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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)

 

Collier Bankruptcy Case Summaries

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2d Cir.

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[6]

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3d Cir.

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, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02

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4th Cir

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, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.04

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5th Cir.

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[4]

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6th Cir.

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) (Boswell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:722.01

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7th Cir.

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

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8th Cir.

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

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9th Cir.

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

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11th Cir.

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

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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

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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, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.06[3][b]

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