Collier Bankruptcy Case Update October-8-01
A Weekly Update of Bankruptcy and Debtor/Creditor Matters
Collier Bankruptcy Case Update
The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.
October 8, 2001
CASES IN THIS ISSUE
(scroll down to read the full summary)
- 1st Cir.
§ 109(g) Debtor prohibited from refiling for one year.
In re Somerset Capital Corp. (Bankr. D. Mass.)
Rule 7004(f) Debtor objecting to proof of claim lacked personal jurisdiction over IRS.
United States of America v. Sousa (In re Sousa) (B.A.P. 1st Cir.)
§ 523(a)(4) Bankruptcy court should have looked beyond the settlement agreement to determine whether the underlying debt was based on fraud.
Giaimo v. Detrano (In re Detrano) (E.D.N.Y.)
§ 523(a)(4) Judgment debts arising from debtors’ misappropriation of partnership funds and removal of and failure to account for inventory held nondischargeable.
Adamo v. Scheller (In re Scheller) (Bankr. S.D.N.Y.)
28 U.S.C. § 1334(b) Bankruptcy court erred in denying motion to compel arbitration.
Pardo v. Akai Elec. Co. Ltd. (In re Singer Co. N.V.) (S.D.N.Y.)
§ 362(d) Landlord was granted relief from stay.
In re Floyd (Bankr. E.D. Pa.)
§ 502(b)(1) Claims arising from debtors’ alleged breach of agreement to decommission nuclear power generating facility not disallowed under section 502(b)(1).
In re Stone & Webster, Inc. (Bankr. D. Del.)
§ 542(a) Court denied motion of state retirement board asserting sovereign immunity.
Pineo v. Schoeneweis (In re Schoeneweis) (Bankr. W.D. Pa.)
§ 1324 Mortgagee whose claim was disallowed was entitled to object to confirmation.
In re Kressler (E.D. Pa.)
§ 362(d) Court conditioned and continued automatic stay to allow debtor to propose and confirm plan in proceeding brought to enforce mechanics’ liens.
Graybar Elec. Co. v. Prop. Techs., LTD. (In re Prop. Techs., LTD.) (Bankr. E.D. Va.)
§ 365(d)(3) Section 365(d)(3) did not encompass administrative claim for rent resulting from debtor’s prepetition lease defaults.
In re 1/2 Off Card Shop, Inc. (Bankr. E.D. Mich.)
§ 506 Bankruptcy court did not err in valuing secured creditors’ replacement lien and did not erroneously shift the ultimate burden of proof.
Official Comm. of Unsecured Creditors of Qualitech Steel Corp. v. Bank Group (In re Qualitech Steel Corp.) (S.D. Ind.)
§ 330(a)(1) Reasonable compensation was awarded.
In re NWFX, Inc. (Bankr. W.D. Ark.)
Rule 3001(f) Claim was allowed.
In re Brazelton Cedar Rapids Group LC (Bankr. N.D. Iowa)
§ 503(b) Debtor’s sublessee could not assert administrative claim for relocation expenses.
Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.) (B.A.P. 9th Cir.)
§ 523(a)(8) Debtors failed to establish undue hardship.
England v. United States (In re England) (Bankr. D. Idaho)
- § 327(c) Trustee was entitled to disgorgement
of fees paid to law firms.
In re Gulf Coast Orthopedic Ctr. (Bankr. M.D. Fla.)
§ 363(f) Sale of property free and clear of liens required consent.
In re Mulberry Corp. (Bankr. M.D. Fla.)
§ 523(a)(2)(A) Debt arising from alleged securities law violations was not excepted from discharge.
Hoffend v. Villa (In re Villa) (11th Cir.)
28 U.S.C. § 158(a) Motion for leave to appeal was denied.
Turner v. Tri-State Plant Food, Inc. (In re Tri-State Plant Food, Inc.) (M.D. Ala.)
Collier Bankruptcy Case Summaries
Debtor prohibited from refiling for one year. Bankr. D. Mass. An involuntary chapter 7 case was filed against the debtor in February 1999. That case was closed in August 2000 with no distribution available to creditors. This voluntary chapter 11 case was filed in October 2000. One of the debtor’s principals informed the bankruptcy court that no proposed reorganization plan would be filed that differed substantially from the reorganization efforts previously made, and the debtor’s primary creditor asserted that the debtor filed the chapter 11 petition simply to delay the effect of a judgment against the debtor that was granted to the creditor, which was currently on appeal in state (California) court. The court noted that the outcome of that litigation would determine the rights of the parties primarily interested in the chapter 11 case and that various principals of the debtor had already filed petitions in the same district. The court also noted its previous order prohibiting the debtor from refiling petitions under any chapter of the Code for 180 days, as a result of a finding that the debtor demonstrated profound disrespect for the Code and Rules and an intent to manipulate the bankruptcy process. The United States trustee made a motion to dismiss the chapter 11 petition. The court granted the motion, again finding that the debtor and its principals were manipulating and orchestrating the proceeding to frustrate creditors and abuse the Code and Rules and, pursuant to sections 109(g) and 105(a), imposed a one year prohibition against filing a new petition. In re Somerset Capital Corp., 2001 Bankr. LEXIS 967, 264 B.R. 788 (Bankr. D. Mass. July 31, 2001) (Rosenthal, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.08
Debtor objecting to proof of claim lacked personal jurisdiction over IRS. B.A.P. 1st Cir. After the debtor filed his chapter 13 petition in October 1999, the IRS filed a timely proof of claim. In June 2000, the debtor filed an objection to the proof of claim, which was served upon the special procedures function of the IRS, upon which the debtor also served notice of the evidentiary hearing. Neither document was served upon the United States Attorney’s office or the Department of Justice. The IRS did not respond to the objection nor appear at the hearing. In July 2000, the bankruptcy court sustained the debtor’s objection, and the IRS filed a motion for reconsideration, requesting that the order be set aside to allow it to file a response to the objection. The debtor opposed the motion but admitted that he had served neither the United States Attorney’s office nor the Attorney General. The court denied the IRS’s motion, reasoning that the IRS had actual notice of the hearing. This appeal followed. The B.A.P. for the First Circuit reversed, holding that the IRS was not served in accordance with Rule 7004(f). Specifically, the B.A.P. found that service upon the IRS’s special procedures staff did not cure a jurisdictional defect, and that the debtor’s failure to serve the United States Attorney in the district and the Attorney General mandated the finding that no personal jurisdiction over the United States existed. United States of America v. Sousa (In re Sousa), 2001 Bankr. LEXIS 974, — B.R. — (B.A.P. 1st Cir. July 19, 2001) (PER CURIAM).
Collier on Bankruptcy, 15th Ed. Revised 10:7004.07
Bankruptcy court should have looked beyond the settlement agreement to determine whether the underlying debt was based on fraud. E.D.N.Y. Before filing his chapter 7 case, the debtor was appointed trustee of an individual’s inter vivos trust. After the individual died, the estate’s court-appointed executor filed state court actions against the debtor and alleged that he fraudulently converted funds from the trust. The debtor, in turn, filed a petition in surrogate’s court seeking a judicial settlement of his account as trustee. The executor and the debtor entered into a settlement agreement intended to resolve their disputes, but the debtor defaulted on the agreement. The executor brought a state court proceeding to enforce the settlement agreement, and the state court entered a judgment against the debtor. After the debtor commenced his chapter 7 case, the executor filed an adversary proceeding seeking a declaration that the debt arising from the judgment was nondischargeable under section 523(a)(4). The parties cross-moved for summary judgment, and the bankruptcy court granted summary judgment in the debtor’s favor. The bankruptcy court held that the debtor’s obligation was dischargeable because it was based solely on a contractual debt. The district court vacated the bankruptcy court’s order, and remanded the case for a determination of whether the debt at issue was incurred as a result of any fraud or breach of fiduciary duty committed by the debtor while serving as trustee. In adopting the majority view, the district court held that in bankruptcy, a court should look beyond a settlement agreement to determine whether or not the underlying debt is, in fact, based on fraud. The court also denied the executor’s motion for summary judgment on the record presented. The court rejected the executor’s argument that the language contained in the parties’ settlement agreement demonstrated the parties’ intention that collateral estoppel would apply to bar the debtor from claiming that he had not breached his fiduciary duties or committed fraud.Giaimo v. Detrano (In re Detrano), 2001 U.S. Dist. LEXIS 11789, — B.R. — (E.D.N.Y. July 10, 2001) (Amon, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Judgment debts arising from debtors’ misappropriation of partnership funds and removal of and failure to account for inventory held nondischargeable. Bankr. S.D.N.Y. The former business partner of the chapter 7 debtor husband obtained prepetition state (Connecticut) court judgments against the debtors in connection with their alleged misappropriation of partnership funds and business inventory. (The debtor wife had acted as bookkeeper for the partnership.) The bankruptcy court held that the debtors’ misappropriation of funds and removal of and failure to account for missing inventory constituted both defalcation while acting in a fiduciary capacity and 'embezzlement' within the meaning of section 523(a)(4). The court noted that when a partner or corporate insider has or obtains custody or control over partnership property, he stands in a position of trust with respect to that property and owes a fiduciary duty to his partners or the other shareholders of his corporate entity with respect to the partnership or corporate property entrusted to him. The court also noted that a partner who diverts partnership funds for his or her own use commits embezzlement within the meaning of section 523(a)(4) (citing Collier on Bankruptcy 15th Ed. Revised).Adamo v. Scheller (In re Scheller), 2001 Bankr. LEXIS 949, 265 B.R. 39 (Bankr. S.D.N.Y. July 25, 2001) (Hardin, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Bankruptcy court erred in denying motion to compel arbitration. S.D.N.Y. The debtor and the creditor, a Japanese corporation, entered into a written agreement for the sale of assets and trademark rights by the creditor to the debtor. The agreement contained a compulsory arbitration provision, to be governed by Japanese law. The debtor and certain of its affiliates filed chapter 11 petitions in September 1999 and February 2000. The creditor filed a proof of claim, alleging that it had not been paid substantial sums for work performed pursuant to the agreement. The debtor filed an adversary proceeding, contending that the creditor had failed to transfer assets in accordance with the agreement and had improperly retained profits. The debtor sought rescission of the agreement and the return of monies already paid. The creditor filed a motion to compel arbitration of the issues raised in the adversary proceeding and to stay the proceeding pending such arbitration. After the bankruptcy court denied the creditor’s motion, this appeal followed. The district court reversed and remanded. The court identified the central issue as whether any underlying purpose of the Code would be adversely affected by enforcing the arbitration clause and concluded that the bankruptcy court had erred in determining that it had discretion to deny such enforcement. The court reasoned that, although the issues presented could be characterized as core matters, that designation in itself was not enough to support a finding of conflict with the Code. The court noted that, under section 1334(b), the bankruptcy court’s jurisdiction of even core proceedings was nonexclusive.Pardo v. Akai Elec. Co. Ltd. (In re Singer Co. N.V.), 2001 U.S. Dist. LEXIS 12902, — B.R. — (S.D.N.Y. August 24, 2001) (Swain, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01
Landlord was granted relief from stay. Bankr. E.D. Pa. The chapter 13 debtor’s landlord moved for relief from the automatic stay to permit him to proceed with the eviction of the debtor. Prior to the debtor’s filing, the landlord had mailed a written demand for the debtor to vacate the premises due to nonpayment of rent and obtained a state court order for possession and judgment. The debtor asserted that he was capable of assuming the lease and that his leasehold interest was extended because the landlord failed to provide the requisite notice to quit under the lease. The bankruptcy court granted the motion, holding that cause existed under section 362(d)(1) to terminate the automatic stay. The court rejected the debtor’s argument that the landlord provided insufficient notice to quit. The debtor’s plan proposal, which would have allowed him to pay rent over the life of the plan, could not be accepted as adequate protection because the proposal would have required the landlord to rent to the debtor beyond the term of the lease.In re Floyd, 2001 Bankr. LEXIS 1128, — B.R. — (Bankr. E.D. Pa. April 3, 2001) (Fox, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Claims arising from debtors’ alleged breach of agreement to decommission nuclear power generating facility not disallowed under section 502(b)(1). Bankr. D. Del. The chapter 11 debtors entered into a prepetition agreement with the owner of a nuclear power generating facility for the decommission of the facility. Subsequently, the power plant owner issued a prepetition notice to one of the debtors, purporting to terminate the agreement because of that debtor’s insolvency and its failure to adequately perform under the contract. After the debtors filed their chapter 11 petition, the owner filed proofs of claim against the debtors and their guarantors. The debtors sought disallowance of the claims and argued, among other things, that the owner did not properly terminate the decommissioning agreement for either insolvency or failure to perform and that the owner did not have a right to damages for terminating the agreement on account of the debtors’ insolvency. The bankruptcy court held that the owner’s claims should not be disallowed under section 502(b)(1) because the owner had the right to bring a claim for damages for termination because of insolvency under the terms of the parties’ agreement; the owner gave the debtors adequate notice of its intent to terminate the agreement for insolvency; and the owner provided adequate notice and time to cure potential defaults.In re Stone & Webster, Inc., 2001 Bankr. LEXIS 920, — B.R. — (Bankr. D. Del. July 26, 2001) (McKelvie, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03
Court denied motion of state retirement board asserting sovereign immunity. Bankr. W.D. Pa. The debtor, a police officer employed by the state (Pennsylvania), had an interest in a voluntary deferred compensation plan established by the state retirement board. After the debtor filed a chapter 7 petition, the bankruptcy court ruled that the plan was estate property. The trustee then filed an adversary proceeding to recover the debtor’s interest in the plan for distribution among creditors. The board filed a motion to dismiss, asserting sovereign immunity and also seeking to relitigate the issue of whether the plan was estate property. The court denied the motion to dismiss, finding that a determination of whether the board was an alter ego or arm of the state could only be made after the record was more fully developed. But the court noted that a strong argument could be made for the conclusion that the board was not an alter ego of the state when three necessary factors were considered: (1) whether the payment of any judgment in favor of the trustee would come from the state treasury; (2) the status of the board under state law; and (3) the degree of the board’s autonomy from state regulation. Pineo v. Schoeneweis (In re Schoeneweis), 2001 Bankr. LEXIS 972, 265 B.R. 419 (Bankr. W.D. Pa. August 6, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:542.02
Mortgagee whose claim was disallowed was entitled to object to confirmation. E.D. Pa. The proof of claim of the chapter 13 debtors’ second mortgagee was disallowed as untimely. The debtors’ plan declared the second mortgagee to be unsecured and proposed to pay it nothing. The mortgagee objected on the grounds that the lien could not be avoided through the confirmation process, and the bankruptcy court sustained the objection. The debtors appealed, arguing that because the mortgagee’s claim was disallowed, the creditor was not a party in interest with standing to object to confirmation of the plan. The district court affirmed, holding that the mortgagee was a party in interest because its lien passed through bankruptcy even though its claim had been disallowed. The court noted that it was well-settled that a lien would continue even though the lienholder was not entitled to share in the distribution through the plan. Since the plan proposed to extinguish the mortgagee’s property interest, it had a pecuniary interest in the proceeding and, thus, was a party in interest entitled to object to confirmation (citing Collier on Bankruptcy, 15th Ed. Revised).In re Kressler, U.S. Dist. LEXIS 11723, — B.R. — (E.D. Pa. August 9, 2001) (Hutton, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1324.01
Court conditioned and continued automatic stay to allow debtor to propose and confirm plan in proceeding brought to enforce mechanics’ liens. Bankr. E.D. Va. The chapter 11 debtor was in the business of installing and servicing telephone equipment and billing systems for large building complexes and businesses. After the debtor commenced its chapter 11 case, a creditor that furnished equipment and materials to the debtor in connection with construction projects in approximately 25 states moved for relief from the stay to assert mechanics’ liens under the laws of the applicable states. The bankruptcy court determined from the evidence presented that the creditor was adequately protected in the short run. The court conditioned and continued the automatic stay in effect for a time period sufficient to allow the debtor to propose and confirm a reorganization plan. The court noted that the creditor had previously been granted relief to perfect its mechanics’ liens and that the statute of limitations to enforce the liens had been tolled. In addition, the debtor was willing to hold in trust any funds received from the owners of the improved property pending resolution of the creditor’s lien claims. The court also held that the debtor’s accounts receivable were property of the estate and concluded that a debtor’s interest in receivables should be considered in deciding a creditor’s action to enforce mechanics’ liens.Graybar Elec. Co. v. Prop. Techs., LTD. (In re Prop. Techs., LTD.), 2001 Bankr. LEXIS 990, 263 B.R. 750 (Bankr. E.D. Va. March 31, 2001) (Tice, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Section 365(d)(3) did not encompass administrative claim for rent resulting from debtor’s prepetition lease defaults. Bankr. E.D. Mich. The chapter 11 debtor operated a number of retail stores in nonresidential real estate leased from various landlords. Under the leases, the rent for each month was due in advance and payable on the first of each month. When the debtor filed its chapter 11 petition on June 2, 2000, rents for the month of June had not been paid. The debtor did not pay the June rents postpetition, although postpetition rents were paid for subsequent months. Several landlords sought relief in the bankruptcy court and requested a judicial finding that the debtor had not complied with section 365(d)(3) by failing to pay the June rent. The landlords asked the court to order the debtor to pay prorated rent for June 2 through June 30, 2000 as an administrative expense or, alternatively, that the landlords be afforded relief from the automatic stay for cause to permit them to pursue their state court remedies. The bankruptcy court denied the landlords’ motions. The court held that although the debtor’s obligation to pay rent for June 2000 arose on June 1, 2000, and the debtor was in default of this obligation when it filed for relief on June 2, 2000, the unambiguous language of section 365(d)(3) did not encompass an administrative claim as a result of the debtor’s prepetition default. The court concluded that, given the consequent status of the claims as prepetition claims, there was not sufficient cause to warrant lifting the stay to enable the landlords to pursue the claims in another forum.In re 1/2 Off Card Shop, Inc., 2001 Bankr. LEXIS 988, — B.R. — (Bankr. E.D. Mich. March 7, 2001) (Shapero, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04
Bankruptcy court did not err in valuing secured creditors’ replacement lien and did not erroneously shift the ultimate burden of proof. S.D. Ind. Believing that maintaining its business as a going concern might enhance its total value, a chapter 11 debtor continued to operate as a debtor in possession for several months after filing its chapter 11 petition. The debtor’s continued operations required substantial new financing, and the bankruptcy court approved an arrangement whereby a group of lenders obtained a superpriority interest in the debtor’s assets in order to induce lenders to provide postpetition financing. Certain existing secured creditors were also granted a postpetition 'replacement lien' as a form of adequate protection for being 'bumped' from their priority status and for the debtor’s ongoing use of the prepetition collateral. The replacement lien was secured, in part, by the debtor’s few postpetition assets and was 'limited in amount to the aggregate diminution in value following the petition date as a result of the utilization of cash collateral and the granting of senior liens.' The bankruptcy court determined the value of the replacement lien, and the official committee of unsecured creditors, whose claims were in line behind any claims allowed under the replacement liens granted to the secured creditors, appealed the valuation decision. The committee also claimed on appeal that the bankruptcy court improperly shifted the burden of proving the value of the secured creditors’ replacement lien to the committee. The district court affirmed. The court held that the bankruptcy court did not err in holding that the secured creditors were entitled to a replacement lien of at least $30 million on the debtors’ postpetition assets, and the bankruptcy court did not assign the ultimate burden of proof to the committee. The court also refused to consider the committee’s argument that the bankruptcy court abused its discretion by denying a motion to compel served only the day before the hearing because it was raised for the first time in the committee’s reply brief.Official Comm. of Unsecured Creditors of Qualitech Steel Corp. v. Bank Group (In re Qualitech Steel Corp.), 2001 U.S. Dist. LEXIS 11768, — B.R. — (S.D. Ind. July 5, 2001) (Hamilton, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01
Reasonable compensation was awarded. Bankr. W.D. Ark. The equity security holder of the chapter 11 debtor corporations filed an objection to the motion for approval of professional fees and expenses for counsel to the trustee. The firm, including attorneys, paralegals and law clerks, had assisted the trustee during the 14-year pendency of the case. The bankruptcy court granted the fee request in part, holding that counsel to the trustee was entitled to reasonable compensation under section 330 for the professional services provided. The court considered the special skills and experience of counsel, the quality of representation, the novelty and complexity of issues and the results obtained. The court declined to award the firm a fee enhancement, noting that the complexity of the cases lay with the administration of the estates, not with the legal issues or legal performance of counsel to the trustee.In re NWFX, Inc., 2001 Bankr. LEXIS 802, — B.R. — (Bankr. W.D. Ark. June 22, 2001) (Fussell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.04
Grant of relief was upheld on appeal. E.D. Pa. The chapter 13 debtor appealed an order of the bankruptcy court that granted his landlord relief from the automatic stay, permitting the landlord to proceed with the eviction of the debtor and his family. Prior to the debtor’s filing, the landlord had mailed a written demand for the debtor to vacate the premises and obtained a state court order for possession and judgment. On appeal, the debtor argued that because the landlord did not provide him with 60-days’ notice of nonrenewal as required under the lease, the lease was renewed automatically for an additional year. The district court affirmed, holding that the bankruptcy court properly granted the landlord relief from the automatic stay. The landlord’s letter, the order of possession and the motion to lift the stay constituted adequate notice to the debtor of the landlord’s intention to terminate the lease.Floyd v. Clark, 2001 U.S. Dist. LEXIS 11828, 266 B.R. 61 (E.D. Pa. May 31, 2001) (Surrick, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
Debtor’s sublessee could not assert administrative claim for relocation expenses. B.A.P. 9th Cir. An entity that subleased office space from the chapter 11 debtor in possession filed an administrative claim based on the debtor’s alleged postpetition breach of the sublease. After the debtor’s plan was confirmed, the plan trustee objected to the sublessor’s administrative claim and moved for summary judgment. The bankruptcy court granted the trustee’s motion based on its conclusion that section 365(d)(3) applied only to debtors as lessees and not to debtor as lessors. The Ninth Circuit B.A.P. affirmed. The B.A.P. also held that the sublessee was not entitled to an administrative claim in the amount of its relocation costs. The court acknowledged that as a matter of law, a nondebtor party to an executory contract with a debtor is entitled to an administrative claim equal to the value of any postpetition benefit conferred on the estate before assumption or rejection of that contract. However, in this case, the sublessee sought recovery of its relocation costs which, the court reasoned, provided no benefit to the estate.Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.), 2001 Bankr. LEXIS 919, 264 B.R. 578 (B.A.P. 9th Cir. July 16, 2001) (Russell, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.06
Debtors failed to establish undue hardship. Bankr. D. Idaho The chapter 7 debtors commenced an adversary proceeding seeking a declaration that the debtor husband’s student loans were dischargeable pursuant to section 523(a)(8). As the result of an injury, the debtor husband lost part of the use of his right hand and had difficulty finding work in the field in which he was trained. He also suffered from a genetic disorder which required occasional medical attention. The debtor wife was not employed, preferring to stay at home until her youngest child reached school age. The debtors sought and were granted numerous forbearances on the loans and never explored alternative repayment programs. The bankruptcy court granted a partial discharge of the accrued interest and other charges only, holding that although the debtors did not have the necessary income to maintain a minimal standard of living, and while their predicament was likely to continue into the future, they could not show that they made good faith attempts to pay their student loan debts. The court noted that the debtors received a large worker’s compensation settlement and tax refund prior to their filing, but failed to use any of the funds to repay their student loans.England v. United States (In re England), 2001 Bankr. LEXIS 1001, 264 B.R. 38 (Bankr. D. Idaho July 3, 2001) (Pappas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Trustee was entitled to disgorgement of fees paid to law firms. Bankr. M.D. Fla. The debtor was an orthopedic medical provider with several affiliates that had common shareholders, officers and directors. Prior to October 1996, more than 40 patients sued the debtor and one of the affiliates for malpractice. The suit was pending when the debtor filed its chapter 11 petition on October 29, 1996. Law Firm A represented the affiliate prepetition, and one of the attorneys with the firm petitioned the bankruptcy court for authorization to represent the debtor in possession. The firm did not disclose its representation of the nondebtor affiliates. The attorney then joined Law Firm B, which petitioned for substitution, stating that it had not previously represented the debtor. Subsequently, the trustee filed a motion for disgorgement, alleging that both firms continued to render services to nondebtor affiliates and had violated disclosure requirements. The court granted the disgorgement motions for the firms’ violation of section 327. When a settlement figure for disgorgement was reached, the court granted its approval, reasoning that the pendency of the motions would pose a roadblock to confirmation, and because the settlement was likely to assist the chapter 11 process. The court had rejected the argument that section 327 was violated only when harm to the estate was demonstrated.In re Gulf Coast Orthopedic Ctr., 2001 Bankr. LEXIS 966, 265 B.R. 326 (Bankr. M.D. Fla. June 29, 2001) (Paskay, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:327.04
Sale of property free and clear of liens required consent. Bankr. M.D. Fla. One of the consolidated chapter 11 debtors filed a motion pursuant to section 363(f) to sell an easement on its real estate holdings free and clear of any liens or encumbrances. The proposed purchaser was a corporation that would, after acquiring the easement, construct a natural gas pipeline on the property. The amount encumbering the land was far in excess of the proposed sales price. The debtor argued that, notwithstanding the absence of unanimous consent, the sale should be approved because section 363(f)(5) permitted a sale free and clear of liens if the entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. Specifically, the debtor asserted that the purchaser had the power of condemnation for the purpose of acquiring easements and that, by virtue of this eminent domain power, the creditors could be compelled to accept money in satisfaction of their secured liens. The bankruptcy court denied the motion, holding that the sale pursuant to section 363(f) was based on unanimous consent, which did not exist because of objections by lienholders. In re Mulberry Corp., 2001 Bankr. LEXIS 971, 265 B.R. 468 (Bankr. M.D. Fla. July 3, 2001) (Paskay, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.06
Debt arising from alleged securities law violations was not excepted from discharge. 11th Cir. The creditor appealed an order of the district court affirming the bankruptcy court’s dismissal of his complaint, in which he sought to have a claim arising from alleged securities law violations deemed nondischargeable under section 523(a)(2)(A). The creditor maintained an investment account with a brokerage firm, of which the chapter 11 debtor was the president, sole shareholder and principal securities executive. The debtor did not handle the creditor’s account; instead, it was allegedly mismanaged fraudulently by two brokers who were employees of the firm. The creditor contended that the alleged fraud of the employees could be imputed to the debtor under section 20(a) of the Securities Exchange Act, so as to render the claim nondischargeable by the debtor. The bankruptcy court held that, because the creditor did not allege that the debtor committed actual fraud, he failed to state a claim of nondischargeability. The Court of Appeals for the Eleventh Circuit affirmed, holding that liability under section 20(a) of the Securities Exchange Act was insufficient to impute culpability to the debtor so as to render the liability nondischargeable under section 523(a)(2)(A). The court noted that liability under section 20(a) of the Securities Exchange Act was not equivalent to liability under the common law of agency or respondeat superior.Hoffend v. Villa (In re Villa), 2001 U.S. App. LEXIS 18376, — F.3d — (11th Cir. August 15, 2001) (Anderson, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Motion for leave to appeal was denied. M.D. Ala. The debtor filed a motion for leave to appeal the bankruptcy court’s order disapproving of a proposed settlement between the debtor and a mass tort class of claimants. The bankruptcy court had concluded that the settlement was flawed because it did not adequately protect the interests of the tort claimants. The district court denied the motion for leave to appeal, holding that the debtor failed to show substantial grounds for the appeal. The court noted that because the settlement did not dispose of all claims brought by the tort plaintiffs, interlocutory review would needlessly delay the case and waste judicial resources.Turner v. Tri-State Plant Food, Inc. (In re Tri-State Plant Food, Inc.), 2001 U.S. Dist. LEXIS 11995, 265 B.R. 450 (M.D. Ala. August 8, 2001) (Dement, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.07