Collier Bankruptcy Case Update October-28-02
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 28, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 330(a)(3) Interim compensation for professionals is
subject to review for reasonableness.
In re ACT Mfg. (Bankr. D. Mass.) 103003
§ 522(b)(2)(A) Debtor’s claimed homestead exemption in parcel adjacent to residence allowed based on state law at time of filing.
In re Edwards (Bankr. D. Mass.) 103013
§ 523(a)(5) Debtor’s obligation to former wife was discharged as being in the nature of a property settlement, not support.
Paddock v. Choquette (In re Choquette) (Bankr. D.R.I.) 103016
§ 365(d)(10) Lessor could not receive payments until
court determined whether lease was a true lease or a security
Wells Fargo Equip. Fin., Inc. v. Circuit-Wise, Inc. (In re Circuit-Wise, Inc.) (Bankr. D. Conn.)
28 U.S.C. § 157(b) Debtor landlord’s adversary
proceeding against lessee properly triable by bankruptcy
Asousa P’ship v. Pinnacle Foods, Inc. (In re Asousa P’ship) (Bankr. E.D. Pa.)
§ 503(b) Debtor’s late proposal for payment of
severance benefit to chief executive officer for pre- and postpetition
service was denied.
In re LCCH Liquidating Corp. (Bankr. W.D. Va.)
§ 362(d) Bankruptcy court correctly granted relief from
stay, based on unlikely success of reorganization.
In re Elmwood Partners, LLC (E.D. La.)
§ 722 After conversion to chapter 7, debtor could redeem
collateral upon payment of balance of chapter 13 secured
In re Dean (Bankr. W.D. Tenn.)
§ 108(b) Stay was lifted because debtor did not exercise
right to redeem property within 60 days.
In re Murray (Bankr. N.D. Ill.)
§ 524(a) Chapter 7 debtor’s failure to schedule or claim exemption in property freed trustee to take possession for spouse’s chapter 13 estate.
Stephens v. Jensen-Carter (In re Stephens) (B.A.P. 8th Cir.)
§ 1322(b)(1) Chapter 13 plan denied for unfairly discriminating among unsecured creditors.
In re Carlson (Bankr. D. Mont.)
§ 502 Debtor’s objection to IRS claim for taxes assessed against partnership, but not against debtor partner individually, overruled.
In re Chauncey (Bankr. M.D. Fla.)
§ 1325(a)(3) Confirmation of chapter 13 plan denied for bad faith where court found debtors converted nonexempt assets into an exempt homestead.
In re Fretwell (Bankr. M.D. Fla.)
§ 1325(a)(5) Debtors seeking to reduce interest payment to chapter 13 creditor required to submit evidence supporting deviation from contract rate.
In re Pledger (Bankr. N.D. Ala.)
Collier Bankruptcy Case Summaries
Interim compensation for professionals is subject to review for reasonableness. Bankr. D. Mass. PROCEDURAL POSTURE: Upon the bankruptcy debtor’s motion, the bankruptcy court established interim compensation procedures which permitted professionals to be paid fees and expenses on a monthly basis. Based upon the court’s review of the monthly summaries of fees and expenses, the court required the professionals to submit interim fee applications and certain creditors objected to the applications. OVERVIEW: Certain professionals, including bankruptcy consultants, financial advisors, and attorneys, sought interim compensation for their services in the bankruptcy proceedings. The bankruptcy court first held that, since the proceeding was essentially a controlled liquidation for the benefit of a secured creditor, the establishment of compensation procedures permitting professionals to receive payment in advance of court review was appropriate. Nonetheless, the professionals were required to show that the requested fees and expenses were reasonable, and the interim fee applications were proper but were subject to subsequent adjustment based on the ultimate results of the professionals’ efforts. Further, the professionals were advised that subsequent applications should adhere to the form and level of detail required by the court, and avoid charging for overlapping and duplicative work. In re ACT Mfg., 2002 Bankr. LEXIS 845, 281 B.R. 468 (Bankr. D. Mass. August 9, 2002) (Rosenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.01
Debtor’s claimed homestead exemption in
parcel adjacent to residence allowed based on state law at time of
filing. Bankr. D. Mass. PROCEDURAL
POSTURE: The bankruptcy debtor claimed a homestead exemption,
under Mass. Gen. Laws. Ann. ch. 188, § 1, in a parcel of land upon
which his residence was located and in a contiguous parcel of land which
he acquired separately and subsequently. The creditors objected to the
debtor’s claimed exemption in the contiguous parcel of land.
OVERVIEW: The debtor claimed that, under Mass. Gen.
Laws. Ann. ch. 188, § 1, the contiguous parcel was properly
included in his recorded homestead exemption since his children played
there, he landscaped a portion of the parcel, and he constructed a
garden shed and a dog run on a portion of the parcel. The creditors
contended, however, that the subject property was not in fact part of
the debtor’s homestead since the debtor admitted that he purchased
the property as an investment and intended to build a house for his
daughter on the property in the future. The bankruptcy court held that
the debtor acquired a valid estate of homestead in the contiguous parcel
when he recorded the declaration of homestead, and the creditors failed
to show that the debtor did not occupy the contiguous parcel as his
principal residence at the time the bankruptcy petition was filed. The
debtor and his family actually used the adjacent parcel as an integral
part of their residence to a reasonable extent, and the debtor’s
intentions at the time the adjacent parcel was purchased, and his
speculative future intentions, were irrelevant to the debtor’s
actual use of the property on the petition date. In re
Edwards, 2002 Bankr. LEXIS 834, 281 B.R. 439 (Bankr. D. Mass.
August 5, 2002) (Feeney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.01
Debtor’s obligation to former wife was
discharged as being in the nature of a property settlement, not
support. Bankr. D.R.I. PROCEDURAL
POSTURE: Plaintiff wife sought a determination under 11 U.S.C.
§ 523(a)(5) that the debt owed by defendant ex-husband pursuant to
a promissory note was nondischargeable in the husband’s bankruptcy
proceeding. OVERVIEW: As part of the divorce, the
parties entered into a property settlement agreement ('PSA'). The
husband failed to pay the wife the entire $10,000 required under the PSA
within the agreed-upon 3-year period. Under the terms of the PSA, the
wife was entitled to force the sale of the property and divide the net
proceeds. Instead of forcing the sale of the property, the parties
entered into an agreement under which the husband executed and delivered
to the wife a promissory note secured by a junior mortgage on the
property. The wife argued that the balance due under the note was
nondischargeable. The court ruled that the disputed obligation was not a
debt incurred in connection with a separation agreement, divorce decree,
or other order of a court of record, and did not fall within the purview
of 11 U.S.C. § 523(a)(5). Furthermore, the court ruled that, even
if the obligation in question was created in connection with the
parties’ divorce, the debt was in the nature of a property
settlement, not support, and was dischargeable for that reason as well.
Paddock v. Choquette (In re Choquette), 2002 Bankr.
LEXIS 392, 276 B.R. 327 (Bankr. D.R.I. April 16, 2002) (Votolato,
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Lessor could not receive payments until court determined whether lease was a true lease or a security interest. Bankr. D. Conn. PROCEDURAL POSTURE: A creditor filed a motion under 11 U.S.C. § 365(d)(10) for payments under an equipment lease. The debtor and the unsecured creditors committee argued that the lease was not a 'true' or 'bona fide' lease but, rather, was a disguised 'security agreement' within the purview of 11 U.S.C. § 101(50). The creditor argued that until the court ruled on whether the lease was a security interest, payments had to be made. OVERVIEW: The court held the creditor was not entitled to the protections of 11 U.S.C. § 365(d)(10) until and unless the court determined that the lease was a 'true' or 'bona fide' lease. The plain meaning of section 365(d)(10) was dispositive of the timely-payment issue, because the Bankruptcy Code provided different rights and remedies for lessors and holders of 'security interests.' On its face, section 365(d)(10) required that for a person or entity to obtain the protections of section 365(d)(10), that person or entity had to be a lessor and not the holder of a security interest. Thus, the creditor could not prevail on the timely-payment issue because the plain meaning of section 365(d)(10) left no room for judicial construction. The 'true' or 'bona fide' lease meaning had been applied by the courts in the context of other sections of 11 U.S.C. § 365. Wells Fargo Equip. Fin., Inc. v. Circuit-Wise, Inc. (In re Circuit-Wise, Inc.), 2002 Bankr. LEXIS 400, 277 B.R. 460 (Bankr. D. Conn. April 23, 2002) (Weil, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04
Debtor landlord’s adversary proceeding against lessee
properly triable by bankruptcy court. Bankr. E.D. Pa.
PROCEDURAL POSTURE: Plaintiff debtor filed an adversary
complaint (1) objecting to defendant lessee’s proof of claim, (2)
seeking possession of the leased facility, and (3) seeking monetary
damages for the lessee’s breach of the lease. The lessee moved to
dismiss the adversary complaint or, alternatively, for discretionary
abstention. OVERVIEW: The debtor leased a manufacturing
facility to the lessee. The lessee ceased paying rent, and the debtor
commenced a state court action. The debtor subsequently filed its
chapter 11 bankruptcy petition, and the lessee filed a proof of claim
similar to its state counterclaim. The debtor filed an objection to the
proof of claim and filed an adversary complaint. The major thrust of the
lessee’s motion to dismiss, or for abstention, was that the
debtor’s adversary complaint should be dismissed so that the
claims could be tried by a jury in the state court action. The federal
bankruptcy court determined that it had equitable jurisdiction over the
debtor’s counterclaims asserted in the adversary complaint. The
lessee, by filing its proof of claim, submitted to the equitable
jurisdiction of the federal bankruptcy court to decide the
debtor’s counterclaims because they arose out of the same
transaction as the lessee’s claim against the estate. The lessee
had no right to trial by jury on the debtor’s counterclaims.
Therefore, dismissal of the adversary complaint was not warranted.
Discretionary abstention was also not warranted under the federal
bankruptcy court’s 12-factor test. Asousa P’ship
v. Pinnacle Foods, Inc. (In re Asousa P’ship), 2002
Bankr. LEXIS 399, 276 B.R. 55 (Bankr. E.D. Pa. March 26, 2002) (Sigmund,
Collier on Bankruptcy, 15th Ed. Revised 1:3.02
Debtor’s late proposal for payment of severance benefit
to chief executive officer for pre- and postpetition service was
denied. Bankr. W.D. Va. PROCEDURAL
POSTURE: The debtor moved for approval to pay a severance
benefit to a former executive officer in the amount of one year’s
salary, arguing that the court, in approving a management agreement
between the debtor and another entity who hired the officer before the
debtor’s assets were sold, had already approved in advance the
payment, or that it was authorized under 11 U.S.C. § 364(a). The
United States trustee and the creditors committee objected.
OVERVIEW: The court found the severance payment was
based upon the officer’s total service to the debtor, not just
that rendered postpetition, and that there was no contractual obligation
for payment of such a benefit. It was apparent that the proposed
severance benefit was based upon the perceived industry standard
practice for termination of a hospital administrator, not any fixed
policy or practice on the part of the management entity. Had the debtor
sought approval of an executive retention plan at the beginning of the
case, the creditors would have had the opportunity to attempt to
determine the value of such a plan before an obligation was incurred.
Its failure to do so led to the conclusion that such a benefit was not
necessary to secure the officer’s continued services. The proposed
package represented an expression of appreciation and gratitude to the
officer for his services. As to whether there was a sound business
reason for awarding severance, the problem was that the proposal was
based in part on pre-bankruptcy service and for which there was no
contractual obligation. It could not be approved as a post-filing
administrative expense with priority over general creditors.
In re LCCH Liquidating Corp., 2001 Bankr. LEXIS
1874, 276 B.R. 106 (Bankr. W.D. Va. December 19, 2001) (Stone,
Collier on Bankruptcy, 15th Ed. Revised 4:503.04
Bankruptcy court correctly granted relief from stay, based on
unlikely success of reorganization. E.D. La.
PROCEDURAL POSTURE: In a chapter 11 bankruptcy case,
appellant debtor appealed a judgment of the bankruptcy court, granting
appellee creditor’s motion to modify the automatic stay and
permitting the creditor to implement foreclosure proceedings on the
debtor’s medical office building and hospital building.
OVERVIEW: The debtor contended that the bankruptcy
court adopted and applied an erroneous standard at the hearing to modify
the automatic stay wherein it was required to show its initial plan of
reorganization could be confirmed over the creditor’s anticipated
rejection of the plan, and the adoption of this legal standard
constituted clear error; and that while the creditor requested relief
from the stay pursuant to 11 U.S.C. § 362(d)(2) of the Bankruptcy
Code, the bankruptcy court treated the hearing as though it was a
confirmation hearing on the initial plan of reorganization. The creditor
contended that the appropriate legal standard under section 362(d) was
applied. The court found that while the bankruptcy court did analyze the
factors considered in a confirmation proceeding, a review of the
transcript as a whole revealed that the appropriate legal standard was
applied pursuant to 11 U.S.C. § 362, finding that there was no
reasonable possibility of a successful reorganization within a
reasonable time. In re Elmwood Partners, LLC, 2002
U.S. Dist. LEXIS 7407, — F. Supp.2d — (E.D. La. April 18,
2002) (Porteous, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
After conversion to chapter 7, debtor could redeem collateral
upon payment of balance of chapter 13 secured claim. Bankr.
W.D. Tenn. PROCEDURAL POSTURE: The debtors filed a
chapter 13 bankruptcy, and later converted their case to chapter 7. The
debtors then moved to redeem their vehicle, which had been involved in
the bankruptcy. OVERVIEW: In their petition, the
debtors listed a debt to the creditor for their vehicle. At the time the
debtors converted their case, the creditor had been paid $4,100 of
principle and $613 in interest payments, leaving principle owed in the
amount of $74. The creditor also filed a split claim of $1,961, which
would have been paid 30 percent, or $588, had the debtors completed
their chapter 13 bankruptcy. The debtors sought to redeem the vehicle
for the amount left owing on the secured portion of the creditor’s
claim, or $74. The creditor’s position was that the debtors should
have been required to pay the remaining secured portion and their
unsecured claim. The court found that where a creditor’s secured
claim was determined in a chapter 13 case that subsequently converted to
chapter 7, in order to redeem under 11 U.S.C. § 722, the debtor
only needed to pay the remaining chapter 13 claim balance, regardless of
the collateral’s current value. In re Dean,
2002 Bankr. LEXIS 843, 281 B.R. 912 (Bankr. W.D. Tenn. August 12, 2002)
Collier on Bankruptcy, 15th Ed. Revised 6:722.01
Stay was lifted because debtor did not exercise
right to redeem property within 60 days. Bankr. N.D.
Ill. PROCEDURAL POSTURE: Certificate of purchase
holder filed a motion to modify the automatic stay under 11 U.S.C.
§ 362(d) to allow him to continue with state court proceedings for
issuance of a tax deed on property owned by the chapter 13 debtor. The
holder also filed an objection to the confirmation of the debtor’s
amended chapter 13 plan. OVERVIEW: The debtor failed to
pay the real estate taxes assessed against his property, and the holder
acquired a certificate of purchase by paying the delinquent taxes. The
debtor failed to redeem the property before filing bankruptcy, but
sought to pay the taxes under the plan. The court noted that 11 U.S.C.
§ 108(b) afforded a chapter 13 debtor the right to cure a default
within 60 days after the petition was filed. It declined to follow a
case that held that section 108(b) did not limit the debtor’s
right to modify secured claims accorded by 11 U.S.C. §§
1322(b)(2), 1325(a)(5). The debtor could not use 11 U.S.C. § 1322
to extend his right to redeem beyond the 60 days allowed by 11 U.S.C.
§ 108(b). After that 60-day redemption period expired, all of the
debtor’s rights to the property expired as well. It rejected the
debtor’s claim that the holder, by obtaining property with equity
valued at $450,000 for $7,411 (the amount of the unpaid delinquent
taxes), was unjustly enriched. Wrongful conduct was a prerequisite for a
finding of unjust enrichment, and as the tax sale was conducted in
accord with Illinois law, the holder did not act wrongfully.
In re Murray, 2002 Bankr. LEXIS 406, 276 B.R. 869
(Bankr. N.D. Ill. March 25, 2002) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:108.03; 8:1322.06
Chapter 7 debtor’s failure to schedule or
claim exemption in property freed trustee to take possession for
spouse’s chapter 13 estate. B.A.P. 8th Cir.
PROCEDURAL POSTURE: Appellant debtor filed an
individual petition for chapter 7 bankruptcy, and later attempted to
claim a homestead exemption. Appellee trustee received notice of the
exemption and objected. Debtor filed a motion for an adjudication
claiming that the trustee violated the discharge injunction under 11
U.S.C. § 524(a). The bankruptcy court denied the motion and debtor
appealed. OVERVIEW: Debtor’s husband moved out of
their house (property) and filed a chapter 13 bankruptcy petition.
Debtor later filed a separate chapter 7 bankruptcy petition, but failed
to schedule an ownership interest in the property, or claim a homestead
exemption. Debtor’s husband filed an amended schedule in
debtor’s case, attempting to exempt the property on his own behalf
as a dependent of debtor. Debtor received a discharge in her case. The
trustee objected to debtor’s husband claiming a homestead
exemption in his case, which was sustained by the court. The trustee
began efforts to take possession and sell the property for the benefit
of the husband’s bankruptcy estate. Debtor filed a Schedule C in
her closed case and claimed a homestead exemption. The trustee received
notice of the claim and objected. The court held that the
trustee’s attempt to liquidate the property was not an attempt to
enforce or collect a liability of debtor personally, but was an attempt
to administer property of her husband’s estate. The appellate
court agreed. The trustee was not infringing upon debtor’s alleged
homestead rights. The trustee’s actions did not violate the
discharge injunction in debtor’s case. Stephens v.
Jensen-Carter (In re Stephens), 2002 Bankr. LEXIS 385, 276 B.R.
610 (B.A.P. 8th Cir. April 29, 2002) (Koger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:524.02
Chapter 13 plan denied for unfairly discriminating among
unsecured creditors. Bankr. D. Mont.
PROCEDURAL POSTURE: Movants, chapter 13 trustee and
student-loan creditor, filed objections to confirmation of the
debtors’ chapter 13 plan. The trustee argued that the plan
unreasonably discriminated among the unsecured class of creditors in
violation of 11 U.S.C. § 1322(b)(1), and the creditor objected that
the plan failed to provide for postpetition interest on its obligation.
OVERVIEW: The chapter 13 plan provided that student
loans would be paid together with unsecured creditors for 36 months;
thereafter, only student loans will be paid until they were paid in
full. No interest was to be paid or was to accrue on the student loans
during the plan, but after its completion, interest would again accrue.
The court noted that the debtors offered no basis — rational or
otherwise — to justify a five year plan that provided for payment
to non-student loan, general unsecured creditors during only the first
three years of the plan. The court agreed with the creditor that
postpetition interest continued to accrue on the unpaid portion of the
nondischargeable student loan. Once the debtors’ attempt to avoid
five years of interest on their student loans was removed, they were
left with a plan that proposed to pay one category of unsecured
creditors a greater percentage on their claims as than another category
of unsecured creditors — for no articulated reason. Thus, they
failed to satisfy the first prong of the Wolff test, and the plan could
not be confirmed.In re Carlson, 2002 Bankr. LEXIS
394, 276 B.R. 653 (Bankr. D. Mont. April 26, 2002) (Kirscher, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.05
Debtor’s objection to IRS claim for taxes assessed against partnership, but not against debtor partner individually, overruled. Bankr. M.D. Fla. PROCEDURAL POSTURE: The debtors objected to a claim, filed by the creditor, the Internal Revenue Service, for employment taxes of a partnership in which one of the debtors was a partner. OVERVIEW: The debtor partner was a general partner of the partnership. He owned a one-half interest in the partnership. There was no dispute that the amounts reflected on the proof of claim correctly stated the delinquent tax liabilities of the partnership. The assessments made against the partnership were not also made against the individual partners. This was the normal administrative practice of the creditor. The court found that the debtor partner’s liability stemmed from his liability under Florida law for all obligations of the partnership. Additionally, although an assessment imbued the creditor with certain administrative methods by which to collect taxes, liability for federal taxes did not depend upon whether the Internal Revenue Service had made a valid assessment. The creditor’s right to look to the debtor partner for payment of the partnership’s tax obligations was sufficient to give the creditor an allowable claim.In re Chauncey, 2002 Bankr. LEXIS 838, 282 B.R. 34 (Bankr. M.D. Fla. February 11, 2002) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.01
Confirmation of chapter 13 plan denied for bad
faith where court found debtors converted nonexempt assets into an
exempt homestead. Bankr. M.D. Fla. PROCEDURAL
POSTURE: The debtors filed a chapter 13 petition for relief
under the Bankruptcy Code. The trustee filed a motion to dismiss for a
bad faith filing and objected to the confirmation of the debtors’
plan. OVERVIEW: The court treated the trustee’s
motion to dismiss as an objection to confirmation. The court examined
the debtors’ income sources and expenses and found that some
expenses were reasonable. However, the court had a problem with the
debtors’ actions. They had consulted a bankruptcy attorney, but
they disregarded their counsel’s legal advice, and instead used
their credit cards to build a new home. The debtors also used their
credit cards for large cash advances and travel. The court believed that
the debtors had not filed a chapter 7 petition because of the conversion
of non-exempt assets into an exempt homestead. Their conduct regarding
dealing with their creditors was questionable. The court believed that
the debtors lacked motivation and sincerity in seeking chapter 13
relief. The debtors had learned from their attorney that some, if not
all, of their unsecured debt would be nondischargeable in a chapter 7
petition. The court found that the debtors failed to prove that they
proposed their chapter 13 plan in good faith. In re
Fretwell, 2002 Bankr. LEXIS 839, 281 B.R. 745 (Bankr. M.D. Fla.
March 19, 2002) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.04
Debtors seeking to reduce interest payment to
chapter 13 creditor required to submit evidence supporting deviation
from contract rate. Bankr. N.D. Ala.
PROCEDURAL POSTURE: The chapter 13 trustee objected to
confirmation of the debtors’ plan of reorganization arguing that
the interest rate to be paid to a secured creditor, at eight percent,
was insufficient to afford the creditor its present value under 11
U.S.C. § 1325(a)(5)(B)(ii). The contract rate was 18 percent. The
debtors argued the higher rate would be providing a profit to the
creditor. OVERVIEW: The court found that a market rate
would consider the lending practices of other lenders making loans of
similar character, amount, and duration. The broader perspective
modified the strict coerced loan approach that only considered loans
made by the secured claimant. Using a regional perspective, the
bankruptcy court would be better able to determine a true market rate
for the loan. While the creditor might receive a profit component, for
the creditor to be placed in as good a position as it would have been
had the present value of the claim been paid immediately, they had to be
paid a market rate of interest, which included a profit factor. The
court adopted a modified coerced loan method as the appropriate method
for determining the current market rate of interest to be paid to a
secured creditor under section 1325(a)(5)(B)(ii) in a chapter 13 case.
In determining the current market rate, there was a rebuttable
presumption that the original contract rate was the current market rate.
The court, at an evidentiary hearing, would consider the evidence in
light of that standard. In re Pledger, 2002 Bankr.
LEXIS 319, 275 B.R. 394 (Bankr. N.D. Ala. March 11, 2002) (Sledge,
Collier on Bankruptcy, 15th Ed. Revised 8:1325.06[b]