Collier Bankruptcy Case Update July-16-01
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.
July 16, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 110(h)(2) Excessive fees were disgorged.
In re Heck (Bankr. D.N.H.)§ 362 Mortgage creditor who attempted foreclosure by way of motion, without seeking relief from stay, was not entitled to fees and costs.
In re Brailsford (Bankr. D.N.H.)§ 704(1) Debtor’s counsel was not entitled to administrative expenses from the estate without first seeking consent from the trustee.
In re Sprague Floor Coverings, Inc. (Bankr. D.N.H.)§ 1124(1) Court held that debtor’s characterization of claim stemming from divorce decree was incorrectly designated as unimpaired.
In re Camann (Bankr. D.N.H.)
2d Cir.
§ 506(a) Chapter 13 debtor could not avoid creditor’s second mortgage lien.
Smith v. Household Fin. Realty Corp. (In re Smith) (Bankr. E.D.N.Y.)§ 1141(d)(1) Claim for patent infringement was discharged.
Singer Co. B.V. v. Groz Beckert KG (In re Singer Co. N.V.) (Bankr. S.D.N.Y.)28 U.S.C. § 157(d) Motion to withdraw reference was granted.
1800Postcards, Inc. v. Morel (S.D.N.Y.)
3d Cir.
§ 365(d)(2) Creditor failed to establish reason to compel debtors to make immediate assumption or rejection of management agreement.
In re Physician Health Corp. (Bankr. D. Del.)28 U.S.C. § 1334(c) Court abstained from state law action.
Grace Cmty., Inc. v. KPMG Peat Marwick, LLP (In re Grace Cmty., Inc.) (Bankr. E.D. Pa.)
4th Cir.
§ 350(b) Section 350(b) did not apply to a dismissed case.
In re Archer (Bankr. E.D. Va.)§ 524(c) Conversion to chapter 7 did not discharge reaffirmed debt.
Meloy v. Bank of McKenney (In re Meloy) (Bankr. E.D. Va.)§ 547(c)(1) Mason failed to demonstrate new value; glazer gave new value by waiving its mechanic’s lien.
Lubman v. C.A. Guard Masonry Contractor, Inc. (In re Gem Constr. Corp. of Va.) (Bankr. E.D. Va.)§ 1325(a)(3) Confirmation denied where court found that plan was not proposed in good faith and did not pass disposable income test.
In re Daniel (Bankr. E.D. Va.)
5th Cir.
§ 105(a) Exceptional circumstances did not warrant stay of tort litigation.
In re Babcock & Wilcox Co. (E.D. La.)§ 503(b) Employee’s claim for severance pay not entitled to priority treatment as administrative expense.
Lasky v. Phones For All, Inc. (In re Phones For All, Inc.) (N.D. Tex.)§ 522(f) Garnishment on bank account was an avoidable lien.
In re Bensen (Bankr. N.D. Tex.)§ 1325(b) Debtors’ expenditures for private school for teenage son held reasonable, but plan confirmation was denied.
In re Webb (Bankr. E.D. Tex.)
6th Cir.
§ 303(b)(1) Petitions were filed improperly.
In re Cadillac by DeLorean & DeLorean Cadillac, Inc. (Bankr. N.D. Ohio)§ 362(d) Relief was denied.
In re Chari (Bankr. S.D. Ohio)§ 552(a)(7) State unemployment agency’s prepetition liens on debtor’s property did not reattach to postpetition preference proceeds recovered by trustee.
Frank v. Mich. State Unemployment Agency (In re Thompson Boat Co.) (6th Cir.)§ 1322(b)(2) Wholly unsecured claim was not protected from modification by section 1322(b)(2).
In re Hoskins (Bankr. E.D. Mich.)
7th Cir.
§ 523(a)(6) Debt excepted from discharge where farmer debtor improperly converted creditor’s collateral by selling one crop to a third party and feeding another crop to his pigs.
ABF, Inc. v. Russell (In re Russell) (Bankr. N.D. Ind.)
9th Cir.
§ 330(a)(3) Counsel’s compensation was properly reduced.
American Law Center PC v. Stanley (In re Jastrem) (9th Cir.)§ 1325(a)(3) Objections were sustained.
In re James (Bankr. D. Idaho)
10th Cir.
§ 522(f) Debtors were permitted to avoid lien on vehicles used in their farming operation.
In re Thompson (Bankr. W.D. Okla.)
11th Cir.
§ 105(a) Bankruptcy court exercised equitable power to grant ownership of property lot to debtor’s ex-husband.
Grant v. Grantham (In re Eiland) (Bankr. M.D. Fla.)§ 365(d)(4) Debtor could not be removed from leased premises.
Wages v. Peach Auto Painting & Collision, Inc. (In re Peach Auto Painting & Collision, Inc.) (Bankr. M.D. Ga.)§ 522(b)(2)(A) Court overruled objection to claimed exemption, with prejudice.
Cardservice Int’l, Inc. v. Inman (In re Inman) (Bankr. M.D. Fla.)§ 523(a)(2)(A) Court rejected 'implied representation' theory and held that debtor’s credit card debt was discharged.
Bank of Am. N.A. v. Way (In re Way) (Bankr. M.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.
Excessive fees were disgorged. Bankr. D.N.H. The United States Trustee filed a motion seeking disgorgement of some or all fees paid by the chapter 13 debtor to a petition preparer on the grounds that his fees exceeded the value of his services. The preparer drafted a skeleton petition for the debtor and the evidence suggested that he spent no longer than two hours to meet with the debtor and prepare the documents. The bankruptcy court granted the motion, holding that any fees paid to the preparer in excess of two hours’ worth of work exceeded the value of services rendered. The preparer was ordered to turn over the excess fees to the chapter 13 trustee.In re Heck, 2000 Bankr. LEXIS 1803, – B.R. – (Bankr. D.N.H. November 28, 2000) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:110.09
Mortgage creditor who attempted foreclosure by way of motion, without seeking relief from stay, was not entitled to fees and costs. Bankr. D.N.H. The debtors’ chapter 13 plan was confirmed in May 2000. One of the purposes of the plan was to provide for payment of postpetition arrearage owed to the mortgage creditor. In August 2000, the creditor filed a motion alleging that the debtors had failed to make regular postpetition mortgage payments for July and August 2000 and sought, as part of the postpetition arrearage, a $300 appraisal fee, a $75 motion filing fee, and $350 in attorney’s fees, all in connection with the filing of the motion. It developed that the debtors were actually behind only one payment. The debtors argued that the motion should never have been filed because neither they nor their counsel had ever been contacted; they were unaware of any delinquency; and the fees should be disallowed as unreasonable.The bankruptcy court denied the creditor’s motion. The court reasoned that, pursuant to section 362, the creditor was prevented from initiating any foreclosure sale, and in order to commence such an action the creditor was required to seek relief from the automatic stay and was entitled to recover certain fees in connection with a motion seeking relief from the stay as long as the expenses were reasonable. The court concluded that the creditor sought to commence foreclosure proceedings by filing the motion, thereby circumventing the necessity of seeking relief from the stay, which was not reasonable and which rendered any fees in connection thereto also unreasonable. In re Brailsford, 2000 Bankr. LEXIS 1799, – B.R. – (Bankr. D.N.H. December 22, 2000) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
Three property lots were property of debtor’s estate and could be sold for distribution to creditors. Bankr. M.D. Fla. The chapter 7 trustee filed an adversary proceeding against the debtor’s ex-husband seeking to avoid any interest of the ex-husband in certain real property under section 544(a)(3). The trustee argued that pursuant to section 544(a)(3), he could avoid the ex-husband’s unperfected interest in three property lots despite the fact that quit claim deeds transferring the property to the ex-husband effectively bound the debtor and her ex- husband. The bankruptcy court held that the trustee could avoid the ex-husband’s interest in all three lots since the trustee’s assertions that the ex-husband’s interests were unperfected were conclusively established, and the ex-husband presented no viable affirmative defense to the trustee’s avoidance action. The court stated that the ex-husband had no legal interest in the property lots because the court avoided the unperfected transfer of the lots and that the trustee could avoid any unperfected equitable interest of the ex-husband in the lots. Thus, the lots belonged wholly to the chapter 7 estate and could be sold for distribution to creditors pursuant to section 363(h). Pursuant to the trustee’s request, however, the court also exercised its equitable powers under section 105(a) and granted the ex-husband ownership of one of the lots. The court said that the trustee’s request was gracious and concluded that granting the ex-husband ownership of one lot was proper since the trustee admitted that the ex-husband paid value for the property, improved the property, and resided on the property full time under color of a valid transfer voidable only by a bona fide purchaser without notice.Grant v. Grantham (In re Eiland), 2000 Bankr. LEXIS 1775, 260 B.R. 301 (Bankr. M.D. Fla. November 21, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:363.08
Debtor’s counsel was not entitled to administrative expenses from the estate without first seeking consent from the trustee. Bankr. D.N.H. The debtor filed a skeleton chapter 7 petition on August 17, 2000, and on September 1, 2000, filed the necessary schedules and statements indicating that the debtor’s counsel had been paid $2,793.49 for services in connection with the chapter 7 case. The statement did not indicate that any further compensation to counsel would be paid. In October 2000, debtor’s counsel filed an application seeking compensation of approximately $4,400 for services rendered during the period of August 2, 2000 through August 31, 2000. Counsel had not been retained by court order, and the trustee represented that the estate contained assets totaling $4,870.51, which could render the estate administratively insolvent. The bankruptcy court denied counsel’s application to the extent that it sought payment from the estate. The court found that (1) the trustee’s consent was not obtained prior to the rendering of services; (2) the trustee objected to the payment beyond the retainer; and (3) the amount requested was large relative to the case. The court concluded that, pursuant to section 704(1), the trustee was responsible for administration of the estate and that if a chapter 7 debtor’s counsel could seek additional attorney’s fees without notice to or consent by the trustee, significant administrative expenses could be incurred without the trustee’s knowledge. In order to avoid that occurrence, the court held that the debtor’s counsel should have obtained consent before performing services for which counsel sought payment from the estate.In re Sprague Floor Coverings, Inc., 2000 Bankr. LEXIS 1811, – B.R. – (Bankr. D.N.H. December 7, 2000) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:704.02
Court held that debtor’s characterization of claim stemming from divorce decree was incorrectly designated as unimpaired. Bankr. D.N.H. A creditor, the debtor’s former spouse, objected to the adequacy of the debtor’s chapter 11 disclosure statement. The creditor argued that the debtor had incorrectly characterized the creditor’s claims as unimpaired when they were impaired. The creditor’s claims arose from obligations imposed by a divorce decree. The debtor argued that his intention was to satisfy the creditor’s claims by way of a sale of certain assets and that language in the plan gave priority to the obligations of the decree over any provisions of the plan itself. Specifically, the debtor argued that the plan contained a savings clause that provided that the terms and conditions of the divorce decree would govern with respect to all matters in the decree that were not dealt with in the plan. The bankruptcy court held that the debtor’s plan provisions regarding the divorce decree were inadequate to render the creditor’s claim unimpaired. The court reasoned, for the purposes of section 1124(1), that if the savings clause, and the creditor’s ability to return to state court, trumped the debtor’s plan, then the plan would have no binding legal effect on the creditor’s claim and would be nothing more than a proposal as to how the claim could be treated. Thus, the claim was properly characterized as impaired. In re Camann, 2000 Bankr. LEXIS 1804, – B.R. – (Bankr. D.N.H. November 16, 2000) (Deasy, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1124.02
2nd Cir.
Chapter 13 debtor could not avoid creditor’s second mortgage lien. Bankr. E.D.N.Y. The debtor filed an adversary proceeding and sought to avoid a creditor’s second mortgage lien. The debtor claimed that the mortgage could be avoided because after deducting the first mortgage balance and certain other hypothetical costs, the mortgagee’s claim was entirely unsecured. The mortgagee defaulted by failing to file an answer or otherwise make an appearance in the proceeding, and the bankruptcy court considered whether entry of judgment by default would be appropriate on the merits of the debtor’s complaint. The court held that because the debtor’s complaint failed to state a claim upon which relief could be granted, the adversary proceeding had to be dismissed. The court found that for purposes of valuing the property, the hypothetical closing costs of a non-contemplated sale could not be deducted from the fair market value of the property. In addition, since the mortgagee held a consensual lien that was superior to the debtor’s homestead exemption claim under state (New York) law, the debtor could not deduct the value of the exemption from the value of the property. Finally, the court found that the mortgagee’s remaining rights under the mortgage were not extinguished altogether by operation of state law (N.Y. R.P.A.P.L. €…). In fashioning relief, the court noted that the automatic stay had not been lifted and ordered that the mortgagee could not take any action to foreclose on its mortgage until after the debtor’s chapter 13 plan was successfully completed.Smith v. Household Fin. Realty Corp. (In re Smith), 2001 Bankr. LEXIS 541, – B.R. – (Bankr. E.D.N.Y. May 21, 2001) (Eisenberg, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03
Claim for patent infringement was discharged. Bankr. S.D.N.Y. The chapter 11 plan was confirmed and provided that the stay would remain in effect until the effective date of the plan, some weeks later. Although it was aware of the chapter 11 bankruptcy case and pending confirmation, purchaser of a patent sued the debtor and related entities in state court for patent infringement and injunctive relief. The debtor filed an adversary proceeding to enjoin the state court litigation, and the patent holder filed a cross claim in the adversary proceeding for the patent infringement. Upon the debtor’s motion for summary judgment, the bankruptcy court held that any claim of the patent holder was discharged in the chapter 11 case. Although it was fully aware that the debtor was using the patent, the patent holder failed to file any claim against it. Accordingly, any claim was discharged pursuant to the terms of the plan(citing Collier on Bankruptcy, 15th Ed. Revised).Singer Co. B.V. v. Groz Beckert KG (In re Singer Co. N.V.), 2001 Bankr. LEXIS 531, 262 B.R. 257 (Bankr. S.D.N.Y. May 10, 2001) (Lifland, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1141.05
Motion to withdraw reference was granted. S.D.N.Y. The purchaser of the chapter 11 debtor’s assets filed a motion for an order withdrawing the reference of an adversary proceeding pending against him. The debtor had sued the purchaser claiming that it failed to pay the remaining purchase price and the debtor’s debts, as required by the purchase agreement, and wrongfully terminated the debtor’s owner as a consultant. The purchaser had also initiated a fraudulent misrepresentation cause of action against the debtor’s owner. After the motion to withdraw the reference was filed, the creditors’ committee intervened as a plaintiff in the adversary proceeding and added a fraudulent conveyance claim. The district court granted the purchaser’s motion, holding that the reference of the debtor’s non-core proceeding and the committee’s core proceeding could be withdrawn in the interests of efficiency. Both the debtor and the purchaser had requested jury trials, and the facts and issues surrounding the claims of all parties sufficiently overlapped.1800Postcards, Inc. v. Morel, 2001 U.S. Dist. LEXIS 7306, – B.R. – (S.D.N.Y. June 6, 2001) (Kaplan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.04
3rd Cir.
Creditor failed to establish reason to compel debtors to make immediate assumption or rejection of management agreement. Bankr. D. Del. The debtors were in the business of managing physician practice groups. After filing their chapter 11 petitions, the debtors entered into agreements with many of the practice groups to reject or terminate their agreements. The creditor was a practice group with whom the debtors reached no such agreement. The creditor filed a motion seeking to compel the debtors to decide whether to assume their practice management agreement ('PMA'). The creditor argued that the debtors were in default on the PMA. The creditor also asserted that the debtor had agreed to reject the PMA for some practice groups in exchange for a settlement payment and that it was clear the debtor would ultimately reject the creditor’s PMA. The debtors opposed the motion, in particular disputing the allegations regarding defaults and contended that they were already acting expeditiously to determine how to deal with the various practice groups. The bankruptcy court denied the motion. The court found that (1) there was insufficient evidence of any prepetition or postpetition breach on the part of the debtors and (2) there was no evidence that the debtors were being dilatory in evaluating their business and deciding which contracts to keep and which to reject. The court concluded that the creditor failed to establish a compelling reason to force the debtors to assume or reject the PMA immediately, pursuant to section 365(d)(2). In re Physician Health Corp., 2001 Bankr. LEXIS 561, 262 B.R. 290 (Bankr. D. Del. May 9, 2001) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04[2]
Court abstained from state law action. Bankr. E.D. Pa. The chapter 11 debtor filed a motion for abstention and remand of an adversary proceeding that had been removed from state (Pennsylvania) court. The debtor filed the complaint postpetition against several parties based upon state law causes of action, including breach of contract, breach of fiduciary duty and negligence. The bankruptcy court granted the debtor’s motion, holding that remand under 28 U.S.C. section 1452(b) was appropriate because the grounds for abstention pursuant to 28 U.S.C. section 1334(c) were present. The proceeding was based upon state law claims and was 'related to,' but did not 'arise under' the bankruptcy case. The action had commenced and could be timely adjudicated in state court.Grace Cmty., Inc. v. KPMG Peat Marwick, LLP (In re Grace Cmty., Inc.), 2001 Bankr. LEXIS 572, – B.R. – (Bankr. E.D. Pa. May 24, 2001) (Carey, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05[2], .07[5]
4th Cir.
Section 350(b) did not apply to a dismissed case. Bankr. E.D. Va. The bankruptcy court denied confirmation of the chapter 13 plan because the plan was not proposed in good faith, and, when the debtor failed to modify the plan, the chapter 13 case was dismissed. One year later, the debtor, without explaining the delay, moved to reopen the case pursuant to section 350(b) to vacate the dismissal order. Specifically, the debtor sought to remove a judgment lien on her property that was recorded during the pendency of the chapter 13 case in violation of the stay. The debtor also sought sanctions against the lienholder. The bankruptcy court held that section 350(b) did not apply to the dismissed case because it was not closed after being 'fully administered' under section 350(a). The bankruptcy court concluded that motions to reopen a case under section 350(b) apply only to cases that are closed pursuant to section 350(a) because a dismissed case is terminated for reasons other than full administration of the case. Applying Rule 9024 and Fed. R. Civ. P. 60(b), the bankruptcy court concluded that the case should not be reopened.In re Archer, 2001 Bankr. LEXIS 530, – B.R. – (Bankr. E.D. Va. April 30, 2001) (Tice, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:350.03
Conversion to chapter 7 did not discharge reaffirmed debt. Bankr. E.D. Va. The chapter 11 debtors and the creditor entered a reaffirmation agreement, and the bankruptcy court entered an order modifying the automatic stay, specifically contemplating the reaffirmation. After the debtors defaulted on payments under the agreement, the creditor foreclosed on the real property securing the note. The debtors then converted their case to chapter 7 and received a discharge. Thereafter, the creditor sought a deficiency balance on the debt. The debtors filed a motion asserting that the creditor’s deficiency claim was discharged in the chapter 7 case. The creditor argued that the debtors reaffirmed a prepetition debt and that the reaffirmation agreement remained enforceable because the debtors did not rescind it within the time prescribed by section 524(c)(4). The court accepted the creditor’s position, and held that nothing in the Code supported the view that a chapter 11 reaffirmation agreement became inoperable following a conversion to chapter 7. The court found that, to the contrary, a plain statutory reading supported the position that the reaffirmation provisions of section 524 applied in both chapter 11 and chapter 7 cases. Meloy v. Bank of McKenney (In re Meloy), 2000 Bankr. LEXIS 1774, – B.R. – (Bankr. E.D. Va. August 14, 2000) (Tice, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.04
Mason failed to demonstrate new value; glazer gave new value by waiving its mechanic’s lien. Bankr. E.D. Va. The debtor contractor hired two subcontractors, a mason and a window glazer. When the subcontractors filed mechanic’s liens against the construction properties, the debtor made payment to the subcontractors. Soon thereafter, the debtor was placed in an involuntary chapter 7 case and the trustee sought to recover the payments to the mason and glazer as preferences. Both subcontractors asserted the new value and ordinary course of business defenses to the preference actions. The bankruptcy court held that while the mason did not give new value when it released its mechanic’s lien, the glazer gave new value when it waived its lien. The mason failed to prove that its lien had any value on the date of the transfer because it failed to show, as an element of its proof, the amount that the owner owed to the general contractor on that date. Under state (Virginia) law, the subcontractor’s recovery was limited to the amount of the debt between the owner and the general contractor. If the mason could not demonstrate that its lien had value, i.e., that it could recover on its independent mechanic’s lien, it could not maintain the new value defense. The glazer demonstrated, however, that it gave new value when it waived its mechanic’s lien because the debtor’s payment to the glazer avoided the imposition of an equitable lien by the bondholder on the contract amounts.Lubman v. C.A. Guard Masonry Contractor, Inc. (In re Gem Constr. Corp. of Va.), 2000 Bankr. LEXIS 1768, – B.R. – (Bankr. E.D. Va. September 12, 2000) (Tice, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 547.04[1]
Confirmation denied where court found that plan was not proposed in good faith and did not pass disposable income test. Bankr. E.D. Va. Judgment creditors holding an unsecured claim against the debtor objected to confirmation of the chapter 13 debtor’s plan. The creditors argued that the plan was not proposed in good faith as required by section 1325(a)(3). The bankruptcy court sustained the objection, and held that the debtor had not proposed her plan in good faith, and the plan failed to pass the 'disposable income' test. The court concluded that the debtor’s plan was not filed in good faith because her case was filed within a few weeks after the state court judgment was entered against her; the debtor’s husband’s full income was not included in the plan budget even though the debtor proposed to pay their joint debt (along with a low percentage of payment to her individual unsecured creditors); and the debtor’s budget contained items which maintained her comfortable prepetition lifestyle. The court found little doubt that debtor filed bankruptcy for the sole purpose of avoiding a substantial payment of the judgment debt and denied confirmation of her plan.In re Daniel, 2001 Bankr. LEXIS 554, 260 B.R. 763 (Bankr. E.D. Va. February 27, 2001) (Tice, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.08
5th Cir.
Exceptional circumstances did not warrant stay of tort litigation. E.D. La. Victims sued the debtor and others for exposure to nuclear waste. During the pendency of the litigation, the debtor filed its chapter 11 petition. The victims sought to sever the defendant from the tort litigation and proceed against the other defendants. The debtor filed an adversary proceeding to enjoin the action against its codefendants. In addition, the codefendants sought to intervene to assert their position that the tort litigation should not proceed. The bankruptcy court dismissed the proceeding in order that the tort litigation could proceed, albeit without the debtor. On appeal, the district court affirmed, holding that the bankruptcy court did not err in declining to issue a stay of the tort litigation involving nondebtor defendants. Actions against nondebtors should be stayed only if the movant demonstrates unusual circumstances as well as the usual elements for issuance of a stay. Unusual circumstances may entail either an identity of interest with the debtor or a showing that the action will have an adverse impact on the debtor’s ability to accomplish reorganization. Since neither of these circumstances existed, the bankruptcy court correctly denied a stay of the tort litigation.In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 6792, – B.R. – (E.D. La. May 18, 2001) (Vance, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.02
Employee’s claim for severance pay not entitled to priority treatment as administrative expense. N.D. Tex. A former employee of the chapter 7 debtor appealed a bankruptcy court order that denied his motion seeking priority treatment for his claim for severance pay as an administrative expense. The bankruptcy court held that claim for severance pay, which was based on a written employment agreement negotiated and performed prepetition, was not entitled to priority treatment as an administrative expense. The district court affirmed and held that the employee’s severance pay claim was not entitled to administrative expense priority. The court noted that contrary to the employee’s claims, the employment agreement did not provide either for severance in lieu of notice or for severance based upon length of service. Furthermore, the severance provision did not result from a transaction between the employee and the debtor-in-possession, and any benefit to the debtor from the provision did not accrue postpetition.Lasky v. Phones For All, Inc. (In re Phones For All, Inc.), 2001 U.S. Dist. LEXIS 7229, – B.R. – (N.D. Tex. June 1, 2001) (Fish, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.06[7][d]
Garnishment on bank account was an avoidable lien. Bankr. N.D. Tex. A judgment creditor filed and served a writ of garnishment on debtor’s bank. Before any funds were paid to the creditor, however, the debtor filed his chapter 7 petition and claimed all of the funds in the account as exempt. The debtor sought to avoid the judgment creditor’s lien created by the garnishment, and the bankruptcy court held that the garnishment merely created a judicial lien so that the lien, which impaired an exemption, was avoidable in its entirety. While a lien was created upon the writ of garnishment, service of that writ did not effect a transfer of title of the funds in the bank account. Rather, the funds remained titled in the debtor, and since the fixing of that lien impaired an exemption of the debtor, the lien was avoided. Second, the protection of section 522(f)(2)(C), which excludes liens arising from mortgage foreclosure from application of the subsection, applies only to liens covered by paragraph 522(f)(2), not to all liens governed by section 522(f). In any event, there was no evidence that the lien arose out of a mortgage foreclosure so that the protections of section 522(f)(2)(C) did not apply. In re Bensen, 2001 Bankr. LEXIS 527, – B.R. – (Bankr. N.D. Tex. May 17, 2001) (Jones, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.11
Debtors’ expenditures for private school for teenage son held reasonable, but plan confirmation was denied. Bankr. E.D. Tex. The chapter 13 trustee objected to the confirmation of the debtors’ plan on the grounds that the debtors were not applying all of their projected disposable income for the first three years of the plan. The trustee also alleged that the debtors were paying less on each allowed unsecured claim than the amount that would be paid on each such claim if the debtors’ estate was liquidated under chapter 7. The trustee questioned, among other things, the reasonableness of the debtors’ expenses for private education for their teenage son. Although the court concluded that the debtors demonstrated that the private school tuition and attendant costs were reasonably necessary for the maintenance and support of their dependent, the court nevertheless denied confirmation of the debtors’ plan. Setting aside the private school expenditures, the court found that the debtors failed to establish that a number of their proposed budget entries were reasonably necessary. The court concluded that the debtors’ discretionary expenses, in the aggregate, allowed the debtors to exceed their basic needs, including a reasonable cushion for recreation and exigencies; thus, they constituted an improper diversion of disposable income in violation of section 1325(b)(1)(B).In re Webb, 2001 Bankr. LEXIS 566, – B.R. – (Bankr. E.D. Tex. May 16, 2001) (Parker, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.08
6th Cir.
Petitions were filed improperly. Bankr. N.D. Ohio Two alleged debtors moved to dismiss the involuntary chapter 7 petitions filed against them. The petitioners were arrested for attempted theft and forgery after they attempted to purchase vehicles from one of the alleged debtors, a car dealership, by presenting a variety of fabricated documents as payment. The petitioners then filed the involuntary cases against the dealership and the municipal court judge who bound them over to the grand jury for indictments. The bankruptcy court dismissed the petitions, holding that the petitioners did not hold claims against the alleged debtors and were not eligible to file involuntary petitions against them. The petitioners’ legal theory was not supported by the facts or the law.In re Cadillac by DeLorean & DeLorean Cadillac, Inc., 2001 Bankr. LEXIS 573, – B.R. – (Bankr. N.D. Ohio May 25, 2001) (Morgenstern-Clarren, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:303.02, .03
Relief was denied. Bankr. S.D. Ohio A defendant bank filed a motion for relief from the automatic stay so that it could add the chapter 7 debtor to a state (Ohio) court lawsuit filed against it as a third party defendant. The lawsuit involved the forged endorsement of checks issued by a company to the payee bank, which were accepted and paid by the defendant bank. After the payee bank suffered losses, it sued the issuing company, which in turn sued the defendant bank. The debtor was an officer and shareholder of the company that allegedly forged the endorsement on each check. The defendant bank argued that the debtor should be added as a third party defendant so that the state court could determine liability between the debtor and the bank. The bankruptcy court denied the bank’s motion, holding that granting relief from the stay to add the debtor to the state court case could result in diminution of the assets of the estate and result in harm to the creditors. Because the bank contested its own liability in the state court action, the debtor’s contingent liability was speculative, as well. The bank was instead required to proceed against the debtor through the claims allowance process.In re Chari, 2001 Bankr. LEXIS 571, – B.R. – (Bankr. S.D. Ohio March 28, 2001) (Clark, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.07
State unemployment agency’s prepetition liens on debtor’s property did not reattach to postpetition preference proceeds recovered by trustee. 6th Cir. A state’s (Michigan’s) unemployment agency filed a statutory tax lien on the chapter 11 debtor’s property for past due unemployment taxes. When the debtor’s case was converted to chapter 7, the agency filed an amended claim. The agency claimed that its lien extended to proceeds recovered by the trustee when he initiated preference actions against the debtor’s other creditors. The bankruptcy court held that the agency’s prepetition liens on the debtor’s property did not reattach to postpetition preference proceeds recovered by the trustee. The district court affirmed, and the agency appealed. The United States Court of Appeals for the Tenth Circuit affirmed the district court’s decision, which affirmed the bankruptcy court’s conclusions that a debtor and his estate are two separate entities; proceeds recovered by trustees in preference actions are property of the bankruptcy estate (not the debtor); and although the agency had a statutory lien on the debtor’s property, that lien did not also attach to property acquired by the estate after the debtor’s bankruptcy petition had been filed.Frank v. Mich. State Unemployment Agency (In re Thompson Boat Co.), 2001 U.S. App. LEXIS 11681, – B.R. – (6th Cir. June 6, 2001) (Ryan, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.18
Wholly unsecured claim was not protected from modification by section 1322(b)(2). Bankr. E.D. Mich. The chapter 13 debtor’s homestead was subject to claims secured by first and second mortgages. The first mortgagee held a claim in excess of $30,000, and the second mortgagee, the creditor, was owed approximately $21,000. The property was valued at $25,000. The debtor’s chapter 13 plan treated the creditor’s claim the same as all other nonpriority unsecured claims, thereby effectively 'stripping off' the lien. The creditor objected, arguing that such a modification of its lien was prohibited by section 1322(b)(2). The bankruptcy court noted the divided opinion with respect to whether section 1322(b)(2) was a freestanding provision that trumped the modifications permitted under section 506(a). The court elected to follow majority opinion and held that the better view was that the United States Supreme Court’s ruling in Nobelman v. American Sav. Bank, 508 U.S. 324, 124 L. Ed. 2d 228, 113 S. Ct. 2106 (1993) construed section 1322(b)(2) in such a way that would permit modification of mortgage-secured claims that were deemed wholly unsecured by operation of section 506(a). The court reasoned that this majority view was based on textual arguments about Nobelman that required the conclusion that the anti-modification clause did not cover wholly unsecured mortgages and that the contrary view was unpersuasive (citing Collier on Bankruptcy 15th Ed. Revised). In re Hoskins, 2001 Bankr. LEXIS 563, – B.R. – (Bankr. E.D. Mich. April 20, 2001) (Spector, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.06[1][a][i]
7th Cir.
Debt excepted from discharge where farmer debtor improperly converted creditor’s collateral by selling one crop to a third party and feeding another crop to his pigs. Bankr. N.D. Ind. Prior to his bankruptcy case, the debtor, who had a feeder pig operation and also farmed several plots of land, granted a creditor a security interest in certain livestock, crops and equipment. The creditor alleged that the debtor sold some of the crops that secured the loan (i.e., his soybean crop) to a third party, and also that he fed other crops securing the loan (i.e., his corn crop) to his pigs. The creditor sought a determination that the debtor’s actions with respect to the collateral constituted a willful and malicious injury, and that its claim against the debtor was nondischargeable under section 523(a)(6). The bankruptcy court held that the debtor’s disposition of the creditor’s collateral constituted a willful and malicious injury, and the debt was nondischargeable under section 523(a)(6). The court concluded that the debtor’s actions in selling the soybeans and then using the sale proceeds for purposes other than payment of the obligation were clearly intentional, as were his actions in feeding the corn crop to his pigs. These actions were in conscious disregard of the debtor’s duties; thus, they were also malicious. In addition, the court found that the debtor failed to establish a satisfactory explanation for his actions, such as duress, compulsion or a course of dealing that the creditor consented to, acquiesced in or tolerated.ABF, Inc. v. Russell (In re Russell), 2001 Bankr. LEXIS 565, 262 B.R. 449 (Bankr. N.D. Ind. March 30, 2001) (Grant, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
9th Cir.
Counsel’s compensation was properly reduced. 9th Cir. The chapter 7 debtor’s counsel appealed the district court’s affirmance of a bankruptcy court order reducing its attorney’s fees from the amount specified in the debtor’s contract. The bankruptcy court had found that the petition was simple and that the firm’s minimal work did not involve any factual or legal complexity. The Court of Appeals for the Ninth Circuit affirmed, holding that the bankruptcy court’s reduction of attorney’s fees was not an abuse of discretion. The court had analyzed the work that the firm performed and took into account the standard rates for bankruptcy representation in the area (citing Collier on Bankruptcy, 15th Ed. Revised).American Law Center PC v. Stanley (In re Jastrem), 2001 U.S. App. LEXIS 11803, – F.3d – (9th Cir. June 7, 2001) (Fletcher, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:330.04
Objections were sustained. Bankr. D. Idaho The chapter 13 debtor’s former business partner and former wife objected to confirmation of the debtor’s plan, arguing that it had not been proposed in good faith. Although the debtor proposed to make substantial payments for 48 months, he failed to properly disclose and schedule all his assets, and his omissions became an issue. The plan preferred the claims of the debtor’s friend, brother and accountant to those of other creditors despite a lack of evidence that the claims deserved priority treatment. The bankruptcy court sustained the objections, holding that the debtor failed to carry his burden of proving that his plan was proposed in good faith. The court allowed the debtor an opportunity to propose a confirmable plan (citing Collier on Bankruptcy, 15th Ed. Revised).In re James, 2001 Bankr. LEXIS 569, 260 B.R. 498 (Bankr. D. Idaho March 6, 2001) (Pappas, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.04
10th Cir.
Automatic stay did not apply to nondebtor defendants. E.D. La. Victims sued the debtor and others for exposure to nuclear waste. During the pendency of the litigation, the debtor filed its chapter 11 petition. The victims sought to sever the defendant from the tort litigation and proceed against the other defendants. The debtor filed an adversary proceeding to enjoin the action against its codefendants. In addition, the codefendants sought to intervene to assert their position that the tort litigation should not proceed. The bankruptcy court dismissed the proceeding and concluded that the tort litigation could proceed, albeit without the debtor. On appeal, the district court affirmed, holding that extension of the automatic stay to the nondebtor codefendants in a tort suit was not warranted. The claims of the codefendants and debtor were not sufficiently derivative, the defendants did not share interests and identity with the debtor, and, while there was a potential for an indemnity claim against the debtor, there was no absolute right to hold the debtor liable pursuant to the agreements between the codefendants.In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 6792, – B.R. – (E.D. La. May 18, 2001) (Vance, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3][d]
11th Cir.
Bankruptcy court exercised equitable power to grant ownership of property lot to debtor’s ex-husband. Bankr. M.D. Fla. The chapter 7 trustee filed an adversary proceeding against the debtor’s ex-husband seeking to avoid any interest of the ex-husband in certain real property under section 544(a)(3). The trustee argued that pursuant to section 544(a)(3), he could avoid the ex-husband’s unperfected interest in three property lots despite the fact that quit claim deeds transferring the property to the ex-husband effectively bound the debtor and her ex-husband. The bankruptcy court held that the trustee could avoid any interest held by the ex-husband in the three lots at issue. Thus, the lots belonged wholly to the chapter 7 estate and could be sold for distribution to creditors pursuant to section 363(h). However, upon the trustee’s request, the court also exercised its equitable powers under section 105(a) and granted the ex-husband ownership of one of the lots. The court said that the trustee’s request was gracious and concluded that granting the ex-husband ownership of one lot was proper since the trustee admitted that the ex-husband paid value for the property, improved the property, and resided on the property full time under color of a valid transfer voidable only by a bona fide purchaser without notice.Grant v. Grantham (In re Eiland), 2000 Bankr. LEXIS 1775, 260 B.R. 301 (Bankr. M.D. Fla. November 21, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.02
Debtor could not be removed from leased premises. Bankr. M.D. Ga. Owner leased property to the debtor’s principal who permitted the debtor to utilize the property for its autobody shop. After the debtor filed its chapter 11 petition, the lessor obtained relief from stay to pursue its state court remedies against the debtor and its principal. Although the debtor continued to operate its shop on the premises, all parties agreed that the debtor had no further interest in the leasehold after failing to accept or reject assumption of the lease. The lessor moved to compel the debtor to surrender the premises, and the bankruptcy court held that since it held the property by permission of the party entitled to possession, the debtor could not be compelled to surrender the premises. Until such time as the state court issued an order terminating the principal’s right to possession of the property, the principal had the right to possess the property. Since the debtor was in possession by permission of the principal, the bankruptcy court did not have the authority to evict the debtor. Moreover, there was no need for an evidentiary hearing since the parties had stipulated to the relevant facts.Wages v. Peach Auto Painting & Collision, Inc. (In re Peach Auto Painting & Collision, Inc.), 2001 Bankr. LEXIS 529, – B.R. – (Bankr. M.D. Ga. March 16, 2001) (Laney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.04
Court overruled objection to claimed exemption, with prejudice. Bankr. M.D. Fla. Creditor, a credit card transaction processor, filed a proof of claim against the debtor’s estate based on money allegedly owed due to breach of an agreement between the creditor and a company at least partially controlled by the debtor. In the agreement, the debtor had personally guaranteed any contract damages incurred by the company. When the company was unable to perform, the creditor pursued the debtor, who subsequently filed a chapter 7 petition. The creditor, whose claim had not been reduced to judgment in state court, filed an adversary complaint against the debtor that included, among other things, an objection to the debtor’s exemptions in household property allegedly owned by her husband. The bankruptcy court overruled the objection, with prejudice, because the deadline for filing objections to exemptions had expired, the objection should have been brought in the main case, not in an adversary proceeding that raised additional claims, and neither party presented any evidence on the substance of the objection.Cardservice Int’l, Inc. v. Inman (In re Inman), 2000 Bankr. LEXIS 1770, 260 B.R. 233 (Bankr. M.D. Fla. December 13, 2000) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.05
Court rejected 'implied representation' theory and held that debtor’s credit card debt was discharged. Bankr. M.D. Fla. Prior to the debtor’s chapter 7 filing, a bank issued the debtor a pre-approved credit card. After the debtor’s chapter 7 case was commenced, the bank’s successor in interest (due to a merger) filed an adversary proceeding against the debtor seeking a determination that debt resulting from the debtor’s use of the credit card was excepted from discharge under section 523(a)(2)(A). The bankruptcy court held that since the bank failed to bring forth evidence of some actual misrepresentation to satisfy the representation element of the section 523(a)(2)(A) actual fraud exception to discharge, the bank failed to present a prima facie case for exception from discharge. The court expressly rejected the 'implied representation' theory, and held that a credit card holder does not make a representation of intention or ability to pay by using a credit card.Bank of Am. N.A. v. Way (In re Way), 2000 Bankr. LEXIS 1778, 260 B.R. 291 (Bankr. M.D. Fla. October 6, 2000) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08