Collier Bankruptcy Case Update November-5-01

Collier Bankruptcy Case Update November-5-01

 

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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 5, 2001

CASES IN THIS ISSUE
(scroll down to read the full summary)

  • 1st Cir.

    § 503(b)(1)(B) Claim for payment of postpetition unemployment benefits was not entitled to priority.
    Mass. Div. of Empl. & Training v. Boston Reg’l Med. Ctr., Inc. (In re Boston Reg’l Med. Ctr., Inc.)
    (B.A.P. 1st Cir.)

    § 1322(b)(1) Chapter 13 plan unfairly discriminated against creditors.
    Bentley v. Boyajian (In re Bentley)
    (B.A.P. 1st Cir.)


    2d Cir.

    § 363 Creditor could purchase an assignment of rights from chapter 7 trustee to pursue existing or potential avoidance claims against debtor’s spouse.
    In re Greenberg
    (Bankr. E.D.N.Y.)


    3d Cir.

    § 362(a) Stay was not violated.
    Pardo v. Horizon Healthcare Plan Holding Co. (In re APF Co.)
    (Bankr. D. Del.)

    § 523(a)(1) Debtor attorney’s federal tax liabilities excepted from discharge.
    Simone v. United States (In re Simone)
    (Bankr. E.D. Pa.)

    § 548(a)(1) Elements of fraudulent conveyance were sufficiently pled.
    Pardo v. Avanti Corp. Health Sys. (In re APF Co.)
    (Bankr. D. Del.)

    § 553(a) Landlord was not required to set off security deposit before asserting claim.
    In re APF Co.
    (Bankr. D. Del.)


    4th Cir.

    § 109(e) Prepetition fraud judgment rendered debtor ineligible for chapter 13.
    In re Stern
    (Bankr. D. Md.)


    5th Cir.

    § 330(a)(1) Order awarding reduced compensation to financial and tax advisor was affirmed.
    PriceWaterhouseCoopers, LLP v. Litzler (In re Harbor Fin. Group)
    (N.D. Tex.)

    Rule 7024 Motions to intervene were granted.
    In re Babcock & Wilcox Co.
    (E.D. La.)


    6th Cir.

    § 503(b)(1)(A) Administrative expense claim was denied.
    In re Visi-Trak, Inc.
    (Bankr. N.D. Ohio)

    § 541(c) Antialienation provisions of annuity contract excluded it as an estate asset.
    In re Barnes
    (Bankr. E.D. Mich.)

    Rule 7056 Creditor’s motion for summary judgment was granted.
    Fifth Third Bank of Northwestern Ohio v. Baumhaft (In re Baumhaft)
    (Bankr. E.D. Mich.)


    7th Cir.

    § 507(a)(1) Code did not preempt wage earners’ lien.
    Peltz v. Wisconsin Dep’t of Workforce Dev. (In re AR Accessories Group)
    (Bankr. E.D. Wis.)


    8th Cir.

    § 523(a)(6) B.A.P. affirmed dismissal of cause of action.
    Jafarpour v. Shahrokhi (In re Shahrokhi)
    (B.A.P. 8th Cir.)

    § 1121(e) Debtors’ small business election was abrogated.
    In re Coleman Enters.
    (Bankr. D. Minn.)


    9th Cir.

    § 362(h) Compensatory and punitive damages imposed against mortgage creditor.
    Henry v. Assocs. Home Equity Servs., Inc. (In re Henry)
    (Bankr. C.D. Cal.)


    10th Cir.

    § 726(a)(1) Claims did not qualify for priority distribution.
    In re Anderson
    (Bankr. D. Kan.)


    11th Cir.

    § 507(a)(8) Tax obligations were not discharged.
    United States v. Romagnolo (In re Romagnolo)
    (M.D. Fla.)

    26 U.S.C. § 6672(a) Failure to remit withholding taxes was not willful.
    In re Nutt
    (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st Cir.

Claim for payment of postpetition unemployment benefits was not entitled to priority. B.A.P. 1st Cir. The debtor filed a chapter 11 petition in February 1999. It had begun to wind up its business and had already discharged employees. Within weeks of the petition filing, the debtor continued to discharge employees, many of whom applied for and received benefits from the state (Massachusetts) unemployment compensation fund. Consequently, the creditor (the state division of employment) filed two proofs of claim for unpaid payments in lieu of contributions for the benefits that had been paid to the employees. The bankruptcy court held that although the prepetition claim was a tax within the meaning of section 507(a)(8), it was not a tax on wages, salaries or commissions under that section. The court also held that a portion of the postpetition claim was entitled to administrative expense priority under section 503(b)(1)(B)(i), but that priority would only be accorded to benefits paid to the extent that such benefits were attributable to service in the employ of the chapter 11 estate, not of the debtor. The parties entered a stipulation whereby the aggregate prepetition and postpetition claims would be allowed as a general unsecured claim in the approximate amount of $2.9 million and a priority administrative claim in the amount of $89,000. The stipulation was subject to rights of appeal, and the creditor appealed the court’s ruling that, although the payments in lieu of contributions were taxes, they were not entitled to priority. The creditor also disputed the ruling that only a portion of its claim was entitled to treatment as a priority administrative expense. The B.A.P. for the First Circuit affirmed the holding that the prepetition claim was not entitled to priority as taxes on wages, since the exaction was remote from the payment of wages, was contingent upon unemployment, and was only related to employees eligible under state statute. The B.A.P. went on to hold that the bankruptcy court was correct in determining that benefits paid postpetition were chargeable under state law to the debtor as the employing entity, not to the estate, and therefore could not constitute a first priority administrative expense. The B.A.P. thus rejected the creditor’s contention that the date of the payment was the dispositive, triggering event that qualified the postpetition payments for priority.Mass. Div. of Empl. & Training v. Boston Reg’l Med. Ctr., Inc. (In re Boston Reg’l Med. Ctr., Inc.), 2001 Bankr. LEXIS 1096, 265 B.R. 838 (B.A.P. 1st Cir. August 27, 2001) (Deasy, B.A.P.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.07

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Chapter 13 plan unfairly discriminated against creditors. B.A.P. 1st Cir. The chapter 13 debtors filed a proposed plan that divided nonpriority unsecured creditors into two classes for different treatment. The first class contained student loan creditors, who were owed a total debt of approximately $57,700, and the plan provided for full payment of those obligations. The second class consisted of all other unsecured claims, which the debtor proposed to pay pro rata at 3.6 percent. The trustee objected, contending that the plan unfairly discriminated against the second class, in violation of section 1322(b)(1). The bankruptcy court denied confirmation, holding that the nondischargeability of the student loans did not justify the preferential treatment of those loans. This appeal followed. The debtors argued that the discrimination was permissible because it enabled them to emerge, after completion of the plan, free of nondischargeable student loan obligations. The B.A.P. for the First Circuit affirmed, holding that the discrimination effectuated by the plan was unfair. The B.A.P. reasoned that the very concept of chapter 13 contemplated that (1) nonpriority, unsecured creditors would share equally in plan contributions and (2) student loans would not be accorded priority, which is distinct from their nondischargeable status. Finally, the debtors’ 'fresh start' argument did not justify the discrimination, because filing for chapter 13 does not necessarily permit a debtor to emerge entirely free of student loan obligations. Bentley v. Boyajian (In re Bentley), 2001 Bankr. LEXIS 1099, 266 B.R. 229 (B.A.P. 1st Cir. September 5, 2001) (PER CURIAM).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05

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2nd Cir.

Creditor could purchase an assignment of rights from chapter 7 trustee to pursue existing or potential avoidance claims against debtor’s spouse. Bankr. E.D.N.Y. The chapter 7 debtor’s primary creditor objected to the trustee’s proposed settlement of fraudulent conveyance and transfer avoidance claims against the debtor’s wife. The creditor also sought an assignment of the right to prosecute the claims, and offered to pay the trustee a premium of $25,0000 over the amount of the trustee’s proposed settlement as consideration for the assignment. The bankruptcy court sustained the creditor’s objection, and entered an order requiring the trustee and the creditor to arrange for the sale and assignment of the trustee’s right to pursue the avoidance actions. The court concluded that the assignment was in the best interests of the estate, and noted that it would serve to maximize the value of the debtor’s estate and would not prejudice the equality of distribution among the debtor’s creditors. The court explained that any concern that the creditor might recover more than its fair share of assets in any subsequent action was obviated in this case by the fact that the creditor assignee represented 99 percent of all outstanding claims. The court also noted that any remaining concern about the potential for inequitable distribution could be dispelled by restricting the assignment so that the creditor was limited to pursuing claims on behalf of the estate, rather than on behalf of itself, and by requiring that any subsequent recovery be equitably distributed to creditors under the trustee’s supervision.In re Greenberg, 2001 Bankr. LEXIS 1084, 266 B.R. 45 (Bankr. E.D.N.Y. August 24, 2001) (Bernstein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.02

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3rd Cir.

Stay was not violated. Bankr. D. Del. The chapter 11 trustee and plan administrator filed a complaint against a medical insurer that had contracted prepetition with the debtor, a physician practice management company, to pay for services provided to the insurer’s enrollees. Before filing its petition, the debtor fell behind in its payment obligations to medical care providers, and the insurer withheld its regular payments to the debtor. The trustee argued that the insurer’s prepetition withholding and postpetition failure to turn over the withheld payments were a sanctionable violation of the automatic stay. The bankruptcy court granted the insurer’s motion to dismiss the counts alleging violations of the stay, holding that the insurer’s postpetition failure to remit the payments withheld prepetition under the prepetition contract did not constitute a violation of the automatic stay. The insurer’s preservation of its prepetition legal status by failing to act postpetition merely maintained the status quo and did not amount to an affirmative act in violation of the automatic stay.Pardo v. Horizon Healthcare Plan Holding Co. (In re APF Co.), 2001 Bankr. LEXIS 1298, – B.R. – (Bankr. D. Del. August 31, 2001) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03

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Debtor attorney’s federal tax liabilities excepted from discharge. Bankr. E.D. Pa. The chapter 7 debtor, an attorney, filed an adversary complaint seeking a determination as to the dischargeability of his tax liabilities for the years 1984, 1986, 1987 and 1988. The IRS asserted that the debtor willfully attempted to evade or defeat his federal income tax liabilities for the tax years at issue, and that his tax liabilities were nondischargeable under section 523(a)(1)(C). Specifically, the IRS argued that the debtor earned substantial funds from his legal work and had enough funds to satisfy the tax obligations, but did not allocate his resources toward the satisfaction of his tax obligations while he had the ability to do so. The bankruptcy court considered the totality of the debtor’s conduct and found that it satisfied both the 'conduct' requirement (i.e., he sought in any manner to evade or defeat his tax liability) and the mental state requirement (i.e., he did so willfully) of section 523(a)(1)(C). Therefore, the obligations at issue were held nondischargeable. The court noted, among other things, that although the debtor had sufficient funds to pay the federal income taxes in the tax years due, he failed to make timely payments or complete tardy payments, and instead chose to use the funds to make substantial loan payments for a vacation home in St. Bart’s, assist his adult son in a new business venture, lease luxury automobiles and take extravagant vacations.Simone v. United States (In re Simone), 2001 Bankr. LEXIS 1091, – B.R. – (Bankr. E.D. Pa. August 14, 2001) (Cosetti, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.07

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Elements of fraudulent conveyance were sufficiently pled. Bankr. D. Del. The chapter 11 trustee filed a complaint to avoid fraudulent transfers related to the prepetition sale of a physician practice management company to the debtor. The trustee sought to recover the cash and shares of stock the debtor paid to the seller. The seller moved to dismiss the complaint, arguing that there was no 'transfer of an interest of the debtor in property' as required by section 548. The seller contended that because the debtor corporation had no property interest in shares of its own stock, the transfer of the debtor’s stock could not be the basis of a fraudulent transfer. The bankruptcy court denied the motion to dismiss, holding that construing the allegations in a light most favorable to the trustee, the complaint adequately alleged 'a transfer of an interest in property of the debtor' for purposes of pleading a fraudulent conveyance. The court noted that the trustee challenged the entire transaction between the debtor and the seller as fraudulent, and attacked not only the transferred stock, but also the debtor’s assumption of assorted liabilities and its transfers of cash.Pardo v. Avanti Corp. Health Sys. (In re APF Co.), 2001 Bankr. LEXIS 1300, – B.R. – (Bankr. D. Del. August 27, 2001) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.02

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Landlord was not required to set off security deposit before asserting claim. Bankr. D. Del. The chapter 11 plan administrator moved to amend the bankruptcy court’s order overruling his objection to the secured claim of the debtor’s landlord. The landlord asserted that by reason of the security deposit required by the terms of the lease with the debtor, the landlord was a partially secured creditor. The plan administrator claimed that because the landlord failed to properly preserve its right to setoff, the basis of its security claim was invalid. The bankruptcy court denied the motion to amend, holding that because the security deposit was not an obligation owed to the debtor, the landlord was not required to exercise its right to setoff before asserting a secured claim. The security deposit was deducted from the landlord’s section 502(b)(6) claim, and section 553(a) was not implicated.In re APF Co., 2001 Bankr. LEXIS 1293, – B.R. – (Bankr. D. Del. October 5, 2001) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.03

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4th Cir.

Prepetition fraud judgment rendered debtor ineligible for chapter 13. Bankr. D. Md. A creditor obtained a fraud judgment of nearly $177,000 against the debtor. Two years later, the debtor filed a chapter 7 petition, asserting on the schedules that his unsecured debt was 'unliquidated,' scheduling the judgment as disputed and asserting that its value was zero. The creditor obtained a judgment of nondischargeability but, before the judgment was entered, the debtor converted the case to one under chapter 13. The creditor sought dismissal of the chapter 13 case and revocation of the chapter 7 discharge. The bankruptcy court held that the debtor was ineligible for chapter 13 because the amount of the debts on the schedules exceeded the statutory limit, despite the debtor’s assertion that the obligations were unliquidated or disputed. Looking to the obligations as of the date the original chapter 7 petition was filed, the bankruptcy court rejected the debtor’s characterization of the debts as unliquidated and the judgment debt as disputed. The debtor’s labels could not overcome the clear evidence to the contrary. Inasmuch as the debtor was ineligible for chapter 13 relief and had filed the motion to convert to chapter 13 in bad faith, the chapter 13 case was dismissed. Revocation of the chapter 7 discharge was, therefore, unnecessary. In re Stern, 2001 Bankr. LEXIS 1094, 266 B.R. 322 (Bankr. D. Md. August 13, 2001) (Schneider, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[2]

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5th Cir.

Order awarding reduced compensation to financial and tax advisor was affirmed. N.D. Tex. The debtor’s financial and tax advisor appealed an order of the bankruptcy court that partially denied its application for fees and expenses incurred after the debtor filed its chapter 11 petition and before its case was converted to chapter 7. The bankruptcy court awarded less than the requested amount of fees and expenses after concluding that some fees were duplicative, reflected an unreasonable use of time or did not materially benefit the estate. The district court affirmed, holding that the bankruptcy court committed no reversible error when it denied a portion of the advisor’s fees for lack of material benefit to the estate. The bankruptcy court properly rejected the more lenient reasonableness standard, and instead used a hindsight test to assess whether the services resulted in an identifiable, tangible and material benefit to the estate.PriceWaterhouseCoopers, LLP v. Litzler (In re Harbor Fin. Group), 2001 U.S. Dist. LEXIS 14412, – B.R. – (N.D. Tex. September 5, 2001) (Kendall, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.04

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Motions to intervene were granted. E.D. La. The asbestos claimants’ committee and the future claimants’ representative moved to intervene in an adversary proceeding brought on behalf of the chapter 11 debtor’s insurers regarding an alleged breach of a coverage agreement. The policies provided coverage for asbestos-related claims by individuals alleging harms caused by asbestos used by the debtor in its boiler systems. The insurer had alleged in its complaint that the debtor had breached the coverage agreement and asserted various defenses to restrict coverage. The district court granted the committees’ motions, holding that the claimants satisfied the requirements for intervention of right under Fed. R. Civ. P. 24(a)(2). The application for intervention was timely, the claimants had an interest in the property that was the subject of the action, the disposition of the action could impair the claimants’ ability to protect their interests, and the claimants’ interests were otherwise inadequately represented by the existing parties to the suit. Alternatively, the court found that the claimants could intervene permissively under Fed. R. Civ. P. 24(b).In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 14608, – B.R. – (E.D. La. September 13, 2001) (Vance, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7024.03, .04

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6th Cir.

Administrative expense claim was denied. Bankr. N.D. Ohio A trade partner of the chapter 11 debtor sought payment of an administrative claim, and the trustee objected. Pursuant to various prepetition and postpetition agreements, the debtor was required to indemnify the trade partner’s costs of defense related to goods manufactured by the debtor and purchased by the trade partner. Shortly before the debtor filed its petition, the trade partner was sued for patent infringement for selling products manufactured by the debtor. The trade partner asserted that the legal expenses incurred in defense of the suit were entitled to administrative expense status pursuant to section 503(b)(1)(A). The bankruptcy court denied the request, holding that the trade partner failed to establish that it was entitled to administrative expense priority for its payment of attorney’s fees in defense of the patent infringement litigation. The trade partner did not prove that its claim for indemnification arose out of a postpetition transaction or that it had benefited the estate.In re Visi-Trak, Inc., 2001 Bankr. LEXIS 1111, 266 B.R. 372 (Bankr. N.D. Ohio August 24, 2001) (Baxter, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06

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Antialienation provisions of annuity contract excluded it as an estate asset. Bankr. E.D. Mich. The chapter 7 debtor was employed by a university, which required her to enroll in a base retirement plan. The debtor participated in the plan through the purchase of two annuity contracts. The premiums were paid by the university. Pursuant to the plan, the debtor could obtain distributions only after age 59, or in the event of disability, death, financial hardship and certain other contingencies. But there were distinctions between the two annuity contracts. Under contract A, the issuer was obligated to use the premiums to purchase accumulation units on behalf of the debtor. In effect, this meant that the premiums would be invested by the issuer and that the debtor stood to gain or lose depending on the return from the investment. Contract B provided that each premium purchased a guaranteed amount of the debtor’s life annuity and of the death benefit for her beneficiary, the amount of which would be determined by the rate schedule in effect under the contract at the time the premium was due. When the debtor filed her petition, she claimed the annuity contracts as fully exempt. The trustee objected to the exemption, arguing that not all of the funds were reasonably necessary for the debtor’s continued support. In response to the trustee, the debtor argued that interest in the annuities was excluded from estate property by virtue of section 541(c)(2). The bankruptcy court examined case precedent and determined as a threshold issue that, in the non-ERISA context, section 541(c)(2) applied only to trust instruments. The court then turned to the issue of whether the annuity contracts were trusts, and held that, with respect to contract A, the debtor held equitable title in at least a portion of the premiums paid on her behalf, because there was a contractual requirement that payments be applied to the debtor’s benefit. On the other hand, there was no 'res' created by contract B to which the debtor could hold any equitable ownership interest. The court therefore concluded that contract A was a trust, invoking section 541(c)(2), but that contract B was not a trust. In conclusion, the court applied state (New York) law to determine that the particular antialienation provisions of contract A were enforceable and that consequently that asset was excluded from the estate under section 541(c)(2).In re Barnes, 2001 Bankr. LEXIS 1078, 264 B.R. 415 (Bankr. E.D. Mich. April 18, 2001) (Spector, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.24

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Creditor’s motion for summary judgment was granted. Bankr. E.D. Mich. The creditor moved for summary judgment on its nondischargeability complaint, asserting that the chapter 7 debtor’s admissions should be given preclusive effect. After the debtor pled guilty to bank fraud, he entered into a prepetition settlement agreement with the creditor bank that he would not object to the nondischargeability of the obligations in any subsequent bankruptcy. Pursuant to the agreement, the debtor stipulated that the bank’s loss was due to the debtor’s fraud, fraud as a fiduciary, and willful and malicious injury. The bankruptcy court granted the creditor’s motion for summary judgment, holding that the debtor’s prepetition admissions and stipulations of fact were binding in the adversary proceeding and justified a judgment of nondischargeability. The debtor’s plea agreement and statements made in the criminal proceedings were entitled to collateral estoppel effect, as well.Fifth Third Bank of Northwestern Ohio v. Baumhaft (In re Baumhaft), 2001 Bankr. LEXIS 1141, – B.R. – (Bankr. E.D. Mich. June 15, 2001) (Rhodes, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7056

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7th Cir.

Code did not preempt wage earners’ lien. Bankr. E.D. Wis. Shortly after the debtor filed its chapter 11 petition, the state (Wisconsin) Department of Workforce Development filed a petition for a wage earners’ lien because of the debtor’s alleged violations of plant closing laws. Under state law, the department’s lien took priority over the secured lenders’ lien, but the lender argued that the state statute reordered the priority of claims and was preempted by bankruptcy law and the Supremacy Clause of the Constitution. The department responded that the state statute did not conflict with the Bankruptcy Code and was not preempted by the Supremacy Clause because the priority scheme under section 507(a) applied only to unsecured claims and not to secured claims. The bankruptcy court granted the department’s motion for partial summary judgment, holding that because section 507(a) applied only to unsecured claims, the state statute that created the lien was not rendered invalid. The court noted that the superpriority status afforded to the wage earners by virtue of the lien was a recognition of the public policy to protect wage earners and was not inconsistent with the underlying policy of the Code.Peltz v. Wisconsin Dep’t of Workforce Dev. (In re AR Accessories Group), 2001 Bankr. LEXIS 1159, – B.R. – (Bankr. E.D. Wis. July 18, 2001) (Shapiro, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.02

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8th Cir.

B.A.P. affirmed dismissal of cause of action. B.A.P. 8th Cir. The creditor appealed an order of the bankruptcy court granting the chapter 7 debtor’s motion for summary judgment dismissing the creditor’s claims for willful and malicious injury. The creditor had entered into a prepetition agreement with the debtor to lease a taxicab. Although the debtor allegedly told the creditor that a portion of the creditor’s rental fee was used by the debtor to reimburse himself for procuring and maintaining insurance coverage for the vehicle, the debtor failed to maintain insurance on the vehicle. The creditor subsequently sustained an injury while operating the taxicab and obtained a state court default judgment against the debtor. The B.A.P. affirmed the dismissal of the cause of action, holding that the creditor failed to establish that the debtor’s failure to maintain insurance on the vehicle was willful and malicious under section 523(a)(6). Even though the debtor’s misrepresentation may have been a deliberate and intentional act, it did not necessarily lead to the creditor’s injury.Jafarpour v. Shahrokhi (In re Shahrokhi), 2001 Bankr. LEXIS 1105, 266 B.R. 702 (B.A.P. 8th Cir. September 18, 2001) (Hill, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

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Debtors’ small business election was abrogated. Bankr. D. Minn. The joint chapter 11 debtors, which were telecommunications companies, elected in their petitions to be considered small businesses under the purview of section 1121(e). A principal creditor filed a motion seeking abrogation of the debtors’ small business status, arguing that (1) one year after the petition filing, the debtors had still not requested confirmation of a proposed plan of reorganization, and no plan was currently before the bankruptcy court; and (2) the debtors were not eligible for small business status in the first plan because their prepetition debt structure exceeded the statutory ceiling of $2 million. The debtors argued that abrogation would be inequitable, and instead requested dismissal of the petitions. The bankruptcy court made the threshold determination that a creditor had standing to seek abrogation of small business status, since creditors’ pecuniary stakes should allow them to seek the removal of a debtor from a nominal status that does not fit the circumstances. The court went on to hold that abrogation was appropriate because the debtors were not, in fact, eligible for small business status in the first place, as a result of the amount of their debt structure. An equally strong ground for abrogation was the posture of the case a year after the petition filing, and the court further held that the debtors’ failure to use the fast track designed for small businesses was sufficient ground to abrogate small business status. The court also denied the debtors’ motion to dismiss, since such relief would be prejudicial to creditors who could not demand payment until months after a dismissal.In re Coleman Enters., 2001 Bankr. LEXIS 1103, 266 B.R. 423 (Bankr. D. Minn. September 5, 2001) (Kishel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1121.07

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9th Cir.

Compensatory and punitive damages imposed against mortgage creditor. Bankr. C.D. Cal. In November 1997, the debtors filed their chapter 7 petition along with a statement of intention, which disclosed that they intended to retain their home. The debtors scheduled the creditor that held the mortgage lien on the property and indicated with an asterisk that they were 'current & continuing payments,' although the parties later agreed that the debtors were in default for two payments as of the petition date. The debtors received their discharge on March 9, 1998. Thereafter, the debtors continued to make payments in the total amount of $6,570, but finally defaulted. For a seven-month period after the petition filing, the creditor contacted the debtors on 90 occasions, mostly by telephone, demanding payment and threatening legal action should the default not be cured. The creditor finally foreclosed on the property. The debtors commenced an adversary proceeding in district court seeking compensatory and punitive damages for violations of the automatic stay and the discharge injunction. The court referred the issues to the bankruptcy court. The court held that the creditor had engaged in egregious, willful conduct in violation of the stay and the injunction. The court found that the contacts made postpetition but prior to discharge were, with rare exception, acts to collect and thereby violated the stay. The court also found that the postdischarge contacts violated the discharge injunction, since the debt was never formally reaffirmed by the debtors. While noting that the discharge injunction did not affect the creditor’s right to enforce the lien, the court awarded the debtors $6,570 in compensatory damages, representing the postpetiton payments made. The court also awarded $65,700 in punitive damages because it was the creditor’s policy to ignore the automatic stay and discharge injunction after a customer had filed for banktuptcy. The court applied section 362(h) as the basis to award damages, noting that section 524 has no explicit provision for damages. Henry v. Assocs. Home Equity Servs., Inc. (In re Henry), 2001 Bankr. LEXIS 1073, 266 B.R. 457 (Bankr. C.D. Cal. August 23, 2001) (Bufford, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.11[3]

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10th Cir.

Claims did not qualify for priority distribution. Bankr. D. Kan. The chapter 7 trustee objected to the payment priorities of several late-filed tax claims. After the trustee filed his final report with the bankruptcy court, the taxing authorities filed proofs of claim asserting unsecured priority and general unsecured claims. The tax claimants asserted that because the trustee did not 'commence distribution' under section 726(a)(1) until the court signed an order approving the final report or until the trustee actually wrote or mailed the distribution checks to the creditors, their claims qualified for distribution. The trustee argued that the claims did not qualify for distribution under section 726(a)(1), because he had already 'commenced distribution' when he submitted his report to the United States trustee. The bankruptcy court rejected the claimants’ arguments, holding that none of the tax claimants’ claims were entitled to a distribution under section 726(a)(1) because they were all filed after the trustee had 'commenced distribution.' The court concluded that the last date on which the priority claims could be filed before the trustee 'commenced distribution' under section 726(a)(1) was the date when the trustee’s initial version of the final report was filed with the court.In re Anderson, 2001 Bankr. LEXIS 1154, 266 B.R. 498 (Bankr. D. Kan. August 14, 2001) (Pusateri, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:726.02[1]

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11th Cir.

Tax obligations were not discharged. M.D. Fla. The IRS appealed a determination by the bankruptcy court that the chapter 7 debtor’s income tax liabilities for several prepetition years were not priority taxes as described by section 507(a)(8)(A)(ii), and thus were not excepted from discharge under section 523(a)(1)(A). After the tax liabilities were assessed against the debtor prepetition, he submitted an offer in compromise to the IRS. The offer in compromise was determined to be not processable, and the IRS demanded payment. The debtor’s subsequent amended offer in compromise was rejected, and the debtor appealed the rejection, which was later withdrawn. The bankruptcy court determined that because the offer in compromise was not pending until it was amended, the appropriate time period since the assessment of taxes had passed, and the taxes were discharged. The district court reversed, holding that the debtor’s taxes were priority taxes and were excepted from discharge. The date the IRS accepted the debtor’s waiver of the statute of limitations – the date of the debtor’s first offer in compromise – was the point at which the offer was deemed pending. The debtor did not withdraw his first offer in compromise, but instead amended the offer, which related back to his original offer in compromise.United States v. Romagnolo (In re Romagnolo), 2001 U.S. Dist. LEXIS 14666, – B.R. – (M.D. Fla. August 27, 2001) (Adams, Jr., D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10[2][b][ii]

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Failure to remit withholding taxes was not willful. Bankr. M.D. Fla. The chapter 11 debtor founded and operated a Florida corporation for many years, during which time the federal withholding taxes were timely paid. After the debtor appointed another person as president and manager of the company, the company failed to remit the taxes for three taxable periods. Learning of the failure to pay the taxes, the debtor paid a portion of the delinquency with personal funds, contacted the IRS to work out a payment schedule and ensured that future payments would be timely made. Since a portion of the taxes remained unpaid, however, the IRS filed a priority claim when the debtor filed a chapter 11 petition, asserting that the debtor was a 'responsible person' under section 6672 of the Internal Revenue Code. The debtor objected to the proof of claim on the basis that, although he was a person with the appropriate authority, the failure to pay over the federal withholding taxes was not willful. The bankruptcy court held that the debtor’s failure to pay over the federal withholding taxes was not willful because, under the circumstances, he did all he reasonably could to ensure that the taxes were paid and, therefore, acted in good faith. The company had no prior record of delinquency to place him on notice to monitor the payment of trust fund taxes. Moreover, upon learning of the delinquency, he remitted some taxes with personal funds, sought a repayment schedule, remained current on the accruing payroll taxes and preferred no other creditors with unencumbered funds. In re Nutt, 2001 Bankr. LEXIS 1093, – B.R. – (Bankr. M.D. Fla. August 2, 2001) (Briskman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 15:TX15.02

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