, his spouse, and his mother signed closing documents and notes on three separate loans. The creditor took mortgages on the debtor’s home and his mother’s home. The debtor and spouse signed a mortgage for a business property they owned and the mother signed a mortgage on her residence. The debtor, his spouse, and his mother all later testified that they had a three-day right of rescission on the loans. The creditor testified that the debtor was aware that no right of rescission existed with regard to the business property. Within the three days following the closing, the debtor, spouse, and mother decided to rescind all three loans by signing the necessary papers, which were then delivered to the creditor, who subsequently claimed that the rescission papers were not timely delivered. After the debtor and spouse filed their chapter 13 petition, the creditor filed a motion for relief from the stay with respect to the debtor, as well as to the spouse and mother, pursuant to section 1301(c). The bankruptcy court made the threshold determination that the loan against the mother’s property was properly rescinded, reasoning that it was not credible that a lender would not have noted the date and time of delivery when faced with a borrower who attempted to rescind in an untimely manner. The court went on to hold that, as a consequence of the valid rescission, the loan against the business property was also validly rescinded, under the doctrine of equitable estoppel. Specifically, the court found that, although the loans were separate, the creditor treated them as a package deal and that the loan secured by the business property would not be granted without the simultaneous loan on the mother’s property. Additionally, the debtor relied on the representation that the right of rescission existed, and would be harmed by that reliance if the rescission was not effective. United Companies Lending Corp. v. Skwozinski (In re Skwozinski), 2001 Bankr. LEXIS 1306, – B.R. – (Bankr. D.N.H. July 18, 2001) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1301.05
Denial of counsel’s appointment was affirmed on appeal. S.D.N.Y. The attorney for the chapter 11 debtor appealed an order of the bankruptcy court denying the debtor’s motion to retain him as its attorney. At the time the debtor sought to retain the attorney, the attorney was suspended from practicing law in the state (New York). Although the attorney was not disqualified from practicing before the federal courts, the bankruptcy court determined that the best interests of the debtor and creditors would not be served by the attorney’s appointment. The district court affirmed, holding that the bankruptcy court did not abuse its discretion when it denied the debtor’s motion to retain counsel of its choice. The court noted that because the attorney could only practice bankruptcy law, he had lost the disinterestedness and objectivity required to advise the debtor with respect to state law issues.Lite Ray Realty Corp. v. Bernstein, 2001 U.S. Dist. LEXIS 16437, – B.R. – (S.D.N.Y. October 12, 2001) (Hellerstein, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:327.04
Related debtor’s waiver of claim did not preclude trustee’s claim for contribution against partner. Bankr. D. Conn. Asserting that the defendant had been a participant in the debtor’s unsavory business dealings, the chapter 7 trustee sued the defendant joint venturer for contribution under partnership and common law theories, and for unjust enrichment based upon partnership tax losses unfairly received. After trial, the bankruptcy court held that the joint venturer was liable to the trustee for contribution. During the formation of the venture, the debtor never ratified these statements, although another partner had given assurances that the venturer’s involvement in the partnership would cost him nothing. Because the debtor had covered more than his share of the partnership operating deficits and the trustee stepped into the shoes of the debtor, the venturer was obligated to the trustee for his share of the operating deficits. Because judgment was rendered in favor of the trustee on the first count, the court did not address the remaining contribution and unjust enrichment claims.Daly v. Testo (In re Richardson), 2001 Bankr. LEXIS 1224, 267 B.R. 663 (Bankr. D. Conn. September 25, 2001) (Dabrowski, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:542.03
Claim for amounts paid under letter of credit and all changes and expenses related to purchase and sale of property allowed. Bankr. D. Del. The debtor, on behalf of another corporation, arranged for a stand-by letter of credit between the creditor and the lender to help secure a construction loan and mortgage made between the lender and the other corporation. Under the terms of a related reimbursement agreement, the debtor agreed to reimburse the creditor for any amounts paid by the creditor to the lender pursuant to the letter of credit agreement. After a default occurred, the lender commenced a foreclosure action against the three properties secured by the mortgage. When only one of the properties received a qualified bid, the debtor entered into a letter agreement with the creditor providing that the debtor would remain obligated to pay the creditor if the creditor would agree to purchase the two remaining properties. When the properties were ultimately sold at auction, the creditor was the high bidder and, thus, became the owner of the foreclosed properties. Following the debtor’s filing of a petition under chapter 11, the creditor received a telex from the lender demanding payment under the letter of credit and subsequently made payment as demanded. The creditor then filed a proof of claim, which included, in part, the amount paid pursuant to the demand made under the letter of credit. The debtor objected to the creditor’s proof of claim, arguing that the creditor’s claim was contingent, because the creditor could resell the properties at a price greater than it paid at the foreclosure sale and that profits from the subsequent resale would satisfy the creditor’s claim. The creditor then moved for summary judgment on the debtor’s objection to the creditor’s claim, asserting that, pursuant to the reimbursement agreement, the debtor was obligated to repay the amounts paid by the creditor under the letter of credit and that the debtor was liable for costs incurred by the creditor as part of purchasing and reselling the foreclosed properties. After finding that no genuine issue of material fact regarding obligation to repay the creditor pursuant to the terms of the letter of credit, the reimbursement agreement, or the letter agreement, the court granted the creditor’s motion for summary judgment and allowed its proof of claim to the extent proven. In re Planet Hollywood Int’l, 2001 Bankr. LEXIS 1217, – B.R. – (Bankr. D. Del. August 30, 2001) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02
Debtor’s motion to dismiss creditor’s reclamation claim for failure to properly identify goods in demand letter denied. Bankr. D. Del. A creditor filed a complaint against the chapter 11 debtor seeking, among other things, reclamation of goods pursuant to section 546(c). The debtor moved to dismiss the complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). The debtor alleged that the creditor’s reclamation claim was fatally flawed because the creditor failed to properly identify the goods in its reclamation demand letter. The bankruptcy court denied the debtor’s dismissal motion, and held that for purposes of the Rule 12(b)(6) motion, the court could not conclude that there was no set of facts that would support a finding that the goods were identifiable at the time of the demand. The court noted that a seller seeking reclamation under section 2-702 of the Uniform Commercial Code and 546(c) of the Bankruptcy Code must plead and prove that (1) the debtor was insolvent when the goods were delivered, (2) a written demand was made within 10 days after delivery, (3) the goods were identifiable at the time of demand, and (4) the goods were in possession of the debtor at the time of demand. The court further noted that neither section 2-702 of the Uniform Commercial Code, Bankruptcy Code section 546(c), nor the relevant case law requires that the demand letter set forth all the information needed to determine the identity of the reclamation goods on hand at demand time. The court concluded that whether a demand letter is sufficient for purposes of identifying the goods at the time of the demand is a facts and circumstances determination. This determination includes consideration of what information the debtor has regarding the identification of the goods, and the extent to which that information can be reasonably accessed to result in the identification of the goods at the time of the demand.Scotts Co. v. Hechinger Co. (In re Hechinger Inv. Co. of Del.), 2001 Bankr. LEXIS 1254, – B.R. – (Bankr. D. Del. September 14, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:546.04
Creditors committee, standing in debtors’ shoes, was in pari delicto with alleged fraud defendants’ and lacked standing to assert claims. 3d Cir. Two chapter 11 debtors were the alleged operators of a Ponzi scheme that collapsed and left numerous investors with significant losses. A creditors’ committee appointed by the bankruptcy trustee brought an action in federal district court on behalf of the debtor corporations, and alleged that certain third parties fraudulently induced the debtors to issue debt securities, thereby deepening their insolvency and forcing them into bankruptcy. More specifically, the complaint asserted that the third parties conspired with the debtors’ management, which was comprised of the debtors’ sole shareholders, to engineer the Ponzi scheme. The district court held that the creditors’ committee lacked standing to assert its claims against the third parties because of the doctrine of in pari delicto. The committee appealed, and the Court of Appeals for the Third Circuit affirmed. The court acknowledged that 'deepening insolvency' constituted a valid cause of action under state (Pennsylvania) law. However, evaluating the committee’s claims as of the commencement of the debtors’ chapter 11 filing, the court concluded that the committee, standing in the shoes of the debtors, was in pari delicto with the third parties it was suing and its claims were properly dismissed.Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 2001 U.S. App. LEXIS 21609, 267 F.3d 340 (3d Cir. October 9, 2001) (Fuentes, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1102.02
Court granted unsecured creditors’ committee’s application to retain financial advisor nunc pro tunc but limited effective date of relief. Bankr. D. Del. The United States trustee objected to the unsecured creditors’ committee’s application to retain a financial advisor nunc pro tunc as of December 1, 2000. The bankruptcy court noted that the third circuit has held that nunc pro tunc relief is available under 'extraordinary circumstances.' However, the court also found that the third circuit’s interpretation of this standard suggested a flexible approach that required bankruptcy courts to consider the circumstances of each case in light of equitable factors. In this case, the court concluded that the circumstances warranted an equitable solution allowing some, though not all, of the requested nunc pro tunc relief. Therefore, the court granted the committee’s application for nunc pro tunc relief effective January 1, 2001, rather than December 1, 2000.In re ICG Communs., Inc., 2001 Bankr. LEXIS 1251, – B.R. – (Bankr. D. Del. August 2, 2001) (Walsh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1103.03
Codebtor stay was violated. Bankr. E.D. Pa. The chapter 13 debtor’s sister filed a motion seeking to find an unsecured creditor in contempt for violating the codebtor stay provided by section 1301(a). The sister had retained the creditor attorney to obtain a divorce and to regain possessions stolen by her former husband. After the sister was unable to manage her case, the debtor guaranteed payment of the creditor’s fees. While the debtor’s chapter 13 case was pending, the state (New York) courts entered summary and final judgment against the sister for payment of the legal fees. The bankruptcy court granted the motion for contempt in part, holding that because the creditor violated the codebtor stay, the resulting judgments were void ab initio. The court declined to award attorney’s fees, noting that the debtor’s sister could have, but failed to, communicate with the creditor and request that appropriate action be taken to stay the state court proceedings.In re Patti, 2001 Bankr. LEXIS 1267, – B.R. – (Bankr. E.D. Pa. September 14, 2001) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1301.02
IRS’ tax lien follows and attaches to personal property acquired after taxpayer moves to another county. Bankr. N.D. Tex. The IRS filed a notice of federal tax lien in the county where the debtors lived. The notice covered federal income taxes for two consecutive years and applied to real and personal property owned by the debtors. Thereafter, the debtors moved to a different county and filed for relief under chapter 13. The IRS then filed a proof of secured claim for unpaid taxes. In court, the debtors argued that they no longer owned personal property in the state where the IRS’ lien was filed and that the lien did not attach to personal property acquired since moving. Thus, they argued that the IRS’ lien should be limited to the value of their personal property at the time debtors moved from the county where the lien was filed. After noting that the tax lien attached to the taxpayers’ property upon the filing of a notice of lien and that the lien applied to all the taxpayers’ property until either the taxpayer satisfied the liability or the statute of limitations on collections runs, the court found that the IRS’ lien attached to the debtors’ property in the new state and overruled the debtors’ objection to the IRS’ secured claim. In re Eschenbach, 2001 Bankr. LEXIS 1216, 267 B.R. 921 (Bankr. N.D. Tex. September 14, 2001) (Felsenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03
Court of Appeals ruled that a right to equitable relief for breach of noncompete covenant was not a 'claim' that could be discharged. 6th Cir. In 1994, the debtors entered into a franchise agreement with the creditor to operate a pharmacy, and the agreement contained a covenant not to compete. In 1997, the creditor obtained a money judgment in state (Iowa) court for nonpayment of royalty fees, after the debtors admitted that they breached the covenant not to compete by working in another pharmacy. In 1998, the creditor filed an action in state court to enjoin the operation of the competing pharmacy in violation of the covenant not to compete, and shortly thereafter the debtors filed a chapter 11 petition, which later converted to chapter 7. The creditor filed an adversary proceeding requesting a determination that the debtors could not reject the franchise agreement because it was terminated prepetition, and that the creditor’s right to equitable relief for breach of the covenant was not dischargeable. The creditor also requested a permanent injunction enforcing the covenant. The bankruptcy court granted summary judgment in favor of the creditor, and terminated the automatic stay to permit the creditor to seek an injunction in state court. The debtors appealed and the district court affirmed. This second appeal followed. The Court of Appeals for the Sixth Circuit affirmed, holding that, for the purposes of determining whether a 'claim' existed under section 101(5), the right to equitable relief constituted a claim only if it was an alternative to a right to payment or if compliance with the equitable order would itself require the payment of money. The Court of Appeals concluded that the creditor, under state law, could only obtain equitable relief if money damages for future injuries were inadequate. Consequently, equitable relief was not an alternative to a right to payment for future injuries and was therefore not a 'claim' that could be discharged.Kennedy v. Medicap Pharms., Inc., 2001 U.S. App. LEXIS 21271, 267 F.3d. 493 (6th Cir. October 2, 2001) (Guy, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:101.05
Court refused to require immediate payment under leases. Bankr. N.D. Ohio The chapter 11 debtors were operating as debtors in possession. In 1989, prior to the petition filing, an entity that combined operations with the debtors entered into master equipment lease agreements with the creditor. The leases were transferred and assigned to the debtors prepetition and extended by two lease extensions, each dated December 7, 2000, under which the debtors were to make payments to the creditor during January, February, and March 2001. No further payments were required by the leases. None of the payments were made and the debtors filed their chapter 11 petitions on April 2, 2001. The creditor filed a motion seeking payment under the leases pursuant to section 365(d)(10), and also raised the issue of whether the property was not necessary to a successful reorganization. The creditor also sought relief from the automatic stay, and requested the bankruptcy court to fix a deadline for the debtor to assume or reject the leases prior to confirmation. The court held that the creditor was essentially asking the court to rewrite the lease provisions to require immediate payment, and denied the request, reasoning that, for the purposes of section 365(d)(10), there must be an actual showing of special circumstances justifying the revision of the parties’ unambiguous terms. The court also (1) declined to fix an accelerated deadline for assumption or rejection, holding that the potential harm to the creditor was no greater than that to any other creditor who negotiated a lease in the case; (2) found that the property was necessary to reorganization and denied the creditor’s request for relief from the stay; and (3) rejected the adequate protection claim, since that relief only applied to postpetition payments, which were not required under the leases in question.In re Republic Techs. Int’l, 2001 Bankr. LEXIS 1195, 267 B.R. 548 (Bankr. N.D. Ohio September 27, 2001) (Shea-Stonum, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04
Law of the case doctrine defeated appeal of identical issue. B.A.P. 6th Cir. The bankruptcy court approved an interim award in compensation to the debtor’s attorneys to be paid from the debtor’s estate. On appeal by the United States trustee, the Bankruptcy Appellate Panel for the Sixth Circuit affirmed. The bankruptcy court then entered a final order approving the administrative claim and disbursement of funds from the estate, and the United States trustee filed this second appeal. The B.A.P. for the Sixth Circuit affirmed, holding that, under the law of the case doctrine, it was precluded from reexamining an issue previously decided in the same case. Because its prior decision addressed the identical issue presented in this appeal, the law of the case doctrine was applicable, precluding the B.A.P. from adjudicating the same issue.Vergos v. Hilburn’s Paint & Body Shop (In re Hilburn’s Paint & Body Shop), 2001 Bankr. LEXIS 1197, 268 B.R. 127 (B.A.P. 6th Cir. October 4, 2001) (Aug, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.09
Trustee’s service of order to show cause on debtor’s mortgagee met satisfied requirements for due process and Rule 7004. Bankr. W.D. Tenn. A mortgagee corporation moved to set aside a bankruptcy court order, entered on an order to show cause brought by the chapter 13 trustee, that deemed the debtor’s mortgage current. The motion also sought rehearing of the underlying order to show cause. The mortgagee primarily alleged that it never received notice of the order to show cause because it was not properly served. The bankruptcy court denied the mortgagee’s motion, and held that service of process upon the mortgagee met the requirements for due process and Bankruptcy Rule 7004. The court found that the mortgagee appointed its bankruptcy department as the proper agent for service and designated its Pennsylvania address as the proper address for service of process in a letter to the chapter 13 trustee. The court concluded that the address designated by the mortgagee satisfied the 'appointment' requirement of Rule 7004(b)(3), and that the mortgagee failed to rebut the presumption of receipt. The court also held that there was no basis for setting aside the court’s order under Fed. R. Civ. P. 60(b)(1) because the mortgagee failed to demonstrate that its own culpable conduct did not lead to its default to some extent.In re Chess, 2001 Bankr. LEXIS 1234, 268 B.R. 150 (Bankr. W.D. Tenn. September 27, 2001) (Kennedy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7004.03
Court of Appeals for the Eighth Circuit held that transfer avoidance was barred by collateral estoppel. 8th Cir. In 1986, two days prior to his marriage to the creditor, the debtor conveyed a parcel of farmland to his son for $10. The son recorded the deed in 1995, during the debtor’s contested divorce proceedings. In the final divorce decree, the creditor was awarded a judgment secured by an equitable lien on any interest the debtor had in the farmland. In 1998, a state (Arkansas) court rejected the creditor’s suit to set aside the transfer to the debtor’s son under state fraudulent transfer laws, concluding that there was no evidence of actual intent to defraud or constructive fraud, as the creditor was on notice of the transfer prior to the marriage. Shortly thereafter, the creditor, along with two other creditors, filed an involuntary chapter 7 petition against the debtor. The trustee filed an adversary proceeding to set aside the 1986 conveyance, and to bring the farmland into the estate. The bankruptcy court granted summary judgment for the trustee, finding that the deed’s record date was the effective date of the transfer, which was made without adequate consideration and rendered the debtor insolvent. The debtor appealed, arguing that principles of res judicata and collateral estoppel barred the trustee from relitigating the fraudulent transfer claim. The Court of Appeals for the Eighth Circuit affirmed, but held that the creditor’s claim could not be satisfied from the farmland portion of the estate, reasoning that the creditor had no right to relitigate the state court’s determination that the effective date of the transfer was in 1986. Consequently, the trustee had no avoidance power under section 544(b)(1) based on the creditor’s rights, but the Court of Appeals held that the fact that the transfer was not voidable by the creditor did not bar the trustee from relying on the rights of other unsecured creditors, and the trustee’s claim on behalf of other creditors was not barred by collateral estoppel.Williams v. Marlar (In re Marlar), 2001 U.S. App. LEXIS 21266, 267 F.3d. 749 (8th Cir. October 2, 2001) (Loken, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.09
Creditor of stripped down claim from debtor’s previous chapter 7 bankruptcy deemed to have allowable claim in debtor’s subsequent chapter 13 case. Bankr. E.D. Cal. The creditor held a secured claim against the debtor when the debtor previously filed for relief under chapter 7 and the creditor’s claim was duly scheduled in that case. The court presiding over the chapter 7 case found that the collateral for the creditor’s claim had no value and, therefore, the claim was to be treated as an unsecured claim. Thus, the creditor’s lien was stripped. After the debtor received a chapter 7 discharge, the debtor filed a chapter 13 petition and ultimately objected to the creditor’s now-unsecured claim. The court found that, because of the chapter 7 discharge, the creditor could not sue the debtor, but it could have foreclosed on its security. The court also found that the subsequent filing of the chapter 13 petition and the application of 11 U.S.C. § 506(a) now prevented the creditor from pursuing its collateral. However, the court found that 'the price of separating the claim from its security' was that the creditor had an unsecured claim against the estate and was entitled to be paid whatever the best-interest of creditors and the disposable income test require to be paid to other unsecured creditors. After finding that the creditor had an unsecured claim, the court overruled the debtor’s objection to the lien-stripped claim. In re Chinayia & Grounder, 2001 Bankr. LEXIS 1202, 266 B.R. 879 (Bankr. E.D. Cal. September 24, 2001) (McManus, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03
City’s civil judgment that enforced payment of criminal restitution found not dischargeable. B.A.P. 9th Cir. The city responded to a chemical fire at the debtor’s residence and the debtor later pled no contest to violations of the city’s code for unsafe storage of hazardous materials without a permit. The debtor was sentenced to formal probation and, as a condition of probation, was sentenced to community service and ordered to pay restitution to the city. The debtor failed to complete any community service hours or pay restitution, and was ordered to serve jail time. When the debtor’s probation ended, the trial court ordered a civil judgment for the unpaid restitution and restitution judgment was entered. The debtor then filed a chapter 7 petition and an adversary proceeding seeking to discharge the amount owed under city’s restitution judgment. After the hearing, the bankruptcy court dismissed the debtor’s complaint, finding that the judgment was not dischargeable based on 11 U.S.C. § 523(a)(7). On review of the record, the Bankruptcy Appellate Panel for the Ninth Circuit found that the debtor’s restitution obligation arose in, and was ordered in conjunction with, a state criminal prosecution. After noting that, in general, restitution proceedings are carried out on behalf of the citizens of the state and not for a particular creditor, the B.A.P. also found that the penal character of the city’s restitution judgment was not altered by the fact that the amount of restitution ordered was the same amount as the city’s damages. Because the restitution order promoted law enforcement by deterrence and served to protect society as a whole, the B.A.P. affirmed the bankruptcy court’s decision dismissing the debtor’s complaint to discharge the debt owed to the city for restitution imposed as condition of debtor’s probation. Warfel v. City of Saratoga, 2001 Bankr. LEXIS 1203, 268 B.R. 205 (B.A.P. 9th Cir. August 15, 2001) (Marlar, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.13
Chapter 13 case was dismissed, subject to immediate plan amendments to trustee’s satisfaction. Bankr. N.D. Cal. The chapter 13 debtor proposed a plan providing for a dividend of approximately 10 percent to unsecured creditors, but the trustee discovered that the debtor had understated his monthly income. The debtor admitted that his income was $430 higher than he originally disclosed, and made two amendments to his schedules that raised his monthly expenses by $250, which amount was sufficient to offset the increase in income since the original schedules reflected a deficit. The trustee objected, arguing that the proposed plan did not meet the disposable income requirements set forth in section 1325(b)(1)(B). The trustee indicated that a plan that increased the monthly payment from $125 to $190 would be acceptable. The debtor expressed the desire to pay $125 per month over an extended period of time, and the trustee made no objection. The bankruptcy court held that any plan incorporating either of those two changes would be confirmed, but that, in the interregnum, confirmation was denied and the chapter 13 petition dismissed if the debtor did not immediately amend the plan to the trustee’s satisfaction. The court noted that the debtor was entitled to a full evidentiary hearing but that, if such a hearing were held, the court would consider as evidence both the superceded versions of his schedules and could possibly conclude that the debtor was required to pay a monthly installment greater than the amount acceptable to the trustee.In re Bohrer, 2001 Bankr. LEXIS 1187, 266 B.R. 200 (Bankr. N.D. Cal. August 2, 2001) (Jaroslovsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.08
Complaint was not time-barred. Bankr. W.D. Okla. The chapter 7 debtors moved for summary judgment, dismissing the nondischargeability complaint against them as untimely. After the creditor and the debtors had entered into a joint venture construction business and the debtors became indebted to the creditor and its principals, the debtors informed the creditor’s principals that they intended to file for bankruptcy. The debtors never directly told the creditor’s principals that they had in fact filed a petition and their schedules did not list either the creditor or the principals. Although the list of creditors was amended to include the principals, they only received notice of the petition after the bar date had passed. The bankruptcy court denied the debtors’ motion for summary judgment, holding that because the creditor had no notice or actual knowledge of the case to permit it to bring a timely determination of dischargeability, the creditor was not bound by the 60-day deadline for filing a complaint. The court determined that 'actual knowledge' of the case did not exist when the creditor’s principals were only told of the debtors’ intention to file a petition at some time in the future (citing Collier on Bankruptcy, 15th Ed. Revised).Today Homes, Inc. v. Brown (In re Brown), 2001 Bankr. LEXIS 1249, 267 B.R. 877 (Bankr. W.D. Okla. October 1, 2001) (Bohanon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.09
Transfers to lottery corporation were not property of the estate. Bankr. M.D. Ga. The debtor, which operated retail stores, entered into a contract with the state (Georgia) lottery corporation for the sale of lottery tickets. The contract required that the retailer maintain a separate trust account to deposit proceeds from ticket sales. Although the debtor maintained a separate trust account, each of the debtor’s stores maintained a separate store account into which all lottery proceeds were deposited. During the week in which the debtor filed its chapter 11 petition in 1996, the amount due for lottery proceeds was not 'swept' from the trust account because of lack of funds. The debtor and the lottery corporation agreed postpetiton to prorate ticket sales and, accordingly, the debtor transferred to the corporation approximately $86,670 out of a general operating account. The debtor eventually assumed its executory contract with the corporation and continued to sell lottery tickets. But in 1998, the debtor commenced an adversary proceeding to recover postpetition transfers from the corporation, arguing that disbursements made for the first six weeks postpetition actually represented prepetition sales and, as such, were recoverable as property of the estate. The corporation argued that the ticket sale proceeds were property of a trust and therefore, could not be property of the estate. The debtor countered with the assertion that any trust was destroyed due to the commingling of ticket sale proceeds with general receipts. The bankruptcy court held that state law created a statutory trust in favor of the lottery corporation, and that, in order for the transferred funds to be excluded from the estate, and thereby not subject to recovery, a sufficient nexus between the statutory trust and the funds transferred was required. The court concluded that the voluntary payment, regardless of the source of the funds, provided the necessary nexus.Suwannee Swifty Stores v. Ga. Lottery Corp. (In re Suwannee Swifty Stores, Inc.), 2001 Bankr. LEXIS 533, 266 B.R. 544 (Bankr. M.D. Ga. May 17, 2001) (Laney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:549.04