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  A Weekly Update of Bankruptcy and Debtor/Creditor Matters

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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.

March 11, 2002

CASES IN THIS ISSUE
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Collier Bankruptcy Case Summaries

2d Cir.

United States trustee's motion for penalties and disgorgement of fees was denied. Bankr. D. Vt. The United States trustee filed a motion seeking an order imposing penalties upon the chapter 7 debtors' bankruptcy petition preparer. The petition identified the nonattorney petition preparer and disclosed that the debtors had paid him $300 to prepare the documents. The United States trustee contended that the preparer obtained an excessive fee for his services, failed to make adequate disclosure of the fee paid to him by the debtors and engaged in the unauthorized practice of law. The preparer denied giving legal advice, and stated that he employed only the federal exemption statute and filed only chapter 7 cases and that by choosing to hire him, the debtors themselves chose chapter 7 and the federal exemptions. At the time they employed the preparer, the debtors executed disclaimers indicating that they made all of the decisions pertaining to their petition and schedules. The bankruptcy court denied the United States trustee's motion, holding that because the petition preparer did not provide legal advice to the debtors and did not charge an excessive fee, he did not negligently or fraudulently prepare the debtors' petition. The court concluded that the legal decisions requisite to the completion and filing of the debtors' petition and related documents were made exclusively by the debtors. In re Schneider, 2002 Bankr. LEXIS 35, 271 B.R. 761 (Bankr. D. Vt. January 4, 2002) (Brown, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:110

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Discharged debtor could not seek indemnification because it did not suffer any out-of- pocket losses. S.D.N.Y. The bank moved to dismiss a fourth-party complaint filed against it by the former chapter 11 debtor on the grounds that the indemnification claim did not state a cause of action. After the bank refused to issue letters of credit to the debtor, the debtor was unable to supply goods to its affiliate. The affiliate defaulted on its own debt and it was sued by its lender. The affiliate, in turn, filed a third-party action against the debtor, alleging that the debtor's failure to supply goods caused the affiliate's default. The debtor filed the fourth-party complaint against the bank, seeking indemnification in the event that it was found liable to its affiliate. After the debtor filed its petition, it consented to entry of judgment against it for damages to the affiliate's business, and the debtor's confirmed plan provided that the affiliate would receive the net proceeds of any recovery in the fourth-party action. The bank moved to dismiss the fourth-party complaint, arguing that the debtor's indemnification claim was barred by the confirmation of the plan and the debtor's discharge under chapter 11. The district court granted the motion to dismiss, holding that section 524(e) did not permit the indemnification action to continue. Pursuant to state (New York) law, a claim for indemnification did not accrue prior to actual payment of a judgment. Since section 524(e) did not permit execution against the debtor's assets and the debtor could not be forced to pay the affiliate's judgment, the debtor had no indemnification claim against the bank. Bank of India v. Trendi Sportswear, Inc., 2002 U.S. Dist. LEXIS 894, - F. Supp.2d - (S.D.N.Y. January 17, 2002) (Martin, Jr., D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:524.05

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District court refused to grant leave to appeal from an interlocutory order. S.D.N.Y. A minority shareholder of a company that was part of the chapter 11 individual debtor's estate filed a motion for leave to appeal an interlocutory order issued by the bankruptcy court. The bankruptcy court had issued a preliminary injunction against the shareholder in an adversary proceeding initiated by the liquidating trustee. The injunction was issued to prevent the shareholder from obstructing the trustee's implementation of the plan of reorganization. The district court denied the shareholder's motion, holding that an appeal would not materially advance the termination of the litigation between the trustee and the shareholder. The preliminary injunction also did not involve a controlling question of law, as to which there was a substantial ground for differences of opinion. Gibson v. Kassover (In re Kassover), 2002 U.S. Dist. LEXIS 1179, - B.R. - (S.D.N.Y. January 23, 2002) (Baer, Jr., D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:5.07

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3d Cir.

Complaint to avoid any transfer of interest under unrecorded mortgage that purported to operate as lien on debtor's residence stated valid cause of action. Bankr. E.D. Pa. The debtor and the chapter 13 trustee filed an adversary complaint against a bank that held a mortgage on both a residential property and a second property owned by the debtor and her husband. The complaint alleged that because the bank failed to index the mortgage under the address or parcel number for the residence or under the debtor's name, the mortgage was not properly recorded or otherwise perfected as of the date that the debtor's bankruptcy case was filed. Thus, according to the debtor and trustee, a bona fide purchaser would have acquired the residence free of any security interest held by the bank. The debtor and the trustee sought to use the bona fide purchaser status granted to the trustee under section 544(a)(3) to avoid any transfer of interest under the mortgage to the extent that it purported to operate as a lien upon the residence. The bank moved to dismiss the complaint, and argued that any flaw in its security interest alleged by the debtor and trustee was irrelevant as a matter of law because the bank held a separate judicial lien against the residence. The basis of the separate asserted lien was a state court default judgment that was entered against the debtor and her husband after a civil complaint for mortgage foreclosure was filed against them. The bankruptcy court denied the bank's motion to dismiss. The court held that the fact that the unrecorded mortgage was the subject of a foreclosure action and default judgment did not change the nature of the bank's security interest; thus, the complaint stated a valid cause of action. The court explained that while a mortgage foreclosure judgment terminates the mortgage, (i.e., the parties' contractual relationship), the security interest created by the mortgage continues to exist. Thus, the bank had no more of a security interest under the foreclosure judgment than it did under the mortgage itself, and it was this underlying security interest that the complaint sought to invalidate under section 544(a)(3). The court also held that the bank's argument, that there was a separate and independent judicial lien as a result of the foreclosure judgment, had no merit under state (Pennsylvania) law. Suy v. St. Edmond's Fed. Sav. Bank (In re Suy), 2001 Bankr. LEXIS 1701, - B.R. - (Bankr. E.D. Pa. December 6, 2001) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:544.08

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Bankruptcy court's dismissal of successor corporation's avoidance action was reversed. D. Del. The successor corporation to the related chapter 11 debtors appealed the bankruptcy court's dismissal of its avoidance action against the creditor. Pursuant to the plan, the successor made a substantial payment that was issued directly to the unsecured creditors and assumed liability for various other types of claims. In return, substantially all of the debtors' assets, including the right to pursue avoidance actions, were transferred to the successor corporation. The bankruptcy court subsequently dismissed the successor's suit seeking to avoid and recover preferential transfers made to the creditor, on the ground that it lacked standing because any recovery from the proceeding would provide no benefit to the estate. The district court reversed, holding that because the successor corporation was assigned the avoidance actions pursuant to the confirmed plan and the estate benefited from such assignment, the successor had standing to bring the action against the creditor. The court concluded that the estate previously benefited from the voluntary, mutual exchange, and the successor was also entitled to receive the benefit of that bargain. Burlington Motor Carriers, Inc. v. Comdata Network, Inc. (In re Burlington Motor Holdings, Inc.), 2002 U.S. Dist. LEXIS 805, - B.R. - (D. Del. January 18, 2002) (Sleet, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:550.02[2]

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4th Cir.

Bankruptcy court erred in partially discharging debtor's student loan obligation. W.D. Va. The student loan creditor appealed the bankruptcy court's decision that partially discharged the debtor's loan obligation. The debtor was 49 years old, held a master's degree in management and was employed as a claims examiner for an insurance company. She earned a modest income and never made any voluntary payments on her student loan. Although the bankruptcy court found that the debtor had not made a good faith effort to repay the loan, the court held that it had the general equitable power under section 105 to partially discharge the debt because the debtor did not have the present ability to pay the entire debt. The district court reversed, holding that the debtor's refusal to minimize her expenses and maximize her income precluded a hardship discharge of any portion of the loan. The bankruptcy court's factual findings were correct, but in the absence of good faith, it was error to discharge any portion of the debt. Tenn. Student Assistance Corp. v. Mort (In re Mort), 2002 U.S. Dist. LEXIS 1123, 272 B.R. 181 (W.D. Va. January 18, 2002) (Jones, D.J.).

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

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5th Cir.

Chapter 13 debtors could not modify plan to provide for surrender of collateral with any resulting deficiency to constitute unsecured claim. Bankr. N.D. Tex. The chapter 13 debtors sought to modify their confirmed plan to provide for surrender of their vehicle to a credit union in satisfaction of their obligation to make payments on the credit union's secured claim. The debtors and the credit union agreed that the vehicle's current value was less than the amount of the credit union's secured claim. The debtors argued that to the extent that any deficiency that existed upon foreclosure by the credit union, the credit union was entitled to nothing more than an unsecured deficiency claim to be paid along with other unsecured creditors under the terms of the modified plan. The bankruptcy court held that the debtor's proposed plan modification could not provide for surrender of collateral with any resulting deficiency after foreclosure constituting an unsecured claim. The court explained that the credit union's lien was already stripped down under the confirmed plan, and concluded that the modification, which would cause the credit union's unsecured claim to increase by the amount of any deficiency, would alter the nature of the credit union's secured claim and, if allowed, stretch the language of section 1329(a) beyond its plain meaning. The court further stated that even if section 1329(a) was construed to allow consideration of the debtors' proposed modification, the proposed modification was unfair and the debtors' should bear the burden of depreciation. Finally, upon the facts presented, the court rejected the debtors' argument that the proposed modification was allowed by section 502(j). In re Coffman, 2002 Bankr. LEXIS 29, 271 B.R. 492 (Bankr. N.D. Tex. January 10, 2002) (Jones, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1329.04

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6th Cir

Insurer did not violate automatic stay by making payments to debtor's directors under officers' and directors' liability insurance policy. Bankr. N.D. Ohio The chapter 11 debtor filed an adversary complaint against its directors that alleged breaches of fiduciary duties, negligence hiring, supervision and retention, fraud, misappropriation, conspiracy and related claims. In addition, the debtor filed a motion to enforce the automatic stay against an insurer that issued an officers' and directors' liability policy to the debtor. The debtors argued that the insurer could not make payments under the policy to the directors without violating the automatic stay. The bankruptcy court held that based on the language of the officers' and directors' liability policy issued to the debtor, the policy proceeds were not property of the debtor's estate, and any payments made by the insurer to the directors pursuant to their claims under the policy did not violate the automatic stay. The court explained that while the debtor was the named insured on the policy, the policy was for the benefit of the debtor's directors and officers. Thus, although the debtor owned the policy, it did not own the proceeds at issue. The court rejected the debtor's argument that it had a pecuniary interest in the policy, which provided indemnity coverage, because no claim was made against indemnity coverage. The court noted that the debtor had not paid any of the directors' defense costs, so it was not entitled to any reimbursement. The court also noted that the debtor had no 'entity coverage' with the insurer that would directly insure the debtor. Youngstown Osteopathic Hosp. Ass'n v. Ventresco (In re Youngstown Osteopathic Hosp. Ass'n), 2002 Bankr. LEXIS 30, 271 B.R. 544 (Bankr. N.D. Ohio January 4, 2002) (Bodoh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised3:362.01

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Debtor's obligation to pay half of ex-wife's mortgage was not in the nature of spousal support. Bankr. S.D. Ohio The chapter 7 debtor's former wife filed a complaint to determine the dischargeability of the debtor's obligation to pay one-half of her monthly mortgage payment. Pursuant to the parties' divorce decree, the debtor and his former wife were equally liable for the mortgage debt on the marital residence. The state (Ohio) court specifically determined that the former wife was not entitled to spousal support, but it also concluded that requiring her to sell the house to pay the debt would very likely increase her need for spousal support. The former spouse argued that the mortgage obligation was, in effect, a support payment because the divorce decree was structured to permit her and her children to remain in the property. The bankruptcy court rejected the spouse's argument, holding that the debtor's mortgage obligation was not excepted from discharge by section 523(a)(5). The record failed to establish clearly and unequivocally that the parties intended to create a support obligation. The court concluded that the state court's express finding that the former spouse was not entitled to support was entitled to due deference. Hammermeister v. Hammermeister (In re Hammermeister), 2001 Bankr. LEXIS 1704, 270 B.R. 863 (Bankr. S.D. Ohio December 14, 2001) (Hoffman, Jr., B.J.).

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

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7th Cir.

Debtor's motion to reopen his case was denied because the court was without authority to extend deadline for filing a reaffirmation agreement. Bankr. S.D. Ind. The chapter 7 debtor moved to reopen his case so that he could file a reaffirmation agreement. The debtor had filed a statement of intention with his petition, wherein he indicated that he intended to reaffirm his debt with the creditor, which was secured by a lien on his mobile home. The debtor, however, failed to file the reaffirmation agreement before receiving a discharge, and his case was closed. The bankruptcy court denied the motion, holding that the debtor's failure to file his reaffirmation agreement prior to receiving his discharge could not be cured by reopening the case and submitting the agreement. The court noted that reaffirmation agreements entered into after entry of the discharge were unenforceable and had no legal significance (citing Collier on Bankruptcy, 15th Ed. Revised). In re Pettet, 2002 Bankr. LEXIS 34, 271 B.R. 855 (Bankr. S.D. Ind. January 16, 2002) (Coachys, B.J.).

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

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8th Cir.

Attorney's fee received for representation of debtor during sale of asset in contemplation of bankruptcy filing was properly disgorged. 8th Cir. The chapter 7 debtor's attorney appealed an order of the B.A.P. affirming the bankruptcy court's order to disgorge a portion of the fee paid by the debtor. Because he failed to disclose a prepetition tax-free exchange of property, the debtor was denied a discharge. The debtor's attorney represented him in the land transaction, which had been effectuated in contemplation of the bankruptcy filing. A portion of the real estate proceeds was paid to the attorney for services related to the transaction both prepetition and postpetition. The bankruptcy court concluded that the land transaction was a sham and ordered disgorgement of the portion of the fee which was not deemed to be reasonable. On appeal, the attorney argued that the bankruptcy court lacked jurisdiction to order him to disgorge the fee and that since his fee was fully earned prepetition, it was not part of the debtor's estate. The Court of Appeals for the Eighth Circuit affirmed, holding that the bankruptcy court acted within its sound discretion in ordering the attorney to return to the estate a portion of the fee paid to him. The bankruptcy court had jurisdiction to review the reasonableness of the attorney's fees and did not clearly err in finding that the representation related to a transaction in contemplation of the bankruptcy filing. The attorney also failed to prove that he was entitled to retain any fees for postpetition services because he did not seek court approval to be paid from assets of the estate. Brown v. Luker (In re Zepecki), 2002 U.S. App. LEXIS 972, 277 F.3d 1042 (8th Cir. January 25, 2002) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 3:329.03, .04

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Bankruptcy court did not have jurisdiction over postdischarge claim objection proceeding. 8th Cir. The chapter 13 debtor appealed the B.A.P. order reversing the bankruptcy court's enforcement order. After completing his plan payments and receiving a discharge, the debtor filed an objection to the student loan creditor's claim, arguing that the collection costs were excessive. The creditor did not respond and the bankruptcy court entered a default order holding that the creditor could recover only the unpaid principal and interest. When the creditor continued to attempt to recoup the collection costs, the debtor reopened his case and filed an adversary proceeding seeking enforcement of the default order. The bankruptcy court issued an order permanently enjoining the creditor from taking any action to recoup the collection costs the court had previously disallowed in its default order. The B.A.P. reversed on the basis that the bankruptcy court lacked subject matter jurisdiction over the dispute. The Court of Appeals for the Eighth Circuit affirmed the B.A.P., holding that because the debtor's challenge to the propriety of the claimed collection costs came after his discharge, the bankruptcy court did not have jurisdiction. The claim could no longer have been against the estate, and thus did not involve a right created by bankruptcy law or arising only in bankruptcy. The claim objection proceeding was not related to the bankruptcy either, because at the time the debtor objected to the claim there was no longer a plan to be confirmed, or an estate, and therefore the proceeding could not conceivably have affected his estate. McAlpin v. Educ. Credit Mgmt. Corp. (In re McAlpin), 2002 U.S. App. LEXIS 1108, 278 F.3d 866 (8th Cir. January 28, 2002) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 1:3.02, .03

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9th Cir.

Landlord was granted relief from stay to evict debtor from premises in which debtor retained a possessory interest. Bankr. C.D. Cal. The chapter 7 debtor's landlord filed a motion for relief from the automatic stay in order to remove the debtor from her apartment. The debtor had previously defaulted on her rent payments and the landlord obtained a prepetition unlawful detainer judgment against the debtor. The landlord moved for relief upon reliance of a state (California) statute that allowed it to enforce a valid writ of possession against a tenant in possession of residential property notwithstanding the tenant's bankruptcy filing. The bankruptcy court rejected the landlord's position, holding that the debtor had an equitable possessory property interest that was protected by section 362(a)(3) even after the landlord obtained an unlawful detainer judgment. Nevertheless, the landlord properly requested relief from the stay and met its burden of proof. The court further concluded that the state statute which operated in contravention of the automatic stay was preempted by section 362 and was unconstitutional. Westside Apts., LLC v. Butler (In re Butler), 2002 Bankr. LEXIS 44, 271 B.R. 867 (Bankr. C.D. Cal. January 9, 2002) (Russell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:362.03[5]; 5:541.05[3]

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Order granting relief did not constitute abandonment of property. 9th Cir. The Commissioner of Internal Revenue appealed the tax court's allowance of the chapter 11 debtor's interest deduction. After the bankruptcy court lifted the automatic stay to allow foreclosure of the debtor's condominium, the property was sold for less than the outstanding balance owed to the secured creditor. The debtor reported the foreclosure sale on his own tax return for that year and claimed a deduction for interest that had accrued on the loan but had not been paid at the time of the sale. The IRS disallowed the deduction and determined a deficiency in the debtor's income tax. The tax court ruled in favor of the debtor and concluded that the lifting of the automatic stay resulted in an abandonment of the property by the estate. The tax court allowed the interest deduction because the amount realized upon the sale of property subject to nonrecourse debt included both the principal amount of the indebtedness and any accrued interest. The Court of Appeals for the Ninth Circuit reversed, holding that the order granting relief from the stay did not, as a matter of law, constitute property abandonment. The lifting of the automatic stay, without explicitly providing for abandonment, did not extinguish the estate's interest in the property and all tax consequences of the sale fell upon the estate. Therefore, the tax court's decision to allow the debtor's interest deduction was founded on an incorrect legal premise. Catalano v. Commissioner of Internal Revenue, 2002 U.S. App. LEXIS 1125, 279 F.3d 682 (9th Cir. January 28, 2002) (Thomas, C.J.).

Collier on Bankruptcy, 15th Ed. Revised3:362.07; 5:554.02

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Debtors retained the right to exempt property only up to the statutory maximum. B.A.P. 9th Cir. The chapter 11 individual debtors appealed the bankruptcy court's grant of preliminary injunction precluding them from selling shares of stock they had claimed exempt under state (California) law. On their schedules, the debtors stated their intention to exempt as many shares of a closely held company as possible, pursuant to the allowable statutory maximum. The trustee did not object to the debtors' exemption, but reserved the right to challenge the valuation of the stock. After the debtors failed to comply with the trustee's requests for financial information to verify their valuation of the shares, the trustee filed a complaint for turnover of estate property and injunctive relief. The debtors argued that the trustee could no longer challenge the value of the shares because she had not timely objected to their exemption, and as such, the shares were no longer property of the estate. The bankruptcy court granted the injunction on the grounds that the trustee had a strong probability of prevailing on the merits of the turnover complaint. The B.A.P. affirmed, holding that although the trustee was required to object to the value of the property subject to the exemption within the time constraints of Rule 4003(b), the trustee still had the right to sell the property that the debtors had claimed exempt. The exemption laws did not provide the debtors with an unassailable ownership interest in the exempt property, and their exemption in the proceeds from a sale of the shares was restricted to the statutory maximum. Since the trustee was likely to prevail on the merits, the bankruptcy court did not abuse its discretion in granting the injunction.Morgan-Busby v. Gladstone (In re Morgan-Busby), 2002 Bankr. LEXIS 38, 272 B.R. 257 (B.A.P. 9th Cir. January 7, 2002) (Ryan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 9:4003.03

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10th Cir.

Debtor's pattern of nondisclosure resulted in denial of discharge. Bankr. N.D. Okla. The judgment creditor filed a complaint objecting to the chapter 7 debtor's discharge. The debtor failed to disclose funds received within a year of his petition from a former business associate and the coowner of his business, and failed to list his associates as creditors. The debtor also failed to list worthless stock as an asset, failed to provide information pertaining to a bank account closed within one year of his filing date, failed to disclose the foreclosure of his home and inflated his monthly expenses by listing nonexistent monthly payments. The debtor asserted that he did not list the funds received as income because the transfers were either loans or gifts from friends that were intended to help him through a difficult financial period. The debtor further claimed that he was not obligated to disclose other information because it was immaterial. The bankruptcy court denied the debtor's discharge, holding that the debtor made material statements under oath that he knew to be false, with the intent to defraud his creditors. The court applied the Tax Code's definition of 'gross income' to the debtor's disclosures in his statement of affairs and schedules, and concluded that the payments were neither loans nor gifts. The court noted that the transfers were made at fairly regular intervals in similar deposits in the debtor's bank account. The additional omissions and misstatements made by the debtor evidenced a pattern of nondisclosure or falsehood that indicated the debtor's fraudulent intent (citing Collier on Bankruptcy, 15th Ed. Revised). The Cadle Co. v. King (In re King), 2002 Bankr. LEXIS 43, 272 B.R. 281 (Bankr. N.D. Okla. January 16, 2002) (Michael, B.J.).

Collier on Bankruptcy, 15th Ed. Revised6:727.04

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11th Cir.

United States trustee's motion to dismiss chapter 7 case as 'substantial abuse' denied. Bankr. M.D. Fla. The United States trustee moved to dismiss the debtor's chapter 7 case on the grounds that granting relief to the debtor would be a 'substantial abuse' of the provisions of chapter 7. The bankruptcy court denied the United States trustee's motion. The court held that ability to pay is the primary, but not conclusive, factor in determining whether there is a substantial abuse of chapter 7; where a debtor has the ability to pay something (either because her income exceeds her expenses or because her expenses are excessive), the following factors should be considered to determine whether they militate against or in favor of dismissal: (1) whether unforeseen or catastrophic events (such as sudden illness, disability or unemployment) propelled the debtor into bankruptcy; (2) whether the debtor's standard of living has substantially improved as a result of the bankruptcy filing; (3) the debtor's age, health, dependents and other family responsibilities; (4) the debtor's eligibility for chapter 13 relief and whether creditors would receive a meaningful distribution in a chapter 13 case; (5) the age of the debts for which the debtor seeks a discharge and the period over which they were incurred; (6) whether the debtor incurred cash advances and made consumer purchases far in excess of her ability to repay; (7) whether the debtor made any payments toward her debts or attempted to negotiate with her creditors; (8) the accuracy of the debtor's schedules and statement of current income and expenses; and (9) whether the debtor filed her petition in good faith. The court also noted that it defined substantial abuse as 'that which shocks the conscience of the court.' Applying the foregoing considerations, the court found that although the debtor could likely pay something into a chapter 13 plan, granting her relief would not be a substantial abuse of the provisions of chapter 7 because a discharge would not substantially improve her standard of living, she had a chronic heart condition, her creditors would not receive a meaningful distribution in a chapter 13 case, her debts were incurred between five and ten years ago, she had made substantial payments on the debts, her schedules and statement of income and expenses were accurate, and she filed her petition in good faith. In re DeGross, 2001 Bankr. LEXIS 1694, 272 B.R. 309 (Bankr. M.D. Fla. October 22, 2001) (Funk, B.J.).

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

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• West's Bankruptcy Newsletter
  A Weekly Update of Bankruptcy and Debtor/Creditor Matters

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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.

May 20, 2002

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

 

Collier Bankruptcy Case Summaries

1st Cir.

Debtor could not void tax return filing extension in order to place tax obligation outside of three-year nondischargeability period. D. Mass. The debtor appealed the bankruptcy court's dismissal of an adversary proceeding seeking to discharge his prepetition income tax liability. The debtor had previously sought a four-month automatic extension to file his tax return. Because the date of the extension was within three years of the date the debtor filed his petition, the IRS contended that the tax obligation was nondischargeable. The debtor argued that the extension was invalid because of misrepresentations he made when filing the request for an extension. The bankruptcy court granted the IRS's motion to dismiss and held that the debtor taxpayer could not receive the benefit of the extension and then argue that it was invalid because of misrepresentations that he had made. The district court affirmed, holding that the debtor's tax liability was not discharged because the three-year period of section 507(a)(8)(A)(1) was measured from the date of the filing extension requested by the debtor. The debtor taxpayer did not have the power to seek an invalidation of the automatic extension independently of the IRS. Kimball v. United States (In re Kimball), 2002 U.S. Dist. LEXIS 4470, - B.R. - (D. Mass. February 27, 2002) (Keeton, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10

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Debt that arose from judgment for defamation, product disparagement and intentional interference with advantageous business relations was not excepted from discharge. Bankr. D. Mass. A creditor filed an adversary proceeding against the chapter 7 debtor seeking, among other things, a determination that a debt that arose from a prepetition federal district court judgment was excepted from discharge under section 523(a)(6). The district court judgment, to the extent that it was affirmed by the Court of Appeals for the First Circuit, awarded the creditor damages for defamation, product disparagement and intentional interference with business relations. The creditor claimed that the necessary elements of proof for a nondischargeability determination under section 523(a)(6) (i.e., that the debtor injured another entity or the property of another entity willfully and maliciously and, by such injury, gave rise to the debt at issue) were established by virtue of the prepetition judgment; thus, the debtor was collaterally estopped from relitigating the issues. The bankruptcy court rejected the creditor's argument and entered judgment in the debtor's favor. The court held that none of the three torts for which the debtor was adjudicated liable (defamation, product disparagement and intentional interference with advantageous business relations) required a showing that the injury was willful or malicious within the meaning of section 523(a)(6). The court also found that the creditor's evidence failed to establish that the debtor caused injury to the creditor both willfully and maliciously. In addition to its holding on the dischargeability issue, the court held that the creditor failed to satisfy his burden of proof on other causes of action brought to deny the debtor's discharge under section 727(a). M & I Heat Transfer Prods., Ltd. v. Gorchev (In re Gorchev), 2002 Bankr. LEXIS 198, 275 B.R. 154 (Bankr. D. Mass. March 7, 2002) (Kenner, B.J.).

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

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Loan extended by private party was not excepted from debtor's discharge. Bankr. D. Mass. The chapter 13 debtor objected to the proof of claim filed by her grandparents that asserted that the debt owed to them was nondischargeable pursuant to section 523(a)(8). The funds had been advanced to the debtor by her grandparents to enable her to attend hair styling school so that she could become a licensed beautician. The debtor argued that because the loan was not made or guaranteed by a governmental entity or a nonprofit institution, her grandparents were not entitled to have the debt excepted from discharge. Her grandparents contended that the statute's language, 'an obligation to repay funds received as an educational benefit, scholarship or stipend,' meant that all student loans were nondischargeable, not simply those made or guaranteed by governmental or nonprofit organizations. The bankruptcy court sustained the debtor's objection, holding that the obligation owed to the debtor's grandparents did not qualify as a student loan and did not come within the exception to discharge under section 523(a)(8). The intent of Congress was to except from discharge loans that were made, guaranteed or funded by a governmental unit or nonprofit institution, not loans extended by a private party. In re Reis, 2002 Bankr. LEXIS 186, 274 B.R. 46 (Bankr. D. Mass. February 28, 2002) (Feeney, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.14[1]

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Debtor's obligation to his former spouse for their credit card debt was discharged. Bankr. D.R.I. The chapter 7 debtor's former spouse filed a complaint seeking a determination that an obligation owed by the debtor was nondischargeable. Pursuant to the parties' divorce decree, the debtor was responsible for paying his former wife $6,000, at the rate of $100 per month, for credit card debt incurred during their marriage. The former spouse had remarried, and together with her new husband had a combined annual income of $83,000. The debtor earned approximately $24,000 a year and had little disposable income and no significant assets. The bankruptcy court entered judgment in favor of the debtor, holding that the debtor's former spouse failed to meet her burden of proving that the obligation was nondischargeable under section 523(a)(15). The debtor was unable to pay the debt at the time of the trial or at any time in the foreseeable future. The court concluded that the former spouse's financial condition was far more comfortable than that of the debtor and that his situation was not likely to change. The harm caused to the former spouse with the debt discharged was minimal compared to the hardship to the debtor if he were required to pay the obligation. Summiel v. Tuoni (In re Tuoni), 2002 Bankr. LEXIS 213, 275 B.R. 186 (Bankr. D.R.I. February 19, 2002) (Votolato, B.J.).

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

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Fraudulent conveyance action commenced against debtor's wife was void. S.D.N.Y. The debtor's wife moved to dismiss the fraudulent conveyance action brought against her by the liquidator of an insurance company in district court, arguing that the commencement of the action violated the automatic stay. The liquidator sought to recover the value of certain residential property conveyed from the debtor to his wife. However, it did not seek relief from the automatic stay or intervention by the trustee. The district court granted the motion to dismiss without prejudice, holding that the action against the debtor's wife was commenced in violation of the automatic stay. The fraudulent conveyance action was a prohibited action to recover a claim against the debtor and was void. Serio v. DiLoreto, 2002 U.S. Dist. LEXIS 4473, - F. Supp.2d - (S.D.N.Y. March 19, 2002) (Swain, D.J.).

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

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Transfer occurred at the time debtor's wages were paid. Bankr. W.D.N.Y. More than 90 days prepetition, a creditor served a continuing levy upon the debtor's employer and, within 90 days of the filing of the bankruptcy petition, the employer paid funds to the creditor. The debtor sought turnover of the funds as a preference, and the creditor responded that since the transfer occurred at the time the levy was served, no transfer occurred during the preference period. Upon cross motions for summary judgment, the bankruptcy court held that the transfer was not made until the debtor acquired rights in the property, i.e., at the time the wages were paid. Thus, when the employer paid the wages to the debtor within 90 days of the filing of the petition, a preferential transfer occurred. Price v. Mfrs. and Traders Trust Co. (In re Price), 2002 Bankr. LEXIS 151, 272 B.R. 828 (Bankr. W.D.N.Y. January 24, 2002) (Bucki, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:547.05[7][b]

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3d Cir.

Creditors' claims required to be discounted to present value as of petition date. Bankr. D. Del. After filing for chapter 11 relief, the debtors filed two motions seeking to fix the amounts of certain proofs of claim and scheduled claims related to the debtors' obligations under some promissory notes. Each claim at issue was asserted or scheduled in an amount equal to the aggregate nominal amount of all outstanding payments due under the applicable promissory note as of the date the debtors filed for bankruptcy. Some of the claims also included amounts for postpetition interest, late fees, attorneys' fees and other charges. In its motion, the debtor sought entry of an order pursuant to section 502(b), reducing the claims to present value as of the petition date and reducing the claims by the amount of any postpetition interest, fees or charges. Certain creditors objected, arguing that their claims should be allowed in the full amount asserted. The bankruptcy court ruled that the language of section 502(b) required that the disputed claims be discounted to their present value as of the petition date. The court reasoned that, under the principles established in section 502(b), interest stops accruing at the date of the filing of the petition because any claim for unmatured interest is disallowed under this section. Further, the court noted that the debtors' bankruptcies operated to accelerate the principal amount due on the claims because the discounting factor for claims after the commencement of a case is generally equivalent to the contractual interest rate on the claim. However, the court reserved for a later date a determination as to the proper discount factor to be applied to calculate the present value of the claims in this case. In re Loewen Group Int'l, Inc., 2002 Bankr. LEXIS 199, 274 B.R. 427 (Bankr. D. Del. February 19, 2002) (Walsh, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.03

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4th Cir.

Denial of creditor's request for administrative expense claim was affirmed on appeal. D. Md. The creditor holding a purchase money security interest in the chapter 13 debtor's furniture appealed the bankruptcy court's order denying its request for payment as an administrative expense. The debtor had purchased the furniture prepetition and pledged it as collateral for any monies unpaid. Although the debtor's confirmed plan proposed to pay the creditor in full, she failed to pay any of the installments due under the plan for over a year. At no time before, during or after the debtor's default did the creditor move for relief from the automatic stay or for adequate protection. The bankruptcy court denied the creditor's request for payment as an administrative expense to recover the decline in the value of its collateral during the pendency of the debtor's case. On appeal, the creditor argued that the debtor's postpetition use of the furniture conferred a concrete benefit upon her estate. The district court affirmed, holding that section 503(b) was not the appropriate remedy for the prepetition secured lender whose collateral diminished in value due the debtor's postpetition possession and use. The debtor's furniture was a consumer purchase used for personal purposes, and was not employed in an effort to operate or reestablish a business, or make an economic profit for the debtor or her estate. Having failed to request adequate protection as the appropriate remedy, the creditor could not use section 503(b) as an alternative means to accomplish the same end. Tidewater Fin. Co. v. Henson, 2002 U.S. Dist. LEXIS 7284, - B.R. - (D. Md. April 18, 2002) (Blake, D.J.).

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

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Damage caused by debtor's ransacking of mobile home deemed nondischargeable. Bankr. D.S.C. The debtor purchased a 1996 mobile home from the creditor under a retail installment contract and gave the creditor a security interest in the mobile home, including its fixtures, appliances and accessories. When the debtor failed to make payments on the home, the creditor filed a state court action to retake possession. After the debtor was served with the state court summons and complaint, the creditor inspected the mobile home and discovered that it was being stripped of its furniture, appliances, equipment and accessories, including its bathtub, stove, refrigerator, air conditioning system, shutters, countertop tiling, light fixtures, stereo system, closet doors, commode, doors and storm windows. The creditor obtained a temporary restraining order against the debtor and the debtor then filed for chapter 7 relief. The creditor then filed an adversary proceeding in the debtor's bankruptcy, seeking to have the debtor's debt determined nondischargeable under section 523(a)(6). The debtor failed to plead or appear in the matter, and the court entered default. At a damage hearing, the court found that the payoff amount of the mobile home was $67,732.98, but due to the damage, the fair market value was $45,000.00. Had the home not been damaged, its fair market value would have been $60,000.00. It also cost the creditor $10,606.95 to repair the damage. The court ruled that the debtor's conversion of the property constituted willful and malicious injury to the property and awarded the creditor a nondischargeable judgment in the amount of $60,000.00, subject to reduction in the amount of any proceeds received from the sale of the mobile home, less the $10,606.95 in repair costs (citing Collier on Bankruptcy, 15th Ed. Revised 4:523.12). Oakwood Acceptance Corp. v. Coltrane (In re Coltrane), 2001 Bankr. LEXIS 1824, 273 B.R. 478 (Bankr. D.S.C. May 11, 2001) (Waites, B.J.).

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

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Debtor's student loans dischargeable after car injury rendered her severely disabled. Bankr. D.S.C. After the debtor's divorce in 1986, she was awarded custody of her two minor children but received only sporadic child support payments from her ex-spouse. To support her children, she went to school to earn her GED and went on to receive a bachelor's degree in secondary education social sciences. While she was attending school, the debtor obtained guaranteed student loans from the creditor in the amount of $6,402. Repayment on the loans began in September 1992, and the debtor requested forbearances on the loans for a total of 51 of the next 92 months. On August 16, 1999, the debtor was involved in a serious car accident and suffered a concussion and spinal injury. Following the car accident, the debtor petitioned for chapter 7 relief and filed a section 523(a)(8) dischargeability complaint, seeking to discharge the student loans owed to the creditor. At the time of the nondischargeability hearing, the debtor was 49-nine-years-old, and her physician had advised her that she would never be capable of holding full-time employment due to her medical condition. Also at the time of the hearing, the debtor derived income from part-time baby-sitting at the rate of $115 per week and a $300 contribution from her ailing father. The creditor objected to the discharge of the student loans, arguing that the debtor had not made a serious effort to repay her student loans prior to filing for bankruptcy relief. After reviewing the elements of the Brunner test, the court found that the debtor would not be able to maintain a minimal standard of living if required to repay the loans and that the permanent nature of her disability would likely prevent her from repaying the loans in the future. The court then found that, while the debtor had requested and received multiple forbearances on her loan repayment, she never fully abandoned her obligation to repay the loans. Because the debtor paid when she could, sought forbearances when she was unable to make payments and kept the creditor informed of her financial situation, the court found that the debtor satisfied the final prong of the Brunner test and ordered the student loan debt discharged. Carlson v. UNIPAC Student Loan (In re Carlson), 2001 Bankr. LEXIS 1826, 273 B.R. 481 (Bankr. D.S.C. May 18, 2001) (Waites, B.J.).

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

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District and court of appeals awarded sanctions for moot and frivolous appeals. 4th Cir. When a lessor obtained a judgment of eviction against a holding company and its principal, the holding company filed a chapter 7 petition. The bankruptcy court granted the lessor relief from stay and, while the debtor's motion for reconsideration was pending, obtained an order evicting the debtor and principal from the premises. After the eviction, the debtor withdrew its motion for reconsideration, admitting that the eviction rendered the motion for relief from stay moot. Despite this admission, the debtor appealed the bankruptcy court's order granting relief from stay. The district court dismissed the appeal and awarded sanctions against the debtor, concluding that the issues were moot and the appeal was frivolous. Applying the clear error standard, the Court of Appeals for the Fourth Circuit affirmed and awarded sanctions, holding that not only did the district court properly award sanctions, but that sanctions for filing a frivolous appeal to the circuit court were warranted. The court first addressed the debtor's contentions and concluded that the appeal was frivolous because the issues were patently moot. Second, sanctions were warranted against both the debtor and its attorney because the result was obvious and the arguments wholly without merit. The debtor's contentions included an argument that the lessor did not exist and an unfounded assertion of ex parte communications between the bankruptcy court and the lessor. Property Movers, L.L.C. v. Goodwin (In re Property Movers, L.L.C.), 2002 U.S. App. LEXIS 2444, - F.3d - (4th Cir. February 14, 2002) (per curiam).

Collier on Bankruptcy, 15th Ed. Revised 10:8020.04[1]

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5th Cir

Chapter 11 trustee's conduct did not rise to level of gross negligence. N.D. Tex. In May 1996, several creditors filed an involuntary bankruptcy petition against the debtor. Shortly thereafter, a chapter 11 trustee was appointed. Between May 1996 and January 1997, the trustee disbursed over $1.3 million. In January 1997, the bankruptcy court confirmed the debtor's joint plan of reorganization and discharged the trustee from his duties, releasing him from all further authority, duties and responsibilities related to the bankruptcy case. The plan named the trustee as disbursing agent for the proceeds of a $2.5 million letter of credit, which was to be placed in a claims reserve account to pay allowed claims. Instead of depositing the proceeds of the letter of credit into a claim reserve account, the trustee deposited the proceeds into the trustee operating account. The debtor then filed an adversary proceeding against the trustee, asserting, in part, breach of fiduciary duty for commingling the funds from the claim reserve account with funds from the operating account. After a hearing, the bankruptcy court ruled that, although the trustee was inattentive to detail, the conduct did not breach his fiduciary duty and that the trustee had been discharged from all duties and responsibilities as of the date the commingling occurred. On appeal, the district court rejected the trustee's argument that he could not be liable because his trustee duties had been discharged and found that a trustee retains a continuing duty of loyalty even after discharge. Nevertheless, the district court affirmed the bankruptcy court's ruling because it found that the bankruptcy court did not clearly err in finding that the trustee's conduct did not amount to an intentional failure to perform his duties or reckless disregard of the consequences of his actions. U.S. Metro Line Servs. v. Litzler (In re VVCI Acquisition Corp.), 2002 U.S. Dist. LEXIS 4317, - B.R. - (N.D. Tex. March 14, 2002) (Lindsay, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:323.02
 

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District court adopted bankruptcy court's recommendation that funds retained by standing chapter 12 trustee be turned over to United States Trustee. E.D. La. The United States Trustee brought a proceeding against a chapter 12 trustee seeking recovery of funds allegedly collected by the chapter 12 trustee over and above the United States Trustee's statutorily determined compensation orders. The chapter 12 trustee filed a counterclaim that, ultimately, was governed by the Federal Tort Claims Act, over which the district court had exclusive jurisdiction. Nevertheless, for purposes of judicial economy, the bankruptcy court undertook the responsibility of issuing proposed findings of fact and conclusions of law as to whether the funds taken by the chapter 12 trustee were excessive. To make that determination, the bankruptcy court considered, among other things, the effect of a policy statement of the Executive Office for United States Trustees ('EOUST') in two handbooks for standing chapter 12 trustees that were in effect during the relevant time period. The bankruptcy court found that funds retained by the chapter 12 trustee had to be turned over to the United States Trustee. In so finding, the bankruptcy court accepted the EOUST's trustee's interpretation of 28 U.S.C. § 586(e), which governs compensation of chapter 12 standing trustees and which was interpreted in the handbooks as requiring expenses to be paid prior to compensation. The district court held that the application of the handbook regulations at issue was appropriate and reasonable; therefore, the bankruptcy court's proposed findings of fact and conclusions of law should be adopted. The district court carefully reviewed section 586(e), and decided that this provision did not appear to either allow or preclude the 'expenses first' policy. However, considering the ambiguity of the statute, the regulatory powers of the attorney general with respect to compensation and the rationale of the 'expenses first' policy in encouraging standing trustees to minimize expenses, the court decided that the policy as set forth in the handbooks was entitled to some deference. Taylor v. Dengel, 2002 U.S. Dist. LEXIS 4145, - B.R. - (E.D. La. March 5, 2002) (Duval, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:6.08

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6th Cir.

Debtor's attorney was denied award of compensation for postpetition services. Bankr. S.D. Ohio The chapter 7 debtor reopened her case and moved for sanctions against her former attorney for attempting to collect outstanding legal fees subsequent to her discharge. The debtor sought disallowance of all compensation on the bases that the creditor failed to adequately disclose the nature of the fee arrangement and that the charges for the services were unreasonable. Prior to filing for bankruptcy, the debtor received a subpoena for a judgment debtor examination and subsequently met with the attorney and paid him a $500 retainer for his services. The parties executed a fee agreement that generally referred to 'debt problems' and stated that work was to be performed at specific hourly rates. The debtor and her attorney later concluded that filing a chapter 7 petition was in the debtor's best interest. The compensation statement filed at the time of the petition referred to an attached copy of the previously executed agreement, but did not disclose what the bankruptcy charges would be, the amount of any retainer or any balance due. The bankruptcy court granted judgment to the debtor, holding that postpetition compensation was disallowed due to the inadequacy of the attorney's disclosure of compensation. The postpetition charges were not unreasonable under section 329(b), but the attorney's disclosure of the charges specific to the bankruptcy filing was inadequate. The court noted that the purpose of the compensation disclosure requirement was to enable the court and the United States Trustee to monitor and examine the compensation paid by the debtors to protect them from overreaching and to make sure assets were not shielded from creditors. In re McNickle, 2002 Bankr. LEXIS 197, 274 B.R. 477 (Bankr. S.D. Ohio February 19, 2002) (Caldwell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:329.03; 9:2016.17

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7th Cir.

Creditor failed to state section 523(a)(2)(A) claim where relevant allegations related to oral representations of insider's financial condition. Bankr. N.D. Ill. An alleged creditor of the chapter 7 debtor filed a complaint seeking a denial of the debtor's discharge under various subsections of section 727(a). The complaint also sought a determination of the nondischargeability of the particular alleged debt owed to the creditor pursuant to various subsections of section 523(a). The debtor moved for summary judgment. The bankruptcy court granted the debtor's motion, in part, and denied the motion, in part. Among other things, the court held that to the extent that the creditor alleged causes of action under section 523(a)(2)(A), he failed to state a claim upon which relief could be granted because virtually all of the relevant allegations related to oral representations regarding the financial condition of an insider of the debtor and, as such, were actionable only under section 523(a)(2)(B), which requires that misrepresentations concerning financial condition be in writing. Jeffrey M. Goldberg & Assocs. v. Holstein (In re Holstein), 2001 Bankr. LEXIS 1833, 272 B.R. 463 (Bankr. N.D. Ill. September 27, 2001) (Sonderby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.08[1]

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Defendant in fraudulent transfer action denied summary judgment because trustee might establish that limitations period was subject to equitable tolling. Bankr. N.D. Ill. In connection with his prepetition purchase of real property from the chapter 7 debtor, an individual granted the debtor's wife at the time a nine-year option to repurchase the property. According to the purchaser, the wife contemporaneously assigned the option to the debtor at the time of the sale. Years later, after the debtor and his wife divorced and the debtor's bankruptcy discharge was granted and his case was closed, the purchaser moved to reopen the chapter 7 case based on the debtor's alleged failure to schedule the option as an asset. The purchaser offered to purchase the trustee's interest in the property for a flat fee in an apparent effort to resolve a pending state court action brought by the former wife to enforce the purchase option, which she claimed had been reassigned to her by the debtor. The trustee rejected the purchase offer, and instead brought an adversary proceeding against the purchaser to recover the property. The trustee alleged that the debtor's initial transfer of the property to the trustee was a fraudulent transfer pursuant to section 544 and the state (Illinois) fraudulent transfer statute. The purchaser moved for summary judgment and alleged, among other things, the trustee's fraudulent transfer claims were time-barred. It was undisputed that the trustee's causes of action under section 544(b) were brought beyond the two-year statute of limitations of section 546(a); thus, the issue for decision was whether the doctrine of equitable tolling applied to the limitations period. The bankruptcy court denied the purchaser's motion for summary judgment. The court held that, among other things, that the purchaser failed to establish that the trustee actually knew of the property sale or that he failed to exercise due diligence in investigating the debtor's financial affairs; therefore, the trustee might be able to establish that the statute of limitations was subject to equitable tolling. Heyman v. Dec (In re Dec), 2001 Bankr. LEXIS 1835, 272 B.R. 218 (Bankr. N.D. Ill. September 6, 2001) (Sonderby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:546.02

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8th Cir.

Court sustained trustee's objections to exemptions claimed by debtor for IRA and college fund. Bankr. W.D. Ark. The chapter 7 trustee objected to exemptions claimed by the debtor for an IRA and a 'college fund.' The trustee did not dispute that the debtor was entitled to exempt a portion of the funds using the section 522(d)(5) 'wildcard' exemption. However, the trustee objected to the debtor's claim of exemption for the remaining value of the funds under section 522(d)(10)(E). The bankruptcy court held that the debtor was not entitled to claim exemptions under section 522(d)(10)(E) for either the IRA or the college fund because the funds were not payments received pursuant to a pension, annuity or 'similar plan or contract' within the meaning of section 522(d)(10)(E). The court determined that there is no per se exemption under section 522(d)(10)(E) for IRAs that qualify for tax exempt status under section 408 of the Internal Revenue Code; rather, Congress intended to exempt section 408 IRAs to the extent they are 'similar plans or contracts' payable 'on account of illness, disability, death, age or length of service' and 'reasonably necessary for the support of the debtor and any dependent of the debtor.' In this case, based on the evidence presented, the court found that both accounts were simply savings accounts set up to pay for the college education of the debtor's son. The court also held that the debtor was not entitled to the exemption claimed because his right to payment from the funds was not on account of illness, disability, death, age or length of service, and because the funds were not reasonably necessary for the support of the debtor or a dependent. In re Skipper, 2002 Bankr. LEXIS 189, 274 B.R. 807 (Bankr. W.D. Ark. February 12, 2002) (Fussell, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.09[10]

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9th Cir.

Arizona debtor could not avoid condominium association's lien. Bankr. D. Ariz. The chapter 13 debtor moved to avoid a lien asserted by a condominium association on the grounds that it impaired his homestead exemption. The lien was based on a judgment obtained by the association in connection with an action brought against the debtor to enforce and collect a previously asserted lien for the debtor's unpaid condominium assessments. The bankruptcy court noted that in order to prevail on his motion, the debtor had to establish the following four factors: (1) he had an interest in his homestead property; (2) he was entitled to a homestead exemption; (3) the condominium association's lien impaired the exemption; and (4) the lien was judicial rather than statutory. The parties did not dispute the existence of the first three factors; thus, the dispositive issue before the court was whether the lien asserted by the association was statutory. The bankruptcy court held that the condominium association's lien was a statutory lien as defined by section 101(53); therefore, the lien could not be avoided for impairing the debtor's homestead exemption. The court rejected the debtor's argument that the lien was judicial because the condominium association obtained a judgment in an enforcement action and the lien was not truly created or choate until that judgment was entered. The court also rejected the debtor's assertion that since the definitions of judicial lien in both the state (Arizona) condominium statute and the Code contained the word 'levied,' the original assessment by the association was a judicial lien even prior to the commencement of the enforcement action. Reece v. Parkview Villas of Scottsdale Owners' Ass'n (In re Reece), 2001 Bankr. LEXIS 1820, 274 B.R. 515 (Bankr. D. Ariz. August 24, 2001) (Curley, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.11

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10th Cir.

Debtor who willfully failed to comply with court order was enjoined from refiling chapter 13 case. Bankr. D. Wyo. The court directed the 13 debtor, who was 'seriously in default,' to submit a plan modification, make payments on the default and provide information to the chapter 13 trustee by a date certain. Although a modification was submitted, the debtor did not comply with any other terms of the order and, two months after the deadlines established by the order, the court dismissed the chapter 13 case. Soon thereafter, the debtor received a federal income tax refund with which she paid the arrearage on her home mortgage and purchased auto insurance. When she filed her second chapter 13 petition, she failed to disclose the payment on her mortgage. Upon a creditor's motion to dismiss for the willful failure to abide by a court order, the bankruptcy court held that the debtor was ineligible for chapter 13 due to her intentional failure to comply with a court order. The debtor deliberately and voluntarily failed to provide information to the trustee and cure her default, even though she knew she would soon receive a large income tax refund. She deliberately waited for the court to dismiss her case and, thus, further delayed her creditors. In light of the calculated nature of her actions and her lack of good faith, the debtor was enjoined from filing a chapter 11 or 13 case for 180 days. In re Basse, 2001 Bankr. LEXIS 1813, 272 B.R. 16 (Bankr. D. Wyo. November 8, 2001) (McNiff, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2;109.08

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11th Cir.

Moving party was not entitled to judgment as a matter of law. Bankr. N.D. Ala. The chapter 7 trustee initiated an adversary proceeding against the IRS, and the IRS moved for summary judgment. The IRS contended that the federal tax obligation of the debtor professional corporation's principal was secured by property owned by the corporation under an alter ego theory. In support of its motion for summary judgment, the IRS asserted that the principal's sole signatory authority over all of the debtor's bank accounts evidenced the misuse of his power over the debtor. The trustee argued that someone other than the debtor's principal could have written checks for the debtor. The bankruptcy court denied the IRS's motion, holding that genuine issues of material fact precluded summary judgment. The court had to reconcile who had control over the payment of expenses in the corporation, which was a factual issue in dispute. Toffel v. United States (In re M. Jack Hollingsworth & Assocs., P.C.), 2002 Bankr. LEXIS 207, - B.R. - (Bankr. N.D. Ala. January 29, 2002) (Cohen, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:7056

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D.C. Cir.

Equitable considerations warranted remand of product liability cases. D.C. The plaintiffs in several asbestos product liability cases moved to remand the removed cases back to the District of Columbia Superior Court. The defendant manufacturer had removed the cases on the grounds that the actions were 'related to' the chapter 11 case of a different asbestos producer. The defendant had a pending claim of indemnification against the debtor with respect to certain friction product claims, the reference of which had been provisionally withdrawn from the Delaware Bankruptcy Court by the Delaware District Court. The plaintiffs asserted that the District of Columbia District Court lacked subject matter jurisdiction over the removed actions because the claims in question were not 'related to' the debtor's chapter 11 proceedings. The defendant moved to stay consideration of the remand motion and argued that the court lacked jurisdiction to remand the actions because the Delaware District Court's provisional order was still in effect. The district court denied the defendant's motion to stay, holding that equitable remand of the product liability cases was warranted to avoid disruption to the superior court docket and prejudicial delay to the other litigants in the cases. The court noted that the defendant removed whole cases and not only the claims against itself, causing a legal monkey wrench to have been thrown into the dockets of the state courts where the asbestosis cases were pending. Nevertheless, because the Delaware District Court order was applicable to the claims against the defendant, the cases were remanded without the defendant's friction product claims. Weaver v. Owens-Corning Fiberglas Corp., 2002 U.S. Dist. LEXIS 3910, 275 B.R. 119 (D.C. March 6, 2002) (Robertson, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.07[5]

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