Collier Bankruptcy Case Update September-10-01
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.
September 10, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
Rule 3018(a) Claim was temporarily allowed in a reduced amount for voting purposes.
In re CGE Shattuck, LLC (Bankr. D.N.H.)
2d Cir.
§ 548(a)(1)(B) Brokers’ commissions paid to advance fraudulent scheme were not avoidable.
Balaber-Strauss v. Lawrence (S.D.N.Y.)§ 707(a) Debtor’s attempts to avoid judgment enforcement constituted grounds for dismissal under section 707(a).
Blumenberg v. Yihye (In re Blumenberg) (Bankr. E.D.N.Y.)
3d Cir.
§ 522(d)(5) Debtor who did not have ownership interest in marital residence was not entitled to exemption.
In re Cohen (Bankr. D.N.J.)§ 1307(c) Dismissal was affirmed on appeal.
Lucabaugh v. IRS (In re Lucabaugh) (E.D. Pa.)28 U.S.C. § 1334(b) Motion to dismiss was denied.
Bowers v. Nat’l Health & Safety Corp. (In re Nat’l Health & Safety Corp.) (Bankr. E.D. Pa.)
4th Cir.
§ 365(d)(10) Lease obligations incurred during the first 60 days of the case may be afforded administrative expense status.
Guttman v. Xtra Lease, Inc. (In re Furley’s Transp., Inc.) (Bankr. D. Md.)
5th Cir.
§ 365(c) Partnership agreement was not assumable.
Stumpf v. McGee (In re O’Connor) (5th Cir.)§ 505(a)(1) Bankruptcy court had jurisdiction over setoff dispute.
IRS v. Luongo (In re Luongo) (5th Cir.)§ 523(a)(4) Nondischargeability determination was affirmed.
In re Lapeyre (E.D. La.)§ 1129(b) Objection to plan was sustained.
In re Sentry Operating Co. of Tex., Inc. (Bankr. S.D. Tex.)28 U.S.C. § 1334(c) District court abstained from proceeding.
Lee v. Miller (S.D. Miss.)
6th Cir.
§ 362(a) Injunctive relief was granted.
In re LTV Steel Co. (Bankr. N.D. Ohio)§ 365(d)(3) Although rent came due prepetition, landlords were entitled to prorated share of rent for the month when petition was filed.
In re Travel 2000, Inc. (Bankr. W.D. Mich.)
7th Cir.
§ 510(c) Claim was subordinated.
In re Biscayne Inv. Group (Bankr. N.D. Ill.)§ 541(a)(1) Nature of prepetition retainer was questioned.
In re Production Assocs. (Bankr. N.D. Ill.)§ 544(a)(1) Bankruptcy court erred in holding that spouse had no vested interest in marital property at the time of the petition filing.
Szyszko v. Szyszko (N.D. Ill.)§ 1306(a) Portion of garnished wages was withheld for trustee.
In re Rasberry (Bankr. N.D. Ill.)
8th Cir.
Rule 3001(f) Proof of claim for child support arrears was held presumptively valid.
McDaniel v. Riverside County Dep’t of Child Support Servs. (In re McDaniel) (B.A.P. 8th Cir.)
9th Cir.
§ 522(b)(2)(A) Debtor who supported epileptic daughter was entitled to a higher homestead exemption.
In re Billings (Bankr. N.D. Cal.)
10th Cir.
§ 523(a)(1) Tax was not discharged.
McKowen v. IRS (In re McKowen) (D. Colo.)
11th Cir.
§ 522(b)(2)(A) Court allowed homestead exemption under state constitution and refused to inquire into debtors’ conversion of property to exempt status.
In re Lowery (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.
Claim was temporarily allowed in a reduced amount for voting purposes. Bankr. D.N.H. In order to block confirmation of the chapter 11 plan, a creditor bank purchased the claim of an individual who had performed site work at the debtor’s golf course. The work had been performed pursuant to several contracts and, after difficulties in receiving payment, a compromise agreement under which the debtor was to pay a portion of the obligation. The amount remaining on the obligation was disputed, and an objection to the proof of claim was pending. The bank sought temporary allowance of the claim for voting purposes, and the bankruptcy court held that in light of the contradictory testimony, the lack of documentation and the lack of an evidentiary hearing, the claim was reduced by one-half for voting purposes. After disallowing $6,000 of the $26,000 regarding a dispute over a dump truck, the court determined that, in light of the conflicting claims regarding the terms of the settlement agreement, it would be inequitable to allow the claim in the full amount, but, recognizing the greater credibility of the bank’s version, the court believed that some measure of the claim should be allowed for voting purposes.In re CGE Shattuck, LLC, 2000 Bankr. LEXIS 1847, – B.R. – (Bankr. D.N.H. November 30, 2000) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:3018.01[5]
2nd Cir.
Brokers’ commissions paid to advance fraudulent scheme were not avoidable. S.D.N.Y. The debtors were several entities operated by an individual who utilized those entities as a Ponzi scheme, using new investors’ funds to repay earlier investors, mostly through the sale of fictitious mortgage participations. In 1993, the SEC commenced an action against the individual and the debtors alleging violations of securities laws. Despite the resulting injunction, the debtors continued to violate federal law, and the district court held the individual and the debtors in contempt and appointed a receiver. Shortly thereafter, in April 1997, six creditors filed an involuntary chapter 7 petition against the debtors, and the receiver eventually filed voluntary petitions for additional entities. A permanent trustee was appointed for all cases. In September 1997, the individual pled guilty to mail fraud, was sentenced to prison and was ordered to make restitution in excess of $30 million. The trustee, meanwhile, commenced adversary proceedings against brokers who were hired to originate mortgages and solicit investors for the debtors in the Ponzi scheme, seeking to recover $5 million in commissions paid by the debtor to the brokers, who asserted that they had no knowledge of the fraudulence of the scheme. The bankruptcy court dismissed the adversary proceeding, holding that value passed between the debtors and brokers, thereby defeating the constructive fraud argument. This appeal followed. The district court affirmed, holding that, for the purposes of section 548(a)(1)(B), the debtors received reasonably equivalent value for the commissions paid to the brokers for performing in good faith a facially lawful service, which they did without any knowledge of wrongdoing. The court concluded that because the transfer was equivalent in value, it was not subject to avoidance (citing Collier on Bankruptcy 15th Ed. Revised). Balaber-Strauss v. Lawrence, 2001 U.S. Dist. LEXIS 9458, 264 B.R. 303 (S.D.N.Y. July 9, 2001) (Brieant, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.05[1][b]
Debtor’s attempts to avoid judgment enforcement constituted grounds for dismissal under section 707(a). Bankr. E.D.N.Y. In 1997, a foreign (Great Britain) court entered judgment against the debtor on a breach of contract action in favor of the creditor. In 1998, in the same country, the debtor was adjudged a bankrupt. In 1999, the state (New York) supreme court entered a judgment against the debtor in favor of the same creditor in the approximate amount of $122,000, which recognized the foreign judgment. The debtor was denied leave to appeal and then filed a chapter 11 petition in October 1999, which was soon converted to chapter 7. The trustee filed an adversary proceeding seeking to deny the debtor’s discharge because of alleged destruction of documents, failure to keep documents or to explain the loss of assets, all of which prevented the trustee from pursuing various fraudulent transfer claims. The bankruptcy court held sua sponte that the debtor’s actions justified both bad faith dismissal and 'for cause' dismissal under section 707(a). The court reasoned that: (1) the creditor was the debtor’s only major creditor; (2) the debtor litigated against the recognition of the judgment and failed at every level; and (3) the debtor filed the petition before the creditor could enforce the judgment, thereby frustrating the creditor’s efforts at collection. The court concluded that the debtor had clearly filed his petition to avoid consequences of a previous judgment and impending proceedings, constituting a finding of bad faith that supported dismissal under section 707(a).Blumenberg v. Yihye (In re Blumenberg), 2001 Bankr. LEXIS 822, 263 B.R. 704 (Bankr. E.D.N.Y. June 29, 2001) (Bernstein, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:707.03
3d Cir.
Debtor who did not have ownership interest in marital residence was not entitled to exemption. Bankr. D.N.J. The debtors, who were married, filed a joint chapter 7 petition. The schedules set forth the debtor husband’s one-half fee interest in real property. The debtor husband indicated that the remaining one-half interest was owned by his mother. The debtor wife had no ownership interest in the property. Nonetheless, she claimed an exemption in the property under the 'wild card' provision of section 522(d)(5). The trustee filed a motion seeking denial of that exemption because the wife had no ownership interest. The bankruptcy court granted the trustee’s motion, holding that the wife was not entitled to claim the exemption because she was not a titleholder. The court also addressed the proposition that under state (New Jersey) law, the wife had the right to joint possession of the marital residence and concluded that, because joint possession was the right to share in the value of the titleholder’s interest, it could not be the subject of a separate exemption. In re Cohen, 2001 Bankr. LEXIS 817, 263 B.R. 724 (Bankr. D.N.J. July 10, 2001) (Stripp, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.09[5]
Dismissal was affirmed on appeal. E.D. Pa. The debtor appealed the bankruptcy court’s order dismissing his fourth chapter 13 case with prejudice and prohibiting him from filing another petition for 180 days. During the pendency of the debtor’s first and second cases, the debtor failed to file tax returns, and his cases were dismissed. The debtor voluntarily dismissed his third case. Despite having stipulated in his second case as to the amount of prepetition tax deficiency, the debtor objected to the IRS’s proof of claim filed in his fourth case. After the bankruptcy court entered an order determining the amount of the IRS’s claim, the debtor continued to file various motions, complaints and appeals attacking the final order. The bankruptcy court granted the IRS’s motion to dismiss the fourth case, finding that the debtor filed his petition in bad faith without an intent to reorganize and for the purpose of hindering and delaying the IRS in its attempt to collect the prepetition taxes. The district court affirmed, holding that the bankruptcy court did not abuse its discretion in dismissing the debtor’s fourth chapter 13 case with prejudice under section 1307(c). The court further found that the bankruptcy court did not abuse its discretion by prohibiting further bankruptcy filings by the debtor for the 180-day period.Lucabaugh v. IRS (In re Lucabaugh), 2001 U.S. Dist. LEXIS 9749, – B.R. – (E.D. Pa. June 25, 2001) (Newcomer, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1307.04
Motion to dismiss was denied. Bankr. E.D. Pa. The former principal of a debtor reorganized under chapter 11 had entered into a prepetition agreement in settlement of litigation between the debtor and another claimant, which included a payment obligation of the debtor to the claimant secured by a cash escrow as well as a pledge of certain securities owned by the principal. Because the debtor held the principal’s securities after confirmation of the plan, the principal filed a complaint against the debtor and the claimant, seeking a declaratory judgment that the claimant turn over the pledged stock to him or, in the alternative, that the debtor be enjoined from delivering to the claimant any of the equity interests under the plan. The claimant moved to dismiss the adversary proceeding, asserting that the bankruptcy court had no subject matter jurisdiction over the action. The court denied the motion to dismiss, holding that because the requested relief potentially required modification of the debtor’s duties under the plan, the court had proper subject matter jurisdiction over the dispute. The court noted that since the confirmed plan mandated distribution of the equity units to which the claimant and principal asserted competing rights, the claimant was an indispensable party to the complaint. Bowers v. Nat’l Health & Safety Corp. (In re Nat’l Health & Safety Corp.), 2001 Bankr. LEXIS 811, – B.R. – (Bankr. E.D. Pa. June 26, 2001) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.01[4]
4th Cir.
Lease obligations incurred during the first 60 days of the case may be afforded administrative expense status. Bankr. D. Md. The debtor trucking company leased numerous trailers from the lessor and, under the terms of the lease agreement, the lease obligations were due ten days after the monthly charges were invoiced. After the chapter 11 petition was filed, the debtor ceased making payments to the lessor and, three months later, the case was converted to chapter 7 and a trustee appointed. Ultimately, the lease was rejected, but not before the debtor incurred over $34,000 in rental fees. The lessor sought payment of the charges as an administrative expense. The trustee objected to that request, asserting that since the obligations were all invoiced prior to the 60th day following the filing of the petition, section 365(d)(10) precluded any right to payment. Moreover, the trustee asserted, since section 365 accorded administrative expense status only to obligations arising after the 59th day of the case, by negative implication, the lessor could not recover the rental obligations for any time during the first 60 days. Upon the trustee’s motion for summary judgment, the bankruptcy court first rejected the trustee’s theory that the obligations arose upon invoicing and determined that the obligations came due under the contract on the due date. Thereafter, the bankruptcy court held that the fact that section 365(d)(10) creates an administrative expense for the lease obligations arising after 60 days from the order from relief did not preclude the lessor from seeking the lease obligation due within the first 60 days as an administrative expense pursuant to section 503(b). Looking to the language of the statute, the legislative history, and, after rejecting the trustee’s case authority, the court concluded that the lessor was entitled to an opportunity to prove that the lease obligations arising within the first 60 days of the bankruptcy case were actual and necessary costs of preserving the estate. Accordingly, the trustee’s motion for summary judgment was denied.Guttman v. Xtra Lease, Inc. (In re Furley’s Transp., Inc.), 2001 Bankr. LEXIS 778, 263 B.R. 733 (Bankr. D. Md. June 12, 2001) (Derby, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04[6][c]
5th Cir.
Partnership agreement was not assumable. 5th Cir. The chapter 11 trustee appealed the district court judgment in favor of the individual debtor’s business partners. The trustee had filed an adversary proceeding against the debtor’s partners, seeking a declaration that they were violating the partnership agreement by engaging in various interest transfers. Although the plan had been confirmed, the partnership agreement was never assumed by the trustee. The bankruptcy court held the agreement passed through the bankruptcy to the liquidating trust managed by the trustee. The district court reversed, in part, holding that the agreement was not assumable and passed through the bankruptcy unaffected, resulting in the trustee having no right to assert claims regarding the interest transfers or to claim a right to distributions made pursuant to them. The Court of Appeals for the Fifth Circuit affirmed the district court’s ruling, holding that because the partnership agreement was not assumed by the trustee and was only binding upon the debtor, only the debtor, not the trustee, could claim a right under the agreement to distributions and to determine the validity of interest transfers. The court noted that the trustee only asserted a right to proceed as a partner under the agreement, not to proceed against the partnership to recover the value of the debtor’s interest in it (citing Collier on Bankruptcy, 15th Ed. Revised).Stumpf v. McGee (In re O’Connor), 2001 U.S. App. LEXIS 15954, – F.3d – (5th Cir. July 16, 2001) (Barksdale, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.06
Bankruptcy court had jurisdiction over setoff dispute. 5th Cir. After the IRS set off the debtor’s income tax overpayment for a prepetition tax year against a discharged tax liability, the debtor moved to reopen her bankruptcy case and amended her schedules to list the overpayment as an exempt asset. She then filed an adversary proceeding against the IRS to recover her tax overpayment. The bankruptcy court permitted the debtor to exempt the overpayment, and the district court reversed. On appeal, the IRS asserted that the bankruptcy court lacked jurisdiction or should have abstained from hearing the matter. The Court of Appeals for the Fifth Circuit rejected the IRS’s argument, holding that the bankruptcy court’s decision not to abstain was proper because the resolution of the issues was governed predominantly by bankruptcy law. The court noted that the debtor was not requesting the bankruptcy court to determine the amount of her tax liability, but instead whether her tax overpayment, by virtue of exemption or dischargeability, was protected from setoff by the IRS (citing Collier on Bankruptcy, 15th Ed. Revised).IRS v. Luongo (In re Luongo), 2001 U.S. App. LEXIS 15986, – F.3d – (5th Cir. July 18, 2001) (Benavides, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:505.01
Nondischargeability determination was affirmed. E.D. La. The individual debtor appealed the bankruptcy court’s order holding certain debts to a corporation in which he was shareholder and director nondischargeable. During his tenure as president of the corporation, the debtor caused the corporation to loan funds to himself and his business in excess of the amount approved by corporation resolution. After the corporation filed for bankruptcy protection, the debtor also collected management fees without court approval and reimbursed himself for expenses allegedly incurred on the corporation’s behalf. Because the debtor was unable to document any of the expenses, the bankruptcy court found that he improperly charged the corporation for his secretarial, automobile and travel costs. The bankruptcy court also found that the debtor’s taking of the unauthorized loans was a breach of his fiduciary duty to the corporation. The district court affirmed, holding that the debtor’s breach of the common law fiduciary duty to the corporation and stockholders was sufficient to satisfy the technical trust requirements of section 523(a)(4). The court held that the bankruptcy court properly found that section 523(a)(4) provided a 'recklessness' standard for breach of fiduciary duty.In re Lapeyre, 2001 U.S. Dist. LEXIS 9806, – B.R. – (E.D. La. July 3, 2001) (Clement, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Objection to plan was sustained. Bankr. S.D. Tex. The equity investors of the debtor voted against the chapter 11 plan and objected to plan confirmation. The investors asserted that payment of 100 percent of trade creditors’ claims was not fair and equitable and unfairly discriminated against other unsecured creditors, including themselves, who received one percent of their claims. Creditors in both classes had equal rank under state law and equal distribution priorities under the Code. The debtor argued that the investors had no right to a distribution because the senior secured creditor was merely sharing its proceeds with the trade creditors, a class which otherwise would receive nothing. The bankruptcy court denied confirmation of the plan, holding that the plan discriminated unfairly by proposing to pay a greater distribution to the class of creditors of equal rank. The court noted that there was no justification for the proposed 99 percent payout differential between the two classes of creditors (citing Collier on Bankruptcy, 15th Ed. Revised). In re Sentry Operating Co. of Tex., Inc., 2001 Bankr. LEXIS 846, 264 B.R. 850 (Bankr. S.D. Tex. June 19, 2001) (Steen, B.J.).
Collier on Bankruptcy, 15th Ed. Revised
District court abstained from proceeding. S.D. Miss. The chapter 13 debtors filed a motion before the district court for discretionary abstention and remand to the state (Mississippi) court of a case they filed for injuries sustained in an automobile accident. The case had been removed to the district court after the defendants learned that the debtors had filed a petition on the same day they filed their personal injury cause of action. The defendants opposed the motion and argued that the district court had exclusive jurisdiction over the case because the negligence and loss of consortium claims brought by the debtors were the property of the bankruptcy estate. The district court granted the debtors’ motion, holding that it was in the interests of justice for the district court to abstain pursuant to 28 U.S.C. § 1334(c) and to remand the action pursuant to 28 U.S.C. § 1452(b) to the state court. The court noted that the trial of state law created issues and rights was more properly adjudicated by a state court, especially since there was no basis for federal jurisdiction independent of section 1334, and the litigation could be timely completed in state court.Lee v. Miller, 2001 U.S. Dist. LEXIS 9898, 263 B.R. 757 (S.D. Miss. March 19, 2001) (Wingate, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05
6th Cir.
Injunctive relief was granted. Bankr. N.D. Ohio The chapter 11 debtor filed a motion seeking enforcement of the automatic stay and injunctive relief against the state (Minnesota) taxing authorities. After the debtor filed its petition, the taxing authorities mailed jeopardy collection notices and filed tax liens against the debtor’s property. The debtor sought an order requiring the removal of the liens and enjoining the taxing authorities from taking further collection actions. The taxing authorities argued that the Eleventh Amendment barred the debtor’s motion because the state had not waived its sovereign immunity. The bankruptcy court granted the debtor’s motion, holding that because the debtor only sought prospective injunctive relief to correct an ongoing violation of federal law, the motion was not barred by the Eleventh Amendment. The court noted that pursuant to the doctrine set forth in Ex parte Young, 209 U.S. 123 (1908), federal courts were permitted to enjoin state officials to conform their conduct to requirements of federal law, notwithstanding any impact on the state treasury.In re LTV Steel Co., 2001 Bankr. LEXIS 816, 264 B.R. 455 (Bankr. N.D. Ohio July 2, 2001) (Bodoh, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03, .04
Although rent came due prepetition, landlords were entitled to prorated share of rent for the month when petition was filed. Bankr. W.D. Mich. The debtor, who occupied retail space in shopping centers and a building managed by the creditors, filed a chapter 11 petition on February 2, 2001. All the leases provided that rent was due on the first of the month. The creditors filed a motion to compel payment of rent. The debtor argued that its February 2001 rent obligation originated on February 1, and consequently did not fall within the postpetition, prerejection period under section 365(d)(3). The creditors argued that the 'proration' approach should apply, under which a debtor is required to pay those amounts that pertain to benefits realized during the postpetition, prerejection period regardless of when the payment became due. The bankruptcy court ruled for the creditors, holding that, even though the creditors’ claims arose prepetition, the obligations under the lease arose postpetition, and that the creditors were entitled to be paid on a pro rata basis. The court reasoned that the debtor’s obligation arose each day in the month of February until it vacated the premises. In re Travel 2000, Inc., 2001 Bankr. LEXIS 813, 264 B.R. 444 (Bankr. W.D. Mich. May 10, 2001) (Stevenson, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04[3][f]
7th Cir.
Claim was subordinated. Bankr. N.D. Ill. The limited partner of the chapter 11 debtor objected to the claim of the principal of the debtor’s corporate general partner, alleging that the principal used the assets of the debtor for his own benefit in an amount in excess of the amount of his claim. Because the debtor never had sufficient funds to pay the principal a salary, the principal utilized funds from the debtor’s bank account to pay his personal expenses. The principal also commingled personal and partnership funds and failed to keep accurate books and records of the debtor. The bankruptcy court overruled the objection to the claim, holding that although the principal’s claim was allowed in full, it was equitably subordinated to the claim of the limited partner. The principal had engaged in inequitable conduct that resulted in injury to the creditors of the debtor’s estate. The court noted that the principal’s insider status and control of the debtor conferred an unfair advantage on him because he received money he was not entitled to.In re Biscayne Inv. Group, 2001 Bankr. LEXIS 836, – B.R. – (Bankr. N.D. Ill. May 29, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.05
Nature of prepetition retainer was questioned. Bankr. N.D. Ill. After the debtor converted from chapter 11 to chapter 7, the bankruptcy court ordered all professionals who had performed services for the debtor to file their final application for compensation. The debtor instead filed an application to employ the same counsel as had represented the debtor during the chapter 11 case. The attorney’s affidavit stated that he had received a retainer prior to the debtor’s petition date for services rendered or to be rendered in connection with the case. The bankruptcy court ordered an evidentiary hearing, holding that it was necessary to review the actual retainer agreement to decide whether the retainer was intended to become the attorney’s property or was intended as security for future services. The court declined to adopt the majority of courts’ position that all prepetition retainers were property of the estate, but instead deferred to state (Illinois) law to determine the nature of the retainer.In re Production Assocs., 2001 Bankr. LEXIS 814, 264 B.R. 180 (Bankr. N.D. Ill. July 11, 2001) (Schmetterer, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.07[2]
Bankruptcy court erred in holding that spouse had no vested interest in marital property at the time of the petition filing. N.D. Ill. The debtor and his spouse were residing in Poland when, in 1980, the debtor alone moved to the United States. In 1986, the debtor obtained a divorce by publication. In 1988, the spouse and the child of the marriage moved to the United States and began residing with the debtor. The spouse was unaware of the divorce decree. A second child was born in 1991. In 1996, the debtor moved out of the marital residence, and the spouse filed for divorce. In 1997, the divorce decree obtained by the debtor was vacated on the grounds that the spouse’s due process rights were violated. In 1999, the debtor filed a chapter 11 petition, later converted to chapter 7. The bankruptcy court entered an order modifying the stay to allow the spouse to proceed in state (Illinois) court to pursue claims for alimony, maintenance and child support. That order also stated that the spouse could not enforce any orders entered by the state court against estate property without further order. In 2000, the state appellate court reversed the vacatur of the 1986 decree. On remand, the circuit court, in January 2001, found that the spouse was a putative spouse who had the same rights as a legal spouse under state law. Meanwhile, in 2000, the debtor had filed a motion to compel the sale of the marital residence, which was granted in February 2001. The bankruptcy court found that, because no distribution award was granted by the state court prepetition, the spouse, if a putative spouse, could have only a general unsecured claim against the estate and would be denied any proprietary rights, and that the spouse had only inchoate rights that were cut off by the trustee’s status as a hypothetical lien creditor. This appeal followed. The district court reversed and remanded, holding that the spouse had a vested interest in the marital property prior to the petition filing. The court found that the bankruptcy court incorrectly relied on authority from states other than Illinois. Under the laws of Illinois, a spouse’s interest in marital property vested at the time the divorce petition was filed. Moreover, the district court found that Illinois law did not require a spouse to establish a separate recorded interest to protect that interest and concluded that the bankruptcy court should have waited to rule on the sale of the residence until the state court determined the spouse’s interest in the property. Szyszko v. Szyszko, 2001 U.S. Dist. LEXIS 9527, – B.R. – (N.D. Ill. July 5, 2001) (Darrow, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Portion of garnished wages was withheld for trustee. Bankr. N.D. Ill. The chapter 13 debtor’s employer filed a motion to determine whether the automatic stay applied to the prepetition and postpetition garnished wages of the debtor so as to prohibit the employer from delivering those funds to the judgment creditor. The judgment creditor had obtained a judgment against the debtor and thereafter initiated postpetition wage deduction proceedings. The debtor subsequently filed a petition and submitted a plan that proposed to pay a 100 percent dividend to creditors. The bankruptcy court ordered the employer to turn over a portion of the funds pending confirmation of the plan, holding that section 1306(a)(2) precluded the enforcement of the wage deduction order as to the postpetition wages of the debtor. The funds were ordered to be turned over to the trustee upon confirmation. The prepetition withheld wages were not property of the estate and were ordered to be turned over to the judgment creditor.In re Rasberry, 2001 Bankr. LEXIS 835, 264 B.R. 495 (Bankr. N.D. Ill. July 10, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1306.02
8th Cir.
Proof of claim for child support arrears was held presumptively valid. B.A.P. 8th Cir. The chapter 13 debtor filed a proof of claim on behalf of the creditor, the county department of child support services, for $9,250, representing the debtor’s prepetition child support debt. Thereafter, the creditor filed an untimely proof of claim on the same debt, but in the amount of $11,212.42. The debtor filed an objection to the second proof of claim, seeking to disallow any amount in excess of the sum set forth in the first proof of claim. The bankruptcy court overruled the debtor’s objection, and this appeal followed. The debtor argued that the creditor’s proof of claim overstated the amount owed because it probably included postpetition interest. The B.A.P. for the Eighth Circuit affirmed, holding that, pursuant to Rule 3001(f), the creditor’s proof of claim was presumptively valid and that the debtor failed to present substantial evidence to rebut that validity.McDaniel v. Riverside County Dep’t of Child Support Servs. (In re McDaniel), 2001 Bankr. LEXIS 806, – B.R. – (B.A.P. 8th Cir. July 11, 2001) (Hill, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:3001.09
9th Cir.
Debtor who supported epileptic daughter was entitled to a higher homestead exemption. Bankr. N.D. Cal. The chapter 13 debtor provided room and board for his unmarried, pregnant and epileptic daughter. Based upon this obligation, the debtor claimed the higher homestead exemption provided under state (California) law. The chapter 13 trustee objected to the confirmation, asserting that the debtor was not entitled to the higher exemption. The bankruptcy court held that since he supported a child who had a physical handicap, the debtor was entitled to claim the higher homestead exemption.In re Billings, 2001 Bankr. LEXIS 779, 262 B.R. 88 (Bankr. N.D. Cal. February 26, 2001) (Jaroslovsky, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10
10th Cir.
Court allowed homestead exemption under state constitution and refused to inquire into debtors’ conversion of property to exempt status. Bankr. M.D. Fla. The debtors resided on a citrus farm that was composed of five contiguous parcels of real property that the debtors purchased in separate transactions between 1978 and 1988. In 2000, the debtors filed a chapter 7 petition and claimed the entire property exempt under the state (Florida) constitution. Both the trustee and a creditor filed objections to the claim of exemption. The creditor argued that the debtors should not be able to take the exemption because they enlarged the property with the specific intent to hinder, delay or defraud creditors by converting nonexempt parcels into exempt homestead property. The debtors filed a motion for summary judgment seeking allowance of the exemption. The bankruptcy court ruled for the debtors. The court examined the state constitution’s homestead exemption and found no exceptions for either a fraudulent conversion or for the purported conversion of nonexempt to exempt property and refused to look behind the exemption to determine how the debtors acquired the property. In re Lowery, 2001 Bankr. LEXIS 812, 262 B.R. 875 (Bankr. M.D. Fla. June 6, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.02