Collier Bankruptcy Case Update October-27-03

Collier Bankruptcy Case Update October-27-03

 


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 27, 2003

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

 

1st Cir.

§ 523(a)(4) Claim arising from partnership in which both creditor and debtor were partners was nondischargeable due to debtor’s fiduciary duty to creditor.
Baker v. Friedman (In re Friedman) (Bankr. D. Mass.)

§ 523(a)(6) Claim for damages based on state commission’s finding of sexual harassment was nondischargeable as based on willful and malicious injury.
Jones v. Svreck (In re Jones) (B.A.P. 1st Cir.)

§ 544(b)(1) Trustee had standing to pursue avoidance action against five individuals and company formed to acquire debtor’s loan obligations.
Turner v. Phoenix Fin., LLC (In re Imageset, Inc.) (Bankr. D. Me.)

2nd Cir.

§ 362(b)(4) Consent decree settling environmental claims against debtor utility company fell within police powers exception to stay.
New York v. Mirant N.Y., Inc. (S.D.N.Y.)

Rule 5011 Motion to withdraw reference of adversary proceeding filed prior to determination as to whether action was core or non-core was premature.
United Illuminating Co. v. Enron Power Mktg., Inc. (In re Enron Corp.) (S.D.N.Y.)


3rd Cir.

§ 1129(a)(7)(A) Creditor not entitled to the release of escrowed funds due to confirmation of chapter 11 plan which provided for greater recovery than under chapter 7.
In re Lason (Bankr. D. Del.)


4th Cir.

§ 362 Automatic stay did not prevent transfer of breach of contract action against debtors on grounds of improper venue.
MTGLQ Investors, LP v. Guire (D. Md.)

§ 362 Agreement for in rem relief from automatic stay was not justified absent bad faith and harm to secured creditor that outweighed harm to unsecured creditors if granted.
Wells Fargo Home Mortg., Inc. v. Herrman (In re Herrman) (Bankr. E.D. Va.)

§ 553 Trustee could not set aside government recovery of basic allowance for housing payments made to debtor who was a Marine.
Tavenner v. United States (In re Vance) (Bankr. E.D. Va.)

§ 1329 Consent order was not proper vehicle for effecting plan modification.
Chase Manhattan Mortg. Corp. v. Leggette (In re Leggette) (Bankr. E.D. Va.)


5th Cir.

§ 547(b)(5) Transfer could not be avoided where trustee failed to demonstrate that creditor received more than it would have if the transfer had not been made.
Cunningham v. T. & R. Demolition, Inc. (In re ML & Assocs., Inc.) (Bankr. N.D. Tex.)


6th Cir.

§ 327(e) Bankruptcy court order setting aside appointment of special counsel reversed due to erroneous factual findings and lack of conflict on issue for which appointment was made.
Vining v. Taunt (In re M.T.G., Inc.) (E.D. Mich.)


7th Cir.

§ 524(a)(2) Creditor’s persistence in sending collection letters despite written notice of discharge violated injunction.
Patrick v. Check Brokerage Corp. (In re Patrick) (Bankr. S.D. Ill.)

§ 706(a) Conversion to chapter 13 denied as attempt to keep proceeds of lawsuit out of hands of creditors.
Darst v. Wampler (In re Wampler) (Bankr. S.D. Ind.)


8th Cir.

§ 522(e) Homestead exemption waiver that was ineffective under state law rendered claim unsecured and unenforceable.
In re Hebert (Bankr. N.D. Iowa)

§ 523(a)(15) Debt owed to father of former spouse and set forth in separation agreement was nondischargeable.
O’Shaughnessy v. O’Shaughnessy (Bankr. N.D. Iowa)


9th Cir.

§ 105(a) Equitable powers of bankruptcy court could not be used to circumvent search and seizure protections of the Fourth Amendment.
Spacone v. Burke (In re Truck-A-Way) (E.D. Cal.)


10th Cir.

§ 727(a) Bankruptcy court exercised proper discretion in refusing to approve settlement that gave creditor nondischargeable claim in exchange for withdrawal of objection to discharge.
Bank One v. Kallstrom (In re Kallstrom) (B.A.P. 10th Cir.)


11th Cir.

§ 362(b)(4) Government action to prevent debtor from processing or distributing adulterated crabmeat was within police power exception to stay.
United States v. Silver Seafood, Inc. (S.D. Ala.)

§ 362(d) Mortgage creditor was not entitled to relief from stay despite fact that lien on debtor’s property secured note was from defunct corporation and not from debtor personally.
In re Curinton (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st Cir.

Claim arising from partnership in which both creditor and debtor were partners was nondischargeable due to debtor’s fiduciary duty to creditor. Bankr. D. Mass. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition. Plaintiff creditor filed an adversary action against the debtor, and sought a determination that a debt owed by the debtor in relation to a partnership in which both parties were partners was nondischargeable pursuant to 11 U.S.C. § 523(a)(4). OVERVIEW: The bankruptcy court found that under partnership law in Massachusetts, the debtor owed the creditor a fiduciary duty for purposes of 11 U.S.C. § 523(a)(4) with respect to the partnership assets, which specifically included the insurance policies in issue. Numerous facts showed that the debtor controlled partnership affairs and owed the creditor a fiduciary duty. Under the Frain test used by the Seventh Circuit, the bankruptcy court found that the debtor held a position of ascendancy over the creditor that imposed fiduciary duties upon the debtor. The evidence showed that the debtor: (1) assumed the role of managing partner; (2) controlled the affairs of the partnership; (3) withheld pertinent information about the performance of the policies; and (4) relied upon the creditor’s trust and her lack of sophistication. The court found that the creditor sustained the required burden of proof to show the debtor’s defalcation in his fiduciary relationship. The court found that the defalcation involved the insurance policies, not the creditor’s initial partnership investment. Damages were determined with reference to the partnership agreement. Baker v. Friedman (In re Friedman), 2003 Bankr. LEXIS 1144, 298 B.R. 487 (Bankr. D. Mass. September 11, 2003) (Feeney, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10 [back to top]

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Claim for damages based on state commission’s finding of sexual harassment was nondischargeable as based on willful and malicious injury. B.A.P. 1st Cir. PROCEDURAL POSTURE: Appellant debtor appealed the order of the Bankruptcy Court for the District of Massachusetts that granted appellee creditor’s motion for summary judgment and held that damages awarded the creditor were nondischargeable pursuant to 11 U.S.C. § 523(a)(6). OVERVIEW: The creditor filed a complaint alleging sexual harassment with the Massachusetts Commission Against Discrimination (“MCAD”) against her former employer and the debtor. The hearing officer found that the debtor had violated Mass. Gen. Laws ch. 151B, § 1(18), and awarded the creditor total damages of $125,829. The debtor filed for bankruptcy protection. The bankruptcy court of appeals found that the creditor could rely on the MCAD decision in support of her summary judgment motion. Harm was suffered by the creditor because the debtor unjustifiably disregarded her right to be free from sexual harassment by engaging in behavior that created an abusive working environment. The finding of sexual harassment constituted the requisite injury and was equivalent to a finding of malicious and willful injury for dischargeability purposes under 11 U.S.C. § 523(a)(6). The debtor’s obligation to the creditor for damages awarded in the sexual harassment action were to be excepted from discharge. Jones v. Svreck (In re Jones), 2003 Bankr. LEXIS 1302, — B.R. — (B.A.P. 1st Cir. October 8, 2003) (Vaughan, B.A.P.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12[2] [back to top]

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Trustee had standing to pursue avoidance action against five individuals and company formed to acquire debtor’s loan obligations. Bankr. D. Me. PROCEDURAL POSTURE: Remaining claims of plaintiff, the chapter 7 trustee, were fraudulent transfer and preference theories. Remaining defendants were a company formed to acquire the debtor’s loan obligations to a bank, and provide it with additional financing, and five individuals. The trustee sought partial summary judgment and defendants cross-moved for summary judgment. OVERVIEW: The trustee sought findings (1) that there existed a creditor of debtor under circumstances that provided standing for the fraudulent transfer avoidance action, (2) that by virtue of stock ownership in the debtor and relation to the company, individual defendants and the company were debtor’s insiders, (3) that debtor made payments to the company and an individual defendant, (4) that the payments were for the benefit of each and all individual defendants, and (5) that they were initial transferees. The issues were: (1) the existence of a creditor who would have standing under the Maine Uniform Fraudulent Transfer Act (“UFTA”) and, thus, enable the trustee to avail himself of 11 U.S.C. § 544(b)(1)’s powers, (2) the defendants’ insider status; and whether, if insiders, any were (3) initial transferees, or (4) persons for whose benefit the transfers were made. The trustee prevailed on the question of the so-called “golden creditor.” The record also established that each of the individual defendants was an insider of debtor, that the transfers under scrutiny did take place, and that the company was an initial transferee within the meaning of 11 U.S.C. § 550(a)(1). Turner v. Phoenix Fin., LLC (In re Imageset, Inc.), 2003 Bankr. LEXIS 1309, — B.R. — (Bankr. D. Me. September 26, 2003) (Haines, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.02, .09 [back to top]

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2nd Cir.

Consent decree settling environmental claims against debtor utility company fell within police powers exception to stay. S.D.N.Y. PROCEDURAL POSTURE: Plaintiffs, a state and state conservation official, sought injunctive relief against defendant utility company for violations of federal pollution laws, which were also incorporated into state law. The state also brought a claim under the common law of public nuisance. The state sought to have the court enter a consent decree that resolved the claims brought by the state against the utility company. OVERVIEW: The state claimed that as a result of certain permitting violations, a power plant owned by the utility emitted nitrogen oxides and sulfur dioxide in levels that violated the law. The parties entered into a consent decree that settled the claims alleged in the complaint. Shortly thereafter, the utility filed for bankruptcy, and continued to manage and operate its businesses as a debtor in possession. The issue was whether the court had jurisdiction to enter the consent decree, given the utility’s ongoing bankruptcy proceeding in a different jurisdiction. The initial issue raised was whether the motion to enter the consent decree was subject to the automatic stay imposed by the bankruptcy proceeding. The state’s actions in this case were plainly directed at protecting the environment and natural resources of the state by rectifying and preventing the ongoing pollution at the plant. The utility claimed that compliance with the terms of the consent decree required outlays in excess of $100 million, but that fact did not make the state’s action in seeking entry of a judgment pursuant to the consent decree one for the enforcement of a money judgment. New York v. Mirant N.Y., Inc., 2003 U.S. Dist. LEXIS 18345, — B.R. — (S.D.N.Y. October 9, 2003) (Koeltl, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5] [back to top]

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Motion to withdraw reference of adversary proceeding filed prior to determination as to whether action was core or non-core was premature. S.D.N.Y. PROCEDURAL POSTURE: Appellant power purchasers filed a motion, pursuant to 28 U.S.C. § 157(d) and Fed. R. Bankr. P. 5011, which sought withdrawal of a reference of their proceeding to the bankruptcy court. The purchasers claimed that the action between the parties was based on a non-core breach of contract and that the parties agreed to resolve disputes through arbitration. Appellee power supplier opposed the motion. OVERVIEW: The supplier had a long-term contract to supply power to the purchasers, which contract required that the parties submit all disputes arising under the contract to arbitration. The supplier filed for bankruptcy, and the purchasers notified it of their intention to terminate the contract. Thereafter, the purchasers entered into a new contract and then subtracted the allegedly substantial losses that they suffered from the amount owed to the supplier. The supplier filed an adversary complaint which, along with 24 other similar proceedings, was stayed by the bankruptcy court and then sent collectively to mediation before another bankruptcy judge. The purchasers sought to withdraw the reference because they contended that the proceeding was non-core and judicial economy supported such an action. The court found that the motion was premature, as there was no determination made as to whether the action was core or non-core. The court found that in the interests of judicial efficiency as well as uniform administration of justice, there was no need to preempt such a determination. United Illuminating Co. v. Enron Power Mktg., Inc. (In re Enron Corp.), 2003 U.S. Dist. LEXIS 16431, — B.R. — (S.D.N.Y. September 22, 2003) (Cote, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:5011.01 [back to top]

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3rdCir.

Creditor not entitled to the release of escrowed funds due to confirmation of chapter 11 plan which provided for greater recovery than under chapter 7. Bankr. D. Del. PROCEDURAL POSTURE: Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code and the cases were jointly administered. Debtors’ plan of reorganization was later confirmed, which provided for creditor and other secured lenders to receive the full value of their collateral. Creditor filed a motion and sought the release of escrowed funds, which debtors opposed. OVERVIEW: Creditor argued that it was entitled to receive its full share of the proceeds of the sale of debtors’ assets under an agreement, while debtors argued that creditor was bound by the lock-up agreement. The court found that the lock-up agreement contemplated a chapter 11 plan that would forgive and reduce portions of the debt and extend the maturity date under the agreement. In addition, the agreement changed certain fixed payment dates. The court concluded that creditor’s claims to the sales proceeds and the rights to raise issues related to the chapter 11 plan’s compliance with 11 U.S.C. § 1129 were adequately preserved until a decision on its motion. The parties disagreed on the appropriate valuation standard under 11 U.S.C. § 1129(a)(7). The evidence presented at a hearing established that a conversion to chapter 7 would have had a deleterious effect on the value of debtors’ business. The court concluded that the valuation evidence presented at the hearings demonstrated that the requirements of 11 U.S.C. § 1129(a)(7)(A) were met. In re Lason, 2003 Bankr. LEXIS 1324, — B.R. — (Bankr. D. Del. October 15, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1129.03[7] [back to top]

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4th Cir.

Automatic stay did not prevent transfer of breach of contract action against debtors on grounds of improper venue. D. Md. PROCEDURAL POSTURE: Plaintiff investment company sued defendants, an individual and five restaurants, alleging breach of contract. Four of the five restaurants then filed bankruptcy petitions in Bankruptcy Court for the Northern District of West Virginia. Defendants moved to dismiss or transfer venue in the District Court for the District of Maryland. OVERVIEW: The restaurants entered into an agreement to borrow money from the investment company’s successor to finance the acquisition of three steakhouse restaurants, one in Maryland and two in West Virginia. The restaurants executed three promissory notes, each of which was secured by a deed of trust to one of the three steakhouses. The individual personally guaranteed the notes. The individual was a West Virginia resident and all five restaurants were West Virginia entities, although two were registered to do business in Maryland. The agreement was to be governed by Connecticut law. The investment company’s successor notified the individual that the restaurants had defaulted on their loan obligations and sent a notice of acceleration and a demand for repayment of the debt. The court found that 11 U.S.C. § 362’s automatic stay entered when the restaurants filed bankruptcy petitions did not apply to the motion to transfer the case because none of its purposes would have been served by delaying the motion to transfer. The District of Maryland was not the proper venue. There was no evidence that the events giving rise to the investment company’s claim occurred in Maryland. MTGLQ Investors, LP v. Guire, 2003 U.S. Dist. LEXIS 18217, — B.R. — (D. Md. October 7, 2003) (Blake, D.J.).

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

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Agreement for in rem relief from automatic stay was not justified absent bad faith and harm to secured creditor that outweighed harm to unsecured creditors if granted. Bankr. E.D. Va. PROCEDURAL POSTURE: Debtor and creditor, the holder of a first lien on the debtor’s home, submitted a proposed consent order to the bankruptcy court that conditioned the automatic stay upon the sale of the debtor’s home. The submitted order contained a provision that would have granted in rem relief from the automatic stay if this case were to be dismissed and a new one filed. The chapter 13 trustee also consented to the order. OVERVIEW: In rem relief in the event of a future filing required two elements — bad faith or abuse of the bankruptcy system and harm to the secured creditor if in rem relief were denied that exceeded the harm to the unsecured creditors in rem relief were granted. The bankruptcy court determined that neither element was present. Although the debtor had multiple bankruptcy filings, the first filing was four and a half years before the second filing. The debtor requested dismissal of a second filing, and he filed his third case a few months after that dismissal. Although there was no explanation for the dismissal and subsequent filing, there was no change in circumstances that would have been detrimental to any party. The prepetition delinquency on the creditor’s mortgage increased by only three additional monthly payments, the delay occasioned by the dismissal and refiling was not excessive, and the creditor was adequately protected. However, if in rem relief were granted, the junior and judgment lienholders would have suffered harm in that they would have been required to buy the property at foreclosure. Wells Fargo Home Mortg., Inc. v. Herrman (In re Herrman), 2003 Bankr. LEXIS 1151, — B.R. — (Bankr. E.D. Va. August 11, 2003) (Mayer, B.J.).

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

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Trustee could not set aside government recovery of basic allowance for housing payments made to debtor who was a Marine. Bankr. E.D. Va. PROCEDURAL POSTURE: Plaintiff trustee filed a complaint seeking to recover deductions from the debtor’s military pay made by defendant United States during the 90 days immediately preceding the filing of the debtor’s chapter 7 petition. The United States maintained that it was entitled, under the doctrine of recoupment, to recover overpayments the debtor, a Marine, received for basic allowance for housing (“BAH”). Both parties sought summary judgment. OVERVIEW: As part of his compensation, the debtor received BAH, which was paid to him directly if he lived off base, but to his housing unit if he lived on base. While living on base, he received BAH to which he was not entitled. The trustee argued that the recoupment doctrine was inapplicable because the United States’ obligation to pay BAH to the debtor was analogous to a government entitlement and was separate from its obligation to pay his basic compensation; therefore, the issue was one of setoff under 11 U.S.C. § 553. The United States argued that the BAH overpayments the debtor owed the government and the military pay that it owed to the debtor were mutual debts that grew out of the debtor’s enlistment agreement, and thus the doctrine of equitable recoupment applied. The court agreed with the United States. The BAH payments were made as a direct result of the debtor’s enlistment contract with the Marine Corps, and arose from the same contract under either the “logical relationship” or the “integrated transaction tests,” as the BAH overpayments to the debtor and the subsequent recovery of those overpayments through his military pay occurred under the same transaction. Tavenner v. United States (In re Vance), 2003 Bankr. LEXIS 1165, 298 B.R. 262 (Bankr. E.D. Va. March 28, 2003) (Tice, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.01 [back to top]

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Consent order was not proper vehicle for effecting plan modification. Bankr. E.D. Va. PROCEDURAL POSTURE: A proposed consent order resolving a motion for relief from the automatic stay was submitted. The order contained two provisions that stated that (1) debtor consented to increasing the monthly plan payment and that the entry of the order was deemed to be a filed proof of claim, and (2) the order was deemed to modify the plan to include the postpetition arrears and that notice of the amended plan was waived by the parties. OVERVIEW: The court found that the substance of the consensual resolution was not objectionable and was well within the usual parameters for the resolution of such matters. As to the two provisions, in essence the parties were seeking to effect a plan modification without following the necessary procedural steps. The court found that the modification precluded every other creditor and party in interest from participating. Just as the procedures followed to achieve confirmation of the initial plan assisted in separating proposed plans that could have succeeded from those that would not, they were also necessary to determine whether a proposed modification would have been beneficial. The proposed provisions by-passed that process and eliminated the participation of those who could have been affected by the modification. The proposed provision relating to the order being deemed an amendment to a filed proof of claim also raised difficulties for the court. The proposed procedure offered notice to no one. Many problems could have arisen when a proof of claim was not timely amended in accordance with a consensual resolution of a motion for relief from stay. Chase Manhattan Mortg. Corp. v. Leggette (In re Leggette), 2003 Bankr. LEXIS 1163, — B.R. — (Bankr. E.D. Va. June 18, 2003) (Mayer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1329.01 [back to top]

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5th Cir.

Transfer could not be avoided where trustee failed to demonstrate that creditor received more than it would have if the transfer had not been made. Bankr. N.D. Tex. PROCEDURAL POSTURE: In an adversary proceeding, the chapter 7 trustee of the debtor’s bankruptcy estate sought, under 11 U.S.C. §§ 547(b) and 550, to avoid and recover a transfer of $62,182 made by the debtor to the creditor. The court conducted a trial. OVERVIEW: The debtor made the transfer within 90 days of the bankruptcy petition, to and for the benefit of the creditor, on account of an antecedent debt. The creditor contended, however, that the debtor did not transfer “an interest of the debtor in property,” that the debtor was not insolvent, and that the creditor did not receive more than it would have received had the debtor filed a case under chapter 7. Tex. Prop. Code § 162.001(a) made construction payments trust funds. However, because the debtor commingled the funds, and the creditor could not trace the funds, the creditor failed to show that the funds it received were trust funds. Therefore, the debtor transferred an interest of the debtor in property. The court also found that although the creditor would have received no payment from the estate in a hypothetical chapter 7 case, it would have been paid in full by the insurance company that supplied the payment bond. Thus, the trustee did not establish that the creditor received more than it would have received had the transfer not been made. As a result, the elements of 11 U.S.C. § 547(b)(5) were not met, and the transfer could not be avoided. Cunningham v. T. & R. Demolition, Inc. (In re ML & Assocs., Inc.), 2003 Bankr. LEXIS 1310, — B.R. — (Bankr. N.D. Tex. October 9, 2003) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03[7] back to top]

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6th Cir.

Bankruptcy court order setting aside appointment of special counsel reversed due to erroneous factual findings and lack of conflict on issue for which appointment was made. E.D. Mich. PROCEDURAL POSTURE: Appellants, an attorney and a bankruptcy estate’s successor trustee, appealed from the bankruptcy court’s decision to set aside a previous order, which authorized the first trustee’s employment of the attorney as special counsel. OVERVIEW: The court agreed that the appeal was not subject to review under 28 U.S.C. § 158(a)(1) because appeals from motions for attorney disqualifications were not final orders. However, the court exercised its discretion to hear the appeal and addressed the substance of the appeal because it was reasonable to conclude that the present issue would be brought back to the same court at the point that it would otherwise become appealable, and that substituting counsel would lead to the expenditure of additional, redundant legal fees. Further, forcing the successor trustee to substitute his present representation with that of another advocate did not necessarily mean that it would materially advance the suit’s ultimate termination. The court found that the bankruptcy court’s factual findings, at least to the extent that they addressed certain subsections of the trustee’s amended application for authority to employ the attorney as special counsel, were clearly erroneous. The court also held that 11 U.S.C. § 327(e) only required that the attorney not be in conflict with the trustee for the specific purpose that the special counsel designation applied. Vining v. Taunt (In re M.T.G., Inc.), 2003 U.S. Dist. LEXIS 16202, 298 B.R. 310 (E.D. Mich. September 11, 2003) (Taylor, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:327.04[9] [back to top]

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7th Cir.

Creditor’s persistence in sending collection letters despite written notice of discharge violated injunction. Bankr. S.D. Ill. PROCEDURAL POSTURE: Debtor instituted an adversary proceeding against creditor under 11 U.S.C. § 524(a)(2), seeking to enforce a discharge injunction. OVERVIEW: After debtor was discharged in bankruptcy proceedings, creditor, a bad check collection business, sent a collection notice to debtor. Debtor’s counsel sent a letter to creditor instructing creditor to cease collection activities because debtor had been discharged in bankruptcy. Creditor send a second collection letter to debtor, to which debtor’s counsel again replied. Creditor then sent two more collection letters before debtor filed the adversary proceeding. Debtor claimed that because the name on the checks was slightly different than the name on the bankruptcy petition, it did not know that the person from whom creditor sought to collect was the same individual as debtor. The court noted that the difference in names might have excused creditor’s action. However, creditor was twice put on notice by letters from debtor’s counsel that debtor had been discharged in bankruptcy, yet creditor failed to reply or otherwise investigate. Therefore, the court found creditor in contempt under 11 U.S.C. § 524(a)(2). Patrick v. Check Brokerage Corp. (In re Patrick), 2003 Bankr. LEXIS 1307, — B.R. — (Bankr. S.D. Ill. October 7, 2003) (Fines, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2] [back to top]

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Conversion to chapter 13 denied as attempt to keep proceeds of lawsuit out of hands of creditors. Bankr. S.D. Ind. PROCEDURAL POSTURE: Debtor, in a chapter 7 bankruptcy, indicated that she had a claim in a class action lawsuit, which she listed as having no value. The chapter 7 trustee treated the case as a “no asset” case. The debtor subsequently received over $15,000 from the lawsuit. The trustee moved for turnover after learning of the recovery. The debtor moved to convert her case pursuant to 11 U.S.C. § 706 to a chapter 13. The trustee objected to the conversion. OVERVIEW: The bankruptcy court determined that 11 U.S.C. § 706(a) did not provide an absolute right to convert. Rather, the court concluded that it had the discretion to deny a motion to convert upon a showing of bad faith. The debtor’s motive for conversion was an attempt to keep the recovery out of the hands of her creditors. She filed her conversion motion immediately following the trustee’s turnover request. The debtor placed a large portion of the recovery in a certificate of deposit, diminishing its value due to the penalty for early withdrawal. The court also concluded that the debtor’s assertion in her bankruptcy petition that the recovery had no value was an intentional misrepresentation. The debtor’s creditors would have been adversely impacted by conversion because the debtor’s unsecured debts were discharged. She had only one secured debt that needed to be treated under a chapter 13 plan, and thus, the debtor’s unsecured creditors would have received nothing, and the debtor would have received a substantial windfall. The debtor did not need the unique protection offered by chapter 13. Thus, there was no benefit to the debtor that outweighed the detriment to her creditors.Darst v. Wampler (In re Wampler), 2003 Bankr. LEXIS 1138, — B.R. — (Bankr. S.D. Ind. August 25, 2003) (Coachys, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:706.02 [back to top]

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8th Cir.

Homestead exemption waiver that was ineffective under state law rendered claim unsecured and unenforceable. Bankr. N.D. Iowa PROCEDURAL POSTURE: Debtor filed a motion to avoid two judgment liens pursuant to 11 U.S.C. § 522(f), alleging that the liens impaired his homestead exemption. Creditor, who held a judgment lien, objected. The creditor alleged that the debtor had signed a personal guarantee that included a waiver of the homestead exemption. OVERVIEW: The issue for the bankruptcy court was whether contract of guarantee executed by the debtor was sufficient to have constituted a statutory exception to the homestead exemption under Iowa Code § 561.21(2). The language in the guarantee stated that “guarantors hereby waive the benefit of all homestead exemption laws.” The bankruptcy court concluded that the waiver provision was not effective because it did not “expressly stipulate” that the debtor’s homestead would be liable for the debt owed to the creditor; the language was merely a waiver of exemption statutes. Because the waiver provision was unenforceable under Iowa law, the debtor’s homestead was exempt on the date that the creditor obtained judgment against him. Consequently, its judgment lien did not attach to the debtor’s homestead and the creditor held only an unsecured claim. Accordingly, 11 U.S.C. § 522(e) rendered the waiver unenforceable as a matter of federal law. In re Hebert, 2003 Bankr. LEXIS 1303, — B.R. — (Bankr. N.D. Iowa September 19, 2003) (Edmonds, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.08 [back to top]

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Debt owed to father of former spouse and set forth in separation agreement was nondischargeable. Bankr. N.D. Iowa PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition. Plaintiff former spouse filed an action against the debtor and sought a determination that a debt owed to the former spouse’s father was nondischargeable under 11 U.S.C. § 523(a)(15). OVERVIEW: The former spouse alleged that under 11 U.S.C. § 523(a)(15), certain debt owed was nondischargeable, while the debtor alleged that at least one of the exceptions to the general rule that prevented discharge under 11 U.S.C. § 523(a)(15) applied. It was uncontested that the debt owed was of the nature of that described in section 523(a)(15). The debtor and her former spouse incurred the debt while married and both parties signed the promissory note. Upon dissolution of the marriage, the couple agreed that each party would satisfy half of the outstanding balance. The settlement agreement provided that both parties would hold each other harmless for the debts stated therein. If the debtor were granted a discharge for the debt owed in issue, the former spouse would then be legally obligated to satisfy the debt. The court concluded that the debtor had the ability to pay the outstanding debt in issue. The debtor failed to satisfy 11 U.S.C. § 523(a)(15)(A). She also failed to satisfy the burden of section 523(a)(15)(B). O’Shaughnessy v. O’Shaughnessy, 2003 Bankr. LEXIS 1304, — B.R. — (Bankr. N.D. Iowa October 7, 2003) (Kilburg, C.B.J.).

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

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9th Cir.

Equitable powers of bankruptcy court could not be used to circumvent search and seizure protections of the Fourth Amendment. E.D. Cal. PROCEDURAL POSTURE: In a bankruptcy action, defendant moved to disqualify the trustee’s counsel (counsel) and his law firm from further participation in the case. OVERVIEW: The bankruptcy court granted counsel’s ex parte application to search two residences, including defendant’s, and unspecified storage lockers and to seize property allegedly belonging to the bankruptcy estate without notice. Counsel took part in the search, and seized and inspected the contents of boxes containing documents from defendant’s counsel. Defendant’s counsel eventually submitted a list of documents for which he claimed privilege. Even so, counsel ultimately turned over all of the seized boxes and documents to the United States Marshals. Based upon counsel’s acts, defendant sought to disqualify counsel and his law firm from the case. In seeking the ex parte order to search defendant’s residence, counsel never provided the bankruptcy court with the statutory or caselaw authority to support a warrantless search and seizure, save his reference to 11 U.S.C. § 105(a). However, this provision, standing alone, could not circumvent the explicit warrant requirements of Fed. R. Crim. P. 41 or the Fourth Amendment, which counsel ignored. As a result, counsel acted in a manner that degraded the integrity of the court and interfered with the administration of justice. Spacone v. Burke (In re Truck-A-Way), 2003 U.S. Dist. LEXIS 16282, — B.R. — (E.D. Cal. September 9, 2003) (Damrell, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.05 [back to top]

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10th Cir.

Bankruptcy court exercised proper discretion in refusing to approve settlement that gave creditor nondischargeable claim in exchange for withdrawal of objection to discharge. B.A.P. 10th Cir. PROCEDURAL POSTURE: In debtors’ proceeding under chapter 7, debtors and creditor requested approval of their settlement of creditor’s adversary proceeding commenced pursuant to 11 U.S.C. § 727(a). The Bankruptcy Court for the Northern District of Oklahoma refused to approve the settlement. Debtors and creditor jointly appealed. OVERVIEW: Debtors and creditor served the proposed settlement as between them on all other creditors. The settlement of creditor’s adversary proceeding provided for a nondischargeable judgment in favor of creditor in return for the voluntary dismissal of its adversary proceedings. No responses or objections to the settlement were filed, and no creditor requested an opportunity to assume prosecution of creditor’s 11 U.S.C. § 727(a) proceeding. Regardless, the bankruptcy court refused to accept the unopposed settlement, and the court affirmed that judgment. Under Fed. R. Bankr. P. 9019, the bankruptcy court had discretion on whether to approve the settlement. The court held that the bankruptcy court did not abuse that discretion. Fed. R. Bankr. P. 7041 restricted the right of parties to a bankruptcy to dismiss 11 U.S.C. § 727(a) claims. A quid pro quo exchange of dismissal for the settlement was exactly what Fed. R. Bankr. P. 7041 discouraged. Moreover, the adversary proceeding did not clearly state a claim under 11 U.S.C. § 523(a) and the settlement did not address such a claim; hence, debtors and creditor could not claim such in an attempt to avoid Fed. R. Bankr. P. 7041. Bank One v. Kallstrom (In re Kallstrom), 2003 Bankr. LEXIS 1153, 298 B.R. 753 (B.A.P. 10th Cir. September 16, 2003) (Clark, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.01 [back to top]

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11th Cir.

Government action to prevent debtor from processing or distributing adulterated crabmeat was within police power exception to stay. S.D. Ala. PROCEDURAL POSTURE: Defendants, both debtors in bankruptcy (debtors), moved the court for an order of stay and for other relief. The Government submitted its opposition to the motion, to which the debtors failed to respond. This matter followed. OVERVIEW: The debtors sought relief under 11 U.S.C. § 362(a)(1). At issue was a critical exception implicated by the motion which provided that the filing of a petition did not operate as a stay of the commencement or continuation of an action or proceeding by a governmental unit to enforce its police and regulatory power, including the enforcement of a judgment other than a money judgment obtained in an action to enforce its police or regulatory power. This action was brought by the Government to restrain and enjoin the debtors from processing or distributing adulterated crabmeat. As such, this proceeding constituted enforcement of laws affecting health, welfare, and safety, with no designs to obtain or enforce a money judgment, and fell squarely within the Government’s police or regulatory power. The Government sought not to adjudicate private rights herein, but rather to effectuate public policy goals. Therefore, the action was exempt from the automatic stay under 11 U.S.C. § 362(b)(4). United States v. Silver Seafood, Inc., 2003 U.S. Dist. LEXIS 16416, — B.R. — (S.D. Ala. July 21, 2003) (Steele, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5] [back to top]

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Mortgage creditor was not entitled to relief from stay despite fact that lien on debtor’s property secured note was from defunct corporation and not from debtor personally. Bankr. M.D. Fla. PROCEDURAL POSTURE: In a chapter 13 bankruptcy case, a mortgage creditor filed a motion for relief from stay, seeking to conduct a foreclosure sale of the property in which the debtor resided. OVERVIEW: The debtor was the founder and sole shareholder of a corporation. The corporation bought the debtor’s home and transferred title to the debtor individually by quitclaim deed. The debtor began making the mortgage payments, and the corporation became defunct. The mortgage agreement was not amended to reflect the change in ownership, however, and the debtor was not individually liable on the note. The creditor contended that it was entitled to relief from the stay in accordance with 11 U.S.C. § 362(d) because the debtor lacked privity with the creditor. The court denied relief, interpreting the term “claim” broadly to permit a debtor to cure a defaulted mortgage within a chapter 13 plan even when no privity of contract existed between the debtor and creditor. The court observed that 11 U.S.C. § 101(5) embodied the broadest meaning possible for the term “claim.” Thus, privity was not essential. A debtor could include an in rem claim in a chapter 13 plan subject to good faith limitations and any limitation in the underlying mortgage.In re Curinton, 2003 Bankr. LEXIS 1166, — B.R. — (Bankr. M.D. Fla. July 24, 2003) (Jennemann, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07 [back to top]

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