Collier

Collier Bankruptcy Case Update September-10-01

 

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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.

September 10, 2001

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

  • 1st Cir.

    Rule 3018(a) Claim was temporarily allowed in a reduced amount for voting purposes.
    In re CGE Shattuck, LLC
    (Bankr. D.N.H.)


    2d Cir.

    § 548(a)(1)(B) Brokers’ commissions paid to advance fraudulent scheme were not avoidable.
    Balaber-Strauss v. Lawrence
    (S.D.N.Y.)

    § 707(a) Debtor’s attempts to avoid judgment enforcement constituted grounds for dismissal under section 707(a).
    Blumenberg v. Yihye (In re Blumenberg)
    (Bankr. E.D.N.Y.)


    3d Cir.

    § 522(d)(5) Debtor who did not have ownership interest in marital residence was not entitled to exemption.
    In re Cohen
    (Bankr. D.N.J.)

    § 1307(c) Dismissal was affirmed on appeal.
    Lucabaugh v. IRS (In re Lucabaugh)
    (E.D. Pa.)

    28 U.S.C. § 1334(b) Motion to dismiss was denied.
    Bowers v. Nat’l Health & Safety Corp. (In re Nat’l Health & Safety Corp.)
    (Bankr. E.D. Pa.)


    4th Cir.

    § 365(d)(10) Lease obligations incurred during the first 60 days of the case may be afforded administrative expense status.
    Guttman v. Xtra Lease, Inc. (In re Furley’s Transp., Inc.)
    (Bankr. D. Md.)


    5th Cir.

    § 365(c) Partnership agreement was not assumable.
    Stumpf v. McGee (In re O’Connor)
    (5th Cir.)

    § 505(a)(1) Bankruptcy court had jurisdiction over setoff dispute.
    IRS v. Luongo (In re Luongo)
    (5th Cir.)

    § 523(a)(4) Nondischargeability determination was affirmed.
    In re Lapeyre
    (E.D. La.)

    § 1129(b) Objection to plan was sustained.
    In re Sentry Operating Co. of Tex., Inc.
    (Bankr. S.D. Tex.)

    28 U.S.C. § 1334(c) District court abstained from proceeding.
    Lee v. Miller
    (S.D. Miss.)


    6th Cir.

    § 362(a) Injunctive relief was granted.
    In re LTV Steel Co.
    (Bankr. N.D. Ohio)

    § 365(d)(3) Although rent came due prepetition, landlords were entitled to prorated share of rent for the month when petition was filed.
    In re Travel 2000, Inc.
    (Bankr. W.D. Mich.)


    7th Cir.

    § 510(c) Claim was subordinated.
    In re Biscayne Inv. Group
    (Bankr. N.D. Ill.)

    § 541(a)(1) Nature of prepetition retainer was questioned.
    In re Production Assocs.
    (Bankr. N.D. Ill.)

    § 544(a)(1) Bankruptcy court erred in holding that spouse had no vested interest in marital property at the time of the petition filing.
    Szyszko v. Szyszko
    (N.D. Ill.)

    § 1306(a) Portion of garnished wages was withheld for trustee.
    In re Rasberry
    (Bankr. N.D. Ill.)


    8th Cir.

    Rule 3001(f) Proof of claim for child support arrears was held presumptively valid.
    McDaniel v. Riverside County Dep’t of Child Support Servs. (In re McDaniel)
    (B.A.P. 8th Cir.)


    9th Cir.

    § 522(b)(2)(A) Debtor who supported epileptic daughter was entitled to a higher homestead exemption.
    In re Billings
    (Bankr. N.D. Cal.)


    10th Cir.

    § 523(a)(1) Tax was not discharged.
    McKowen v. IRS (In re McKowen)
    (D. Colo.)


    11th Cir.

    § 522(b)(2)(A) Court allowed homestead exemption under state constitution and refused to inquire into debtors’ conversion of property to exempt status.
    In re Lowery
    (Bankr. M.D. Fla.)


Collier Bankruptcy Case Summaries

1st Cir.

Claim was temporarily allowed in a reduced amount for voting purposes. Bankr. D.N.H. In order to block confirmation of the chapter 11 plan, a creditor bank purchased the claim of an individual who had performed site work at the debtor’s golf course. The work had been performed pursuant to several contracts and, after difficulties in receiving payment, a compromise agreement under which the debtor was to pay a portion of the obligation. The amount remaining on the obligation was disputed, and an objection to the proof of claim was pending. The bank sought temporary allowance of the claim for voting purposes, and the bankruptcy court held that in light of the contradictory testimony, the lack of documentation and the lack of an evidentiary hearing, the claim was reduced by one-half for voting purposes. After disallowing $6,000 of the $26,000 regarding a dispute over a dump truck, the court determined that, in light of the conflicting claims regarding the terms of the settlement agreement, it would be inequitable to allow the claim in the full amount, but, recognizing the greater credibility of the bank’s version, the court believed that some measure of the claim should be allowed for voting purposes.In re CGE Shattuck, LLC, 2000 Bankr. LEXIS 1847, – B.R. – (Bankr. D.N.H. November 30, 2000) (Deasy, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:3018.01[5]

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2nd Cir.

Brokers’ commissions paid to advance fraudulent scheme were not avoidable. S.D.N.Y. The debtors were several entities operated by an individual who utilized those entities as a Ponzi scheme, using new investors’ funds to repay earlier investors, mostly through the sale of fictitious mortgage participations. In 1993, the SEC commenced an action against the individual and the debtors alleging violations of securities laws. Despite the resulting injunction, the debtors continued to violate federal law, and the district court held the individual and the debtors in contempt and appointed a receiver. Shortly thereafter, in April 1997, six creditors filed an involuntary chapter 7 petition against the debtors, and the receiver eventually filed voluntary petitions for additional entities. A permanent trustee was appointed for all cases. In September 1997, the individual pled guilty to mail fraud, was sentenced to prison and was ordered to make restitution in excess of $30 million. The trustee, meanwhile, commenced adversary proceedings against brokers who were hired to originate mortgages and solicit investors for the debtors in the Ponzi scheme, seeking to recover $5 million in commissions paid by the debtor to the brokers, who asserted that they had no knowledge of the fraudulence of the scheme. The bankruptcy court dismissed the adversary proceeding, holding that value passed between the debtors and brokers, thereby defeating the constructive fraud argument. This appeal followed. The district court affirmed, holding that, for the purposes of section 548(a)(1)(B), the debtors received reasonably equivalent value for the commissions paid to the brokers for performing in good faith a facially lawful service, which they did without any knowledge of wrongdoing. The court concluded that because the transfer was equivalent in value, it was not subject to avoidance (citing Collier on Bankruptcy 15th Ed. Revised). Balaber-Strauss v. Lawrence, 2001 U.S. Dist. LEXIS 9458, 264 B.R. 303 (S.D.N.Y. July 9, 2001) (Brieant, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.05[1][b]

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Debtor’s attempts to avoid judgment enforcement constituted grounds for dismissal under section 707(a). Bankr. E.D.N.Y. In 1997, a foreign (Great Britain) court entered judgment against the debtor on a breach of contract action in favor of the creditor. In 1998, in the same country, the debtor was adjudged a bankrupt. In 1999, the state (New York) supreme court entered a judgment against the debtor in favor of the same creditor in the approximate amount of $122,000, which recognized the foreign judgment. The debtor was denied leave to appeal and then filed a chapter 11 petition in October 1999, which was soon converted to chapter 7. The trustee filed an adversary proceeding seeking to deny the debtor’s discharge because of alleged destruction of documents, failure to keep documents or to explain the loss of assets, all of which prevented the trustee from pursuing various fraudulent transfer claims. The bankruptcy court held sua sponte that the debtor’s actions justified both bad faith dismissal and 'for cause' dismissal under section 707(a). The court reasoned that: (1) the creditor was the debtor’s only major creditor; (2) the debtor litigated against the recognition of the judgment and failed at every level; and (3) the debtor filed the petition before the creditor could enforce the judgment, thereby frustrating the creditor’s efforts at collection. The court concluded that the debtor had clearly filed his petition to avoid consequences of a previous judgment and impending proceedings, constituting a finding of bad faith that supported dismissal under section 707(a).Blumenberg v. Yihye (In re Blumenberg), 2001 Bankr. LEXIS 822, 263 B.R. 704 (Bankr. E.D.N.Y. June 29, 2001) (Bernstein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:707.03

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3d Cir.

Debtor who did not have ownership interest in marital residence was not entitled to exemption. Bankr. D.N.J. The debtors, who were married, filed a joint chapter 7 petition. The schedules set forth the debtor husband’s one-half fee interest in real property. The debtor husband indicated that the remaining one-half interest was owned by his mother. The debtor wife had no ownership interest in the property. Nonetheless, she claimed an exemption in the property under the 'wild card' provision of section 522(d)(5). The trustee filed a motion seeking denial of that exemption because the wife had no ownership interest. The bankruptcy court granted the trustee’s motion, holding that the wife was not entitled to claim the exemption because she was not a titleholder. The court also addressed the proposition that under state (New Jersey) law, the wife had the right to joint possession of the marital residence and concluded that, because joint possession was the right to share in the value of the titleholder’s interest, it could not be the subject of a separate exemption. In re Cohen, 2001 Bankr. LEXIS 817, 263 B.R. 724 (Bankr. D.N.J. July 10, 2001) (Stripp, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.09[5]

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Dismissal was affirmed on appeal. E.D. Pa. The debtor appealed the bankruptcy court’s order dismissing his fourth chapter 13 case with prejudice and prohibiting him from filing another petition for 180 days. During the pendency of the debtor’s first and second cases, the debtor failed to file tax returns, and his cases were dismissed. The debtor voluntarily dismissed his third case. Despite having stipulated in his second case as to the amount of prepetition tax deficiency, the debtor objected to the IRS’s proof of claim filed in his fourth case. After the bankruptcy court entered an order determining the amount of the IRS’s claim, the debtor continued to file various motions, complaints and appeals attacking the final order. The bankruptcy court granted the IRS’s motion to dismiss the fourth case, finding that the debtor filed his petition in bad faith without an intent to reorganize and for the purpose of hindering and delaying the IRS in its attempt to collect the prepetition taxes. The district court affirmed, holding that the bankruptcy court did not abuse its discretion in dismissing the debtor’s fourth chapter 13 case with prejudice under section 1307(c). The court further found that the bankruptcy court did not abuse its discretion by prohibiting further bankruptcy filings by the debtor for the 180-day period.Lucabaugh v. IRS (In re Lucabaugh), 2001 U.S. Dist. LEXIS 9749, – B.R. – (E.D. Pa. June 25, 2001) (Newcomer, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1307.04

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Motion to dismiss was denied. Bankr. E.D. Pa. The former principal of a debtor reorganized under chapter 11 had entered into a prepetition agreement in settlement of litigation between the debtor and another claimant, which included a payment obligation of the debtor to the claimant secured by a cash escrow as well as a pledge of certain securities owned by the principal. Because the debtor held the principal’s securities after confirmation of the plan, the principal filed a complaint against the debtor and the claimant, seeking a declaratory judgment that the claimant turn over the pledged stock to him or, in the alternative, that the debtor be enjoined from delivering to the claimant any of the equity interests under the plan. The claimant moved to dismiss the adversary proceeding, asserting that the bankruptcy court had no subject matter jurisdiction over the action. The court denied the motion to dismiss, holding that because the requested relief potentially required modification of the debtor’s duties under the plan, the court had proper subject matter jurisdiction over the dispute. The court noted that since the confirmed plan mandated distribution of the equity units to which the claimant and principal asserted competing rights, the claimant was an indispensable party to the complaint. Bowers v. Nat’l Health & Safety Corp. (In re Nat’l Health & Safety Corp.), 2001 Bankr. LEXIS 811, – B.R. – (Bankr. E.D. Pa. June 26, 2001) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.01[4]

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4th Cir.

Lease obligations incurred during the first 60 days of the case may be afforded administrative expense status. Bankr. D. Md. The debtor trucking company leased numerous trailers from the lessor and, under the terms of the lease agreement, the lease obligations were due ten days after the monthly charges were invoiced. After the chapter 11 petition was filed, the debtor ceased making payments to the lessor and, three months later, the case was converted to chapter 7 and a trustee appointed. Ultimately, the lease was rejected, but not before the debtor incurred over $34,000 in rental fees. The lessor sought payment of the charges as an administrative expense. The trustee objected to that request, asserting that since the obligations were all invoiced prior to the 60th day following the filing of the petition, section 365(d)(10) precluded any right to payment. Moreover, the trustee asserted, since section 365 accorded administrative expense status only to obligations arising after the 59th day of the case, by negative implication, the lessor could not recover the rental obligations for any time during the first 60 days. Upon the trustee’s motion for summary judgment, the bankruptcy court first rejected the trustee’s theory that the obligations arose upon invoicing and determined that the obligations came due under the contract on the due date. Thereafter, the bankruptcy court held that the fact that section 365(d)(10) creates an administrative expense for the lease obligations arising after 60 days from the order from relief did not preclude the lessor from seeking the lease obligation due within the first 60 days as an administrative expense pursuant to section 503(b). Looking to the language of the statute, the legislative history, and, after rejecting the trustee’s case authority, the court concluded that the lessor was entitled to an opportunity to prove that the lease obligations arising within the first 60 days of the bankruptcy case were actual and necessary costs of preserving the estate. Accordingly, the trustee’s motion for summary judgment was denied.Guttman v. Xtra Lease, Inc. (In re Furley’s Transp., Inc.), 2001 Bankr. LEXIS 778, 263 B.R. 733 (Bankr. D. Md. June 12, 2001) (Derby, B.J.).

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

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5th Cir.

Partnership agreement was not assumable. 5th Cir. The chapter 11 trustee appealed the district court judgment in favor of the individual debtor’s business partners. The trustee had filed an adversary proceeding against the debtor’s partners, seeking a declaration that they were violating the partnership agreement by engaging in various interest transfers. Although the plan had been confirmed, the partnership agreement was never assumed by the trustee. The bankruptcy court held the agreement passed through the bankruptcy to the liquidating trust managed by the trustee. The district court reversed, in part, holding that the agreement was not assumable and passed through the bankruptcy unaffected, resulting in the trustee having no right to assert claims regarding the interest transfers or to claim a right to distributions made pursuant to them. The Court of Appeals for the Fifth Circuit affirmed the district court’s ruling, holding that because the partnership agreement was not assumed by the trustee and was only binding upon the debtor, only the debtor, not the trustee, could claim a right under the agreement to distributions and to determine the validity of interest transfers. The court noted that the trustee only asserted a right to proceed as a partner under the agreement, not to proceed against the partnership to recover the value of the debtor’s interest in it (citing Collier on Bankruptcy, 15th Ed. Revised).Stumpf v. McGee (In re O’Connor), 2001 U.S. App. LEXIS 15954, – F.3d – (5th Cir. July 16, 2001) (Barksdale, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.06

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Bankruptcy court had jurisdiction over setoff dispute. 5th Cir. After the IRS set off the debtor’s income tax overpayment for a prepetition tax year against a discharged tax liability, the debtor moved to reopen her bankruptcy case and amended her schedules to list the overpayment as an exempt asset. She then filed an adversary proceeding against the IRS to recover her tax overpayment. The bankruptcy court permitted the debtor to exempt the overpayment, and the district court reversed. On appeal, the IRS asserted that the bankruptcy court lacked jurisdiction or should have abstained from hearing the matter. The Court of Appeals for the Fifth Circuit rejected the IRS’s argument, holding that the bankruptcy court’s decision not to abstain was proper because the resolution of the issues was governed predominantly by bankruptcy law. The court noted that the debtor was not requesting the bankruptcy court to determine the amount of her tax liability, but instead whether her tax overpayment, by virtue of exemption or dischargeability, was protected from setoff by the IRS (citing Collier on Bankruptcy, 15th Ed. Revised).IRS v. Luongo (In re Luongo), 2001 U.S. App. LEXIS 15986, – F.3d – (5th Cir. July 18, 2001) (Benavides, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:505.01

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Nondischargeability determination was affirmed. E.D. La. The individual debtor appealed the bankruptcy court’s order holding certain debts to a corporation in which he was shareholder and director nondischargeable. During his tenure as president of the corporation, the debtor caused the corporation to loan funds to himself and his business in excess of the amount approved by corporation resolution. After the corporation filed for bankruptcy protection, the debtor also collected management fees without court approval and reimbursed himself for expenses allegedly incurred on the corporation’s behalf. Because the debtor was unable to document any of the expenses, the bankruptcy court found that he improperly charged the corporation for his secretarial, automobile and travel costs. The bankruptcy court also found that the debtor’s taking of the unauthorized loans was a breach of his fiduciary duty to the corporation. The district court affirmed, holding that the debtor’s breach of the common law fiduciary duty to the corporation and stockholders was sufficient to satisfy the technical trust requirements of section 523(a)(4). The court held that the bankruptcy court properly found that section 523(a)(4) provided a 'recklessness' standard for breach of fiduciary duty.In re Lapeyre, 2001 U.S. Dist. LEXIS 9806, – B.R. – (E.D. La. July 3, 2001) (Clement, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10

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Objection to plan was sustained. Bankr. S.D. Tex. The equity investors of the debtor voted against the chapter 11 plan and objected to plan confirmation. The investors asserted that payment of 100 percent of trade creditors’ claims was not fair and equitable and unfairly discriminated against other unsecured creditors, including themselves, who received one percent of their claims. Creditors in both classes had equal rank under state law and equal distribution priorities under the Code. The debtor argued that the investors had no right to a distribution because the senior secured creditor was merely sharing its proceeds with the trade creditors, a class which otherwise would receive nothing. The bankruptcy court denied confirmation of the plan, holding that the plan discriminated unfairly by proposing to pay a greater distribution to the class of creditors of equal rank. The court noted that there was no justification for the proposed 99 percent payout differential between the two classes of creditors (citing Collier on Bankruptcy, 15th Ed. Revised). In re Sentry Operating Co. of Tex., Inc., 2001 Bankr. LEXIS 846, 264 B.R. 850 (Bankr. S.D. Tex. June 19, 2001) (Steen, B.J.).

Collier on Bankruptcy, 15th Ed. Revised

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District court abstained from proceeding. S.D. Miss. The chapter 13 debtors filed a motion before the district court for discretionary abstention and remand to the state (Mississippi) court of a case they filed for injuries sustained in an automobile accident. The case had been removed to the district court after the defendants learned that the debtors had filed a petition on the same day they filed their personal injury cause of action. The defendants opposed the motion and argued that the district court had exclusive jurisdiction over the case because the negligence and loss of consortium claims brought by the debtors were the property of the bankruptcy estate. The district court granted the debtors’ motion, holding that it was in the interests of justice for the district court to abstain pursuant to 28 U.S.C. § 1334(c) and to remand the action pursuant to 28 U.S.C. § 1452(b) to the state court. The court noted that the trial of state law created issues and rights was more properly adjudicated by a state court, especially since there was no basis for federal jurisdiction independent of section 1334, and the litigation could be timely completed in state court.Lee v. Miller, 2001 U.S. Dist. LEXIS 9898, 263 B.R. 757 (S.D. Miss. March 19, 2001) (Wingate, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05

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6th Cir.

Injunctive relief was granted. Bankr. N.D. Ohio The chapter 11 debtor filed a motion seeking enforcement of the automatic stay and injunctive relief against the state (Minnesota) taxing authorities. After the debtor filed its petition, the taxing authorities mailed jeopardy collection notices and filed tax liens against the debtor’s property. The debtor sought an order requiring the removal of the liens and enjoining the taxing authorities from taking further collection actions. The taxing authorities argued that the Eleventh Amendment barred the debtor’s motion because the state had not waived its sovereign immunity. The bankruptcy court granted the debtor’s motion, holding that because the debtor only sought prospective injunctive relief to correct an ongoing violation of federal law, the motion was not barred by the Eleventh Amendment. The court noted that pursuant to the doctrine set forth in Ex parte Young, 209 U.S. 123 (1908), federal courts were permitted to enjoin state officials to conform their conduct to requirements of federal law, notwithstanding any impact on the state treasury.In re LTV Steel Co., 2001 Bankr. LEXIS 816, 264 B.R. 455 (Bankr. N.D. Ohio July 2, 2001) (Bodoh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03, .04

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Although rent came due prepetition, landlords were entitled to prorated share of rent for the month when petition was filed. Bankr. W.D. Mich. The debtor, who occupied retail space in shopping centers and a building managed by the creditors, filed a chapter 11 petition on February 2, 2001. All the leases provided that rent was due on the first of the month. The creditors filed a motion to compel payment of rent. The debtor argued that its February 2001 rent obligation originated on February 1, and consequently did not fall within the postpetition, prerejection period under section 365(d)(3). The creditors argued that the 'proration' approach should apply, under which a debtor is required to pay those amounts that pertain to benefits realized during the postpetition, prerejection period regardless of when the payment became due. The bankruptcy court ruled for the creditors, holding that, even though the creditors’ claims arose prepetition, the obligations under the lease arose postpetition, and that the creditors were entitled to be paid on a pro rata basis. The court reasoned that the debtor’s obligation arose each day in the month of February until it vacated the premises. In re Travel 2000, Inc., 2001 Bankr. LEXIS 813, 264 B.R. 444 (Bankr. W.D. Mich. May 10, 2001) (Stevenson, B.J.).

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

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7th Cir.

Claim was subordinated. Bankr. N.D. Ill. The limited partner of the chapter 11 debtor objected to the claim of the principal of the debtor’s corporate general partner, alleging that the principal used the assets of the debtor for his own benefit in an amount in excess of the amount of his claim. Because the debtor never had sufficient funds to pay the principal a salary, the principal utilized funds from the debtor’s bank account to pay his personal expenses. The principal also commingled personal and partnership funds and failed to keep accurate books and records of the debtor. The bankruptcy court overruled the objection to the claim, holding that although the principal’s claim was allowed in full, it was equitably subordinated to the claim of the limited partner. The principal had engaged in inequitable conduct that resulted in injury to the creditors of the debtor’s estate. The court noted that the principal’s insider status and control of the debtor conferred an unfair advantage on him because he received money he was not entitled to.In re Biscayne Inv. Group, 2001 Bankr. LEXIS 836, – B.R. – (Bankr. N.D. Ill. May 29, 2001) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.05

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Nature of prepetition retainer was questioned. Bankr. N.D. Ill. After the debtor converted from chapter 11 to chapter 7, the bankruptcy court ordered all professionals who had performed services for the debtor to file their final application for compensation. The debtor instead filed an application to employ the same counsel as had represented the debtor during the chapter 11 case. The attorney’s affidavit stated that he had received a retainer prior to the debtor’s petition date for services rendered or to be rendered in connection with the case. The bankruptcy court ordered an evidentiary hearing, holding that it was necessary to review the actual retainer agreement to decide whether the retainer was intended to become the attorney’s property or was intended as security for future services. The court declined to adopt the majority of courts’ position that all prepetition retainers were property of the estate, but instead deferred to state (Illinois) law to determine the nature of the retainer.In re Production Assocs., 2001 Bankr. LEXIS 814, 264 B.R. 180 (Bankr. N.D. Ill. July 11, 2001) (Schmetterer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.07[2]

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Bankruptcy court erred in holding that spouse had no vested interest in marital property at the time of the petition filing. N.D. Ill. The debtor and his spouse were residing in Poland when, in 1980, the debtor alone moved to the United States. In 1986, the debtor obtained a divorce by publication. In 1988, the spouse and the child of the marriage moved to the United States and began residing with the debtor. The spouse was unaware of the divorce decree. A second child was born in 1991. In 1996, the debtor moved out of the marital residence, and the spouse filed for divorce. In 1997, the divorce decree obtained by the debtor was vacated on the grounds that the spouse’s due process rights were violated. In 1999, the debtor filed a chapter 11 petition, later converted to chapter 7. The bankruptcy court entered an order modifying the stay to allow the spouse to proceed in state (Illinois) court to pursue claims for alimony, maintenance and child support. That order also stated that the spouse could not enforce any orders entered by the state court against estate property without further order. In 2000, the state appellate court reversed the vacatur of the 1986 decree. On remand, the circuit court, in January 2001, found that the spouse was a putative spouse who had the same rights as a legal spouse under state law. Meanwhile, in 2000, the debtor had filed a motion to compel the sale of the marital residence, which was granted in February 2001. The bankruptcy court found that, because no distribution award was granted by the state court prepetition, the spouse, if a putative spouse, could have only a general unsecured claim against the estate and would be denied any proprietary rights, and that the spouse had only inchoate rights that were cut off by the trustee’s status as a hypothetical lien creditor. This appeal followed. The district court reversed and remanded, holding that the spouse had a vested interest in the marital property prior to the petition filing. The court found that the bankruptcy court incorrectly relied on authority from states other than Illinois. Under the laws of Illinois, a spouse’s interest in marital property vested at the time the divorce petition was filed. Moreover, the district court found that Illinois law did not require a spouse to establish a separate recorded interest to protect that interest and concluded that the bankruptcy court should have waited to rule on the sale of the residence until the state court determined the spouse’s interest in the property. Szyszko v. Szyszko, 2001 U.S. Dist. LEXIS 9527, – B.R. – (N.D. Ill. July 5, 2001) (Darrow, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.05

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Portion of garnished wages was withheld for trustee. Bankr. N.D. Ill. The chapter 13 debtor’s employer filed a motion to determine whether the automatic stay applied to the prepetition and postpetition garnished wages of the debtor so as to prohibit the employer from delivering those funds to the judgment creditor. The judgment creditor had obtained a judgment against the debtor and thereafter initiated postpetition wage deduction proceedings. The debtor subsequently filed a petition and submitted a plan that proposed to pay a 100 percent dividend to creditors. The bankruptcy court ordered the employer to turn over a portion of the funds pending confirmation of the plan, holding that section 1306(a)(2) precluded the enforcement of the wage deduction order as to the postpetition wages of the debtor. The funds were ordered to be turned over to the trustee upon confirmation. The prepetition withheld wages were not property of the estate and were ordered to be turned over to the judgment creditor.In re Rasberry, 2001 Bankr. LEXIS 835, 264 B.R. 495 (Bankr. N.D. Ill. July 10, 2001) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1306.02

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8th Cir.

Proof of claim for child support arrears was held presumptively valid. B.A.P. 8th Cir. The chapter 13 debtor filed a proof of claim on behalf of the creditor, the county department of child support services, for $9,250, representing the debtor’s prepetition child support debt. Thereafter, the creditor filed an untimely proof of claim on the same debt, but in the amount of $11,212.42. The debtor filed an objection to the second proof of claim, seeking to disallow any amount in excess of the sum set forth in the first proof of claim. The bankruptcy court overruled the debtor’s objection, and this appeal followed. The debtor argued that the creditor’s proof of claim overstated the amount owed because it probably included postpetition interest. The B.A.P. for the Eighth Circuit affirmed, holding that, pursuant to Rule 3001(f), the creditor’s proof of claim was presumptively valid and that the debtor failed to present substantial evidence to rebut that validity.McDaniel v. Riverside County Dep’t of Child Support Servs. (In re McDaniel), 2001 Bankr. LEXIS 806, – B.R. – (B.A.P. 8th Cir. July 11, 2001) (Hill, B.J.).

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

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9th Cir.

Debtor who supported epileptic daughter was entitled to a higher homestead exemption. Bankr. N.D. Cal. The chapter 13 debtor provided room and board for his unmarried, pregnant and epileptic daughter. Based upon this obligation, the debtor claimed the higher homestead exemption provided under state (California) law. The chapter 13 trustee objected to the confirmation, asserting that the debtor was not entitled to the higher exemption. The bankruptcy court held that since he supported a child who had a physical handicap, the debtor was entitled to claim the higher homestead exemption.In re Billings, 2001 Bankr. LEXIS 779, 262 B.R. 88 (Bankr. N.D. Cal. February 26, 2001) (Jaroslovsky, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.10

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10th Cir.

Court allowed homestead exemption under state constitution and refused to inquire into debtors’ conversion of property to exempt status. Bankr. M.D. Fla. The debtors resided on a citrus farm that was composed of five contiguous parcels of real property that the debtors purchased in separate transactions between 1978 and 1988. In 2000, the debtors filed a chapter 7 petition and claimed the entire property exempt under the state (Florida) constitution. Both the trustee and a creditor filed objections to the claim of exemption. The creditor argued that the debtors should not be able to take the exemption because they enlarged the property with the specific intent to hinder, delay or defraud creditors by converting nonexempt parcels into exempt homestead property. The debtors filed a motion for summary judgment seeking allowance of the exemption. The bankruptcy court ruled for the debtors. The court examined the state constitution’s homestead exemption and found no exceptions for either a fraudulent conversion or for the purported conversion of nonexempt to exempt property and refused to look behind the exemption to determine how the debtors acquired the property. In re Lowery, 2001 Bankr. LEXIS 812, 262 B.R. 875 (Bankr. M.D. Fla. June 6, 2001) (Funk, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.02

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Collier Bankruptcy Case Update February-14-05

 


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.

February 14, 2005

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

 

3d Cir.

§ 547(c)(2) Transferee could not maintain ordinary course of business defense to avoidance absent sufficient evidence of prior course of dealings with debtor. Waslow v. Dover Findings, Inc. (In re M Group, Inc.) (Bankr. D. Del.)


4th Cir.

§ 506(a) Petition date was proper valuation date for debtor’s primary residence in proceeding to determine validity of third mortgage on the property. Dean v. LaPlaya Inv., Inc. (In re Dean) (Bankr. E.D. Va.)

§ 547(b) Debtors who were solvent at time of alleged preferential transfers could not prevail on avoidance claims. Heilig-Meyers Co. v. Wachovia Bank (In re Heilig-Meyers Co.) (Bankr. E.D. Va.)


5th Cir.

§ 109(e) Chapter 13 case dismissed after creditor whose claim was not discharged in debtor’s prior chapter 7 case obtained judgment resulting in noncontingent, liquidated debt in excess of limits. In re Muller (Bankr. N.D. Tex.)

§ 365 Debtor ordered to pay increased, alternative rent under lease of assets without prejudice to future showing that “lease” was actually a financial transaction or that increase was a penalty. In re Mirant Corp. (Bankr. N.D. Tex.)


6th Cir.

§ 329 Trustee’s motion to disgorge attorneys’ fees incurred in connection with debtor’s redemption of vehicle denied in absence of any actual or statutory conflict of interest. In re Ray (Bankr. M.D. Tenn.)

§ 544(a) Trustee waived right to exercise strong arm powers by not referencing section 544(a) in joint pre-trial order singed by counsel for trustee and debtor. Gold v. National City Home Loan Servs. (In re Hamama) (Bankr. E.D. Mich.)


7th Cir.

§ 503(b)(1)(A) Creditor’s breach of contract claim against debtor did not give rise to an administrative expense. In re National Steel Corp. (Bankr. N.D. Ill.)

§ 523(a)(9) Bankruptcy court ruling that claim for injuries caused by debtor’s operation of a motorboat while intoxicated was nondischargeable reversed as a motor boat is not a “motor vehicle.” Dilk v. Delph (S.D. Ind.)


8th Cir.

§ 547(c) Bankruptcy court properly held that creditor did not establish that the ordinary course of business or subsequent new value exceptions to avoidance applied to transfers trustee sought to avoid. Shodeen v. Airline Software, Inc. (In re Accessair, Inc.) (B.A.P. 8th Cir.)

§ 549(a) Bankruptcy court properly avoided postconversion quitclaim deed from debtor to spouse pursuant to prepetition prenuptial agreement as an unauthorized postpetition transfer. Cox v. Griffin (B.A.P. 8th Cir.)

28 U.S.C. § 1334(c)(2) Stay pending appeal denied because bankruptcy court decision to abstain and remand fraud case was not appealable. Official Plan Comm. of Omniplex Communs. Group, LLC v. Lucent Techs., Inc. (E.D. Mo.)


9th Cir.

§ 362(h) Telephone company that sent postpetition collection letter willfully violated stay but was not subject to sanctions absent proof of actual damages by debtor. In re McCain (Bankr. D. Idaho)


10th Cir.

§ 349(a) Debtors’ sixth chapter 13 petition, field after prior five cases were dismissed for failure to make plan payments, dismissed with prejudice, due to debtors’ bad faith. In re Smith (Bankr. D. Utah)

§ 1325(b) Plan including private school tuition for debtors approved where debtors had significantly reduced other expenses and private education was demonstrably superior to public school. In re Villegas (Bankr. D. Utah)


11th Cir.

§ 106(a)(3) IRS could not be held liable for punitive damages for willful violation of stay. Baird v. United States (In re Baird) (Bankr. M.D. Ala.)

§ 505(a) Request for redetermination of taxes was properly within jurisdiction of bankruptcy court. Hospitality Ventures/LaVista v. Heartwood 11, LLC (In re Hospitality Ventures/La Vista)
(Bankr. N.D. Ga.)


D.C. Cir.

§ 105(a) Bankruptcy court declined to exercise equitable powers to order IRS to consider debtor’s offer in compromise. 1900 M Rest. Assocs. v. United States (1900 M Rest. Assocs.) (Bankr. D.D.C.)

Rule 2002(f)(3) Court refused to adjust bar date despite failure of clerk’s office to fill in date in notice to creditors as failure to inquire would be a lack of due diligence and debtor could file on creditors’ behalf. In re Barnes (Bankr. D.D.C.)



Collier Bankruptcy Case Summaries

 

3d Cir.

Transferee could not maintain ordinary course of business defense to avoidance absent sufficient evidence of prior course of dealings with debtor. Bankr. D. Del. PROCEDURAL POSTURE: Plaintiff unsecured claims administrator filed a motion for summary judgment in his action to avoid and recover under 11 U.S.C. § 547 certain preferential transfers made to defendant transferee. The transferee also filed a motion for summary judgment. OVERVIEW: The administrator asserted that, within 90 days prepetition, debtor issued checks to the transferee and that the payments constituted preferential transfers that were avoidable under 11 U.S.C. § 547. The transferee asserted that the transfers at issue were made on a debt that was antecedent pursuant to section 547(b)(2) because debtors’ obligations were incurred before debtor made the transfers. The court held that the only conclusive evidence presented to the court of a preferential payment were payments represented by two checks. The court held that the amount of the checks would constitute an avoidable preference unless the transferee could establish that the payments were in the ordinary course of the parties’ business or financial affairs and according to ordinary business terms. In granting the administrator’s motion for summary judgment in part and denying the transferee’s motion for summary judgment, the court held that there was insufficient evidence of the parties’ course of dealing before the preference period, and there was no evidence of what constituted the ordinary course of business or financial affairs of the parties. Waslow v. Dover Findings, Inc. (In re M Group, Inc.), 2005 Bankr. LEXIS 72, — B.R. — (Bankr. D. Del. January 20, 2005) (Fitzgerald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2][back to top]

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4th Cir.

Petition date was proper valuation date for debtor’s primary residence in proceeding to determine validity of third mortgage on the property. Bankr. E.D. Va. PROCEDURAL POSTURE: After filing for chapter 13 bankruptcy protection, plaintiff debtors filed an adversary proceeding to determine the validity and nature of a third mortgage lien held by defendant creditor. The parties moved for summary judgment. At the hearing on the motions, the parties agreed that the issue was the proper valuation date of the debtors’ primary residence for the purpose of determining whether the creditor’s third mortgage lien was allowable. OVERVIEW: The bankruptcy court did not interpret 11 U.S.C. § 506(a) or its legislative history to mean that a totality of the circumstances or other flexible method applied in determining the valuation date. Rather, the legislative history called for permitting different valuations depending on a debtor’s use of the property as revealed during a bankruptcy case. Within the context of a debtor’s principal residence, the bankruptcy court did not need to wait until the confirmation date to determine a debtor’s use of his principal residence since a debtor’s proposed use of his principal residence was to provide shelter for the debtor and his dependents and was known on the date the debtor filed the bankruptcy petition date. In this case, the petition date was the appropriate date to value the debtors’ principal residence because they had used the property as their principal residence throughout the bankruptcy case. Moreover, permitting a valuation date removed from the petition date would have allowed the creditor’s status to change from that of an unsecured creditor to a secured creditor through no affirmative action of the debtors to put their property to more productive use. Dean v. LaPlaya Inv., Inc. (In re Dean), 2005 Bankr. LEXIS 2168, — B.R. — (Bankr. E.D. Va. December 28, 2005) (Tice, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.03[back to top]

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Debtors who were solvent at time of alleged preferential transfers could not prevail on avoidance claims. Bankr. E.D. Va. PROCEDURAL POSTURE: Plaintiff debtors filed a complaint to avoid allegedly preferential or fraudulent cash transfers and grants of liens made to defendants, a group of prepetition secured creditors. OVERVIEW: The transfers at issue were made on May 25, 2000, as part of a major financial restructuring of the debtors. The issues for decision were: (1) whether the debtors were insolvent on a consolidated basis on May 25; (2) whether defendant lenders were entitled to a new value defense with regard to the allegedly preferential transfers; and (3) whether the lenders were entitled to an ordinary course of business defense with regard to the allegedly preferential cash transfers. In finding the debtors were solvent on May 25, the court applied the balance sheet test of insolvency because debtors were operating as a going concern on May 25; debtors were not on their deathbed. After subtracting total liabilities from total assets the result was $ 41,629,000 of positive shareholders’ equity, which represented the court’s finding that on a balance sheet analysis the debtors were solvent on May 25. Other factors also suggested solvency. Inter alia, debtors’ did not report significant losses for the five fiscal years 1996 through 2000, and a large part of their loss was from two nonrecurring items; further, debtors were not without cash to meet operating and debt servicing needs at May 25. Heilig-Meyers Co. v. Wachovia Bank (In re Heilig-Meyers Co.), 2005 Bankr. LEXIS 2167, — B.R. — (Bankr. E.D. Va. December 21, 2005) (Tice, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03[back to top]

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5th Cir.

Chapter 13 case dismissed after creditor whose claim was not discharged in debtor’s prior chapter 7 case obtained judgment resulting in noncontingent, liquidated debt in excess of limits. Bankr. N.D. Tex. PROCEDURAL POSTURE: Creditor filed a motion to dismiss debtors’ chapter 13 case, on the grounds that debtors’ noncontingent, liquidated, unsecured debts exceeded the allowable debt limits under 11 U.S.C. § 109(e). OVERVIEW: Debtors, husband and wife, filed for relief under chapter 7 and listed creditor as the holder of an unsecured nonpriority claim. Creditor, the provider of satellite television service, had sued debtors in state court, alleging that debtor husband had on 42 occasions surreptitiously possessed and illegally used in violation of federal communications and copyright laws various devices and equipment designed to intercept and decrypt creditor’s protected satellite communications. The court discharged debtors but held that creditor’s debt was not discharged. Subsequently, debtors filed for relief under chapter 13, and the next day creditor obtained a default judgment on its claim. In dismissing debtors’ chapter 13 case, the court held that the debt was noncontingent because debtors’ liability did not depend on the happening or occurrence of a future extrinsic event and disputed debts were included in the eligibility calculations. The court also held that the debt was liquidated because it was ascertainable prepetition to the extent of minimum damages, based on a calculation of the minimum statutory damages under the federal statutes that debtor husband violated. In re Muller, 2005 Bankr. LEXIS 57, — B.R. — (Bankr. N.D. Tex. January 19, 2005) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[back to top]

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Debtor ordered to pay increased, alternative rent under lease of assets without prejudice to future showing that “lease” was actually a financial transaction or that increase was a penalty. Bankr. N.D. Tex. PROCEDURAL POSTURE: Putative lessors, special purpose entities affiliated with financial institutions, asserted that a bankruptcy debtor was liable for increased rent on unexpired leases of assets to the debtor, which also acted as an issuer of notes securing the lessors’ loans, upon the debtor’s termination of its status as an issuer of securities. The lessors moved to compel payment of the alternative rent under 11 U.S.C. § 365.OVERVIEW: The leases provided for increased rent to offset the increased interest rate the lessors were required to pay on the loans upon termination of the debtor’s issuer status. The debtor contended that section 365 did not apply to require payment of the alternative rent because the relationship of the lessors to the debtor was not that of lessors-lessee within the meaning of section 365 but rather of parties to a financial transaction. The debtor also argued that section 365 was inapplicable since its default under the lease was nonmonetary and the increased rent constituted a penalty. The bankruptcy court first held that the evidence was insufficient to establish whether the parties’ transactions were in fact leases but, under section 365, payment of the increased rent was mandatory until it was judicially determined that no lease was involved, and the relevant documents were labeled as leases and contained no terms inconsistent with true leases. Further, in the absence of any express obligation of the debtor to maintain its status as a securities issuer, its obligation to pay the increased rent was a monetary obligation subject to section 365 rather than a cure of a nonmonetary obligation or a penalty. In re Mirant Corp., 2004 Bankr. LEXIS 1377, — B.R. — (Bankr. N.D. Tex. September 15, 2004) (Lynn, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.01[back to top]

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6th Cir.

Trustee’s motion to disgorge attorneys’ fees incurred in connection with debtor’s redemption of vehicle denied in absence of any actual or statutory conflict of interest. Bankr. M.D. Tenn. PROCEDURAL POSTURE: Three otherwise unrelated chapter 7 cases involving various debtors were before the court on movant United States trustee’s (“UST”) motion to disgorge attorney fees under 11 U.S.C. § 329. The UST sought disgorgement in connection with debtors’ redemption of automobiles on the basis of the existence of an alleged conflict of interest and unreasonableness of the fees. Non-movant attorney hired independent counsel and objected to the UST’s motion. OVERVIEW: Debtors redeemed vehicles pursuant to 11 U.S.C. § 722 whereby they borrowed the redemption funds from a lender that provided redemption loans. Debtors’ loans included a provision that allowed them to borrow enough funds to pay the attorney fees associated with the redemption. At the closing of each of the loans, the lender disbursed the loan proceeds that paid off the redemption value to the secured creditor, paid the fees associated with the loan, and paid the attorney his fees. The UST argued that the attorney accepted, or appeared to accept, financial incentives to refer his clients to the lender, resulting in a conflict of interest, and that the fees charged for the redemptions were unreasonable for the routine redemption services. The court concluded that delving into the relationships of the parties fully exonerated any conflict of interest allegations. It also found no statutory conflict of interest either, as the Bankruptcy Code was willing to overlook an attorney’s representation of the debtor and a creditor absent an objection where there was no actual conflict. It also held that the attorney demonstrated the reasonableness of the $300 fee charged for the redemptions. In re Ray, 2004 Bankr. LEXIS 1370, 314 B.R. 643 (Bankr. M.D. Tenn. September 17, 2004) (Paine, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.01[back to top]

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Trustee waived right to exercise strong arm powers by not referencing section 544(a) in joint pre-trial order singed by counsel for trustee and debtor. Bankr. E.D. Mich. PROCEDURAL POSTURE: Chapter 7 trustee filed a complaint against creditor, seeking to avoid the recording of a mortgage as a post-petition transfer in violation of 11 U.S.C. § 549(a). OVERVIEW: Debtor and his wife executed a mortgage in favor of creditor. Subsequently, debtor filed for chapter 7 relief and the mortgage was recorded 17 days later. The court held that, because the recording of a mortgage was not a transfer, as defined under 11 U.S.C. § 101(54), the recording of the mortgage did not constitute a post-petition transfer that was avoidable under 11 U.S.C. § 549(a). The court also held that trustee waived his right to exercise his strong arm powers under 11 U.S.C. § 544(a) to avoid the transfer because the joint final pre-trial order signed by counsel for trustee and debtor did not mention section 544(a). The court further held that trustee could not pursue a claim of a violation of the automatic stay under 11 U.S.C. § 362(a), which claim was not included in the complaint, but was included in the final pretrial order, because the pretrial order could not be used as a vehicle for adding claims or defenses. Gold v. National City Home Loan Servs. (In re Hamama), 2005 Bankr. LEXIS 65, — B.R. — (Bankr. E.D. Mich. January 24, 2005) (Rhodes, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.02[back to top]

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7th Cir.

Creditor’s breach of contract claim against debtor did not give rise to an administrative expense. Bankr. N.D. Ill. PROCEDURAL POSTURE: Creditor moved for allowance and payment of a chapter 11 administrative expense pursuant to 11 U.S.C. § 503(b)(1)(A) from the bankruptcy estates of related debtor entities (the “debtor”). OVERVIEW: This was not the typical scenario where a creditor provided goods or services to the debtor and sought payment for them as an administrative expense claim. Creditor’s request for an administrative expense claim was based on a contract and debtors’ alleged breach thereof. Creditor maintained that it purchased substantial amounts of steel above the contract rate and that, in doing so, debtor’s estate benefited. The court found that creditor failed the Jartran test. The first element of the test was met, as creditor’s claim arose from its postpetition purchase of steel from debtor. However, the second element was not met. Creditor did not incur any actual, necessary costs and expenses of preserving the estate in connection with the purchaser of steel at the increased price under the amended price proposal. Instead, creditor sought the costs and expenses it incurred as a result of debtor’s alleged breach of the contract, including the amount it paid above the contract price, financing charges, interest, and attorneys’ fees. Further, the price creditor paid was under the market rate at the time. Creditor was not entitled to an administrative expense claim under section 503(b)(1)(A). In re National Steel Corp., 2004 Bankr. LEXIS 1639, 316 B.R. 287 (Bankr. N.D. Ill. October 26, 2004) (Squires, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:503.06[back to top]

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Bankruptcy court ruling that claim for injuries caused by debtor’s operation of a motorboat while intoxicated was nondischargeable reversed as a motor boat is not a “motor vehicle.” S.D. Ind. PROCEDURAL POSTURE: Plaintiff married couple filed an adversary complaint in the bankruptcy court against defendant debtor. Pursuant to 11 U.S.C. § 523(a)(9), the couple sought to except from discharge their claims for damages arising out of injuries that the husband had received in a boating accident. The debtor filed an interlocutory appeal after the bankruptcy court denied his motion to dismiss the claim. OVERVIEW: The couple filed a personal injury suit against the debtor in a state court after the debtor’s motorboat collided with their vessel, causing severe injuries to the husband. The debtor thereafter filed a chapter 11 bankruptcy petition, which triggered a stay of the couple’s civil suit. The couple responded by filing the adversary complaint; in one count they asked the bankruptcy court to except from discharge, pursuant to section 523(a)(9), those debts resulting from the motorboat accident. The debtor filed a Fed. R. Civ. P. 12(b)(6) motion to dismiss the claim. In denying the motion, the bankruptcy court rejected the debtor’s argument that 11 U.S.C. § 523(a)(9) did not apply because the term “motor vehicle,” as used in section 523(a)(9), did not include motorboats. The court found that the bankruptcy court had erred in interpreting section 523(a)(9). Dictionaries, the federal Dictionary Act, and the overall statutory framework of the United States Code made clear that “motor vehicle” as used in section 523(a)(9) referred only to land vehicles. The debtor’s dismissal motion should have been granted because the term “motor vehicle,” as used in section 523(a)(9), did not include motorboats. Dilk v. Delph, 2005 U.S. Dist. LEXIS 26727, — B.R. — (S.D. Ind. November 24, 2005) (Tinder, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.15[back to top]

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8th Cir.

Bankruptcy court properly held that creditor did not establish that the ordinary course of business or subsequent new value exceptions to avoidance applied to transfers trustee sought to avoid. B.A.P. 8th Cir. PROCEDURAL POSTURE: Plaintiff chapter 7 trustee sought to avoid six preferential transfers that the debtor had made to defendant creditor. The Bankruptcy Court for the Southern District of Iowa held that the creditor failed to meet its burden of proof in demonstrating that the trustee could not avoid the transfers remitted to the creditor under either the ordinary course or subsequent new value defenses contained in 11 U.S.C. §§ 547(c)(2) and (c)(4). OVERVIEW: The bankruptcy court properly concluded that the creditor failed to establish that the debtor remitted the preference payments in the ordinary course of business under 11 U.S.C. § 547(c)(2) because its determination that the creditor’s witness was not credible was clearly within its purview, the documentary evidence showed that the tardiness of the debtor’s payments became substantially more significant during the preference period, and the payments for which no invoice was provided were properly ignored. Moreover, the creditor’s mere provision of the dates of the debtor’s payments did not establish a baseline of dealings between the parties, two of the preference payments were made in response to heightened collection efforts, and the creditor failed to establish the general range of terms prevailing within the industry. The bankruptcy court properly held that the creditor did not provide subsequent new value to the debtor after receiving at least some of the preference payments because it failed to present credible evidence that it installed software and hardware per a later agreement. Shodeen v. Airline Software, Inc. (In re Accessair, Inc.), 2004 Bankr. LEXIS 1369, 314 B.R. 386 (B.A.P. 8th Cir. September 22, 2004) (McDonald, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[back to top]

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Bankruptcy court properly avoided postconversion quitclaim deed from debtor to spouse pursuant to prepetition prenuptial agreement as an unauthorized postpetition transfer. B.A.P. 8th Cir. PROCEDURAL POSTURE: In a chapter 7 bankruptcy case originally filed as a chapter 11 case, plaintiff trustee filed against defendant wife an adversary complaint seeking to avoid the transfer of funds to the wife and the filing of a quitclaim deed. The United States Bankruptcy Court for the Western District of Arkansas entered judgment in favor of the trustee. The wife appealed. OVERVIEW: In January 2002, debtor husband filed a chapter 11 bankruptcy petition, which was converted into a chapter 7 case in 2003. After the conversion, the wife recorded a quitclaim deed allegedly executed by debtor early in 2000 as part of a prenuptial agreement. The agreement and the deed addressed property on which a liquor store was located. In late 2000, debtor purchased the liquor store. That store made rental payments to him. Later, debtor filed articles of incorporation and issued 50 shares of the corporation to himself and 50 shares to the wife. No assets were transferred to the corporation, and the wife paid no consideration for her stock. In 2001, debtor instructed his bookkeeper to make certain payments to the wife. After debtor filed for bankruptcy, the trustee sought to avoid those payments and the later filing of the quitclaim deed. The bankruptcy court properly ruled for the trustee. The prenuptial agreement evinced an intent to grant a future interest, and debtor did not relinquish control of the property. Further, even if the wife obtained an interest in the land, the trustee’s interest in the property had priority over the wife’s interest. Cox v. Griffin, 2005 Bankr. LEXIS 68, — B.R. — (B.A.P. 8th Cir. January 27, 2005) (Federman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:549.03[back to top]

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Stay pending appeal denied because bankruptcy court decision to abstain and remand fraud case was not appealable. E.D. Mo. PROCEDURAL POSTURE: Plaintiff, the official plan committee of a chapter 11 debtor, filed a fraud suit in state court against defendant contractor. After the contractor filed a notice of removal, the committee filed a motion to remand. After the court granted the committee’s motion to remand, the contractor filed a motion for a stay of the court’s remand order pending appeal. OVERVIEW: In granting the committee’s motion for remand, the court found that it was required to abstain from hearing the case pursuant to 28 U.S.C. § 1334(c)(2). After the court entered an order remanding the case to state court, the contractor filed a notice of appeal. The contractor subsequently filed a motion to stay the remand order pending appeal. The court held that it would deny the contractor’s motion for a stay because the contractor failed to show that the remand order was appealable under § 1334 and, thus, the contractor failed to demonstrate a likelihood of success on the merits. Moreover, even if the remand order was found to be appealable, the statutory requirements for abstention under section 1334(c)(2) were met, and, thus, the contractor was unlikely to succeed on merits of the appeal. The court further held that the remaining factors also counseled against a stay because (1) the contractor would not be irreparably injured in the absence of a stay, and (2) the issuance of a stay would cause an unnecessary time delay in the adjudication of the case. Official Plan Comm. of Omniplex Communs. Group, LLC v. Lucent Techs., Inc., 2004 U.S. Dist. LEXIS 23291, — B.R. — (E.D. Mo. September 14, 2004) (Webber, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05[2][back to top]

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9th Cir.

Telephone company that sent postpetition collection letter willfully violated stay but was not subject to sanctions absent proof of actual damages by debtor. Bankr. D. Idaho PROCEDURAL POSTURE: Chapter 7 debtors filed motions to recover monetary sanctions from diverse creditors pursuant to 11 U.S.C. § 362(h), alleging that the creditors violated the automatic stay in effect in their bankruptcy case. The court conducted a hearing at which none of the creditors appeared, although one filed a motion to dismiss, and the court entered findings of fact and conclusions of law under Fed. R. Bankr. P. 7052 and 9014. OVERVIEW: Debtors filed a mailing matrix with their petition, pursuant to Fed. R. Bankr. P. 1007, that named the creditors, and they were mailed a copy of the notice commencing the bankruptcy case. Five creditors sent letters attempting to collect the relevant debt from the debtors, but only one sent a letter while the stay was actually in effect. Claims against four of the creditors were thus dismissed. The one creditor that filed a motion to dismiss, however, had violated the stay. The court also found that the creditor’s principal, a telephone company, had violated the stay, although it may not have had actual knowledge of the bankruptcy. Neither the creditor nor its principal appeared for the hearing. Although a willful violation of 11 U.S.C. § 362(a) had been committed, the debtors had not offered any proof of actual damages resulting from the violation. Debtors and their counsel apparently had made no attempt to resolve the problem directly with the creditor. In the absence of actual damages, punitive damages and attorneys’ fees were not available. In re McCain, 2004 Bankr. LEXIS 2172, — B.R. — (Bankr. D. Idaho August 19, 2004) (Pappas, B.J.).

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

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10th Cir.

Debtors’ sixth chapter 13 petition, field after prior five cases were dismissed for failure to make plan payments, dismissed with prejudice, due to debtors’ bad faith. Bankr. D. Utah PROCEDURAL POSTURE: Debtors filed a sixth chapter 13 bankruptcy petition. Pursuant to 11 U.S.C. § 349(a), the United States trustee moved to dismiss debtors’ current case with prejudice and bar the discharge of scheduled debts in the case to any case filed in the future. OVERVIEW: Debtors filed two chapter 7 petitions and received a discharge in each case. Debtors also filed five previous chapter 13 petitions that were dismissed for failure to make plan payments. Regarding the present case, debtors were five months delinquent on their plan payments when the trustee moved to dismiss. The court determined that a dismissal with prejudice, barring the discharge of scheduled debts in the present case to any case filed in the future, was warranted because debtors’ plan was filed in bad faith. The court based its finding upon: (1) significant inconsistencies in the statements and schedules filed in debtors’ eight bankruptcy cases; (2) the dismissal of each of the previous chapter 13 cases; (3) debtors’ unstable employment history; (4) debtors’ escalating amounts of unsecured debt; and (5) debtors’ serial filings. In re Smith, 2004 Bankr. LEXIS 2169, — B.R. — (Bankr. D. Utah November 19, 2004) (Thurman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:349.01[1][back to top]

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Plan including private school tuition for debtors approved where debtors had significantly reduced other expenses and private education was demonstrably superior to public school. Bankr. D. Utah PROCEDURAL POSTURE: Debtors moved to confirm their chapter 13 plan. The debtors listed as an expense an item for private school tuition for their two children. The chapter 13 trustee initially objected to this expenditure because the debtors did not propose a plan that would have paid 100 percent of their unsecured debt. The trustee subsequently withdrew his objection. The court scheduled a hearing on the matter. OVERVIEW: Private school expenses were presumed to not be reasonably necessary for maintenance and support under 11 U.S.C. § 1325(b). However, this presumption was rebuttable based, inter alia, on the debtors’ reducing other expenses and/or increasing the plan terms so that creditors received the same distribution as if the debtors were not paying for private school. The debtors rebutted this presumption. The debtors chose to pursue a plan for 55 months instead of the 36-month minimum in order to repay more to their creditors. In addition, the debtors voluntarily reduced what typically would have been considered reasonable expenses. For example, the debtors had only two cars, one for each household (the debtors separated after filing their petition), both of which were about 10 years old. In addition, the debtors surrendered their home and were each living with relatives to reduce living expenses. Finally, the debtors provided evidence that a private education curriculum was superior to the local public schools and that private school had helped the children to stay away from such things as drugs and alcohol. The trustee did not attempt to rebut this evidence. In re Villegas, 2004 Bankr. LEXIS 1747, — B.R. — (Bankr. D. Utah October 5, 2004) (Thurman, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.08[back to top]

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11th Cir.

IRS could not be held liable for punitive damages for willful violation of stay. Bankr. M.D. Ala. PROCEDURAL POSTURE: Plaintiff debtor filed an adversary proceeding against defendant IRS, alleging a willful violation of the automatic stay imposed by 11 U.S.C. § 362 and seeking to hold the IRS in contempt of court. The debtor sought compensatory damages, punitive damages, and attorney fees. OVERVIEW: The IRS violated the automatic stay by its collection actions during the pendency of the chapter 13 case. The IRS contended that its actions were justified, hence not willful, because it mistakenly believed the debtor’s case had been dismissed. However, the dismissal was conditional, and the court ultimately decided not to dismiss the case. The IRS was not justified in unilaterally treating the case as dismissed based on receipt of an order which clearly made dismissal conditional. The IRS had a duty to make an inquiry as to the status of the case prior to commencing actions in violation of the automatic stay. As to damages, pursuant to 11 U.S.C. § 106(a)(3), punitive damages were not available. The debtor also requested damages for emotional distress, specifically, “worry, embarrassment, humiliation, and mental anguish.” However, he provided no evidence supporting these damages. As for attorney fees, the debtor failed to prove that the IRS was substantially unjustified in its position. The wrongful conduct of the IRS occurred pre-litigation. During the course of the adversary proceeding, the IRS was justified in its challenge of the debtor’s claim for damages. Baird v. United States (In re Baird), 2004 Bankr. LEXIS 2174, — B.R. — (Bankr. M.D. Ala. November 24, 2004) (Williams, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.05[back to top]

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Request for redetermination of taxes was properly within jurisdiction of bankruptcy court. Bankr. N.D. Ga. PROCEDURAL POSTURE: Plaintiff bankruptcy debtor-in-possession brought an adversary proceeding against defendants, a purchaser of tax claims against the debtor and the taxing authority, seeking a redetermination of ad valorem taxes under 11 U.S.C. § 505(a). Defendants moved the bankruptcy court to abstain under 28 U.S.C. § 1334(c)(1) or to decline to exercise its discretionary jurisdiction under 11 U.S.C. § 505(a). OVERVIEW: The debtor contended that the assessed value of its property was erroneous and resulted in excessive taxes, but the time for challenging the taxes in state court expired. Defendants argued that abstention or declining jurisdiction was warranted because any relief to the debtor would not benefit unsecured creditors and would prejudice defendants. The bankruptcy court held that abstention under 28 U.S.C. § 1334(c)(1) was debtor’s tax issues, and 11 U.S.C. § 505(a) did not grant the court discretion to decline jurisdiction over the tax redetermination claim except through abstention under 28 U.S.C. § 1334(c)(1). Permissive abstention was available only where interests such as comity or federalism warranted state resolution of an issue, but such state resolution was not possible since the debtor no longer had a state remedy. Further, even though 11 U.S.C. § 505(a) provided that the court may redetermine a tax, the word “may” was used in the sense of stating authorization, and section 505(a) did not permit the court to decline to exercise its jurisdiction unless permissive abstention was appropriate. Hospitality Ventures/LaVista v. Heartwood 11, LLC (In re Hospitality Ventures/La Vista), 2004 Bankr. LEXIS 1638, 314 B.R. 843 (Bankr. N.D. Ga. August 18, 2004) (Bonapfel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:505.01[back to top]

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D.C. Cir.

Bankruptcy court declined to exercise equitable powers to order IRS to consider debtor’s offer in compromise. Bankr. D.D.C. PROCEDURAL POSTURE: Plaintiff debtor brought an adversary proceeding against defendant, the United States, seeking an order compelling the government to have IRS to consider under I.R.C. § 7122(a) an offer-in-compromise submitted by the debtor on IRS Form 656 after the commencement of the debtor’s chapter 11 case but before the filing of any proposed chapter 11 plan. Pending before the court were cross-motions for summary judgment. OVERVIEW: IRS procedure directed that form offers were to be treated as nonprocessable if a taxpayer had a pending bankruptcy case and that payment proposals were to be considered through the plan confirmation process. The debtor claimed that this treatment constituted discrimination in violation of 11 U.S.C. § 525(a). The court found that 11 U.S.C. § 525(a) was not available because the debtor’s asserted right to submit a form offer was not a license, permit, charter, or franchise within the meaning of the law. Further, the court found that mandamus relief was not available under 11 U.S.C. § 105(a) because the decision was a discretionary one for which mandamus was not available. The IRS owed no clear duty to the debtor under I.R.C. § 7122 or 11 U.S.C. § 1129(a)(9)(C) to process the offer, and it was not an abuse of discretion to treat the offer as nonprocessable. Mandamus was also unavailable on an alternative ground because the debtor had an alternate adequate remedy through the plan confirmation process. Finally, the “fresh start” principle served as no basis for compelling the IRS to process the offer because 11 U.S.C. § 105(a) was not a roving commission to do equity. 1900 M Rest. Assocs. v. United States (1900 M Rest. Assocs.), 2005 Bankr. LEXIS 66, — B.R. — (Bankr. D.D.C. January 24, 2005) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:105.05[back to top]

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Court refused to adjust bar date despite failure of clerk’s office to fill in date in notice to creditors as failure to inquire would be a lack of due diligence and debtor could file on creditors’ behalf. Bankr. D.D.C. PROCEDURAL POSTURE: Debtor filed for bankruptcy relief. The court clerk sent to debtor’s creditors notice regarding the conversion of the case to a chapter 13 case, but the notice did not state the deadline for a creditor other than a governmental unit to file a proof of claim. OVERVIEW: Inadvertently, the clerk’s office left blank the space in the notice for indicating the deadline for filing proofs of claim. Thus, the creditors had not been notified of the Fed. R. Bankr. P. 3002(c) deadline as required by Fed. R. Bankr. P. 2002(f)(3). Further, the deadline would expire before creditors received a new, complete notice. Fed. R. Bankr. P. 9006(b)(3) prohibited the court from fixing a new bar date. The court had power to apply equitable tolling to the bar date, but that power ought not be invoked when it would be inconsistent with the text of the relevant statute. Also, a creditor who failed to inquire about the bar date probably had not acted with due diligence. Fed. R. Bankr. P. 2002(c)(3) did not specify the consequences of failing to notify creditors of the bar date. If the court did not extend the bar date, the ineffectiveness of debtor’s bankruptcy plan to discharge claims of creditors who were not given notice protected the creditors’ due process rights. Under Fed. R. Bankr. P. 3004, debtor could file a proof of claim on behalf of a creditor. And, the court could and would allow late-filed claims unless and until debtor objected to them. In re Barnes, 2005 Bankr. LEXIS 2171, — B.R. — (Bankr. D.D.C. December 10, 2005) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:2002.07[back to top]

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Collier Bankruptcy Case Update January-28-02

 


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, 2002

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

  • 2d Cir.

    § 303(i)(2) Court sua sponte awarded sanctions against creditor and his attorney for filing involuntary chapter 11 petition in bad faith.
    In re Grossinger
    (Bankr. S.D.N.Y.)

    § 303(i)(2) Court sua sponte awarded sanctions against creditors for filing sham involuntary chapter 11 petition.
    In re Stern
    (Bankr. S.D.N.Y.)

    § 364(c) Interim postpetition financing was authorized to avoid irreparable harm to estates.
    In re Enron Corp.
    (Bankr. S.D.N.Y.)

    28 U.S.C. § 157(d) Motion to withdraw reference was denied without prejudice to its renewal after bankruptcy court concluded oversight of discovery and pretrial motions.
    Mishkin v. Ageloff (In re Adler, Coleman Clearing Corp.)
    (S.D.N.Y.)


    3d Cir.

    § 541(a)(1) Insurance proceeds were not part of bankruptcy estate based on language contained in financing statement.
    In re Tower Air, Inc.
    (Bankr. D. Del.)


    4th Cir.

    § 327(a) Court of Appeals affirmed denial of nunc pro tunc approval of broker’s employment.
    Binswanger Cos. v. Merry-Go-Round Enters.
    (4th Cir.)

    § 523(a)(4) Officers of travel agency were held personally liable for conversion of funds held in trust by travel agency.
    Ellison v. Airlines Reporting Corp. (In re Ellison)
    (S.D. W. Va.)


    5th Cir.

    § 726(a)(1) Court of Appeals defined effective date on which chapter 7 distribution commenced.
    Security State Bank v. Internal Revenue Service (In re Van Gerpen)
    (5th Cir.)

    28 U.S.C. § 158(d) Issues raised on appeal from district court order that was pending at time of debtor’s bankruptcy filing were not moot.
    Supreme Beef Processors, Inc. v. United States Dep’t of Agriculture
    (5th Cir.)


    6th Cir.

    § 329(b) Bankruptcy court had authority and discretion to order disgorgement for failure to disclose fees.
    Henderson v. Kisseberth (In re Kisseberth)
    (6th Cir.)

    § 362(b)(3) Materialman’s lien was not superior to lien held by secured lender.
    Durkan Patterned Carpet, Inc. v. Premier Hotel Dev. Group (In re Premier Hotel Dev. Group)

    (Bankr. E.D. Tenn.)

    § 523(a)(15) Court determined that debtor was unable to pay only a portion of his divorce obligations.
    Woolard v. Axline (In re Woolard)
    (Bankr. S.D. Ohio)

    § 541(a)(1) Disgorged fees, originally paid by third parties, were not property of the estate.
    Henderson v. Kisseberth (In re Kisseberth)
    (6th Cir.)

    § 1325(b) Plan which paid secured creditor more than debtors’ obligation under prepetition mortgage payment was confirmed.
    In re Elrod
    (Bankr. E.D. Tenn.)


    7th Cir.

    § 547(c)(2) Creditor failed to prove payments were in the ordinary course of business.
    H.L. Hansen Lumber Co. v. G & H Custom Craft, Inc. (In re H.L. Hansen Lumber Co. of Galesburg, Inc.)
    (Bankr. C.D. Ill.)


    8th Cir.

    § 362(d) Bankruptcy court granted retroactive relief from the automatic stay in order to prevent state court judgment from being void.
    In re Harris
    (Bankr. W.D. Mo.)

    § 523(a)(6) Debts arising from state court punitive damage award and contempt order were nondischargeable.
    Siemer v. Nangle (In re Nangle)
    (8th Cir.)

    § 1325(a)(5) Secured creditor was not entitled to payment of contract interest rate through debtors’ plan.
    Household Auto. Fin. v. Gorham
    (8th Cir.)


    9th Cir.

    § 727(a)(4)(A) Debtor was denied a discharge for signing corporation’s schedules and statement of affairs in blank.
    Kavanagh v. Leija (In re Leija)
    (Bankr. E.D. Cal.)


    11th Cir.

    § 523(a)(8) Debtor’s impecunious circumstances warranted discharge of her student loan obligation.
    Ivory v. United States (In re Ivory)
    (Bankr. N.D. Ala.)

    28 U.S.C. § 157(d) District court denied motion to withdraw the reference.
    United States v. Heller Healthcare Fin., Inc. (In re Numed Healthcare, Inc.)
    (M.D. Fla.)


Collier Bankruptcy Case Summaries

2nd Cir.

Court sua sponte awarded sanctions against creditor and his attorney for filing involuntary chapter 11 petition in bad faith. Bankr. S.D.N.Y. The petitioning creditor filed an involuntary chapter 11 petition against the alleged debtor using FORM 1, which is the voluntary petition form, and altering the form in a make-shift manner to resemble an involuntary petition form. The petitioning creditor then signed the declaration section, indicating that the information contained in the petition was true and correct and that filing of the petition on behalf of the debtor was authorized. The petitioning creditor was the only creditor to sign the petition. Further, the petition was never served on the alleged debtor and no further action was taken by the petitioning creditor or his attorney. The petitioning creditor, however, did notify the alleged debtor’s mortgagee, which was then required to file a motion for relief from stay in order to pursue its action against the alleged debtor. After granting the bank’s relief from stay motion, the court sua sponte issued an order to show cause why the involuntary petition should not be dismissed, and why sanctions should not be assessed against the petitioning creditor for filing the petition in bad faith. At the show cause hearing, the court found that the petitioning creditor’s claim was based on a simple, nominal claim that could have been pursued in state court. The court also found that the requirements of 11 U.S.C. § 303 had not been satisfied, including the fact that no evidence had been presented that the debtor was not paying his debts as they became due. The court also found that the amount in dispute was significantly less than the statutory minimum required to file an involuntary petition and that the petition had been filed by only one creditor.Because the petitioning creditor had filed the involuntary bankruptcy petition solely to obtain an advantage in its dispute with the alleged debtor, the bankruptcy court found that the petition had been filed in bad faith and awarded sanctions against the creditor and his counsel. In re Grossinger, 2001 Bankr. LEXIS 1584, 268 B.R. 386 (Bankr. S.D.N.Y. October 19, 2001) (Hardin, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.15

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Court sua sponte awarded sanctions against creditors for filing sham involuntary chapter 11 petition. Bankr. S.D.N.Y. Three alleged creditors filed an involuntary chapter 11 petition against the debtor, citing unpaid claims based on a judgment and outstanding loans. The creditors took no further action to prosecute the chapter 11 case and, approximately two months later, the debtor’s mortgage-holder bank filed a motion for relief from stay. One of the creditors filed an objection to the relief from stay motion but failed to appear at the hearing. However, the other two petitioning creditors appeared and indicated that the chapter 11 had been filed for the purpose of stalling the bank’s foreclosure sale so that the petitioning creditors could purchase the debtor’s residence. As of the lift stay hearing date, there was no affidavit of service of the summons listed on the docket, and the debtor later stated that she had not been served with the petition. In light of the petitioning creditors’ dubious motive for filing the involuntary petition and their failure to serve the petition on the debtor, the court issued an order to show cause why sanctions should not be ordered for a bad faith filing. At the sanctions hearing, the court noted that the petitioning creditors had previously filed two other involuntary chapter 11 petitions, which had been dismissed with prejudice for failure to prosecute. The court also noted that, rather than filing an involuntary petition, the petitioning creditors could have appeared at the foreclosure sale and purchased the debtor’s residence. Because the petitioning creditors failed to serve a summons on the alleged debtor until after the court issued its order to show cause, and because they failed to take any action to advance the involuntary petition they had filed, the court ordered that each of the petitioning creditors be sanctioned for filing the involuntary petition in bad faith. In re Stern, 2001 Bankr. LEXIS 1585, 268 B.R. 390 (Bankr. S.D.N.Y. October 19, 2001) (Hardin, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:303.15

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Interim postpetition financing was authorized to avoid irreparable harm to estates. Bankr. S.D.N.Y. The chapter 11 debtors, producers and sellers of natural gas, electricity and communications to wholesale and retail customers, requested authorization to obtain interim postpetition financing. While the debtors’ precarious financial condition had curtailed their availability of credit, a steady stream of cash was essential to the maintenance of their businesses. The debtors needed substantial working capital to preserve their going concern and negotiated with a syndicate of financial institutions to provide a postpetition credit facility. The bankruptcy court approved the debtors’ motion, holding that the debtors’ urgent and immediate need for cash to continue to operate warranted the authorization of postpetition financing on an interim basis. The credit provided under the debtor in possession credit agreement enabled the debtors to continue financing their numerous operations, pay their employees and operate their businesses in an orderly and reasonable manner to preserve and enhance the value of their assets and enterprise for the benefit of all parties in interest. The court further concluded that the terms of the agreement were fair and reasonable, and were negotiated by the parties in good faith and at arm’s length. Absent entry of an order, the debtors’ estates would have been immediately and irreparably harmed.In re Enron Corp., 2001 Bankr. LEXIS 1563, – B.R. – (Bankr. S.D.N.Y. December 3, 2001) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:364.04

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Motion to withdraw reference was denied without prejudice to its renewal after bankruptcy court concluded oversight of discovery and pretrial motions. S.D.N.Y. The plaintiff moved to withdraw the reference of the adversary proceeding from the bankruptcy court, asserting that its demand for a jury trial and the need to adjudicate issues under RICO, the Securities Exchange Act and the Sherman Antitrust Act made withdrawal mandatory. The underlying bankruptcy case had been pending before the bankruptcy court for approximately six years, expert discovery was still in progress and dispositive pretrial motions remained to be decided. The district court denied the motion without prejudice, holding that the plaintiff failed to assert sufficient grounds to withdraw the reference of the adversary proceeding under either the mandatory or permissive provisions of 28 U.S.C. § 157(d). The court noted that the proceeding was still in the early stages and, considering judicial economy, concluded that the proper course was to allow the proceeding to mature under the supervision of the bankruptcy court until the matter was ready for trial.Mishkin v. Ageloff (In re Adler, Coleman Clearing Corp.), 2001 U.S. Dist. LEXIS 20362, 270 B.R. 562 (S.D.N.Y. December 7, 2001) (Marrero, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04

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3d Cir.

Insurance proceeds were not part of bankruptcy estate based on language contained in financing statement. Bankr. D. Del. Prior to the debtor filing for bankruptcy, the creditor was a major equipment lender for the debtor. In one of their transactions, the creditor and the debtor entered into a loan consolidation agreement in which the creditor loaned the debtor money to purchase an airplane and four jet engines. The loan documents provided for cross-collateralization of each item of security and granted the creditor a security interest in insurance proceeds. In addition, the security agreement for the transaction stated that the debtor was required to obtain approval for the use of any insurance proceeds, and the creditor retained sole discretion over any insurance moneys. Prior to the debtor’s bankruptcy, one of the engines on the airplane became damaged and the debtor repaired the engine at its expense. After the bankruptcy petition was filed, the chapter 7 trustee filed a claim with the insurance company for the cost of the engine repairs, and the matter came before the court when the trustee filed a motion to approve a compromise with the insurance company. At the hearing on the trustee’s motion, the trustee argued that since the creditor had received the repaired engine, it was not also entitled to the insurance proceeds which covered the repair costs of the engine. The court found in favor of the creditor and against the trustee, noting that based on their loan and security agreements, it was the obvious intention of the parties that the insurance proceeds were property of the creditor and must be turned over to the creditor. In re Tower Air, Inc., 2001 Bankr. LEXIS 1588, 268 B.R. 404 (Bankr. D. Del. December 12, 2001) (Newsome, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.05; .10

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4th Cir.

Court of Appeals affirmed denial of nunc pro tunc approval of broker’s employment. 4th Cir. In 1995, the creditor, a real estate broker, learned that the debtor’s chapter 11 case was likely to be converted to chapter 7 and approached the debtor in the hope of obtaining an exclusive listing for the sale of the debtor’s distribution center. The debtor did not agree, but the creditor proceeded to search for a buyer. Thereafter, the debtor’s board of directors authorized an agreement with the creditor to list the property. Before any such agreement was finalized, the board revoked its authorization, and the case was converted to chapter 7. The creditor contacted the trustee, requesting that it be employed as the broker for the property sale, and also forwarded a copy of a $15 million offer from a prospective purchaser. The trustee did not accept the offer and instead employed a different broker. Ultimately, the trustee accepted a $19 million offer from the same purchaser, and paid the appropriate commission to the appointed broker. The creditor filed a complaint in bankruptcy court, asserting it was entitled to a brokerage commission under state (Maryland) law, and moved for summary judgment. The court denied the motion, finding that (1) a genuine issue of fact existed as to whether the creditor was the procuring broker, and (2) the creditor was not licensed as a broker in the state. The trustee then moved for summary judgment, arguing that the nonlicensed status of the creditor entitled the trustee to judgment as a matter of law. The court denied that motion, concluding that the license requirement would not prevent the creditor’s recovery should the court decide to approve the creditor as the broker on a nunc pro tunc basis. After trial, the court found that the creditor was not entitled to that approval, because it was never formally employed by the trustee, and because the creditor failed to prove that the purchaser was ready, willing and able to meet the terms under which the sale was finally made. The district court affirmed. The Court of Appeals affirmed the district court’s conclusions that (1) the state licensing requirement precluded recovery under a procuring broker theory; (2) consequently, the finding that the creditor was not the procuring broker was not clearly erroneous; and (3) the denial of nunc pro tunc approval was correct because of the creditor’s failure to request appointment prior to the sale.Binswanger Cos. v. Merry-Go-Round Enters., 2001 U.S. App. LEXIS 26137, – F.3d. – (4th Cir. December 6, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 3:327.03[3]

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Officers of travel agency were held personally liable for conversion of funds held in trust by travel agency. S.D. W. Va. The chapter 7 debtors appealed an order of the bankruptcy court awarding a nondischargeable judgment in favor of the creditor. The creditor was a corporation authorized on behalf of airlines to demand payment and collect from travel agents the airlines’ portion of the revenues received by agents from their sales of tickets. The debtors were officers of a travel agency which had entered into a prepetition agreement specifying that proceeds of the ticket sales remained the property of the airlines held in trust for the carrier. The debtors were involved in the day-to-day operations and were personal guarantors of the travel agency. After the agency failed to remit funds collected from the sale of tickets, the creditor filed an adversary proceeding seeking a nondischargeable judgment. The bankruptcy court granted summary judgment to the creditor, finding that a fiduciary relationship existed between the debtors and the creditor and that because the debtors’ actions constituted defalcation, they were personally liable for the breach of fiduciary duty. The district court affirmed, holding that the bankruptcy court did not err in finding that the debtors were fiduciaries of the creditor under section 523(a)(4). The creditor proved that the debtors committed fraud or defalcation while acting in a fiduciary capacity.Ellison v. Airlines Reporting Corp. (In re Ellison), 2001 U.S. Dist. LEXIS 20211, – B.R. – (S.D. W. Va. September 20, 2001) (Faber, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.10

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5th Cir.

Court of Appeals defined effective date on which chapter 7 distribution commenced. 5th Cir. In 1997, the debtor filed a chapter 7 petition. The trustee retained a law firm to provide legal services on behalf of the estate. Subsequently, the bankruptcy court approved the firm’s application for compensation, which was paid by the trustee in January 1998. The court issued a notice advising creditors that the estate might contain assets and set a bar date of June 15, 1998. In January 1999, the debtor filed two proofs of claim on behalf of the IRS. The majority of the indebtedness to the IRS was entitled to priority. Another creditor objected to the claims, arguing that they were untimely and not entitled to priority. The IRS asserted that the claims were made before the trustee had commenced distribution and, pursuant to section 726(a)(1), were entitled to priority status. The court overruled the objections, stating that the trustee had not commenced distribution, but offered no further basis for its ruling. On appeal, the district court held that distribution had not commenced because the trustee had not filed his final report when the IRS claims were filed. This second appeal followed. The creditor maintained that the trustee’s payment of administrative expenses constituted a distribution for the purposes of determining the effective date of distribution. The Court of Appeals for the Fifth Circuit affirmed, holding that the disbursement of estate funds for routine liquidation expenses did not equate with actual distribution, which only took place when the final liquidation occurred. Thus, the proper interpretation of 'commences distribution' is the date when the court approved the trustee’s final report (citing Collier on Bankruptcy 15th Ed. Revised). Security State Bank v. Internal Revenue Service (In re Van Gerpen), 2001 U.S. App. LEXIS 26013, 267 F.3d. 453 (5th Cir. October 10, 2001) (Politz, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:726.02

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Issues raised on appeal from district court order that was pending at time of debtor’s bankruptcy filing were not moot. 5th Cir. Before filing for bankruptcy protection, a beef processing corporation filed a complaint against the United States Department of Agriculture ('USDA') in federal district court. The complaint alleged that the federal Food Safety Inspection Service (a subsidiary agency of the USDA) overstepped the authority given to it by the federal Meat Inspection Act by creating tests to detect salmonella in raw meat products. On cross-motions for summary judgment, the district court granted summary judgment in favor of the beef processor and held that certain salmonella standards exceeded the USDA’s statutory authority. The district court entered a permanent injunction enjoining enforcement of the standard against the beef processor, and the USDA appealed to the Court of Appeals for the Fifth Circuit. While the appeal was pending, the beef processor filed a chapter 11 case. The USDA moved to lift the stay on its appeal and filed a suggestion of mootness. A motions panel of the Court of Appeals denied a motion for remand with instructions to dismiss as moot. Thereafter, the beef processor’s case was converted into a chapter 7 liquidation. The USDA again raised the question of mootness. The bankruptcy court held that the appeal was not moot; the possibility that the beef processor might continue to function as a meat processor even after its chapter 7 proceeding satisfied Article III.Supreme Beef Processors, Inc. v. United States Dep’t of Agriculture, 2001 U.S. App. LEXIS 26205, – F.3d – (5th Cir. December 6, 2001) (Higginbotham, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.02[4]

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6th Cir.

Bankruptcy court had authority and discretion to order disgorgement for failure to disclose fees. 6th Cir. When their attorney sued them for unpaid legal fees, the chapter 7 debtors reopened their bankruptcy case. The bankruptcy court concluded that the fees were excessive and that the attorney failed to comply with the disclosure requirements of the Code and Rules. As a sanction, the bankruptcy court ordered disgorgement of $9,000 of the nearly $12,000 already collected and directed that it be paid to the chapter 7 estate. The district court affirmed but reversed the bankruptcy court’s allocation of the funds, holding that a portion of the disgorged fees, which had been paid by third parties, was to be returned to the debtors rather than to the estate. The Court of Appeals for the Sixth Circuit affirmed, holding that section 329 granted authority to the bankruptcy court to order, at its discretion, disgorgement of the fees. The court rejected the argument that the bankruptcy court had in rem jurisdiction over the funds because the funds had been paid by third parties and, thus, were not property of the estate. The court also determined that there was no denial of Fifth Amendment due process because, by submitting the fee application, the attorney placed all issues before the court. In any event, the attorney was on notice that the court intended to exercise jurisdiction over the full amount of the fees. Finally, the court determined that the bankruptcy court did not abuse its discretion in ordering disgorgement of the fees because, although the bankruptcy court failed to determine precisely the amount by which the fees were excessive, disgorgement was an appropriate sanction for the attorney’s failure to disclose the fees. Henderson v. Kisseberth (In re Kisseberth), 2001 U.S. App. LEXIS 26412, 273 F.3d 714 (6th Cir. December 12, 2001) (Leegilman, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.03[1][k], 329.04[2], 329.05[3]

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Materialman’s lien was not superior to lien held by secured lender. Bankr. E.D. Tenn. The creditor sought to enforce its materialman’s lien against the chapter 11 debtor’s real property and a determination that its lien was superior to the lien held by the debtor’s principal secured lender. The creditor supplied materials for the completion of the debtor’s hotel and recorded its lien after the debtor had executed a deed of trust in favor of the secured lender. The secured lender moved to dismiss the complaint, arguing that the creditor did not record its notice of lien within the time required under state (Tennessee) law to preserve the lien as to subsequent encumbrancers for value. The creditor argued that it could file its lien within 90 days after the building was completed and because the debtor filed bankruptcy during the 90-day period following completion of the building, its ability to preserve the lien was stayed. The bankruptcy court granted the secured lender’s motion to dismiss, holding that because the automatic stay did not preclude the filing of the notice of lien, the period for filing the notice was not tolled. Sections 362(b)(3) and 546(b), construed together, indicated that the filing of the bankruptcy did not stay the perfection of certain interests in property whereby under nonbankruptcy law, the perfection related back and was effective over intervening lien creditors if it occurred prior to the expiration of the grace period (citing Collier on Bankruptcy, 15th Ed. Revised).Durkan Patterned Carpet, Inc. v. Premier Hotel Dev. Group (In re Premier Hotel Dev. Group), 2001 Bankr. LEXIS 1576, 270 B.R. 234 (Bankr. E.D. Tenn. October 11, 2001) (Parsons, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.05[4]; 5:546.03

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Portion of support payments was disguised property settlement outside scope of dischargeability exception. Bankr. S.D. Ohio The chapter 7 debtor filed an adversary proceeding seeking to determine the dischargeability of monthly support payments he was obligated to make to his former wife pursuant to a separation agreement and decree of dissolution. The separation agreement denominated the payments as spousal support and was uncontested. Although the parties had originally agreed that the debtor would pay the wife’s share of his businesses in equal monthly installments, the payments were ultimately added to the amount designated as spousal support in the separation agreement. The bankruptcy court granted judgment in favor of the debtor in part, holding that although designated as spousal support, a significant portion of the award was not actually in the nature of alimony, maintenance or support and was therefore dischargeable for purposes of section 523(a)(5). To the extent that the monthly payments exceeded what the debtor’s wife had originally negotiated for support, the payments were nothing more than an effort to divide equitably what the parties believed at one time to be the value of the debtor’s businesses.Woolard v. Axline (In re Woolard), 2001 Bankr. LEXIS 1542, 269 B.R. 754 (Bankr. S.D. Ohio August 3, 2001) (Sellers, B.J.).

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

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Court declined approval of reaffirmation agreements found to be against debtor’s best interests. Bankr. S.D. Ohio The chapter 7 debtor, proceeding without legal counsel, executed two reaffirmation agreements with a credit union. The first reaffirmation agreement related to a loan made to the debtor and his wife by the credit union. The debtor’s wife owned a car at the time the loan was made, and the car was pledged as security for the loan. Thereafter, the debtor and his wife separated and the wife moved out of state with the car, which the debtor no longer drove. The second reaffirmation agreement related to an unsecured debt incurred on a Visa card issued by the credit union. The debtor stated that he wanted to reaffirm the debts because he was told by the credit union that his membership would be canceled if he 'filed bankruptcy on them.' The bankruptcy court held a hearing to determine whether the reaffirmation agreements were voluntary, in the debtor’s best interests and imposed undue hardship on the debtor or his dependents. The court held that the agreements did not impose an undue hardship upon the debtor since he might be able to make the agreed-upon payments. Nevertheless, the court refused to approve the agreements because it found that they were not in the debtor’s best interests. The court noted, among other things, that the debtor was free to pay both of the obligations at issue if he freely chose to do so, and that he did not need to waive the benefit of his discharge to do that. The court also reminded the credit union that threats or coercive actions designed to force a debtor to repay a discharged debt may have serious legal consequences.In re Ezell, 2001 Bankr. LEXIS 1541, 269 B.R. 768 (Bankr. S.D. Ohio September 4, 2001) (Sellers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.04

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Plan which paid secured creditor more than debtors’ obligation under prepetition mortgage payment was confirmed. Bankr. E.D. Tenn. The chapter 13 trustee objected to confirmation of the debtors’ proposed plan. The debtors proposed to pay the holder of a second mortgage on their home an additional payment each month at an interest rate lower than the prepetition mortgage rate. The proposed plan called for 60 months of payments and provided for a 25 percent dividend on unsecured claims. The trustee contended that the extra payments should have been made toward the claims of other unsecured creditors. The bankruptcy court overruled the objection, holding that the plan satisfied the disposable income test. The court assumed that the extra monthly payment to the secured creditor was disposable income and noted that the plan payments after the first 36 months of the plan paid the shortage created by the extra payments. The court further found that the plan had been proposed in good faith.In re Elrod, 2001 Bankr. LEXIS 1573, 270 B.R. 258 (Bankr. E.D. Tenn. December 6, 2001) (Stinnett, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.08[4]

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7th Cir.

Creditor failed to prove payments were in the ordinary course of business. Bankr. C.D. Ill. The chapter 11 debtor, a manufacturer of building supplies, initiated an adversary proceeding against one its suppliers to recover a preference. Upon the supplier’s assertion that the payments were subject to the ordinary course of business exception, the bankruptcy court held that although some late payments were ordinary as between the parties, the supplier failed to demonstrate that the payments were made according to industry standards. The supplier failed to introduce testimony to define the industry or to demonstrate the credit practices in the relevant industry. With regard to the subjective element, the court rejected the creditor’s argument that the payments should be analyzed in 'batches,' as it had been the debtor’s practice to pay for a number of invoices with one check. The court instead analyzed each invoice and its related payment separately. The court determined the outer limit of late payments and concluded that those payments which were paid during the preference period more than 10 percent later than the outer limit of the established practice were not ordinary. H.L. Hansen Lumber Co. v. G & H Custom Craft, Inc. (In re H.L. Hansen Lumber Co. of Galesburg, Inc.), 2001 Bankr. LEXIS 1580, 270 B.R. 273 (Bankr. C.D. Ill. October 16, 2001) (Perkins, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2]

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8th Cir.

Bankruptcy court granted retroactive relief from the automatic stay in order to prevent state court judgment from being void. Bankr. W.D. Mo. After the creditors filed an action in the Kansas state court against the debtors, the debtors filed a chapter 13 petition in the Western District of Missouri. The creditors sought relief from the automatic stay in order to proceed with their state court action. The debtors did not oppose the creditors’ motion for relief from stay and the bankruptcy court granted the motion. For an undisclosed reason, the parties then voluntarily dismissed the state court action and the creditors refiled the case the next day. However, the newly-filed state court case omitted one of the creditor’s claims against the debtors. After the state court ruled in favor of the creditors on the refiled case, the debtors appealed. Meanwhile, the debtors moved to convert their chapter 13 case to one under chapter 7. The bankruptcy court granted the debtors’ motion to convert and entered an order discharging the debtors. Although the debtors never challenged the creditors’ right to prosecute the refiled state court case based on the existence of the automatic stay, the bankruptcy court noted that, absent annulment of the automatic stay, the state court judgment entered in the refiled case would be void. The bankruptcy court then considered whether it would be appropriate to retroactively annul the automatic stay as to the second state court case. Retroactive relief from the automatic stay requires compelling circumstances, including considerations of (1) whether the creditor had actual or constructive knowledge of the bankruptcy filing, (2) whether the debtor has acted in bad faith, (3) whether there was any equity in the property of the estate, (4) whether the property was necessary for an effective reorganization, (5) whether grounds for relief from the stay existed and whether the motion for relief would otherwise have been granted, (6) whether failure to grant retroactive relief would cause unnecessary expense to the creditor, (7) whether the creditor has detrimentally changed its position on the basis of the action taken, (8) whether the creditor took affirmative action postpetition to bring about the violation of the stay, and (9) whether the creditor promptly sought retroactive relief and approval for actions already taken. Since the bankruptcy court had previously granted relief from the automatic stay, so that the creditors could proceed with their original state court case and since the refiled state court case was filed immediately after the voluntary dismissal of the first and contained essentially the same claims, the court found that the circumstances warranted retroactively annulling the automatic stay. In re Harris, 2001 Bankr. LEXIS 1343, 268 B.R. 199 (Bankr. W.D. Mo. August 17, 2001) (Koger, B.J.).

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

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Debts arising from state court punitive damage award and contempt order were nondischargeable. 8th Cir. After the commencement of the debtor’s chapter 7 case, a judgment creditor brought an adversary proceeding against the debtor seeking a determination that two judgment debts were nondischargeable. The first judgment debt at issue arose from a state (Illinois) court jury verdict against the debtor that awarded punitive damages to the creditor. The second judgment arose after the creditor registered the Illinois judgment in Missouri as a foreign judgment, and the Missouri court imposed a fine against the debtor for contempt after he failed to comply with court-ordered discovery. The creditor moved for summary judgment, and the bankruptcy court granted the motion. The debtor appealed, and the B.A.P. reversed the bankruptcy court’s determination that the debt created by the contempt order was not dischargeable. The Court of Appeals for the Eighth Circuit affirmed, in part, and reversed, in part, and held that both the debt arising out of the Illinois judgment and the one arising from the Missouri contempt order were not dischargeable under § 523(a)(6). With respect to the Illinois judgment, the court concluded that the jury’s verdict could only have been based on a conclusion that the debtor’s acts involved an actual or deliberate intention to harm the creditor; thus, he inflicted a 'willful' and 'malicious' injury upon her for the purpose of section 523(a)(6). The court also concluded that the contempt order established that the debtor’s failure to comply with a court order constituted 'willful and malicious' conduct under section 523(a)(6).Siemer v. Nangle (In re Nangle), 2001 U.S. App. LEXIS 26274, 274 F.3d. 481 (8th Cir. September 12, 2001) (Arnold, C.J.).

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

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Secured creditor was not entitled to payment of contract interest rate through debtors’ plan. 8th Cir. The secured creditor appealed the district court’s affirmance of the bankruptcy court’s order overruling the creditor’s objection to the debtors’ chapter 13 plan. In their plan, the debtors elected to retain an automobile financed by the creditor, pursuant to the 'cram-down' provision of section 1325(a)(5)(B). The plan proposed that the debtors would pay interest at a rate calculated based on the 30-year treasury bond rate for a specified date, plus nominal interest. The creditor contended that the appropriate rate was the substantially higher contract rate. The bankruptcy court overruled the creditor’s objection and held that the plan’s proposed rate was a reasonable means of determining the appropriate interest rate in the chapter 13 context and that the creditor’s proposed rate improperly accounted for profit and overhead. The Court of Appeals for the Eighth Circuit affirmed the district court, holding that there was no clear error in the bankruptcy court’s conclusion that the interest rate proposed in the debtor’s plan was reasonable.Household Auto. Fin. v. Gorham, 2001 U.S. App. LEXIS 26351, – F.3d – (8th Cir. December 11, 2001) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.06[3]

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9th Cir.

Debtor was denied a discharge for signing corporation’s schedules and statement of affairs in blank. Bankr. E.D. Cal. The chapter 7 trustee filed an adversary proceeding against the individual debtor, seeking the denial of his discharge pursuant to sections 727(a)(4)(A) and 727(a)(7). The debtor, as president of the debtor corporation, signed the corporation’s schedules and statement of financial affairs in blank, knowing that they would be subsequently completed by his attorney and filed in the corporation’s case. The debtor had provided the attorney with copies of the corporation’s prior bankruptcy documents to use in preparing the schedules and did not review them before they were filed. The bankruptcy court denied the debtor’s discharge, holding that the debtor’s signing of blank schedules in his corporation’s bankruptcy case constituted a knowing and fraudulent false oath under section 727(a)(4)(A). The verification clauses in the Official Forms, which the debtor signed under the penalty of perjury, (1) represented that the debtor had read the information in the documents and (2) they were true and correct to the best of his information and belief. Since the debtor verified the pleadings in blank, the court did not need to assess the truthfulness of the information in the documents or consider the debtor’s efforts to explain the disposition of the corporation’s assets. Because the corporation was an insider of the debtor, the debtor’s discharge was denied pursuant to section 727(a)(7).Kavanagh v. Leija (In re Leija), 2001 Bankr. LEXIS 1568, 270 B.R. 497 (Bankr. E.D. Cal. December 3, 2001) (Lee, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.04, .10

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10th Cir.

Debtor’s impecunious circumstances warranted discharge of her student loan obligation. Bankr. N.D. Ala. The chapter 7 debtor filed an adversary proceeding seeking to have her student loan debt declared dischargeable. The debtor, a single mother of three unhealthy children, obtained the loan while attending a vocational school which lost its accreditation and closed before she completed her course of study. Due to the debtor’s own unstable health, her employment was sporadic and her expenses were greater than her income. The bankruptcy court discharged the debt, holding that excepting the student loan debt from the debtor’s discharge would have imposed an undue hardship on the debtor and her dependents. The debtor could not maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loan. Additional circumstances existed, indicating that the debtor’s state of affairs was likely to persist for a significant portion of the repayment period of the student loan. The court further noted that there was no evidence that the debtor’s failure to make more than token repayment was the result of bad faith because she never had the ability to pay her student loan debt.Ivory v. United States (In re Ivory), 2001 Bankr. LEXIS 1566, 269 B.R. 890 (Bankr. N.D. Ala. October 29, 2001) (Cohen, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14

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District court denied motion to withdraw the reference. M.D. Fla. The United States moved to withdraw the reference of an adversary proceeding brought against another creditor to determine the validity, priority and extent of liens that both parties held against the chapter 11 debtors. The complaint against the creditor asserted that in the event it lent money to the debtors, it could have a tax liability. The United States argued that the Internal Revenue Code and state law conversion claims against the creditor required withdrawal of the reference. The district court denied the motion, holding that neither mandatory nor permissive withdrawal was appropriate. The court noted that no substantial and material consideration of nonbankruptcy federal law was necessary, and the bankruptcy court possessed familiarity with the action. Conducting discovery in the context of the bankruptcy proceeding provided greater efficiency for the parties and the judicial system.United States v. Heller Healthcare Fin., Inc. (In re Numed Healthcare, Inc.), 2001 U.S. Dist. LEXIS 19264, – B.R. – (M.D. Fla. October 12, 2001) (Merryday, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.04

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