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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 7, 2002

CASES IN THIS ISSUE
(scroll down to read the full summary)

 

Collier Bankruptcy Case Summaries

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3d Cir.

Defendant’s motion to dissolve injunction denied in proceeding brought by debtor/plaintiff alleging interference with contract rights, conversion, and misappropriation of trade secrets Bankr. D. Del. PROCEDURAL POSTURE: Through an adversary proceeding, plaintiff, a subsidiary debtor in a chapter 11 bankruptcy case, obtained a preliminary injunction (the injunction) prohibiting defendant competitor from contacting any of the debtor’s customers and from hiring any of the debtor’s employees. The competitor moved to dissolve the injunction. OVERVIEW: The debtor obtained the injunction because the competitor had hired one of the debtor’s employees and, through that employee, had obtained the debtor’s customer list. Since entry of the injunction, the debtor had continued to operate its durable medical equipment ('DME') company in the Maryville, Tennessee area. Since the filing of the adversary proceeding, the competitor had opened a DME company in that area and a third DME facility had opened in the area. Based on the opening of those two facilities and the passage of time, the competitor alleged that changed conditions warranted dissolving the injunction. The court disagreed. The injunction continued to benefit the debtor and the potential harm to the debtor from allowing the competitor to benefit from the ill-gotten customer list was still palpable. If the list was no longer useful to the competitor, as the competitor claimed, there would be no reason for the competitor to move for dissolution of the injunction. Also, because the competitor alleged it had not hired any of the debtor’s employees and it had no positions open, no prejudice to the competitor resulted from keeping the injunction in place. Rotech Med. Corp. v. Blount Memorial Hosp. (In re Integrated Health Servs.), 2002 Bankr. LEXIS 345, — B.R. — (Bankr. D. Del. April 12, 2002) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.02

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Rent due on unexpired non-residential leases were administrative expenses which would be properly calculated at time of assumption or rejection. Bankr. D. Del. PROCEDURAL POSTURE: Several landlords filed motions for immediate payment of rent in connection with unexpired non-residential leases under 11 U.S.C. § 365(d)(3), 503(b), for the 19-day period from the petition date of March 13, 2002, through the end of that month. The debtors objected, arguing that rent for March was a prepetition obligation and that the amount of any administrative claim should be determined after the leases were either assumed or rejected. OVERVIEW: The March rent was a prepetition obligation since it was due in full on March 1 and the leases did not require payment on a pro-rata basis. 11 U.S.C. § 365(d)(3) did not require payment of rent for March. The court disagreed with the debtors’ argument that the rent should be offset by any section 365(d)(3) future overpayment, as the debtors’ theory assumed that they were entitled to a refund or rebate for that portion of their rent payment that covered a post-rejection period. The debtors could not prorate the monthly rent and pay only for the days that the premises were occupied. The debtors agreed the landlords had administrative claims under 11 U.S.C. § 503(b), but argued the leases’ rents were not necessarily the fair rental values, which would require expert testimony. If assumed, the cure payments would moot the rent motion. The court could not find that because the debtors would comply with 11 U.S.C. § 365(d)(3) pending assumption or rejection, that they were admitting that the contract rate was the fair rental value. The administrative rents did not have to be segregated, as that would in effect be providing the landlords with adequate protection or a security interest. In re HQ Global Holdings, Inc., 2002 Bankr. LEXIS 806, — B.R. — (Bankr. D. Del. August 2, 2002) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.04, .05

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Exemption in full amount of debtor’s husband’s life insurance proceeds was reasonably necessary for subsistence of debtor and minor children. Bankr. M.D. Pa. PROCEDURAL POSTURE: After the debtor husband’s death, the surviving debtor wife claimed an exemption in life insurance proceeds of $50,172 under 11 U.S.C. § 522(d)(11)(C). The trustee filed an objection to the exemption, claiming that it exceeded the exemption limit. The trustee did not oppose an exemption of $15,000. OVERVIEW: Examining the reasonable needs limitation of 11 U.S.C. § 522(d), the court noted that the wife had a high school education and had been a court clerk for 13 years. She and her children, ages 4 and 10, were in good health with no special needs. In addition to nominal exempted assets, the wife exempted interests in a retirement plan, a 401k plan, other life insurance proceeds, and certificates of deposit, all with an aggregate value of $31,997. There were no continuing financial obligations such as alimony or support. But the wife had a monthly deficit of $352, for the basic subsistence requirements. That subsistence deficit was the type of situation that Congress was seeking to avoid with the exemption provisions. There was no evidence of the wife’s age. If she was young, an early access to her pension and her 401k would presumably result in taxes and an early withdrawal penalty, reducing the amounts by 20 percent or more. Absent any penalties, the total value of uncontested exempt assets ($31,997) was insubstantial for her entire term of retirement. All of the insurance proceeds were reasonably necessary for the subsistence of the debtor wife and her two minor children. In re Collins, 2002 Bankr. LEXIS 816, 281 B.R. 580 (Bankr. M.D. Pa. July 3, 2002) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.02[3], .09[11]

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Debt owed to county for debtor’s delinquent child’s detention in juvenile facility was dischargeable. Bankr. M.D. Pa. PROCEDURAL POSTURE: Creditor county brought an adversary proceeding to determine if the debt owed to the county for the debtor’s minor child’s care in various juvenile facilities, because of the child’s delinquent behavior, was dischargeable under 11 U.S.C. § 523(a)(5), (18). The debtor argued the debt was not owed to a child under 11 U.S.C. § 523(a)(5), and no federal funds had been involved as required under 11 U.S.C. § 523(a)(18). OVERVIEW: The county admitted no federal funds had been involved to invoke section 523(a)(18). The state court order directed the debtor to pay the state collection unit for the support of the debtor’s child. The fact that the obligation was in the nature of child support did not result in the debt’s exception from discharge unless either the obligation was to a spouse, former spouse, or child under 11 U.S.C. § 523(a)(5), or 'such debt,' namely a debt to a spouse, former spouse, or child, was to a governmental assignee under 11 U.S.C. § 523(a)(5)(A). The debt was a judgment in favor of the state under a statutory right to reimbursement, was not a debt to a child, spouse, or former spouse, and was not assigned to the government. It did not fit the exception to discharge of section 523(a)(5)(A). The reimbursement was owed to the county, not to the child. Although a later state court order stated that the support action was brought on behalf of the child and the right to collect had been assigned to the state, the county had not raised the issue in its briefs or during the hearing. The requirements of the section 523(a)(5)(A) exception to discharge was not met. Bradford County Children & Youth Servs. v. Wise (In re Wise), 2001 Bankr. LEXIS 1952, 281 B.R. 248 (Bankr. M.D. Pa. December 27, 2001) (Thomas, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.01, .07

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Breach of contract with creditor, although flagrant, did not support objection to discharge on basis of fraud. Bankr. W.D. Pa. PROCEDURAL POSTURE: A creditor filed a complaint objecting to discharge due to fraud under 11 U.S.C. § 523(a)(2)(A), asserting that the debtor refused to allow the creditor to harvest timber pursuant to a contract between them and that the debtor subsequently sold the right to harvest some of the timber to another individual. OVERVIEW: A state court had found as a matter of law that the contract was not ambiguous and that the debtor’s evidence of fraud by the creditor in procuring the contract was not sufficient to warrant submitting the case to a jury. But, no monetary award in favor of the creditor had entered in the state court. The bankruptcy court found that the most that could be said was that the debtor breached the contract. The debtor’s 'reckless disregard' of the contract’s unambiguous language, without more, did not transform the breach into fraud. The outcome was the same if the creditor claimed it was fraud by false representations prior to the execution of the contract. The creditor failed to show that the debtor knew, when he represented that the creditor could have the timber, that the representation was false and that he eventually would prevent the creditor from doing so and would instead sell the timber to another. The court could not conclude on flagrancy alone that the debtor more likely than not knew when he so represented to the creditor that the representation was false or that he more likely than not intended at that time to deceive the creditor under 11 U.S.C. § 523(a)(2)(A). Porter v. Smith (In re Smith), 2002 Bankr. LEXIS 807, 281 B.R. 613 (Bankr. W.D. Pa. August 5, 2002) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1]

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Payment made pursuant to release in settlement of state court litigation was payment on account of antecedent debt. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiff bankruptcy trustee brought an adversary proceeding against defendant transferee of funds from the debtor, alleging that the prepetition transfer of funds from the debtor to the transferee in settlement of a pending fraud action was a voidable preference. The transferee moved for summary judgment. OVERVIEW: The transferee contended that the transfer was no voidable because it was made in exchange for a release and dismissal of the pending action and was thus not made for or on account of an antecedent debt and, in any event the transfer was a contemporaneous exchange for new value. The court first held that the transfer was voidable since the debt and the transferee’s claim arose at the time of the debtor’s allegedly fraudulent conduct which gave rise to the litigation, and thus the subsequent settlement of the litigation constituted payment for an antecedent debt. Further, the release did not constitute new value because the only thing that the debtor received in exchange for the transfer was, in fact, freedom from liability on an antecedent debt and there was no additional increase in value of any assets of the debtor’s estate. Peltz v. New Age Consulting Servs., Inc. (In re USN Communs., Inc.), 2002 Bankr. LEXIS 347, 279 B.R. 99 (Bankr. D. Del. April 9, 2002) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03

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4th Cir.

Relief from stay granted to allow creditor to foreclose in interests of judicial economy. Bankr. E.D. Va. PROCEDURAL POSTURE: Plaintiff debtor defaulted on a mortgage and defendant creditor attempted to foreclose on the property. The debtor filed a third petition under chapter 13 of the Bankruptcy Code after her first two petitions were dismissed. The creditor filed a motion to abstain or remand and objection to confirmation of the debtor’s amended plan. The creditor filed a motion for relief from the automatic stay to permit it to continue with state court litigation. OVERVIEW: The court found that modifying the stay promoted judicial economy and did not interfere with the debtor’s bankruptcy case. The state court litigation would assist with the administration of the debtor’s bankruptcy case since the amount of any claim by the debtor against the creditor, the validity and priority of the creditor’s deed of trust, and the amount of the creditor’s claims asserted against the debtor would become certain. The bankruptcy estate was protected because the creditor, if successful, would still need to seek enforcement of any judgment through the bankruptcy court. The court did not believe that the debtor’s plan was proposed in good faith. The debtor failed to establish that she was likely to be successful in her attempt to obtain damages as it was totally dependent on a favorable lawsuit in two court cases. The court found that the debtor’s plan provided for the resolution of the creditor’s secured claim through a speculative lawsuit and provided for unfeasible adequate protection payments. Ewald v. Nat’l City Mortgage Co. (In re Ewald), 2002 Bankr. LEXIS 822, — B.R. — (Bankr. E.D. Va. January 2, 2002) (Tice, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3]

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Convenience store debtors could reject portion of lease. Bankr. M.D.N.C. PROCEDURAL POSTURE: Bankruptcy debtors moved to reject certain unexpired non-residential real estate property leases under 11 U.S.C. § 365. The landlords contended that a single lease covered all the leased properties and that the debtors must therefore assume or reject the lease as a whole. OVERVIEW: The debtors operated a chain of convenience stores which were leased from several landlords under a single lease, and the debtors sought to reject the unexpired lease obligations only for those stores which were unprofitable. The landlords contended that the single lease could only be assumed or rejected in its entirety. The court held that the lease was divisible and thus the debtors were entitled to reject the lease with regard to the unprofitable stores without rejecting the entire lease. The lease terms providing that the sale, destruction, or condemnation of a single store did not affect the lease with regard to the remaining stores, and the allocation of rent among the stores, evidenced the parties’ intent to create a divisible lease. Further, the obligations with regard to each store were easily performed independently of each other, and the fact that the debtors paid rent in a lump sum did not overcome the express rent allocation. Also, the lease clause permitting the landlords to terminate the entire lease for a default with regard to one property was unenforceable since it otherwise conflicted with the debtors’ right to reject portions of the divisible lease. In re Convenience USA, Inc., 2002 Bankr. LEXIS 348, — B.R. — (Bankr. M.D.N.C. February 12, 2002) (Stocks, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.03[1]

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Trustee’s motion to dismiss for substantial abuse denied where debtor filed in good faith and only a small surplus was available to fund chapter 13 plan. Bankr. E.D. Va. PROCEDURAL POSTURE: The United States trustee moved to dismiss the debtor’s chapter 7 case for substantial abuse under 11 U.S.C. § 707(b), arguing that a plan could be funded from monthly income surplus of $253, and that an additional $200 per month was available if excess expenses were considered under 11 U.S.C. § 1326(b). Those items of expense were alleged excess food allowance of approximately $100 and a $100 loan payment to the debtor’s parents. OVERVIEW: It was noted that the debts were primarily consumer obligations. The debtor did have a monthly surplus of $253. Her claimed food expense was $300, and claimed a payment of $100 to her parents for a loan. The trustee correctly argued that the $100 loan payment to the debtor’s parents would not be allowed in a chapter 13 budget. But, on the record the court was unwilling to limit the debtor’s food allowance to $200. Thus, the most that the debtor could be required to pay in a chapter 13 was approximately $350 per month. Under appropriate circumstances, available monthly funds in that amount could be sufficient to justify an 11 U.S.C. § 707(b) dismissal. However, it was a relatively small payment to project onto a hypothetical 36-month chapter 13 plan. The court held that the debtor filed the case in good faith. The other relevant factors did not support dismissal. The court noted that there was a presumption that favored the debtor’s filing. In re Lawrence, 2001 Bankr. LEXIS 1962, — B.R. — (Bankr. E.D. Va. September 17, 2001) (Tice, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.04

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Private school tuition for debtor’s dyslexic child was not a luxury and did not invalidate chapter 13 plan. Bankr. E.D. Va. PROCEDURAL POSTURE: A creditor objected to confirmation of the debtor’s chapter 13 plan, asserting that the plan was proposed in bad faith under 11 U.S.C. § 1325 because the debtor (1) proposed to repay only 18 percent of the claim, (2) intentionally failed to list certain assets, (3) intentionally understated her income, and (4) was not providing all of her disposable income to make the payments under the plan. OVERVIEW: At the hearing, the debtor argued that her schedules included all of her income from both jobs. She also explained that the expense for private school tuition was a necessity, as her 12-year-old dyslexic daughter had to attend the school because there were no other programs for dyslexic children in the area. At the court’s direction, counsel for the debtor filed revised schedules and a revised statement of financial affairs. After reviewing the revised schedules, the court concluded that the debtor’s chapter 13 plan was proposed in good faith and otherwise complied with the requirements for confirmation under 11 U.S.C. § 1325. The debtor did not intentionally misrepresent her income and the private school tuition was not a luxury item. The trustee was directed to submit an order of confirmation. Belcher v. Belcher (In re Belcher), 2001 Bankr. LEXIS 1957, — B.R. — (Bankr. E.D. Va. October 30, 2001) (Tice, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.01

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5th Cir

Survivors granted relief from stay to file lawsuit related to accident. E.D. La. PROCEDURAL POSTURE: Petitioner towing company obtained a stay against filing any suit within three days of a decedent’s death. The company sued under 46 U.S.C. § 181 et seq., seeking limitation of liability. Claimants, decedent’s mother and estate, moved for lifting of the automatic stay. OVERVIEW: The company’s counsel told the court that his only remaining objection to lifting the stay concerned identification of the alternative forum. Counsel for the mother and estate advised that they intend to jointly file a law suit in state court. The court found that under the circumstances, it should exercise its discretion in favor of lifting the stay. In re Delta Towing, LLC, 2002 U.S. Dist. LEXIS 7385, — B.R. — (E.D. La. April 17, 2002) (Berrigan, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[4]

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Bankruptcy court’s order granting motion to reject executory contract reversed in part. N.D. Tex. PROCEDURAL POSTURE: Appellants, debtors, challenged the decision of the United States Bankruptcy Court for the Northern District of Texas, which granted the debtors’ motion to reject an executory contract, because it concluded that the contract for the sale of real estate would be rejected. The debtors challenged the order on several grounds. OVERVIEW: In the bankruptcy case, the debtors filed a motion to reject the executory contract to purchase real estate. A debtor claimed that the bankruptcy court erred in applying legal principles of waiver in concluding that he waived his right under the contract to rely on one closing date by subsequently agreeing to a different closing date. The court held that the debtor’s argument suffered from two principal fallacies. First, he focused on a single component of the bankruptcy court’s comprehensive waiver ruling and, from that, claimed that the entire waiver decision was erroneous. Second, although he phrased his appellate argument in a manner that could be intended to avoid review under the deferential clear error standard, he essentially argued that the bankruptcy court erred factually in finding that he waived his right to rely on a certain closing date. The bankruptcy court’s opinion did not, however, follow only one clear analytical path when it decided the estoppel question. Because the court could not determine that the bankruptcy court based its estoppel ruling on affirmable findings and conclusions, it vacated that part of the order and remanded for further proceedings. Biesel v. Billings (In re Biesel), 2002 U.S. Dist. LEXIS 7357, — B.R. — (N.D. Tex. April 24, 2002) (Fitzwater, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.03

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In no-asset case, bankruptcy court properly held that failure to notify creditor was merely negligent and did not prevent discharge. N.D. Tex. PROCEDURAL POSTURE: Appellant creditors appealed from the opinion and order and final judgment of the bankruptcy court, in which it declared that appellee debtor’s debt owed to the creditors was discharged. OVERVIEW: The gravamen of the creditors’ argument on appeal was that the bankruptcy court erred in finding that the debtor’s failure to provide notice to the creditors was negligent, not intentional or reckless. The bankruptcy court, after hearing testimony, concluded that the evidence that the debtor followed his counsel’s advice did not support a finding of intentional or reckless failure by the debtor. In fact, there was no finding that the debtor acted negligently in following his counsel’s advice. The bankruptcy court did, however, conclude that based on the circumstances, the debtor’s attorney’s failure to serve notice of the amended matrix to the creditors who were added did constitute negligent conduct on his part. Because there was no evidence to suggest that the bankruptcy court’s finding was clearly erroneous, it did not err in its ruling. The bankruptcy court found that because this was a no-asset case, there was no administrative disruption and the instant court agreed. Even if the creditors received notice, the creditors would not have been able to file a proof of claim or receive any dividends from the bankrupt estate because it was a no-asset case. Am. Chiropractic Clinic-North v. Rodriguez, 2002 U.S. Dist. LEXIS 14702, — B.R. — (N.D. Tex. August 1, 2002) (Solis, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.01, .07

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6th Cir.

Summary judgment motion for declaratory judgment denied and creditor not allowed to proceed against debtor’s former managers. Bankr. N.D. Ohio PROCEDURAL POSTURE: The chapter 11 debtor sought a declaratory judgment that due to an officers and director’s insurance policy, 11 U.S.C. § 362(a)(1), (3), stayed a state court action against two of its former managers initiated postpetition against the debtor and the managers by a former employee. That action had been amended, removing the debtor as a defendant and adding the employee’s wife as another plaintiff. Cross-motions for summary judgment were filed. OVERVIEW: The court found the policy provided direct coverage to directors, officers, and employees, and indirect coverage to the debtor for any indemnification of directors, officers, and employees. It also provided that a retention amount was to be borne by the debtor or an insured. The debtor had set forth conclusory statements that it was obligated to pay the retention amount on behalf of the managers. If the action proceeded, the policy did not contractually obligate the debtor to pay the retention on the managers’ behalf. There was no evidence as to whether the debtor was obligated, separate and apart from the policy, to indemnify the managers. As to whether 'unusual circumstances' justified an extension of the stay, the court was again without any evidence that there was an obligation to indemnify. While the debtor would have to address discovery in the action, since the managers were no longer employed by the debtor, their defense would not detract from the debtor’s ability to restructure, The court could not support a finding, on summary judgment, that the state court action against only the managers was in circumvention of the automatic stay. Republic Techs. Int’l, LLC v. Valey (In re Republic Techs. Int’l, LLC), 2002 Bankr. LEXIS 321, 275 B.R. 508 (Bankr. N.D. Ohio February 21, 2002) (Shea-Stonum, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3], [5]

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District court affirmed bankruptcy court’s decision to except debt from discharge based on debtor/subcontractor’s breach of fiduciary duty. E.D. Mich. PROCEDURAL POSTURE: Appellee creditor made a claim against appellant debtor. The United States Bankruptcy Court determined that $57,534 of the debt that the debtor owed to the creditor was nondischargeable. The debtor appealed. OVERVIEW: The debt arose in the course of a construction project in which the creditor acted as general contractor and hired the debtor and his company to serve as a subcontractor. The debtor contended that the Bankruptcy Court erred in finding that the debtor misappropriated funds paid to him by the creditor that should have been used to pay the debtor’s material suppliers, effectively requiring the creditor to pay those obligations twice. The debtor also argued that the finding that his conduct violated the Michigan Builders Construction Fund Act ('MBCFA'), Mich. Comp. Laws § 570.151 et seq., was erroneous. The court found that the factual determinations of the Bankruptcy Court were amply supported by evidence in the record as the evidence showed that the debtor would cross out the names of third parties when the creditor issued checks to him and the third party and would deposit the full amount of the checks into his account. The court also found that the determination that the debtor breached his fiduciary duty to the creditor, which rendered the portion of the debt identified by the Bankruptcy Court nondischargeable under 11 U.S.C. § 523(a)(4), was correct as a matter of law. Kriegish v. Lipan (In re Kriegish), 2002 U.S. Dist. LEXIS 6870, 275 B.R. 838 (E.D. Mich. April 9, 2002) (Lawson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10

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7th Cir.

Conjecture regarding purchasers’ motives faith was an insufficient basis to deny motion to sell property. N.D. Ill. PROCEDURAL POSTURE: Creditor filed an appeal of the decision of the United States Bankruptcy Court for the Northern District of Illinois, which had denied the trustee’s motion to sell the estate’s interest in the debtor’s stock and real property to the creditor, or, in the alternative, to abandon the estate’s interest in the assets. The court also granted the trustee’s motion to abandon the residence and the debtor appealed. OVERVIEW: Included among the assets of the estate were 100 shares of stock in the debtor’s wholly-owned medical services corporation, real estate, and a residence. The bankruptcy court found that the creditor was not acting in good faith but with an intent to injure the debtor. The district court noted that the bankruptcy court took no evidence and made its decision on counsel’s argument. Also, the district court indicated that it did not need to discuss the cases cited by the parties as to what constituted bad faith because there was no indication as to what conduct the bankruptcy court considered as evidencing bad faith, even assuming that bad faith was relevant. The court concluded that there was insufficient support in the record on which to base the denial of the motion to sell (and the granting of the alternative relief of abandoning) the stock and the real estate. The only evidence before the court was that there was no equity in the residence, and the trustee determined that the $5,000 offer was insufficient to outweigh the burdensome nature of retaining the asset. This evidence supported the bankruptcy court’s decision to grant the trustee’s motion to abandon the residence. Stroud v. Lopez, 2002 U.S. Dist. LEXIS 5909, — B.R. — (N.D. Ill. March 29, 2002) (Coar, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.02

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8th Cir.

Creditor granted summary judgment on trustee’s complaint to avoid lien even though creditor’s financing statement was erroneously terminated by court clerk. Bankr. E.D. Ark. PROCEDURAL POSTURE: Defendant creditor filed a motion for summary judgment in connection with an adversarial complaint filed by plaintiff trustee to avoid liens held by the creditor. The creditor claimed its lien was valid under Ark. Code Ann. § 4-9-403(1) (Supp. 1999) notwithstanding a clerical error by the filing officer, who erroneously terminated its financing statement. OVERVIEW: The debtor borrowed money from the creditor and provided the creditor with a security interest in certain property. The creditor filed a financing statement, which was accepted and filed by the filing officer. The creditor executed a subordination of its lien, which was filed. At the time the subordination was filed, the filing officer erroneously terminated the creditor’s financing statement. The debtor filed a bankruptcy petition. A search did not disclose the financing statement and the trustee sold the collateral. The trustee filed an adversarial complaint to avoid the creditor’s lien and the creditor filed a motion for summary judgment. The court ruled that under Ark. Code Ann. § 4-9-403(1) (Supp. 1999) presentation for filing of a financing statement and tender of the filing fee or acceptance of the statement by the filing officer constituted filing and that a mistake by the filing officer did not affect the perfection of the creditor’s security interest where the financing statement presented was proper even though no notice was given to subsequent searchers. The court found that there was no issue of a material fact and granted the creditor’s motion. Luker v. United States (In re Masters), 2002 Bankr. LEXIS 342, 273 B.R. 773 (Bankr. E.D. Ark. January 17, 2002) (Mixon, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11

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9th Cir.

Trustees’ motion to reconvert case to chapter 7 granted where the initial conversion to chapter 13 was an attempt to preempt proper case administration. Bankr. E.D. Cal. PROCEDURAL POSTURE: Chapter 7 bankruptcy debtors converted their action to chapter 13, claimed exemptions for a motor home which was their residence and for an annuity, and belatedly filed a proposed chapter 13 plan. The chapter 7 and chapter 13 trustees moved to reconvert the case to chapter 7, and the trustees objected to the claimed exemptions and to confirmation of the debtors’ plan. OVERVIEW: After the chapter 7 trustee discovered undisclosed assets of the debtors, including trusts which owned the motor home and the annuity, the debtors converted their petition to chapter 13 and untimely filed a reorganization plan. The trustees contended that debtors’ lack of diligence after the conversion constituted an attempt to obtain a dismissal of the chapter 13 proceeding, since the chapter 7 proceeding could only be dismissed for cause, and avoid liquidation of the undisclosed assets. The bankruptcy court held that reconversion to chapter 7 was warranted, since the debtors’ belated plan, inability to exempt the undisclosed assets, and filing of a non-confirmable plan indicated that the conversion was intended to escape the scrutiny of the bankruptcy court with the unscheduled assets in hand. The motor home was non-exempt property of the trusts, and the spendthrift provisions of the trusts were unenforceable. Further, the annuity did not qualify under state law as a exemptible private retirement plan, and their proposed plan could not be confirmed since the debtors were unable to make the plan payments and provided insufficient payment to unsecured. In re Barnes, 2002 Bankr. LEXIS 352, 275 B.R. 889 (Bankr. E.D. Cal. April 12, 2002) (McManus, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1307.04

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10th Cir.

Collateral estoppel regarding violation of securities laws applied to find debt nondischargeable. Bankr. D. Utah PROCEDURAL POSTURE: Both parties sought summary judgment on the merits on issues that arose from plaintiff Indian Band’s (creditor) motion for summary judgment on first and second claims for relief brought under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B), respectively, and a cross motion for summary judgment of the claims filed by defendant debtor. OVERVIEW: The district court had previously found, inter alia, that debtor was liable for violation of federal securities law which resulted in a $625,000 judgment, related to creditor’s investment in a waste management facility. Debtor then filed for chapter 7 bankruptcy. Creditor’s second claim for relief sought to have the judgment determined nondischargeable under 11 U.S.C. § 523(a)(2)(B), while the first claim sought nondischargeability under 11 U.S.C. § 523(a)(2)(A). The cross motions necessitated a determination of two underlying issues: first, the meaning of the term 'financial condition' as used in 11 U.S.C. § 523(a)(2)(B), and second, the interplay of a United States Supreme Court case and the tort of fraudulent misrepresentation with 11 U.S.C. § 523(a)(2)(A). With regard to 11 U.S.C. § 523(a)(2)(B)(ii), the court employed a strict interpretation, and concluded that a letter at issue from debtor did not constitute a statement respecting an insider’s financial condition, and that there was no issue of material fact. With regard to 11 U.S.C. § 523(a)(2)(A), the court found that creditor had met all its elements based upon debtor’s oral statements. Skull Valley Band of Goshute Indians v. Chivers (In re Chivers), 2002 Bankr. LEXIS 316, 275 B.R. 606 (Bankr. D. Utah April 9, 2002) (Boulden, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:523.08

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11th Cir.

Debtor was judicially estopped from proceeding with federal district court action that was not disclosed in debtor’s bankruptcy case. N.D. Ga. PROCEDURAL POSTURE: Plaintiff filed a discrimination action against defendant. Defendant removed the action to federal court. Thereafter, plaintiff filed for bankruptcy. Defendant moved for summary judgment, contending plaintiff was judicially estopped from proceeding with the discrimination suit because he did not disclose the suit in the bankruptcy proceeding. Plaintiff modified his bankruptcy petition to reflect the suit. OVERVIEW: The court found that plaintiff’s modification of his bankruptcy petition did not permit him to proceed with the discrimination matter without being judicially estopped. Plaintiff did not attempt to modify his bankruptcy petition until after defendant filed the instant summary judgment motion. The question on the bankruptcy petition was not ambiguous in any way, and as such, there was no doubt that plaintiff concealed the existence of the discrimination lawsuit. Moreover, even if plaintiff did not understand the question on the petition, defendant had offered the affidavit of plaintiff’s trustee in which the trustee stated that plaintiff told the trustee that he was not involved in any lawsuits in which he was seeking money damages. Traylor v. Gene Evans Ford, 2002 U.S. Dist. LEXIS 6705, 185 F. Supp. 1338 (N.D. Ga. January 22, 2002) (Shoob, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:521.03

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