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.

October 20, 2003

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

Collier Bankruptcy Case Summaries

Threat made by creditor during settlement discussions to initiate action to deny debtor’s discharge violated stay. 1st Cir. PROCEDURAL POSTURE: Plaintiff debtor filed a complaint, in bankruptcy court, against defendants, a creditor and an attorney, alleging an improper attempt to collect, assess, or recover a debt by using coercive negotiation tactics in violation of the Bankruptcy Code’s automatic stay. The bankruptcy court granted defendants’ motion to dismiss. The district court affirmed the bankruptcy court. The debtor appealed. OVERVIEW: The debtor was a 17-year veteran of the real estate industry. The creditor filed an adversary proceeding to deny the debtor a discharge pursuant to 11 U.S.C. § 727. During negotiation settlement the creditor’s attorney told the debtor’s attorney that if the dischargeability issue was not resolved in the creditor’s favor, he would take action at the New Hampshire Real Estate Commission to revoke the debtor’s real estate broker’s license. The debtor agreed to the creditor’s proposed settlement, but the bankruptcy court rejected the settlement and denied the creditor’s complaint on all grounds. The court of appeals found that although negotiations regarding discharge were not per se violations of the automatic stay, the statement by defendants could “reasonably be deemed tantamount to a threat” of immediate action against the debtor. Where an unsecured creditor’s statement functionally forced the debtor to treat a professional license as collateral, a dismissal on the pleadings was unacceptable because the statement could be found to be coercive by a trier of fact. Because the debtor’s damages were unclear, the district court needed to examine the issue closely on remand. Diamond v. Premier Capital, Inc. (In re Diamond), 2003 U.S. App. LEXIS 20615, — F.3d — (1st Cir. October 9, 2003) (Torruella, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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Conversion to chapter 7 dissolved chapter 11 committee and chapter 7 trustee could not substitute self for committee in appeal of sale order. D. Me. PROCEDURAL POSTURE: Appellant committee of unsecured creditors appealed a bankruptcy court’s order approving the sale of a corporation. While that appeal was pending, the corporation filed a motion to dismiss and/or convert its action under chapter 11, and the bankruptcy court converted the case to an action under chapter 7, and appointed a trustee. The trustee filed a motion to substitute himself as a party to the committee’s appeal. OVERVIEW: A corporation filed a petition under chapter 11, and a committee of unsecured creditors was appointed to protect creditors’ interests. The bankruptcy court entered an order which established a timeline for accepting a stalking horse bid and the acceptance of competing bids, and a company submitted a stalking horse bid but demanded reimbursement of expenses related to its stalking horse functions and a break-up fee of $5 million in the event of a successful counter-bid that displaced it. The corporation accepted the company’s bid and the bankruptcy court found that the decision was proper. The committee of unsecured creditor’s appealed the bankruptcy court’s judgment and, while that appeal was pending, the bankruptcy court converted the corporation’s action into an action under chapter 7. The federal district court held that the trustee who was appointed when the action was converted to a chapter 7 action would not be allowed to pursue the committee’s appeal because it was bound by decisions the corporation made as a debtor-in-possession, including the decision to accept the stalking horse bid. Official Comm. of Unsecured Creditors v. Belgravia Paper Co., Inc. (In re Great N. Paper, Inc.), 2003 U.S. Dist. LEXIS 16852, — B.R. — (D. Me. September 19, 2003) (Hornby, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1102.02, .03 [back to top]

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Debtor’s interest in rent-stabilized lease of apartment occupied with nondebtor significant other was property of the estate. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Plaintiffs, a debtor and her significant other who lived with the debtor in her rent-stabilized apartment, objected to defendant chapter 7 trustee seeking an order to assume and assign the lease for the apartment. The debtor also moved for abandonment of certain legal claims. The trustee, along with the other defendant, the landlord, moved for summary judgment. OVERVIEW: The bankruptcy court held that the debtor’s legal interests in her rent-stabilized lease were property of the estate. Thus, the trustee could assume the lease and evict the debtor and her significant other without violating New York City’s rent stabilization regulations because the debtor’s rights under her rent-stabilized lease were grounded solely in the lease and were not unique statutory rights. The bankruptcy court also rejected the argument that the trustee could not transfer the occupancy interest in the premises pursuant to 11 U.S.C. § 363(f), and 11 U.S.C. § 363(1) did not even apply to the debtor’s significant other because he had no independent possessory interest in the premises. Further, because only the chapter 7 trustee was authorized to assume the lease, the debtor was not entitled to notice and hearing on a stipulation between the landlord and the trustee regarding the lease. Regarding the abandonment of the legal claims, the debtor argued that the trustee’s delay in pursuing the claims implied that the trustee had decided to abandon them. However, any delay was due to the debtor’s lack of cooperation, and the trustee did begin to pursue the claims. Toledano v. Kittay (In re Toledano), 2003 Bankr. LEXIS 1173, — B.R. — (Bankr. S.D.N.Y. August 7, 2003) (Lifland, B.J.).

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

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Police power exception to automatic stay applied to state action to enforce consumer protection laws. D. Del. PROCEDURAL POSTURE: Appellant Consumer Protection Division of the Office of the Attorney General for the State of Maryland challenged a decision from the bankruptcy court, which granted appellee debtor’s motion to enforce the automatic stay of 11 U.S.C. § 362(a) and held the Division could not pursue restitution in its action against the debtor to enforce Maryland’s Consumer Protection Act and Custom Home Protection Act. OVERVIEW: The Division alleged that the debtor violated Maryland law in the sale of new homes to Maryland consumers and sought an order against the debtor that provided injunctive relief, restitution, civil penalties, and costs. After receiving notice of the enforcement action, the debtor filed a motion, seeking a determination that the action was subject to the automatic stay under 11 U.S.C. § 362(a). The bankruptcy court determined that the Division could pursue the action except that it could not pursue any restitution. On appeal, the court held that enforcement of actions to protect the public health and safety merited a higher priority than the debtor’s rights to an automatic stay. The court concluded that the Division’s enforcement action was not intended to protect the government’s interest in the debtor’s property but related to matters of public safety and welfare and was intended to effectuate public policy. Therefore, the police and regulatory power exception set forth in sections 362(b)(4), (5) applied to the enforcement of automatic stay in the Division’s enforcement action. Consumer Prot. Div. v. Nanticoke Homes, Inc. (In re Nanticoke Homes, Inc.), 2003 U.S. Dist. LEXIS 17704, — B.R. — (D. Del. September 30, 2003) (Robinson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05 [back to top]

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Bankruptcy Code requirement that postpetition attorneys’ fees and costs be approved by the bankruptcy court did not give rise to a cause of action for its violation. E.D. Pa. PROCEDURAL POSTURE: Plaintiff debtors brought a class action against defendant bank, as mortgagee or debt servicer, claiming that the attorneys’ fees and costs allegedly incurred during bankruptcy proceedings which were not approved by the bankruptcy court were illegal under federal and state law and the bankruptcy code. The matter was transferred to the bankruptcy court as an adversary action. The suit was dismissed. The debtors appealed. OVERVIEW: The debtors conceded that their claims for violations of federal and state lending laws, breach of contract, and for injunctive relief were properly dismissed. Accordingly, the only issue before the court was whether or not the debtors stated a viable cause of action for violations of 11 U.S.C. §§ 105 and 506(b). In essence, the debtors interpreted section 506(b) to mean that any bankruptcy-related attorneys’ fees and costs assessed by the bank after the bankruptcy petition was filed were not allowed without application to and approval by the bankruptcy court. They further interpreted 11 U.S.C. § 105(a) as conferring upon them the right to bring a private cause of action for a violation of 11 U.S.C. § 506(b). The court concluded that Congress did not authorize or intend to authorize a private right of action for a violation of 11 U.S.C. § 506(b) under either 11 U.S.C. § 105(a) or 11 U.S.C. § 506(b) itself.Henthorn v. GMAC Mortg. Corp. (In re Henthorn), 2003 U.S. Dist. LEXIS 16893, — B.R. — (E.D. Pa. September 23, 2003) (Joyner, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04 [back to top]

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Dismissal of chapter 7 bankruptcy with prejudice and denial of debtor’s attorneys’ fees and costs upheld. S.D. W. Va. PROCEDURAL POSTURE: Appellant debtor filed for chapter 7 protection in the bankruptcy court. The bankruptcy court granted appellee creditor’s motion to dismiss an adversary proceeding with prejudice and granted the debtor’s motion requesting an evidentiary hearing. The debtor appealed the order dismissing the case. OVERVIEW: The debtor argued that the bankruptcy court erred in refusing to give him an evidentiary hearing on his 11 U.S.C. § 523(d) request for attorneys’ fees and its decision that the creditor’s complaint was substantially justified. Since the bankruptcy court fully entertained the parties’ respective position on the issue of attorneys’ fees, the district court rejected the debtor’s contention that it failed to conduct a hearing under section 523(d). Moreover, the creditor was substantially justified in filing the complaint in the adversary proceeding because at the time the complaint was filed, the creditor relied on the discrepancy between the debtor’s financial information as provided in two loan applications and the bankruptcy filings. Once it obtained the debtor’s financial information for the year in question and understood the debtor’s intent to include his wife’s income with his as part of the stated monthly income, the creditor moved to dismiss the adversary proceeding. Thus, the debtor was not entitled to an award of attorneys’ fees and costs. Walker v. Star USA Fed. Credit Union (In re Walker), 2003 U.S. Dist. LEXIS 16787, — B.R. — (S.D. W. Va. September 24, 2003) (Hallanan, Sr. D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.27 [back to top]

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Bankruptcy court properly set aside deeds of trust affecting property held by debtor and spouse as tenants by the entirety. W.D. Va. PROCEDURAL POSTURE: On appeal, appellant/cross appellee debtor contended that the bankruptcy court erred in finding that two deeds of trust could be avoided but only to the extent necessary to pay the creditors and otherwise to remain in effect. Cross appellant bank contended that the bankruptcy court erred in denying the bank’s motion to dismiss the chapter 11 case for lack of good faith and improper purpose. OVERVIEW: The bank also argued that it was error for the bankruptcy court to fail to address or sustain its contention that the debtor was estopped to assert or recover upon the causes of action set forth in the adversary proceeding, that the determination that the debtor met her burden of proof under Va. Code § 55-80 and Tenn. Code § 66-3-101 was clearly erroneous, and that it was error to set aside the deeds of trust with respect to the interest of the debtor’s husband, a nondebtor, non-plaintiff. The court rejected the parties’ arguments. The property held by the debtor and her husband as tenants by the entirety was to be included in the bankruptcy estate, therefore, the bankruptcy court had jurisdiction over the property and properly set aside the deeds of trust affecting the properties to the extent necessary to benefit the creditors but otherwise to remain in effect. Even though it appeared that the debtor’s purpose in filing for chapter 11 protection was to preserve her home for her own use and benefit, that motivation did not necessarily preclude her from utilizing the bankruptcy process. The fact that her petition was not objectively futile defeated a bad faith filing claim. Coleman v. Community Trust Bank (In re Coleman), 2003 U.S. Dist. LEXIS 17628, — B.R. — (W.D. Va. September 30, 2003) (Williams, Sr. D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09 [back to top]

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Preference action against employee of debtor’s parent company dismissed due to failure to show that employee was an insider. Bankr. N.D. Tex. PROCEDURAL POSTURE: Defendant, a former employee of the chapter 7 debtors’ parent company, moved for partial summary judgment on the bankruptcy trustee’s preference claim. OVERVIEW: The parties agreed that the transfers at issue were made more than 90 days prior to the bankruptcy filings, and that under 11 U.S.C. § 547(b)(4)(B), the trustee had to show that the employee was an insider of the debtors at the time of the transfers in order to prevail. The trustee had no standing to assert claims on behalf of the parent company. The trustee could only bring the debtors’ claims. As a result, even if the employee exercised control over the parent company at the time of the debtors’ transfers to him, the technical requirements of 11 U.S.C. § 547 would not be met. The trustee failed to show the requisite control of the debtors that was required by section 547(b)(4)(B). While the trustee raised a genuine issue of material fact regarding the employee’s status as an insider of the parent company, the trustee failed to do so regarding the debtors. On the basis of summary judgment record before the court, the court found that the employee had no relationship, contractual or otherwise, with the debtors at the time of the payments in question, and the employee was not a creditor of the debtors when they paid him $630,500 on behalf of their parent company. Brown v. Sontheimer (In re Promedco of New England, Inc.), 2003 Bankr. LEXIS 1266, — B.R. — (Bankr. N.D. Tex. October 6, 2003) (Houser, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04 [back to top]

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