The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.

December 3, 2001

View Previous Case Summaries

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

• 1st Cir.

  ß 523(a)(6) Tape recording of conversation was willful and malicious.
  Mazurczyk v. O’Neil (Bankr. D. Mass.)

  ß 547(b) Trustee was granted summary judgment.
  Stephenson v. Schreiber (In re Emerson) (Bankr. D.N.H.)

  ß 1325(a)(6) Creditor’s objection was overruled.
  In re Amadon (Bankr. D.N.H.)

  ---

  2d Cir.

  ß 328(a) Debtor seeking attorney’s fees was entitled to one-third of the actual recovery in discrimination action.
  Schlant v. Victor Belata Belting Co. (W.D.N.Y.)

  ß 547(c)(2) Insiders’ motions for summary judgment were denied.
  Lawson v. Corrao Family LLC (In re Kelly’s Chocolates, Inc.) (Bankr. W.D.N.Y.)

  ---

  3d Cir.

  ß 109(e) Judgment based on guarantee was held to be noncontingent.
  In re Heaton (E.D. Pa.)

  ß 541(d) No sufficient nexus existed to establish constructive trust.
  EBS Pension, L.L.C. v. Edison Bros. Stores, Inc. (In re Edison Bros., Inc.) (Bankr. D. Del.)

  ß 1127(b) Creditor precluded from seeking payment on its claim where payment would be inconsistent with debtor’s plan of reorganization.
  In re Planet Hollywood Int’l (Bankr. D. Del.)

  ---

  4th Cir.

  ß 101(5) Assigned annuity payments were property rights, not dischargeable claims.
  Granati v. Stone St. Capital, Inc. (In re Granati) (Bankr. E.D. Va.)

  ---

  6th Cir.

  ß 550(e) Holder of avoided lien could not invoke section 550(e) entitlement to replacement lien.
  Carpenter v. G.E. Capital Mortg. Servs. (In re Carpenter) (Bankr. E.D. Tenn.)

  ß 1307(c) Motion to reconsider dismissal of chapter 13 denied.
  In re Nosker (Bankr. S.D. Ohio)

  ---

  7th Cir.

  ß 523(a)(1) Debtor willfully evaded tax liabilities and was not entitled to discharge the tax debt in bankruptcy.
  Krumhorn v. United States (In re Krumhorn) (N.D. Ill.)

  ---

  8th Cir.

  ß 362(a) Although creditor violated automatic stay, debtor failed to establish damages.
  In re Hoskins (Bankr. W.D. Mo.)

  ß 523(a)(8) Debtor’s obligation to repay student loans not dischargeable, despite hardship, where hardship was not 'undue.' Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful) (8th Cir.)

  ---

  9th Cir.

  ß 110(b)(1) Preparers were held in contempt.
  In re Powell (Bankr. N.D. Cal.)

  ß 522(f) Debtors were entitled to avoid lien on real property after sale to third parties.
  Culver, LLC v. Chiu (In re Chiu) (B.A.P. 9th Cir.)

  ß 523(a)(6) B.A.P. for the Ninth Circuit remanded for determination of insolvency and intent on section 523(a)(6) claims.
  Nahman v. Jacks (In re Jacks) (B.A.P. 9th Cir.)

  ß 523(a)(8) Student loans were not discharged.
  Furneri v. Graduate Loan Ctr. (In re Furneri) (Bankr. D. Alaska)

  Rule 7015 Adversary proceeding 'related back' to contested matter.
  Gschwend v. Markus (In re Markus) (B.A.P. 9th Cir.)

  ---

  11th Cir.

  ß 505(a)(1) District court remanded for determination of whether tax debt was unliquidated.
  United States v. Goldsby (In re Goldsby) (S.D. Fla.)

  ß 548(d)(2)(B) Transfers made to commodity broker were not protected by section 548(d)(2)(B).
  Harpley v. A.G. Edwards & Sons, Inc. (In re Paramount Citrus, Inc.) (M.D. Fla.)

  ---

Collier Bankruptcy Case Summaries

1st Cir.

Tape recording of conversation was willful and malicious. Bankr. D. Mass. The debtor and creditor, who were neighbors with a history of disputes, launched into an argument during which the debtor tape recorded their oral exchanges. The argument culminated in the creditor’s assault of the debtor with a fishing net. The creditor was charged with assault and battery, but the jury found him not guilty of assault with a dangerous weapon. The creditor then filed suit against the debtor for tape recording the conversation in violation of state (Massachusetts) law. Shortly thereafter, the debtor filed a chapter 7 petition. The bankruptcy court lifted the automatic stay to allow the state court action to proceed. The creditor obtained a judgment against the debtor, based on the debtor’s act of illegally tape recording conversations he had with the creditor. The state court found that the tape recording was 'willful and malicious,' but also determined that the debtor’s intent was not to injure the creditor but to create an accurate record. The creditor then filed a motion for summary judgment seeking a determination that the judgment was nondischargeable pursuant to section 523(a)(6). The court ruled for the creditor, holding that the state court findings were not inconsistent because an intent to injure was not required for an act to be willful and malicious. The court concluded that (1) the act was willful, because the debtor intentionally used the tape recorder; (2) the act was malicious, because the debtor acted in conscious disregard of his duties, despite the lack of intent to cause injury; and (3) the creditor suffered an injury, because the state court awarded the creditor a monetary amount (citing Collier on Bankruptcy, 15th Ed.). Mazurczyk v. O’Neil, 2001 Bankr. LEXIS 1302, 268 B.R. 1 (Bankr. D. Mass. October 11, 2001) (Rosenthal, B.J.).

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

Trustee was granted summary judgment. Bankr. D.N.H. A transferee filed a complaint seeking the net proceeds from the auction sale of the debtor’s aircraft by the chapter 7 trustee. The trustee denied that the transferee was entitled to the net proceeds from the sale and filed a motion for summary judgment. The bankruptcy court had previously concluded that the debtor’s transfer of the aircraft to the transferee was preferential under section 547(b) and fraudulent under section 544. The transferee asserted that under the Uniform Fraudulent Transfer Act, he held a lien on the proceeds of the sale of the aircraft because he held a lien on the property at the time it was auctioned by the trustee. The bankruptcy court granted the trustee’s motion for summary judgment, holding that a defense under the Uniform Fraudulent Transfer Act was not a defense to the preferential transfer action under the Code. Because the transferee failed to establish a claim of defense under which he could ultimately prevail against the trustee with respect to the proceeds, judgment was entered in favor of the trustee.Stephenson v. Schreiber (In re Emerson), 2001 Bankr. LEXIS 1305, – B.R. – (Bankr. D.N.H. July 24, 2001) (Deasy, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.03, .04

Creditor’s objection was overruled. Bankr. D.N.H. The secured creditor objected to confirmation of the debtors’ chapter 13 plan, asserting that the debtors were unable to show that they had the ability to make the payments under the plan. The debtors’ plan provided for monthly payments both through the trustee and outside the plan for two years, followed by a substantial balloon payment to the secured creditor. One of the debtors testified that her codebtor’s brother had committed to obtain a loan to permit him to buy the secured collateral as an investment. The creditor argued that the lack of a legally enforceable obligation to refinance the property was fatal to the debtors’ efforts to confirm the plan. The bankruptcy court overruled the objection, holding that the debtors satisfied their burden of proof to establish a reasonable likelihood of their ability to make the balloon payment. The court noted that the Code did not require absolute certainty that the balloon payment would be made, only that the likelihood of payment was based on more than pure speculation.In re Amadon, 2001 Bankr. LEXIS 1304, – B.R. – (Bankr. D.N.H. September 6, 2001) (Deasy, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1325.07

2nd Cir.

Debtor seeking attorney’s fees was entitled to one-third of the actual recovery in discrimination action. W.D.N.Y. The debtor commenced an action alleging that her employer discriminated against her on the basis of sex and intentionally inflicted emotional distress. In 1998, the trustee was substituted as plaintiff because the debtor had failed to list the claims in her schedule of assets, resulting in the inclusion of those claims in the estate. The debtor claimed as damages all past salary and increases, retirement benefits, vacation pay from 1992 to the date of judgment, along with $1 million in punitive damages and $1 million in compensatory damages. The district court dismissed the claim for emotional distress and granted the employer’s motion to bifurcate the liability and damages phases of the action. After trial, the jury awarded neither compensatory nor punitive damages, and the court eventually awarded $832.34 in back pay and $316.64 in interest. The trustee then filed a motion seeking to recover attorney’s fees of approximately $46,500 and disbursements of about $2,000. The employer opposed any award of attorney’s fees, arguing that the debtor’s success was de minimis. The court determined that the debtor’s recovery was de minimis, (1) given the substantial difference between the judgment sought and the award recovered, and (2) in light of the legal issue on which the debtor prevailed, which had no particular significance beyond the parties to the action. The court concluded that the de minimis nature of the recovery foreclosed a full award of attorney’s fees, which consequently was limited to one-third of the recovery amount. The court, however, allowed the disbursements, which were not addressed in any opposition pleadings by the employer. Schlant v. Victor Belata Belting Co., 2001 U.S. Dist. LEXIS 16539, – B.R. – (W.D.N.Y. October 2, 2001) (Elfvin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.02

Insiders’ motions for summary judgment were denied. Bankr. W.D.N.Y. Various insiders of the chapter 7 debtor moved for summary judgment on the trustee’s complaints seeking avoidance of preferential transfers. The debtor, whose business cycle necessitated annual short-term loans, sought a prepetition loan from a quasi-public development authority. The development authority authorized the loan, under the condition that the debtor obtain a matching subordinated loan from a separate entity. The debtor’s principal and her family members advanced the debtor sufficient funds, and the obligations were paid back several weeks before their due dates and within one year of the debtor’s involuntary petition. The insiders argued that because they were first-time lenders in what was the ordinary borrowing cycle for the debtor, the loans were made in the ordinary course of their and the debtor’s businesses. The bankruptcy court denied the motions for summary judgment, holding that the insiders’ loan transactions were not ordinary within the meaning of section 547(c)(2). The court noted that the purpose of the preference statute was to ensure equity of distribution in favor of those creditors who were not relatives of the debtor’s principal officer.Lawson v. Corrao Family LLC (In re Kelly’s Chocolates, Inc.), 2001 Bankr. LEXIS 1328, 268 B.R. 345 (Bankr. W.D.N.Y. September 28, 2001) (Kaplan, B.J.).

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

3d Cir.

Judgment based on guarantee was held to be noncontingent. E.D. Pa. In 1990, an entity entered into agreements with the creditor for the financing of vehicles. The debtor was one of two officers and shareholders of the entity. To secure the loan, the entity granted security interest in the vehicles and other assets, and the debtor executed continuing guarantees, agreeing to act as surety. After defaulting on its payment, the entity entered a forbearance agreement with the creditor to allow repayment, but the entity was unable to do so and instead filed a chapter 11 petition. As a result, the creditor declared the entire indebtedness due and confessed judgment in state (Pennsylvania) court against the debtor. That court entered judgment in the claimed amount of approximately $947,000. The debtor filed a chapter 7 petition in 1998. The creditor filed an adversary proceeding seeking a determination of nondischargeability. Prior to the hearing, the debtor filed a motion to convert to chapter 13, which was granted. Thereafter, the creditor filed an amended motion to reconvert to chapter 7, which the bankruptcy court granted, holding that the debtor did not qualify under chapter 13 because the debtor owed a noncontingent, liquidated and unsecured debt in excess of the statutory limit of $250,000. The debtor appealed, arguing principally that the judgment was a confessed judgment and was subject to challenge. As such, the debt was disputed and not final and could not be classified as liquidated. The district court affirmed, holding that, for the purposes of section 109(e), the debt was liquidated and noncontingent. The court reasoned that the judgment made the value of the claim ascertainable, and the possibility of a challenge to its validity was not an occurrence of an extrinsic event which would trigger liability, thereby making it contingent.In re Heaton, 2001 U.S. Dist. LEXIS 15813, – B.R. – (E.D. Pa. September 28, 2001) (Waldman, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:109.06[2][a]

No sufficient nexus existed to establish constructive trust. Bankr. D. Del In the debtors’ first chapter 11 cases during 1997, an order was entered confirming a joint plan of reorganization that provided for the termination of the debtors’ over-funded pension plan and the payment of the excess funds to the creditor, for distribution to general unsecured creditors. A portion of the funds was reserved by the debtors to pay potential tax liabilities arising from the termination. To the extent that no money was due to the IRS, the debtors were required to remit the balance to the creditor. In 1998, the IRS notified the debtors that no additional taxes were owed, and the creditor thus made demand for turnover of the reserved funds. Before remitting those funds, the debtors filed new chapter 11 petitions in 1999. At all times between the termination of the pension plan and the second petition filing, the debtors had sufficient availability under a revolving credit facility to borrow the sum due to the creditor. The creditor then filed this adversary proceeding seeking turnover of the funds, which it claimed were being held by the debtors in a constructive trust for the creditor’s benefit and were therefore exempt from estate property pursuant to section 541(d). The debtors argued that the funds were never segregated but were commingled with other funds, and that, consequently, no constructive trust had been created. The bankruptcy court issued an opinion in which it denied both parties’ motions for summary judgment, based on the conclusion that a material issue of disputed fact existed as to whether there was a nexus between the alleged constructive trust and the funds sought. The parties stipulated that, at the time of the second petition filing, the debtor, by way of the revolving credit facility, had access to the amount sought. The parties then filed motions seeking final judgment. The debtor argued that the creditor was equitably estopped from arguing that there was a constructive trust on the funds, since the creditor filed statements with the SEC identifying itself as an unsecured creditor, not the beneficiary of a constructive trust. The creditor argued that it disagreed with the characterization of its claim as unsecured and pointed to its filed proof of claim as evidence. The court rejected the debtor’s equitable estoppel argument, holding that there was no evidence of the debtor’s reliance on the creditor’s statements, a necessary component of equitable estoppel. But the court went on to grant the debtor’s motion, holding that there was no sufficient nexus to establish a constructive trust. Specifically, the debtors did not designate the funds they had available to borrow or identify them in any way as funds subject to a trust. The court concluded that there was a significant difference between having cash on hand and being able to draw upon a line of credit because, until the money was borrowed, it remained the property of the secured lenders.EBS Pension, L.L.C. v. Edison Bros. Stores, Inc. (In re Edison Bros., Inc.), 2001 Bankr. LEXIS 1333, 268 B.R. 409 (Bankr. D. Del October 11, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:541.26

Creditor precluded from seeking payment on its claim where payment would be inconsistent with debtor’s plan of reorganization. Bankr. D. Del. The bankruptcy court disallowed a portion of creditor’s claim because the creditor had not provided sufficient evidence to establish that the expense was payable by the debtor, but allowed the remainder of the claim. The debtor filed a timely appeal of the court’s order allowing the remainder of the claim and, as a result, had not paid the creditor’s claim. The creditor then filed a motion for reconsideration, arguing that the court should modify its order and direct the debtor to make an immediate distribution of the amounts owed to the creditor under the plan or, alternatively, escrow that sum until the appeal was completed. The creditor based its motion on the deterioration of the debtor’s financial condition and its concern that the debtor would not have any funds left to pay the creditor if payment was not required until after the debtor’s appeal was decided. In rebuttal, the debtor argued that it could not pay the creditor because the debtor’s confirmed plan of reorganization only allowed for payment of 'allowed claims,' which were defined in the plan as claims that were allowed by a final order no longer subject to appeal. The bankruptcy court then denied the creditor’s motion, finding that the creditor was bound by the terms of the debtor’s plan of reorganization and could not ask for relief, including payment of its claim or escrowing of funds, that was inconsistent with the debtor’s confirmed plan. In re Planet Hollywood Int’l, 2001 Bankr. LEXIS 1352, – B.R. – (Bankr. D. Del. October 19, 2001) (Walrath, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1127.04

4th Cir.

Assigned annuity payments were property rights, not dischargeable claims. Bankr. E.D. Va. The debtor entered an agreement settling an action she brought for the wrongful death of her husband. The defendant in the action, a trucking company, agreed to make monthly payments to the debtor, which would be secured by the purchase of an annuity contract from a life insurance company. After the debtor had received monthly payments for 12 years, the debtor and creditor entered a purchase agreement whereby the creditor paid the debtor a lump sum of $52,000 in exchange for the remaining annuity payments payable between 1997 and 2015. Anticipating that the payor might not honor the assignment, the agreement required the debtor to instruct the payor to mail the payments to a lockbox address designated by the creditor, for deposit into an account in the debtor’s name but under the creditor’s control. The creditor received payments in this fashion for approximately 21 months, but in March 1999 the debtor instructed the payor to cease sending payments to the lockbox and send them instead to an account under the debtor’s control. Consequently, the debtor kept payments made for April 1999 and subsequent months. The creditor filed suit in circuit court against the debtor, alleging breach of contract and fiduciary duty, fraud and conversion. The court directed the debtor to deposit into the court’s registry any payments received pending a final ruling. The debtor did not comply but instead, in November 2000, filed a chapter 7 petition and claimed the payments as exempt under state (Virginia) law. The creditor filed an objection to the exemption and an adversary proceeding to determine that its claim against the debtor was nondischargeable. Eventually the creditor moved for summary judgment based on section 523(a)(6). The debtor argued that a valid assignment never occurred because assignment was prohibited under the terms of the settlement agreement and annuity contract. The bankruptcy court granted the creditor’s motion in part and denied it in part, based on two principal rulings: (1) although the debtor had no power to make a valid legal assignment of the payments, a finding of equitable assignment was appropriate because allowing the debtor to keep the lump sum payment along with the annuity payment would constitute unjust enrichment; and (2), according to the majority of decisions, equitable assignments of personal injury proceeds were not dischargeable claims, pursuant to section 101(5), but property interests and that, accordingly, the creditor’s right to specific performance of the annuity purchase agreement was not a claim and had not been discharged. However, the court did not rule on the section 523(a)(6) claim with regard to the payments the debtor retained prepetition, holding that the factual element of malice remained in general dispute, and denying that portion of the summary judgment motion. Granati v. Stone St. Capital, Inc. (In re Granati), 2001 Bankr. LEXIS 1212, – B.R. – (Bankr. E.D. Va. September 1, 2001) (Mitchell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.05[5]

6th Cir.

Holder of avoided lien could not invoke section 550(e) entitlement to replacement lien. Bankr. E.D. Tenn. In 1998, the debtors executed a note and deed of trust in favor of the lender, by which they pledged their interest in previously-acquired real property as security for a loan. The lender mistakenly recorded the deed of trust in the wrong county. The creditor was the lender’s successor in interest. After the debtors filed their chapter 7 petition, the trustee sold the property pursuant to an order of the bankruptcy court, with the creditor’s lien attaching to the sale proceeds to the extent that it was enforceable against the real property. The trustee then filed a motion for summary judgment, seeking to avoid the lien pursuant to his powers under section 544(a). The creditor also sought summary judgment, arguing that, although its security interest could be avoided by the trustee, it was still entitled to a replacement lien pursuant to section 550(e). The parties stipulated that the funds obtained by the loan to the debtors were applied to a prior encumbrance on the property, therefore constituting an 'improvement' of the property, and that the prior lien would have been superior to the trustee’s rights. The bankruptcy court noted that the issue of whether the protections of section 550(e)(1) extended to holders of avoided security interests, or whether anything was actually 'recovered' when a trustee used strong arm powers to avoid a nonpossessory interest, was the subject of divided opinion. The court finally denied the creditor’s motion, reasoning that the debtor’s interest became property of the estate upon the petition filing and that, when such interest merged with the avoided mortgage, the trustee held the entire interest in the property. As such, there was no need for the trustee to recover the creditor’s interest under section 550. Because avoidance and recovery were distinct remedies, and because the trustee was not required to effectuate any additional recovery, section 550(e) was not implicated and defenses provided under that section were unavailable to the creditor. Carpenter v. G.E. Capital Mortg. Servs. (In re Carpenter), 2001 Bankr. LEXIS 1218, 266 B.R. 671 (Bankr. E.D. Tenn. August 13, 2001) (Stair, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:550.06

Motion to reconsider dismissal of chapter 13 denied. Bankr. S.D. Ohio The debtor filed a motion seeking reconsideration of the bankruptcy court’s order denying confirmation of his amended chapter 13 plan and dismissing the case. The court had determined that the debtor failed to (1) establish that he was an individual whose income was sufficiently stable and regular; (2) provide for submission of future income; (3

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.

June 23, 2003

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

---

3d Cir.

§ 365 License agreements with franchisees were executory contracts which could be rejected by debtor.
In re HQ Global Holdings, Inc. (Bankr. D. Del.)

§ 547(c)(2) Trustee could not avoid payment made by debtor clothier for prepetition shipment of sweaters pursuant to the ordinary course of business exception.
Bohm v. Golden Knitting Mills, Inc. (In re Forman Enters.) (Bankr. W.D. Pa.)

Collier Bankruptcy Case Summaries

Injunction proceeding stayed where plaintiff had commenced an involuntary bankruptcy proceeding against an indispensable party. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff sellers moved pursuant to Fed. R. Civ. P. 65 for an injunction ordering the delivery of a certain number of free-trading shares of a corporation by defendant companies and individuals. OVERVIEW: The corporation was an indispensable party under Fed. R. Civ. P. 19(a). Thus, the court could not reach the merits of the seller’s claim ; the seller’s could not show the likelihood of success on the merits or serious questions going to the merits. The court assumed the corporation had acquiesced to the jurisdiction of the court, as the corporation submitted papers and appeared before the court. Further, there was no evidence that the corporation would destroy diversity jurisdiction. Thus, the corporation met the jurisdictional requirements of Rule 19. The corporation was also a necessary party, as complete relief could not be accorded in the absence of the corporation, which was the principal in a principal/agent relationship with two defendants and had given its agents limited ability to provide the relief requested. Further, the sellers appeared to acknowledge that the corporation should be a party to this action; however, they did not join the corporation because they had initiated an involuntary bankruptcy petition against the corporation under 11 U.S.C. § 303. Because the resulting automatic stay, the court had to stay this action until the corporation could be joined. Boat Basin Investors, LLC v. First Am. Stock Transfer, Inc., 2003 U.S. Dist. LEXIS 1838, — B.R. — (S.D.N.Y. February 7, 2003) (Sweet, D.J.).

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

ABI Members, click here to get the full opinion.

License agreements with franchisees were executory contracts which could be rejected by debtor. Bankr. D. Del. PROCEDURAL POSTURE: A debtor and its related entities (the debtors) filed chapter 11 petitions and the cases were jointly administered. The debtors later moved to reject certain license agreements with certain franchisees. The franchisees’ committee and the individual franchisees opposed the motion and claimed that the agreements were not executory contracts subject to 11 U.S.C. § 365. OVERVIEW: The agreements in issue were related to the exclusive use of the proprietary marks in certain territories. Under the agreements the debtors could not use the proprietary marks in the territories it granted to the franchisees. The court found that the debtors’ agreement to forbear from using the proprietary marks in the exclusive franchisee territories was an ongoing material obligation as of the bankruptcy petition date. The court concluded that the agreements were executory contracts subject to the provisions of 11 U.S.C. § 365. The court used the business judgment standard to determine that the debtors’ rejection of the agreements was made to benefit the estate and not done in bad faith. The franchisees were not protected by 11 U.S.C. § 365(n). In re HQ Global Holdings, Inc., 2003 Bankr. LEXIS 146, 290 B.R. 507 (Bankr. D. Del. February 25, 2003) (Walrath, B.J.).

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

ABI Members, click here to get the full opinion.

Trustee could not avoid payment made by debtor clothier for prepetition shipment of sweaters pursuant to the ordinary course of business exception. Bankr. W.D. Pa. PROCEDURAL POSTURE: Plaintiff, chapter 7 trustee in bankruptcy, sought to avoid as a preference a payment made by debtor clothier to defendant creditor, made five weeks prior to the filing of debtor’s bankruptcy petition for a shipment of sweaters the debtor had previously received from the creditor. The creditor asserted the payment was made within the “ordinary course” of business, and was not avoidable under 11 U.S.C. § 547(c)(2). OVERVIEW: The creditor sold the merchandise to the debtor after receiving a favorable credit report, on NET 30-day terms. The two had never done business before. The court determined that the transfer to the creditor qualified as a preference under 11 U.S.C. § 547(b), because the debtor was insolvent at the time it made the payment. The creditor argued that the transfer nonetheless fell within the scope of the “ordinary course” exception set forth in 11 U.S.C. § 547(c)(2). It was undisputed that the transfer debtor made for the first shipment of sweaters was on account of a debt incurred in the ordinary course of the business affairs of the debtor and the creditor. The creditor presented testimony describing the relevant industry, that payments routinely were made after the due date on “NET 30” terms. The court agreed that no unusual conduct occurred during the period between when the creditor had shipped the sweaters and the debtor had sent the payment that would have taken the payment out of the ordinary course of business. Although the payment was a preference, it could not be avoided under the ordinary course of business exception. Bohm v. Golden Knitting Mills, Inc. (In re Forman Enters.), 2003 Bankr. LEXIS 543, — B.R. — (Bankr. W.D. Pa. June 3, 2003) (Markovitz, B.J.).

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

ABI Members, click here to get the full opinion.

Attorney’s fees and late charges denied as court could not determine reasonableness of agreed flat fee without time records. Bankr. W.D. Va. PROCEDURAL POSTURE: Previously, the chapter 7 trustee liquidated property in which movant, a secured creditor, held a security interest. The trustee paid the secured debt from the sale proceeds, and the secured creditor moved for the payment of attorney fees and late charges pursuant to 11 U.S.C. § 506. The trustee objected to the motion. OVERVIEW: The secured creditor sought payment of attorney’s fees in the amount of $1,225.00 and late charges of $50.95. The trustee objected. At hearing on the objection, counsel for the secured creditor presented no evidence to support allowance of attorney’s fees under 11 U.S.C. § 506(b) or the late charges. Subsequently, in response to an order of the court, the secured creditor’s attorney filed documentation supporting the fee request and late charges. In that documentation, counsel revealed that the matters covered by the request for attorney’s fees arose as a result of a flat fee arrangement between counsel and the secured creditor. Counsel did not maintain time records. Without time records, the court has no basis for determining the reasonableness of the fees counsel requested. Also, counsel again failed to justify the late charge fee of $50.95. Countrywide Home Loans, Inc. v. Poff (In re Poff), 2003 Bankr. LEXIS 507, — B.R. — (Bankr. W.D. Va. May 27, 2003) (Krumm, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:506.04 [back to top]

ABI Members, click here to get the full opinion.

Debtor who agreed to waive discharge of claim in first bankruptcy could not seek discharge of the same claim in subsequent filing. Bankr. N.D. Miss. PROCEDURAL POSTURE: In a prior bankruptcy, defendant debtor agreed to a waiver of discharge on obligations owed to plaintiff creditor. Subsequently, the debtor filed for bankruptcy, seeking to discharge the creditor’s obligations to which the debtor waived discharge. The creditor filed an adversary proceeding seeking a determination that the debts were nondischargeable pursuant to 11 U.S.C. § 523(a)(10). The creditor moved for summary judgment. OVERVIEW: After the waiver in the prior bankruptcy, the creditor obtained a state court judgment against the debtor. The debtor submitted an affidavit that although at the time of the waiver, he felt it was a conscious and fully informed judgment, he subsequently discovered the total ramifications of such a waiver. If he had known the full ramifications, he would never have agreed to this waiver of discharge. The bankruptcy court was unsympathetic, calling the debtor’s actions a blatant effort to abuse the bankruptcy process. The debtor could not manufacture a disputed material issue of fact by simply submitting a second sworn affidavit that was directly adverse to the earlier affidavit that he submitted in the prior bankruptcy. The bankruptcy court held that the debtor was judicially estopped from attempting to take his current legal position which was completely inconsistent with the position that he took in the prior bankruptcy. Glover v. Herzog (In re Herzog), 2003 Bankr. LEXIS 501, — B.R. — (Bankr. N.D. Miss. May 5, 2003) (Houston, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.16 [back to top]

ABI Members, click here to get the full opinion.

Plan confirmation denied due to separate classification of unsecured student loans which were given more favorable treatment than general unsecured debt. Bankr. N.D. Tex. PROCEDURAL POSTURE: Debtors moved for confirmation of their proposed final chapter 13 plan. The chapter 13 trustee objected to the plan, arguing that it unfairly discriminated against unsecured creditors. OVERVIEW: Debtors’ plan was a 60-month plan providing for payments of $440 per month, resulting in a 5.6 percent return to unsecured creditors. The plan separately classified the two student loans and provided for direct payments of $200 per month against the student loans. Debtors and the trustee stipulated that, if the student loan debts were not separately classified (and hence no discrimination) and thus paid pro rata with other unsecured creditors, the dividend to unsecured creditors under a hypothetical 36-month plan would increase to approximately 12 percent. The parties further stipulated that the $200 direct payment on the student loans was the regular payment on the loans and that such payment will continue for a period of 10 years. The trustee argued that the plan violated 11 U.S.C. § 1322(b)(1), by treating nondischargeable unsecured student loan obligations more favorably than dischargeable general unsecured debt. The court adopted a formula described in another bankruptcy case in the district and, based on that formula, debtors’ plan did violate section 1322(b)(1). Paragraph (b)(5) did not save the plan, as it did not constitute an exception to paragraph (b)(1). In re Gilley, 2003 Bankr. LEXIS 520, — B.R. — (Bankr. N.D. Tex. June 3, 2003) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05 [back to top]

ABI Members, click here to get the full opinion.

Venue of dispute between debtor and customer changed to district where bankruptcy was pending in the interests of justice and efficient administration of the estate. E.D. La. PROCEDURAL POSTURE: Plaintiff seller filed a voluntary petition for relief under chapter 11 in the Bankruptcy Court for the Northern District of Texas. The seller commenced an action in state court against defendant buyer, seeking money for steel allegedly purchased by the buyer. The buyer removed the case and moved to transfer venue. The seller moved for abstention and/or remand. OVERVIEW: The case was removed to the district court on the grounds that it was arising in or related to the seller’s bankruptcy case, under 28 U.S.C. §§ 1334(b), 1452(a). The buyer contended that it was entitled to a setoff and/or recoupment. There was a strong presumption in favor of placing venue in the district where the bankruptcy proceedings were pending. The court found that the considerations behind the presumption were heightened because the determination under 28 U.S.C. § 157(b)(3) was required in order to decide the seller’s motion for abstention and/or remand. This determination was for the bankruptcy judge. Thus, the interests of justice and the efficient administration of the bankruptcy estate strongly favored transfer. Moreover, it likely would have been more convenient for the parties to litigate both the seller’s claim and the buyer’s counterclaim in the same forum-particularly if both claims arose out of the same transaction. Thus, whether the buyer’s claim was ultimately classified as a setoff or not, the buyer was restricted to the bankruptcy court in its pursuit of that claim until the bankruptcy court determined otherwise. Bayou Steel Corp. v. Boltex Mfg. Co., LP, 2003 U.S. Dist. LEXIS 9395, — B.R. — (E.D. La. May 30, 2003) (Englehardt, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:4.04 [back to top]

ABI Members, click here to get the full opinion.

Creditor’s lien in debtor’s insurance proceeds which was perfected postpetition was avoidable by trustee. Bankr. E.D. Tenn. PROCEDURAL POSTURE: The chapter 7 trustee sought to avoid the creditor’s security interest in the debtor’s car under Tenn. Code § 55-3-126 and 11 U.S.C. §§ 544 and 550, and argued that perfection after the bankruptcy violated 11 U.S.C. § 362 and that insurance proceeds paid to the creditor were subject to turnover under 11 U.S.C. § 542. On cross motions for summary judgment, the creditor argued it was entitled to equitable subrogation. OVERVIEW: The exclusive method for obtaining a perfected security interest on the car was by having such lien noted on the certificate of title as provided by Tenn. Code § 55-3-126. Although the creditor had refinanced the debtor’s car and paid off the prior lienor, the creditor’s security interest was not perfected for two years. The security interest in the car was not perfected until the Tennessee Department of Title and Registration received the creditor’s application for the notation of the lien on the certificate of title, which was after the bankruptcy. Any equitable principals under Tenn. Code § 47-1-103, such as subordination, had to give way to the requirements of Tenn. Code §§ 47-9-311 and 55-3-126. Perfection occurred in violation of the automatic stay of 11 U.S.C. § 362(a)(4) and was voided. The trustee, as a hypothetical judicial lien creditor under 11 U.S.C. § 544(a)(1), was entitled to avoid the creditor’s lien in the insurance proceeds received from the insurance company and to recover the same under 11 U.S.C. § 550(a)(1). Farmer v. LaSalle Bank (In re Morgan), 2003 Bankr. LEXIS 327, 291 B.R. 795 (Bankr. E.D. Tenn. March 18, 2003) (Stair, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.05 [back to top]

ABI Members, click here to get the full opinion.