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 22, 2003

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

Student loan debt was dischargeable on grounds of undue hardship where debtor could not maintain a minimal standard of living and suffered from persistent health problems. Bankr. W.D.N.Y. PROCEDURAL POSTURE: Plaintiff debtor filed a chapter 7 petition and listed defendant creditor as a scheduled creditor related to student loan debt. The debtor filed an adversary action, pursuant to 11 U.S.C. § 523(a)(8), against the creditor and sought a determination that the student loan debt was dischargeable. OVERVIEW: The court believed that a minimal standard of living would incorporate the procurement of basic health insurance, but the court found that the debtor could not afford medical insurance, and despite health problems, had not visited a physician during the last three or four years. The court applied the three prongs of the Brunner test for undue hardship to determine the nondischargeability of the student loans pursuant to 11 U.S.C. § 523(a)(8). Under the first prong, the court found that the debtor could not maintain a minimal standard of living, even without any payment on account of her student loan. The debtor met the second prong where the debtor’s current state of affairs was likely to persist for a significant portion of the repayment period. The debtor showed good faith related to repayment of her loans, which was the third Brunner test prong. The court found that the debtor’s circumstances generally represented the uncommon situation where repayment of a student loan would constitute an undue hardship under the Brunner test.Armesto v. New York State Higher Educ. Servs. Corp. (In re Armesto), 2003 Bankr. LEXIS 1061, — B.R. — (Bankr. W.D.N.Y. August 21, 2003) (Bucki, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Law firm precluded from acting as counsel for debtors where partner had served as counsel prepetition and had served as an officer of debtor within two years of petition. Bankr. D. Del. PROCEDURAL POSTURE: The debtors sought to retain a law firm as counsel for the debtors. The United States trustee objected to the application, asserting that the firm was not “disinterested” as required by 11 U.S.C. §§ 327(a) and 101(14). OVERVIEW: A partner at the law firm held the position of secretary of several of the debtors within two years of the filing of the bankruptcy petition. The debtors asserted that the firm should not have been disqualified based on that service because, although the partner was the secretary, which was an officer under the debtors’ by-laws, his role was ministerial only and he should not have been considered as an officer. The court concluded that it should not inquire into what role the officer may have played but needed to determine only whether the partner was in fact an officer. In this case, the debtors conceded that fact. The disqualification was not simply because the partner served as counsel to the debtors prepetition, it was because the partner also served as an officer of the debtors within two years of the petition. Therefore, 11 U.S.C. §§ 327(a) and 101(14)(D) precluded the firm’s retention, notwithstanding 11 U.S.C. § 1107(b). Having one member’s independence and disinterestedness impugned because he was an officer had to equally affect the firm’s independence and disinterestedness such that the firm had to be disqualified under 11 U.S.C. § 327(a). In re Essential Therapeutics, Inc., 2003 Bankr. LEXIS 754, 295 B.R. 203 (Bankr. D. Del. June 13, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.14 [back to top]

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Creditor’s claim for repayment of a loan was dischargeable absent evidence that debtor’s failure to repay was willful and malicious. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiff creditor brought a complaint against defendant debtor in which the creditor objected to the dischargeability of his debt. The creditor also moved to dismiss the debtor’s bankruptcy case on the grounds it was a bad faith filing. OVERVIEW: The debtor worked for the creditor, and they became involved in a romantic relationship. After their relationship ended, the creditor asserted that he “loaned” the debtor a significant amount of money and obtained default judgments against the debtor. The debtor filed for bankruptcy. The bankruptcy court found that the monthly checks were not loans because there was no deadline to repay the funds, nor was there an agreed upon repayment schedule or interest rate. Given the debtor’s financial condition and lack of a job, the creditor could not establish the requisite justifiable reliance on any promise to repay. Although the debtor admitted that she promised to repay the $12,000 loan, there was insufficient evidence to establish that, at the time the loan was made, the debtor did not intend to repay it. Therefore, the creditor did not show that the debtor misrepresented her intent to repay the loan. The creditor did not shown the debtor’s actions to be “willful and malicious” for an exception to discharge under 11 U.S.C. 523(a)(6). The debtor had an “honest intention” in filing her petition and thereby met her burden of showing good faith. Webber v. Giarratano (In re Giarratano), 2002 Bankr. LEXIS 1052, — B.R. — (Bankr. D. Del. September 3, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12[2] [back to top]

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In determining whether debtor was insolvent at time of alleged preferential transfer, debtor’s liabilities must be valued at face value. Bankr. D. Del. PROCEDURAL POSTURE: The matter was before the court on the motion filed by plaintiff, the liquidating trustee, for summary judgment in an action to avoid an alleged preferential payment made to defendant individual. OVERVIEW: The liquidating trustee filed a motion for summary judgment in an action to avoid an alleged preferential payment made to the individual. The debtors filed voluntary chapter 11 petitions and their liquidating plan of reorganization was confirmed. All assets of the debtors were transferred to the liquidating trustee and she filed a complaint against the individual to avoid and recover an alleged preferential transfer to the individual. The court granted the motion. The individual conceded that the liquidating trustee had established all elements of 11 U.S.C. § 547(b) except the fourth one, that the debtors were insolvent at the time of the transfer. He stated that the debtors were solvent at that time. The court disagreed and held that for purposes of determining whether a debtor was insolvent under section 547, the liabilities of the debtor must be valued at face value. The individual failed, therefore, to present credible evidence to rebut the presumption in section 547(f) that the debtors in the case were insolvent at the time of the transfer. Hanna v. Crenshaw (In re ORBCOMM Global L.P.), 2003 Bankr. LEXIS 759, — B.R. — (Bankr. D. Del. June 12, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03 [back to top]

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Bankruptcy court lacked jurisdiction over debtor insurance holding company’s preference action under McCarran-Ferguson Act due to potential impairment of state insurance statute. Bankr. D. Del. PROCEDURAL POSTURE: Defendant, a subsidiary of a holding company that owned companies engaged in the business of writing insurance policies, filed a motion to dismiss an adversary proceeding brought against it by plaintiff trustee for the holding company. The trustee initiated the adversarial proceeding, seeking the avoidance and recovery of preferential and/or fraudulent transfers. OVERVIEW: An Ohio court placed the subsidiary under state supervision based on an investigation by the Ohio Department of Insurance (“ODI”), which alleged that the subsidiary’s assets had been transferred and commingled with other holding company entities. Those assets were transferred back to the subsidiary. The Ohio court ordered the subsidiary into statutory rehabilitation, which became liquidation. The holding company trustee filed a proof of claim in the liquidation. Meanwhile, an involuntary chapter 7 petition was filed against the holding company, which was converted to chapter 11. The subsidiary filed a proof of claim against the holding company. The holding company trustee objected and filed an action for avoidance of preferential transfers. In granting the subsidiary’s dismissal motion, the court held that its exercise of subject matter jurisdiction was “reverse preempted” by the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq. The court reasoned that the Bankruptcy Code did not specifically relate to the business of insurance, Ohio Rev. Code § 3903.42 was enacted for the purpose of regulating the business of insurance, and the Bankruptcy Code impaired section 3903.42. Logan v. Credit Gen. Ins. Co. (In re PRS Ins. Group, Inc.), 2003 Bankr. LEXIS 749, 294 B.R. 609 (Bankr. D. Del. June 11, 2003) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02[2] [back to top]

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Court had “related to” jurisdiction over debtor cable provider’s lawsuit against satellite provider that engaged in postpetition solicitation of debtor’s subscribers. Bankr. D. Del. PROCEDURAL POSTURE: Defendant satellite provider filed a motion to dismiss for lack of subject matter jurisdiction debtor cable provider’s adversary proceeding alleging that the satellite provider violated 11 U.S.C. § 362 (a)’s automatic stay provision and causes of action for contempt, tortious interference with contract, tortious interference with prospective business relations, publication of injurious falsehood, defamation by slander, and unfair competition. OVERVIEW: The cable provider filed a chapter 11 petition and continued to operate its cable television business as a debtor in possession. It claimed that the satellite provider violated the automatic stay by soliciting the cable provider’s subscribers and urging them to switch to satellite service because of its financial situation. The satellite provider asserted that its solicitation of the cable provider’s subscribers did not violate the automatic stay because those subscribers were not property of the estate. The court held that the cable provider’s nonbankruptcy law causes of action, if successful, could have significantly impacted the cable provider’s rights, options, and ability to administer the estate. Of importance was the fact that the satellite provider’s solicitation was premised on the bankruptcy filing. Regardless of whether the cable provider’s customers were property of the estate, the satellite provider’s conduct provided a sufficient basis for the cable provider’s nonbankruptcy causes of action to be pursued on a “related to” basis under 28 U.S.C. § 1334(b). Classic Communs., Inc. v. EchoStar Communs. Corp. (In re Classic Communs., Inc.), 2003 Bankr. LEXIS 746, — B.R. — (Bankr. D. Del. May 30, 2003) (Walsh, B.J.).

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

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Tax payments made by debtor to the IRS were not recoverable fraudulent transfers due to the voluntary payment doctrine. D. Md. PROCEDURAL POSTURE: In a chapter 7 bankruptcy proceeding, appellee trustee filed an adversary proceeding, alleging that the Internal Revenue Service was a beneficiary of fraudulent transfers from the debtor on behalf of the debtor’s owner. The bankruptcy court granted the trustee’s motion for summary judgment and denied the summary judgment motion filed by appellant United States. The United States appealed. OVERVIEW: The debtor’s owner and principal officer used the debtor’s corporate funds on three occasions to pay his individual federal tax liabilities. The trustee relied on 11 U.S.C. § 544(b)(1), seeking to avoid the transfers under the Maryland Uniform Fraudulent Conveyance Act. The bankruptcy court determined that the trustee was entitled to recover from the government, as avoidable fraudulent conveyances, the tax payments made by the debtor to the IRS. The district court determined that the bankruptcy court erred in granting summary judgment in favor of the trustee. The trustee’s claim was barred by an immunity, the voluntary payment doctrine, to which governmental units with taxing authority are entitled under Maryland law. Where the taxpayer voluntarily paid the tax, the trustee could not maintain an action against the United States for a tax refund under the MUFCA. The MUFCA was not an exception to the voluntary payment doctrine. United States v. Field (In re Abatement Environmental Res., Inc.), 2003 U.S. Dist. LEXIS 11989, — B.R. — (D. Md. May 27, 2003) (Davis, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09 [back to top]

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Trustee’s sale of liened property could be included among moneys disbursed for purposes of calculating reasonable compensation. N.D. Tex. PROCEDURAL POSTURE: Appellant, commercial group challenged two orders issued by the bankruptcy court which approved the United States trustee’s final report and awarding compensation and reimbursement to appellee chapter 7 trustee. OVERVIEW: The present court first determined whether the bankruptcy court correctly awarded compensation to the trustee for his services as a trustee. Next, the court examined the compensation ceiling and determined whether the compensation was reasonable. The court also decided whether reimbursement for a secretary’s work was correct. The case involved the sale of the property that had a lien against it. The commercial group’s classification of the transfer as a lien assumption and not as a sale skewed the facts. The bankruptcy court held, and the district court agreed, that the trustee was part of the transaction and could count the sale as part of his moneys disbursed. The court knew of no authority in the Fifth Circuit that required payment to actually pass through a trustee’s hands to qualify as moneys disbursed. Although the bankruptcy court stated that it enhanced the lodestar based on the Johnson factors, it did not state which of the factors it used to warrant its enhancement of the lodestar. Accordingly, the Johnson factors could not serve as a basis to enhance the lodestar. Reimbursement was awarded for the actual and necessary expenses for secretarial services. Commercial Finish Group v. Milbank, 2003 U.S. Dist. LEXIS 15338, — B.R. — (N.D. Tex. August 29, 2003) (Lindsay, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:326.02 back to top]

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Voluntarily reduced attorneys’ fees allowed as reasonable after further minor reductions by court. Bankr. N.D. Tex. PROCEDURAL POSTURE: Attorneys for the unsecured creditors’ committee moved for final allowance of compensation and reimbursement of expenses under 11 U.S.C. § 330(a). OVERVIEW: In an effort to comply with its obligation, and in response to the comments of the United States trustee, the attorneys reduced the fee request to $160,868.50, and the expense request to $4,952.49. The trustee agreed that this voluntary reduction addressed concerns about inadequate descriptions of work performed, clumping of time, paralegal rates charged for ministerial tasks, and similar objections. In addition, the voluntary reduction also addressed de minimus charges that should not be billed to a client and staffing levels for particular conferences and meetings. With regard to the time expended and benefit to the estate, the court analyzed the services in light of the exigencies faced by the committee and its counsel. Circumstances necessitated a considerable workload in a compressed time period. The attorneys engaged 116 hours worth of services on plan related matters, including the plan, the trust agreement, an employment agreement, and the voting procedures for the plan. They spent 180 hours investigating assets and potential causes of actions against insiders. Except for certain reductions, the time spent was reasonable and necessary, with a benefit to the estate. In re Avatex Corp., 2003 Bankr. LEXIS 719, — B.R. — (Bankr. N.D. Tex. July 8, 2003) (Felsenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:330.01, .02 [back to top]

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Relief from stay granted to allow state court to determine debtor’s liability for auto accident and whether debtor was intoxicated at the time of the collision. Bankr. S.D. Ohio PROCEDURAL POSTURE: Putative bankruptcy creditors asserted that the debtor was liable for compensatory and punitive damages arising from a collision of the parties’ automobiles. The creditors moved pursuant to 11 U.S.C. § 362(d)(1) for modification of the automatic stay to permit the creditors to pursue state court actions against the debtor. OVERVIEW: The creditors contended that permitting the state actions would involve no expense to the estate since the debtor was represented by his insurer, and would permit the creditors to pursue punitive damages based on the debtor’s alleged intoxication at the time of the collision. The debtor argued that the creditors intended to argue that the debt was not dischargeable and the dischargeability of the debt was a matter for the bankruptcy court. The bankruptcy court held that the most economical use of judicial time and resources was to permit the state court to determine, by use of special verdicts, whether the debtor caused the collision and whether the debtor was intoxicated at the time of the collision. Upon receipt of such verdicts, the bankruptcy could then proceed to determine the dischargeability of the debt. In re Fearn, 2003 Bankr. LEXIS 730, 295 B.R. 240 (Bankr. S.D. Ohio June 17, 2003) (Calhoun, B.J.).

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

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Annuity payments received from estate of debtor’s mother were not akin to future earnings, did not replace lost income and were not exempt. E.D. Mich. PROCEDURAL POSTURE: Plaintiff debtors, a husband and a wife, filed a joint chapter 7 petition. The debtors listed an annuity and claimed it exempt under 11 U.S.C. § 522(d)(10)(E). Defendant trustee filed objections to the claimed exemption. The bankruptcy court found that the annuity did not qualify for exemption under section 522(d)(10)(E). The debtors appealed. The trustee moved to dismiss the appeal. OVERVIEW: The wife’s mother’s will bequeathed the wife a portion of her estate in the form of the annuity. The trustee argued that the annuity did not qualify for an exemption because the right to receive payments was not premised upon illness, disability, death, age, or length of service. The debtors argued that the wife’s benefits were paid on account of her mother’s death and should have therefore qualified for an exemption under 11 U.S.C. § 522(d)(10)(E). However, the court found that the debtors could not have satisfied the requirement that the wife’s payments were replacement for lost income or akin to future earnings, and, thus, the annuity did not qualify for an exemption under section 522(d)(10)(E). Weidman v. Shapiro, 2003 U.S. Dist. LEXIS 15432, — B.R. — (E.D. Mich. August 7, 2003) (Feikens, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10][b] [back to top]

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Debtor who gave 26% of income to charity and protested that it was impossible to study for the bar exam after work and on weekends was not entitled to discharge of student loans. Bankr. N.D. Ohio PROCEDURAL POSTURE: Plaintiff, a chapter 7 debtor, filed suit against defendant creditors seeking to determine the dischargeability of certain student loan debts pursuant to 11 U.S.C. § 523(a)(8). OVERVIEW: After filing for voluntary relief under chapter 7, the debtor commenced an adversary proceeding to discharge her student loan debts from four different creditors. The total student loan debt, including interest, was approximately $130,000.00. The debtor sought a discharge of her student loan debts on the basis of undue hardship. Each creditor countered that her level of undue hardship did not rise to the degree which would allow for the discharge of her student loan obligations. The court found that the debtor had not met her burden to establish undue hardship under 11 U.S.C. § 523(a)(8). The court reasoned that the debtor’s own choices were not prudent. Twenty-six percent of her income goes to charitable causes, and she was making no payments on the student loans. The debtor’s assertion that it was “totally impossible” to study for the bar exam on weekends and after work was incredible. The sole $168.23 payment to one creditor hardly constituted a good faith effort under the third Brunner prong. Moreover, the court reasoned that the debtor was physically and mentally healthy by her own admission with no dependents. Parks v. Graduate Loan Ctr. (In re Parks), 2003 Bankr. LEXIS 764, 293 B.R. 900 (Bankr. N.D. Ohio May 7, 2003) (Baxter, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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