Assumption of Contract Bars Avoidance Action

In In re Greater Southeast Community Hospital Corp. I, 327 B.R. 26 (Bankr. D. D.C. 2005), Bankruptcy Judge Martin S. Teel Jr. addressed whether the assumption of an executory contract limited a liquidating trustee's power to recover alleged preferential transfers. The debtor had confirmed a chapter 11 plan, which authorized the debtor to assume or reject certain contracts after confirmation based on the debtor's ability to reach an agreement on the amount of the cure obligations owing under each executory contract. Additionally, the plan established a liquidating trust that was authorized to assert preferential transfers and other causes of action. The liquidating trustee filed a declaratory judgment action seeking to recover pre-petition payments made to a creditor who was party to an unassumed executory contract. The bankruptcy court held that the operation of §§547 and 365 was mutually exclusive, rejecting the argument that the Bankruptcy Code did not bar the avoidance and recovery of payments made pursuant to an executory contract. Since the debtor's assumption of the executory contract carries with it all of the benefits and burdens of the contract, a trustee could not both assume the benefits of the contract and seek to avoid payments made to satisfy the obligations under the contract. The bankruptcy court also dismissed the liquidating trustee's argument that the hypothetical liquidation test under §547(b)(5) must be determined as of the date of the petition, without taking into account any post-petition proceedings. Once the assumption power has been exercised under §365, pursuit of the trustee's powers under §547 is barred and rendered irrelevant as the hypothetical liquidation analysis.

Equitable Tolling Does Not Extend Deadline to Filed Dischargeability Complaint

The ability of a bankruptcy court to extend the time period for filing a nondischargeability complaint was recently considered in In re Eaton, 327 B.R. 79 (Bankr. D. N.H. 2005). Ten days after the deadline, the plaintiff filed a complaint seeking to have certain debts held nondischargeable. The debtor filed a motion for summary judgment alleging that the complaint should be dismissed based on the plaintiff's failure to timely file the complaint. In opposing the motion for summary judgment, the plaintiff argued that the deadline should be extended since the debtor had not properly sent notice to the plaintiff of the deadline, the failure to timely file the complaint was excusable neglect based on an error in calculating the bar date by plaintiff's counsel and/or that the deadline should be equitably tolled. Bankruptcy Judge J. Michael Deasy found that the plaintiff had actual notice of the deadline in time to file the complaint. Additionally, the bankruptcy court did not believe that the failure of plaintiff's counsel to accurately calculate the deadline could constitute excusable neglect. In considering the plaintiff's arguments relating to equitable tolling, the bankruptcy court reviewed and rejected the various decisions from other courts holding that the time period to file a complaint could be extended after the deadline had passed. The failure to timely move for an extension of the deadline to file a complaint within the time period set forth under Bankruptcy Rule 4007 was fatal to the complaint.

9019 Criteria Not Changed by Arthur Andersen Decision

In In re Adelphia Comm. Corp., 327 B.R. 143 (Bankr. S.D.N.Y. 2005), Bankruptcy Judge Robert E. Gerber was asked to approve a settlement agreement among the debtors, the U.S. Department of Justice, the Securities and Exchange Commission and former insiders of the debtors. At the time the debtors entered into settlement negotiations, they were faced with numerous claims by each of these entities, as well as potential criminal liability. After more than a year of negotiations, there was an agreement that required the debtors to establish a substantial restitution fund for persons that held publicly traded securities and were victims of the debtors' pre-petition conduct. In reviewing the settlement, the bankruptcy court considered the factors for approval of a settlement set forth in In re Texaco Inc., 84 B.R. 893, 902 (Bankr. S.D.N.Y. 1988). After applying each of the factors, the bankruptcy court found that the settlement was fair and equitable and in the best interest of the debtors' estates. Following entry of the bankruptcy court's order approving the settlement, the bankruptcy court in In re Adelphia Comm. Corp., 327 B.R. 175 (Bankr. S.D.N.Y. 2005), granted a motion for reconsideration to consider the decision of Arthur Andersen LLP v. United States, 125 S.Ct. 2129 (2005), and additional facts that had arisen based on subsequent public statements made by the government in related litigation. The bankruptcy court found that the Supreme Court's opinion in Arthur Andersen did not change the factors that the bankruptcy court considered in approving the settlement, specifically that the debtors' risk of being indicted on criminal charges was not eliminated by the Arthur Andersen decision. Additionally, any new facts arising from the government's arguments in related litigation did not alter the bankruptcy court's determination concerning the likelihood of the debtors' ability to recover against the former insiders.

Leases Could Not Be Recharacterized as Mortgages

In In re Mirant Corp., 327 B.R. 262 (Bankr. N.D. Tex. 2005), Bankruptcy Judge D. Michael Lynn considered the question of whether it was appropriate to recharacterize pre-petition leases as mortgages. In order to finance the purchase of certain power-generation assets, the debtors had entered into a complex series of transactions resulting in a series of leases with the defendants. Post-petition, the debtors sought to recharacterize these lease obligations, arguing that the transactions were not true leases but were actually disguised mortgages. The bankruptcy court recognized that recharacterization would require the bankruptcy court to exercise its equitable powers and further noted that courts generally are instructed to use such powers sparingly. The bankruptcy court maintained that the exercise of equitable powers was permitted only when it was in furtherance of the Code and dismissed the motion to recharacterize.

Miscellaneous

•Monster Content LLC v. Homes.com Inc., 331 B.R. 438 (N.D. Cal. 2005) (if a chapter 11 creditor can be identified through reasonably diligent efforts, due process demands reasonable actual notice of claims bar date even if creditor had actual knowledge of bankruptcy and even if debtor believed claim was speculative);

•In re Nettel Corp. Inc., 327 B.R. 8 (Bankr. D. D.C. 2005) (award of prejudgment interest in preference proceeding calculated on prime rate of interest rather than Treasury Bill rate);

•In re Dehon Inc., 327 B.R. 38 (Bankr. D. Mass. 2005) (Eleventh Amendment immunity did not apply in preferential transfer action);

•In re Perez, 327 B.R. 94 (Bankr. E.D.N.Y. 2005) (suspended attorney found conducting an "unauthorized practice of law" by assisting pro se former client in filing a response to relief from stay motion);

•In re Bruno, 327 B.R. 104 (Bankr. E.D.N.Y. 2005) (former counsel to chapter 7 trustee was not entitled to a portion of contingency fee award, since firm had failed to adequately disclose conflicts of interest prior to initial employment);

•In re Pulver, 327 B.R. 125 (Bankr. W.D.N.Y. 2005) (amendment to timely filed complaint allowed where newly plead causes of action arose out of the same conduct, transaction or occurrence as set forth in the original pleading);

•In re Cehula, 327 B.R. 241 (Bankr. W.D. Pa. 2005) (debtor failed to satisfy burden of showing inability to repay student loans, since debtor did not undertake effort to reduce current expenses, including reduction of monthly student loan payments);

•In re Globe Metallurgical Inc., 327 B.R. 182 (Bankr. S.D.N.Y. 2005) (mere conclusory statement of meritorious defense was insufficient to support motion to vacate default judgment); and

•In re CVEO Corp., 327 B.R. 210 (Bankr. D. Del. 2005) (bankruptcy court could not grant summary judgment on "mere conduit" defense to preference action where questions remained as to defendant's dominion and control over the funds)