Collier Bankruptcy Case Update October-29-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
October 29, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 2d Cir.
Rule 8009 Motion to dismiss appeal because of late-filed brief denied.
In re Romaniello (D. Conn.)
§ 523(a)(5) Court grants plaintiff’s motion for summary judgment seeking to have her divorce settlement proceeds from the debtor deemed nondischargeable.
Lane v. Lane (In re Lane) (Bankr. D. Del.)
Rule 7056 Bankruptcy court’s order granting summary judgment reversed.
V.W. Bldg. & Design, Inc. v. Woskob (In re Woskob) (M.D. Pa.)
28 U.S.C. § 1334(c) District court granted debtor’s motion requesting that district court abstain from deciding removed case and remand case to state court.
Wheeling-Pittsburgh Corp. v. Am. Ins. Co. (In re Wheeling-Pittsburgh Corp.) (N.D. W. Va.)
§ 523(a)(4) Texas executor’s personal indebtedness for taxes held nondischargeable under section 523(a)(4).
United States v. Tomlin (In re Tomlin) (N.D. Tex.)
28 U.S.C. § 1334(c) District court abstained from hearing settlement enforcement action.
Broyles v. U.S. Gypsum Co. (E.D. Tex.)
§ 523(a)(1) Tax liability resulted from debtor’s willful attempt to evade or defeat tax and was therefore nondischargeable.
United States v. Gardner (In re Gardner) (Bankr. W.D. Ky.)
§ 524(a)(2) Chapter 7 case reopened to allow negligence proceeding to continue against debtor as nominal defendant.
Simpson v. Rodgers (In re Rodgers) (Bankr. W.D. Tenn.)
§ 524(c) Reaffirmation agreement did not waive already-existing default.
In re Moore (Bankr. E.D. Ky.)
§ 544(a)(3) Foreclosure action operated as constructive notice to chapter 7 trustee.
Treinish v. Norwest Bank Minn., N.A. (In re Periandri) (B.A.P. 6th Cir.)
Rule 4007(c) Creditor seeking an extension of time to file a complaint objecting to discharge or dischargeability must file its motion for extension prior to expiration of bar date set for filing discharge or dischargeability complaints.
Nardei v. Maughan (In re Maughan) (B.A.P. 6th Cir.)
§ 523(a)(8) District court reversed bankruptcy court’s decision to discharge debtor’s student loan obligation as 'undue hardship.' Goulet v. Educ. Credit Mgmt. Corp. (In re Goulet) (W.D. Wis.)
§ 521(1) Failure to list qui tam action on schedules warranted invocation of judicial estoppel.
United States ex rel. Gebert v. Transp. Admin. Servs. (8th Cir.)
§ 523(a)(9) Creditor failed to establish debtor’s intoxication.
Boone v. Barnes (In re Barnes) (B.A.P. 8th Cir.)
§ 727(a) Debtor denied discharge based on fraudulent conduct.
Block v. Moss (In re Moss) (B.A.P. 8th Cir.)
28 U.S.C. § 158(a) Debtor’s appeal from order granting mortgagee’s motion for relief from stay dismissed as moot.
Fields v. Option One Mortg. Corp. (In re Fields) (B.A.P. 8th Cir.)
§ 365(d)(3) Lessor’s claim for 'further rent' that actually represented debtor’s obligations under a promissory note entitled to administrative priority status.
Cukierman v. Uecker (In re Cukierman) (9th Cir.)
§ 547(b)(5) Court of Appeals held that fully secured creditor did not receive preferential payments.
Batlan v. Transamerica Comm. Fin. Corp. (In re Smith’s Home Furnishings, Inc.) (9th Cir.)
28 U.S.C. § 586(e) Motion for allowance of Trustee’s fees denied.
In re Rivera (Bankr. D.N.M.)
§ 510(c) Claims of general partner and sole controlling person equitably subordinated to claim of limited partner.
In re Biscayne Inv. Group (Bankr. S.D. Fla.)
§ 522(f) Debtor failed to set forth grounds for reconsideration of the court’s determination regarding IRS tax liens.
In re Lawrence (Bankr. N.D. Fla.)
28 U.S.C. § 158(d) Court of Appeals lacked jurisdiction over appeal.
Slobodinsky v. Salkin (In re Saber) (11th Cir.)
Collier Bankruptcy Case Summaries
Motion to dismiss appeal because of late-filed brief denied. D. Conn. The chapter 7 debtor appealed from a bankruptcy court order that overruled his objections to a creditor’s proof of claim and entered a stipulated judgment. The creditor moved to dismiss the appeal based on the debtor’s failure to file a supporting brief in accordance with the requirements of Rule 8009. The district court noted that the time limitations set forth in Rule 8009 are not jurisdictional and that the court must exercise discretion to determine whether dismissal of an appeal is appropriate in the circumstances presented. The court held that because the debtor ultimately filed a brief (albeit untimely) and because the creditor showed no actual prejudice, dismissal of the appeal was not warranted. The court also stated that while it did not condone the apparent indifference of debtor’s counsel toward filing deadlines, dismissal of the appeal after the filing of the debtor’s late-filed brief was too draconian as a consequence for lack of attention to filing deadlines.In re Romaniello, 2001 U.S. Dist. LEXIS 14017, 265 B.R. 349 (D. Conn. August 3, 2001) (Arterton, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:8009.02
Court grants plaintiff’s motion for summary judgment seeking to have her divorce settlement proceeds from the debtor deemed nondischargeable. Bankr. D. Del. Plaintiff and debtor were divorced and, while the issue of property division was pending in state (Delaware) court, the debtor filed a chapter 13 petition. The bankruptcy court granted relief from the stay to allow the state court to proceed with issues concerning property division, alimony, maintenance and illegal dissipation of assets. The state court relied on Delaware law to determine the percentage of the marital estate that each spouse should receive and, ultimately, ordered the debtor to make a payment to the plaintiff within 90 days in lieu of alimony. In the bankruptcy proceeding, the plaintiff then argued that the property award constituted support and that the debt should be deemed nondischargeable pursuant to section 523(a)(5). After noting that the court must look beyond the label to ascertain the true nature of the property, the court found that the plaintiff’s financial circumstances at the time of the property settlement warranted a finding that the debtor’s obligation to the plaintiff was actually in the nature of support and was therefore nondischargeable under section 523(a)(5). Lane v. Lane (In re Lane), 2001 Bankr. LEXIS 1239, – B.R. – (Bankr. D. Del. September 26, 2001) (Fitzgerald, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Bankruptcy court’s order granting summary judgment reversed. M.D. Pa. Plaintiffs, a corporation and the estate of debtor’s ex-husband brought an adversary proceeding to determine ownership of certain funds held in escrow by the state of Florida after it took a portion of the corporation’s land. The estate of the debtor’s ex-husband argued that the corporate tax returns, which were signed by the debtor in her role as secretary and while she was married to her ex-husband, indicated that he owned 100 percent of the company. The debtor argued that the unsigned stock certificates, which were received while the debtor and her ex-husband were still married, indicated that each owned 50 percent of the shares of the company. The debtor also pointed to the fact that her ex-husband had filed a bankruptcy petition, which he later withdrew, indicating that he only owned 50 percent of the corporation in question. On cross-motions for summary judgment, the court denied the estate’s motion and granted summary judgment in favor of the debtor. The bankruptcy court found that the debtor owned 50 percent of the corporation because (1) the former husband’s bankruptcy petition constituted a judicial admission of only 50 percent ownership, (2) the stock certificates listed debtor as half-owner; and (3) the company was probably jointly owned since most of their marital property was jointly owned. The district court reversed the bankruptcy court’s order that granted summary judgment in favor of the debtor, reasoning that the bankruptcy court’s factual determinations regarding the tax returns, the bankruptcy petition and the unsigned stock certificates were inappropriate in light of the standard for summary judgment. The court also noted that the corporation was incorporated in Florida and that under Florida law, the question of ownership of the company was a question of fact to be determined by the fact-finder at trial. V.W. Bldg. & Design, Inc. v. Woskob (In re Woskob), 2001 U.S. Dist. LEXIS 13749, – B.R. – (M.D. Pa. February 6, 2001) (McClure, Jr., D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7056.01
District court granted debtor’s motion requesting that district court abstain from deciding removed case and remand case to state court. N.D. W. Va. The plaintiff filed a state court action and later filed for protection under chapter 11 of the Bankruptcy Code. After the filing of the chapter 11 petition, defendants in the state court action filed a notice of removal with the federal district court pursuant to 28 U.S.C. § 1334 and Federal Rule of Bankruptcy Procedure 9027(a)(2)(A). The sole basis for removal was that plaintiff’s claims were related to plaintiff’s bankruptcy case and that the property at issue was property of the bankruptcy estate. In response, the plaintiff filed a motion in the district court requesting that the court abstain from deciding the removed case and remand the case to state court, claiming that defendants were forum shopping and not attempting to invoke the true bankruptcy jurisdiction afforded by section 1334. In deciding whether to abstain, the district court noted that it must consider five factors, including: (1) whether a timely motion to abstain has been filed, (2) whether the proceeding is based upon a state law cause of action, (3) whether the proceeding is a core bankruptcy proceeding, (4) whether the action could have been commenced in federal court absent section 1334 jurisdiction, and (5) whether the action can be timely adjudicated in a state court with proper jurisdiction. Upon analysis of the facts, the district court found that abstention was proper and granted the plaintiff’s motion based on the fact that the motion was timely filed, the proceeding was a noncore proceeding, the matter involved a state law question rather than a federal question and there was no diversity of citizenship, and the court was of the opinion that the matters at issue could be more timely adjudicated in state court. Wheeling-Pittsburgh Corp. v. Am. Ins. Co. (In re Wheeling-Pittsburgh Corp.), 2001 U.S. Dist. LEXIS 16259, – F.3 – (N.D. W. Va. September 27, 2001) (Stamp, Jr., D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9027.09
Texas executor’s personal indebtedness for taxes held nondischargeable under section 523(a)(4). N.D. Tex. The IRS filed a prepetition action seeking, among other things, a judgment against the debtor for breach of fiduciary duties while serving as executor of his father’s estate. After the debtor filed his chapter 7 petition, the IRS filed an adversary complaint objecting to the debtor’s discharge. The IRS alleged that the debtor’s personal liability for unpaid taxes should be excepted from discharge under section 523(a)(4) because by acts and omissions that amounted to fraud or defalcation, the debtor breached his fiduciary duty to the IRS as a creditor of the deceased father’s estate. The debtor moved to dismiss the complaint for failure to state a claim on which relief could be granted and argued that the government lacked standing to sue because, as a matter of law, he did not owe a fiduciary duty to the IRS. The bankruptcy court denied the motion and held that under state (Texas) law, an estate executor occupies a position of trust to all parties who have an interest in the estate, that the position of trust applies especially to creditors when the estate is insolvent, and that an executor’s duty to creditors extends to the United States. The debtor was granted leave to appeal the bankruptcy court’s interlocutory order. The district court affirmed. The court held that Texas common law, combined with Texas Probate Code section 3(c), imposed a fiduciary duty on the debtor, as executor, to pay federal estate taxes in accordance with applicable law, and the nature of this duty, as a trust-type obligation, satisfied the type of obligation required by section 523(a)(4).United States v. Tomlin (In re Tomlin), 2001 U.S. Dist. LEXIS 13989, 266 B.R. 350 (N.D. Tex. September 6, 2001) (Fitzwater, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
District court abstained from hearing settlement enforcement action. E.D. Tex. A group of entities settled a personal injury action brought by the creditors for asbestos exposure. The creditors, alleging that the entities did not pay the settlement, sought enforcement in state (Texas) court. One of the entities filed a chapter 11 petition. Thereafter, the other two entities removed their portion of the state court case relating only to the claims raised by the settlement enforcement proceeding, while specifying that they were not removing any proceedings related to the asbestos personal injury claims. They founded that removal on the creditors’ assertion of joint and several liability among all the entities. The entities also claimed the right to remove on the basis that the action was one arising under or related to Title 11. The creditors sought to return the case to state court under mandatory or discretionary abstention. The district court held that the requirements for mandatory abstention under section 1334(c)(2) had been met, because the settlement enforcement proceeding involved a state law claim for which the sole basis of bankruptcy jurisdiction was 'related to' jurisdiction. The court also took into account the fact that the action could not have been brought in federal court absent the chapter 11 filing and that the most timely adjudication would take place in state court.Broyles v. U.S. Gypsum Co., 2001 U.S. Dist. LEXIS 14252, 266 B.R. 778 (E.D. Tex. July 6, 2001) (Cobb, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05
Tax liability resulted from debtor’s willful attempt to evade or defeat tax and was therefore nondischargeable. Bankr. W.D. Ky. The United States brought an adversary proceeding against the chapter 7 debtor to determine the dischargeability of his 1990 and 1991 federal tax liability. The pivotal issue was the debtor’s conduct in failing to pay his tax liability, and whether or not it constituted a willful attempt to evade or defeat a tax sufficient to preclude discharge of the tax obligation. The bankruptcy court noted that the Sixth Circuit has interpreted the phrase 'willfully attempted in any manner to evade or defeat such tax' as a voluntary, conscious and intentional evasion of taxes. The court then held, on the evidence presented, that the debtor willfully attempted to evade or defeat his tax liability, thereby making his federal tax liability for 1990 and 1991 nondischargeable. The court focused on three aspects of the debtor’s conduct: (1) his use of nominee bank accounts, (2) his lifestyle, and (3) his ability to pay the taxes. The court concluded that although the debtor controlled his finances, and despite flexibility granted by the IRS, the debtor forsook his duty to pay taxes and spent his money lavishly, concealed his assets in nominee bank accounts and violated a tacit agreement to pay the taxes from certain settlement funds.United States v. Gardner (In re Gardner), 2001 Bankr. LEXIS 1083, – B.R. – (Bankr. W.D. Ky. May 22, 2001) (Stosberg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07
Chapter 7 case reopened to allow negligence proceeding to continue against debtor as nominal defendant. Bankr. W.D. Tenn. The debtor was named as a defendant in a prepetition state (Tennessee) court action after she was involved in an automobile accident with the plaintiff. Thereafter, the debtor’s no-asset chapter 7 case was filed, she received a discharge, and the case was closed. The state court plaintiff moved to reopen the debtor’s chapter 7 case, modify the discharge injunction and then proceed with the state court lawsuit. The plaintiff did not, however, seek to impose any personal liability against the debtor. The bankruptcy court granted the plaintiff’s motion and held that under the totality of the circumstances, good cause existed to warrant reopening the case to allow for a modification of the section 524(a) injunction and to allow the plaintiff to proceed to finality with the pending state court action. The court expressly noted that although the pending lawsuit against the debtor could proceed to finality, any eventual judgment against the debtor could not modify the previous discharge of the debtor’s personal liability to the plaintiff. The court explained that, if necessary, it is permissible to commence or continue an action against a debtor as a nominal defendant to prove liability as a prerequisite to recovery, such as recovery from a liability insurer. Simpson v. Rodgers (In re Rodgers), 2001 Bankr. LEXIS 1131, – B.R. – (Bankr. W.D. Tenn. September 18, 2001) (Kennedy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02
Reaffirmation agreement did not waive already-existing default. Bankr. E.D. Ky. After filing her petition, the debtor entered into a reaffirmation agreement with the creditor holding the note and mortgage on her real property. Thereafter, the debtor tendered, and the creditor accepted, three monthly payments of $693. The debtor tendered three subsequent payments that were refused by the creditor, which instead demanded arrearages of approximately $15,500. The debtor filed a motion to enforce the agreement, and the creditor cross-moved to clarify and interpret the agreement and to permit resumption of foreclosure proceedings. The bankruptcy court overruled the debtor’s motion. The court examined the terms of the agreement, which reflected an unpaid principal balance in the amount of $71,003 and contained a provision calling for acceleration of that entire principal balance upon default. The court found that the acceleration clause was only a statement of default terms and that the agreement taken as a whole did not cure or waive the already-existing default at the time of the reaffirmation.In re Moore, 2001 Bankr. LEXIS 1098, – B.R. – (Bankr. E.D. Ky. April 26, 2001) (Howard, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.04
Foreclosure action operated as constructive notice to chapter 7 trustee. B.A.P. 6th Cir. The creditor, the holder of a first mortgage on the debtor’s real property, commenced a foreclosure action, which was stayed by the debtor’s chapter 13 petition filing on May 11, 1999. The case was later converted to chapter 7, after which the trustee filed an adversary proceeding pursuant to section 544(a)(3) to determine the validity of the mortgage and to set the mortgage aside as improperly executed. Specifically, the trustee argued that, because the debtor’s signature on the instrument was witnessed by only one person, thereby violating requirements under state (Ohio) law, the mortgage was rendered defective. The creditor filed a motion for summary judgment, arguing that the foreclosure action provided constructive notice to the trustee, which prevented the trustee from standing in the shoes of a bona fide purchaser for avoidance purposes. The bankruptcy court granted the creditor’s motion, holding that the trustee did not obtain the status of a bona fide purchaser because, pursuant to the state lis pendens statute, the foreclosure action operated as constructive notice to any purchaser. The trustee appealed, arguing that the state lis pendens statute did not operate to turn an invalid mortgage into a valid lien. The B.A.P. for the Sixth Circuit affirmed, holding that the state lis pendens statute operated to provide constructive notice of the pendency of the foreclosure action concerning specifically described property, along with the knowledge of all claims against the property. Moreover, the B.A.P. noted that the statute itself provided that, during the pendency of the litigation, no third person could acquire an interest in the property that disregarded the creditor’s interest. Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 2001 Bankr. LEXIS 1077, 266 B.R. 651 (B.A.P. 6th Cir. September 10, 2001) (Brown, B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.03
Creditor seeking an extension of time to file a complaint objecting to discharge or dischargeability must file its motion for extension prior to expiration of bar date set for filing discharge or dischargeability complaints. B.A.P. 6th Cir. The debtor filed a chapter 7 petition, and notice was served advising all creditors of the deadline for filing a complaint objecting to the debtor’s discharge or to the dischargeability of a certain debt. Although the creditor and his counsel received a copy of the notice, the creditor’s counsel waited until three days after the bar date to file a motion for extension of time to file its objection. The motion cited excusable neglect and inadvertence, because counsel was waiting for discovery documents that were to be provided by debtor. According to the creditor’s motion, the debtor failed to provide certain documents at the debtor’s 2004 examination but indicated that he would timely provide these documents to the creditor’s counsel. The documents were not produced, and the creditor’s counsel argued that he was not able to file a timely complaint without the requested discovery documents. Rule 4007(c) provides that a complaint to determine dischargeability under section 523(c) must be filed no later than 60 days after the first date set for the meeting of creditors and that the court may, for cause, extend the time fixed for filing such a complaint. Rule 4007(c) also states that the complaint must be filed before time has expired. At the hearing on the motion to extend the time, creditor’s counsel argued that Rule 9003(b)(3) allows the court to exercise its equitable powers under 11 U.S.C. § 105(a) and enlarge the time for filing a complaint objecting to discharge in cases where the motion for extension of time to file is submitted after the bar date. The bankruptcy court granted the creditor’s motion for an extension of time and ruled that the debtor’s debt to the creditor was nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). On appeal, the B.A.P. noted that, while the Sixth Circuit has created one minor exception to the widely-accepted rule that Rule 4007(c)’s bar date can be enlarged only prior to its expiration, the exception has been very narrowly applied, and only when the court itself made the error that resulted in the untimely action of the creditor. After noting this exception, the court found that the exception was not applicable in this case. The court further found that the creditor, who had notice of the bankruptcy and the bar date, had the responsibility to pursue and protect its own interests and should have obtained an extension of time prior to the bar date if it was not prepared to file an actual objection to discharge as of the bar date. Accordingly, the B.A.P. reversed the decision of the bankruptcy court granting the extension of time to file the complaint objecting to discharge. Nardei v. Maughan (In re Maughan), 2001 Bankr. LEXIS 1237, – B.R. – (B.A.P. 6th Cir. October 12, 2001) (Aug, Jr., B.A.P.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:4007.04, 
District court reversed bankruptcy court’s decision to discharge debtor’s student loan obligation as 'undue hardship.' W.D. Wis. An educational lender appealed a bankruptcy court’s decision to discharge the chapter 7 debtor’s student loan obligation pursuant to the 'undue hardship' provision of section 523(a)(8). The district court reversed and held that the debtor failed to satisfy his burdens of proving both that his current state of affairs was likely to persist for a significant portion of the loan repayment period and that he made good faith efforts to repay the loans. The court reasoned that where, as here, the debtor was a capable individual with outside financial support and very limited obligations, the only reasonable inference was that he could support himself and make loan payments if he applied some effort. The court concluded that there was a substantial likelihood that the debtor’s present inability to fulfill his financial commitment would not continue and that his future financial circumstances would permit repayment. The court also noted that the only fact relied upon by the bankruptcy court to support its finding that the debtor made good faith efforts to repay the loan was that the debtor sought forbearance agreements. The court explained that the fact that a debtor sought to avoid payment could not be the basis for a finding of a good faith effort to repay.Goulet v. Educ. Credit Mgmt. Corp. (In re Goulet), 2001 U.S. Dist. LEXIS 13869, 264 B.R. 527 (W.D. Wis. July 11, 2001) (Shabez, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Failure to list qui tam action on schedules warranted invocation of judicial estoppel. 8th Cir. A company obtained certification as a minority-owned business under the Small Business Act. An officer and shareholder of that company, and his spouse, who was also an employee of the company, were subsequently fired from their positions for misappropriating funds. When the company filed a claim for over $500,000 in the shareholder and spouse’s chapter 7 case, the debtors filed a counter claim for $1.2 million. The parties ultimately settled the dispute, and releases of liability were signed, after which the debtors obtained their chapter 7 discharge. Two years later, the debtors filed a qui tam action in district court against the company on behalf of the United States, alleging that the company had submitted a false application for its certification as a minority-owned business. The United States elected not to intervene in the suit, and the company defendants moved to dismiss, asserting that (1) the debtors did not have standing, (2) releases had been given, and (3) the debtors were judicially estopped by their failure to disclose the cause of action on their bankruptcy. The district court granted the defendants’ motion for summary judgment, and the Court of Appeals for the Eighth Circuit affirmed, holding that under the doctrine of judicial estoppel, the debtors’ failure to list the qui tam action on their schedules barred them from maintaining the action. The court rejected the debtors’ argument that they were not the real parties in interest, because they brought the action and stood to benefit from it. The debtors were not entitled to assert that the lawsuit did not belong to them for purposes of the bankruptcy case and, at the same time, prosecute the action to recover damages for themselves. The confidential disclosure requirements of the qui tam proceeding did not prevent them from listing the action on their schedules, because several remedies existed in the Bankruptcy Code and Rules to protect the information from unwarranted public disclosure.United States ex rel. Gebert v. Transp. Admin. Servs., 2001 U.S. App. LEXIS 18312, 260 F.3d 909 (8th Cir. August 14, 2001) (Bowman, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:521.06
Creditor failed to establish debtor’s intoxication. B.A.P. 8th Cir. In 1997, the debtor lost control of his vehicle, and the creditor, driving her own car, collided with the debtor’s car, causing her various injuries and causing the death of her passenger. Upon questioning, the debtor denied that he had been drinking, but it later developed that the debtor had consumed three 12-ounce beers. The creditor also admitted to having consumed some cocktails during the evening. Thereafter, the debtor was charged with involuntary manslaughter and opted for a plea of careless and imprudent driving, which resulted in a sentence in February 1999 of a year’s imprisonment. The creditor filed a negligence action against the debtor in state (Missouri) court, seeking recovery for the injuries she sustained. In 2000, the debtor filed a chapter 7 petition. The creditor filed an adversary proceeding seeking a determination that any damages she might be awarded in the state court action were nondischargeable pursuant to section 523(a)(9). The bankruptcy court held that the creditor failed to meet her burden of proof in demonstrating that the debtor was intoxicated under state law at the time of the accident. The creditor appealed, arguing that the debtor’s blood alcohol content test results were unreliable because of the time lapse and that the state trooper’s observation of the debtor at the hospital following the accident, as well as the horizontal gaze nystagmus ('HGN') test, constituted substantial evidence of intoxication. The B.A.P. for the Eighth Circuit affirmed, holding that both the creditor’s arguments were unpersuasive. Specifically, the B.A.P. found that the bankruptcy court did not err because the creditor failed to offer any evidence concerning the trooper’s skill, training and expertise to qualify him as an expert witness, or any evidence as to the reliability of the HGN test or its application to the facts of this case.Boone v. Barnes (In re Barnes), 2001 Bankr. LEXIS 1080, 266 B.R. 397 (B.A.P. 8th Cir. September 10, 2001) (McDonald, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.15
Debtor denied discharge based on fraudulent conduct. B.A.P. 8th Cir. The debtor filed a sexual harassment lawsuit against her employer and was represented by several law firms throughout the course of the litigation. She ultimately received a $3 million settlement, but refused to pay two of the law firms that had represented her during the litigation. Instead, the debtor transferred a substantial portion of the settlement proceeds to various corporations, investments and trusts, which she established under her own name, various aliases, and in her family’s name. The law firms sued the plaintiff for their fees and obtained judgments against her. The debtor then filed a chapter 7 petition, but continued to make unauthorized distributions and transfers despite the pending bankruptcy. After the debtor amended her schedules to show that she owned corporations that held significant assets, the chapter 7 case was converted to one under chapter 11 and then ultimately dismissed. The debtor continued to resist paying the law firm’s judgments and went on to file another chapter 7 petition in a different state. Again, the debtor’s schedules failed to reflect assets she held via her corporations or under her various aliases. The debtor also filed an application to be excused from her meeting of creditors due to a claimed disability, and instead offered to answer creditors’ questions in writing. After being made aware of the 'irregularities' in the debtor’s case, the bankruptcy court invoked its equitable powers pursuant to 11 U.S.C. § 105 and ordered that the deadline for filing complaints objecting to discharge or dischargeability be indefinitely extended. Relying on this order, the trustee filed an objection to the debtor’s discharge. After the court granted the trustee’s motion, the debtor appealed the court’s rulings that the trustee’s complaint was timely filed and that the debtor’s discharge was denied. On review, the B.A.P. noted that the debtor had not appealed the bankruptcy court’s order indefinitely extending the deadline to file complaints objecting to discharge or dischargeability and, thus, she was prevented from collaterally attacking the order on appeal. The panel also noted that, since it was not appealed, the order remained in full force. Accordingly, the panel reasoned that the trustee reasonably relied upon the order in filing his complaint. After determining that the bankruptcy court had appropriately exercised its section 105 authority and that it had appropriately found that the trustee’s complaint was timely filed, the B.A.P. affirmed the bankruptcy court’s ruling that the debtor should be denied a discharge pursuant to section 727(a). Block v. Moss (In re Moss), 2001 Bankr. LEXIS 1081, 266 B.R. 408 (B.A.P. 8th Cir. August 9, 2001) (Schermer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.02, .04, .05, .06
Debtor’s appeal from order granting mortgagee’s motion for relief from stay dismissed as moot. B.A.P. 8th Cir. The chapter 13 debtor appealed a bankruptcy court order that granted a mortgagee’s motion for relief from the automatic stay to foreclose its mortgage on the debtor’s property. The bankruptcy court held that since the property had been foreclosed upon and title had been transferred to the mortgagee pursuant to a foreclosure proceeding validly conducted under state (Missouri) law, the issues raised by the debtor on appeal were moot. The court noted that a sale in a bankruptcy case is not subject to modification by an appellate court unless the appellant receives a stay pending appeal, and that the debtor failed to seek such a stay or post a supersedeas bond. The court did not reach the merits, but did note that there was ample evidence in the record to sustain the bankruptcy court’s findings that the debtor had no equity in the property and that a reorganization was not feasible. The court also found that the bankruptcy court properly held the debtor to the proof presented at the properly noticed hearing on the motion for relief from stay.Fields v. Option One Mortg. Corp. (In re Fields), 2001 Bankr. LEXIS 1082, 266 B.R. 415 (B.A.P. 8th Cir. September 10, 2001) (Dreher, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02
Lessor’s claim for 'further rent' that actually represented debtor’s obligations under a promissory note entitled to administrative priority status. 9th Cir. In connection with a prepetition lease restructuring agreement for a lease of nonresidential real property, the debtor borrowed funds from his lessor through two promissory notes. The parties then agreed to a new lease that included a provision requiring the debtor to pay the lessor monthly sums that matched the repayment obligations on the promissory notes. The monthly sums were denominated as 'further rent' in the new lease, but it was undisputed that the 'further rent' provision represented the repayment of the promissory notes. Thereafter, the debtor filed a chapter 11 case that was later converted to chapter 7. The lessor filed an administrative priority claim that included all of the unpaid 'further rent' obligations that accrued between the time the chapter 11 petition was filed and the time of the rejection of the lease. The debtor objected to the lessor’s asserted priority status. The bankruptcy court held that the obligations denominated as 'further rent' were entitled to administrative priority even though they actually represented repayments of promissory notes. The B.A.P. affirmed, and the debtor appealed. The United States Court of Appeals for the Ninth Circuit held that regardless of whether or not the obligation to repay the promissory notes was related to the debtor’s use of the premises, it was an obligation under an unexpired lease of nonresidential real property that the debtor was required to perform pending the assumption or rejection of the lease. Therefore, the lessor’s claim relating to that obligation enjoyed administrative priority status under section 365(d)(3). The court also held that the B.A.P. erred in holding that the particular provision for attorney’s fees in the lease gave rise to an obligation that fell within the scope of section 365(d)(3), because the debtor’s obligation to pay attorney’s fees had not arisen at the time the lease was rejected. Similarly, the court held that the lessor’s claim for interest on the debtor’s unpaid lease obligations was not entitled to administrative priority under section 365(d)(3), because it was not an obligation under the lease (citing Collier on Bankruptcy 15th Ed. Revised).Cukierman v. Uecker (In re Cukierman), 2001 U.S. App. LEXIS 19737, – F.3d – (9th Cir. September 7, 2001) (Schroeder, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04
Court of Appeals held that fully secured creditor did not receive preferential payments. 9th Cir. The debtor was a retailer of furniture, electronic goods and appliances. The creditor was one of the debtor’s primary lenders for nearly a decade. The creditor’s loans to the debtor were secured by a first priority, floating lien on prime inventory and sale proceeds. When the debtor began to suffer substantial losses, the creditor reduced the line of credit and also demanded paydowns of the existing debt. The debtor managed to make payments of approximately $12 million between May and August 1995, until the debtor filed a chapter 11 petition, also in August 1995. As of that date, the debtor owed approximately $10,728,000 to the creditor, which took possession of the collateral and liquidated it, realizing the sum of about $10,823,000. After the case was converted to chapter 7, the trustee discovered the $12 million in payments made during the 90-day prepetition period. When the creditor refused to return the funds, the trustee commenced an adversary proceeding, seeking to avoid the payments as preferential transfers under section 547(b). The parties stipulated that the first four elements of a preference were met, as set forth in section 547(b)(1) through (b)(4). The remaining issue was whether the payments met the 'greater amount' test of section 547(b)(5). The bankruptcy court held that the payments were not avoidable transfers, and the district court affirmed. This appeal followed. The trustee argued that (1) the payments, plus the amount that the creditor received from the postpetition sale of its collateral, was greater than the amount received from the sale alone, and (2) the creditor had not traced the source of the payments to sales of its collateral. The Court of Appeals for the Ninth Circuit affirmed, rejecting both of the trustee’s arguments, and holding that the 'addback' calculation proposed by the trustee did not satisfy the trustee’s burden because payments came from collateral secured by a floating lien. Specifically, prepetition transfers to a creditor who is fully secured on the petition date are generally not preferential because that creditor is entitled to 100 percent of its claims. Moreover, in this case, the value of the debtor’s collateral exceeded its indebtedness, so the creditor could not have received more by virtue of the payments than it would have received in a hypothetical liquidation without the payments. The Court of Appeals, rejecting the trustee’s second contention, also held that the burden of tracing the funds used to make the preferential payments was on the trustee. A dissenting opinion stated the position that the creditor was not in fact fully secured, because no determination had been made as to what the status of the creditor’s claims would have been had the payments not been made.Batlan v. Transamerica Comm. Fin. Corp. (In re Smith’s Home Furnishings, Inc.), 2001 U.S. App. LEXIS 20382, – B.R. – (9th Cir. September 13, 2001) (Hall, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
Motion for allowance of Trustee’s fees denied. Bankr. D.N.M. The debtor filed a chapter 13 petition that was later dismissed prior to confirmation. The chapter 13 trustee filed a motion for allowance of trustee’s fees under 28 U.S.C. § 586, which entitles the standing chapter 13 trustee to collect a percentage fee and specifies the amounts upon which the percentage fee shall be computed. The court found that 28 U.S.C. § 586 had to be read in conjunction with the other sections of the bankruptcy code, including 11 U.S.C. § 1326. In doing so, the court found that, when a case is dismissed or converted prior to confirmation, section 1326 requires that the standing chapter 13 trustee return all payments, except for any allowable § 503(b) administrative expenses, to the debtor. Accordingly, the court denied the trustee’s motion for payment of the 10 percent fee. In re Rivera, 2001 Bankr. LEXIS 1232, – B.R. – (Bankr. D.N.M. June 6, 2001) (McFeeley, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1326.03
Claims of general partner and sole controlling person equitably subordinated to claim of limited partner. Bankr. S.D. Fla. The claimant, a limited partner of the debtor, made several contributions to the debtor, including a contribution in the amount of $600,000. After considering many factors, the court found that, regardless of whether the claimant’s contribution was classified as 'debt' or 'equity,' the contributions still constituted a claim. The court then considered whether, due to their conduct, the claims of the debtor’s general partner and the debtor’s controlling person should be subordinated to the limited partner’s claim. Equitable subordination is appropriate only where (1) a claimant has engaged in inequitable conduct; (2) the misconduct results in an unfair advantage to the claimant or causes injury to another creditor; and (3) subordination of the claim is not otherwise inconsistent with the provisions of the Bankruptcy Code. In considering the evidence, the court found that there had been commingled personal and partnership funds, crediting of personal loans against partnership obligations, utilization of funds from the debtor’s bank account to pay personal expenses and mismanagement of the debtor to the point of having a court appoint a receiver for the debtor. After finding that the general partner and the controlling person had mismanaged the debtor, violated the limited partnership agreement and committed self-serving acts while acting on behalf of the debtor, the court found that this conduct warranted the proper exercise of the court’s power to equitably subordinate the general partner’s and the controlling person’s claims to the limited partner’s allowed claim. In re Biscayne Inv. Group, 2001 BANKR. LEXIS 1079, 264 B.R. 765 (Bankr. S.D. Fla. May 29, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.05
Debtor failed to set forth grounds for reconsideration of the court’s determination regarding IRS tax liens. Bankr. N.D. Fla. The chapter 7 debtor filed a motion pursuant to section 522(f)(1)(A), seeking to avoid certain IRS tax liens. The debtor argued that, as a result of a judgment entered by the Court of Appeals for the Sixth Circuit, the IRS liens had been transformed into judicial liens and were thus avoidable. The bankruptcy court denied the debtor’s motion, holding that the tax liens arose by operation of law without judicial action and, as such, were not judicial liens for the purposes of section 522(f)(1), since they were not obtained through judicial process. The debtor filed a motion for reconsideration of that ruling, along with a motion to quash the statutory lien. The bankruptcy court denied the motion, holding that the debtor failed to set forth any grounds for reconsideration and did not specifically challenge the court’s previous holding that the Court of Appeals judgment did not create a judicial lien. Similarly, the court found that the debtor cited no authority to support an order quashing the statutory lien and entered an order prohibiting the debtor from filing any further challenges to the IRS tax claims or their enforceability.In re Lawrence, 2001 Bankr. LEXIS 1173, – B.R. – (Bankr. N.D. Fla. July 2, 2001) (Killian, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.11
Court of Appeals lacked jurisdiction over appeal. 11th Cir. The trustee commenced an adversary proceeding, seeking to avoid a transfer of real property from the debtor to his mother. The trustee alleged that the debtor had assigned a fee simple interest in the property as a land trust and executed a quitclaim deed to the transferee as 'second successor trustee' of the trust, which took place within one year of the debtor’s petition filing. The transferee asserted numerous affirmative defenses, including allegations that (1) the trust was not estate property; (2) the transferee held 100 percent beneficial interest in the land trust; and (3) the transferee gave consideration for the transfer. The trustee filed a motion for summary judgment to avoid the transfer as fraudulent. The trustee, however, failed to ask for a declaration that the quitclaim deed conveyed nothing. The bankruptcy court denied the trustee’s motion, holding that there was never a transfer because a merger had occurred when the debtor obtained 100 percent of the equitable interest in the personal property of the land trust and 100 percent of the legal and equitable interest in the trust’s real property. Because the debtor was the fee simple absolute owner, the assignment to the transferee was ineffective in transferring the real property. But the court did not take the additional step of quieting title by forcing the transferee to give the trustee a quitclaim deed, or by issuing a declaratory judgment. The transferee appealed to the district court, which affirmed, and this second appeal followed. The Court of Appeals for the Eleventh Circuit dismissed the appeal, holding that it did not have jurisdiction pursuant to section 158(d). The Court of Appeals determined that jurisdiction did not exist over the district court’s disposition of an appeal from a nonfinal bankruptcy court order. The order was nonfinal because the trustee ultimately sought marketable title but did not receive it pursuant to the order, which neglected to quiet title in the property.Slobodinsky v. Salkin (In re Saber), 2001 U.S. App. LEXIS 20427, – F.3d. – (11th Cir. September 13, 2001) (Tjoflat, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02