Collier Bankruptcy Case Update October-22-01
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.
October 22, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 541(d) PACA trust funds were not estate property.
In re Ozcelik (Bankr. D. Mass.)§ 546(b) Court of Appeals held that environmental superlien was not subject to the stay.
229 Main St. Ltd. P’ship v. Mass. Dep’t. of Envtl. Prot. (In re 229 Main St.) (1st Cir.)
2d Cir.
§ 546(a) Statute of limitations for trustee to file avoidance action could be extended by stipulation.
Pryor v. Barbara (In re Rodriguez) (Bankr. E.D.N.Y.)Rule 9006(b)(1) Excusable neglect was not established.
In re SC Corp. (Bankr. D. Conn.)
3d Cir.
§ 548(a)(1) Trustee sufficiently alleged prima facie case for breach of fiduciary duty and fraudulent transfer.
The Official Comm. of Unsecured Creditors of High Strength Steel, Inc. v. Lozinski (In re High Strength Steel, Inc.) (Bankr. D. Del.)
5th Cir.
§ 362(h) Possibility that funds were property of the estate required claimant to move for relief from stay.
Milbank v. McGee (In re LATCL, Inc.) (N.D. Tex.)§ 502(a) IRS was entitled to amend proof of claim after confirmation of the chapter 13 plan.
United States v. Johnston (N.D. Tex.)
6th Cir.
§ 523 Bankruptcy court entered judgment against insurer on claim to have debt declared nondischargeable.
Flener v. Pac. Indemnity Ins. Co. (In re Miller) (Bankr. W.D. Ky.)§ 523(a)(15) Separation agreement debt was dischargeable.
Abney v. Lyon (In re Abney) (Bankr. E.D. Ky.)§ 544(a)(1) Trustee had superior right than secured creditor to bank account deposit.
In re Danville Wholesale Tire Co. (Bankr. E.D. Ky.)§ 548(a)(1)(A) Payment of attorney’s fees did not constitute fraudulent transfer.
Spradlin v. Estate of Bill Collett (In re Universal Mining Corp.) (Bankr. E.D. Ky.)
7th Cir.
§ 547(c)(2) Creditor failed to prove that preferential payments were made in the ordinary course of business.
Krol v. Finishing Co. (In re H. King & Assocs.) (Bankr. N.D. Ill.)
8th Cir.
§ 330(a) Attorney’s fees could not be paid out of trust income.
Kaplan v. Ramette (In re Bame) (Bankr. D. Minn.)§ 362(h) Willful violation of stay warranted damages of $88.
Rosengren v. GMAC Mortg. Corp. (D. Minn.)
9th Cir.
§ 303(b)(1) Court of Appeals affirmed dismissal of involuntary petition.
Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.) (9th Cir.)§ 524(a)(1) Court of Appeals held that collection of state tax debt could be enjoined.
Goldberg v. Ellett (In re Ellett) (9th Cir.)§ 724 FDIC could not avoid prereceivership liens.
Fed. Deposit Ins. Corp. v. County of Orange (In re County of Orange) (9th Cir.)
10th Cir.
§ 523(a)(5) Bankruptcy court properly applied preponderance of evidence standard in proceeding to determine dischargeability of attorneys’ fees awarded by divorce court.
Brasher ex. rel Turner v. Turner (In re Turner) (B.A.P. 10th Cir.)Rule 7023 Court of Appeals held that stock recipients lacked standing to appeal settlement agreement.
Weinman v. Fidelity Capital Appreciation Fund (In re Integra Realty Resources) (10th Cir.) 103034
11th Cir.
§ 523(a)(1) Debtor’s tax return, filed after IRS substitute return, was not a good faith effort to file a return.
United States v. Ralph (M.D. Fla.) 103013
Collier Bankruptcy Case Summaries
1st Cir.
PACA trust funds were not estate property. Bankr. D. Mass. The debtor and his spouse were the sole officers and shareholders of a company, which was a dealer or commission merchant as defined by the Perishable Agricultural Commodities Act ('PACA'). In 1998, the debtor entered into an agreement to purchase agricultural goods from the creditor. The debtor personally guaranteed payment. Thereafter, the debtor accepted several shipments, and the accompanying invoices notified the debtor that the goods were delivered subject to the statutory trust authorized by PACA. The debtor did not make payment to the creditor, but instead used proceeds from the sale of the goods to pay other expenses and indebtedness. The creditor filed suit in state district court, which approved an attachment against the debtor’s real estate in the amount of $6,200. Soon thereafter, the debtor filed a chapter 13 petition, listing the creditor’s claim as nonpriority and unsecured. The creditor filed a motion for a superpriority claim and also objected to confirmation, arguing that it perfected its interest in the statutory trust by notifying the debtor of its intent to preserve PACA trust benefits and that the debtor was personally liable for the debt as the controlling person of his company. The bankruptcy court denied the creditor’s motion, holding that in the event of bankruptcy, PACA trust funds were not property of the estate. The court analyzed Congressional intent and determined that PACA’s trust provision was to provide unpaid produce sellers with greater protection from the risk of a buyers’ default. But that protection did not extend to providing suppliers with a superpriority claim in the bankruptcy case of a debtor who was only secondarily liable, in the absence of evidence that the debtor obtained possession of trust assets or proceeded in an individual capacity. In re Ozcelik, 2001 Bankr. LEXIS 808, – B.R. – (Bankr. D. Mass. July 5, 2001) (Boroff, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.26
Court of Appeals held that environmental superlien was not subject to the stay. 1st Cir. The debtor owned a shopping plaza that leased to a dry cleaning business, which caused the property to become contaminated with pollutants. The state (Massachusetts) Department of Environmental Protection proceeded with emergency cleanup and then sought reimbursement for the resulting expenses. The department also informed the debtor that it intended to record a lien against the property to secure the cleanup costs. The debtor requested an adjudicatory hearing but, before its conclusion, filed a chapter 11 petition. The hearing officer in the administrative case ruled that the environmental superlien statute provided an exception to the automatic stay and refused to adjourn the proceeding. The debtor requested that the bankruptcy court hold the state in contempt for continuing to litigate the proceeding. The court denied the request, ruling that the stay did not preclude continuation of the proceedings required to perfect the environmental superlien. The district court affirmed, and this appeal followed. The Court of Appeals for the First Circuit affirmed, holding that the statutory lien met the requirements of both sections 362(b)(3) and 546(b)(1)(A). The Court of Appeals determined that (1) the department’s expenditures, notice of intent to record a lien and pursuit of that lien, established the required 'interest in property,' and (2) the department’s simultaneous creation and perfection effectuated by the state superlien statute qualified as an 'act to perfect,' which established the threshold finding that the requirements for an exception to the stay under section 362(b)(3) had been met. The Court of Appeals then turned to section 546(b), which limits the power to avoid statutory liens, and determined that the provision applied because it allowed the holder of an interest in property to perfect its interest if, absent the petition filing, the interest holder could have perfected its interest against an entity acquiring rights in the property before the date of perfection (citing Collier on Bankruptcy 15th Ed. Revised). 229 Main St. Ltd. P’ship v. Mass. Dep’t. of Envtl. Prot. (In re 229 Main St.), 2001 U.S. App. LEXIS 18804, 262 F.3d. 1 (1st Cir. August 22, 2001) (Selya, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:546.03[2][a]
2nd Cir.
District Court denied extension of automatic stay to nondebtor defendants. E.D.N.Y. Plaintiff filed a federal lawsuit against four defendants. One of the defendants later filed a petition in bankruptcy, and the district court case was stayed as to that defendant. The remaining defendants then filed a motion with the district court seeking to extend the automatic stay to the remaining defendants. Extension of the automatic stay to nondebtors is a matter of discretion. Factors to consider include: (1) whether continuation of the outside litigation would impede the debtor’s reorganization efforts; (2) whether the plaintiff would suffer a hardship; (3) whether a recovery would affect the property of the estate; and (4) whether the nondebtor seeking the extension of the stay is independently liable to the plaintiff. While the court recognized that, pursuant to 11 U.S.C. § 105, it had the power to extend the automatic stay to the nondebtor defendants, it found that extension of the stay was not warranted based on the relatively noncomplex nature of the litigation and the fact that the debtor’s reorganization efforts would not be severely impacted by allowing the case to continue against the remaining defendants. Millard v. Developmental Disabilities Inst., Inc., 2001 U.S. Dist. LEXIS 13366, 266 B.R. 42 (E.D.N.Y. August 23, 2001) (Wexler,D.J.).
Collier on Bankruptcy, 15th Ed. Revised 105.02[1]; 362.01; 362.03
Statute of limitations for trustee to file avoidance action could be extended by stipulation. Bankr. E.D.N.Y. In 1998, the debtor filed a chapter 11 petition that was subsequently converted to chapter 7. The chapter 7 trustee discovered that the debtor had made prepetition payments to an attorney in the amount of $27,500. The trustee timely entered into two stipulations extending his time to commence an adversary proceeding against the attorney beyond the statute of limitations set forth in section 546(a). The trustee obtained no similar stipulation from the debtor’s sister, who was the recipient of the legal services paid for by the debtor. The trustee filed an adversary proceeding against the attorney and the sister on September 22, 2000, seeking to avoid the transfers. The attorney filed a motion to dismiss, based on the expiration of the statute of limitations. On April 23, 2001, the sister filed a motion by newly retained counsel that raised the statute of limitations issue. The bankruptcy court denied the motions but granted the sister leave to file a late answer, as long as the statute of limitations issue was not raised. The central issue was whether the statute of limitations set forth in section 546(a) could be extended by the parties, waived or equitably tolled, or whether it conferred subject matter jurisdiction on the bankruptcy court. The court held that the time limits set forth in section 546(a) were extendable by stipulation. The court made an analysis of legislative intent and determined that the time limits were not intended to be jurisdictional, and as such were subject to waiver, estoppel and equitable tolling. The court reasoned that this view was consistent with the ability of bankruptcy courts to enlarge the time to file complaints objecting to discharge or to dischargeability.Pryor v. Barbara (In re Rodriguez), 2001 Bankr. LEXIS 1020, – B.R. – (Bankr. E.D.N.Y. August 15, 2001) (Eisenberg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:546.01[1], .02[3],[4]
3d Cir.
Trustee sufficiently alleged prima facie case for breach of fiduciary duty and fraudulent transfer. Bankr. D. Del. In 1996, the debtor and certain of its insiders entered a loan agreement with the creditor pursuant to promissory notes, for which each was jointly liable. The debtor also pledged its interest in all its personal property and three parcels of real property as collateral. An individual insider, the CEO of a corporation that owned 92 percent of the debtor, also signed a guaranty. In 1997, the debtor became insolvent. After the debtor filed a chapter 11 petition, the official committee of unsecured creditors filed an adversary proceeding, alleging that the insiders benefited from the loans to the debtor’s detriment, because the corporation received over $11.4 million in loan proceeds while the debtor received less than $300,000. The debtor also incurred intercompany debt of approximately $5.4 million. After conversion to chapter 7, the trustee also alleged that the individual insider made a retroactive increase of the rent paid by the debtors and that certain corporate allocation charges exceeded the value of any benefit to the debtor, both transactions constituting a breach of fiduciary duty. The trustee also contended that the individual arranged for the debtor to repay nearly all of the loan because of the corporation’s weak financial condition and that the debtor’s financial statements were doctored to conceal the retroactive allocations. The complaint stated numerous counts, including preference, fraudulent conveyance under sections 548(a)(1)(a) and (a)(1)(b) and unauthorized postpetition transfers. The defendant insiders filed motions to dismiss various counts of the complaint as failing to state a cause of action. The bankruptcy court denied the motions to dismiss with regard to all but one count, holding that (1) the reconciliation of the debtor’s financial records was a transfer and that the trustee had pled all the elements required to establish a fraudulent transfer under state (Delaware) law; (2) the allegations regarding a breach of fiduciary duty were sufficient because, under state law, if a corporation becomes insolvent, its officers and directors owe a fiduciary duty to unsecured creditors; (3) the alleged transfers effected a setoff in violation of the automatic stay; and (4) the creditor’s knowledge that the insiders were breaching their fiduciary duty, and its acceptance of the diverted funds, established the elements for aiding and abetting such a breach. The court noted that, although the complaint sufficiently stated a cause of action for breach of fiduciary duty, a final determination of that breach could only be made after full adjudication. The court also held that the trustee had the power, under section 544(a), to compel marshaling, which would require the creditor to return the money paid by the debtor, but concluded that such repayment would prejudice the creditor because disbursements had already been made.The Official Comm. of Unsecured Creditors of High Strength Steel, Inc. v. Lozinski (In re High Strength Steel, Inc.), 2001 Bankr. LEXIS 1017, – B.R. – (Bankr. D. Del. August 2, 2001) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.02, .04, .05
5th Cir.
Possibility that funds were property of the estate required claimant to move for relief from stay. N.D. Tex. Two companies entered into a merger agreement under which one was to cease doing business. Despite the agreement, however, the merged corporation continued operations. When the surviving corporation filed a bankruptcy petition, its trustee demanded that the merged corporation turn over its receivables. The merged corporation, however, retained all funds and, through its attorney, disbursed them to its creditors as well as to the attorney. Upon the trustee’s motion, the court issued orders to show cause why the attorneys, the merged corporation and its principal should not be held in contempt for violating the automatic stay. After hearing the matter, the bankruptcy court issued proposed findings concluding that the respondents violated the automatic stay and recommending an award to the trustee of $250,000 damages, $250,000 punitive damages and $125,000 attorneys’ fees. Upon the respondents’ objections to the proposed findings, the district court sustained in part and overruled in part the objections, holding that since the bankruptcy estate may have had an interest in the funds, the respondents’ exercise of control over the funds was a violation of the stay. The fact that the parties disputed ownership of the funds did not preclude them from becoming property of the estate when the petition was filed. Rather than exerting control over the funds to the exclusion of the trustee, the respondents were required to move for relief from stay in order to obtain a determination of their rights to the funds. However, the trustee was not entitled to an award of punitive damages since the debtor was not a natural person. The district court also concluded that the matter was core, that the respondents received sufficient notice of the proceedings as required by Rule 9020, and that the bankruptcy court properly placed the burden of proof upon the trustee.Milbank v. McGee (In re LATCL, Inc.), 2001 U.S. Dist. LEXIS 12478, – B.R. – (N.D. Tex. August 14, 2001) (Buchmeyer, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11[3]
IRS was entitled to amend proof of claim after confirmation of the chapter 13 plan. N.D. Tex. The chapter 13 debtor’s schedules revealed ownership of residential real property with equity of $1,000. In addition, she scheduled as personal property a one-third interest in an inheritance from her father. The IRS filed its proof of claim for over $45,600, asserting a secured claim to the extent of the $1,000 equity disclosed in the schedules. After confirmation of the plan, the debtor sought permission to sell real property inherited from her father, prompting the IRS to amend its proof of claim to increase its secured claim by the value of that real property. The debtor objected to the amendment, and the bankruptcy court sustained the objection, concluding that the IRS had sufficient notice of her assets and should have investigated the nature of inheritance. The district court reversed, holding that since the amended proof of claim arose out of the same transaction and occurrence as the original proof of claim, the bankruptcy court erred in disallowing the amendment. The court applied both Rule 7015, governing amendments to pleadings, and section 105(a), equitable principals, and concluded that denying the amendment was an abuse of discretion because the amendment did not change the amount or the basis of the claim, and the debtor was not unduly prejudiced. The district court rejected the bankruptcy court’s conclusion that the IRS was at fault because it failed to investigate the nature of the interest. Rather, the district court stressed the debtor’s obligation to disclose all assets and concluded that disclosing an inheritance on the schedule pertaining to personal property was not a disclosure of an interest in real property.United States v. Johnston, 2001 U.S. Dist. LEXIS 13314, – B.R. – (N.D. Tex. August 16, 2001) (Means, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03[4]
6th Cir.
Trustee did not have standing to sue debtor’s attorneys and accountants. S.D.N.Y. Upon discovering that the chapter 7 debtor had orchestrated a very large Ponzi scheme, the chapter 7 trustee sued the debtor’s attorneys and accountants for breaches of their professional duties, alleging that they failed to report the fraud to the debtor’s innocent directors and officers. The defendants moved for summary judgment on the basis that the trustee did not have standing to sue because he merely stood in the shoes of the debtor and, thus, could not sue for the wrong it inflicted upon itself. The district court held that the trustee lacked standing under state (New York) law to seek recovery against third parties for injuries incurred by the misconduct of the debtor’s controlling managers. Applying circuit precedent, the court held that a company cannot sue others for its own wrong. Since the trustee stood in the shoes of the debtor, it could not assert an action that the debtor could not bring. Rather, the cause of action against third parties for abetting corrupt management belonged to the creditors of the corporation, not to the debtor corporation or its trustee. In any event, as a factual matter, there were no innocent managers who either had the ability or the motive to halt the corrupt practices of the debtor. The court also rejected that trustee’s assertion that the court lacked the authority to conduct a factual hearing on the standing issue.Breeden v. Kirkpatrick & Lockhart, 2001 U.S. Dist. LEXIS 12506, – B.R. – (S.D.N.Y. August 21, 2001) (Sprizzo, D.J.).
Collier on Bankruptcy, 15 Ed. Revised 3:323.03[2]
IRS was entitled to amend proof of claim after confirmation of the chapter 13 plan. N.D. Tex. The chapter 13 debtor's schedules revealed ownership of residential real property with equity of $1,000. In addition, she scheduled as personal property a one-third interest in an inheritance from her father. The IRS filed its proof of claim for over $45,600, asserting a secured claim to the extent of the $1,000 equity disclosed in the schedules. After confirmation of the plan, the debtor sought permission to sell real property inherited from her father, prompting the IRS to amend its proof of claim to increase its secured claim by the value of that real property. The debtor objected to the amendment, and the bankruptcy court sustained the objection, concluding that the IRS had sufficient notice of her assets and should have investigated the nature of inheritance. The district court reversed, holding that since the amended proof of claim arose out of the same transaction and occurrence as the original proof of claim, the bankruptcy court erred in disallowing the amendment. The court applied both Rule 7015, governing amendments to pleadings, and section 105(a), equitable principals, and concluded that denying the amendment was an abuse of discretion because the amendment did not change the amount or the basis of the claim, and the debtor was not unduly prejudiced. The district court rejected the bankruptcy court's conclusion that the IRS was at fault because it failed to investigate the nature of the interest. Rather, the district court stressed the debtor's obligation to disclose all assets and concluded that disclosing an inheritance on the schedule pertaining to personal property was not a disclosure of an interest in real property.United States v. Johnston, 2001 U.S. Dist. LEXIS 13314, — B.R. — (N.D. Tex. August 16, 2001) (Means, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03[4]
Trustee had superior right than secured creditor to bank account deposit. Bankr. E.D. Ky. Prior to the petition filing, the debtor sold a vehicle that generated proceeds in the amount of approximately $8,000, which the debtor placed in a bank account. After the petition was filed, the trustee recovered the funds and, in her final report, proposed to distribute the funds to unsecured creditors. One creditor, who held a security interest in some of the debtor’s property, objected. The creditor claimed that its secured status entitled it to the funds, because the debtor had granted it a lien on rights against the depository bank. The creditor also had a security interest in the vehicle that had been sold, but that interest was never properly perfected. The bankruptcy court overruled the creditor’s objection, holding that the trustee, pursuant to section 544 and state (Kentucky) law, had the rights of a garnishee against the debtor’s bank account. The court therefore concluded that the trustee’s position was superior, since she was a judicial lien creditor with respect to the funds, and the creditor held only a security interest in the debtor’s right to the funds, not in the funds themselves. In re Danville Wholesale Tire Co., 2001 Bankr. LEXIS 1069, – B.R. – (Bankr. E.D. Ky. February 7, 2001) (Howard, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Payment of attorney’s fees did not constitute fraudulent transfer. Bankr. E.D. Ky. A group of creditors filed a collection action in state (Kentucky) court against the debtor and against four individuals who were officers, directors or shareholders of the debtor. The debtor and the individuals retained an attorney by way of a contingency fee agreement and asserted a counterclaim containing seven counts of fraud, breach of contract, fraud in the inducement and punitive damages. Meanwhile, two corporate creditors obtained a judgment against the debtor for a combined sum in excess of $1 million. In the first state court action, the creditors obtained judgments of approximately $1.9 million, but at trial a jury awarded the debtor and the individuals a judgment of approximately $5.5 million against those creditors. A global settlement was reached in both actions, structured so that the first creditors would release their judgment and pay $650,000 to the corporate creditors and $1.35 million to the debtor and the individuals. The attorney’s legal fees were approximately $700,000. Upon receipt of the settlement payment, the attorney directed the individuals to divide the net balance of the funds between them. After the debtor filed its petition, the trustee filed an adversary proceeding, alleging that the individuals, as officers, directors, and shareholders of the debtor, and their attorney, wrongfully transferred the settlement monies within one year prior to the petition filing, with the actual intent to hinder, delay or defraud creditors. The bankruptcy court held that the trustee did not establish the prima facie elements of fraud. Specifically, the court found that the attorney received only his fee and did not participate in the division of the net balance. The court also noted that inherent in fraud was the requirement that the defrauder obtain a benefit with an actual intent to enrich himself or another, and concluded that the attorney did not enrich himself because he received only that to which he was entitled, namely, his contingency fee and litigation expenses.Spradlin v. Estate of Bill Collett (In re Universal Mining Corp.), 2001 Bankr. LEXIS 1064, – B.R. – (Bankr. E.D. Ky. March 5, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.04
7th Cir.
Creditor failed to prove that preferential payments were made in the ordinary course of business. Bankr. N.D. Ill. The debtor was a business that designed and built retail displays. The creditor was a metal finisher who treated the debtor’s displays. While insolvent, the debtor made certain payments to the creditor on account of antecedent debts. After the debtor filed a chapter 11 petition, the trustee filed an adversary proceeding, asserting that the transfers were avoidable, preferential payments. The creditor argued that the transfers were exempt from avoidance as payments made in the ordinary course of business, pursuant to section 547(c)(2). The creditor filed a motion for summary judgment seeking dismissal of the trustee’s complaint. The bankruptcy court denied the motion, holding that the creditor failed to meet the burden of proof required for a motion for summary judgment. Specifically, the creditor failed to offer any evidence regarding the objective inquiry with respect to whether the payment transactions were ordinary in the industry examined as a whole.Krol v. Finishing Co. (In re H. King & Assocs.), 2001 Bankr. LEXIS 1065, (Bankr. N.D. Ill. August 27, 2001) (Squires, B.J.) (for electronic publication only).
Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2]
8th Cir.
Attorney’s fees could not be paid out of trust income. Bankr. D. Minn. In June 2000, the bankruptcy trustee commenced an adversary proceeding against the trustee of a grantor retained income trust ('GRIT'). Under the trust, the debtor, through the trustee, was to fund the trust by transferring his interest in a corporation. The debtor was to receive all income for 10 years, after which his daughter would receive the remainder of the trust assets. The parties entered a settlement agreement, whereby the GRIT trustee would authorize the corporation to make the final distribution of 50 percent of the corporation’s profit to the trustee through October 10, 2000, the termination date of the GRIT. The agreement expressly reserved the issue of attorney’s fees and expenses resulting from the adversary proceeding. The GRIT trustee deposited a segregated amount of the final distribution in a separate account pending resolution of the fees and costs issue, and thereafter commenced this adversary proceeding seeking a declaratory judgment that he was entitled to recover attorney’s fees, expenses and trustee compensation. The GRIT trustee argued that he was entitled to summary judgment, since the provisions of the GRIT expressly provided that he could employ and compensate attorneys and that the segregated amount was the source from which to pay such costs and expenses. The bankruptcy trustee filed a motion for partial summary judgment, seeking a determination that if the fees sought were in fact compensable by the GRIT, they would be paid only from principal and not from income. The trustee reasoned that, because the segregated amount derived from income, while the attorney’s fees and costs were incurred in defending the principal, the GRIT trustee could not seek repayment from the segregated amount. The bankruptcy court held that the attorney’s fees and expenses sought must be made against principal and not the segregated amount. The court followed state (Minnesota) case law, which generally determined that when the litigation primarily concerned the disposition of trust principal, any allowances for attorney’s fees and expenses must be paid out of principal.Kaplan v. Ramette (In re Bame), 2001 Bankr. LEXIS 807, 263 B.R. 594 (Bankr. D. Minn. June 21, 2001) (Dreher, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.03[3]
Willful violation of stay warranted damages of $88. D. Minn. The chapter 7 debtor neglected to schedule or otherwise give notice of the chapter 7 case to his mortgage holder. Not surprisingly, when the debtor was two months in arrears, the mortgagee contacted the debtor. Upon being advised of the chapter 7 case, the mortgagee asked whether the debtor intended to reaffirm the debt and urged him to consult with his attorney. Two subsequent phone calls ensued in which the mortgagee urged the debtor to reaffirm the obligation or face a motion for relief from stay and costs. After receiving his discharge, the debtor filed a motion for sanctions in the district court, requesting $5,000 in compensatory damages and $25,000 in punitive damages. During discovery, despite repeated requests, the debtor failed to itemize his actual damages. On cross motions for summary judgment, the district court held that although the mortgagee willfully violated the stay by repeatedly pressuring the debtor to bring his account current, only $88 in damages was warranted because that was the amount the debtor was able to itemize. The court rejected the mortgagee’s defense that its actions were not willful and that the debtor was equally at fault, noting that it was the creditor’s burden to prevent violations of the stay once it had knowledge of the bankruptcy case. However, the debtor was not entitled to damages for emotional distress. Concluding with a strong admonishment, the court awarded the debtor attorney’s fees in the amount of $150 because that reflected the amount of work that was appropriate to dispose of the litigation. Punitive damages were denied altogether. Rosengren v. GMAC Mortg. Corp., 2001 U.S. Dist. LEXIS 13119, – B.R. – (D. Minn. August 7, 2001) (Doty, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11[3]
9th Cir.
Court of Appeals affirmed dismissal of involuntary petition. 9th Cir. In 1990, two individuals formed the debtor corporation, a manufacturer of fishing equipment. Individual A eventually became the majority shareholder and took over another company that was in serious debt. In 1998 and 1999, Individual B was assigned the claims of two of the debtor’s putative creditors. In 1999, an initial involuntary petition was filed against the debtor that included four petitioning creditors. The bankruptcy court dismissed the petition, finding that the creditors’ claims were subject to dispute and that the creditors were, therefore, not bona fide creditors pursuant to section 303(b)(1). The court also determined that the debtor was generally paying its debts. The B.A.P. affirmed, and this appeal followed. The Court of Appeals for the Ninth Circuit affirmed, holding that the bankruptcy court did not clearly err in determining that the petitioners were not bona fide creditors, since the facts gave rise to a legitimate disagreement as to whether the debt was actually owed. Nor did the bankruptcy court err by applying a ‘totality of the circumstances’ test to conclude that the debtor was generally paying its debts, since the debtor was current with tax obligations, payroll, rent, utilities and operating expenses. Both these determinations were bases for proper dismissal of the involuntary petition (citing Collier on Bankruptcy 15th Ed. Revised). Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 2001 U.S. App. LEXIS 19212, 262 F.3d. 985 (9th Cir. August 28, 2001) (Ferguson, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:303.04
Court of Appeals held that collection of state tax debt could be enjoined. 9th Cir. In 1994, the debtor filed a chapter 13 petition, scheduling the state (California) franchise tax board as a general unsecured creditor for nonpriority personal income tax obligations for certain years between 1980 and 1990. The debtor notified the creditor, which did not file a proof of claim or otherwise participate in the case. In April 1995, the chapter 13 plan was confirmed. The creditor received no distributions, the plan was completed, and the debtor received a discharge in April 1997. Some months later, the creditor sent the debtor a demand for payment, maintaining that the debt had not been discharged. The debtor filed this adversary proceeding, seeking injunctive and declaratory relief against the creditor, which filed a motion based on state sovereign immunity. The bankruptcy court denied the motion, ruling that the debtor’s action was proper under Ex Parte Young, 209 U.S. 123, 52 L.Ed. 714, 28 S. Ct. 441 (1908). After the B.A.P. for the Ninth Circuit affirmed, this appeal followed. The creditor made several arguments including contentions that (1) the debtor’s adversary proceeding and discharge order were ineffectual because of states’ sovereign immunity, and (2) state courts had jurisdiction to determine the dischargeability of tax debts, pursuant to the Tax Injunction Act. The Court of Appeals for the Ninth Circuit affirmed, holding that the creditor was properly enjoined from collecting the tax debt, despite the creditor’s failing to file a proof of claim and thereby submit to the jurisdiction of the bankruptcy court. The Court of Appeals found that (1) the action did not violate sovereign immunity, because the state was not compelled to submit to jurisdiction unless it wished to share in the estate; (2) the bankruptcy court was empowered to determine dischargeability of tax debts; and (3) the Tax Injunction Act ran afoul of the Code, because section 524 specifically provides for an injunction against governmental units. The Act could not abridge the power expressly granted to the bankruptcy court to determine the dischargeability of debts owed to the state. Goldberg v. Ellett (In re Ellett), 2001 U.S. App. LEXIS 19184, – F.3d. – (9th Cir. July 16, 2001) (O’Scannlain, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2]
FDIC could not avoid prereceivership liens. 9th Cir. In 1994, the debtor (Orange County, California) filed a chapter 9 petition. In 1995, the Federal Deposit Insurance Corporation ('FDIC') succeeded as receiver for various financial institutions in the debtor county and for real property that had been foreclosed by those institutions. Under protest, the FDIC paid to the debtor in excess of $805,000 in delinquent and redemption penalties for nonpayment of property tax, some of which was incurred before the receivership. The debtor also collected over $158,000 in state 'Mello-Roos' taxes. The FDIC then filed 41 proofs of claim, arguing that the debtor’s collection of the real property tax penalties was unlawful and that the payments must be refunded. The bankruptcy court disallowed the claims for prereceivership penalties, determining that the FDIC could not avoid prereceivership liens for these penalties. The court also held that the FDIC was not liable for redemption penalties which were not secured by liens, both before and after the receivership, or for postreceivership 'Mello-Roos' taxes. The B.A.P. for the Ninth Circuit affirmed, and this second appeal followed. The Court of Appeals for the Ninth Circuit affirmed, holding that the FDIC was not exempt from liens that attached before the receivership appointment. The Court of Appeals interpreted the statutory language of section 1825(b) of Title 12 and concluded that the statute did not require the extinction of prereceivership liens securing penalties for nonpayment of real property taxes that the FDIC subsequently acquired as a receiver. Conversely, the FDIC was not liable for the penalties that were not secured by preexisting liens and was exempt from the 'Mello-Roos' taxes. Fed. Deposit Ins. Corp. v. County of Orange (In re County of Orange), 2001 U.S. App. LEXIS 19219, 262 F.3d 1014 (9th Cir. August 28, 2001) (Boochever, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:724.02
10th Cir.
Bankruptcy court properly applied preponderance of evidence standard in proceeding to determine dischargeability of attorneys’ fees awarded by divorce court. B.A.P. 10th Cir. The debtor’s former wife and her counsel appealed a bankruptcy court order that held that the debtor’s obligation to pay attorneys’ fees and costs arising out of his divorce proceedings was not excepted from discharge under section 523(a)(5). Based on language contained in the bankruptcy court’s oral ruling, the appellants argued that the bankruptcy court erroneously applied the clear and convincing evidence standard rather than the preponderance of the evidence standard. They also argued that the court abused its discretion in refusing to admit certain evidence and erred in finding that they failed to carry their burden of proof. The Tenth Circuit B.A.P. affirmed. The court held that the bankruptcy court did not apply a clear and convincing evidence standard of proof rather than a preponderance of the evidence standard, and correctly determined that the appellants failed to satisfy their burden of proving that the attorneys’ fees awarded by the divorce court were in the nature of support. The B.A.P. concluded that although the bankruptcy court used the words 'clearly' and 'convincing' in the same sentence in its ruling, the court used those words with their ordinary meaning and with an acknowledgment of the appropriate standard of proof. The B.A.P. also held that the bankruptcy court did not abuse its discretion in refusing to admit an exhibit that had not been provided to opposing counsel prior to trial.Brasher ex. rel Turner v. Turner (In re Turner), 2001 Bankr. LEXIS 1070, 266 B.R. 491 (B.A.P. 10th Cir. September 5, 2001) (Krieger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Court of Appeals held that stock recipients lacked standing to appeal settlement agreement. 10th Cir. In 1988, the debtor, a hotel and restaurant company, spun off its restaurant business to its shareholders to form a separate corporation. In 1992, the debtor filed a chapter 11 petition and, in 1994, the bankruptcy court approved the debtor’s reorganization plan and the formation of a trust to act on behalf of unsecured creditors. The trustee for the creditors’ trust filed this suit in 1994, seeking to recover the value of the restaurant shares from the beneficial recipients. The creditors’ trustee alleged the fraudulent transfer of those shares and also sought relief under various Code sections. After attempting service of the complaint upon more than 800 defendants, the creditors’ trustee filed a motion for class certification. The court certified a defendant class of stock recipients along with seven representative defendants. The district court withdrew the suit, and eventually approved a settlement agreement, overruling the objection of an attorney who represented the unofficial protective committee of stockholders. The court also allowed for immediate recovery of settlement funds. Certain groups of defendants appealed. The creditors’ trustee alleged that one group opted out of the settlement and proceeded with their defenses in district court. The creditors’ trustee argued that the stockholders who opted out of the settlement lacked standing to bring an appeal objecting to that settlement, and that no final judgment existed as to those stockholders. A second group consisted of members of the unofficial committee. A third group was comprised of class members who accepted the settlement and had judgments entered against them. Similarly, the creditors’ trustee argued that these stockholders lacked standing to appeal because they were not named parties and did not move to intervene in the class action. The Court of Appeals for the Tenth Circuit held that the stockholders who opted out and the stockholders who accepted the settlement lacked standing to appeal. The Court of Appeals found that (1) the opt-out stockholders’ contention that the immediate availability of settlement funds placed them at a tactical disadvantage was an insufficient allegation of legal prejudice to warrant standing to appeal, and (2) the unnamed stockholders who accepted the settlement also lacked standing because formal intervention was a prerequisite for unnamed class members to appeal. To hold otherwise would allow unnamed members to be substituted for certified class members and effectively undermine class action suits by permitting unnamed members to pursue appeals contrary to the wishes of named class representatives.Weinman v. Fidelity Capital Appreciation Fund (In re Integra Realty Resources), 2001 U.S. App. LEXIS 18913, – B.R. – (10th Cir. August 21, 2001) (Ebel, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7023.01, .02, .03, .04
11th Cir.
Debtor’s tax return, filed after IRS substitute return, was not a good faith effort to file a return. M.D. Fla. The debtor failed to file federal income tax returns for three years because she could not pay the taxes. Accordingly, the IRS prepared substitute returns and assessed taxes based upon the substitute returns. Years later, the debtor prepared, signed and filed form 1040EZ returns. The debtor filed a chapter 7 petition and sought a determination that the federal income taxes were dischargeable. The bankruptcy court held that the obligations were dischargeable since the debtor had prepared returns, although belatedly. On appeal, the district court reversed, holding that the tax returns, submitted after the IRS prepared substitute returns, did not constitute returns for dischargeability purposes. The court applied a four-part test, which included the requirement that the returns be an honest and reasonable attempt to satisfy the tax law. Comparing the situation to In re Hatton, 220 F.3d 1057 (9th Cir. 2000), the court concluded that the filing of the returns only after the IRS began collection efforts served no purpose so that the taxes were not dischargeable.United States v. Ralph, 2001 U.S. Dist. LEXIS 13521, 266 B.R. 217 (M.D. Fla. August 16, 2001) (Kovachevich, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07[3]