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 16, 2002

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

Collier Bankruptcy Case Summaries

ABI Members, click here to get the full opinion.

Debtor in possession's motion to incur debt secured by senior lien denied due to failure to provide adequate protection for existing IRS liens. Bankr. D. Conn. PROCEDURAL POSTURE: The debtor filed a chapter 11 petition under the Bankruptcy Code. In a revised motion, the debtor filed as debtor in possession and sought authorization pursuant to 11 U.S.C. § 364(d) to incur debt secured by a senior mortgage to a creditor. The creditor was the federal government and it held two prepetition federal income tax liens on all of the debtor's assets. The creditor filed an objection to the motion. OVERVIEW: The creditor claimed that the debtor did not provide adequate protection for the tax liens on the property when they were primed by the proposed first mortgage. The debtor asserted that it required the loan to complete construction of houses on the property. The debtor had contested the validity of the tax liens and litigation was pending in a district court. The debtor presented evidence that while the debtor remained in the bankruptcy, it could not otherwise secure loans from local lending institutions, but that the interest and other terms of the proposed loan were similar to those that an institutional lender would likely impose. The creditor argued that the record did not support a finding that a sufficient equity would exist upon completion to protect the tax liens. The debtor, for adequate protection, neither proposed cash payments to the creditor nor additional or replacement liens. The debtor was not providing the creditor with the equivalent of the creditor's interest in the property when an unspecified portion of the proposed loan was to fund the debtor's operating non-construction expenses and fees. The debtor could not proceed with the motion under section 364(d). In re Seth, 2002 Bankr. LEXIS 761, 281 B.R. 150 (Bankr. D. Conn. July 10, 2002) (Krechevsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:364.05[2]

Letter of credit proceeds were not property which could be used by debtor or its trustee. Bankr. D. Del. PROCEDURAL POSTURE: Debtor filed a complaint against defendant bank alleging the bank improperly drew on a letter of credit ('LC') in breach of the LC and a prior order of the court, and that the bank failed to account for certain funds which were deposited into an account. The debtor alleged the LC proceeds were property the debtor could use under 11 U.S.C. § 363, and were subject to turnover under 11 U.S.C. § 542. The bank moved to dismiss. OVERVIEW: Under the language of the LC in the context of the prior order, a question existed as to whether the bank's draft and certification in support of the draw fairly represented the facts. Thus, dismissal of the breach of contract and improper draw claims was improper. The bank acknowledged that determining whether there were any collected funds on deposit in a particular account to pay any claim, let alone determining the amount of such funds if any existed, was impossible. But, the section 542 turnover claim failed, as the LC proceeds were not estate property under 11 U.S.C. § 541 and thus not subject to turnover under 11 U.S.C. § 542 as property that the debtor could use under 11 U.S.C. § 363. The debtor's equitable interests in breach of contract claims did not alter the result. The debtor's interest in the missing deposits was liquidated and undisputed. That the funds were subject to a hold had no bearing on the allegations that the deposits were never credited to the account. Also, the fact that the debtor admitted that a portion of the deposits belonged to its liquidators did not alter the debtor being a party in interest under Fed. R. Civ. P. 17(a). Hechinger Inv. Co. of Del., Inc. v. Allfirst Bank (In re Hechinger Inv. Co. of Del.), 2002 Bankr. LEXIS 774, - B.R. - (Bankr. D. Del. July 29, 2002) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.01

Creditor who had begun but not completed repossession of debtor's vehicle prior to bankruptcy denied relief from stay. Bankr. E.D. Va. PROCEDURAL POSTURE: A secured creditor repossessed the debtor's car early on the same day the debtor filed her chapter 13 petition. The creditor moved for relief from the automatic stay under 11 U.S.C. § 362(d)(1), arguing that the repossession before the bankruptcy extinguished the debtor's interest in the vehicle under Va. Code Ann. § 8.9A-609, -619. The debtor argued she could cure the default under 11 U.S.C. § 1322(b)(3) and redeem the car under her plan. OVERVIEW: The debtor needed the car to work and make the plan payments. The creditor had not executed a transfer statement or applied for a certificate of title. The argument that Va. Code Ann. § 8.9A-619(c) gave the creditor the right to acquire full title before disposition was contradicted by the statute. The debtor had the right of redemption under Va. Code Ann. § 8.9A-623; it was not an intangible property right separate from an interest in the car itself. The debtor had both legal and equitable ownership, subject only to the lien and the default remedies. Any surplus after the creditor's sale had to be paid to the debtor, which was inconsistent with the notion that the debtor had no form of property interest in the car or at best only bare legal title. Looking at Va. Code Ann. §§ 46.2-633, -615, in conjunction with the U.C.C., the court held the term 'repossession,' as used in Va. Code Ann. § 46.2-633, did not mean 'instantly upon taking possession,' but referred to the entire repossession and disposition process. The exercise of the right of redemption was precisely what the debtor's plan proposed to do. The creditor was adequately protected as required by 11 U.S.C. § 361. Tidewater Fin. Co. v. Moffett (In re Moffett), 2002 Bankr. LEXIS 760, - B.R. - (Bankr. E.D. Va. July 8, 2002) (Mitchell, B.J.).

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

Proposal to arbitrate claims which plan provided would be tried or settled in court was denied as an attempt to modify the plan. 5th Cir. PROCEDURAL POSTURE: Debtor in bankruptcy, its affiliates, and claimants appealed from an order of the United States District Court for the Eastern District of Texas upholding a bankruptcy court's determination denying the debtor's request to liquidate the bankruptcy claims through binding arbitration. OVERVIEW: A confirmed plan of reorganization provided that certain claims against the chapter 11 debtor and its nondebtor affiliates would be resolved in a court of competent jurisdiction and determined by settlement or final judgment. The debtor, its affiliates, and the claimants later requested the bankruptcy court's approval of a proposed agreement to liquidate the claims through binding arbitration. At issue following the bankruptcy court denial of the request for binding arbitration was a subject matter jurisdiction challenge by appellees, the insurers, and the substantive issue of whether the proposed agreement constituted an impermissible attempt to modify a 'substantially consummated' plan of reorganization under 11 U.S.C. § 1127(b). The court of appeals found that the bankruptcy court had jurisdiction because the challenge pertained to the plan's implementation or execution and satisfied the test for post-confirmation jurisdiction. The court likewise agreed that the motion was appropriately viewed as an attempt to 'modify' the plan in violation of 11 U.S.C. § 1127(b) and would alter the parties' rights, obligations, and expectations under the plan. United States Brass Corp. v. Travelers Ins. Group, Inc., 2002 U.S. App. LEXIS 15351, - F.3d - (5th Cir. July 31, 2002) (Duhe, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1127.01

Creditor's complaint for determination of dischargeability of debt denied for failure to comply with federal and local rules. Bankr. N.D. Ill. PROCEDURAL POSTURE: A creditor filed a complaint against the debtor to determine the dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A), (B), alleging fraud. The debtor filed a motion for summary judgment pursuant to Fed. R. Civ. P. 56 and Fed. R. Bankr. P. 7056, but failed to file a statement of undisputed material facts as required by N.D. Ill. Bankr. R. 402.M. OVERVIEW: The debtor's failure to filed a 402.M statement of material facts as to which he contended there were no genuine issues was fatal to his motion. The bankruptcy court noted that the United States Court of Appeals for the Seventh Circuit had upheld strict application of local rules regarding motions for summary judgment. As Rule 402.M specifically provided, the movant's failure to file a statement of material facts was grounds for denial for the motion. The rigorous requirements of the rule were not arbitrary or petty, but rather were enacted in order to aide the court in ascertaining the factually supported claims from those which are defenseless. The motion for summary judgment was denied for the debtor's failure to comply with the procedural requirements of the rule.Harris Bank Oakbrook Terrace v. Corrigan (In re Corrigan), 2002 Bankr. LEXIS 763, - B.R. - (Bankr. N.D. Ill. July 18, 2002) (Squires, B.J.).

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

ABI Members, click here to get the full opinion.

Sale of debtors' property was not a preferential transfer as there was no antecedent debt or debtor-creditor relationship with purchaser. Bankr. N.D. Ill. PROCEDURAL POSTURE: The debtors filed for relief under chapter 13 of the Bankruptcy Code and filed an adversary action against a purchaser to avoid a transfer as fraudulent pursuant to 11 U.S.C. § 548(a)(1) and as a preferential payment under 11 U.S.C. § 547(b). The proceeding was dismissed and the debtors filed a motion to vacate the dismissal, as did the purchaser. The purchaser also filed a renewed motion for summary judgment. The court vacated the dismissal. OVERVIEW: The debtors owned real property which was to be sold at a sheriff's sale pursuant to a foreclosure judgment. The debtors claimed that the property transfer to the purchaser rendered them insolvent and was for less than a reasonably equivalent value. The court found that to obtain relief under 11 U.S.C. § 548(a)(1)(B), the debtors were required to establish not only that the transfer was for less than a reasonably equivalent value, but also that they were insolvent at the time of the transfer or became insolvent as a result of the transfer. The court found that a genuine issue of material facts existed with respect to the element of the debtors' insolvency. There was no evidence regarding the value of what was given and received in the transfer. The debtors also sought to avoid the transfer to the purchaser under 11 U.S.C. § 547(b) and claimed that the transaction constituted a mortgage financing and an equitable mortgage. The court found that there was no evidence establishing a debtor-creditor relationship prior to the transfer between the parties, and therefore no evidence identifying any antecedent debt owed by the debtors to the purchaser to satisfy the second element. Steder v. Surplus Prods., Inc. (In re Steder), 2002 Bankr. LEXIS 764, - B.R. - (Bankr. N.D. Ill. July 25, 2002) (Squires, B.J.).

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

ABI Members, click here to get the full opinion.

Dispute between debtor's spouse and lender which would not affect the amount of secured claims did not give rise to 'related to' jurisdiction. N.D. Ill. PROCEDURAL POSTURE: Plaintiff wife filed suit against defendants in state court alleging, among other things, that they fraudulently induced her to execute a mortgage on some real estate to secure a loan defendant bank made to the company headed by the wife's husband. Defendants, who contended that the case was related to a bankruptcy case, removed it to federal court. They then moved to have the case referred to the bankruptcy court. OVERVIEW: The wife had no interest in the husband's company, which was the subject of a bankruptcy case. The bank loaned the company $1.5 million. The wife signed a sheet of paper at the bank, that she was told was just a formality to complete the bank file. The document was, in fact, a signature page that the bank attached to a mortgage on the real property. The wife discovered the lien when she tried to sell the property. If the wife won the suit, the bank's secured claim in the bankruptcy case would have increased from $950,000 to $1.5 million and the wife's claim would have disappeared, leaving a total of $1.5 million in secured claims. If the wife lost the suit, the bank would have kept its $950,000 secured claim and the wife would have kept her $600,000 secured claim, leaving a total of $1.5 million in secured claims. Thus, the total amount of secured claims asserted against the estate would have remained the same, regardless of the outcome of the suit. Therefore, the court found that the suit was not related to the bankruptcy. Because 'related to' jurisdiction was the only purported basis for federal subject matter jurisdiction, the case had to be remanded to state court. Beevers v. N. Shore Cmty. Bank & Trust Co., 2002 U.S. Dist. LEXIS 14112, - B.R. - (N.D. Ill. July 31, 2002) (Plunkett, S.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01[4]

ABI Members, click here to get the full opinion.

Trustees of ERISA plans were entitled to nondischargeable judgment against debtors for breach of fiduciary duties. Bankr. W.D. Ark. PROCEDURAL POSTURE: Defendant debtor filed a voluntary petition with his wife seeking relief under chapter 7 of the Bankruptcy Code. Plaintiffs, trustees for various welfare plans, filed a complaint and alleged that the trustees were entitled to a nondischargeable judgment against the debtor pursuant to 11 U.S.C. § 523(a)(4). The debtor filed an answer to the complaint. The trustees filed a motion for summary judgment, which was denied. OVERVIEW: The court adopted and incorporated into the opinion over 40 stipulated facts filed by the parties. The trustees claimed that the Employee Retirement Income Security Act of 1974 ('ERISA'), 29 U.S.C. §§ 1001-1461, created a requisite technical trust, and that the debtor owed fiduciary duties to the trustees arising from this technical trust, which the debtor breached. The court held that ERISA created fiduciary duties that established the elements required for the creation of a technical trust, and an ERISA fiduciary acted in a fiduciary capacity as contemplated by 11 U.S.C. § 523(a)(4). The court found that the debtor exercised authority or control over the alleged plan assets and it concluded that the debtor was a fiduciary to the trustees. The court also concluded that the unpaid employer contributions to the trustees were plan assets within the meaning of ERISA. The court held that the unpaid contributions were credits, property, or other assets of the trustees and that the debtor breached his fiduciary duties to the trustees by committing defalcation. Hunter v. Philpott (In re Philpott), 2002 Bankr. LEXIS 782, 281 B.R. 271 (Bankr. W.D. Ark. July 31, 2002) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.25

ABI Members, click here to get the full opinion.

Monthly statements warning of repossession of vehicle absent voluntary payments did not violate discharge order. C.D. Cal. PROCEDURAL POSTURE: The United States Bankruptcy Court for the Central District of California ruled that defendant financing company's collection activities did not violate 11 U.S.C. § 524(a)(2) or plaintiff debtor's related bankruptcy discharge. As a result, the bankruptcy court declined to impose what it deemed the sole remedy available to plaintiff debtor, a citation for contempt. Plaintiff debtor appealed. OVERVIEW: Plaintiff contended that defendant violated 11 U.S.C. § 524(a)(2) by sending him monthly billing statements after he received his discharge of debt to compel payment on a debt. The bankruptcy court found defendant sent monthly statements to plaintiff so as 'to facilitate' and 'encourage' payments. The bankruptcy court did not find that such statements were sent to harass or coerce plaintiffs into making involuntary payments. Moreover, although defendant did alter its normal monthly statements in April, November and December 1998, those altered statements commented only that voluntary payments must be timely received by defendant if plaintiff wished to retain possession of the vehicle. The court opined that this heading was an accurate reflection of the law and in no way indicated that defendant sought to enforce the debt as a personal liability of plaintiff. As such, the court held that the statements did not fall within those expressly enjoined by 11 U.S.C. § 524 (a)(2). Ramirez v. GMAC (In re Ramirez), 2002 U.S. Dist. LEXIS 13888, 280 B.R. 252 (C.D. Cal. June 10, 2002) (Matz, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2]

Punitive damages, interest and fees charged against creditor that charged chapter 13 debtors' accounts with undisclosed attorneys fees. Bankr. S.D. Ala. PROCEDURAL POSTURE: In a class action, a chapter 13 debtor challenged a mortgage creditor's charging of debtors' accounts with proof of claim preparation attorney's fees without disclosing the fees, asserting that posting or collecting the fees violated 11 U.S.C. § 506(b), and seeking damages, an injunction, attorney's fees, prejudgment interest, and sanctions. The creditor moved for judgment on partial findings and for a judgment at the close of evidence. OVERVIEW: The creditor had instructed its counsel not to disclose the proof of claim preparation fee on the proofs of claim. The undisclosed fees were improper under 11 U.S.C. § 506(b). Information as to the undisclosed fees could be produced more easily by the creditor. Preconfirmation fees were part of the secured claims in the chapter 13 cases. The proof of claim fee had to be disclosed so that a debtor knew the fee was part of the secured claim. It had had to be included in the arrearage claim portion of the debt so that a debtor could pay the fee through a plan as allowed by 11 U.S.C. § 1322(b)(5). Section 1322(b)(5) gave the debtor options for plan formulation, not the creditor. Because the fees were undisclosed, equitable tolling applied and the statute of limitations was extended back to 1994. Debtors whose cases were converted or dismissed were included in the class. The creditor remained liable regardless of its assignment of the loans. Any fees paid had to be returned. All charges were presumed to be preconfirmation. An injunction, attorney's fees, punitive damages of $2,000,000, and prejudgment interest under 28 U.S.C. § 1961(a) were appropriate under 11 U.S.C. § 105. Harris v. First Union Mortgage Corp. (In re Harris), 2002 Bankr. LEXIS 771, 281 B.R. 327 (Bankr. S.D. Ala. May 10, 2002) (Mahoney, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04

ABI Members, click here to get the full opinion.