Collier Bankruptcy Case Update September-24-01
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 24, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 552(b)(1) Security interest in law partnership’s contingency fee agreement survived partner’s bankruptcy and the firm’s dissolution and attached to postpetition payment of fee.
Cadle Co. v. Schlichtmann (1st Cir.)
2d Cir.
§ 503(b)(1)(A) Rental arrears were an administrative expense.
In re Babbs (Bankr. S.D.N.Y.)Rule 7004(b)(9) Motion to dismiss adversary complaint for improper service denied when debtor failed to notify court of proper address and new counsel.
Wallace v. Shapiro (In re Shapiro) (Bankr. E.D.N.Y.)
3d Cir.
§ 542(b) Payment made by debtor prepetition was deemed a loan and thus recoverable by trustee.
U. S. Physicians, Inc. v. Smith (E.D. Pa.)
4th Cir.
§ 502(b)(2) Section 502(b)(2) did not bar creditor from applying chapter 13 plan payments to postpetition interest on nondischargeable student loan debts.
Kielisch v. Educ. Credit Mgmt. Corp. (In re Kielisch) (4th Cir.)§ 548(a)(1)(A) Court of Appeals held that fraudulent transfer of otherwise exempt property was subject to avoidance and recovery. Tavenner v. Smoot (4th Cir.)
5th Cir.
§ 523(a)(7) Bail bond judgments were discharged.
Hickman v. Texas (In re Hickman) (5th Cir.)26 U.S.C. § 6321 Judgment was entered for IRS.
Thomas v. Lightfoot (In re Thomas) (Bankr. E.D. La.)
6th Cir.
§ 523(a)(6) Debt was nondischargeable.
Call Fed. Credit Union v. Sweeney (In re Sweeney) (Bankr. W.D. Ky.)
7th Cir.
§ 523(a)(2)(A) Indiana state court judgment for fraud and 'home improvement fraud' entitled to collateral estoppel effect and resulting judgment debt was nondischargeable.
Schroeder v. Busick (In re Busick) (Bankr. N.D. Ind.)
8th Cir.
§ 503(b) Unsecured loan was not an ordinary expense entitled to administrative priority.
In re Blessing Indus., Inc. (Bankr. N.D. Iowa)§ 523(a)(8) Student loan debtor demonstrated undue hardship.
Meling v. United States (In re Meling) (Bankr. N.D. Iowa)§ 524(c) Reaffirmation agreement did not need to be filed prior to discharge.
In re Whisenant (Bankr. W.D. Ark.)§ 544(a)(1) Court of Appeals affirmed application of Oklahoma law in determining perfection of security interest.
Meeks v. Western Mercedes Benz Credit Corp. (In re Stinnett) (8th Cir.)§ 544(a)(1) Creditor’s security interest was held to be unperfected.
In re Jackson (Bankr. W.D. Ark.)
9th Cir.
§ 524(a)(2) Court of Appeals held that discharge injunction applied to collection of state taxes.
Goldberg v. Ellett (In re Ellett) (9th Cir.)§ 706(b) Compelled conversion to chapter 11 was not warranted.
In re Lenartz (Bankr. D. Idaho)Rule 7023 Class certification denied in proceeding brought by debtors challenging creditor’s collection practices.
Kibler v. WFS Fin., Inc. (In re Kibler) (Bankr. E.D. Cal.)
10th Cir.
§ 1322(b)(5) Confirmation denied plan that proposed to pay debtor’s second mortgage in full but pay only 44 percent of amounts owed to unsecured creditors.
In re Crussen (Bankr. W.D. Okla.)
11th Cir.
§ 523(a)(2)(A) Debtor precluded from disputing that state court’s award of compensatory economic damages for fraud and noneconomic damages for fraud were nondischargeable.
Doughty v. Hill (In re Hill) (Bankr. M.D. Fla.)§ 523(d) Creditor was not entitled to attorney’s fees for section 523 proceeding after having been awarded fees in prepetition litigation.
Diamax Auto Repair, Inc. v. Taylor (In re Taylor) (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.
Security interest in law partnership’s contingency fee agreement survived partner’s bankruptcy and the firm’s dissolution and attached to postpetition payment of fee. 1st Cir. A law firm borrowed funds from a bank and granted the bank a security interest in a contingent fee receivable at the end of certain environmental litigation. After the environmental litigation was settled, but before the settlement was approved by the state’s (Massachusetts) department of environmental protection and the proceeds could be distributed, one of the firm’s partners filed a chapter 7 petition that caused the firm’s dissolution. For the next four years, the debtor continued to work on the environmental litigation until its final resolution. The settlement proceeds were distributed, but when the bank’s successor-in-interest received no distribution, it filed a district court action against the debtor and his former partners. Cross-motions for summary judgment were denied and, after a trial, the jury returned a verdict for the defendants. The successor-in-interest appealed. The United States Court of Appeals for the First Circuit reversed. The court held that the successor-in-interest’s security interest in the law firm’s contingency fee agreement survived the firm’s dissolution and the individual partner’s bankruptcy and attached to the postpetition payment of the fee. The court determined that the successor-in-interest was entitled to judgment against the debtor to the extent of the settlement proceeds he retained after making payments to his former partners and a codefendant, but before he received notice of the successor-in-interest’s claim. The matter was remanded to the district court for a determination of the amount.Cadle Co. v. Schlichtmann, 2001 U.S. App. LEXIS 16715, 258 F.3d 1 (1st Cir. July 19, 2001) (Schwarzer, D.J. (sitting by designation)).
Collier on Bankruptcy, 15th Ed. Revised 5:552.02
2nd Cir.
Rental arrears were an administrative expense. Bankr. S.D.N.Y. The landlord sought an order allowing as an administrative expense the debtor’s residential rental arrears that accrued after the debtor filed for chapter 13 and before she converted to chapter 7. The landlord argued that the postpetition, preconversion rental payments were properly classified as administrative expenses as defined in section 503(b)(1)(A), and thus exempted from discharge. The bankruptcy court granted the landlord’s request, holding that the debtor’s residential rental arrears merited administrative expense priority and were not discharged after the case was converted from chapter 13 to chapter 7. The court found that the residential or nonresidential status of the premises was irrelevant to satisfying the preconditions of allowable administrative expenses. The debt arose from a postpetition transaction with the estate, and the premises benefited the estate (citing Collier on Bankruptcy, 15th Ed. Revised).In re Babbs, 2001 Bankr. LEXIS 914, 265 B.R. 35 (Bankr. S.D.N.Y. July 16, 2001) (Blackshear, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.06
Motion to dismiss adversary complaint for improper service denied when debtor failed to notify court of proper address and new counsel. Bankr. E.D.N.Y. Creditors brought an adversary proceeding against the chapter 7 debtor to bar his discharge and/or to have certain debts deemed nondischargeable. The debtor moved to dismiss the proceeding on the grounds that the summons and complaint were mailed to the debtor at an address other than that listed on the petition and also mailed to an attorney not listed on the court record as the debtor’s counsel. The bankruptcy court denied the debtor’s motion for dismissal. The court acknowledged that Rule 7004(b)(9) governs service of a complaint on a debtor and requires service on both the debtor and his counsel. However, in this case, the court found that dismissal was not warranted because any error in service of the summons and complaint was caused by the debtor’s failure to notify the court of his proper address and of his new counsel. The court refused to reward the debtor’s failure to perform his delegated duties.Wallace v. Shapiro (In re Shapiro), 2001 Bankr. LEXIS 883, 265 B.R. 373 (Bankr. E.D.N.Y. July 11, 2001) (Eisenberg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 9:7004.03
3d Cir.
Payment made by debtor prepetition was deemed a loan and thus recoverable by trustee. E.D. Pa. An individual entered an asset purchase agreement with the debtor and then became an employee of the debtor. In 1998, the individual received a $100,000 check from the debtor. The check request form indicated that the check was for a short-term interest-free advance. After the debtor filed a chapter 11 petition, later converted to chapter 7, the trustee filed an adversary proceeding, asserting that the check was a short-term loan which the parties intended to be paid off as soon as the individual’s home refinancing was completed, and sought turnover pursuant to section 542. The individual argued that the check was for services rendered by his spouse, who was employed by the debtor between 1997 and 1998. The bankruptcy court found the trustee’s turnover claim to be noncore, and submitted conclusions of law recommending that the district court award the trustee the funds for the loan principal. The district court found the transfer to be a loan and granted the trustee’s claim for turnover. The court noted that the funds were not declared on the individual’s and spouse’s joint income tax returns, that the tissue copy of the check bore the word 'note' and that the spouse’s compensation memorandum had no record of such income. The court also held that the bankruptcy court had properly concluded that the individual’s claim of setoff was waived since it was not raised until his posttrial submission, and that, in any event, the individual had no standing to raise a defense to offset funds owed to another.U. S. Physicians, Inc. v. Smith, 2001 U.S. Dist. LEXIS 9707, – B.R. – (E.D. Pa. July 12, 2001) (Waldman, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:542.03
4th Cir.
Section 502(b)(2) did not bar creditor from applying chapter 13 plan payments to postpetition interest on nondischargeable student loan debts. 4th Cir. A student loan creditor appealed a district court order that affirmed the bankruptcy court’s decision that the creditor violated section 502(b)(2) by applying the debtors’ chapter 13 plan payments to postpetition interest on their nondischargeable student loan debts. The United States Court of Appeals for the Fourth Circuit reversed. The court held that the creditor was not barred from applying the debtors’ payments to postpetition interest on their student loans because section 523(a)(8) precludes the discharge of a debtor’s student loan debts absent a showing of undue hardship; section 502 does not address a student loan creditor’s ability to apply estate payments to postpetition interest debts; and the student loan creditor’s application of payments in this case was consistent with standard accounting practices set forth in 34 C.F.R. § 682.404(f) (which generally require a creditor to apply student loan payments first to the payment of interest before loan principal). The court reasoned that a ruling in the debtors’ favor would allow them to partially discharge the interest on their nondischargeable student loan debts without a showing of undue hardship, as required by section 523(a)(8), and would reduce the overall amount that the debtors had to pay and prevent the accumulation of interest that would have accrued but for their bankruptcies.Kielisch v. Educ. Credit Mgmt. Corp. (In re Kielisch), 2001 U.S. App. LEXIS 16814, 258 F.3d 315 (4th Cir. July 26, 2001) (Williams, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03
Court of Appeals held that fraudulent transfer of otherwise exempt property was subject to avoidance and recovery. 4th Cir. The creditors were the former employer and employment union of the debtor. In 1996, the debtor suffered a work-related injury and eventually left his employment. Subsequently, the creditors filed suit against the debtor for his illegal tape-recording of a meeting with the creditors. The debtor in turn filed suit against the employer seeking compensation for his injury. The debtor also incorporated a home repair business whose stock was wholly owned by the debtor’s wife and two children. In April 1998, the district court found the debtor liable to the creditors for the wiretapping, taking the issue of damages under advisement. In July 1998, the debtor and the former employer settled the injury claim for $250,000. Upon receipt of the funds, the debtor transferred them to the corporation’s bank account. In August 1998, the district court ordered the debtor to pay $180,000 to the former employer and $170,000 to the union. Thereafter, the debtor made several purchases using funds from the corporation’s bank account, including automobiles for his wife and daughter and a motorcycle for his son. The debtor also wrote checks from that account to himself and his son as 'wages' and for a down payment on a home. In December 1998, the union filed suit against the debtor seeking to set aside the transfers as fraudulent, and the employer intervened in the action. The debtor then filed a chapter 7 petition. In 1999, the trustee filed this adversary proceeding seeking to avoid and recover the transfers as fraudulent, pursuant to section 548(a)(1)(A). The bankruptcy court held that the trustee could recover the funds. The district court affirmed, and this appeal followed. The Court of Appeals affirmed, noting, as a threshold issue, that under state (Virginia) law, the debtor could have left the settlement proceeds in his account and exempted them as money recovered in a personal injury action, but that the transfer of exempt property was subject to avoidance and recovery. The Court of Appeals then held that the transfers were properly characterized as fraudulent, taking into consideration the fact that they were made to related parties and without adequate consideration. Tavenner v. Smoot, 2001 U.S. App. LEXIS 15901, 257 F.3d. 401 (4th Cir. July 16, 2001) (Motz, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.04
5th Cir.
Court of Appeals held that prevailing party in lawsuit brought by trustee could not collect attorney’s fees as an administrative priority. 5th Cir. After the debtor filed its chapter 7 petition, the trustee commenced an action in district court against a corporation for breach of a prepetition drilling contract, alleging that the corporation was obligated to pay the debtor for drilling services and had failed to do so. The corporation filed a counterclaim, alleging that the debtor had breached the contract by failing to drill according to specifications. The jury rejected the allegations of both sides, so the court awarded no attorney’s fees, neither party having prevailed. The corporation appealed to the Court of Appeals for the Fifth Circuit, which vacated the district court’s order and remanded for a determination of the prevailing party. The district court then held that the corporation was the prevailing party and awarded approximately $315,000 in attorney’s fees and $181,000 in costs. Prior to that award, the corporation had filed a motion in bankruptcy court to have its claim for attorney’s fees and costs given priority as an administrative expense pursuant to section 503(b)(1)(A). The court denied the motion, and the district court affirmed. This appeal followed. The Court of Appeals for the Fifth Circuit affirmed, holding that (1) the corporation’s damages did not arise until after the trustee brought the action, so the damages were in essence a postpetition claim; (2) the damages did not stem from any act of the trustee that was wrongful or unilateral; and (3) the attorney’s fees arose from the defense of a suit brought by the trustee in good faith.Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 2001 U.S. App. LEXIS 15916, 258 F.3d. 385 (5th Cir. July 13, 2001) (Ellison, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.06
Bail bond judgments were discharged. 5th Cir. The state (Texas) appealed the district court’s reversal of the bankruptcy court’s ruling that the debtor’s bond forfeiture debts were nondischargeable under section 523(a)(7). Prior to filing bankruptcy, the debtor served as a surety on criminal bail bonds. When a criminal defendant failed to appear in court, a judgment for the amount of the bond was entered against the debtor. The debtor sought to discharge several bond forfeiture judgments against her, and the state filed an adversary proceeding seeking to have the debts declared nondischargeable. The district court reversed the bankruptcy court and found that the debtor’s bail bond forfeiture judgments were not the type of penal forfeiture contemplated by section 523(a)(7). The Court of Appeals for the Fifth Circuit affirmed the district court, holding that because section 523(a)(7) excluded from discharge only those forfeitures imposed due to misconduct or wrongdoing by the debtor, the debt arising from the debtor’s failure to fulfill her contractual obligation to the state as a surety on a criminal bail bond was not the sort of punitive or penal forfeiture rendered nondischargeable. The court noted that the bail bond judgments were not a penal sanction rooted in the traditional responsibility of the state to protect its citizens, but rather arose from a contractual duty of the debtor.Hickman v. Texas (In re Hickman), 2001 U.S. App. LEXIS 16812, – F.3d – (5th Cir. July 26, 2001) (Benavides, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.13
6th Cir.
Debt was nondischargeable. Bankr. W.D. Ky. The secured creditor filed an adversary complaint objecting to the discharge of a debt, alleging that the chapter 7 debtor willfully and maliciously injured it by converting insurance proceeds he received to his own use. The debtor financed the purchase of a motorcycle through a note, which granted the creditor a security interest in the motorcycle and stated that the collateral included any substitutions, replacements, parts or proceeds. The agreement also specified that any insurance payments were to be payable to the creditor for the lesser of the value of the collateral or the unpaid balance of the loan. After the motorcycle was destroyed in an accident, the debtor used the insurance money to purchase a new motorcycle. The bankruptcy court awarded judgment to the creditor, holding that the debtor caused a willful and malicious injury to the creditor by converting the insurance proceeds for his own use. The court inferred the debtor’s intent from the circumstantial evidence and concluded that he understood his actions were substantially certain to harm the creditor.Call Fed. Credit Union v. Sweeney (In re Sweeney), 2001 Bankr. LEXIS 909, 264 B.R. 866 (Bankr. W.D. Ky. June 11, 2001) (Roberts, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
7th Cir.
Indiana state court judgment for fraud and 'home improvement fraud' entitled to collateral estoppel effect and resulting judgment debt was nondischargeable. Bankr. N.D. Ind. Judgment creditors moved for summary judgment on their complaint seeking a determination that a state court judgment entered against the chapter 7 debtor for, among other things, fraud and 'home improvement fraud,' was nondischargeable under section 523(a)(2)(A). The court noted that under state (Indiana) law, the state court judgment would be entitled to preclusive effect based on the doctrine of collateral estoppel if the issue in both actions was identical, the issue was actually litigated, the resolution or determination of the identical issue was necessary to the judgment in the state court action and a final judgment determined or resolved the issue in the state court action. The court found that there was no real dispute on three of the four collateral estoppel factors. The critical determination was whether the state court’s findings concerning fraud were necessary to its resulting judgment. The bankruptcy court reviewed the state court’s judgment and granted the creditor’s motion for summary judgment. The court concluded that the state court’s finding that the debtor’s acts constituted home improvement fraud was necessary to its judgment. The court held that findings of fact contained in the state court judgment collaterally estopped the debtor from relitigating those findings, and those findings were sufficient to satisfy the creditor’s burden of proving that the obligation represented by the judgment was a debt obtained by the false pretenses, false representations or actual fraud under section 523(a)(2)(A).Schroeder v. Busick (In re Busick), 2001 Bankr. LEXIS 924, 264 B.R. 518 (Bankr. N.D. Ind. April 17, 2001) (Grant, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
8th Cir.
Unsecured loan was not an ordinary expense entitled to administrative priority. Bankr. N.D. Iowa Upon realizing the extent of the financial difficulties of the debtor, an investor became more involved in the management of the debtor’s finances and gave the debtor an unsecured loan, consisting of a $300,000 line of credit. Although the debtor’s attorney specifically advised the investor that court approval was required, the investor failed to seek court approval for the loan. When the chapter 11 case was converted to chapter 7, the creditor sought repayment of the loan, totaling $195,000, as an administrative expense. The estate was estimated to have a total of $200,000 in assets, most of which would go to the taxing authorities. The bankruptcy court held that the unsecured loan was not entitled to administrative expense status because it was not given in the ordinary course of the debtor’s business. Specifically, the transaction failed the 'vertical test' in that it was a one-time loan transaction for which court approval would be required and payment as an administrative expense would require reordering the priorities for payment under the Code.In re Blessing Indus., Inc., 2001 Bankr. LEXIS 893, 263 B.R. 268 (Bankr. N.D. Iowa April 5, 2001) (Kilburg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.05
Student loan debtor demonstrated undue hardship. Bankr. N.D. Iowa The chapter 7 debtor filed an adversary proceeding seeking an undue hardship discharge of her student loan debt. The debtor had a long, well-documented history of mental illness, suffering from bipolar disorder and never holding a job for more than a few months. Her psychiatrist testified that the debtor would never be able to work more than part-time at a low-stress job and would probably have to depend on Social Security benefits for the rest of her life and reside in a supervised living facility. The bankruptcy court held the debt to be dischargeable as an undue hardship. The court found that the debtor’s illness prevented her from entering the workforce with marketable skills or abilities and that she had an income just above the poverty level. Although a hardship discharge normally requires a good faith attempt to repay, the court did not require such a showing due to the severity of the debtor’s illness.Meling v. United States (In re Meling), 2001 Bankr. LEXIS 897, 263 B.R. 275 (Bankr. N.D. Iowa April 9, 2001) (Kilburg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14[2]
Reaffirmation agreement did not need to be filed prior to discharge. Bankr. W.D. Ark. After the debtor filed his chapter 7 petition in August 1999, the creditor, his former spouse, informed him of her intention to object to his discharge. As consideration for her not doing so, the debtor agreed to reaffirm his debt to the creditor. The reaffirmation agreement was drafted by debtor’s counsel, signed by the debtor and forwarded to the creditor’s attorney in October 1999. The debtor made a few payments on the agreement after the discharge was granted but eventually defaulted, and the creditor filed a motion in chancery court for contempt. In November 2000, the chapter 7 case was reopened, and the debtor filed a motion to hold the creditor in contempt for attempting to collect a discharged debt in violation of the discharge injunction. The parties stipulated that the agreement was entered into prior to discharge but, for unknown reasons, the court clerk failed to enter the agreement in the docket. It developed that the agreement was tendered for filing in November 1999. The bankruptcy court held that, although a reaffirmation agreement must be entered into before a discharge is granted, section 524 did not require that a reaffirmation agreement be filed prior to the discharge to be a valid agreement. The court directed the clerk to enter the agreement on the docket on the date of tender, nunc pro tunc. (citing Collier on Bankruptcy 15th Ed. Revised). In re Whisenant, 2001 Bankr. LEXIS 898, 265 B.R. 164 (Bankr. W.D. Ark. July 5, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:524.04[1]
Court of Appeals affirmed application of Oklahoma law in determining perfection of security interest. 8th Cir. The debtor purchased a truck on credit in Texas, and the seller immediately transferred interest in the security agreement to the creditor. That agreement indicated that the debtor’s home address was in Arkansas. The truck was registered on the debtor’s behalf in Oklahoma, which issued a title reflecting a lien in favor of the creditor. Upon purchase, the debtor drove the truck to his residence in Arkansas and thereafter operated the truck there for business purposes. The debtor never owned a business in Oklahoma. The bankruptcy court held that under Arkansas law, Oklahoma law controlled the perfection of the creditor’s security interest and that, because Oklahoma law required indication of such interest on the certificate of title, the creditor’s interest was perfected for the purposes of Arkansas law. After the court entered judgment for the creditor, the trustee appealed to the district court, which affirmed. This appeal followed. The trustee argued that Arkansas law regarding vehicle registration applied to determine the validity of the security interest, and that under those provisions the security interest was not perfected because the truck was never registered in Arkansas. The Court of Appeals for the Eighth Circuit affirmed, holding that Arkansas’s codification of the UCC section applied, because the issue was the perfection of the security interest, not compliance with Arkansas’s registration laws, which served a separate purpose.Meeks v. Western Mercedes Benz Credit Corp. (In re Stinnett), 2001 U.S. App. LEXIS 15783, – F.3d. – (8th Cir. July 16, 2001) (PER CURIAM).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
Creditor’s security interest was held to be unperfected. Bankr. W.D. Ark. In November 1999, the debtors executed a promissory note and security agreement in favor of the creditor, granting a security interest in two trucks. The creditor also filed a UCC financing statement describing the trucks. At the time, titles to the trucks, issued in Oklahoma, reflected that the debtors were residents of that state and also noted liens in favor of different lenders in September 1999. The original titles were mailed to the creditor after it paid the debts owed to the original lenders. At the creditor’s instruction, the debtors also made a handwritten note on the back of each title certificate that the creditor was a lienholder. The creditor also told the debtors to have the titles reissued, showing the creditor as the lienholder, but the debtors simply kept the titles as they were, and no new titles were ever issued. The debtors then became residents of Arkansas and filed a chapter 7 petition in 2000. The creditor filed a motion for abandonment and relief from the automatic stay as to the trucks, as well as other property. The debtors agreed to surrender the trucks, but the trustee filed an objection, arguing that the creditor’s claim of a security interest was not perfected under Arkansas law and that, consequently, its claim of a security interest was subordinate to the trustee’s rights pursuant to section 544(a). The bankruptcy court denied the creditor’s motion, holding that section 544(a) applied since the creditor failed to comply with perfection statutes in either Arkansas or any other state (citing Collier on Bankruptcy 15th Ed. Revised).In re Jackson, 2001 Bankr. LEXIS 896, 265 B.R. 176 (Bankr. W.D. Ark. June 26, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
9th Cir.
Court of Appeals held that discharge injunction applied to collection of state taxes. 9th Cir. In 1994, the debtor filed a chapter 13 petition, scheduling the state (California) franchise tax board as a general unsecured creditor in the amount of $18,000 for nonpriority income tax obligations. The debtor notified the creditor, who did not file a proof of claim or otherwise participate. The debtor’s chapter 13 plan was confirmed in April 1995. The creditor received no distributions under the plan, and the debtor received a discharge in April 1997. Shortly thereafter, the creditor sent a demand for payment in the approximate amount of $22,000, contending that the debt was not discharged. The debtor filed an adversary proceeding in bankruptcy court, seeking injunctive and declaratory relief. The creditor moved to dismiss based on state sovereign immunity. The court denied that motion and held that the debt was discharged. The B.A.P. for the Ninth Circuit affirmed, and this appeal followed. The creditor made several arguments, chiefly that the debtor’s adversary proceeding was barred by sovereign immunity and that the Tax Injunction Act, set forth in 28 U.S.C. § 1341, barred the action and required debtors to seek their remedy in state court. The Court of Appeals for the Ninth Circuit affirmed, holding that the tax obligations were properly discharged, so that the creditor was already enjoined by the discharge injunction of section 524(a)(2) from collecting the state tax as a personal liability of the debtor. The Court of Appeals reasoned that the Tax Injunction Act was incompatible with the Code’s detailed scheme governing the dischargeability of tax debts, only some of which were excepted from discharge. Similarly, sovereign immunity did not apply, since section 524 injunctions apply to governmental units, including states.Goldberg v. Ellett (In re Ellett), 2001 U.S. App. LEXIS 15898, 254 F.3d. 1135 (9th Cir. July 16, 2001) (O’Scannlain, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2]
Compelled conversion to chapter 11 was not warranted. Bankr. D. Idaho Chapter 7 debtors, whose income was over $100,000 per year, had over $214,000 in unsecured debt and nearly $1,000,000 in secured debt. A creditor moved, under section 706(b), for an order requiring the debtor to convert to chapter 11. The court sua sponte issued an order to show cause why the case should not be dismissed as abuse of the provisions of chapter 7, pursuant to section 707(b). The bankruptcy court held that conversion to chapter 11 was not in the best interests of the creditors because the debtors could not be compelled to allocate their post petition income to fund a chapter 11 plan. The debtors had no business to reorganize, and the postpetition earnings would not be property of the estate. Thus, the creditors could not easily compel the debtors to pay their debts in Chapter 11 if they did not choose to do so. In re Lenartz, 2001 Bankr. LEXIS 894, 263 B.R. 331 (Bankr. D. Idaho June 12, 2001) (Pappas, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:706.03
Class certification denied in proceeding brought by debtors challenging creditor’s collection practices. Bankr. E.D. Cal. The chapter 7 debtors entered into a prepetition loan agreement with a creditor in order to finance their purchase of an automobile. According to the debtors, despite knowledge of their chapter 7 case and discharge, the creditor did not attempt to obtain a reaffirmation agreement from them or advise them that they were no longer personally liable for the discharged obligation. Allegedly, due to the creditor’s failure to inform them of their rights, the debtors paid the entire outstanding balance of the loan. The debtors claimed that the payment violated their discharge and brought a class action proceeding against the creditor challenging its debt collection practices. The debtors’ proposed class included individuals in the United States who filed chapter 7 petitions with notice to the creditor, who did not execute valid reaffirmation agreements with the creditor and who were solicited for payment on their prepetition obligations by the creditor. The bankruptcy court denied class certification because the debtors failed to meet the numerosity, typicality and adequacy of representation requirements of Fed. R. Civ. P. 23(a)(1), (3) and (4), and because the class action was not maintainable under either Fed. R. Civ. P. 23(b)(2) or (3). With respect to the Fed. R. Civ. P. 23(b), the court noted that certification under Rule 23(b)(3) was not appropriate because commonality of legal and factual issues did not predominate among all class members. The court also explained that although the debtors’ complaint contained causes of action for declaratory and injunctive relief, certification under Rule 23(b)(2) was not appropriate because the relief sought was primarily monetary in nature. Kibler v. WFS Fin., Inc. (In re Kibler), 2001 Bankr. LEXIS 889, – B.R. – (Bankr. E.D. Cal. March 19, 2001) (McKeag, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:7023.02
10th Cir.
Confirmation denied plan that proposed to pay debtor’s second mortgage in full but pay only 44 percent of amounts owed to unsecured creditors. Bankr. W.D. Okla. The chapter 13 trustee objected to confirmation of a plan proposed by the debtor. Under the plan, the debtor proposed to pay the second mortgage on his home in full during the life of the three-year plan, but pay only 44 percent of amounts owed to unsecured creditors. The debtor argued that under the permissive long-term debt provisions of section 1322, a debtor may accelerate or deaccelerate a debt or may choose to pay the debt in full. The trustee argued that prepayment of the second mortgage was not reasonably necessary for the support of debtor’s family, that the prepayment built equity in the real property to the benefit of the debtor rather than his unsecured creditors and that the debtor’s classification of the second mortgage was unfair. The trustee also argued that the plan preferred the debtor to other creditors and that the debtor was not sincerely making his best efforts to pay his debts. The bankruptcy court held that the trustee’s objections were meritorious and denied confirmation of the proposed plan. The court noted that the debtor enjoyed a substantial income and that his proposed plan would allow him to walk away from over half of the obligations he to owed fourteen credit card issuers while enjoying the benefits inuring from wholly prepaying his second mortgage in only three years. In fact, the court concluded, if the debtor had devoted his disposable income toward paying his unsecured creditors instead of prepaying his second mortgage, he would likely have had no need for bankruptcy protection at all.In re Crussen, 2001 Bankr. LEXIS 884, 264 B.R. 723 (Bankr. W.D. Okla. July 17, 2001) (TeSelle, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.09
11th Cir.
Debtor precluded from disputing that state court’s award of compensatory economic damages for fraud and noneconomic damages for fraud were nondischargeable. Bankr. M.D. Fla. In a prepetition state (California) court proceeding involving allegations of fraud and intentional infliction of emotional distress against the debtor, a creditor was awarded compensatory economic damages for fraud, noneconomic damages for fraud, damages for emotional distress and punitive damages. The creditor filed an adversary complaint seeking a determination that the judgment debt was nondischargeable in its entirety based on principles of collateral estoppel and moved for summary judgment. The bankruptcy court granted the creditor’s summary judgment motion, in part, and denied the motion, in part. The court held that the debtor was precluded from disputing that the compensatory economic damages for fraud and noneconomic damages for fraud were nondischargeable under section 523(a)(2)(A). Thus, the state court’s compensatory economic damage award for fraud and its noneconomic award of damages for fraud were nondischargeable, as was an additional compensatory fraud damage award made pursuant to a subsequent consent judgment. The court also held that because the elements of section 523(a)(6) did not closely mirror the elements of intentional infliction of emotional distress and each of the requirements for the punitive damage claim, collateral estoppel did not apply to the intentional infliction of emotional distress damages and the punitive damages awarded by the state court.Doughty v. Hill (In re Hill), 2001 Bankr. LEXIS 923, 265 B.R. 270 (Bankr. M.D. Fla. February 26, 2001) (Proctor, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Creditor was not entitled to attorney’s fees for section 523 proceeding after having been awarded fees in prepetition litigation. Bankr. M.D. Fla. The creditor obtained a judgment in state (Florida) court against the debtor for approximately $1,669, plus an award of attorney’s fees for $600. The debtor then filed a chapter 7 petition, and the creditor filed an adversary proceeding, seeking a determination that the judgment should be excepted from discharge and also that the creditor be awarded attorney’s fees resulting from legal representation in the adversary proceeding. The bankruptcy court held that the judgment was nondischargeable due to res judicata effect, but did not rule on the second count for attorney’s fees. The creditor then filed a motion for reconsideration of its attorney’s fees claim. The court held that because the attorney’s fees were already determined in the prepetition litigation, the creditor was not entitled to additional fees in connection with the dischargeability litigation.Diamax Auto Repair, Inc. v. Taylor (In re Taylor), 2001 Bankr. LEXIS 970, 265 B.R. 294 (Bankr. M.D. Fla. June 1, 2001) (Paskay, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08[8]