Collier Bankruptcy Case Update September-23-02

Collier Bankruptcy Case Update September-23-02

 


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 23, 2002

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

 

1d Cir.

§ 330 Attorneys' fees in chapter 13 case reduced as excessive relative to traditional hourly fees and benefit and necessity of services rendered.
In re Argento (Bankr. D. Mass.)

§ 503(b)(1)(A) Creditor's postpetition bandwith management services for debtor's website were valid administrative expenses.
In re Talk City, Inc. (Bankr. D. Mass.)

Rule 2016(b) Attorneys' fees' reduced for failure to properly disclose postpetition payments received from debtor.
In re Argento (Bankr. D. Mass.)


2d Cir.

§ 326(a) Trustee could not claim maximum allowable commission on fees paid to special counsel absent performance of extraordinary service to estate.
In re Butts (Bankr. W.D.N.Y.)

§ 362 Advanced stage of sexual harassment case and lack of prejudice to other creditors justified relief from stay to allow action to proceed.
Stranz v. Ice Cream Liquidation, Inc. (In re Ice Cream Liquidation, Inc.) (Bankr. D. Conn.)

§ 544 Debtor's fraudulent conveyance claim dismissed on pleadings in adversary proceeding could be raised by trustee.
Sharp Int'l Corp. v. State Street Bank & Trust Co. (In re Sharp Int'l Corp.) (Bankr. E.D.N.Y.)


3d Cir.

§ 330 Attorneys' fees awarded to secured creditor must bear reasonable relationship to amount of claim.
In re Green Valley Beer (Bankr. W.D. Pa.)

§ 503(b) Royalty payments due consultant pursuant to agreement with debtor were not administrative claims.
In re Waste Sys. Int'l, Inc. (Bankr. D. Del.)

§ 506(b) Oversecured creditor's claim for attorney's fees reduced to the extent that it was unreasonable and for delay in providing information to debtor.
In re Green Valley Beer (Bankr. W.D. Pa.)

§ 522(f)(1)(A) Portion of debtor's interest in property not encumbered by mortgage or exemption subject to unavoidable judgment lien.
Miller v. Sul (In re Miller) (3d Cir.)


5th Cir.

§ 548 'Loan payments' to corporate officers for undocumented loans which rendered debtor insolvent properly held fraudulent.
Randall v. Erstmark Capital Corp. (In re Erstmark) (N.D. Tex.)


6th Cir.

§ 349(a) Debtor who willfully transferred assets after trustee's request for turnover barred from refilling for six years after dismissal.
In re Johnson (Bankr. W.D. Ky.)

§ 706(a) Debtors who allegedly lied about assets and concealed information allowed to convert from chapter 7 to chapter 13 over trustee's objection.
In re Gibbons (Bankr. N.D. Ohio)

§ 1111(a) Late filing of proofs of claim by creditors with undisputed claims allowed due to insufficient notice of bar date order.
In re ATD Corp. (Bankr. N.D. Ohio)


7th Cir.

§ 707(b) Chapter 7 case properly dismissed for substantial abuse where chapter 13 could be sustained absent payments on SUVs debtor sought to retain.
Costello v. Bodenstein (N.D. Ill.)


8th Cir.

§ 363(b) Non-judicial sale of debtor's real property was subject to court approval.
Brink v. Payless Cashways, Inc. (In re Payless Cashways, Inc.) (B.A.P. 8th Cir.)


9th Cir.

§ 502(b)(1) IRS proofs of claim against individual debtors for partnership debt disallowed where the only timely assessment was against the partnership.
U.S. v. Galletti (In re Galletti) (9th Cir.)


11th Cir.

§ 106 Section 106 abrogates the states' 11th Amendment immunity and is unconstitutional.
Venable v. Acosta (In re Venable) (Bankr. M.D. Fla.)

§ 506(b) Mortgagee's attorneys fees must be disclosed as part of secured claim.
Slick v. Norwest Mortgage Inc. (In re Slick) (Bankr. S.D. Ala.)

§ 523(a)(1)(C) Bankruptcy court erred in discharging debtor's IRS liability.
U.S. v. Spiwak (In re Spiwak) (S.D. Fla.)



Collier Bankruptcy Case Summaries

1st Cir.

Attorneys' fees in chapter 13 case reduced as excessive relative to traditional hourly fees and benefit and necessity of services rendered. Bankr. D. Mass. PROCEDURAL POSTURE: The debtors' attorney filed an application for compensation and application for fee seeking total fees of $12,837.50 and no expense reimbursement is requested. The application and the attorney's disclosure of compensation pursuant to Fed. R. Bankr. P. 2016(b) stated that $1,500.00 was paid as a retainer, although the application also indicated that $2,700.00 had also been paid postpetition. The debtors filed their case under chapter 13. OVERVIEW: The bankruptcy court first noted that the attorney failed to file a supplemental statement to disclose the postpetition payments. The postpetition receipt of money directly from the debtors, and the source of those funds, should have been disclosed. In attempting to calculate a reasonable fee amount, the bankruptcy court adopted a standard that incorporated both the 'initial fixed fee standard' for what were the routine services inherent in any routine chapter 13 case and the lodestar method for those services that exceeded the routine tasks. There was no document that clearly stated what the attorney charged as his initial fixed fee although the bankruptcy court assumed the $1,500.00 charge was for the routine services. The bankruptcy court found this reasonable. For the non-routine services that the attorney performed, the bankruptcy court found reasonable the $150.00 per hour rate and the $200.00 per hour rate for time spent in court. The bankruptcy court then found some of the hours spent on certain tasks excessive and reduced the fees. The court also reduced the fees for the attorney's failure to disclose. In re Argento, 2002 Bankr. LEXIS 799, - B.R. - (Bankr. D. Mass. August 1, 2002) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:330.01

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Creditor's postpetition bandwith management services for debtor's website were valid administrative expenses. Bankr. D. Mass. PROCEDURAL POSTURE: Creditor presented seven requests for allowance and payment of administrative expense claims. The claims arose from the creditor's operation and then turnover to the debtor of debtor's web site during the initial five months of the debtor's bankruptcy under chapter 11. The claims totaled $442,547.23; the debtor objected to all but $25,992.00 of the total. OVERVIEW: The debtor's contented that the charges were not administrative expenses within the meaning of 11 U.S.C. § 503(b)(1)(A) because they were not provided at the debtor's request. The bankruptcy court agreed. The debtor had demanded turnover of the web site and was at all times entitled to turnover as expeditiously as possible. Instead, the creditor operated the web site by its own decision, not under obligation or at the debtor's request. Thus, the services and costs were prepetition claims and not administrative expenses. Further, costs associated with the turnover were also not administrative expenses because the parties' prepetition agreement contemplated a turnover. In negotiating the transfer of the web site to the debtor, the creditor agreed that, until the debtor could procure bandwidth from another source, the creditor would continue to provide bandwidth. The creditor also provided bandwidth management services during this period. The bankruptcy court found this was a valid administrative expense. The court deferred ruling on the creditor's request for intellectual property licensing fees. In re Talk City, Inc., 2002 Bankr. LEXIS 795, - B.R. - (Bankr. D. Mass. July 17, 2002) (Kenner, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:503.06

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Attorneys' fees' reduced for failure to properly disclose postpetition payments received from debtor. Bankr. D. Mass. PROCEDURAL POSTURE: The debtors' attorney filed an application for compensation and application for fee seeking total fees of $12,837.50 and no expense reimbursement is requested. The application and the attorney's disclosure of compensation pursuant to Fed. R. Bankr. P. 2016(b) stated that $1,500.00 was paid as a retainer, although the application also indicated that $2,700.00 had also been paid postpetition. The debtors filed their case under chapter 13. OVERVIEW: The bankruptcy court first noted that the attorney failed to file a supplemental statement to disclose the postpetition payments. The postpetition receipt of money directly from the debtors, and the source of those funds, should have been disclosed. In attempting to calculate a reasonable fee amount, the bankruptcy court adopted a standard that incorporated both the 'initial fixed fee standard' for what were the routine services inherent in any routine chapter 13 case and the lodestar method for those services that exceeded the routine tasks. There was no document that clearly stated what the attorney charged as his initial fixed fee although the bankruptcy court assumed the $1,500.00 charge was for the routine services. The bankruptcy court found this reasonable. For the non-routine services that the attorney performed, the bankruptcy court found reasonable the $150.00 per hour rate and the $200.00 per hour rate for time spent in court. The bankruptcy court then found some of the hours spent on certain tasks excessive and reduced the fees. The court also reduced the fees for the attorney's failure to disclose. In re Argento, 2002 Bankr. LEXIS 799, - B.R. - (Bankr. D. Mass. August 1, 2002) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
9:2016.15, 16

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2d Cir.

Trustee could not claim maximum allowable commission on fees paid to special counsel absent performance of extraordinary service to estate. Bankr. W.D.N.Y. PROCEDURAL POSTURE: Chapter 7 debtors, a husband and wife, challenged the reasonableness of the trustee's request for an allowance of commissions equal to the maximum amount allowable under 11 U.S.C. § 326(a). OVERVIEW: During the administration of their bankruptcy estate, the debtors settled a medical malpractice case for an amount substantially in excess of that required to pay all claims against the debtors and expenses of administering the estate. The trustee had minimal involvement in the suit and its settlement, but sought the maximum commissions on sums disbursed to special counsel in the malpractice suit. The bankruptcy court declined to award the amount of commissions that the trustee requested because that amount was not reasonable under 11 U.S.C. § 330, and recalculated the amount based on the distributions that would have been necessary to effect a full repayment of all creditors, but only a partial commission on the remainder of the distributions. The estate was not complicated. The trustee did not perform any extraordinary service relating to the malpractice claim. Because of the surplus, the trustee had no need to evaluate its adequacy from the perspective of creditors. Nor did the trustee need to exercise any special diligence on behalf of the debtors, who supported the settlement. There were no complex disputes regarding claims. In re Butts, 2002 Bankr. LEXIS 794, 281 B.R. 176 (Bankr. W.D.N.Y. July 19, 2002) (Bucki, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:326.01

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Advanced stage of sexual harassment case and lack of prejudice to other creditors justified relief from stay to allow action to proceed. Bankr. D. Conn. PROCEDURAL POSTURE: Debtor was a corporation in chapter 11 bankruptcy. Plaintiffs were former employees who sued the debtor for sexual harassment under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., in federal district court. Plaintiffs moved for relief from automatic stay to permit them to prosecute to judgment their claim against the debtor. The debtor objected to the motion, the employees' claim. OVERVIEW: The issue for the bankruptcy court was whether a grant of relief from stay and abstention under 28 U.S.C. § 1334(c) in order to allow the prepetition proceedings to proceed in a federal district court outside of the district in respect of a 'personal injury tort claim' would have been an invalid exercise by the bankruptcy court of the exclusive jurisdiction enjoyed by the district court for the district to set venue in respect of such claims. The bankruptcy court concluded that the sexual harassment counts constituted a 'personal injury tort claim.' As such, the bankruptcy court found it lacked jurisdiction pursuant to 28 U.S.C. § 157(b)(5) to try the claim. Granting stay relief would not have unduly prejudiced the interests of other creditors. The litigation had been pending before the district court for almost five years and motions for summary judgment where pending. The district court was therefore more advanced with respect to the merits of the matter than the bankruptcy court. If the stay of pre-trial proceedings remained in effect, the employees would have had to bear the cost and delay inherent in duplicating those proceedings in the bankruptcy court. Stranz v. Ice Cream Liquidation, Inc. (In re Ice Cream Liquidation, Inc.), 2002 Bankr. LEXIS 801, 281 B.R. 154 (Bankr. D. Conn. July 31, 2002) (Weill, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:362.01

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Debtor's fraudulent conveyance claim dismissed on pleadings in adversary proceeding could be raised by trustee. Bankr. E.D.N.Y. PROCEDURAL POSTURE: Debtors, a corporation and its subsidiary, filed an adversary proceeding in bankruptcy court against defendant bank. The debtors alleged the bank aided and abetted officers of the debtors in committing fraud against its shareholders. The bank moved to dismiss for failure to state a claim upon which relief could be granted pursuant to Fed. R. Civ. P. 12(b)(6) and for failure to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b). OVERVIEW: The debtor's officers breached their fiduciary duties to the debtor and its creditors by causing the debtor to raise many millions of dollars through misrepresentations and fraudulent fund transfers. With respect to the an aiding and abetting claim, the bank argued that the complaint did not adequately allege that the bank had actual knowledge of the officers' breach of fiduciary duty, or that the bank induced or participated in the breach. The debtor tried to impute knowledge to the bank by analogizing events surrounding the debtor to another corporate fraud where the bank was a lender. This, at best, alleged constructive knowledge, which was insufficient to impose aiding and abetting liability under New York law. With respect to the inducement or substantial assistance allegations, the fact that the bank failed to return telephone calls from investors did not amount to 'substantial assistance.' The debtor also alleged that the bank received a fraudulent transfer or constructive fraudulent transfer because a payment was made while the debtor was insolvent. The appellate court disagreed; the payment was made for fair consideration it was payment for an antecedent debt. Sharp Int'l Corp. v. State Street Bank & Trust Co. (In re Sharp Int'l Corp.), 2002 Bankr. LEXIS 797, 281 B.R. 506 (Bankr. E.D.N.Y. July 30, 2002) (Craig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:544.01

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3d Cir.

Attorneys' fees awarded to secured creditor must bear reasonable relationship to amount of claim. Bankr. W.D. Pa. PROCEDURAL POSTURE: An oversecured creditor, a bank, sought approval of counsel fees of $24,610 and expenses of $1,104 under 11 U.S.C. § 506(b). The debtor objected, arguing that (1) the bank was adequately protected, (2) the fees were unreasonable, (3) the services were lumped together, and (4) the fees should be reduced by amounts the debtor paid in United States trustee's fees due to the bank's delay in providing information resulting in delay in proposing a plan. OVERVIEW: The was sufficient collateral to protect the bank's claim nearly three times over and it received regular adequate protection payments. Under 11 U.S.C. § 506(b) the bank had to meet the billing standards of 11 U.S.C. § 330. The compensation had to bear a rational relationship to the amount of the secured claim. The bank's delay in providing materials resulted in additional fees. Staffing the case with 24 professionals was excessive. The amount requested was excessive in relation to an $82,000 debt secured by collateral worth three times that much. But, the debtor's past defaults required more involvement than might otherwise have been needed. One category, listed as general bankruptcy matters, lacked enough meaningful description for a finding of reasonableness. It was disallowed in full. The fees were reduced by 30 percent on disclosure statement and plan issues due to the bank's delay. Being unable to ascertain whether the debtor could have confirmed its plan and avoid the trustee's fees, the court found the debtor's objection was not the appropriate vehicle for addressing whether the bank should be held responsible for the trustee's fees as a sanction. In re Green Valley Beer, 2002 Bankr. LEXIS 779, 281 B.R. 253 (Bankr. W.D. Pa. July 29, 2002) (Fitzgerald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:330.01

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Royalty payments due consultant pursuant to agreement with debtor were not administrative claims. Bankr. D. Del. PROCEDURAL POSTURE: The debtor and several affiliates filed a petition under chapter 11 of the Bankruptcy Code. A consultant filed a proof of administrative claim. Later the consultant and his children filed an adversary action against the debtor and its directors. The debtor filed a motion to dismiss and for sanctions. The consultant filed a response and a cross-motion. The debtor objected to the consultant's response and cross-motion. OVERVIEW: The consultant had sold a company to the debtor in exchange for stock. The debtor and the consultant executed a consulting agreement. The court found that neither the debtor nor the consultant had terminated the agreement. The consultant had sought to classify the royalty payments due under the agreement as an administrative claim pursuant to 11 U.S.C. § 503(b)(1)(A). The debtor claimed that the agreement was not an executory agreement because it had expired by its own terms. The court found that the time for testing whether there were material unperformed obligations on both sides was when the bankruptcy petition was filed. The mere fact that the agreement itself had expired did not render the issue moot. The obligation to make the royalty payments arose when the agreement was executed prepetition. The fact that the prepetition obligation was dependent upon the occurrence of a postpetition event did not make the obligation an administrative claim. Instead, the obligation was a contingent claim. Whether the event occurred or not determined the amount of the contingent claim, not its priority. In re Waste Sys. Int'l, Inc., 2002 Bankr. LEXIS 768, 280 B.R. 824 (Bankr. D. Del. July 19, 2002) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:503.05

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Oversecured creditor's claim for attorney's fees reduced to the extent that it was unreasonable and for delay in providing information to debtor. Bankr. W.D. Pa. PROCEDURAL POSTURE: An oversecured creditor, a bank, sought approval of counsel fees of $24,610 and expenses of $1,104 under 11 U.S.C. § 506(b). The debtor objected, arguing that (1) the bank was adequately protected, (2) the fees were unreasonable, (3) the services were lumped together, and (4) the fees should be reduced by amounts the debtor paid in United States trustee's fees due to the bank's delay in providing information resulting in delay in proposing a plan. OVERVIEW: The was sufficient collateral to protect the bank's claim nearly three times over and it received regular adequate protection payments. Under 11 U.S.C. § 506(b) the bank had to meet the billing standards of 11 U.S.C. § 330. The compensation had to bear a rational relationship to the amount of the secured claim. The bank's delay in providing materials resulted in additional fees. Staffing the case with 24 professionals was excessive. The amount requested was excessive in relation to an $82,000 debt secured by collateral worth three times that much. But, the debtor's past defaults required more involvement than might otherwise have been needed. One category, listed as general bankruptcy matters, lacked enough meaningful description for a finding of reasonableness. It was disallowed in full. The fees were reduced by 30 percent on disclosure statement and plan issues due to the bank's delay. Being unable to ascertain whether the debtor could have confirmed its plan and avoid the trustee's fees, the court found the debtor's objection was not the appropriate vehicle for addressing whether the bank should be held responsible for the trustee's fees as a sanction. In re Green Valley Beer, 2002 Bankr. LEXIS 779, 281 B.R. 253 (Bankr. W.D. Pa. July 29, 2002) (Fitzgerald, B.J.).

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

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Portion of debtor's interest in property not encumbered by mortgage or exemption subject to unavoidable judgment lien. 3d Cir. PROCEDURAL POSTURE: Appellant debtor sought review of a decision of the United States District Court for the District of Pennsylvania, which affirmed a decision of the bankruptcy court. The bankruptcy court determined that a portion of a judgment lien possessed by the judgment creditor was not avoidable under 11 U.S.C. § 522(f)(1)(A). OVERVIEW: The debtor owed a one-half interest in a house with another person who was not a party to the bankruptcy and who was not the debtor's spouse. The house was valued at $100,000 total with an outstanding mortgage of $74,703. The debtor claimed an exemption in the home of $8,075. The judgment creditor had a judgment lien against the debtor. The bankruptcy court determined that the debtor's one-half interest in the property was encumbered by one half of the mortgage, leaving a portion of $4,573 which was not avoidable and which could be applied toward the creditor's judgment lien. The district court affirmed the bankruptcy court, and the court affirmed. The court rejected the debtor's contention that the entire mortgage obligation needed to be applied to the debtor's interest in the property, which would result in no funds being left to apply toward the judgment lien. The court held that it was illogical to net the total outstanding secured debt balance attributable to both the debtor and the joint tenant against the debtor's one-half interest in the property. Such an application essentially provided a windfall to the debtor and disregarded the rights of other creditors. Miller v. Sul (In re Miller), 2002 U.S. App. LEXIS 3, 299 F.3d 183 (3d Cir. August 6, 2002) (Scirica, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:522.11

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5th Cir

'Loan payments' to corporate officers for undocumented loans which rendered debtor insolvent properly held fraudulent. N.D. Tex. PROCEDURAL POSTURE: The bankruptcy court awarded damages to appellee corporate debtor, finding that appellant corporate officers fraudulently transferred sums from the debtor to themselves and breached their fiduciary duties to the debtor's creditors by making the transfers. The officers appealed from the judgment. OVERVIEW: The officers received payments from the debtor which the officers argued were loan repayments. The district court determined that the bankruptcy court did not err in finding that the transfers were fraudulent. The officers presented no documentation of the loans, and the bankruptcy court found that the officers actually owed the debtor. Also, the bankruptcy court properly found that the debtor was insolvent at the time of the transfers. In addition, the officers breached their fiduciary duty to the debtor and its creditors by making the transfers. Finally, the bankruptcy court correctly calculated the amount to be awarded as damages for the fraudulent transfers, not on the breach of fiduciary duty findings. Randall v. Erstmark Capital Corp. (In re Erstmark), 2002 U.S. Dist. LEXIS 14493, - B.R. - (N.D. Tex. August 2, 2002) (Lynn, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:548.01

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6th Cir.

Debtor who willfully transferred assets after trustee's request for turnover barred from refilling for six years after dismissal. Bankr. W.D. Ky. PROCEDURAL POSTURE: After the trustee filed a motion to compel debtor to turn over to the trustee certain estate property, debtor moved to dismiss her bankruptcy petition. The trustee moved for an extension of the time to file a nondischargeability complaint. OVERVIEW: After debtor filed her bankruptcy petition, the trustee faxed a letter to her directing debtor to turn over $5,621.55 of estate property. When the trustee did not receive the money requested from debtor, the trustee filed a motion to compel debtor to turnover the property. At a hearing, debtor offered no reasonable explanation for her failure to pay the money over to the trustee. She simply stated that she spent the money on living expenses and private school tuition. Documents debtor later filed, in response to a court directive, established that she had spent the majority of the estate's money after the trustee notified her of her duty to turnover the money. The trustee filed a recommendation asking the court to dismiss debtor's case with prejudice and bar her from filing another bankruptcy petition for six years. The court found debtor's conduct to have been particularly egregious, as debtor 'blatantly' spent property of the estate, postpetition, after the trustee notified her in writing of the duty to provide the trustee with the money. Therefore, the court found, merely prohibiting debtor from filing another petition for 180 days was an insufficient punishment. In re Johnson, 2002 Bankr. LEXIS 783, 281 B.R. 269 (Bankr. W.D. Ky. July 29, 2002) (Stosberg, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:349.01[1]

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Debtors who allegedly lied about assets and concealed information allowed to convert from chapter 7 to chapter 13 over trustee's objection. Bankr. N.D. Ohio PROCEDURAL POSTURE: Debtors moved to convert their chapter 7 case to a chapter 13 case. OVERVIEW: The bankruptcy trustee had filed an adversary proceeding asking that debtors be denied discharge. The trustee alleged that debtors failed to list their assets completely and that they concealed other information critical to the administration of the estate. In opposing the motion to convert, the trustee argued that the right to convert was not absolute in cases where debtors had allegedly lied about their assets, concealed material information from the trustee, and moved to convert to nullify the trustee's objection to discharge. The court, however, found that the language of 11 U.S.C. § 706(a) was unambiguous, the plain meaning was easily ascertained from its language, and the legislative history was consistent with a straightforward reading of the section; therefore, the court applied the section as written, and allowed debtors to convert their chapter 7 case to a proceeding under chapter 13. In re Gibbons, 2002 Bankr. LEXIS 792, 280 B.R. 833 (Bankr. N.D. Ohio July 16, 2002) (Morgenstern, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
6:706.02

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Late filing of proofs of claim by creditors with undisputed claims allowed due to insufficient notice of bar date order. Bankr. N.D. Ohio PROCEDURAL POSTURE: The debtor filed a chapter 11 petition under the Bankruptcy Code and listed two creditors (the creditors), among others, on its schedules. The court entered an order establishing a bar date and a notice requiring creditors to file claims. Neither of the creditors objected to the order. The court later entered an order confirming the debtor's first amended plan of reorganization. The creditors filed motions seeking payments of their claims. OVERVIEW: The debtor listed the creditors' claims as fixed and undisputed. The debtor also prepared the bar date order, which the court later found was not sufficiently specific and detailed. The debtor commenced making distributions to creditors who had physically filed proofs of claim prior to the deadline specified in the bar date order, but did not make any distribution to the creditors. The debtor claimed that under the terms of the bar date order, all unsecured creditors were required to file proofs of claim. The debtor argued that because the creditors had failed to file proofs of claim, the debtor did not need to make any distributions. The court disagreed. The court found that the creditors did not receive sufficient notice of their need to physically file proofs of claim. The bar date order was ambiguous. The court found that nowhere in the bar date order did it state that the provisions of 11 U.S.C. § 1111(a) no longer applied. The court noted that the bar date order's citation to Fed. R. Bankr. P. 3003 further supported the interpretation that the creditors were not required to physically file proofs of claim. In re ATD Corp., 2002 Bankr. LEXIS 804, 278 B.R. 758 (Bankr. N.D. Ohio March 1, 2002) (Bodoh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
7:1111.02

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7th Cir.

Chapter 7 case properly dismissed for substantial abuse where chapter 13 could be sustained absent payments on SUVs debtor sought to retain. N.D. Ill. PROCEDURAL POSTURE: Appellant-debtors appealed from an order of the United States Bankruptcy Court for the Northern District of Illinois granting the motion of appellee United States trustee dismissing their petition as a substantial abuse of the provisions of chapter 7 of the Bankruptcy Code, pursuant to 11 U.S.C. § 707(b). OVERVIEW: The trustee in bankruptcy asserted that the debtors' case was abusive because they sought to retain two new high end sport utility vehicles ('SUVs'), arguing that if the debtors did not have payments on the SUVs, they would be able to repay unsecured creditors under chapter 13 of the Bankruptcy Code. The bankruptcy court conducted an evidentiary hearing on the motion, orally stated its finding that the debtors were favoring the SUVs creditor over unsecured debt they would otherwise be able to pay. The court granted the trustee's motion and entered an order dismissing the debtors' case. Although different courts of appeal defined substantial abuse somewhat differently, the district court held that the bankruptcy court had followed the correct procedure by adopting a totality of the circumstances analysis, whereby the debtors' ability to repay debts was considered in the full context of the case. The bankruptcy court had not abused its discretion in engaging in such a factual analysis. Costello v. Bodenstein, 2002 U.S. Dist. LEXIS 14421, - B.R. - (N.D. Ill. July 24, 2002) (Coar, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
6:707.04

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8th Cir.

Non-judicial sale of debtor's real property was subject to court approval. B.A.P. 8th Cir. PROCEDURAL POSTURE: Appellee debtor filed a petition under chapter 11 of the Bankruptcy Code. Appellant, an individual, sought approval of real property which he purchased from the debtor. The bankruptcy court approved the transaction, but at a higher price than the individual had originally bid in a non-judicial procedure. The individual appealed from the United States Bankruptcy Court for the Western District of Missouri. OVERVIEW: The debtor used a real estate broker to sell the real property, but this plan was never subjected to court review or approval, nor were the creditors given notice or an opportunity to comment. The panel found that the sales contract stated that the sale was subject to court approval. The bankruptcy court had made a correct decision, based on judicial precedent, to rebid the matter. The panel found the individual's arguments were without merit. The bankruptcy court had the discretion to hold an auction in the face of a competing higher bid. The court did not abuse its discretion in finding that any expectation the individual had in the first sale did not rise to a level warranting an approval of his bid without conducting a judicial auction. The sale of the bankruptcy estate's property was clearly subject to court approval under the express terms of 11 U.S.C. § 363(b). Brink v. Payless Cashways, Inc. (In re Payless Cashways, Inc.), 2002 Bankr. LEXIS 805, 281 B.R. 648 (B.A.P. 8th Cir. August 8, 2002) (Kressel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:363.02

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9th Cir.

IRS proofs of claim against individual debtors for partnership debt disallowed where the only timely assessment was against the partnership. 9th Cir. PROCEDURAL POSTURE: Appellees, debtors, filed chapter 13 bankruptcy petitions. Appellant United States through its agency the Internal Revenue Service ('IRS') filed proofs of claim against the debtors for unpaid employment taxes assessed the debtors' partnership. The bankruptcy court disallowed the claim. The United States District Court for the Central District of California affirmed the bankruptcy court decision. The United States appealed. OVERVIEW: The IRS filed proofs of claim against the debtors for the unpaid taxes that the IRS had assessed against the partnership. The debtors objected to the claims on the ground that the IRS had assessed only the partnership and not the individual debtors and that the statute of limitations for assessment had run. The IRS conceded that it had not assessed the debtors within the usual three-year limit, but argued that its timely assessments against the partnership extended the time for collection of the taxes from the debtors. The court of appeals held that the IRS's claims were properly disallowed. The assessment against the partnership was not an assessment against the individual debtors, because they were separate taxpayers. Consequently, the assessment against the partnership extended the statute of limitations only for the partnership; it had no effect on the ordinary three-year statute of limitations for the debtors. California partnership law did not aid the IRS because it did not obtain a judgment against the debtors, and it was too late to do so because the applicable statute of limitations was three years. U.S. v. Galletti (In re Galletti), 2002 U.S. App. LEXIS 15906, - F.3d - (9th Cir. August 8, 2002) (Kleinfeld, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.03[2]

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11th Cir.

Section 106 abrogates the states' 11th Amendment immunity and is unconstitutional. Bankr. M.D. Fla. PROCEDURAL POSTURE: The debtor filed a complaint alleging the defendants, a city police department and its officers, violated the automatic stay under 11 U.S.C. § 362 by failing to intervene in a postpetition re-possession of the debtor's vehicle. The defendants moved to dismiss, arguing Eleventh Amendment immunity, that 11 U.S.C. § 106 was unconstitutional as applied to the defendants, and that the claims were barred by the doctrine of sovereign immunity. OVERVIEW: The city police department and its police officers were agents of the State of Florida, and the Eleventh Amendment was a bar against any claims against them in the bankruptcy court. The Defendants had not in any way unequivocally expressed a waiver of immunity. There was no cause of action for damages against the defendants for acting in their official capacities for misconduct arising directly under the due process clause of the Florida Constitution, and if such an action did exist it would be barred by sovereign immunity. The police officers' activities were clearly discretionary. The police officers did nothing more than follow the long-standing police department policy of not interfering with civil disputes between private citizens. That policy resulted from the city's exercise of its executive power. The court held that Congress' attempt in enacting 11 U.S.C. § 106 to abrogate the states' Eleventh Amendment immunity was unconstitutional. Congress' bankruptcy powers granted in U.S. Const. art. I, section 8, did not confer on Congress the power to abrogate a state's Eleventh Amendment rights. The suit was barred by the Eleventh Amendment. Venable v. Acosta (In re Venable), 2002 Bankr. LEXIS 770, 280 B.R. 916 (Bankr. M.D. Fla. July 25, 2002) (Proctor, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:106.01

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Mortgagee's attorneys fees must be disclosed as part of secured claim. Bankr. S.D. Ala. PROCEDURAL POSTURE: Debtors, a certified class, argued that creditor could not charge attorneys fees to debtors' accounts at any time during a bankruptcy case without disclosure of those fees. Creditor, a mortgage company, moved for a judgment on partial findings pursuant to Fed. R. Bankr. P. 7054. Creditor also moved for a verdict at the close of the evidence. OVERVIEW: Creditor argued that the fees were not treated a 'defaults,' and therefore, did not need to be cured under 11 U.S.C. § 1322(b)(5). However, because debtors did not know the fee existed, the fee could not be a part of the secured claim and could not be collected after discharge. Also, creditor could not decide for debtors what arrearage or costs debtors may or may not pay in the plan by picking and choosing which 11 U.S.C. § 506(b) costs to disclose. Creditor also argued that debtors could remain liable for some debts that could not be or were not included in creditor's proof of claim. However, the court held that if the fee was not disclosed, it was discharged. Creditor then contended that the statute of limitations had run on some debtors. However, the fact that the fees were completely undisclosed made an equitable tolling argument especially appropriate. Debtors were awarded a refund or expungement of the undisclosed fees plus prejudgment interest. Slick v. Norwest Mortgage Inc. (In re Slick), 2002 Bankr. LEXIS 772, 280 B.R. 722 (Bankr. S.D. Ala. May 10, 2002) (Mahoney, C.B.J.).

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

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Bankruptcy court erred in discharging debtor's IRS liability. S.D. Fla. PROCEDURAL POSTURE: Appellant, the United States, sought review of the judgment of the United States Bankruptcy Court for the Southern District of Florida, discharging appellee debtor's income tax liabilities for certain years and denying the motions of the United States to dismiss and for judgment on the pleadings. OVERVIEW: The debtor beneficially owned a condominium. He enabled a corporation owned by a trust funded by his father to acquire the mortgage on his condominium. The debtor caused initiation of a foreclosure proceeding, which he later abandoned on discovering that the United States did not have a lien against the property. In a suit by the United States, the district court entered a judgment against the debtor and his wife for unpaid taxes, establishing that federal tax liens applied to the condominium. Prior to foreclosure, the debtor filed bankruptcy. The bankruptcy court held that the debtor's tax obligations were discharged for lack of evidence of willful tax evasion, despite the argument of the United States that the tax liabilities were nondischargeable under 11 U.S.C. § 523(a)(1)(C), as the debtor did not have the wherewithal to pay his tax liabilities. The district court found this ruling to be clearly erroneous in light of the debtor's tax return for the last year in question, which reported a substantial tax liability. The court remanded the matter to examine tax liability for that year, and to determine, under the totality of circumstances, whether there was willful evasion. U.S. v. Spiwak (In re Spiwak), 2002 U.S. Dist. LEXIS 14530, - B.R. - (S.D. Fla. June 10, 2002) (Moore, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.07[4]

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