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  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.

   

  January 28, 2001

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

  1st Cir.

  § 502(a) Proof of claim to which no party objected was deemed allowed in the amount stated.
  Clifford v. United States of America (D. Mass.)

  § 503(b)(1)(B) A portion of unemployment benefit obligations were taxes incurred by the estate.
  In re Boston Regional Medical Center (Bankr. D. Mass.)

  § 727(a)(2) Debtor’s transfer of cash to his father supported finding of actual intent to defraud creditor.
  Annino, Draper & Moore, P.C. v. Lang (In re Lang) (B.A.P. 1st Cir.)

  § 1307(d) Sua sponte conversion to chapter 13 was necessary.
  In re Kazis (Bankr. D. Mass.)

  § 1329 Trustee’s proposed amendment to confirmed plan was warranted.
  Barbosa v. Soloman (D. Mass.)

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  2d Cir.

  § 304(c) Preliminary injunction granted, in part.
  In re MMG LLC (Bankr. S.D.N.Y.)

  § 331 Compensation was denied, in part.
  In re Bennett Funding Group (Bankr. N.D.N.Y.)

  § 362(b)(4) Exception to stay was inapplicable.
  In re Ottenschot (Bankr. N.D.N.Y.)

  § 544(b)(1) Lease payments were essentially mortgage payments on behalf of insider, rendering transfers fraudulent conveyances. Mendelsohn v. Nat’l Westminster Bank, U.S.A. (In re Frank Santora Equip. Corp.) (Bankr. E.D.N.Y.)

  Rule 7012(b) Court lacked jurisdiction to hear debtor’s claim regarding imposition of unemployment insurance tax rating on transferees.
  Victory Markets, Inc. v. NYS Unemployment Ins. (In re Victory Mkts.) (Bankr. N.D.N.Y.)

  Rule 7026 Trustee failed to demonstrate cause to compel depositions prior to his own compliance with discovery requests.
  Breeden v. Arkin, Schaffer & Supino (In re Bennett Funding Group) (Bankr. N.D.N.Y.)

  Rule 9024 Chapter 13 confirmation order was not revoked.
  Associates Home Equity Servs. v. Lemon (In re Lemon) (Bankr. N.D.N.Y.)

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  3d Cir.

  § 365(d)(10) Claim not allowed for default arising in first 60 days postpetition.
  Winthrop Resources Corp. v. Forman Enters., Inc. (In re Forman Enters., Inc.) (Bankr. W.D. Pa.)

  § 707(b) Nondebtor spouse’s income was considered in determining debtor’s ability to pay for purposes of substantial abuse inquiry.
  United States Trustee v. Staub (In re Staub) (Bankr. M.D. Pa.)

  28 U.S.C. § 1412 'First filed' rule mandated dismissal of action against the trustee.
  Butera v. Ryan (E.D. Pa.)

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  4th Cir.

  § 349(b) Appeal dismissed as moot.
  Constructivist Found. v. Bonner (D. Md.)

  § 522(h) Debtor was entitled to avoid transfer of garnished wages to judgment creditor.
  Susquehanna Fin. v. Norcia (In re Norcia) (D. Md.)

  § 523(a)(5) Nondischargeability of debt was affirmed on appeal.
  Adams v. Council, Baradel, Kosmerl & Nolan, P.A. (In re Adams) (D. Md.)

  § 523(a)(15) Former spouse was required to commence proceeding to have marital debt determined nondischargeable.
  Nelson v. Nelson (In re Nelson) (Bankr. E.D. Va.)

  § 541(c) Deferred compensation plan was excludable from the estate.
  In re Mueller (Bankr. D. Md.)

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  5th Cir.

  § 503(b)(1)(A) Administrative expense claim was denied.
  In re SGS Studio, Inc. (Bankr. N.D. Tex.)

  § 523(a)(3) Debt was discharged despite lack of notice to the creditor.
  Lott Furniture v. Ricks (In re Ricks) (Bankr. M.D. La.)

  § 523(a)(15) Indebtedness to former wife was nondischargeable.
  Smith v. Smith (In re Smith) (Bankr. N.D. Tex.)

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  6th Cir.

  § 363(e) Debtors’ motion for orders authorizing subleases granted.
  In re Service Merchandise Co., Inc. (Bankr. M.D. Tenn.)

  § 523(a)(6) Administrative law findings that debtor fired employees for collective activity constituted willful and malicious injury. National Labor Relations Bd. v. Branoff (In re Branoff) (Bankr. E.D. Mich.)

  § 523(a)(6) Debts resulting from aggravated assault were nondischargeable.
  Mitchell v. Mitchell (In re Mitchell) (Bankr. N.D. Ohio)

  Rule 9019 Compromise of marshaling of assets litigation approved.
  In re Universal Electric Sign Co., Inc. (Bankr. E.D. Wis.)

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  7th Cir.

  § 523(a)(9) Debtor’s motion for summary judgment was denied.
  Gage v. Hagen (In re Hagen) (Bankr. E.D. Wis.)

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  8th Cir.

  § 522(l) Debtor was entitled to appreciated value of exemption.
  Stoebner v. Wick (In re Wick) (D. Minn.)

  § 523(a)(2)(A) State (Kansas) court fraud judgment was nondischargeable.
  Burt v. Maurer (In re Maurer) (B.A.P. 8th Cir.)

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  9th Cir.

  § 362(h) Complaint stated cause of action for violation of automatic stay.
  Bassett v. American Gen. Fin., Inc. (In re Bassett) (B.A.P. 9th Cir.)

  § 506(b) Section 506(b) did not determine debtor’s entitlement to attorney’s fees.
  Hassen Imports P’ship v. KWP Fin. VI (In re Hassen Imports P’ship) (B.A.P. 9th Cir.)

  § 524 Section 524 did not imply a private right of action.
  Peterson v. Wells Fargo Bank, N.A. (In re Peterson) (E.D. Cal.)

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Collier Bankruptcy Case Summaries

1st Cir.

Proof of claim to which no party objected was deemed allowed in the amount stated. D. Mass. The United States filed a proof of claim for federal income taxes and a separate claim for a responsible person penalty. The debtor objected to the claim for the responsible person penalty and, after trial, the bankruptcy court determined that the debtor was not a responsible person under 26 U.S.C. § 6672. In addition, the bankruptcy court inexplicably issued a judgment reducing the $12,586 claim for income taxes to $3,765. Subsequently, and without notice to the United States, the court issued an order directing the United States to disgorge funds. The United States appealed and the district court reversed, holding that the bankruptcy court erred in reducing the claim for income taxes since no party had objected to that claim. No evidence having been presented to contest the validity of the claim, it was valid, and, therefore, deemed allowed in the amount stated on the claim. It appeared that the amount in the judgment was a mere clerical error.Clifford v. United States of America, 2000 U.S. Dist. LEXIS 18001, – B.R. – (D. Mass. November 21, 2000) (Gorton, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.02[1]

A portion of unemployment benefit obligations were taxes incurred by the estate. Bankr. D. Mass. Chapter 11 debtor, a nonprofit hospital, opted to make payments in lieu of contributions under state (Massachusetts) law. Under this option, the hospital reimbursed the state’s unemployment benefits fund for actual payments instead of making quarterly contributions generally required of businesses. The state filed a proof of claim for the benefits paid to debtor’s employees discharged prepetition, asserting that the claim was a priority tax. Thereafter, the debtor closed the hospital and discharged all of its employees, many of whom applied for unemployment benefits. Accordingly, the state filed a second claim for unemployment benefits, claiming the entire amount as an administrative expense as a tax incurred by the estate because the benefits were paid after the filing of the chapter 11 case. Alternatively, the state asserted that the obligation was an administrative expense because the terminations occurred after the filing of the chapter 11 case. Upon the debtor’s objection to the proof of claim for the administrative expenses, the bankruptcy court held that administrative status was accorded only to the extent the benefits were attributable to employment by the debtor, rather than the prepetition hospital entity. Only the obligations arising from benefits to persons who were employed by the debtor, and whose base employment periods included postpetition services, were entitled to administrative expense status. Thus, benefits paid to employees terminated prepetition were not administrative expenses, even though the benefits were paid postpetition. The benefits paid to employees terminated postpetition but whose base periods, as defined by applicable state law, did not include postpetition service were not administrative expenses. However, the benefits paid to employees whose benefits were based upon periods that included some postpetition service to the estate, to the extent the benefits were attributable to that postpetition service were an administrative expense (citing Collier on Bankruptcy, 15th Ed. Revised).In re Boston Regional Medical Center, 2000 Bankr. LEXIS 1485, – B.R. – (Bankr. D. Mass. December 4, 2000) (Kenner, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.07

Debtor’s transfer of cash to his father supported finding of actual intent to defraud creditor. B.A.P. 1st Cir. The creditor was a law firm representing the debtor on a claim against the debtor’s employer. When the employer failed to pay sums due pursuant to an arbitration award, the debtor entered into a contingency fee agreement with the creditor for the purpose of collection. After recovery from the employer and payment to the debtor, the creditor demanded the contingency fee, which the debtor did not pay. After the debtor filed a chapter 7 petition, the creditor filed an adversary proceeding on the ground that the debtor fraudulently transferred the proceeds of the award to his father for the express purpose of avoiding the creditor’s claim, in violation of section 727(a)(2)(A). The bankruptcy court denied the debtor’s discharge. This appeal followed, based on the debtor’s argument that the court improperly found that the debtor made the transfers with actual fraudulent intent. The B.A.P. for the First Circuit affirmed, holding that the debtor’s lack of credibility, the transfers to a close relative when the debtor was being pursued by a creditor, and the failure to keep records of transfers made for less than equivalent value, all supported the finding that the debtor acted with actual intent to hinder, delay and defraud the creditor. Annino, Draper & Moore, P.C. v. Lang (In re Lang), 2000 Bankr. LEXIS 1586, – B.R. – (B.A.P. 1st Cir. December 20, 2000) (PER CURIAM).

Collier on Bankruptcy, 15th Ed. Revised 6:727.02[3]

Sua sponte conversion to chapter 13 was necessary. Bankr. D. Mass. The chapter 13 trustee filed a motion to dismiss the debtor’s case after the debtor failed to make monthly plan payments as well as sales or payroll taxes for the debtor’s fur and storage business. The bankruptcy court sua sponte converted the case to chapter 11, holding that conversion to chapter 11 reorganization in the hands of a trustee who could be successful in the organization of the business was in the best interests of the estate. The court noted that because the debtor failed to pay the necessary operating costs such as insurance and taxes, a chapter 11 trustee would protect the interests of creditors.In re Kazis, 2000 Bankr. LEXIS 1528, – B.R. – (Bankr. D. Mass. December 14, 2000) (Rosenthal, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1307.05

Trustee’s proposed amendment to confirmed plan was warranted. D. Mass. The chapter 13 debtors appealed the district court’s decision upholding the bankruptcy court’s order granting the trustee’s motion to modify their confirmed plan. Pursuant to a stipulation between the debtors and the lienholder on the debtors’ rental property, the lender’s secured claim was stripped down to the agreed market value of the property. The stipulation and plan provided for payment in full of the secured claim and payment of the remaining unsecured balance at not less than ten percent. After confirmation, but before the case was closed, the property was sold for twice the stipulated value. The trustee moved to compel the debtors to amend their plan in order to distribute the proceeds from the sale to the unsecured creditors. The bankruptcy court granted the motion and the district court affirmed. The Court of Appeals for the First Circuit affirmed, holding that the trustee was not precluded by res judicata from seeking an amendment to the confirmed plan pursuant to section 1329. The court found that it was antithetical to the system to allow the debtors to strip down the mortgage, underpay the unsecured creditors and obtain a super discharge, while selling the property mortgaged for a price of two times its estimated value for purposes of the strip down, and keeping to themselves the excess of the proceeds (citing Collier on Bankruptcy, 15th Ed. Revised).Barbosa v. Soloman, 2000 U.S. App. LEXIS 33448, – F.3d – (D. Mass. December 21, 2000) (Casellas, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1329

2d Cir.

Preliminary injunction granted, in part. Bankr. S.D.N.Y. The joint provisional liquidators appointed by the Cayman Islands court commenced an ancillary case under section 304 and sought a preliminary injunction against the commencement or continuation of litigation against the debtor in the United States. One creditor, the debtor’s former founding shareholder, opposed the motion, arguing that he should be permitted to liquidate his remaining claims before an arbitrator in the United States, as provided for in the parties’ shareholder agreement. The bankruptcy court sustained the shareholder’s objection, holding that the motion for preliminary injunction was granted except to the extent that the shareholder could continue the arbitration proceedings in the United States. The court noted that the provisional liquidation proceedings were fair and the costs of arbitration would not threaten the estate (citing Collier on Bankruptcy, 15th Ed. Revised).In re MMG LLC, 2000 Bankr. LEXIS 1535, – B.R. – (Bankr. S.D.N.Y. December 26, 2000) (Bernstein, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:304.08

Compensation was denied, in part. Bankr. N.D.N.Y. Attorneys for the chapter 11 trustee filed a tenth interim application for payment of professional fees and reimbursement of expenses. The United States trustee and creditors’ committee objected to the application. The bankruptcy court disallowed, in part, the requested application, holding that reductions to the fees and expenses sought in the application were warranted. The court noted that many of the tasks were purely clerical and did not require the services of highly compensated paralegals. Several of the narrative descriptions in the time records were so vague that the court was compelled to conclude that the work described required no professional judgment. In re Bennett Funding Group, 2000 Bankr. LEXIS 1573, – B.R. – (Bankr. N.D.N.Y. December 28, 2000) (Gerling, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:331.03

Exception to stay was inapplicable. Bankr. N.D.N.Y. The town filed a motion seeking a determination that enforcement of a judgment of foreclosure on the chapter 13 debtor’s real property was exempt from the automatic stay pursuant to section 362(b)(4). The town held a secured claim in connection with a fine for violation of a junk storage ordinance and had taken an assignment of a judgment of foreclosure entered in favor of the mortgage holder. The town requested leave to proceed with the foreclosure sale of the premises, arguing that the sale represented another means at its disposal to further the public health, safety and welfare of the town’s residents and should be exempt from the automatic stay. The bankruptcy court denied the motion, holding that the town was not exempt from the automatic stay when attempting to enforce the judgment of foreclosure. The court noted that the judgment of foreclosure was obtained by the mortgage holder and was not obtained in an action or proceeding by the town to enforce its regulatory power.In re Ottenschot, 2000 Bankr. LEXIS 1576, – B.R. – (Bankr. N.D.N.Y. September 18, 2000) (Gerling, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5]

Lease payments were essentially mortgage payments on behalf of insider, rendering transfers fraudulent conveyances. Bankr. E.D.N.Y. In 1987, the debtor corporation entered a written lease agreement with one of its insiders, under which the debtor was tenant and the insider was landlord of commercial premises at an annual rent of $120,000. The insider eventually assigned his interest in the lease to the creditor for the purpose of securing payment due to the creditor from the insider on two mortgage notes. The creditor also held notes for two loans extended to the debtor. A municipal taxing authority also had a tax warrant against the debtor that remained unsatisfied. The debtor and a related entity filed chapter 11 petitions, later converted to chapter 7. The chapter 7 trustee then filed adversary proceedings seeking to avoid eight payments made by the debtor to the creditor within the year prior to the petition. The creditor argued that the transfers satisfied the fair consideration requirement under state (New York) law because they were rent payments made directly to the creditor by the debtor pursuant to the assignment of lease. The bankruptcy court determined that the payments were mortgage payments, not lease payments and that, as a result, the creditor failed to establish the fair consideration element. The court went on to hold that the trustee had established his fraudulent conveyance claim, since the remaining two elements were satisfied: the debtor was insolvent at the time of the transfers, and a final judgment was rendered that remained unsatisfied, the last element giving the trustee avoidance powers under section 544(b)(1).Mendelsohn v. Nat’l Westminster Bank, U.S.A. (In re Frank Santora Equip. Corp.), 2000 Bankr. LEXIS 1537, – B.R. – (Bankr. E.D.N.Y. December 7, 2000) (Eisenberg, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.09

Court lacked jurisdiction to hear debtor’s claim regarding imposition of unemployment insurance tax rating on transferees. Bankr. N.D.N.Y. In 1995, the debtor filed a chapter 11 petition. The creditor, the state (New York) division of labor, unemployment insurance division, filed an administrative expense claim, representing the debtor’s postpetition unemployment insurance tax obligation. Subsequently, the debtor’s plan was confirmed, under which the debtor satisfied the creditor’s claim. Also pursuant to the plan, many of the debtor’s stores were sold individually to 17 separate investors, and these transferees assumed a portion of the debtor’s experience rating for determining unemployment insurance tax premiums. The creditor asserted that it notified the transferees of the partial transfer of the experience rating, that such rating resulted in a negative account balance, and that if the transferees made voluntary payments, their tax rate could be reduced. The debtor filed an adversary proceeding, arguing that the partial transfer and the method of crediting the amounts previously paid by the debtor violated the terms of the plan and that the higher unemployment insurance experience tax rating impacted adversely on the administration of the plan. The creditor argued that the bankruptcy court lacked subject matter jurisdiction to hear the issue because the dispute turned solely on matters involving nondebtor parties. As an initial matter, the court found that Rule 7012(b) provided for lack of subject matter jurisdiction as a defense to a pleading and went on to dismiss the debtor’s complaint, holding that because there was a reasonable recourse to court by the debtor, there was sufficient remedy to prohibit a federal court from enjoining the state process.Victory Markets, Inc. v. NYS Unemployment Ins. (In re Victory Mkts.), 2000 Bankr. LEXIS 1568, – B.R. – (Bankr. N.D.N.Y. October 2, 2000) (Gerling, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7012.04

Chapter 13 confirmation order was not revoked. Bankr. N.D.N.Y. The secured creditor filed an adversary proceeding against the chapter 13 debtors seeking revocation of the order confirming their plan. The debtors proposed to bifurcate the creditor’s claim based on what they deemed to be the value of the property and pay the secured portion of the claim in full. After the plan was confirmed without objection, the creditor argued that the plan’s language was vague and misleading and thereby failed to provide sufficient notice of the treatment of its claim. The debtors filed a motion for summary judgment dismissing the action. The bankruptcy court granted the debtors’ motion for summary judgment, holding that because the creditor did not allege actual fraud on the part of the debtors, revocation of the confirmation order was not warranted. The court noted that fraud was the only ground for relief available for revocation of the chapter 13 confirmation order (citing Collier on Bankruptcy, 15th Ed. Revised).Associates Home Equity Servs. v. Lemon (In re Lemon), 2000 Bankr. LEXIS 1574, – B.R. – (Bankr. N.D.N.Y. October 26, 2000) (Gerling, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9024

3d Cir.

Claim not allowed for default arising in first 60 days postpetition. Bankr. W.D. Pa. A creditor who leased computer equipment to the chapter 11 debtor moved for payment of attorney’s fees required under its lease. The fees were incurred in objecting to the debtor’s motion to reject unexpired real property leases and in preserving its rights with respect to the debtor’s motion to grant a senior lien to its secured lender. The debtor had not yet rejected or assumed the creditor’s equipment lease. The bankruptcy court granted the fee request, in part, holding that the lessor was entitled to fees only for those actions which were taken pursuant to the lease and were necessary to enforce the debtor’s postpetition obligations arising on and after the 60th day of the case. The lessor was not allowed an administrative expense claim for work performed within the first 60 days postpetition, which did not fall within section 365(d)(10), and work that did not benefit the estate under section 503(b)(1).Winthrop Resources Corp. v. Forman Enters., Inc. (In re Forman Enters., Inc.), 2000 Bankr. LEXIS 1529, – B.R. – (Bankr. W.D. Pa. December 14, 2000) (Fitzgerald, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.04[6]

Nondebtor spouse’s income was considered in determining debtor’s ability to pay for purposes of substantial abuse inquiry. Bankr. M.D. Pa. The debtor filed a chapter 7 petition, reporting net monthly expenses of $1,726 and net monthly income of $1,458. The debtor’s reported unsecured debts totaled $14,100 and his monthly expenses included a $900 payment for postsecondary education of two children. In response to the trustee’s request, the debtor filed amended schedules to disclose his nondebtor spouse’s net monthly income of $27,384 and expenses of $11,368. A fraction of the nondebtor’s income was used to compensate for the debtor’s monthly deficit. The United States trustee filed a motion pursuant to section 707(b) to dismiss the petition, noting the ability and willingness of the nondebtor to assume the debtor’s personal living expenses, which would allow him to apply his income to debts, and alleging that the $900 payment was unreasonable and unnecessary. The debtor argued that to require the nondebtor to pay his living expenses would be effectively to require her to repay his debts. The bankruptcy court first noted that the essential element in a section 707(b) case was an inquiry into the debtor’s ability to pay his debts, and that the court consider the income and expenses of both the debtor and nondebtor spouse in determining income for section 707(b) purposes. The court finally held that the nondebtor spouse’s income was not being rendered liable for the debtor’s debts but was simply being considered in determining whether the debtor himself had available discretionary income by virtue of sharing a joint household. The court granted the motion and dismissed the petition, reasoning that it could not ignore the fact that the debtor was married to a spouse whose disposable income was so great that it could pay off the entirety of the unsecured debt in a matter of months.United States Trustee v. Staub (In re Staub), 2000 Bankr. LEXIS 1544, – B.R. – (Bankr. M.D. Pa. October 11, 2000) (Woodside, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.04[4]

'First filed' rule mandated dismissal of action against the trustee. E.D. Pa. Chapter 11 trustee commenced suit in the bankruptcy court in the District of Connecticut against debtor’s former attorneys to obtain a one million dollar prepetition retainer as a fraudulent transfer. Attorneys filed suit in the Eastern District of Pennsylvania to enjoin the trustee’s action, on the ground that the Pennsylvania district court had, prepetition, dismissed the debtor’s efforts to obtain return of the retainer. The chapter 11 trustee moved to dismiss under the 'first filed' rule, asserting that the bankruptcy court first had jurisdiction and, thus, was entitled to determine the action. The district court held that the 'first filed' rule barred the court from exercising jurisdiction over the attorneys’ action because the action was filed first in the other forum; the parties were identical; the issues were either identical or included res judicata inquiries; and application of the rule avoided duplicative litigation. Since the action against the trustee was filed as a new action, and not as a motion under Rule 69 within the context of the previous litigation in the Pennsylvania district court, the trustee’s action in the District of Connecticut was the action filed first.Butera v. Ryan, 2000 U.S. Dist. LEXIS 17878, – F. Supp. – (E.D. Pa. December 11, 2000) (Padova, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:4.04[4]

4th Cir.

Appeal dismissed as moot. D. Md. The chapter 7 debtor appealed the bankruptcy court’s order granting the secured creditor’s motion to terminate the automatic stay. The creditor proceeded with the foreclosure proceedings and subsequently purchased and sold the property to a third party. The case was later dismissed with prejudice. The creditor moved to dismiss and asserted that the debtor lost the protections of section 349(b)(3) when its case was dismissed. The district court granted the motion to dismiss, holding that because the property re-vested in the creditor and was sold after the case was dismissed, the creditor’s appeal of the automatic stay termination was moot. Constructivist Found. v. Bonner, 2000 U.S. Dist. LEXIS 18563, – B.R. – (D. Md. October 26, 2000) (Chasanow, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:349.03

Debtor was entitled to avoid transfer of garnished wages to judgment creditor. D. Md. The creditor obtained a money judgment against the debtor in state (Maryland) court and a writ of garnishment was served on the debtor’s employer. Thereafter, the debtor filed a chapter 13 petition, later converted to chapter 7. Within the 90 day period preceding the petition filing, the employer transferred a total of $1,308.23 of the debtor’s wages to the creditor. The debtor filed a complaint seeking recovery of that amount, arguing that these proceeds were claimed as exempt on her schedule C. The parties agreed that the trustee could have brought a preference action to avoid transfer of the funds but failed to do so. The parties filed in bankruptcy court cross motions for summary judgment on the issue of whether state law precluded a debtor from exempting garnished wages and recovering them in a preference action. The court ruled that the debtor could avoid a wage garnishment payment made to a judgment creditor during the 90 day prepetition period. This appeal followed. The district court affirmed, holding that section 522(h) allowed the debtor to avoid transfer if (1) the debtor could have exempted the property; (2) the transfer would have been avoidable by the trustee; (3) the trustee had not attempted to avoid the transfer; (4) the transfer was not voluntary; and (5) the debtor did not conceal the property. The court noted that the first element was in issue, and concluded that, once the petition was filed, the debtor had the right to avoid the transfer because she had elected to exempt the wage attachment under state law.Susquehanna Fin. v. Norcia (In re Norcia), 2000 U.S. Dist. LEXIS 19013, – B.R. – (D. Md. November 21, 2000) (Chasanow, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.12[2]

Nondischargeability of debt was affirmed on appeal. D. Md. The chapter 7 debtor appealed the bankruptcy court’s decision finding that attorney’s fees awarded to his former spouse were in the nature of support and nondischargeable under section 523(a)(5). The former spouse had assigned her right to the attorney’s fees awarded by the family court to her attorney in exchange for a dollar for dollar credit against her account. The debtor argued that section 523(a)(5) was inapplicable because the fees were neither in the nature of support, nor were they paid directly to his former spouse. The district court affirmed, holding that the attorney’s fees were in the nature of support and the assignment clause under section 523(a)(5)(A) did not pertain to the assignment of attorney’s fees by the former spouse to her attorney. The court noted that the assignment clause was only enacted to deter assignments made to state welfare agencies.Adams v. Council, Baradel, Kosmerl & Nolan, P.A. (In re Adams), 2000 U.S. Dist. LEXIS 18559, – B.R. – (D. Md. October 23, 2000) (Nickerson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.11[8]

Former spouse was required to commence proceeding to have marital debt determined nondischargeable. Bankr. E.D. Va. Although the debtor’s divorce decree required her to indemnify her husband from the obligations on her automobile, when she filed her chapter 7 petition, the former husband was ultimately required to make payment on the automobile. The former husband sought an order from the state (Virginia) court holding her in contempt. Despite her defense that the indemnification obligation was discharged, the state court ordered the debtor to reimburse her former spouse. The debtor sought a determination in the bankruptcy court that the former spouse’s actions were a violation of the discharge injunction. The former spouse responded that he was not required to file an action to determine nondischargeability but, rather, the debtor was obliged to bring the action if she wanted the obligation relating to a divorce decree to be discharged. The bankruptcy court held that the former spouse was required to file the complaint to have the obligation determined nondischargeable pursuant to section 523(a)(15). Section 523 clearly required the former spouse to commence the appropriate action within a time certain, and failure to do so rendered the debt discharged. Res judicata did not apply because the state court lacked jurisdiction to make a section 523(a)(15) determination.Nelson v. Nelson (In re Nelson), 2000 Bankr. LEXIS 1491, – B.R. – (Bankr. E.D. Va. September 19, 2000) (Shelley, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.21

Deferred compensation plan was excludable from the estate. Bankr. D. Md. The chapter 7 debtors claimed an exemption of one codebtor’s retirement account, a deferred compensation plan, in the full amount of approximately $90,000. The trustee objected to the exemption, arguing that the plan was not an ERISA-qualified plan under section 541(c)(2). The bankruptcy court determined that the deferred compensation plan was excludable from the estate pursuant to section 541(c)(2). Specifically, the court held that (1) the debtor had a beneficial interest in a bona fide trust; (2) the plan was created and administered in good faith; (3) there was a restriction on the transfer of the beneficial interest; (4) there was no fraudulent conduct or violation of any plan provisions; and (5) the restriction on transfer was enforceable under applicable nonbankruptcy law. The court added the good faith requirement to the established elements. In re Mueller, 2000 Bankr. LEXIS 1548, – B.R. – (Bankr. D. Md. November 7, 2000) (Schneider, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.24

5th Cir.

Administrative expense claim was denied. Bankr. N.D. Tex. A lender who committed to provide postpetition financing to the chapter 11 debtor filed a motion for payment, as an administrative expense, of the costs incurred in its efforts to provide financing. After various negotiations, the debtor obtained postpetition financing from a different lender. The claimant argued that its presence as an able lender compelled the competing lender to improve the terms of its postpetition loan offer to the debtor, thereby providing a benefit to the estate and supporting the allowance of an administrative expense. The bankruptcy court denied the motion for allowance of the administrative expense, holding that the lender did not meet its burden of proving that the debtor had an enhanced ability to function as a going concern because of the changes to the competing lender’s loan terms. The court noted that the lender’s costs of unsuccessfully soliciting business from the debtor did not translate into an administrative expense without an actual, tangible benefit to the estate and the debtor’s ability to function as a going concern.In re SGS Studio, Inc., 2000 Bankr. LEXIS 1592, – B.R. – (Bankr. N.D. Tex. November 14, 2000) (Felsenthal, B.J.).

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

Debt was discharged despite lack of notice to the creditor. Bankr. M.D. La. Chapter 7 debtor neglected to list or give notice to a particular creditor. After the time for filing proofs of claim expired, but before final distribution, the creditor learned of the chapter 7 case. Upon realizing that the creditor was not listed, the debtor amended her schedules and filed an untimely proof of claim on the creditor’s behalf. The creditor filed an adversary proceeding seeking a determination that the debt was not dischargeable pursuant to section 523(a)(3) because it did not have notice of the case in sufficient time to permit timely filing of a proof of claim. The bankruptcy court held that since the creditor received notice in time to file a proof of claim prior to distribution, section 523(a)(3) did not apply to preclude discharge of the debt. Section 726, governing distribution, permitted the creditor to share equally with creditors who filed timely proofs of claim, and its right to participate in distribution was not affected by the lack of notice or tardy filing of the claim. In the chapter 7 context, timely under section 523(a)(3) means filed in time to receive dividends pursuant to section 726(a). Thus, the claim was timely for purposes of distribution, and section 523(a)(3)(A) was inapplicable so that the debt was dischargeable.Lott Furniture v. Ricks (In re Ricks), 2000 Bankr. LEXIS 1492, – B.R. – (Bankr. M.D. La. October 3, 2000) (Phillips, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.09

Indebtedness to former wife was nondischargeable. Bankr. N.D. Tex. The chapter 7 debtor’s former wife filed an adversary proceeding objecting to the discharge of debts the debtor agreed to pay upon their divorce. The debts included unpaid credit cards and one-half of the parties’ income taxes. The debtor argued that the debts were dischargeable because he was unable to pay them and that discharging the debts would result in a benefit to him that outweighed the detriment to the former spouse. The bankruptcy court granted judgment in favor of the former spouse, holding that the debts were nondischargeable under section 523(a)(15). The court doubted the debtor’s veracity because he understated his income and failed to explain questionable expenses on his schedules. The court found that the debtor could make reasonable and significant payment on the debts. Additionally, the indebtedness would not impose an undue hardship on the debtor, but could upon the former spouse if the debts were discharged.Smith v. Smith (In re Smith), 2001 Bankr. LEXIS 4, – B.R. – (Bankr. N.D. Tex. January 3, 2001) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.21

6th Cir.

Debtors’ motion for orders authorizing subleases granted. Bankr. M.D. Tenn. The chapter 11 debtors moved for entry of eleven separate orders authorizing them to enter into various leases and subleases with a third party at 11 of the debtors’ retail stores. Certain landlords objected. The bankruptcy court held that the debtors could proceed under section 363, were not required to first assume the leases under section 365 and were entitled to consummate the subleases. The court found that the landlords were adequately protected by the benefits of the subleases and capital improvements proposed by the debtors and the third party, and also by the landlords’ rights in the event of termination of the primary leases, absent any attornment and nondisturbance agreement terms imposed by the court.In re Service Merchandise Co., Inc., 2000 Bankr. LEXIS 1507, – B.R. – (Bankr. M.D. Tenn. July 5, 2000) (Paine, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:363.05

Administrative law findings that debtor fired employees for collective activity constituted willful and malicious injury. Bankr. E.D. Mich. The creditor, a labor regulatory entity, commenced an administrative proceeding against the debtor, alleging various anti-union activities in management decisions in the operation of a restaurant. Among the claims eventually proved was that the debtor fired employees for engaging in collective activity. The administrative law judge found that the debtor personally, and in concert with other parties, committed the alleged acts, and awarded back pay for employees, in a total amount exceeding $427,000, an indebtedness deemed owed to the creditor on behalf of the employees. These findings were eventually confirmed by the Court of Appeals for the Sixth Circuit. After the debtor filed a chapter 7 petition, the creditor instituted an adversary proceeding seeking a determination of nondischargeability pursuant to section 523(a)(6) and moved for summary judgment. The bankruptcy court granted the motion, holding that, there being no issue of material fact, the conduct of the debtor established the elements for a judgment based on willful and malicious injury caused by the debtor.National Labor Relations Bd. v. Branoff (In re Branoff), 2000 Bankr. LEXIS , – B.R. – (Bankr. E.D. Mich. August 7, 2000) (Spector, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12[3]

Debts resulting from aggravated assault were nondischargeable. Bankr. N.D. Ohio The chapter 7 debtor’s sister filed a complaint alleging that debts owed by the debtor were nondischargeable under section 523(a)(6). The debtor and her sister were involved in a physical altercation which resulted in an injury to the sister’s arm that required stitches and a visit to the hospital. The debtor later pleaded guilty to criminal aggravated assault and a civil default judgment was also entered against her. The bankruptcy court rendered judgment in favor of the sister, holding that the debts were incurred as the result of a willful and malicious injury under section 523(a)(6). The debtor’s plea admitted that she caused serious physical harm to another. The court further found that the record supported the conclusion that the debtor clearly desired to cause the consequences of her acts.Mitchell v. Mitchell (In re Mitchell), 2000 Bankr. LEXIS 1530, – B.R. – (Bankr. N.D. Ohio December 15, 2000) (Baxter, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.12

Compromise of marshaling of assets litigation approved. Bankr. E.D. Wis. Brother and sister corporations each obtained loans from lender which was fully cross collateralized on the assets of the companies. When the brother corporation filed a chapter 7 petition, the trustee filed an adversary proceeding for marshaling of assets to compel the lender to look solely to the viable, nondebtor sister corporation for payment of its claim. The trustee sought approval of a settlement by which the sister corporation would pay the trustee $15,000 and the lender would not be compelled to look solely to the assets of the sister corporation. Several creditors objected to the settlement, asserting that the sister corporation could afford to pay more. The bankruptcy court held that although the trustee’s marshaling litigation was viable, the best interests of the parties and the estate warranted approval of the settlement. Continued litigation would deplete the small estate, jeopardize payment of debtor’s employees’ wages, would likely result in the demise of the viable sister corporation, and thereby harm the sister corporation’s creditors and employees.In re Universal Electric Sign Co., Inc., 2000 Bankr. LEXIS 1470, – B.R. – (Bankr. E.D. Wis. October 24, 2000) (McGarity, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9019

7th Cir.

Debtor’s motion for summary judgment was denied. Bankr. E.D. Wis. The creditor filed a complaint seeking a determination that he was entitled to punitive damages against the chapter 7 debtor arising out of an accident which was allegedly caused by the debtor’s operation of a motor vehicle while intoxicated. The debtor moved for summary judgment, claiming that punitive damages were not damages arising out of death or injury within the meaning of section 523(a)(9) and that the adversary proceeding should be dismissed. The bankruptcy court denied the debtor’s motion for summary judgment, holding that the punitive damages, if established, could be nondischargeable. Because a state (Wisconsin) court action was pending, the court abstained from ruling on the issues of liability and damages (citing Collier on Bankruptcy, 15th Ed. Revised).Gage v. Hagen (In re Hagen), 2000 Bankr. LEXIS 1591, – B.R. – (Bankr. E.D. Wis. December 8, 2000) (Shapiro, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.15

8th Cir.

Debtor was entitled to appreciated value of exemption. D. Minn. The chapter 7 debtor appealed the bankruptcy court’s judgment in favor of the trustee awarding proceeds from the debtor’s stock sale to the estate. The debtor had claimed a contingent stock option with her employer exempt with an unknown value. The trustee did not object to the exemption, and the debtor received her discharge. The debtor later received proceeds from the stock buyout and the trustee filed an adversary proceeding to recover the proceeds in excess of the debtor’s available exemption limit. The bankruptcy court held that the trustee’s failure to object did not preclude him from seeking to recover the estate’s share of the proceeds of the buyout remaining after the exercise of the debtor’s exemption rights. The district court reversed, holding that since the trustee made no objection to the debtor’s exemption of the contingent stock option within the 30 day period, the option claimed as exempt became exempt. Stoebner v. Wick (In re Wick), 2001 U.S. Dist. LEXIS 118, – B.R. – (D. Minn. January 2, 2001) (Alsop, S.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.05

State (Kansas) court fraud judgment was nondischargeable. B.A.P. 8th Cir. The chapter 7 debtor appealed the bankruptcy court’s determination that the state (Kansas) court fraud judgment against her was nondischargeable. The debtor had purchased a stenograph machine from another court reporter by orally agreeing to assume the remaining payments that were owed the secured lender. After the debtor defaulted on payments, the parties entered into a written agreement whereby the debtor again agreed to make all payments. The debtor subsequently defaulted and was sued in state court. The debtor admitted at trial before the state court that she had no intention of performing under the written contract and was found guilty of fraud. The bankruptcy court determined that collateral estoppel precluded relitigation and the fraud judgment was nondischargeable. The debtor argued on appeal that because she already had possession of the machine when she subsequently committed fraud, she obtained nothing as a result of her fraud. The B.A.P. affirmed, holding that either the machine itself or a renewal of the agreement for its use qualified as property within the meaning of section 523(a)(2)(A). It was sufficient for nondischargeability purposes that the debtor either obtained the property in a new transaction which was tainted by fraud or by an extension of credit originally granted.Burt v. Maurer (In re Maurer), 2000 Bankr. LEXIS 1527, – B.R. – (B.A.P. 8th Cir. December 22, 2000) (Hill, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08

9th Cir.

Complaint stated cause of action for violation of automatic stay. B.A.P. 9th Cir. In a class action brought by the chapter 7 debtor asserting a private right of action for violation of the discharge injunction, the debtor also alleged that the creditor’s actions with respect to a reaffirmation agreement violated the automatic stay. The bankruptcy court dismissed the debtor’s allegations regarding the automatic stay. The debtor appealed. The B.A.P. noted that a creditor does not, absent some sort of harassment or coercion, violate the automatic stay by asking a debtor to sign a reaffirmation agreement. However, the B.A.P. held that the complaint in this case stated a claim for relief and should not have been dismissed. The court found that the complaint could reasonably have been construed to allege that the creditor harassed or coerced the debtor into signing the reaffirmation agreement at a time when the automatic stay was still in effect.Bassett v. American Gen. Fin., Inc. (In re Bassett), 2000 Bankr. LEXIS 1515, – B.R. – (B.A.P. 9th Cir. October 13, 2000) (Carlson, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07

Section 506(b) did not determine debtor’s entitlement to attorney’s fees. B.A.P. 9th Cir. The creditor holding the promissory note secured on real property of the debtor was determined by the bankruptcy court to be an oversecured creditor. The note contained provisions for payment of attorney’s fees incurred by the creditor as a result of a bankruptcy proceeding and for a default rate of interest at 3 percent above the contract rate. The court eventually entered an order (1) denying the debtor’s request for attorney’s fees under state (California) law for successfully defending against the creditor’s motion for relief from the stay, (2) imposing the default rate of interest pursuant to section 506(b) and (3) allowing the creditor’s attorney’s fees in connection with efforts to collect under the note from nondebtor guarantors. The debtor appealed, arguing that section 506(b) did not prevent the allowance of attorney’s fees to the debtor. The B.A.P. for the Ninth Circuit affirmed, holding that section 506(b) governed the right of a secured creditor to recover on its claim and did not determine whether a debtor was entitled to recover fees and costs. The B.A.P. also affirmed the award of attorney’s fees for pursuing collection against the guarantors, reasoning that the attorney’s fees provision of the note was not rebutted by the debtor in support of his narrow reading of that provision. Hassen Imports P’ship v. KWP Fin. VI (In re Hassen Imports P’ship), 2000 Bankr. LEXIS 1581, – B.R. – (B.A.P. 9th Cir. December 21, 2000) (Montali, B.J.).

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

Section 524 did not imply a private right of action. E.D. Cal. The chapter 7 debtors alleged that the creditor, which held a security interest in the debtors’ automobile, was in violation of various provisions of sections 362 and 524 because the creditor failed to terminate an automated payment plan after the petition filing. The creditor filed a motion to dismiss several of the claims, arguing that there was no private right of action under section 524. The district court granted the motion, holding that no private right of action was implied by section 524, since the bankruptcy court was empowered to impose upon a creditor monetary damages as a sanction for violations of section 524 injunctions, thereby providing the aggrieved debtor with an adequate remedy. Peterson v. Wells Fargo Bank, N.A. (In re Peterson), 2000 U.S. Dist. LEXIS 18372, – B.R. – (E.D. Cal. August 17, 2000) (Coyle, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02