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.

December 2, 2002

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

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Airport with substantial debt was eligible chapter 11 debtor even though it was not insolvent at time of filing. Bankr. D.N.J. PROCEDURAL POSTURE: The debtor airport filed a voluntary chapter 11 bankruptcy petition. Movants sought reconsideration of the court’s approval of a settlement agreement, and also sought dismissal, alleging that the debtor filed its petition in bad faith. The debtor filed a motion to reject an agreement of sale between the debtor and movant individual pursuant to 11 U.S.C. § 365 and a motion to extend the exclusivity period pursuant to 11 U.S.C. § 1121(d). OVERVIEW: The court found that whether the $874,000 in unsecured debt was owed to the debtor’s affiliates and managing members was irrelevant to the question of good faith in filing the bankruptcy petition, as it was still indebtedness for which the debtor was liable. Clearly, the debtor was an eligible debtor under 11 U.S.C. § 109. The debtor’s petition listed two other state court actions involving parties other than the movants, and the court’s list of creditors contained 13 creditors, not including the movants. Based on the public policy of the state in facilitating businesses through accessibility to smaller airports throughout the state, and the financial distress of the airport industry as a whole, the debtor had a legitimate and valid purpose for filing bankruptcy regardless of its solvency at the time of filing. Since the filing, the debtor had demonstrated a good faith effort in restructuring its business by resolving issues of corporate governance amongst its managing members, restructuring its secured debt, and entering into a consent agreement with an unsecured creditor. In re Central Jersey Airport Servs., LLC, 2002 Bankr. LEXIS 892, 282 B.R. 176 (Bankr. D.N.J. August 20, 2002) (Gindin, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.01

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Executory contract for sale of debtor’s airport rejected as a faster sale at the higher current market price would benefit the estate. Bankr. D.N.J. PROCEDURAL POSTURE: The debtor airport filed a voluntary chapter 11 bankruptcy petition. Movants sought reconsideration of the court’s approval of a settlement agreement, and also sought dismissal, alleging that the debtor filed its petition in bad faith. The debtor filed a motion to reject an agreement of sale between the debtor and movant individual pursuant to 11 U.S.C. § 365 and a motion to extend the exclusivity period pursuant to 11 U.S.C. § 1121(d). OVERVIEW: The court found that whether the $874,000 in unsecured debt was owed to the debtor’s affiliates and managing members was irrelevant to the question of good faith in filing the bankruptcy petition, as it was still indebtedness for which the debtor was liable. Clearly, the debtor was an eligible debtor under 11 U.S.C. § 109. The debtor’s petition listed two other state court actions involving parties other than the movants, and the court’s list of creditors contained 13 creditors, not including the movants. Based on the public policy of the state in facilitating businesses through accessibility to smaller airports throughout the state, and the financial distress of the airport industry as a whole, the debtor had a legitimate and valid purpose for filing bankruptcy regardless of its solvency at the time of filing. Since the filing, the debtor had demonstrated a good faith effort in restructuring its business by resolving issues of corporate governance amongst its managing members, restructuring its secured debt, and entering into a consent agreement with an unsecured creditor. In re Central Jersey Airport Servs., LLC, 2002 Bankr. LEXIS 892, 282 B.R. 176 (Bankr. D.N.J. August 20, 2002) (Gindin, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01

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Debtor with at least 14 creditors, actively restructuring, with probability of successful reorganization and valid purpose, filed in good faith. Bankr. D.N.J. PROCEDURAL POSTURE: The debtor airport filed a voluntary chapter 11 bankruptcy petition. Movants sought reconsideration of the court’s approval of a settlement agreement, and also sought dismissal, alleging that the debtor filed its petition in bad faith. The debtor filed a motion to reject an agreement of sale between the debtor and movant individual pursuant to 11 U.S.C. § 365 and a motion to extend the exclusivity period pursuant to 11 U.S.C. § 1121(d). OVERVIEW: The court found that whether the $874,000 in unsecured debt was owed to the debtor’s affiliates and managing members was irrelevant to the question of good faith in filing the bankruptcy petition, as it was still indebtedness for which the debtor was liable. Clearly, the debtor was an eligible debtor under 11 U.S.C. § 109. The debtor’s petition listed two other state court actions involving parties other than the movants, and the court’s list of creditors contained 13 creditors, not including the movants. Based on the public policy of the state in facilitating businesses through accessibility to smaller airports throughout the state, and the financial distress of the airport industry as a whole, the debtor had a legitimate and valid purpose for filing bankruptcy regardless of its solvency at the time of filing. Since the filing, the debtor had demonstrated a good faith effort in restructuring its business by resolving issues of corporate governance amongst its managing members, restructuring its secured debt, and entering into a consent agreement with an unsecured creditor. In re Central Jersey Airport Servs., LLC, 2002 Bankr. LEXIS 892, 282 B.R. 176 (Bankr. D.N.J. August 20, 2002) (Gindin, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1121.01

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A casino is an entity as defined by the bankruptcy code. W.D.N.C. PROCEDURAL POSTURE: Plaintiff debtor moved for an injunction and any other equitable relief from defendant state’s attempt to collect a prepetition debt, in violation of the automatic stay of 11 U.S.C. § 362, under the guise of a criminal prosecution. OVERVIEW: The debtor filed bankruptcy on his debts, including gambling and bad check debts. The state and casino (state) failed to file a complaint with the bankruptcy court to determine the dischargeability of the debt. Instead, the state attempted to collect on the prepetition unsecured debt by instituting criminal prosecution. The debtor sought an injunction from the criminal prosecution and the state’s attempt to extradite him, claiming that the criminal prosecution was simply a postpetition attempt to collect a prepetition debt. The court agreed, finding that the casino fell within the 11 U.S.C. § 101(15) definition of an entity and its claim was of the type automatically stayed. Just as the casino could not bring prepetition claims against the debtor outside the bankruptcy process, neither could the state bring claims for the debts owed to the casino by the debtor on the casino’s behalf. The state was not subject to the automatic stay of 11 U.S.C. § 362, but because the criminal prosecution was actually an attempt to collect a debt, injunctive relief was warranted under 11 U.S.C. § 105. In re Simonini, 2002 U.S. Dist. LEXIS 15626, 282 B.R. 604 (W.D.N.C. August 8, 2002) (Mullen, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.15

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Award of attorneys’ fees in chapter 13 case where no plan had been filed was still an administrative expense. Bankr. E.D. Va. PROCEDURAL POSTURE: A debtor filed a voluntary chapter 13 bankruptcy petition. The debtor’s attorney applied for approval and payment of compensation as counsel for the debtor. The chapter 13 trustee did not object to the amount of the requested fees but questioned whether there was any legal authority to pay them from the funds he had on hand, since no plan had been confirmed and the case was ripe for dismissal. OVERVIEW: The court had previously ruled, in connection with a prior fee application by the same attorney, that $90 per hour was an excessive rate for paralegal time. Based on the court’s general familiarity with prevailing rates in the area (derived from reviewing fee applications in other cases), the court determined that $75 per hour was currently the general market rate for paralegal time. A rate of $185 per hour for attorney time was within the range of prevailing local rates for an attorney of the attorney’s experience. An award of compensation to the attorney for a chapter 13 debtor plainly constituted compensation awarded under 11 U.S.C. § 330(a), which in turn qualified the award as an expense of administration under 11 U.S.C. § 503(b). Since 11 U.S.C. § 1326 directed the trustee to deduct any unpaid claim allowed under 11 U.S.C. § 503(b) before returning funds to the debtor, it followed that the approved compensation was able to be, and should have been, paid by the chapter 13 trustee before returning funds to the debtor. In re Hall, 2002 Bankr. LEXIS 898, — B.R. — (Bankr. E.D. Va. February 14, 2002) (Mitchell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.04

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Bankruptcy court properly excluded debtor’s 401(k) plan from the estate. E.D. Va. PROCEDURAL POSTURE: Appellant Internal Revenue Service ('IRS') appealed an order of the bankruptcy court, which found that debtor’s 401(k) plan was not property of the bankruptcy estate for purposes of securing the IRS’s claim. OVERVIEW: Both parties agreed that a 401(k) plan was normally excluded from the bankruptcy estate. The issue was whether the IRS could secure its claim in the chapter 13 bankruptcy against property that was not property of the bankruptcy estate. The court agreed with the bankruptcy court’s rejection of a 'split personality' characterization of 401(k) plans, i.e., allowing the 401(k) plan to secure the claims of some bankruptcy parties but not others. Thus, debtor’s interest in his 401(k) plan was not property of the estate for the purposes of establishing the IRS’s secured claim. The court also found that the IRS’s tax claims maintained their priority status, despite the fact that some taxes were outside the three-year look back period. The look back period of 11 U.S.C. § 507(a)(8)(A)(i) was tolled during the pendency of the series of bankruptcy petitions that debtor filed. Internal Revenue Service v. Wingfield, 2002 U.S. Dist. LEXIS 15885, — F. Supp.2d — (E.D. Va. July 12, 2002) (Friedman, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.07

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Attorneys’ fees in soon to be dismissed chapter 13 filing were to be deducted by trustee prior to returning funds to debtor. Bankr. E.D. Va. PROCEDURAL POSTURE: A debtor filed a voluntary chapter 13 bankruptcy petition. The debtor’s attorney applied for approval and payment of compensation as counsel for the debtor. The chapter 13 trustee did not object to the amount of the requested fees but questioned whether there was any legal authority to pay them from the funds he had on hand, since no plan had been confirmed and the case was ripe for dismissal. OVERVIEW: The court had previously ruled, in connection with a prior fee application by the same attorney, that $90 per hour was an excessive rate for paralegal time. Based on the court’s general familiarity with prevailing rates in the area (derived from reviewing fee applications in other cases), the court determined that $75 per hour was currently the general market rate for paralegal time. A rate of $185 per hour for attorney time was within the range of prevailing local rates for an attorney of the attorney’s experience. An award of compensation to the attorney for a chapter 13 debtor plainly constituted compensation awarded under 11 U.S.C. § 330(a), which in turn qualified the award as an expense of administration under 11 U.S.C. § 503(b). Since 11 U.S.C. § 1326 directed the trustee to deduct any unpaid claim allowed under 11 U.S.C. § 503(b) before returning funds to the debtor, it followed that the approved compensation was able to be, and should have been, paid by the chapter 13 trustee before returning funds to the debtor. In re Hall, 2002 Bankr. LEXIS 898, — B.R. — (Bankr. E.D. Va. February 14, 2002) (Mitchell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1326.01

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Attorneys retained as special counsel after claiming to be disinterested persons precluded from claiming prepetition attorneys’ fees. E.D. La. PROCEDURAL POSTURE: Appellant firms and attorneys appealed an order of the bankruptcy court, which granted summary judgment in favor of appellee company on the issue prepetition attorneys’ fees claimed by the firms and attorneys. OVERVIEW: The two attorneys had failed to disclose their prepetition claims. Thus, the effectively averred that no such claims existed. The attorneys argued that their failure to disclose resulted not from an intent to deceive the bankruptcy court, but out of inexperience in bankruptcy proceedings and ignorance of bankruptcy law. The instant court found that, even if the failure to disclose the fees due to inexperience or lack of knowledge of bankruptcy law, such a justification would be insufficient to preclude application of judicial estoppel to their claims. The appeals court did not require bad faith or intentional non-disclosure in bankruptcy cases. W. Delta Oil Co. v. Hof (In re W. Delta Oil Co.), 2002 U.S. Dist. LEXIS 15776, — F. Supp.2d — (E.D. La. August 21, 2002) (Barbier, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3: 327.02

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Bankruptcy court properly disallowed asbestos-related claim where creditor failed to establish that claim had been settled. E.D. La. PROCEDURAL POSTURE: Appellant creditor asserted that he and appellee debtor had agreed to settle his asbestos-related injury claim before the debtor filed for bankruptcy relief. The debtor objected to the creditor’s proof of claim, and the bankruptcy court disallowed the claim. The creditor appealed. OVERVIEW: Pennsylvania contract law was the appropriate state law to resolve the issues on appeal. The creditor was a Pennsylvania resident, his alleged exposure to asbestos-containing products occurred in Pennsylvania, and the settlement negotiations took place in Pennsylvania. The court uncovered no case in which the Pennsylvania Supreme Court retreated from its position that an attorney must have a client’s express authority to settle a case. There was no evidence that the creditor, as opposed to his attorneys, accepted the terms of debtor’s settlement offer, and there was no evidence that the creditor cloaked his lawyers with the authority to settle his claim on the terms discussed in the letters. Further, the creditor presented no evidence that the creditor or his estate ever had knowledge of the terms of the alleged settlement prior to the bankruptcy. Therefore, ratification did not apply. Finally, the court found that promissory estoppel was inapplicable because the creditor could not establish one of the essential elements of promissory estoppel, that the enforcement of debtor’s promise was necessary to avoid injustice. Rovida v. Babcock & Wilcox Co. (In re Babcock & Wilcox Co.), 2002 U.S. Dist. LEXIS 15742, — F. Supp.2d — (E.D. La. August 13, 2002) (Vance, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:3001.09

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Bankruptcy court correctly held that debtor’s transfer of stock, for less than reasonably equivalent value, while insolvent, was fraudulent. N.D. Ill. PROCEDURAL POSTURE: Appellant sought to set aside the decision of the United States Bankruptcy Court for the Northern District of Illinois which was entered in favor of appellee bankruptcy trustee for the debtor. OVERVIEW: Appellant and his brother owned stock in the debtor along with another individual. The debtor was a corporation. The other individual and his family wanted to become the sole owners of the debtor. Appellant entered into a stock redemption agreement, a consulting agreement, and a covenant not to compete. An involuntary petition for relief under chapter 7 was filed against the debtor. The trustee filed a complaint to recover the transfers from the debtor to appellant. The court held that the trustee successfully carried its evidentiary burden of showing that the debtor did not receive a reasonable equivalent value for the value it transferred to appellant and successfully carried its evidentiary burden of showing that the debtor was insolvent at the time of the transfers to appellant. Appellant did not establish the value of either the consulting agreement or the covenant not to compete therefore was not entitled to the defense under 11 U.S.C. § 548(c). Appellant was the initial transferee of the payments having dominion and control over the money and thus beholden to the avoidance powers of the trustee. Chapman v. Baldi (In re Gropman, Inc.), 2002 U.S. Dist. LEXIS 15654, — F. Supp.2d — (N.D. Ill. August 20, 2002) (Holderman, D.J.).

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

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Discharge denied on motion of judgment creditor where debtor failed to properly disclose all income or ownership of motor vehicle. Bankr. W.D. Mo. PROCEDURAL POSTURE: Defendant debtor filed a chapter 7 petition under the Bankruptcy Code. Plaintiff, a judgment creditor, filed an action and objected to the debtor’s discharge under 11 U.S.C. § 727. The debtor filed a motion to dismiss. OVERVIEW: The creditor alleged that the debtor failed to list a vehicle on the bankruptcy schedules and also failed to disclose all of his income. The debtor amended his schedules but failed to list the vehicle. The debtor also failed to appear at trial to respond to the creditor’s allegations. The creditor had obtained a state court judgment against the debtor for unsatisfactory construction work the debtor performed. The debtor later admitted that he had additional income at a creditors’ meeting. At trial, the creditor introduced a certified copy of the debtor’s application for the vehicle’s title and license, which was dated before the date of the bankruptcy petition. A witness also testified that the debtor owned the car before bankruptcy. The court concluded that the creditor had met his burden of proof and the burden had shifted to the debtor. The court found that the debtor owned the car when he filed his petition, despite the fact that he did not list it as an asset. The debtor failed to meet his burden of proof that he did not own the vehicle. The court found that the debtor also did not accurately amend his schedules to reflect his income. A discharge under section 727 was not warranted. Weese v. Lambert (In re Lambert), 2002 Bankr. LEXIS 900, 280 B.R. 463 (Bankr. W.D. Mo. April 4, 2002) (Federman, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.01

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Cash surrender values of debtors’ life insurance policies were not exempt under state law and were property of their estates. B.A.P. 10th Cir. PROCEDURAL POSTURE: Appellants, a debtor in one bankruptcy case and married debtors in a second bankruptcy case (collectively, the debtors), appealed from separate orders of the bankruptcy court sustaining the appellee trustee’s objections to their exemptions in the cash surrender value of certain life insurance policies. The cases were consolidated for appeal. OVERVIEW: The debtors had purchased insurance policies with cash surrender values and claimed an exemption in the cash surrender value on their bankruptcy schedules, and the trustee objected. The bankruptcy court applied state law and found that Wyo. Stat. Ann. § 26-15-129 was unambiguous and this statute precluded the debtors from claiming an exemption in the cash surrender values of the life insurance policies. On appeal, the trustee claimed that the statute prohibited the exemption claimed by the debtors. The bankruptcy appellate panel disagreed with the debtors’ argument that the bankruptcy court’s interpretation rendered the statute ambiguous. The plain language of the statute expressly prohibited the insured or the person executing the insurance from receiving proceeds of the policy free from creditors’ claims. Both the panel and the bankruptcy court agreed with this analysis. Specifically, in the case of the married debtors, the panel found that when they filed their chapter 7 petition, neither could claim as exempt any interest as a beneficiary in a life insurance policy owned by the other. Michaels v. Zubrod (In re Michaels), 2002 Bankr. LEXIS 896, 282 B.R. 234 (B.A.P. 10th Cir. August 20, 2002) (Michael, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.04

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Debtor and attorney sanctioned for violating injunction against attempts to void bankruptcy court’s order for sale of interest in probate estate. Bankr. M.D. Fla. PROCEDURAL POSTURE: The bankruptcy court previously approved the chapter 7 trustee’s motion for the sale of the bankruptcy estate’s interest in a probate estate. The trustee filed an adversary proceeding against defendants, the debtor and debtor’s attorney, seeking sanctions against them for violating an injunction which barred defendants from prosecuting any actions to void the sale ordered by the bankruptcy court. OVERVIEW: Debtor filed for chapter 7 relief and received a discharge of her debts. During the administration of the bankruptcy estate, debtor’s aunt died and left debtor 15 percent of the residuary estate. The debtor did not disclose to the chapter 7 trustee her interest in the probate estate. Debtor’s bankruptcy case was reopened. The bankruptcy court held that the debtor’s rights in the probate estate were property of the bankruptcy estate. The trustee then negotiated a sale of the bankruptcy estate’s interest in the probate estate to the probate executor. The bankruptcy court approved and authorized the trustee’s sale of that estate asset. Debtor filed actions in state and federal court challenging the sale, claiming the sale was an illicit conspiracy between the trustee and the executor to deprive the debtor of her inheritance. The trustee sought to enjoin debtor from pursuing legal challenges to the sale. The bankruptcy court granted the injunction. The bankruptcy court found that debtor and her attorney willfully violated the injunction and ordered sanctions against them. Henkel v. Lickman (In re Lickman), 2002 Bankr. LEXIS 901, 282 B.R. 709 (Bankr. M.D. Fla. August 19, 2002) (Corcoran, B.J.).

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

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Subcontractor, who failed to pay sub-subcontractors, had no claim to remaining funds held by general contractor which were not estate property. Bankr. N.D. Ala. PROCEDURAL POSTURE: Plaintiff, a general contractor, brought an adversary proceeding against defendants, the debtor/subcontractor, a secured creditor, a lienholder, the Internal Revenue Service ('IRS'), and others, seeking a ruling that a contract balance that it was holding was not property of the bankruptcy estate and that it could be paid to the sub-subcontractors. Before the court were the parties’ motions for summary judgment and the response of the IRS. OVERVIEW: The debtor agreed to be a subcontractor to the general contractor. The debtor did not pay its sub-subcontractors, then filed for bankruptcy protection. The general contractor was holding the contract balance and sought a ruling that it could pay the funds to the sub-subcontractors and vendors. The court ruled that it could. It was undisputed that the debtor breached the terms of the contracts by not paying the sub-subcontractors. Hence, under Alabama law, the debtor had no legal or equitable rights in the contract balance; moreover, due to the breach, the funds did not represent an 'account receivable' or 'contract right' of the debtor, and therefore, none of the other creditors had a claim to the funds based on their arguments that their liens attached to accounts receivable or contract rights of the debtor. The contract balance was not estate property under 11 U.S.C. § 541; thus, it was not subject to the distribution scheme enacted under the Bankruptcy Code. A secured claim did not attach to property that was not part of the estate. The general contractor was not entitled to attorneys’ fee because the action was not filed as an interpleader, per Fed. R. Bankr. P. 7022. Halstead Contractors, Inc. v. C & C Excavating, Inc. (In re C & C Excavating, Inc.), 2002 Bankr. LEXIS 905, — B.R. — (Bankr. N.D. Ala. June 17, 2002) (Sledge, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.01

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Debt resulting from slander of creditor, though nondischargeable in chapter 7, is dischargeable upon completion of chapter 13 plan. Bankr. S.D. Fla. PROCEDURAL POSTURE: The debtor filed a petition for relief under chapter 13 of the U.S. Bankruptcy Code. At a plan confirmation hearing, a creditor objected to confirmation, while the trustee recommended confirmation of the plan. OVERVIEW: The creditor claimed that a liability was owed by the debtor, which arose from the debtor’s false representations that the creditor had been involved with, or implicated in, the commission of child molestation. The court found that under 11 U.S.C. § 523(a)(6), a debt incurred as a result of willful and malicious injury inflicted upon a person or that person’s property was not dischargeable in a chapter 7 case. The court found that the debtor’s plan satisfied the requirements as to the minimum amount to be paid under such a plan. The court noted that while the creditor wanted the debtor to pay a larger aggregate due amount to the creditor under the plan, the debtor was not required to do so because the requirements had been met. The plan satisfied all requirements of 11 U.S.C. § 1325(a). In re McGovern, 2002 Bankr. LEXIS 894, 282 B.R. 506 (Bankr. S.D. Fla. August 14, 2002) (Friedman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1328.02

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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.

February 3, 2003

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

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4th Cir.

§ 362 Bankruptcy court order lifting stay to allow completion of foreclosure vacated due to fact that debtor still held interest in the property under state law on date of filing.
In re Country Lake Enters., Inc. (Bankr. E.D.N.C.)

Collier Bankruptcy Case Summaries

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Creditor allowed to set off amount owed by debtor against amount owed to debtor on secured claim. Bankr. S.D.N.Y. PROCEDURAL POSTURE: In plaintiff trustee’s action against defendant creditor to recover $600,000, both parties moved for summary judgment pursuant to Fed. R. Civ. P. 56(c). OVERVIEW: The creditor, the debtor’s former chief financial officer, owed the debtor $600,000, secured by a mortgage. The trustee sued the creditor to foreclose on the mortgage to recover the amount owed. The creditor sought summary judgment on his claim to setoff obligations the debtor owed him, and the trustee sought summary judgment on his foreclosure claim. The court granted the creditor summary judgment on his claim concerning the setoff of a stock agreement between himself and the debtor. The fact that the creditor, along with other directors of the debtor, voted in favor of the pledge of the creditor’s shares in exchange for a loan, did not prevent him from setting off that amount he was owed from the amount he owed the debtor. The trustee was granted summary judgment on his claim that the amount the creditor was entitled to under the deferred compensation plan was $58,000, the present value on the bankruptcy petition date, rather than $500,000, the aggregate amount that would be paid to the creditor over 10 years after he reached the age of 65. Pereira v. Nelson (In re Trace Int’l Holdings, Inc.), 2002 Bankr. LEXIS 1138, 284 B.R. 32 (Bankr. S.D.N.Y. October 11, 2002) (Bernstein, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.01 [back to top]

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Filing of pro se petition by limited liability company was not void ab initio. Bankr. D. Conn. PROCEDURAL POSTURE: A creditor moved to lift the stay under 11 U.S.C. § 362, arguing that the debtor limited liability company filed its petition pro se instead of through an attorney under 28 U.S.C. § 1654, Fed. R. Bankr. P. 9010, and Local Bankruptcy Rule 9010-1, that the petition was void ab initio.The court issued an order to show cause as to dismissal under 11 U.S.C. § 707(a). The debtor, the chapter 7 trustee, and the United States trustee objected. OVERVIEW: It was noted that neither 28 U.S.C. § 1654, Fed. R. Bankr. P. 9010, Local Bankruptcy Rule 9010-1, nor any other federal statute or rule provided that the filing of a pro se voluntary petition by an artificial entity was void ab initio. 11 U.S.C. § 109 defined who could be a debtor and did not mandate a "void ab initio" rule as to such a filing. The petition was not void ab initio. Any such defect was cured by an appearance of counsel for the debtor. The appearance was reasonably prompt, and no one had argued that the administration of the case was substantially compromised by the passage of time before the appearance was filed. The debtor had filed its schedules and the meeting of creditors had taken place. Both trustees argued against dismissal. The interests of the creditors militated against dismissal, because of allegations of misconduct by the debtor’s management. The trustee had questioned the validity of the creditor’s security interest. The debtor alleged that there could be preferences against the creditor which would be time barred if the case was dismissed. The pro se chapter 7 filing was not "cause" to dismiss the case under 11 U.S.C. § 707(a) or to lift the stay. Orsini v. Interiors of Yesterday, LLC (In re Interiors of Yesterday, LLC), 2002 Bankr. LEXIS 1145, 284 B.R. 19 (Bankr. D. Conn. October 11, 2002) (Murphy Weil, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.03 [back to top]

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Consultant that knowingly and intentionally misrepresented status as "disinterested person" denied compensation other than that already paid by debtor. Bankr. W.D. Pa. PROCEDURAL POSTURE: The chapter 11 debtor’s accountant and consultant applied for compensation and reimbursement of expenses under 11 U.S.C. § 330(a)(1), which included the interim payments he had previously received while he was employed. The debtor objected, arguing that the amount was excessive and the consultant was not "disinterested" when he was retained under 11 U.S.C. § 327(a), and thus under 11 U.S.C. § 328(c) compensation should be denied. OVERVIEW: The application to employ the consultant made no mention that he was a prepetition creditor. After the debtor’s principal died, the new principal fired the consultant, at which point the consultant stated the debtor only owed him $1,500, for which he was paid. Had the court known that the consultant was not a "disinterested person" under 11 U.S.C. § 327(a), his employment would not have been approved. The court had discretion under 11 U.S.C. § 328(c) to award compensation even though his appointment was improper from the start. But the consultant was no novice to the court, leading the court to conclude that the failure of disclosure was knowing and intentional. And, employees with whom the consultant claimed to have met credibly testified that such meetings never occurred. Some of debtor’s most lucrative accounts left when the consultant fired a manager, resulting in a substantial and permanent loss of revenue. The statement that the consultant was only owed $1,500 when he was fired seriously undermined the application’s request for $28,000. The consultant was only entitled to the amounts he had previously been paid. In re Authorized Factory Serv., Inc., 2002 Bankr. LEXIS 1116, 283 B.R. 684 (Bankr. W.D. Pa. October 8, 2002) (Markovitz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.05 [back to top]

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Permanently disabled debtor with little likelihood of future employment granted undue hardship discharge of student loans. Bankr. D.N.J. PROCEDURAL POSTURE: The debtor filed an adversary complaint seeking a hardship discharge of his student loans owed to a creditor pursuant to 11 U.S.C. § 523(a)(8)(B), arguing that it would be an undue hardship for him to repay the loans. OVERVIEW: The debtor received disability income and food stamps. His disabilities were permanent and he was told not to work. He was not capable of taking care of himself. His friends or family paid his bills, walked and cared for his dog, and bought his car and paid all insurance, maintenance, and repairs. The debtor’s net income was $21 per month. The monthly student loan payment was $66. He did not have enough income to make the student loan payments and maintain a minimal standard of living. He had no extra expenses to eliminate. The fact that he was on public assistance and was unable to work due to his disabilities suggested that even lower payments would cause undue hardship. He was unlikely to receive a future benefit from his education. The disabilities were likely to continue throughout the loan repayment term for reasons not within his control. The debtor began making his payments on time and made timely payments for 11 months, showing a good faith effort to repay the loan. He also had made good faith efforts to find and to maintain a job, but due to his disabilities he was unable to keep any job. The debtor met the "undue hardship" test under 11 U.S.C. § 523(a)(8). Rivera v. New Jersey Educ. Student Assistance Auth. (In re Rivera), 2002 Bankr. LEXIS 1118, 284 B.R. 88 (Bankr. D.N.J. October 8, 2002) (Gindin, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back to top]

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Bankruptcy court order lifting stay to allow completion of foreclosure vacated due to fact that debtor still held interest in the property under state law on date of filing. Bankr. E.D.N.C. PROCEDURAL POSTURE: On remand from the district court, the debtor moved for reconsideration of an order granting the secured creditors relief from stay as to a foreclosure of the debtor’s property, arguing that under N.C. Gen. Stat. §§ 103-4(3a), 45-21.27 (2001), the upset bid period had not expired when the bankruptcy was filed. The debtor also moved for relief from an order denying a request for sanctions. OVERVIEW: The court had previously found that the foreclosure sale was final before the bankruptcy was filed after the state court’s close of business on March 25. The court had concluded that the debtor retained some interest in the property until the deed was delivered, holding that a trustee’s deed was void because it was delivered and recorded by a substitute trustee under the deed of trust in violation of the stay, but denied sanctions because there was no basis for holding the creditors responsible for the violation. The court had also lifted the stay to allow the foreclosure to be completed, assuming the debtor had no remaining interest in the property. The issue of a holiday was only raised on appeal. Using its discretion to consider the new issue, the court found that because March 25, Greek Independence Day, was a holiday under N.C. Gen. Stat. § 103-4(3a) (2001), under the plain language of N.C. Gen. Stat. § 45-21.27(a) (2001) the 10-day period expired on March 26, after the bankruptcy was filed. The property was part of the estate. The new finding on the expiration of the upset bid period provided no new grounds on which to find that the creditors should be subject to sanctions. In re Country Lake Enters., Inc., 2002 Bankr. LEXIS 1161, 284 B.R. 223 (Bankr. E.D.N.C. September 26, 2002) (Small, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back to top]

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Malpractice action by debtor challenging payment of defendant law firm’s fees from estate was a core proceeding. E.D. La. PROCEDURAL POSTURE: While appellee debtor’s confirmed bankruptcy plan was still under the bankruptcy court’s administration, it and another appellee, a creditor, filed a malpractice suit against appellant law firm in state court. The law firm filed an adversary proceeding in bankruptcy court. The appellees’ motion to dismiss was granted, and the law firm appealed the dismissal by the bankruptcy court. OVERVIEW: The law firm sought a declaratory judgment that the actions taken and legal services performed during the administration of the debtor’s estate were valid and proper, including the receipt of the legal fees paid for those legal services rendered. The malpractice action was a collateral attack on the administration of the plan of reorganization during the pendency of the bankruptcy proceeding. The claims against the law firm clearly challenged the bankruptcy court’s decisions relating to the administration of the debtor’s confirmed plan, including its orders authorizing payment of the law firm’s fees from the debtor’s escrowed funds. The appellees sought to have the law firm disgorge the fees and pay other damages, resulting in enrichment to the debtor’s estate and affecting the continuing distribution of debtor’s assets. It clearly bore on the interpretation and execution of the debtor’s confirmed plan. It was therefore a core proceeding within the exclusive jurisdiction of the bankruptcy court. Slater Law Firm v. S. Parish Oil Co., Inc., 2002 U.S. Dist. LEXIS 19245, — B.R. — (E.D. La. October 8, 2002) (Livaudais, Sr. D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02 [back to top]

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Significant punitive damages assessed for creditor’s flagrant, repeated and threatening attempts to collect from debtors despite notice of stay. Bankr. N.D. Ohio PROCEDURAL POSTURE: The chapter 7 debtors filed a motion for sanctions for repeated violations of the automatic stay of 11 U.S.C. § 362(a)(6) against a creditor who had held a second mortgage on the debtor’s former residence. No representative from the creditor appeared for the hearing. The debtors alleged that the creditor had contacted them on approximately 15 occasions postpetition to demand payment despite the fact that the creditor knew of the bankruptcy. OVERVIEW: The case was the most egregious stay violation case to come before the court. The creditor willfully and flagrantly violated section 362(a)(6). The stress to the debtor wife’s heart condition may have caused her to remain out of the workforce longer than otherwise necessary. The tactics, threatening garnishments and the debtor husband’s loss of job, were intolerable. The creditor’s agents stated they did not care about the bankruptcy, did not contact the debtors’ counsel, called the debtors repeatedly at home and work, and did not attend the hearing. After notices from the court and being told many times of the bankruptcy, the creditor continued to harass and threaten the debtors. Even after being served with the motion, the violations continued. Under 11 U.S.C. §§ 105 and 362(h), significant punitive damages were warranted. Because the creditor was attempting to prefer itself over other creditors by seeking payment that would have violated 11 U.S.C. § 549(a), 50 percent of the punitive damages were assessed to the trustee for distribution to unsecured creditors. Under 11 U.S.C. § 510(c), due to the gross misconduct, equitable subordination of the creditor’s claim was appropriate. In re Kortz, 2002 Bankr. LEXIS 1105, 283 B.R. 706 (Bankr. N.D. Ohio September 27, 2002) (Shea-Stonum, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.11[3] [back to top]

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Debtor’s late mailing of tax return without using certified or registered mail did not render debt to IRS nondischargeable for failure to file. Bankr. N.D. Ill. PROCEDURAL POSTURE: Plaintiff debtor filed a chapter 7 petition under the Bankruptcy Code and received a discharge. The debtor was granted permission to reopen his case and he filed an adversary action against defendant, federal government, to determine the dischargeability of an alleged tax debt. The government filed a motion for summary judgment. OVERVIEW: The government claimed that 11 U.S.C. § 523(a)(1)(B)(i) excepted from discharge any tax for which the required return was not filed, and asserted this was the situation with the debtor’s case. The court found that the Internal Revenue Service ("IRS") had never filed a claim against the debtor’s estate, nor had it filed an adversary proceeding to determine the dischargeability of any of the income taxes the debtor owed. The IRS had no record that the return was received, although it acknowledged receipt of other returns. Under 26 U.S.C. § 7502, a document was deemed delivered on the date it was postmarked if the document was: (1) properly placed in the U.S. mail prior to the filing deadline; and (2) delivered to the IRS after the deadline. The taxpayer admitted he mailed the return after the tax-filing deadline, and the court found that the safe harbor provision of section 7502 was unavailable to avoid penalties. The court rejected the government’s claim that the taxpayer never filed his return and could not get the tax debt discharged because he did not send the return by certified or registered mail. That position was not supported by the Bankruptcy Code or 26 U.S.C. § 7502(c). Payne v. United States (In re Payne), 2002 Bankr. LEXIS 1107, 283 B.R. 719 (Bankr. N.D. Ill. October 3, 2002) (Schmetterer, B.J.).

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

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Bankruptcy Code remedy for violations of discharge injunction is exclusive and precludes action under the Fair Debt Collection Practices Act. S.D. Ind. PROCEDURAL POSTURE: Plaintiff debtor sued defendant debt collector and alleged violations of the Fair Debt Collection Practices Act ("FDCPA"), in particular 15 U.S.C. § 1692e(2)(A), (2)(B), (5), (10), and section 1692(f), and Ind. Code § 35-43-5-3. The debt collector moved for summary judgment. The debtor moved to strike the affidavit of the debt collector submitted in support of the debtor’s summary judgment motion. OVERVIEW: The debt collector was hired by a mortgage company to foreclose a mortgage on real estate owned by debtor which mortgage secured a note on which debtor had been indebted to the mortgage company. However, debtor’s debt on the note had previously been discharged in bankruptcy. While acting on behalf of the mortgage company, the debt collector filed a complaint against debtor. At that time the debt collector was unaware that the debt with the mortgage company was discharged in bankruptcy. As for debtor’s claim based on the debt collector’s alleged overstatement of the amount of the debt, the court found that the debtor did not produce sufficient evidence to raise a genuine issue of material fact for trial. The mere fact that the amount of the final judgment was different, that is, less than the amount requested in the demand for judgment did not prove a violation of 15 U.S.C. §§ 1692e(2)(A) or (B). Furthermore the court found that the reasoning and conclusions of decisions which held that the Bankruptcy Code precluded FDCPA claims based on violations of the Bankruptcy Code were more persuasive than those that held otherwise. Wehrheim v. Secrest, 2002 U.S. Dist. LEXIS 19020, — B.R. — (S.D. Ind. August 16, 2002) (Tinder, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.01 [back to top]

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Prepetition judgment lien on debtor’s earnings did not survive discharge of underlying judgment. Bankr. N.D. Ill. PROCEDURAL POSTURE: Under a 735 Ill. Comp. Stat. Ann. 5/2-1402 (West Supp. 1996) wage deduction order entered more than 90 days before the debtor filed bankruptcy, the debtor’s employer was required to withhold a portion of the debtor’s wages until the creditor’s judgment was paid. After the debtor’s discharge entered under 11 U.S.C. § 727, the creditor filed an adversary complaint arguing that the citation lien survived the chapter 7. The debtor moved to dismiss. OVERVIEW: The court originally indicated orally that the motion to dismiss would be denied. But, the court sua sponte reconsidered its oral ruling. Since no final judgment had entered in the case, the court could reconsider its decision. The court held that the overriding bankruptcy "fresh start" policy controlled over state law on wage garnishments. The debtor could keep her postpetition wages because the lien’s underlying debt was discharged. The lien did not survive the chapter 7 discharge. Future earnings were not "property" under the bankruptcy laws until those earnings were in existence, and a lien on subsequent earnings was extinguished upon discharge. The citation lien under 735 Ill. Comp. Stat. Ann. 5/2-1402 (West Supp. 1996) secured payment of the judgment and terminated when the judgment was satisfied. Once the judgment was voided under 11 U.S.C. § 524(a), it no longer supported a lien that attached to property acquired after the judgment was voided. The prepetition citation lien did not attach to wages earned after the judgment was voided by discharge. Any prepetition wages collected were not property of the estate. But, the lien did not attach to any postpetition wages. Johnson v. Chetto (In re Chetto), 2002 Bankr. LEXIS 1109, 282 B.R. 215 (Bankr. N.D. Ill. August 2, 2002) (Doyle, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.02 [back to top]

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Relief from stay appropriate for limited purpose of determining debtor’s liability from among several defendants in state court action. B.A.P. 8th Cir. PROCEDURAL POSTURE: Appellees sought relief from the automatic stay to continue a state court action in which debtor and the appellees were co-defendants. Appellees sought relief from the automatic stay in anticipation of filing counter-claims against the debtor. The bankruptcy court granted appellees relief from the automatic stay for the limited purpose of determining debtor’s liability. Debtor appealed. OVERVIEW: The bankruptcy court determined that the claims in state court were being made by several plaintiffs against several defendants, that cross-claims and counter-claims were probable, and that some of the various theories being pursued by the plaintiffs would include matters better left to the jurisdiction and expertise of the state court. The bankruptcy court also determined that judicial economy would best be served by allowing the state court to determine issues of liability and damages as to the debtor, but limited the grant of relief to only those issues. The appellate court found that the bankruptcy court properly balanced the potential prejudice to the debtor and the bankruptcy estate against the hardship to the appellees and the other parties if they were not allowed to proceed in state court. By allowing the state court to determine liability and damages, a determination that would otherwise require a trial in the bankruptcy court, but limiting the ability of the appellees to enforce the judgment, the bankruptcy court substantially reduced the potential harm to the debtor. The bankruptcy court did not abuse its discretion in granting the appellees relief. Loudon v. Amogio Foods, Inc. (In re Loudon), 2002 Bankr. LEXIS 1139, 284 B.R. 106 (B.A.P. 8th Cir. October 16, 2002) (Dreher, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.07[3] [back to top]

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