Collier Bankruptcy Case Update October-27-03
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Bankruptcy Newsletter
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 27, 2003
CASES IN
THIS ISSUE
(scroll down to read the full
summary)
§ 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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion.
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]
ABI Members, click here to get the full opinion
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]
ABI Members, click here to get the full opinion
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]
ABI Members, click here to get the full opinion
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
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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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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
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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]