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 6, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Debtor could not reopen case to add personal injury claim or lien creditor which were likely omitted from schedules in bad faith. Bankr. D.R.I. PROCEDURAL POSTURE: Debtors filed a joint chapter 7 petition under the Bankruptcy Code, but their schedules failed to disclose either a personal injury claim or creditor’s status as a lien creditor. Debtor’s moved to reopen their bankruptcy case, pursuant to 11 U.S.C. § 350, to add creditor, and creditor objected. OVERVIEW: The court found that debtors’ schedules were inaccurate and very likely intentionally false from the inception when they failed to include a significant personal injury claim as an estate asset. Debtors and their attorneys passed up many opportunities during the case, and before any funds were disbursed, to correct the omission. On two occasions debtors amended their schedules to obtain their piece of the personal injury settlement, but left creditor off the schedules. The court found that under the circumstances that debtors and their representatives did not act in good faith. The court also found that creditor would suffer extreme prejudice if the case were reopened and creditor was added, pursuant to 11 U.S.C. § 350. All of the proceeds from the settlement were already disbursed, and unsecured creditors received a substantial dividend. Creditor was entitled to pursue its claim in the state court. In re McGuire, 2003 Bankr. LEXIS 1188, — B.R. — (Bankr. D.R.I. August 25, 2003) (Votolato, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:350.01 [back to top]

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Plan confirmation denied on grounds that parochial school tuition was not reasonably necessary expense. Bankr. D.R.I. PROCEDURAL POSTURE: Chapter 13 trustee objected to confirmation of debtors’ chapter 13 plan on the ground that the debtors were not contributing all of their disposable income, as required under 11 U.S.C. § 1325(b)(1)(B). At issue was whether tuition for parochial school for the debtors’ children was a reasonably necessary expense. The debtors claimed that the tuition qualified as a contribution under the Religious Liberty and Charitable Donation Act of 1998. OVERVIEW: The bankruptcy court held that the tuition expenses for the parochial school did not qualify as “charitable contributions” under 11 U.S.C. § 1325(b)(2)(A). The intent of the Religious Liberty and Charitable Donation Protection Act of 1998 was to protect religious tithing, not parochial school tuition payments. The bankruptcy court then held that the tuition was not reasonably necessary. In so holding, the bankruptcy court distinguished this case from cases that allowed tuition payments for private schools. First, the debtors’ children did not have any special needs, e.g., learning disabilities, that would have required private education. They debtors did not show that the local public schools were inadequate; their reasons for choosing parochial school were purely preferential. Second, the debtors proposed none of the indicia of good faith shown by the debtors in cases allowing such tuition. For instance, in one case, a debtor had given up healthcare insurance coverage and in another, a debtor proposed a five-year plan. The debtors claimed many borderline and/or excessive expenses, and were unwilling to extend their plan beyond three years. In re Watson, 2003 Bankr. LEXIS 1187, — B.R. — (Bankr. D.R.I. September 15, 2003) (Votolato, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.08 [back to top]

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Attorneys’ fee application granted in reduced amount due to failure to promptly file necessary foreign administration proceedings. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Debtor’s counsel and financial advisor applied for fees and expenses in connection with debtor’s chapter 11 case. OVERVIEW: Counsel sought $757,080 in fees and $121,179.70 in out-of-pocket expenses. The advisor sought $43,225.81 in fees and $52,916.57 in expenses. The joint administrators argued the fees should be reduced or denied based on the professionals’ role in debtor’s original decision not to file English administration proceedings. They also argued there should be no compensation for services performed after January 28, 2003, the date secured creditors with interests in two of debtor’s vessels obtained ex parte provisional liquidation orders for certain debtors in the English court. They finally argued the professionals should not be compensated for litigation against those creditors to enforce the automatic stay. The court found counsel had an independent obligation to start the automatic stay litigation, whether based on a fiduciary duty to the estate and creditors, or because failing to do so would have breached the requirement that it be disinterested. The conduct of such litigation was reasonable. Inter alia, however, the court concluded that counsel should bear a portion of the cost of confusion and disruption caused by not originally filing English administration proceedings. In re Cenargo Int’l, PLC, 2003 Bankr. LEXIS 819, 294 B.R. 571 (Bankr. S.D.N.Y. June 27, 2003) (Drain, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.04 [back to top]

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Breach of contract action brought by construction company debtor against school board was related to bankruptcy and properly removed. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff debtor brought an action in state court claiming breach of contract, unjust enrichment, indemnification, and delay and interference. The debtor subsequently filed a bankruptcy petition. The debtor removed the action to the district court pursuant to 28 U.S.C. § 1452(a). Defendant board of education moved to remand the action to state court. OVERVIEW: The issue before the court was whether the action related to the debtor’s bankruptcy proceeding. A proceeding was related to a bankruptcy case if the outcome could have conceivably had any effect on the estate being administered in bankruptcy. The debtor sought to recover money damages for breach of contract, unjust enrichment, indemnification, and delay and interference. The breach of contract claim alone sought damages totaling over $800,000. The court found that the outcome of the action could have conceivably had an effect on the bankruptcy estate because the claims in the action constituted potential assets of the estate. It was conceivable that the action could have had an effect on the debtor’s bankruptcy estate for the simple reason that if the debtor were to prevail and win a money judgment, the estate would have had substantially more assets at its disposal. Therefore, the action was related to the bankruptcy case. Delcon Constr. Corp. v. Board of Educ., 2003 U.S. Dist. LEXIS 16449, — B.R. — (S.D.N.Y. September 18, 2003) (Koeltl, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02 [back to top]

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Court utilized discretion to determine debtor’s tax liability in order to sustain adversary proceeding against director of tax bureau. Bankr. E.D. Pa. PROCEDURAL POSTURE: Plaintiff bankruptcy debtor filed an adversary proceeding to void the tax sale of her home. Defendants, county and director of the county tax claim bureau, moved to dismiss the complaint under Fed. R. Civ. P. 12(b). OVERVIEW: The debtor alleged 42 U.S.C. § 1983 and constructive fraudulent transfer claims. The court initially concluded it had subject matter jurisdiction over the claims. Nothing in the record demonstrated that the debtor contested either the liability or amount of the tax at the time of the petition. Further, given the debtor’s assertion that the property was sold for less than market value, policy considerations were relevant. Thus, the court’s exercise of its discretion to determine the debtor’s tax liability under 11 U.S.C. § 505(a) was appropriate. The section 1983 claim against the county, via the bureau, failed because the complaint did not state that the debtor’s right to procedural due process was violated as part of county policy or practice. The section 1983 claim against the director, however, survived. Under the lenient pleading standards, the complaint informed the director of the alleged unconstitutionally conduct, when it was to have occurred, what injury was suffered, and what relief was demanded. Further, neither prong of qualified immunity was met. The fraudulent transfer claim also survived, as the debtor alleged the property was sold for substantially less than it was worth. Daniels v. County of Chester (In re Daniels), 2003 Bankr. LEXIS 809, — B.R. — (Bankr. E.D. Pa. July 16, 2003) (Raslavich, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:505.01 [back to top]

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Action by employees, some of whom were in bankruptcy, against employer for time sheet manipulation was non-core action subject to mandatory abstention and remand. S.D. Miss. PROCEDURAL POSTURE: Plaintiff employees’ Circuit Court of Holmes County, Mississippi, action against defendant employers and managers, alleged manipulation of time sheets or that the employees were required to work “off of the clock,” resulting in payment for less hours than those worked. Defendants removed the case under 28 U.S.C. §§ 1332 and 1441, arguing fraudulent joinder of the managers. The employees sought remand. Defendants moved to strike a rebuttal brief. OVERVIEW: The employees resided in Mississippi. The managers worked at the Mississippi stores where the employees worked. The employers were residents of other states. The managers could be liable under Mississippi law for the interference with contractual relations claims, based on an implied contract for the employers to compensate the employees for the hours worked, if the mangers had no justifiable cause for tampering with time sheets or requiring work “off the clock.” The managers were not fraudulently joined to defeat diversity under section 1332. There was no basis to deny remand. Some of the employees were in bankruptcy. But, their claims were not related to their bankruptcies, could have been brought outside the scope of bankruptcy law, and were premised on state law. They were non-core proceedings under 28 U.S.C. § 157(b)(2) and 28 U.S.C. § 1334(c)(2) required abstention. The case could not have been commenced in the federal court absent the bankruptcies, and the other factors for mandatory abstention were met; the court was barred from exercising bankruptcy jurisdiction. Alternatively, the factors for discretionary abstention were also met. The rebuttal did not prejudice defendants. Sago v. Wal-Mart Stores, Inc., 2003 U.S. Dist. LEXIS 15793, — B.R. — (S.D. Miss. September 2, 2003) (Barbour, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05[2] back to top]

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Michigan creditor could not exploit Florida homestead exemption to avoid collection of judgment for bad faith filing of involuntary petition. Bankr. E.D. Mich. PROCEDURAL POSTURE: Debtor was involved in a chapter 7 case when creditor filed an involuntary petition against debtor. The court entered a judgment in debtor’s favor and against petitioning creditor pursuant to 11 U.S.C. § 303. Debtor filed a motion for miscellaneous post-judgment relief and sought to collect on the judgment. OVERVIEW: Debtor asserted that because creditor used the proceeds from his Michigan assets to purchase the Florida home immediately after the court’s judgment was entered, creditor should be ordered to sell that home and remit the proceeds in partial satisfaction of the judgment. Creditor argued that his Florida home was protected by Florida’s homestead exemption. The narrow question raised in this case was whether a Michigan resident, who filed an involuntary petition in bad faith against debtor, and against whom a substantial judgment was entered under 11 U.S.C. § 303(i), could avoid the effect of that judgment by the subsequent liquidation of his Michigan assets and the purchase of a home in a state with an unlimited homestead exemption. The court concluded that 11 U.S.C. § 303(i) preempted Florida homestead law and that debtor was entitled to the relief it sought as to creditor’s new home in Florida. In addition, creditor did not meet the residency requirements under Florida law and was not entitled to claim the Florida homestead exemption. The court found that creditor lacked the actual intention to live permanently in Florida. In re John Richards Home Bldg. Co., LLC, 2003 Bankr. LEXIS 1190, — B.R. — (Bankr. E.D. Mich. September 17, 2003) (Rhodes, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.15 [back to top]

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Chapter 7 debtor could not “strip off” valueless junior lien. 6th Cir. PROCEDURAL POSTURE: Plaintiff debtors filed an adversary proceeding against defendant mortgage company to avoid the mortgage company’s junior lien on the debtors’ residence pursuant to 11 U.S.C. § 506(d). The bankruptcy court found that section 506(d) did not permit the “strip off” of the valueless junior lien. The District Court for the Western District of Michigan affirmed. The debtors appealed from the judgment. OVERVIEW: The debtors’ residence was encumbered by a first mortgage and the mortgage company’s junior mortgage. The mortgage company held a valueless junior lien since the debtors’ property had a market value that was less than the amount of the lien securing the first mortgage. The debtors argued that the junior lien was completely unsecured pursuant to 11 U.S.C. § 506(a) and that the lien could be “stripped off” pursuant to 11 U.S.C. § 506(d). The appellate court determined that the debtors could not utilize section 506(a) and (d) to “strip off” the junior lien, because the mortgage company’s claim was allowed pursuant to 11 U.S.C. § 502 and the claim was secured, whether or not the value of the property sufficed to cover the claim. The appellate court found that a chapter 7 debtor may not use section 506 to “strip off” an allowed junior lien where the senior lien exceeds the fair market value of the real property in question. Talbert v. City Mortg. Servs. (In re Talbert), 2003 U.S. App. LEXIS 19660, — F.3d — (6th Cir. September 24, 2003) (Siler, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.06 [back to top]

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Attorneys’ fees were administrative expenses properly included in plan approved over objection of trustee. Bankr. E.D. Mich. PROCEDURAL POSTURE: A trustee filed an objection to the attorney fee provision in debtors’ chapter 13 plan, claiming that it was unnecessary and unduly burdensome for the trustee to administer, that it was contrary to Fed. R. Bankr. P. 3021, and that it might delay payments to other creditors. OVERVIEW: The debtors filed their chapter 13 plan of reorganization, and utilized a form plan. The standard fee for the district was $1,400, but the debtors requested $2,000 rather than the standard fee. The court noted that 11 U.S.C. § 1326 required the payment of administrative expenses such as attorney fees to be made before or contemporaneously with the payments to creditors. The trustee objected to the provision that required a 30-day escrow of estimated fees. The trustee argued that the escrow was unnecessary and it was not permitted by the Bankruptcy Code. However, the trustee pointed to no Code provision that prohibited such an escrow. The court found that the Code permitted chapter 13 plans to include any appropriate provision not inconsistent with the Code. The trustee also argued that only “allowed” claims were entitled to disbursement under 11 U.S.C. § 1326(a) and (b) and that attorney fees did not become allowed claims until after a fee application had been filed, notice and opportunity for hearing, and court approval of the fees. The court held that administrative priority claims could be estimated and set aside. In re Meadows, 2003 Bankr. LEXIS 1073, 297 B.R. 671 (Bankr. E.D. Mich. September 4, 2003) (McIvor, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1326.01 [back to top]

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