Collier Bankruptcy Case Update October-7-02
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
October 7, 2002
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 363 Injunction granted compelling specific performance
of asset purchase agreement by buyer as necessary to success of chapter
Aerovox, Inc. v. Parallax Power Components, LLC (In re Aerovox) (Bankr. D. Mass.)
§ 105(a) Defendant’s motion to dissolve injunction
denied in proceeding brought by debtor/plaintiff alleging interference
with contract rights, conversion, and misappropriation of trade
Rotech Med. Corp. v. Blount Memorial Hosp. (In re Integrated Health Servs.) (Bankr. D. Del.)
§ 503(b) Rent due on unexpired non-residential leases were administrative expenses which would be properly calculated at time of assumption or rejection.
In re HQ Global Holdings, Inc. (Bankr. D. Del.)
§ 522(d)(11)(C) Exemption in full amount of debtor’s husband’s life insurance proceeds was reasonably necessary for subsistence of debtor and minor children.
In re Collins (Bankr. M.D. Pa.)
§ 523(a) Debt owed to county for debtor’s delinquent child’s detention in juvenile facility was dischargeable.
Bradford County Children & Youth Servs. v. Wise (In re Wise) (Bankr. M.D. Pa.)
§ 523(a)(2)(A) Breach of contract with creditor, although flagrant, did not support objection to discharge on basis of fraud.
Porter v. Smith (In re Smith) (Bankr. W.D. Pa.)
§ 547(b)(2) Payment made pursuant to release in settlement of state court litigation was payment on account of antecedent debt.
Peltz v. New Age Consulting Servs., Inc. (In re USN Communs., Inc.) (Bankr. D. Del.)
§ 362(d)(1) Relief from stay granted to allow creditor
to foreclose in interests of judicial economy.
Ewald v. Nat’l City Mortgage Co. (In re Ewald) (Bankr. E.D. Va.)
§ 365(a) Convenience store debtors could reject portion of lease.
In re Convenience USA, Inc. (Bankr. M.D.N.C.)
§ 707(b) 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.
In re Lawrence (Bankr. E.D. Va.)
§ 1325 Private school tuition for debtor’s dyslexic child was not a luxury and did not invalidate chapter 13 plan.
Belcher v. Belcher (In re Belcher) (Bankr. E.D. Va.)
§ 362(d) Survivors granted relief from stay to file
lawsuit related to accident.
In re Delta Towing, LLC (E.D. La.)
§ 365(a) Bankruptcy court’s order granting motion to reject executory contract reversed in part.
Biesel v. Billings (In re Biesel) (N.D. Tex.)
§ 523(a) In no-asset case, bankruptcy court properly held that failure to notify creditor was merely negligent and did not prevent discharge.
Am. Chiropractic Clinic-North v. Rodriguez (N.D. Tex.)
§ 362(a)(3) Summary judgment motion for declaratory
judgment denied and creditor not allowed to proceed against
debtor’s former managers.
Republic Techs. Int’l, LLC v. Valey (In re Republic Techs. Int’l, LLC) (Bankr. N.D. Ohio)
§ 523(a)(4) District court affirmed bankruptcy court’s decision to except debt from discharge based on debtor/subcontractor’s breach of fiduciary duty.
Kriegish v. Lipan (In re Kriegish) (E.D. Mich.)
§ 363 Conjecture regarding purchasers’ motives
faith was an insufficient basis to deny motion to sell
Stroud v. Lopez (N.D. Ill.)
§ 522(f) Creditor granted summary judgment on
trustee’s complaint to avoid lien even though creditor’s
financing statement was erroneously terminated by court
Luker v. United States (In re Masters) (Bankr. E.D. Ark.)
§ 1307(c) Trustees’ motion to reconvert case to chapter 7 granted where the initial conversion to chapter 13 was an attempt to preempt proper case administration.
In re Barnes (Bankr. E.D. Cal.)
§ 523(a)(2)(A) Collateral estoppel regarding violation of securities laws applied to find debt nondischargeable.
Skull Valley Band of Goshute Indians v. Chivers (In re Chivers) (Bankr. D. Utah)
§ 521(1) Debtor was judicially estopped from proceeding with federal district court action that was not disclosed in debtor’s bankruptcy case.
Traylor v. Gene Evans Ford (N.D. Ga.)
Collier Bankruptcy Case Summaries
Injunction granted compelling specific performance of asset purchase agreement by buyer as necessary to success of chapter 11 plan. Bankr. D. Mass. PROCEDURAL POSTURE: In this chapter 11 action, plaintiff debtor filed a motion for injunction compelling specific performance of an asset purchase agreement ('APA') and escrow of disputed funds. OVERVIEW: The debtor requested that the court enter a preliminary injunction compelling defendant buyer to immediately perform its obligations under the APA, close the sale, pay the entire purchase price, and order that the disputed amount of the adjustments due to inventory changes be held in escrow pending a determination of the appropriate amount. The debtor asserted that specific performance was the appropriate remedy as money damages were inadequate to redress the estate’s injury. The court held that the debtor had met the requirements for issuance of the preliminary injunction. The court reasoned that the debtor had established more than a reasonable likelihood of success on the merits of its complaint. Also, the court found that the debtor sustained its burden on the element of irreparable harm. Absent injunctive relief, the prospects for its liquidating chapter 11 plan, premised on the sales of the three major components of its business, would be destroyed. Finally, the debtor had shown that money damages to the bankruptcy estate resulting from the buyer’s breach were not capable of being ascertained with certainty and would not fully alleviate harm to its creditors and the estate. Aerovox, Inc. v. Parallax Power Components, LLC (In re Aerovox), 2002 Bankr. LEXIS 812, 281 B.R. 419 (Bankr. D. Mass. July 9, 2002) (Feeney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.01
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
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)
Collier on Bankruptcy, 15th Ed. Revised 4:503.04, .05
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, .09
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
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,
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
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)
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
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,
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
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
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,
Collier on Bankruptcy, 15th Ed. Revised 6:707.04
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
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,
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
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
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,
Collier on Bankruptcy, 15th Ed. Revised 4:523.01, .07
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, 
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
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
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,
Collier on Bankruptcy, 15th Ed. Revised 4:522.11
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
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,
Collier on Bankruptcy, 15th Ed. Revised 5:523.08
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