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 3, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Employee who facilitated liquidation of debtor’s subsidiary violated stay in seeking to collect payment resulting in voluntary termination and voiding right to payment. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Claimant employee was hired by a subsidiary of debtors to facilitate the postpetition liquidation of that particular entity. The employee alleged that under the employment contract, he was entitled to a retention bonus and a termination payment, which the debtors never paid. The employee moved to have these claims treated as priority administrative claims. OVERVIEW: After the debtors failed to pay the retention bonus, the employee sent the debtors a demand letter stating that their failure to pay the retention bonus was a material breach of the employment agreement that he considered the employment relationship to be terminated, and that he was entitled to the termination payment. The bankruptcy court determined that the employment agreement was subject to the protection of the automatic stay. By sending the demand letter, the employee violated the stay. Because of the violation of the automatic stay, the bankruptcy court deemed the demand letter as void and treated the employee’s termination as a voluntary termination. Because his termination was voluntary, under the employment agreement, he was not entitled to keep the retention bonus. Because the demand letters were deemed void, he failed to give the appropriate notice to receive the termination payment. Even if the employee were entitled to these payments, he executed a general release that released his claims for these payments. Finally, the employee was sufficiently compensated for his postpetition services and was not entitled to recover additional amounts in quantum meruit. In re Enron Corp., 2003 Bankr. LEXIS 1346, — B.R. — (Bankr. S.D.N.Y. October 21, 2003) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06 [back to top]

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Income of spendthrift trust of which debtor was beneficiary was not property of the estate, but interest in trust remainder was estate property. Bankr. D. Conn. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition. Plaintiff chapter 7 trustee filed an action against the debtor and co-defendants, two trustees, to determine that the debtor’s interest in certain trust income and a trust remainder were property of the bankruptcy estate pursuant to 11 U.S.C. § 541. A trustee moved, pursuant to Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012(b), to dismiss the complaint. OVERVIEW: The complaint alleged that the debtor was a discretionary beneficiary of the income from an inter vivos trust that became irrevocable upon the settlor’s death. The chapter 7 trustee argued that the debtor’s interest in the trust income and the remainder of the trust were property of the bankruptcy estate. A trustee argued that the trust was a spendthrift trust under Connecticut law and the trust income, pursuant to 11 U.S.C. § 541(c)(2), was not property of the estate. The court disagreed and found that the debtor’s interest in the remainder was property of his bankruptcy estate. The debtor had no rights in the income of the trust sufficient to make such rights property of the debtor’s bankruptcy estate. The trust document gave the corporate trustee the discretion to determine whether and how much of the trust’s income and principal to distribute to the beneficiaries or to accumulate, which satisfied the requirements under Connecticut law for a spendthrift trust. The debtor’s interest in the trust remainder was property of the bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1). The trustee was not entitled to dismissal under Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012(b). O’Neil v. Fleet Nat’l Bank (In re Britton), 2003 Bankr. LEXIS 1354, — B.R. — (Bankr. D. Conn. October 3, 2003) (Krechevsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.01 [back to top]

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Debtor’s obligation to pay off former spouse’s mortgage was nondischargeable due to ability to pay and detriment to ex-spouse. Bankr. W.D. Pa. PROCEDURAL POSTURE: Plaintiff was the former spouse of defendant debtor. The former spouse sought a determination that the obligation of the debtor to pay off a mortgage against property owned by him and in which he resided was excepted from discharge by 11 U.S.C. § 523(a)(15). The debtor asserted that she was not able to pay off the mortgage and that the debt in question therefore was dischargeable in accordance with 11 U.S.C. § 523(a)(15)(A). OVERVIEW: The debtor first tried to deny that she ever agreed to pay her ex-spouse’s mortgage. However, during her divorce proceedings, the state court determined that she had so agreed. Thus, the debtor was collaterally estopped from raising this issue. Each of these requirements was satisfied in this instance. The bankruptcy court next determined that the obligation was incurred “in the course of a divorce.” Thus, the obligation was excepted from discharge unless at least one of the exceptions found at 11 U.S.C. §§ 523(a)(15)(A) and (B) applied to this case. The exception found at 11 U.S.C. § 523(a)(15)(A) did not apply because, contrary to what the debtor asserted at trial, she had the ability to pay the debt. Considering the amount of equity the debtor had in her own residence, she should have been able to take out a second mortgage against it in an amount sufficient to pay her debt to her ex-spouse. The exception in 11 U.S.C. § 523(a)(15)(B) also did not apply to this case because the detriment the ex-spouse would have suffered outweighed the benefit to the debtor of a discharge because the ex-spouse could not work due to a disability. Ferguson v. Enciso (In re Enciso), 2003 Bankr. LEXIS 1323, — B.R. — (Bankr. W.D. Pa. October 15, 2003) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.21 [back to top]

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Issues of fact as to corporation’s status as alter ego of debtor necessitated denial of corporation’s summary judgment motion on committee’s action for fraud. Bankr. E.D. Pa. PROCEDURAL POSTURE: Plaintiff official committee of unsecured creditors filed an adversary action against defendant corporation to recover damages for the alleged fraudulent transfer to the corporation of substantially all of the assets of a subsidiary of the bankruptcy debtor. The corporation moved for summary judgment. OVERVIEW: The complaint alleged actual and constructive fraud under 11 U.S.C. § 548(a)(1)(A), (B), and actual and constructive fraud under the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa. Cons. Stat. § 5101 et seq. The corporation challenged the committee’s reverse veil piercing argument, arguing that it was essential for the committee to present evidence of intentional misconduct. The court, however, rejected the contention that fraudulent intent was a necessary finding in all corporate veil piercing cases. As to constructive fraud, the court found that many genuine issues of material fact were in dispute concerning the alleged separate corporate existence of the debtor’s subsidiary, e.g., the committee argued that corporate formalities were completely disregarded and that the totality of the evidence clearly supported the charge that the subsidiary was completely dominated by the debtor and should be viewed as its alter ego. There were also issues of fact as to intentional fraud. Inter alia, if the alter ego issue were resolved adversely to the corporation, the insolvency of the transferor factor was certainly present. Official Comm. of Unsecured Creditors v. Banta Corp. (In re Xyan.com, Inc.), 2003 Bankr. LEXIS 824, 299 B.R. 357 (Bankr. E.D. Pa. July 22, 2003) (Raslavich, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.02 [back to top]

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Bankruptcy filing did not extend time period for debtor to file notice of recission under the Truth in Lending Act. Bankr. D. Md. PROCEDURAL POSTURE: Defendant creditor moved to dismiss the debtor’s complaint or in the alternative, for summary judgment arguing that the debtor’s notice of election to rescind via the adversary proceeding complaint was untimely under Truth in Lending Act, 15 U.S.C. § 1601 et. seq. OVERVIEW: The debtor argued that the notice of election to rescind was timely under the extension of time granted by Fed. R. Bankr. P. 9006. The debtor gave notice to the creditor of her election to rescind by means of the complaint. The debtor did not allege that she gave notice by any other means, despite having the option under 12 C.F.R. § 266.23(a)(2) to give notice by mail, telegram, or other means of written communication. Because the debtor had the option of giving notice of her election to rescind by a method other than the filing of a complaint, she was not bound to the use the federal courts to give notice. Because the debtor’s notice of election to rescind was not required to have been brought in the bankruptcy case, the Federal Rules of Bankruptcy Procedure did not extend the statutory time for the debtor to give notice of her election to rescind. The debtor’s notice was not timely when she filed her complaint. Her right to give notice expired on day earlier. The debtor’s argument that 11 U.S.C. § 108 gave her 60 days from the date of the filing of the petition to give her notice of recission did not prevail. Thomas v. GMAC Res. Funding Corp. (In re Thomas), 2003 Bankr. LEXIS 827, — B.R. — (Bankr. D. Md. July 7, 2003) (Keir, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:108.01 [back to top]

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Debtor’s rights in general intangible that was property of the estate was subject to creditor’s prepetition security interest. Bankr. M.D.N.C. PROCEDURAL POSTURE: Debtors had paid a retainer to their attorneys for representation in the bankruptcy case. After the attorneys withdrew, a balance remained in the retainer fund. The debtors moved to turn these funds over to the chapter 11 trustee. Creditor alleged that the funds were a general intangible and as such, the funds belonged to it pursuant to a prepetition security interest. OVERVIEW: The bankruptcy court first determined that the retainer was a security retainer in which the debtors maintained an interest. The law firm did not earn the retainer on receipt but simply maintained the funds on deposit until earned. The debtors’ interest in the retainer was neither a deposit account (because the law firm was not a bank or financial institution) or “money” (because the debtors had only the right to receive a refund on the unearned portion of the retainer fund) and therefore, the interest was a general intangible. The debtors’ rights in the retainer arose prepetition, and therefore, became property of the estate upon the bankruptcy filing pursuant to 11 U.S.C. § 541. The bankruptcy court determined that 11 U.S.C. § 552 could not be used to strip off a lien on property that existed prepetition. The creditor claiming the security interest properly perfected its security interest by filing the appropriate financing statements. Accordingly, the debtor’s right to the refund of the retainer balance, a general intangible, was subject to the creditor’s security interest. In re E-Z Serve Convenience Stores, Inc., 2003 Bankr. LEXIS 1358, 299 B.R. 126 (Bankr. M.D.N.C. September 16, 2003) (Carruthers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.01 [back to top]

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Creditor’s motion for reconsideration of denial of claims on grounds of mistake denied given that creditor had previously entered into a binding settlement. Bankr. N.D. Tex. PROCEDURAL POSTURE: Debtor filed a chapter 11 petition that was later converted to chapter 7. The case was jointly administered with other related bankruptcy cases. Creditor filed claims and 11 of the claims were denied. Creditor moved pursuant to 11 U.S.C. § 502(j); Fed. R. Bankr. P. 3008 for reconsideration of the denied claims under Fed. R. Civ. P. 60; Fed. R. Bankr. P. 9024. OVERVIEW: The court found that where creditor failed to move for reconsideration of the claims within 10 days after the court’s entry of the order that allowed one claim and disallowed the remainder, then the court looked to Fed. R. Civ. P. 60, made applicable by Fed. Bankr. P. 9024, to determine what constituted “cause” for reconsideration of creditor’s disallowed claims under 11 U.S.C. § 502(j). Creditor argued that cause existed to reconsider the claims based on mistake, but the court disagreed. The court found that the creditor made a deliberate choice to settle. The fact that she was not represented by counsel at the time she entered into the agreement did not diminish the deliberateness of her choice. Creditor failed to show how the documents she received after the settlement would have changed her negotiating posture. A settlement agreement that resolved litigation was considered to be actually litigated. The court failed to find cause under 11 U.S.C. § 502(j) to reconsider the claims. In re Harbor Fin. Group, 2003 Bankr. LEXIS 1351, — B.R. — (Bankr. N.D. Tex. October 21, 2003) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.11 [back to top]

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District court properly reversed discharge of student loans on grounds that debtor’s choice to seek work only in low-paying field of music did not create undue hardship. 5th Cir. PROCEDURAL POSTURE: Appellant debtor sought to discharge his student loan pursuant to 11 U.S.C. § 523(a)(8). The District Court for the Eastern District of Louisiana reversed the bankruptcy court’s decision that to require the debtor to repay his student loans would be an undue hardship. The debtor appealed. OVERVIEW: The debtor was a professional cellist who had obtained over $77,000 in government-insured student loans to finance his education. The debtor filed for chapter 7 bankruptcy. The court of appeals found that the district court correctly applied de novo review to the bankruptcy court’s dischargeability holding because the decision to discharge the debts represented a conclusion regarding the legal effect of the bankruptcy court’s factual findings as to the debtor’s circumstances. The debtor had not established persistent undue hardship entitling him to discharge his student loans. The debtor held a masters degree in music from the New England Conservatory of Music. He was about 43 years old, healthy, well-educated, and had no dependents, yet had repaid only $755 of his over $77,000 debt. The debtor was capable of obtaining additional steady employment in a number of different arenas. Furthermore, nothing in the Bankruptcy Code suggested that the debtor could choose to work only in the field in which he was trained, obtain a low-paying job, and then claim that it would be an undue hardship to repay his student loans. United States Dept. of Educ. v. Gerhardt (In re Gerhardt), 2003 U.S. App. LEXIS 21643, — F.3d — (5th Cir. October 23, 2003) (Jones, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Transfer of more than half of marital property to debtor’s former spouse pursuant to divorce decree was not avoidable, debtor having received reasonably equivalent value. 5th Cir. PROCEDURAL POSTURE: Appellant trustee challenged a decision entered by the District Court for the Western District of Texas that granted summary judgment to appellee, appellant debtor’s former husband, in an adversary action under 11 U.S.C. § 548 to recover assets from the former husband. OVERVIEW: The debtor had transferred property to the former husband pursuant to a divorce decree. The divorce court had granted custody of the minor child to the former husband as well as ownership in more than 50 percent of the couple’s community estate. Less than a year after the decree, the debtor filed for chapter 7 bankruptcy. The trustee sought to avoid the transfer under 11 U.S.C. § 548. The bankruptcy court had ruled that the debtor had received reasonably equivalent value as a matter of law, despite the fact that the divorce court had divided the property on a basis explicitly described as “disproportionate.” The appellate court noted that the issue of whether the debtor had received reasonably equivalent value under 11 U.S.C. § 548 was a question of fact. The court held that the debtor had not received less than reasonably equivalent value for her claims solely by virtue of the fact hat the debtor had received less than half of the community property. Ingalls v. Erlewine (In re Erlewine), 2003 U.S. App. LEXIS 21653, — F.3d — (5th Cir. October 23, 2003) (King, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.01 [back to top]

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