Collier Bankruptcy Case Update August-12-02
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A Weekly Update of Bankruptcy and Debtor/Creditor Matters
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.
August 12, 2002
CASES IN THIS ISSUE
- 1st Cir.
§ 523(a) Creditor’s motion for exception to discharge denied due to insufficient evidence of intent to deceive.
Northeast Credit Union v. Butterworth (In re Butterworth) (Bankr. D.N.H.)
2d Cir.
§ 304 Modification of injunction prohibiting action against debtor during pendency of foreign proceeding denied.
In re Bd. of Dirs. of Hopewell Int’l Ins. Ltd. (Bankr. S.D.N.Y.)§ 524 IRS violated discharge injunction by holding a refund and continuing to demand payment for 14 years.
Atkins v. U.S. (In re Atkins) (Bankr. N.D.N.Y.) 082022
3d Cir.
§ 1113 Debtor’s motion to reject collective bargaining agreement denied due to difficulty in assessing fairness and equity of proposal.
Nat’l Forge Co. v. Indep. Union of Nat’l Forge Employees (In re Nat’l Forge Co.) (Bankr. W.D. Pa.)
4th Cir.
§ 506 Tax refund, where debtor filed taxes jointly with nondebtor spouse, was not exempt tenancy-by-the-entirety property but property of the estate.
Valley Inn v. B.O.A. Wholesale (In re The Valley Inn) (Bankr. W.D. Va.)
5th Cir.
§ 105 Chapter 7 case dismissed due to inaccurate filings by debtor who was a bankruptcy attorney.
In re Solomon (Bankr. E.D. Tex.)§ 109(e) As judgment in favor of state against debtor was unliquidated at time of filing, Chapter 13 case did not exceed unsecured debt limit.
In re Horne (Bankr. E.D. Tex.)§ 362(a) Creditor who exceeded terms of limited lifting of stay found in contempt of court.
Thornburg v. Lynch (In re Thornburg) (Bankr. E.D. Tex.)
6th Cir.
§ 101(5)(B) Injunctive relief is not a claim subject to discharge in bankruptcy.
River View Land Co. v. Bucak (In re Bucak) (Bankr. W.D. Tenn.)§ 523(a)(6) Claim arising from debtor’s negligent operation of motor vehicle dischargeable.
Guthrie v. Kokenge (In re Kokenge) (Bankr. E.D. Tenn.)
7th Cir.
§ 548 Service fees and commissions earned by broker in good faith from debtor engaged in Ponzi scheme were not avoidable fraudulent transfers.
First Commer. Mgmt. Group v. Reinhardt (In re First Commer. Mgmt. Group) (Bankr. N.D. Ill.)
8th Cir.
§ 522(b)(2)(B) Tax refund where debtor filed jointly with nondebtor spouse, was not exempt tenancy-by-the-entirety property but property of the estate.
In re Walker (Bankr. W.D. Mo.)
9th Cir.
§ 362 Foreclosure sale to bona fide purchaser in violation of stay voided.
Mitchell v. Mitchell (In re Mitchell) (B.A.P. 9th Cir.)§ 541(a)(1) Chapter 7 debtors’ unscheduled equitable interest in real property was property of the estate and not subject to tax foreclosure.
U.S. v. Gabel (N.D. Cal.)
10th Cir.
§ 365(a) After initial dismissal for improper notice, debtor’s renewed motion for rejection of unexpired commercial leases granted nunc pro tunc.
In re CCI Wireless, LLC (Bankr. D. Colo.)§ 544 Trustee’s amended complaint including § 548 claim related back to original claims under § 544 and state law.
Malloy v. Mulkey Tire, Inc. (In re Universal Factoring Co.) (Bankr. N.D. Okla.)
11th Cir.
§ 362 Service of civil contempt warrant not barred by automatic stay.
Goodman v. Albany Realty Comp. (In re Goodman) (Bankr. M.D. Ga.)§ 362(a) Creditor’s post-filing repossession of equipment and refusal to turn it over to trustee on request violated stay.
Mullis v. USA Restaurant Equip. Co. (In re Harsh) (Bankr. M.D. Ga.)§ 523(a)(6) Injuries caused to creditor by business of which debtor was sole shareholder did not prevent discharge.
Ford Motor Credit Co. v. Moody (In re Moody) (Bankr. S.D. Ga.)
Collier Bankruptcy Case Summaries
1st Cir.
Creditor’s motion for exception to discharge denied due to insufficient evidence of intent to deceive. Bankr. D.N.H. PROCEDURAL POSTURE: The debtor filed a petition under Chapter 13 of the Bankruptcy Code, which was dismissed. The debtor then filed a petition under Chapter 7. The creditor filed a complaint against the debtor seeking an exception to discharge of monies owed pursuant to 11 U.S.C. § 523(a)(2)(B). OVERVIEW: The court found that in order to satisfy its burden under 523(a)(2)(B), the creditor was required to prove that there was a statement in writing, that it was materially false concerning the debtor’s financial condition, that the creditor reasonably relied on this false statement, and that the debtor made the false statement with the intent to deceive. The court found that the credit increase form was not an equation of the assets and liabilities of the debtor. The court found that the term 'base annual income' was not defined and was ambiguous in the context of one running a business as a 'doing business as' and not as a separate legal entity. The application was not a financial statement that asked for a complete listing of the debtor’s assets and liabilities. There was no evidence that the creditor relied on the base annual income entry on the form in granting the credit card limit increase. The court found that there was insufficient evidence of the debtor’s intent to deceive.Northeast Credit Union v. Butterworth (In re Butterworth), 2002 Bankr. LEXIS 645, 279 B.R. 31 (Bankr. D.N.H. May 28, 2002) (Vaughn, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.01
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2nd Cir.
Modification of injunction prohibiting action against debtor during pendency of foreign proceeding denied. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Movant, a creditor, sought modification of a permanent injunction issued in August 1999 granting debtor’s petition for ancillary relief under 11 U.S.C. § 304. The injunction prohibited commencement or continuation of any action or proceeding against debtor or its United States assets in violation of debtor’s Bermuda 'Scheme of Arrangement.' OVERVIEW: The court had earlier held that a Bermuda Injunction and the Bermuda 'Scheme of Arrangement' were entitled to comity and that the creditor would not be unfairly prejudiced by entry of a permanent injunction, prohibiting it from pursuing its claims against the debtor in the United States other than through the Scheme, and requiring that it arbitrate any dispute with the debtor under Bermuda law. In its present motion, the creditor argued that it was entitled to a modification of the permanent injunction under the equitable provisions of Fed. R. Civ. P. 60(b)(5). The creditor’s argument for modification was principally based on alleged critical changes in the circumstances since 1999, particularly the fact that the debtor had fully carried out its Scheme of Arrangement, and had paid all of its creditors. The court did not find any changes in the facts or the law since its entry that would have justified disturbing its conclusion that the provision of the Scheme providing for a uniform arbitration procedure in Bermuda under Bermuda law was entitled to be enforced in the United States. The court also was not persuaded by arguments alleging maladministration of the Scheme.In re Bd. of Dirs. of Hopewell Int’l Ins. Ltd., 2002 Bankr. LEXIS 673, – B.R. – (Bankr. S.D.N.Y. June 27, 2002) (Gropper, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:304.01
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IRS violated discharge injunction by holding a refund and continuing to demand payment for 14 years. Bankr. N.D.N.Y. PROCEDURAL POSTURE: The debtor filed an adversary action seeking damages against defendant United States ('U.S.'), alleging violations of the discharge injunction provided by 11 U.S.C. § 524. The debtor sought compensatory damages under 11 U.S.C. § 105(a), 524(a), a return of an income tax refund with interest, interest on income tax refunds that had been intercepted and later returned, and attorneys’ fees and costs under 28 U.S.C. § 2412. OVERVIEW: The U.S. received a copy of the discharge order, but ignored it, and for 14 years demanded payment of a discharged mortgage debt after the property was surrendered. It was a stream of harassment that affected the debtor mentally and physically; medical evidence was not required. The U.S. stated it had a prepetition reaffirmation agreement, but, there was no bankruptcy debtor when it was allegedly signed, and it was never filed with the court. A tax refund had been seized and held for 15 years. There were threatening collection demands. The debtor’s request of $150,000 was too large to compensate for the emotional stress shown. Damages of $30,000 were appropriate, plus return of the tax refund still being held. I.R.C. § 6343(c) did not waive sovereign immunity for interest to be awarded. The willful violation of the discharge injunction and a bad faith finding allowed an award of attorneys’ fees. A government agent had told the debtor his debt had not been discharged. Attorney’s fees under 28 U.S.C. § 2412(d)(2)(A) were increased by a cost of living increase for each year in which the work was performed, but expenses for retrieving and reopening the case were not allowed.Atkins v. U.S. (In re Atkins), 2002 Bankr. LEXIS 670, 279 B.R. 639 (Bankr. N.D.N.Y. June 18, 2002) (Littlefield, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.01
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3d Cir.
Debtor’s motion to reject collective bargaining agreement denied due to difficulty in assessing fairness and equity of proposal. Bankr. W.D. Pa. PROCEDURAL POSTURE: Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The debtor filed a motion to reject a collective bargaining agreement in accordance with 11 U.S.C. § 1113. The committee of unsecured creditors supported the motion and the union opposed the motion. OVERVIEW: Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The debtor filed a motion to reject a collective bargaining agreement in accordance with 11 U.S.C. § 1113. The committee of unsecured creditors supported the motion and the union opposed the motion.Nat’l Forge Co. v. Indep. Union of Nat’l Forge Employees (In re Nat’l Forge Co.), 2002 Bankr. LEXIS 639, 279 B.R. 493 (Bankr. W.D. Pa. June 19, 2002) (Bentz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1113.01
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4th Cir.
Tax refund, where debtor filed taxes jointly with nondebtor spouse, was not exempt tenancy-by-the-entirety property but property of the estate. Bankr. W.D. Va. PROCEDURAL POSTURE: Appellant, the debtor, challenged the decision of the United States Bankruptcy Court for the Western District of Virginia to grant appellee, the creditor, attorney’s fees as secured debt. OVERVIEW: The debtor argued that the creditor was not entitled to attorney’s fees because it failed to make a demand for fees at the time of default. That, under the terms of the note, the creditor could only demand fees upon a subsequent default, and since the debtor fulfilled its obligations under the plan, there was no subsequent default. The court found that the note intended for the creditor to declare attorney’s fees due and payable as part of the note. Reading the default provision as a whole revealed that 'together with a reasonable attorney’s fee' modified 'balance due and payable' and not 'the privilege to declare.' Declaring the entire unpaid balance of the note due and payable was a condition precedent to obtaining attorney’s fees. Rather than requiring two separate declarations, 'together with a reasonable attorney’s fee' simply indicated that the defaulting debtor was required to pay attorney’s fees in addition to immediately satisfying the debt. The debtor’s argument that the deed of trust only secured the principal amount plus interest and not any other obligations under the note contradicted state law. The plan also revealed that the fees were part of the secured debt.Valley Inn v. B.O.A. Wholesale (In re The Valley Inn), 2002 U.S. Dist. LEXIS 11576, – B.R. – (Bankr. W.D. Va. June 21, 2002) (Michael, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01
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5th Cir.
Chapter 7 case dismissed due to inaccurate filings by debtor who was a bankruptcy attorney. Bankr. E.D. Tex. PROCEDURAL POSTURE: A creditor filed a motion to dismiss the debtor’s Chapter 7 bankruptcy pursuant to 11 U.S.C. §§ 105, 707(a), pleading as cause the debtor’s lack of good faith. OVERVIEW: There was no evidence that any debt was non-dischargeable under 11 U.S.C. § 523. No complaints under § 523 or 11 U.S.C. § 727 had been filed. But, the debtor’s schedules and statement of financial affairs were inaccurate in violation of his duties under 11 U.S.C. § 521, and no amendments had been filed. A statement that the debtor made monthly charitable contributions of $400 was an error. Other inconsistencies, such as listing debts that had previously been paid, were identified. The court was disturbed that all of the mistakes were made in the debtor’s favor and were designed to reach a result favorable to him. The schedules were not prepared haphazardly or in haste. He knew or should have known of the errors, as he was a bankruptcy attorney. If he did not know of the inaccuracies, it was by choice. Regardless of whether good faith was required under 11 U.S.C. § 707(a) or whether it was lacking, the errors were the type of malfeasance that the court was empowered to protect against through 11 U.S.C. § 105. The inaccuracies as to unsecured nonpriority creditors inflated the debt to exceed the Chapter 13 illegibility limits under 11 U.S.C. § 109(e).In re Solomon, 2002 Bankr. LEXIS 655, 277 B.R. 706 (Bankr. E.D. Tex. March 12, 2002) (Sharp, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.01
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As judgment in favor of state against debtor was unliquidated at time of filing, Chapter 13 case did not exceed unsecured debt limit. Bankr. E.D. Tex. PROCEDURAL POSTURE: In a Chapter 13 action, before the court was the trustee’s motion to dismiss. OVERVIEW: Several months after the debtor filed a voluntary petition for relief under Chapter 13, the State of Texas Office of the Attorney General (Texas) filed an unsecured claim in the case in the amount of $485,375.00. The unsecured claim of Texas resulted from a judgment entered by a Texas district court against a corporation in which the debtor was an officer and a 50% shareholder as of the date of filing his schedules and statement of financial affairs. The trustee sought dismissal of the case on the basis that the debtor did not qualify for relief under Chapter 13 because his unsecured debt exceeded the limits set forth in 11 U.S.C. § 109(e). The court concluded that the debt owed to Texas by the debtor, as reprehensible as his conduct may have been, could not have been liquidated on the date of the filing of the petition under any theory of what constituted a liquidated debt. In re Horne, 2002 Bankr. LEXIS 653, 277 B.R. 712 (Bankr. E.D. Tex. March 12, 2002) (Sharp, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.06
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Creditor who exceeded terms of limited lifting of stay found in contempt of court. Bankr. E.D. Tex. PROCEDURAL POSTURE: The debtor filed a motion for contempt, sanctions, and attorney fees. The debtor also moved to a declare a judgment lien void. OVERVIEW: An automatic stay was lifted for the specific purpose of allowing the creditor to pursue a motion for enforcement in connection with a state court divorce settlement agreement. The creditor filed an abstract of judgment with respect to that judgment entered in post divorce enforcement proceedings. The debtor filed a motion in contempt. The court held that neither the doctrine of res judicata nor the law of the case precluded judgment. The court found that the creditor’s argument that she believed she had relief from the stay to fully pursue her motion for enforcement in family law court wholly lacked merit. The debtor averred that the creditor violated the automatic stay by filing a notice of lis pendens against his real property. The creditor denied the allegation and denied that the act of filing the same was an attempt to create a lien on the property. However, the court held that the filing the notice of lis pendens was a violation of the automatic stay because it was an act beyond the scope of the relief requested.Thornburg v. Lynch (In re Thornburg), 2002 Bankr. LEXIS 654, 277 B.R. 719 (Bankr. E.D. Tex. March 12, 2002) (Sharp, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
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6th Cir.
Injunctive relief is not a claim subject to discharge in bankruptcy. Bankr. W.D. Tenn. PROCEDURAL POSTURE: A creditor, a hunting club, sought a determination that its judgment against the debtor for attorney’s fees incurred during the pursuit of a civil action for injunctive relief, due to the debtor’s altercation with another guest on the hunting club’s premises, was non-dischargeable under 11 U.S.C. § 523(a)(6). The creditor moved for a judgment on the pleadings, arguing that collateral estoppel applied to the state court judgment. OVERVIEW: The injunctive relief was not a 'claim' subject to discharge by virtue of 11 U.S.C. § 101(5)(B). But, there was insufficient evidence from the state court action that the debtor actually intended for his conduct to cause a willful and malicious injury to the creditor, a corporate entity, or its property, under 11 U.S.C. § 523(a)(6). The state court complaint alleged that the debtor willfully, maliciously, brutally, and physically assaulted another guest. Other than a breach of the hunting club rules, there was no substantive proof showing a cognizable 'willful and malicious' injury to the creditor, its land, or its property. The willful and malicious injury was personal to the other guest. The creditor suffered the unfortunate effects of one its guests, the debtor, materially breaching the terms of a use agreement which defined certain proscribed conduct. But, such conduct regarding the creditor could not under the circumstances be defined as a willful and malicious injury. Assuming arguendo that the debtor willfully and maliciously injured the other guest, such injury could not be vicariously imputed in favor of the creditor so as to except its attorney’s fees from discharge. River View Land Co. v. Bucak (In re Bucak), 2002 Bankr. LEXIS 656, 278 B.R. 488 (Bankr. W.D. Tenn. May 17, 2002) (Kennedy, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:105.05
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Claim arising from debtor’s negligent operation of motor vehicle dischargeable. Bankr. E.D. Tenn. PROCEDURAL POSTURE: Creditors, asserting they were injured while they were passengers in a car being driven by the debtor, and that the debtor had been attempting to race against another car on a snowy and winding mountain road at excessive speeds, filed a complaint under 11 U.S.C. § 523(a)(6) to have the personal injury debts declared non-dischargeable. The debtor filed a motion for summary judgment to which the creditors objected. OVERVIEW: While the debtor’s version of the facts was less detailed than that of the creditors, he did acknowledge that the vehicle might have been operated in a reckless manner. The court held that § 523(a)(6) required deliberate or intentional injury. Even in a light most favorable to the creditors, the court found the creditors had failed to make a sufficient showing on the one material element of their case — the willfulness of the debtor’s conduct. The creditors asked the court to infer, from the 'outrageousness' of the debtor’s driving, that he 'willfully' wrecked his car and caused injury to the creditors. However, their evidence, if believed in full, showed only that the debtor intentionally drove his car in an irresponsible and unjustified manner at high speeds while intentionally racing on a winding mountain road. There was not one shred of evidence to support that the debtor intended to, or believed it was 'substantially certain' that he would, injure the creditors by wrecking his car. In sum, the evidence pointed only to the conclusion that the debtor acted recklessly. Debts arising from recklessly or negligently inflicted injuries did not fall within the compass of § 523(a)(6). Guthrie v. Kokenge (In re Kokenge), 2002 Bankr. LEXIS 649, – B.R. – (Bankr. E.D. Tenn. June 4, 2002) (Stair, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12[2]
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7th Cir.
Service fees and commissions earned by broker in good faith from debtor engaged in Ponzi scheme were not avoidable fraudulent transfers. Bankr. N.D. Ill. PROCEDURAL POSTURE: The trustee filed a complaint against the defendant, a broker for the debtor engaged in a Ponzi scheme, to avoid fraudulent transfers under 11 U.S.C. §§ 544, 548, and 740 Ill. Comp. Stat. 160/5(a), of the Illinois Uniform Fraudulent Transfer Act ('UFTA'). On cross motions for summary judgment, the broker argued that in serving as a broker and recruiting purchasers of pay telephones from the debtor, he had no knowledge of the fraudulent scheme. OVERVIEW: The complaint pled constructive fraud. The proper analysis looked to the actual transaction between the debtor and the broker, and the court had to measure what was given and received in that transaction. There was a distinction between profits and commissions in the context of a Ponzi scheme and a fraudulent transfer action. The broker performed services for the debtor by recruiting investors, and then performed follow up services with respect to those investors. To the extent he did so, the broker had a claim against the debtor equal to the value of his services, thus, the 11 U.S.C. § 548(a)(1)(B) claim failed. The commissions did not deplete the estate because the debtor received adequate consideration, or reasonably equivalent value, in the form of a release of the broker’s claims for unpaid commissions. The debtor’s obligation to pay the commissions was a debt that was satisfied by paying the broker. The satisfaction of that obligation fell within 11 U.S.C. § 548(d)(2)(A). The commissions were within the range of commissions within the industry. The broker acted in good faith under 11 U.S.C. § 548(c) when he received his commissions. The analysis under UFTA was the same.First Commer. Mgmt. Group v. Reinhardt (In re First Commer. Mgmt. Group), 2002 Bankr. LEXIS 676, 279 B.R. 230 (Bankr. N.D. Ill. May 9, 2002) (Black, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.01
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8th Cir.
Tax refund where debtor filed jointly with nondebtor spouse, was not exempt tenancy-by-the-entirety property but property of the estate. Bankr. W.D. Mo. PROCEDURAL POSTURE: The Chapter 7 trustee filed a motion to compel the debtor to turnover an income tax refund, arguing the refund was property of the estate under 11 U.S.C. § 541(a)(1). The debtor claimed that the refund was due to an earned income credit ('EIC') under a joint tax return, that she and her nondebtor husband held the refund as tenants by the entirety, and the refund was exempt under Missouri law and 11 U.S.C. § 522(b)(2)(B). OVERVIEW: The debtor’s interest in the refund was property of the estate under 11 U.S.C. § 541(a)(1), and was not exempt as 'earnings' under Missouri’s garnishment statute. The debtor testified that the refund was received because of the EIC and the amount was increased because the husband’s two minor children lived with them. But, the debtor had earned all of the income for her family, and, accordingly, the refund was property in which the debtor held a legal interest; it was property of her estate. Under 11 U.S.C. § 522(b)(2)(B) and Missouri law, if the debtor held the refund as a tenant by the entirety, she could exempt the entire refund. A tax refund issued on behalf of debtors who filed a joint tax return was not per se owned by the debtors as tenants-by-the-entirety property. Congress allowed taxpayers to file joint tax returns in order to equalize the tax burden for married persons in noncommunity property states, not to effect a change of ownership of property rights as between the spouses. The joint tax return did not contain any language of conveyance. The refund was property of the bankruptcy estate, and it was not exempt as tenants-by-the-entirety property.In re Walker, 2002 Bankr. LEXIS 664, 279 B.R. 544 (Bankr. W.D. Mo. June 7, 2002) (Federman, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.02
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9th Cir.
Foreclosure sale to bona fide purchaser in violation of stay voided. B.A.P. 9th Cir. PROCEDURAL POSTURE: Appellees, the debtors, filed a Chapter 13 bankruptcy petition prior to a foreclosure sale of their residence. Appellant, a purchaser, acquired the residence without notice. He filed an action and moved for a declaration that 11 U.S.C. § 549(c) excepted the purchase from the automatic stay. The motion was denied and the purchaser appealed the denial of the United States Bankruptcy Court for the Southern District of California. OVERVIEW: The debtors’ counsel claimed that he notified the debtors’ lender of the bankruptcy filing, but the foreclosure sale proceeded. The purchaser later moved for an order annulling the automatic stay and validating the foreclosure sale. The purchaser alternatively requested an order declaring the foreclosure sale excepted from the automatic stay by § 549(c). The debtors opposed the motion and the bankruptcy court denied it, holding § 549(c) was not an exception to the automatic stay. The court voided the foreclosure sale. On appeal, the appellate panel determined that the only issue was whether § 549(c) was an exception to the automatic stay, which would then validate the postpetition foreclosure sale to the purchaser, who was a bona fide purchaser ('BFP') without notice of the debtors’ bankruptcy petition. The court found that Congress saw fit to protect BFPs in § 549 but not in 11 U.S.C. § 362. This appeared to give greater protection to BFPs who purchased from debtors than to those purchasing at sales violating an automatic stay. A transfer of estate property to a BFP was not an exception to § 362.Mitchell v. Mitchell (In re Mitchell), 2002 Bankr. LEXIS 663, 279 B.R. 839 (B.A.P. 9th Cir. June 17, 2002) (Brandt, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
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Chapter 7 debtors’ unscheduled equitable interest in real property was property of the estate and not subject to tax foreclosure. N.D. Cal. PROCEDURAL POSTURE: Plaintiff United States sued defendant taxpayers to reduce tax assessments to judgments and to foreclose tax liens against the taxpayers’ residence. The taxpayers objected to certain evidence and moved to dismiss the complaint for lack of subject matter jurisdiction. The court held a trial on the matter. OVERVIEW:The parties stipulated that the taxpayers did not pay federal income taxes for four years and owed certain taxes and penalties for those years. The only issue for trial was whether the Internal Revenue Service ('IRS') failed to properly assess the taxes and penalties. The court admitted the assessment forms and the summary records of assessment prepared by the IRS because they were self-authenticating public documents that complied with the standards required under 26 C.F.R. § 302.6203-1. Moreover, the assessment forms sufficiently identified the taxpayers and they had submitted no contrary evidence indicating that the assessments were invalid. Thus, the assessments were valid and final judgment was entered in favor of the United States. Nevertheless, the court granted the motion to dismiss the claims for foreclosure on the taxpayers’ residence because to the extent that the taxpayers retained an unscheduled equitable interest in the real property after their Chapter 7 bankruptcy, that interest remained property of the bankruptcy estate even though the bankruptcy case had closed. Thus, only the bankruptcy trustee had standing to pursue a claim with respect to the residence.U.S. v. Gabel, 2002 U.S. Dist. LEXIS 11533, – B.R. – (N.D. Cal. March 25, 2002) (Brown Armstrong, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.04
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10th Cir.
After initial dismissal for improper notice, debtor’s renewed motion for rejection of unexpired commercial leases granted nunc pro tunc. Bankr. D. Colo. PROCEDURAL POSTURE: The Chapter 11 debtor filed a motion under 11 U.S.C. § 365(a) to reject unexpired real property shopping center leases, which was dismissed for inadequate notice. The debtor filed a renewed motion to reject the leases nunc pro tunc to the date of the original motion. The creditor lessors objected, and moved to compel payments of postpetition rents under 11 U.S.C. § 365(d)(3), to which the debtor and the creditors’ committee objected. OVERVIEW: The debtor and the committee argued that rent was due and payable on February 1st, the petition was filed February 8th, and thus, the rent should not be prorated, and all of the February rent was a prepetition claim. The court adopted the 'performance date approach' under the circumstances. The obligation to pay rent fell on the first day of the month. The leases did not have a prorated rent clause. The debtor’s obligation arose when the debtor became legally obligated to perform, that was, on the first. To prorate the February rent would not comport with the terms of the leases. Allowing a proration when the leases did not allow for it would render a windfall to the lessors and would be a significant detriment to the unsecured creditors and the debtor. The equities were well balanced; it was an ordinary course of business circumstance. Approving the rejection nunc pro tunc to the date of the original motion, the court found most or perhaps all of the leased premises were vacated before, on, or shortly after the bankruptcy was filed. While the original motion’s notice was not proper, it did not appear that the debtor was dilatory or abusing the bankruptcy system in its actions.In re CCI Wireless, LLC, 2002 Bankr. LEXIS 650, 279 B.R. 590 (Bankr. D. Colo. June 24, 2002) (Brooks, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.03
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Trustee’s amended complaint including § 548 claim related back to original claims under § 544 and state law. Bankr. N.D. Okla. PROCEDURAL POSTURE: The trustee filed a complaint to recover payments from a creditor under 11 U.S.C. § 544 and the Oklahoma Uniform Fraudulent Transfer Act (UFTA). An amended complaint added a claim under 11 U.S.C. § 548. A pretrial order was entered. The creditor moved to dismiss, asserting a failure to plead fraud with particularity under Fed. R. Civ. P. 9(b), and argued the amended complaint was filed after 11 U.S.C. § 546(a)’s period of limitations. OVERVIEW: The creditor argued that the amended complaint did not incorporate the first complaint’s claims. But, that was irrelevant because the pretrial order, filed four months earlier, superceded the pleadings. Pleading fraud with particularity did not apply, because the creditor was aware of details from discovery. Relation back under Fed. R. Civ. P. 15(c) applied to the amended complaint which merely added a claim as to transfers during the year before the bankruptcy. It related back because the first complaint sought recovery of transfers during the four years before the bankruptcy. Assuming that the elements of UFTA were equivalent to 11 U.S.C. § 548, the § 548 claim would be encompassed by the UFTA count in the first complaint. The amended complaint incorporated by reference the first complaint’s factual allegations, including that the debtor was engaged in a continuing Ponzi scheme; its allegations of transfers during the year before the bankruptcy could be seen as springing from the same underlying pattern of conduct as alleged in the first complaint.Malloy v. Mulkey Tire, Inc. (In re Universal Factoring Co.), 2002 Bankr. LEXIS , 279 B.R. 297 (Bankr. N.D. Okla. June 12, 2002) (Michael, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.01
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11th Cir.
Service of civil contempt warrant not barred by automatic stay. Bankr. M.D. Ga. PROCEDURAL POSTURE: The debtor filed a motion for contempt and request for an emergency hearing. The court held a hearing and had to decide whether to issue a permanent injunction, based on the automatic stay of 11 U.S.C. § 362, against service of an arrest warrant which had been issued for the debtor. OVERVIEW: The creditor was unable to collect a judgment from the debtor, and the debtor did not respond to discovery requests or orders. The state court issued a warrant for the debtor’s arrest. The debtor filed for bankruptcy, and the bankruptcy court granted the debtor a preliminary injunction against service of the warrant, and then the debtor sought a permanent injunction. The bankruptcy court found that the warrant in this case was in the nature of civil contempt. A contempt order that allowed the debtor to purge himself of contempt, as the warrant here did, was civil. The creditor sought to have the bankruptcy court dissect the purposes behind the warrant and hold that to the extent it was used to force the debtor to comply with the creditor’s efforts to enforce a judgment, it was controlled by the automatic stay of 11 U.S.C. § 362, but to the extent it issued due to the debtor’s disregard for the authority of the state court, the automatic stay did not apply. However, the bankruptcy court found that the purposes were inextricably intertwined and were not able to be severed. The court found that an injunction was not necessary since the automatic stay fulfilled that purpose.Goodman v. Albany Realty Comp. (In re Goodman), 2001 Bankr. LEXIS 1917, 277 B.R. 839 (Bankr. M.D. Ga. October 15, 2001) (Walker, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01
ABI Members, click here to get the full opinion.
Creditor’s post-filing repossession of equipment and refusal to turn it over to trustee on request violated stay. Bankr. M.D. Ga. PROCEDURAL POSTURE: The trustee filed a complaint to avoid the transfer of a security interest under 11 U.S.C. § 544, for turnover of the debtor’s restaurant equipment, and for damages for violating the automatic stay under 11 U.S.C. § 362(a), (h), because the creditors refused to turnover the equipment after the trustee demanded a turnover. The court entered a default but permitted the creditors to fully participate in the pretrial conferences and the trial. OVERVIEW: The equipment had deteriorated and had no fair market value. The creditors had failed to perfect their security interest under Ga. Code Ann §§ 11-9-302(1), 11-9-401. The trustee’s rights as a hypothetical lien creditor took priority over the unperfected interest, under 11 U.S.C. § 544(a). Repossessing the equipment after the bankruptcy and continuing to hold it violated the automatic stay. When the creditors received the trustee’s second letter, they knew of the bankruptcy filing and of the unlawful nature of their actions. But they continued to refuse to cooperate. It was a knowing and willful violation for which the trustee could recover damages, costs, and attorney fees under 11 U.S.C. § 362(h). The value of the equipment was less than the Rev. Proc. 87-56, 1987-2 C.B. 674, depreciated value based on the purchase price. The creditors, who were not nationals, were aware of the law but preferred to remain ignorant of its requirements. Punitive damages were appropriate, given that the creditors refused to comply with the court’s order to disclose the location of the equipment, and did not comply until the first trial date. Mullis v. USA Restaurant Equip. Co. (In re Harsh), 2001 Bankr. LEXIS 1926, 277 B.R. 833 (Bankr. M.D. Ga. August 27, 2001) (Walker, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03
ABI Members, click here to get the full opinion.
Injuries caused to creditor by business of which debtor was sole shareholder did not prevent discharge. Bankr. S.D. Ga. PROCEDURAL POSTURE: The creditor, secured by a floor-plan financing arrangement on the debtor’s automobile dealership, filed a complaint against the debtor to determine dischargeability under 11 U.S.C. § 523(a)(6). The creditor asserted that that the dealership was 'out of trust,' because proceeds from the sales of five vehicles, representing the creditor’s collateral, were not remitted by the dealership as required by the floor-plan agreement. OVERVIEW: The debtor, the dealership’s sole shareholder, was unaware of irregularities until the manager, hired on the creditor’s approval, informed the debtor. The debtor immediately shut down the business to prevent further losses and notified the creditor. The debtor was not directly involved with the dealership’s day-to-day operations. The creditor had refused to approve the debtor’s first choice for manager and was actively involved in overseeing the financing with regular inspections. The creditor’s employee had done an inspection just days before the debtor was told of the out-of-trust position and found no problems. By placing responsibility for floor-plan financing with a man who had been approved by the creditor and submitting to regular inspections, it could not be said that the creditor was substantially certain to be injured by the debtor’s actions under § 523(a)(6). Although several checks were issued to other creditors after the out-of-trust position was known, no segregated account was required, and the creditor knew that the funds were commingled. Regardless of whether the dealership willfully inflicted injury on the creditor, the debtor was not actively involved.Ford Motor Credit Co. v. Moody (In re Moody), 2001 Bankr. LEXIS 1916, 277 B.R. 865 (Bankr. S.D. Ga. October 5, 2001) (Walker, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12[2]
Collier Bankruptcy Case Update June-30-03
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.
June 30, 2003
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 523(a)(8)
Debtor, unable to utilize
law degree due to corroborated
mental illness was entitled to
undue hardship discharge of student
loans.
Boots v. New Hampshire Higher
Educ. Assistance Found. (In re
Boots) (Bankr. D.N.H.)
§ 1307(c)
Debtor’s petition dismissed
with prejudice, having been filed
in bad faith with sole intention
of defeating claim of ex-spouse.
In re Fleury (Bankr.
D. Mass.)
2d Cir.
§ 105(a) Bankruptcy court declined to exercise discretion to stay discovery in state court action brought by third party.
Adelphia Communs. Corp. v. Rigas (In re Adelphia Communs. Corp.) (Bankr. S.D.N.Y.)
§ 327 Accountants’ prior representation of certain creditors required that notice be given to all creditors prior to approval of employment by trustee.
In re Builders Capital and Servs., Inc. (Bankr. S.D.N.Y.)
§ 330 Debtor’s attorney not entitled to receive compensation from the estate as an administrative expense absent prior consent of trustee.
In re Burch (Bankr. W.D.N.Y.)
§ 503(b) Creditors who contracted to supply natural gas to debtor were entitled to administrative expense at contract rate as reasonable value of goods and services.
Bethlehem Steel Corp. v. BP Energy Co. (In re Bethlehem Steel Corp.) (Bankr. S.D.N.Y.)
3d Cir.§ 544(a)(3) Postpetition assignee of properly perfected municipal liens was entitled to same rights as municipality and the liens were not avoidable.
Jackson v. Capital Asset Research Corp. (In re Jackson) (Bankr. M.D. Pa.)
§ 544(b) District court erred in denying derivative standing to creditors’ committee to pursue fraudulent transfer claim on behalf of the estate.
Official Comm. of Unsecured Creditors of Cybergenics, Corp. v. Chinery (3d Cir.)
§ 547(c)(2) Payments made by debtor to creditor according to ordinary business terms were not preferential transfers.
Fulcrum Direct, Inc. v. Associated Footware, Inc. (In re Fulcrum Direct, Inc.) (Bankr. D. Del.)
4th Cir.
§ 523(a)(8)
Bankruptcy court erred
in granting undue hardship discharge
of student loans despite debtor’s
increased income and failure to
establish good faith effort to
pay.
Ekenasi v. Education Res.
Inst. (In re Ekenasi) (4th
Cir.)
28 U.S.C. §
157(d) Bankruptcy
court refused to withdraw reference
of creditor’s fraud action
that had been asserted as a nondischargeability
claim.
MC Contractors, Inc. v. Fink
(In re Fink) (W.D.N.C.)
5th Cir.
§ 362(a) Limited modification of stay granted to allow divorce court to determine debtor’s eligibility for state homestead exemption in proceeds from sale of home.
In re Forsberg (Bankr. N.D. Tex.)
§ 521(1) Former debtor’s EEOC complaint precluded due to failure to disclose the pending administrative complaint in bankruptcy.
Kamont v. West (S.D. Miss.)
28 U.S.C. § 1334 Court exercised discretionary abstention to remand state medical malpractice action related to bankruptcy of defendant practice group.
Crawford v. Paris Primary Care Group (E.D. Tex.)
6th Cir.
§ 547 Recovery of fabricated steel from debtor’s construction site by supplier was not an avoidable preference.
Spradlin v. Jarvis (In re Tri-city Turf Club, Inc.) (6th Cir.)
§ 1303 Debtors had standing to pursue state cause of action to set aside judgment of foreclosure in bankruptcy court.
York v. Bank of Am. (In re York) (Bankr. E.D. Tenn.)
7th Cir.
§ 365 Agreement between debtor and credit card sales processor was an executory contract, not a financial accommodation, that could be assumed without any additional assurances.
In re UAL Corp. (Bankr. N.D. Ill.)
8th Cir.
§ 327 Bankruptcy court properly exercised discretion in approving reasonable fees for trustee’s own law firm, acting as trustee’s attorneys.
Henricksen v. Manty (In re Henricksen) (B.A.P. 8th Cir.)
§ 327 Law firm that actively represented second largest creditor disqualified from representing trustee due to actual conflict of interest.
In re Am. Energy Training, Inc. (Bankr. W.D. Mo.)
§ 503(b)(1)(A) Bankruptcy court erred in denying administrative expense where creditor’s actions clearly benefited the estate.
Agriprocessors, Inc. v. Iowa Quality Beef Supply Network, LLC (In re Tama Beef Packing, Inc.) (B.A.P. 8th Cir.)
§ 522(b) Bankruptcy court properly held that debtors did not act fraudulently in converting non-exempt property to exempt homestead.
Williams v. Bradley (In re Bradley) (B.A.P. 8th Cir.)
§ 523(a)(6) Debt to assignee of note secured by 100 head of cattle and two trailers was not excepted from discharge where unauthorized sale of collateral was willful but without malice.
Johnson v. Logue (In re Logue) (B.A.P. 8th Cir.)
9th Cir.
§ 106(b) Bankruptcy court properly ruled that state agency had waived sovereign immunity and could not pursue collection of discharged debt.
California v. Harleston (In re Harleston) (B.A.P. 9th Cir.)
§ 523(a)(1)(C) Debtor’s tax debt excepted from discharge due to willful evasion efforts, including the creation of a three-tiered trust.
Rowen v. United States (In re Rowen) (Bankr. D. Alaska)
10th Cir.
§ 523(a)(2)(A) Post-divorce support payments made to debtor by former spouse were recoverable and nondischargeable due to debtor’s fraudulent misrepresentation that former spouse was the father of her children.
Lang v. Lang (In re Lang) (B.A.P. 10th Cir.)
Collier Bankruptcy Case Summaries
1st
Cir.
Debtor,
unable to utilize law degree
due to corroborated mental illness
was entitled to undue hardship
discharge of student loans.
Bankr. D.N.H. PROCEDURAL
POSTURE: The debtor
filed an adversary proceeding
seeking a discharge of her student
loan obligations. OVERVIEW:
The debtor received her law
degree later in life. She took
the student loans at issue in
order to obtain that degree.
She passed the bar and practiced
as an attorney for six years.
However, her mental health did
not allow her to continue practicing
law. She had, instead, taken
a job as a mail carrier. The
court applied the Brunner test
to determine whether the loans
were dischargeable. The debtor’s
schedules indicated that she
did not have any surplus income.
The debtor chose to spend more
on her phone expenses rather
than other types of discretionary
spending, and the court did
not fault with that. The debtor’s
testimony indicated that she
expected her health problems
to continue into the future.
Her testimony was collaborated
by the medical reports from
her mental health providers.
The creditor did not provide
any evidence that the debtor’s
medical condition would improve
in the immediate future. The
parties stipulated on the record
that the debtor had made a good
faith effort towards repayment
of the loan. The court therefore
found that the three prongs
of the Brunner test were met,
and the loans were dischargeable
under 11 U.S.C. § 523(a)(8).
Boots v. New Hampshire
Higher Educ. Assistance Found.
(In re Boots), 2003
Bankr. LEXIS 321, — B.R.
— (Bankr. D.N.H. March
26, 2003) (Deasy, B.J.).
Collier on Bankruptcy,
15th Ed. Revised 4:523.14
[back
to top]
ABI Members, click here to get the full opinion.
Debtor’s
petition dismissed with prejudice,
having been filed in bad faith
with sole intention of defeating
claim of ex-spouse.
Bankr. D. Mass. PROCEDURAL
POSTURE: Debtor filed
a chapter 13 petition. The court
issued an order to show cause
why it should not dismiss the
petition for lack of good faith
in filing. That matter was before
the court. OVERVIEW:
The court concluded debtor failed
to show cause. Debtor had the
single-minded intent to avoid
payment to creditor. Debtor
had dissipated over $350,000
over the year and a half between
this and previous bankruptcy
filing. She received $244,000
from a judgment and $107,416.19
after refinancing her home between
the two petitions. She only
intended to defeat a divorce
decree. Debtor was singular
in her desire to discharge creditor’s
claim in the judgment, and the
paucity of unsecured assets
compared to debtor’s equity
underscored her intent. In the
first petition, debtor expressly
listed her interest in the judgment
as to not include creditor’s
claim, yet listed creditor’s
claim on a promissory note.
Conversely, in the second petition,
she listed creditor’s
claim in the judgment as contested
because the claim was discharged
in the first petition. However,
because creditors share of the
judgment was expressly not included
in the first petition, and was
not discharged, debtor could
not assert that the claim was
discharged in this petition.
Debtor was not making an honest
effort to repay her debts to
the best of her abilities, and
her actions appeared purposeful
and planned. In
re Fleury, 2003 Bankr.
LEXIS 586, — B.R. —
(Bankr. D. Mass. June 6, 2003)
(Hillman, B.J.).
Collier on Bankruptcy,
15th Ed. Revised 8:1307.01
[back
to top]
2d Cir.
Bankruptcy
court declined to exercise discretion
to stay discovery in state court
action brought by third party.
Bankr. S.D.N.Y.
PROCEDURAL POSTURE: In
an adversary proceeding, third
party accounting firm sought,
by letter request, to be heard
in opposition to the form of an
order to be entered by the court
to implement its decision on a
motion for emergency relief staying
discovery in a state court action.
OVERVIEW: The
firm opposed provisions in the
proposed order that would permit
documentary discovery in the state
court action from the firm and
other third parties. The court
concluded that the firm had the
requisite standing, though the
firm was not a party in either
action; the firm was a prospective
target in the state court action
and was thus in the class of persons
intended to be protected by the
Private Securities Litigation
Reform Act (“PSLRA”).
The court also concluded that
it had the power to stay document
discovery from the firm and other
non-parties under 15 U.S.C §
78u-4(b)(3)(D) and 11 U.S.C §
105(a). However, the court found
that it should not exercise that
power in this case. The court’s
own needs and concerns were not
impacted by the envisioned document
discovery. The court clarified
that, although it was staying
document discovery in the state
case, it also was not authorizing
such discovery. Adelphia
Communs. Corp. v. Rigas (In re
Adelphia Communs. Corp.), 2003
Bankr. LEXIS 587, — B.R.
— (Bankr. S.D.N.Y. June
12, 2003) (Gerber, B.J.).
Collier on Bankruptcy, 15th Ed.
Revised 2:105.04 [back
to top]
ABI Members, click here to get the full opinion.
Accountants’
prior representation of certain
creditors required that notice
be given to all creditors prior
to approval of employment by trustee.
Bankr. S.D.N.Y. PROCEDURAL
POSTURE: In a chapter
7 action, the trustee made application
for the appointment of accountants
for the estate. OVERVIEW:
With the trustee’s application,
one of the directors of the proposed
accountants submitted an affidavit
which acknowledged that the firm
had previously provided services
to the trustee individually, to
various of the creditors in this
case, and to the New York State
Attorney General with respect
to its investigation of debtor’s
activities. However, the court
concluded that no consequence
attached to the accountants’
prior representation of the case
trustee individually. Prior service
to the Attorney General would
allow for continuity of function.
Without more, that relationship
did not establish a necessary
conflict of interest. The greater
concern arose from the accountants’
representation of other creditors.
It was proper to give notice to
all creditors prior to approval
of the trustee’s employment
of the proposed accountants. In
re Builders Capital and Servs.,
Inc., 2003 Bankr. LEXIS
313, 291 B.R. 258 (Bankr. S.D.N.Y.
April 2, 2003) (Bucki, B.J.).
Collier on Bankruptcy,
15th Ed. Revised 3:327.01
[back
to top]
ABI Members, click here to get the full opinion.
Debtor’s
attorney not entitled to receive
compensation from the estate as
an administrative expense absent
prior consent of trustee. Bankr.
W.D.N.Y. PROCEDURAL
POSTURE: Chapter 7 debtor’s
attorney filed an application
for compensation for legal services.
A compensation order was entered.
The United States trustee filed
an objection to the application
for compensation. The chapter
7 trustee filed an objection and
a motion for reconsideration.
OVERVIEW: The
United States trustee and the
chapter 7 trustee claimed that
the debtor’s attorney was
not entitled to receive compensation
for legal services from the debtor’s
estate. 11 U.S.C § 330 permitted
the court to award a professional
person, such as an attorney, reasonable
compensation for services rendered.
However, the attorney was required
to show that he was appointed
under 11 U.S.C § 327; the
attorney must have obtained the
pre-consent of the trustee; and
the pre-consent needed to be attached
to the application as an exhibit.
Here, the court was not prepared
to find that 11 U.S.C § 330
permitted compensation for an
attorney to be paid as an administrative
expense from the chapter 7 debtor’s
estate. In re Burch,
2003 Bankr. LEXIS 522, 292 B.R.
490 (Bankr. W.D.N.Y. April 9,
2003) (Ninfo, C.B.J.).
Collier on Bankruptcy,
15th Ed. Revised 3:330.01
[back
to top]
ABI Members, click here to get the full opinion.
Creditors
who contracted to supply natural
gas to debtor were entitled to
administrative expense at contract
rate as reasonable value of goods
and services. Bankr.
S.D.N.Y. PROCEDURAL
POSTURE: In a bankruptcy
case, the debtors, a corporation
and its subsidiaries, and two
creditors filed motions for summary
judgment with respect to contracts
for the purchase and sale of natural
gas used as fuel in the debtors’
steel plants. OVERVIEW:
The debtors asserted that the
creditors were entitled to administrative
expense payments at the prevailing
market rate for natural gas and
not the rates set forth in the
contracts. The creditors contended
that the debtors waived their
rights and were estopped from
contesting the contract price.
The court agreed with the creditors.
The debtors, in support of their
request for the utility order
with injunctive provisions, represented
that the gas deliveries under
the contracts were essential to
the debtors’ business operations
and that any interruption in service
would have substantially diminished
or eliminated the debtors’
chances for a successful reorganization.
The creditors reasonably relied
on the utility order and representations
made by the debtors that they
would be adequately protected
through administrative expense
designation for payments on the
same basis as those made prepetition
(prompt and full payment of outstanding
utility bills). Accordingly, the
court agreed with the creditors
that the debtors were estopped
from arguing against the contract
rate. Bethlehem Steel
Corp. v. BP Energy Co. (In re
Bethlehem Steel Corp.),
2003 Bankr. LEXIS 310, 291 B.R.
260 (Bankr. S.D.N.Y. March 19,
2003) (Lifland, B.J.).
Collier on Bankruptcy,
15th Ed. Revised 4:503.04 [back
to top]
ABI Members, click here to get the full opinion.
3d Cir
Postpetition
assignee of properly perfected
municipal liens was entitled to
same rights as municipality and
the liens were not avoidable.
Bankr. M.D. Pa. PROCEDURAL
POSTURE: Plaintiff bankruptcy
debtors brought an adversary proceeding
against defendant assignee of
municipal liens authorized by
the Municipal Claims and Tax Liens
Act (“MCTLA”), 53
Pa. Stat. § 7101 et. seq.,
for the debtors’ unpaid
utility charges, alleging that
the liens were avoidable under
11 U.S.C. §§ 544(a)(3)
and 545(2) as not perfected at
the time the debtors’ bankruptcy
petition was filed. OVERVIEW:
The municipality recorded the
liens and, after the debtors filed
their bankruptcy petition, assigned
the liens to the assignee. The
assignee did not record lien documents,
but the municipality filed a praecipe
stating that the liens were assigned
to the assignee. The debtors contended
that the praecipe was not effective
to perfect the municipal liens
with regard to the assignee, and
thus the liens were avoidable.
The bankruptcy court held, however,
that the postpetition assignment
of the liens entitled the assignee
to the same rights as the municipality
under the MCTLA, and therefore
the liens were not avoidable.
Jackson v. Capital
Asset Research Corp. (In re Jackson),
2003 Bankr.
LEXIS 217, 290 B.R. 527 (Bankr.
M.D. Pa. March 19, 2003) (France,
B.J.).
Collier on Bankruptcy, 15th Ed.
Revised 5:544.08 [back
to top]
ABI Members, click here to get the full opinion.
District
court erred in denying derivative
standing to creditors’ committee
to pursue fraudulent transfer
claim on behalf of the estate.
3d Cir. PROCEDURAL
POSTURE: Plaintiff committee
of unsecured creditors appealed
an order of the District Court
For the District of New Jersey,
which denied the committee derivative
standing, setting aside an order
of the bankruptcy court authorizing
the committee to sue on the bankruptcy
estate’s behalf to avoid
a fraudulent transfer in a chapter
11 proceeding. OVERVIEW:
The question was whether the United
States Supreme Court’s Hartford
decision, which interpreted 11
U.S.C. § 506(c) to foreclose
anyone other than a trustee from
seeking to recover administrative
costs on its behalf, operated
to prevent the bankruptcy court
from authorizing the suit. The
district court’s decision
of exclusivity relied on the Hartford
decision, in which the Supreme
Court determined that language
of section 506(c), which was identical
to language found in section 544(b),
foreclosed the right of any non
trustee to prosecute that action.
The district court found that
there was no principled basis
under which it could apply different
meanings to the words “the
trustee may” in separate
sections of the Bankruptcy Code.
The court concluded, however,
that 11 U.S.C. §§ 1109(b),
1103(c)(5), and 503(b)(3)(B) evinced
Congress’s approval of derivative
avoidance actions by creditors’
committees, and bankruptcy courts’
equitable powers enabled them
to authorize such suits as a remedy
in cases where a debtor in possession
unreasonably refused to pursue
an avoidance claim. Derivative
standing was a valuable tool for
creditors and courts alike in
chapter 11 proceedings. Official
Comm. of Unsecured Creditors of
Cybergenics, Corp. v. Chinery,
2003 U.S. App.
LEXIS 10703, 330 F.3d 548 (3d
Cir. May 29, 2003) (Becker, C.J.).
Collier on Bankruptcy, 15th Ed.
Revised 5:544.09 [back
to top]
ABI Members, click here to get the full opinion.
Payments
made by debtor to creditor according
to ordinary business terms were
not preferential transfers. Bankr.
D. Del. PROCEDURAL
POSTURE: Plaintiff debtor
filed suit, seeking to avoid certain
payments to defendant creditor
as preferential transfers. The
creditor asserted certain affirmative
defenses and filed a counterclaim,
and the debtor moved for summary
judgment. OVERVIEW:
As to the alleged preference payments
of $60,000, the transfers were
not avoidable. The record established
that there was no material variation
in their relationship pre- and
post-filing. Thus, the payments
at issue were according to ordinary
business terms and qualified under
11 U.S.C. § 547(c)(2) as
an exception to preference payments.
As to the allegedly abandoned
shoes, there was insufficient
evidence to establish that the
goods were abandoned. Silence
was insufficient to demonstrate
abandonment. The creditor acknowledged
that it agreed to store the goods
for the debtor for a storage fee
and that it agreed to try to sell
the goods on behalf of the debtor.
Moreover, the creditor did not
file a motion seeking to have
the goods abandoned as required
by 11 U.S.C. § 554. As to
the unpaid invoice issued by the
debtor to the creditor, the defense
of new value was not available
and the debtor had established
that it was owed $98,064.55. However,
whether the creditor was entitled
to offset any of that amount against
its alleged damages for the debtor’s
alleged breach of contract required
further evidence. Therefore, entry
of a judgment on that issue was
deferred. Fulcrum
Direct, Inc. v. Associated Footware,
Inc. (In re Fulcrum Direct, Inc.),
2003 Bankr. LEXIS 318, —
B.R. — (Bankr. D. Del. April
14, 2003) (Fitzgerald, C.B.J.).
Collier on Bankruptcy,
15th Ed. Revised 5:547.04[2] [back
to top]
ABI Members, click here to get the full opinion.
Bankruptcy
court erred in granting undue
hardship discharge of student
loans despite debtor’s increased
income and failure to establish
good faith effort to pay.
4th Cir. PROCEDURAL
POSTURE: Appellant lenders
appealed an order of the United
States District Court for the
Southern District of West Virginia,
affirming the bankruptcy court’s
order discharging appellee debtor’s
student loan debts pursuant to
11 U.S.C. § 523. OVERVIEW:
The bankruptcy court clearly erred
in finding that the debtor met
his burden of establishing the
Brunner factors and, therefore,
erred in discharging the student
loan obligations based upon the
record before it. By the time
of the trial, the debtor’s
income was nearly double the income
upon which the plan was originally
based. The evidence of the debtor’s
projected income and expenses
was simply too speculative to
substantiate the findings made
by the bankruptcy court on the
issue. Also, it was inappropriate
for the bankruptcy court to consider
a purported obligation to pay
a foreign support order which
was not legally enforceable and
which was not being fulfilled
in order to relieve the debtor
of a legally enforceable obligation
to pay student loan debts guaranteed
by the federal government. Further,
the debtor failed to prove that
he had made good faith efforts
to repay the loans, and the bankruptcy
court clearly erred in finding
otherwise. The debtor filed the
adversary proceeding to discharge
the student loan debt in its entirety
within a mere three months of
obtaining confirmation of the
plan. Ekenasi v. Education
Res. Inst. (In re Ekenasi), 2003
U.S. App. LEXIS 7157, 325 F.3d
541 (4th Cir. April 16, 2003)
(Traxler, C.J.).
Collier on Bankruptcy, 15th Ed.
Revised 4:523.14 [back
to top]
ABI Members, click here to get the full opinion.
Bankruptcy
court refused to withdraw reference
of creditor’s fraud action
that had been asserted as a nondischargeability
claim. W.D.N.C. PROCEDURAL
POSTURE: In an adversary
proceeding arising from defendant
debtors’ chapter 11 bankruptcy
proceeding, plaintiff creditor
sued the debtors. Pursuant to
28 U.S.C § 157(d) and (e),
the creditor moved to have the
district court withdraw its reference
of the matter to the bankruptcy
court. OVERVIEW:
The creditor argued that since
it would not consent to a jury
trial before the bankruptcy court
and because the bankruptcy court
was prohibited by 28 U.S.C §
157(e) from conducting a jury
trial without its consent, no
jury trial of the adversary proceeding
could be held absent withdrawal
of the reference by the district
court. Thus, it contended, cause
for withdrawal existed. It also
argued that cause existed in that
the matter was state law-dominated
and not dependent on other matters
being considered by the bankruptcy
court in its administration of
the case. The creditor’s
argument had force only if it
was entitled to a jury trial.
In bringing the dischargeability
action, the creditor did not have
the right to a jury trial with
respect to any common law claims
on which its claim of nondischargeability
was based. The court was unpersuaded
by the creditor’s argument
that it had brought a fraud action
seeking money damages, and thus
its cause of action was legal,
rather than equitable, in nature.
The fraud claim was asserted as
a nondischargeability claim over
which the bankruptcy court exercised
equitable jurisdiction.
MC Contractors, Inc. v. Fink
(In re Fink),
2003 U.S. Dist. LEXIS 9380, —
B.R. — (W.D.N.C. June 5,
2003) (Voorhees, D.J.).
Collier on Bankruptcy, 15th Ed.
Revised 1:3.04 [back
to to
Collier Bankruptcy Case Update March-31-03
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 31, 2003
CASES IN THIS ISSUE
(scroll down to read the full summary)
§ 506(a) Bankruptcy court lacked jurisdiction
to determine secured status while the same issue was pending before the BAP.
In re Bradshaw (Bankr. D. Mass.)
§ 524 “Redemption Agreements” sent
to debtors for return of collateral did not purport to impose personal liability
and did not violate discharge orders.
Arruda v. Sears, Roebuck & Co. (1st Cir.)
2d Cir.
§ 510(c) Claims of financial company and lenders
could not be equitably subordinated absent evidence of substantial misconduct.
Official Comm. of Unsecured Creditors v. Morgan Stanley & Co., Inc.
(In re Sunbeam Corp.) (Bankr. S.D.N.Y.)
§ 547 Bankruptcy court erred in denying trustee’s
claim of avoidable preference when there was evidence that debtor had insufficient
assets at the time of transfer.
Goldberg v. Such (In re Keplinger) (N.D.N.Y.)
§ 1103(c)(5) Creditors’ committee could
not maintain an action against third parties without first obtaining approval
of court.
Official Comm. of Unsecured Creditors v. Morgan Stanley & Co., Inc.
(In re Sunbeam Corp.) (Bankr. S.D.N.Y.)
3rd Cir.
§ 105 Bankruptcy court exercised equitable powers
to reset fraud action for trial despite Third Circuit holding in Cybergenics
II that would deny plaintiff creditors’ committee standing.
Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In
re W.R. Grace & Co.) (Bankr. D. Del.)
§ 109(g)(1) Debtor’s ninth bankruptcy, filed
during refilling bar imposed upon dismissal of eight bankruptcy, was filed in
bad faith without a valid purpose other than to impede a tax lien sale.
In re Lami (Bankr. E.D. Pa.)
§ 365 Order rejecting unexpired leases and executory
contracts vacated due to mistaken inclusion of leases and contracts which debtor
did not wish to reject.
In re Sleepmaster Fin. Corp. (Bankr. D. Del.)
§ 502(c) Creditor’s claim for environmental
clean-up estimated based on costs already incurred but not reimbursed, excluding
any claim for future costs.
In re Kaiser Group, Int’l, Inc. (Bankr. D. Del.)
4th Cir.§ 362(b)(4) Enforcement actions of state department of labor were subject to automatic stay.
In re Midway Airlines Corp. (E.D.N.C.)
§ 503(b)(1)(B) Prepetition taxes could not be allowed as administrative expenses.
In re Pasta Café Corp. (Bankr. D. Md.)
§ 507(a)(8) Tax claim treated as secured under state law was not entitled to unsecured priority treatment.
In re Pasta Café Corp. (Bankr. D. Md.)
5th Cir.
§ 548 Transfers by debtors to other ministries
were made for value and in good faith.
Jimmy Swaggart Ministries v. Hayes (In re Hannover Corp.) (5th Cir.)
6th Cir.
§ 726(b) Disgorgement of attorneys’ fees
required in order to achieve a pro rata disbursement among administrative claimants.
In re Specker Motor Sales Co. (Bankr. W.D. Mich.)
7th Cir.
§ 362 Creditor’s pursuit of contempt proceedings against debtor was a willful violation of stay justifying award of attorneys’ fees.
In re Banalcazar (Bankr. N.D. Ill.)
§ 522(f)(1)(A) Bankruptcy court properly denied motion to avoid judicial lien on bank accounts as government proceeds deposited therein were not exempt.
Schoonover v. Karr (S.D. Ill.)
8th Cir.
§ 507(a)(7) Claim for legal fees relating to modification of child support and judgment as to amount of child support arrearage was entitled to priority status.
In re Fiore (Bankr. E.D. Mo.)
9th Cir.
§ 523(a)(8) Deferred university tuition was not a loan absent written agreement or other promise to repay and was dischargeable.
Navarro v. University of Redlands (In re Navarro) (Bankr. C.D. Cal.)
10th Cir.
§ 553(a) Department of Agriculture had no claim against debtors in chapter 12 proceeding as claim was discharged in prior chapter 7 proceeding.
United States v. Myers (In re Myers) (B.A.P. 10th Cir.)
11th Cir.
§ 509 Manufacturer that was jointly liable with debtor on asbestos claim and made partial payment was not entitled to subrogation.
Celotex Corp. v. Allstate Ins. Co. (Bankr. M.D. Fla.)
§ 523(a)(1)(C) Tax liability of debtor involved in illegal telemarketing operation was nondischargeable due to willful failure to file.
Passavant v. United States (In re Passavant) (Bankr. M.D. Fla.)
§ 523(a)(1)(C) Debtors’ tax liability excepted from discharge due to willful attempts to evade or defeat taxes along with evidence of substantial income and large expenditures.
Hassan v. United States (In re Hassan) (Bankr. S.D. Fla.)
Collier Bankruptcy Case Summaries
1st Cir.
Bankruptcy court lacked jurisdiction to determine
secured status while the same issue was pending before the BAP. Bankr.
D. Mass. PROCEDURAL POSTURE: Married debtors filed a
chapter 13 petition for relief under the Bankruptcy Code. The debtors filed:
(1) a motion to determine a secured status pursuant to 11 U.S.C. § 506(a);
(2) an objection to a proof of claim filed by a state department of revenue;
and (3) an objection to a proof of claim filed by the Internal Revenue Service
(“IRS”). OVERVIEW: The debtors’ chapter
13 plan was confirmed, and both the state department of revenue and the IRS
filed proof of claims. The debtors took no action to avoid the liens or otherwise
object to the tax claims, and the trustee moved to dismiss because the plan
was no longer feasible with the unchallenged tax claims. The debtors filed
a motion to avoid the tax liens and both taxing authorities objected. The
court denied the debtors’ motions, as well as both of the debtors’
motions for reconsideration. The debtors then filed notices of appeal from
the court’s two orders and a motion for leave to appeal. The bankruptcy
appellate panel held that the two orders were final and denied the debtors’
motion for leave to appeal as moot. However, the panel held that an appeal
from one order denying reconsideration was timely and could proceed as a discrete
question. The debtors then filed a motion and the objections on the same issue
in the bankruptcy court. The court analyzed the procedural facts and determined
that it was improper to rule on issue that was simultaneously pending before
the bankruptcy appellate panel. In re Bradshaw, 2002
Bankr. LEXIS 1202, 284 B.R. 520 (Bankr. D. Mass. October 22, 2002) (Rosenthal,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.03 [back
to top]
ABI Members, click here to get the full opinion.
“Redemption Agreements”
sent to debtors for return of collateral did not purport to impose personal
liability and did not violate discharge orders. 1st Cir. PROCEDURAL
POSTURE: Appellants, former chapter 7 debtors, seeking to represent
a putative class, sued appellee department store for violation of 11 U.S.C.
§ 524, and the store’s attorneys for violation of the Fair Debt
Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692 et seq.
The United States District Court for the District of Rhode Island dismissed
the debtors’ complaints. The debtors appealed. OVERVIEW:
After the debtors obtained discharges of debts owed to the store, the store
sent “redemption agreements” to the debtors, which asked them
to contact the store to arrange for turning over the collateral (various household
items) pursuant to the agreements. The debtors claimed that the store violated
the Bankruptcy Code by the manner in which it essayed to enforce security
liens in household goods and other personal property. As to the alleged violations
of 11 U.S.C. § 524, the appellate court held that each redemption agreement
contained an explicit acknowledgment that the debtor’s failure to redeem
as described within the agreement would not have imposed any personal liability
on the debtor. Further, each agreement stated that if the debtor failed to
pay the redemption amount, the store’s only recourse was against the
collateral. Since the agreements did not purport to impose any personal liability
on account of discharged debts, section 524(c) did not affect their enforceability.
As to the FDCPA claim by one of the debtors, the appellate court held that
none of the facts set forth in the complaint supported an inference that the
debtor was obligated to pay any money to the store. Arruda v.
Sears, Roebuck & Co., 2002 U.S. App. LEXIS 22574, 310
F.3d 13 (1st Cir. October 30, 2002) (Selya, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.01 [back
to top]
2d Cir.
Claims of financial company and lenders could not be equitably subordinated absent evidence of substantial misconduct. Bankr. S.D.N.Y. PROCEDURAL POSTURE: The debtor filed a chapter 11 petition. Plaintiff, the debtor’s unsecured creditors’ committee, filed an action against defendants, a financial company and various bank lenders. The financial company filed a motion to dismiss, as did one lender. Both motions sought dismissal for lack of standing to pursue an action, pursuant to Fed. R. Civ. P. 12(b)(6). The debtor supported the two motions to dismiss. OVERVIEW: The committee’s amended complaint sought to equitably subordinate the claims of the financial company and all lenders: (1) to avoid and recover for the estate the lenders’ claims and liens as fraudulent conveyances; (2) to recover damages for the financial company’s alleged gross negligence; and (3) for the financial company’s alleged act of aiding and abetting fraud. The committee argued that the corporate veil should be pierced because of the financial company’s purported control and dominance over its affiliate. The court found that there was no evidence that the financial company used an affiliate to shield itself from potential liability. The committee failed to overcome the reluctance to disregard the corporate structure. The court found that were no facts alleged in the amended complaint to support a finding that the lenders had either actual or constructive knowledge that the debtor was insolvent at the time of, or would be rendered insolvent by, the purchase of the acquisitions in issue. The committee failed to meet the standards for obtaining the court’s approval to pursue any claim the estate might have against the financial company. Official Comm. of Unsecured Creditors v. Morgan Stanley & Co., Inc. (In re Sunbeam Corp.), 2002 Bankr. LEXIS 1183, 284 B.R. 355 (Bankr. S.D.N.Y. October 18, 2002) (Gonzalez, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:510.05 [back to top]
ABI Members, click here to get the full opinion.
Bankruptcy court erred in denying
trustee’s claim of avoidable preference when there was evidence that debtor
had insufficient assets at the time of transfer. N.D.N.Y.
PROCEDURAL POSTURE: Appellant chapter 7 trustee challenged
a decision of the bankruptcy court that found the trustee failed to present
sufficient evidence to carry his burden of demonstrating that a prebankruptcy
petition payment to appellee creditor should have been deemed an avoidable preference
pursuant to 11 U.S.C. § 547. OVERVIEW: The bankruptcy
court specifically stated that the trustee failed to provide any factual analysis
or legal support for his conclusion that the debt was unsecured or that the
creditor received a disproportionate share. The court found that the issue presented
was whether the bankruptcy court properly found that the trustee failed to sustain
his burden of demonstrating that the payment to the creditor was avoidable as
a preferential payment under section 547. The court had to determine whether
the creditor was a secured creditor, and if so, whether there would have been
less than a 100 percent payout to unsecured creditors in a chapter 7 distribution.
The court found that it could not determine whether the creditor was secured
or unsecured, and therefore it proceeded with the assumption that the creditor
was unsecured. There was evidence on the record that the debtors had insufficient
assets to cover their liabilities and, if so, other unsecured creditors would
not have been able to recover 100 cents on the dollar and any payments to them
during the preference period would have been avoidable. Goldberg
v. Such (In re Keplinger), 2002 U.S. Dist. LEXIS 20300, 284
B.R. 344 (N.D.N.Y. October 7, 2002) (Hurd, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.01 [back
to top]
ABI Members, click here to get the full opinion.
Creditors’ committee could
not maintain an action against third parties without first obtaining approval
of court. Bankr. S.D.N.Y. PROCEDURAL POSTURE:
The debtor filed a chapter 11 petition. Plaintiff, the debtor’s unsecured
creditors’ committee, filed an action against defendants, a financial
company and various bank lenders. The financial company filed a motion to dismiss,
as did one lender. Both motions sought dismissal for lack of standing to pursue
an action, pursuant to Fed. R. Civ. P. 12(b)(6). The debtor supported the two
motions to dismiss. OVERVIEW: The committee’s amended
complaint sought to equitably subordinate the claims of the financial company
and all lenders: (1) to avoid and recover for the estate the lenders’
claims and liens as fraudulent conveyances; (2) to recover damages for the financial
company’s alleged gross negligence; and (3) for the financial company’s
alleged act of aiding and abetting fraud. The committee argued that the corporate
veil should be pierced because of the financial company’s purported control
and dominance over its affiliate. The court found that there was no evidence
that the financial company used an affiliate to shield itself from potential
liability. The committee failed to overcome the reluctance to disregard the
corporate structure. The court found that were no facts alleged in the amended
complaint to support a finding that the lenders had either actual or constructive
knowledge that the debtor was insolvent at the time of, or would be rendered
insolvent by, the purchase of the acquisitions in issue. The committee failed
to meet the standards for obtaining the court’s approval to pursue any
claim the estate might have against the financial company. Official
Comm. of Unsecured Creditors v. Morgan Stanley & Co., Inc. (In re Sunbeam
Corp.), 2002 Bankr. LEXIS 1183, 284 B.R. 355 (Bankr. S.D.N.Y.
October 18, 2002) (Gonzalez, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 7:1103.05[1][f] [back
to top]
ABI Members, click here to get the full opinion.
3rd Cir.
Bankruptcy
court exercised equitable powers to reset fraud action for trial despite Third
Circuit holding in Cybergenics II that would deny plaintiff creditors’
committee standing. Bankr. D. Del. PROCEDURAL POSTURE:
Defendants in an action under 11 U.S.C. § 544 moved for dismissal. The
debtor and the equity holders committee moved for the appointment of an examiner
under 11 U.S.C. § 1106(b) or “limited trustee” to prosecute.
The personal injury claimants committee requested appointment of a trustee under
11 U.S.C. § 1104(a). The property damage claimants committee requested
that the trial be reset and that the debtor be barred from participating. OVERVIEW:
The court had authorized the committees to pursue the action under 11 U.S.C.
§ 544. The debtor intervened and litigated in concert with the defendants.
Just prior to trial, the United States Court of Appeals for the Third Circuit
ruled that an official chapter 11 creditors committee lacked derivative capacity
to sue under 11 U.S.C. § 544. The bankruptcy court found that examiners
had no power to prosecute under 11 U.S.C. § 544. Under 11 U.S.C. §
1104(a), where the impetus for a trustee stemmed from the single issue of the
fraudulent conveyance action, a trustee was a last resort. The unique circumstances
of the case required it to go forward, regardless of the Third Circuit’s
holding, due to the need to protect the parties’ investment in the case.
Emphasizing that the case was on the eve of a very complex trial, and drawing
on the court’s equitable powers and the powers under 11 U.S.C. §
105, the court state the Third Circuit’s rule should be relaxed and the
case reset for trial. The Third Circuit’s mandate had not yet issued and
a petition for rehearing en banc had been filed. The debtor could participate.
An interlocutory appeal under 28 U.S.C. § 1292(b) was proper. Official
Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In re W.R. Grace
& Co.), 2002 Bankr. LEXIS 1241, 285 B.R. 148 (Bankr. D.
Del. October 24, 2002) (Wolin, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.01 [back
to top]
ABI Members, click here to get the full opinion.
Debtor’s ninth bankruptcy,
filed during refilling bar imposed upon dismissal of eight bankruptcy, was filed
in bad faith without a valid purpose other than to impede a tax lien sale.
Bankr. E.D. Pa. PROCEDURAL POSTURE: A mortgage creditor
filed a motion to dismiss the debtor’s chapter 13, and to nullify a tax
lien sale, arguing the debtor was not eligible under 11 U.S.C. § 109(g)(1)
due to a bar order and dismissal of the debtor’s eighth bankruptcy, and
that the tax lien sale was in violation of the automatic stay of 11 U.S.C. §
362. Another creditor, the holder of a tax lien that was satisfied at the sale,
objected. The debtor did not answer or appear. OVERVIEW: It
was the debtor’s ninth bankruptcy, filed during the pendency of a refiling
bar, prompted by the scheduled tax sale. At the tax sale, the debtor’s
son bought the property free of the mortgage creditor’s mortgage. The
debtor then moved to dismiss the bankruptcy. The debtor’s actions were
in bad faith. To the extent the previous bar was supported by findings under
11 U.S.C. § 109(g)(1), the debtor was not an authorized debtor under 11
U.S.C. § 301, and the stay did not apply. There was no showing of a valid
bankruptcy purpose. The court inferred from the repeated filings to stay foreclosure
that the debtor would have used the automatic stay if the son had not bought
the property. The eight prior bankruptcy cases were all dismissed. The case
had been pending for six weeks with no prosecution. The court found the requisite
willfulness under section 109(g)(1). The automatic stay of 11 U.S.C. §
362(a) did not attach when debtor filed his new petition after dismissal of
the bankruptcy case for willful failure to comply with court orders to filed
documents and prosecute the prior case. This case was dismissed with a bar toward
refiling for 180 days. The tax lien sale was not nullified. In re
Lami, 2003 Bankr. LEXIS 97, — B.R. — (Bankr. E.D. Pa. January
2, 2003) (Sigmund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.08 [back
to top]
ABI Members, click here to get the full opinion.
Order rejecting unexpired leases
and executory contracts vacated due to mistaken inclusion of leases and contracts
which debtor did not wish to reject. Bankr. D. Del. PROCEDURAL
POSTURE: The debtors moved to vacate an order authorizing them to reject
certain unexpired leases and executory contracts pursuant to 11 U.S.C. §
365. OVERVIEW: The debtors had filed a motion for an order
authorizing them to reject certain unexpired leases and executory contracts
pursuant to 11 U.S.C. § 365. However, on that same day, the debtors discovered
that the exhibit to the original motion contained several executory contracts
which the debtors did not, in fact, want to reject. The debtors’ counsel
contacted the clerk’s office and chambers in an effort to prevent the
entry of the order. The clerk’s office changed the docket entry for the
certificate of no objection to indicate that it had been “entered in error.”
However, an order was entered granting the motion. It was clear that the order
could have been vacated under Fed. R. Civ. P. 60(a)(1) since it was entered
by mistake or inadvertence. However, the court also noted that counsel used
inappropriate means of attempting to prevent entry of the order. In
re Sleepmaster Fin. Corp., 2002 Bankr. LEXIS 1196, 284 B.R.
411 (Bankr. D. Del. October 23, 2002) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:365.01 [back
to top]
ABI Members, click here to get the full opinion.
Creditor’s claim for environmental
clean-up estimated based on costs already incurred but not reimbursed, excluding
any claim for future costs. Bankr. D. Del. PROCEDURAL
POSTURE: The debtors filed a motion to estimate, under 11 U.S.C. §
502(c), a creditor’s claim for recovery of past and future costs related
to cleanup of environmental contamination under 42 U.S.C. §§ 9607(a)
and 9613(f), of the Comprehensive Environmental Response, Compensation, and
Liability Act (“CERCLA”). The creditor argued that, as a state school,
it was an arm of the state and had sovereign immunity under the Eleventh Amendment.
OVERVIEW: The creditor has waived any Eleventh Amendment sovereign
immunity by filing a proof of claim and consenting to determination of the amount
of its claim in the bankruptcy court. The creditor could not proceed under 42
U.S.C. § 9607 solely by virtue of its status as a governmental entity.
Where both parties were potentially responsible parties (“PRP”),
any claim that would reapportion costs between the parties was a claim for contribution.
The environmental enforcement role was undertaken by the government, not by
the creditor. The creditor was a contributor to the contamination as a sponsor
of research at the site. It had stated that all research materials left at the
site by sponsors contained hazardous substances and contributed to the harm.
The creditor was an operator under section 101(20)(A)(ii) of CERCLA and was
limited to a claim for contribution under 42 U.S.C. § 9613. The claim had
to be disallowed under 11 U.S.C. § 502(e)(1) as to future costs. Under
the debtors’ plan, the creditor would receive only 9.6 percent of any
claim allowed. The claim was estimated in the full amount of the costs already
incurred for which the creditor had not received reimbursement. In
re Kaiser Group, Int’l, Inc., 2003 Bankr. LEXIS 98,
— B.R. — (Bankr. D. Del. February 7, 2003) (Walrath, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.04 [back
to top]
ABI Members, click here to get the full opinion.
4th Cir
Enforcement
actions of state department of labor were subject to automatic stay. E.D.N.C.
PROCEDURAL POSTURE: Appellant, the North
Carolina Department of Labor (“NCDOL”), issued a letter that appellee
debtor airline had violated the North Carolina Wage and Hour Act with respect
to prepetition vacation wages. The debtor filed an emergency motion to determine
the extent of the automatic stay under 11 U.S.C. § 362. The bankruptcy
court granted the motion, and the NCDOL appealed. OVERVIEW:
The letter stated that payment of the wages was due within 14 days and that
unless an appeal was requested within 14 days, the amount due for vacation wages
would become final. The NCDOL claimed that the bankruptcy court lacked jurisdiction
over the motion because of sovereign immunity, that its enforcement actions
were excepted from the automatic stay under 11 U.S.C. § 362(b)(4), and
that the automatic stay did not extend to the individuals. The court disagreed,
holding that: (1) the Eleventh Amendment was not implicated because the NCDOL
was not a named defendant in the motion, the court had jurisdiction over debtors
and their estates so sovereign immunity was not implicated, and the automatic
stay applied automatically; and (2) the state was not acting within its police
powers as the NCDOL was not seeking to recover money to benefit the state, so
the pecuniary purpose test was satisfied, and the NCDOL’s claim did not
seek to promote public policies but was a suit seeking to recover wages for
individuals; and (3) the automatic stay applied as to the claims against the
individuals as the debtor’s estate could be diminished as the individuals
were covered by corporate insurance. In re Midway Airlines
Corp., 2002 U.S. Dist. LEXIS 20855, 283 B.R. 846
(E.D.N.C. October 3, 2002) (Boyle, C.D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.05[5] [back
to top]
ABI Members, click here to get the full opinion.
Prepetition taxes could not be allowed
as administrative expenses. Bankr. D. Md. PROCEDURAL
POSTURE: After the debtor’s chapter 11 was converted to chapter
7, a tax creditor county, moved for allowance and payment of personal property
taxes for the year 2000 as an administrative expense under 11 U.S.C. §§
503(b)(1)(B) and (C). Alternatively, the creditor argued that the claim, assessed
and due under Md. Code, Tax-Prop. §§ 6-202, 10-102(a) and 14-804,
was entitled to priority under 11 U.S.C. § 507(a)(8). OVERVIEW:
The debtor filed bankruptcy in September, 2000. Under Md. Code, Tax-Prop. §
10-102(a), the property taxes were due on July 1 in each taxable year. The year
2000 taxes were not incurred postpetition. Only taxes incurred postpetition
could be allowed as administrative expenses under 11 U.S.C. § 503(b)(1)(B)(i).
The county held a liquidated claim on July 1, and held an unliquidated and contingent
claim from the date of assessment, January 1. Therefore, the taxes were incurred
on January 1 and were prepetition. 11 U.S.C. § 507(a)(8) only provided
priority treatment to unsecured tax claims. Under Md. Code, Tax-Prop. §
14-804, the tax claim was a secured claim. If the tax claim was a secured claim
under section 14-804, then it was not entitled to unsecured priority treatment
under 11 U.S.C. § 507(a)(8). As the tax was computed upon the value of
personal property and formed a statutory priming first lien upon such property,
it appeared that it was a secured claim on the petition date. No evidence was
offered to demonstrate that the claim was other than secured. Therefore, the
alternative treatment under section 507(a)(8) was also denied. In
re Pasta Café Corp., 2002 Bankr. LEXIS 1188, 284 B.R.
564 (Bankr. D. Md. September 26, 2002) (Keir, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:503.07 [back
to top]
ABI Members, click here to get the full opinion.
Tax claim treated as secured under state
law was not entitled to unsecured priority treatment. Bankr. D.
Md. PROCEDURAL POSTURE: After the debtor’s chapter
11 was converted to chapter 7, a tax creditor county, moved for allowance and
payment of personal property taxes for the year 2000 as an administrative expense
under 11 U.S.C. §§ 503(b)(1)(B) and (C). Alternatively, the creditor
argued that the claim, assessed and due under Md. Code, Tax-Prop. §§
6-202, 10-102(a) and 14-804, was entitled to priority under 11 U.S.C. §
507(a)(8). OVERVIEW: The debtor filed bankruptcy in September,
2000. Under Md. Code, Tax-Prop. § 10-102(a), the property taxes were due
on July 1 in each taxable year. The year 2000 taxes were not incurred postpetition.
Only taxes incurred postpetition could be allowed as administrative expenses
under 11 U.S.C. § 503(b)(1)(B)(i). The county held a liquidated claim on
July 1, and held an unliquidated and contingent claim from the date of assessment,
January 1. Therefore, the taxes were incurred on January 1 and were prepetition.
11 U.S.C. § 507(a)(8) only provided priority treatment to unsecured tax
claims. Under Md. Code, Tax-Prop. § 14-804, the tax claim was a secured
claim. If the tax claim was a secured claim under section 14-804, then it was
not entitled to unsecured priority treatment under 11 U.S.C. § 507(a)(8).
As the tax was computed upon the value of personal property and formed a statutory
priming first lien upon such property, it appeared that it was a secured claim
on the petition date. No evidence was offered to demonstrate that the claim
was other than secured. Therefore, the alternative treatment under section 507(a)(8)
was also denied. In re Pasta Café Corp., 2002 Bankr.
LEXIS 1188, 284 B.R. 564 (Bankr. D. Md. September 26, 2002) (Keir, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.10 [back
to top]
ABI Members, click here to get the full opinion.
Transfers by debtors
to other ministries were made for value and in good faith. 5th
Cir. PROCEDURAL POSTURE: Appellee bankruptcy trustee brought
an adversary proceeding to recover money paid by debtors to appellant ministries.
The United States District Court for the Middle District of Louisiana reversed
the bankruptcy court’s determination in favor of the ministries regarding
certain transfers under 11 U.S.C. § 548. The ministries appealed. OVERVIEW:
The trustee argued and the ministries contested that transfers under an option
agreement for the purchase of certain real estate could be avoided as actual
and/or constructive fraudulent conveyances under 11 U.S.C. § 548(a). The
ministries additionally claimed the “good faith” defense of 11 U.S.C.
§ 548(c). The court of appeals found that the bankruptcy court’s
findings were comprehensive, cogent, and entitled to the respect due them under
the clear error standard. It was undisputed that the ministries took for value
and section 548(c) allowed a transferee who took for value to retain the transfer
to the extent that he gave value to the debtor in exchange. The call option
had value, their values were determined at the time of origination and the debtor’s
practical inability to exercise his option was irrelevant to its valuation under
section 548(c). Therefore, the ministries did not part with a right worth less
than what the debtor had paid for it. The court rejected the finding of bad
faith on the part of the ministries. The transaction was not outside the scope
of La. Civ. Code art. 2040. Jimmy Swaggart Ministries v. Hayes (In
re Hannover Corp.), 2002 U.S. App. LEXIS 22490, 310 F.3d 796
(5th Cir. October 29, 2002) (Jones, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:548.01 [back
to top]
ABI Members, click here to get the full opinion.
6th Cir.
Disgorgement of attorneys’ fees required
in order to achieve a pro rata disbursement among administrative claimants.
Bankr. W.D. Mich. PROCEDURAL POSTURE: A debtor
filed a chapter 11 petition, and the debtor’s counsel was paid a retainer
that the court approved. The United States trustee moved to convert the case
to chapter 7, which was granted. The court later entered an order that approved
a proposed distribution and disgorgement of the debtor’s counsel’s
fees. The debtor moved for reconsideration, and the United States trustee and
two creditors objected to the debtor’s motion. OVERVIEW:
The debtor’s counsel argued that disgorgement of attorneys’ fees
after conversion from chapter 11 was discretionary under 11 U.S.C. § 331,
and the court agreed that disgorgement was discretionary under section 331 because
the allowance of compensation was always discretionary. The court disagreed
with the counsel’s position and found that 11 U.S.C. § 726(b) required
the disgorgement of interim compensation in every case of administrative insolvency
in order to achieve a pro rata disbursement. To allow the debtor’s counsel
to collect more than the other administrative claimants was a violation of the
equality of distribution required under 11 U.S.C. § 726(b). The amount
of fees subject to review at the end of a case was not only the balance due
at the end but all compensation sought, including the interim fees and the retainer
already received. The entire amount of the fees, and not just the amount the
attorney sought over and above the retainer, was subject to review and award.
In re Specker Motor Sales Co., 2003 Bankr. LEXIS
163, — B.R. — (Bankr. W.D. Mich. February 26, 2003) (Stevenson,
B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:726.03 [back
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7th Cir.
Creditor’s pursuit of contempt proceedings
against debtor was a willful violation of stay justifying award of attorneys’
fees. Bankr. N.D. Ill. PROCEDURAL POSTURE:
The debtor filed a motion for damages, costs, and attorneys’ fees under
11 U.S.C. § 362(h), arguing the creditor’s actions in proceeding
with post-judgment debt collection activity in state court violated the automatic
stay imposed by 11 U.S.C. § 362(a). The creditor filed a motion seeking
a declaration that the automatic stay did not apply to its state court actions,
or alternatively, seeking relief from the stay under 11 U.S.C. § 362(d).
OVERVIEW: The state court’s finding that the stay did
not apply was not a final judgment and did not implicate Rooker-Feldman. The
erroneous state court decision as to the applicability of the stay was void
ab initio. The creditor was not a governmental unit. The pursuit of civil contempt
proceedings was a private pursuit of individual interests in enforcing a court
order to assist in collecting a judgment. The police power exception of 11 U.S.C.
§ 362(b)(4) did not apply. The creditor’s actions were subject to
the stay. The contempt proceedings were pursued with knowledge of the bankruptcy.
It was a deliberate action, a willful violation of the stay. 11 U.S.C. §
362(h) did not require a specific intent to violate the stay. The debtor was
awarded actual damages, including attorneys’ fees and costs caused by
the stay violation. The attorneys’ fees were reduced to those entries
reflecting damages actually caused by the violation. Punitive damages were not
justified. Retroactive relief from the stay was not proper under equitable standards.
The state court proceeding sought records that were property of the estate under
11 U.S.C. § 541(a) which were more properly examined by the trustee. In
re Banalcazar, 2002 Bankr. LEXIS 1240, 283 B.R. 514 (Bankr. N.D. Ill.
August 15, 2002) (Wedoff, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.01 [back
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Bankruptcy court properly denied motion
to avoid judicial lien on bank accounts as government proceeds deposited therein
were not exempt. S.D. Ill. PROCEDURAL POSTURE:
Appellant debtor filed a bankruptcy petition under the Bankruptcy Code and filed
a motion pursuant to 11 U.S.C. § 522(f)(1)(A) to avoid a judicial lien
of appellee creditor. The creditor objected to the motion. The court ruled against
the debtor and the debtor appealed the decision of the bankruptcy court. OVERVIEW:
The debtor alleged that the balances of the subject bank accounts were traceable
to specific monthly deposits that were subject to state exemption law. No objection
to the claimed exemptions was filed within 30 days of the creditors’ meeting.
The bankruptcy court determined that the debtor’s claim of exemption was
without merit. In lien avoidance proceedings, the dispute over exempt proceeds
concerned only the lien creditor and the debtor, not the estate. Only the debtor’s
entitlement to avoid the lien was at issue. The district court agreed with the
bankruptcy court and rejected the debtor’s argument that certain government
payments were exempt under 11 U.S.C. § 522. The district court found no
clear error in the bankruptcy court’s decision. The debtor failed to overcome
the burden necessary on the lien avoidance action. Schoonover v.
Karr, 2002 U.S. Dist. LEXIS 21595, 285 B.R. 695 (S.D. Ill. August 20,
2002) (Gilbert, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.11 [back
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8th Cir.
Claim for legal fees relating
to modification of child support and judgment as to amount of child support
arrearage was entitled to priority status. Bankr. E.D. Mo.
PROCEDURAL POSTURE: A chapter 13 trustee objected to the priority status
of a proof of claim filed by a creditor. The trustee alleged that the claim
did not appear to be entitled to priority and that the claim failed to specify
the priority of the claim as required. OVERVIEW: The creditor
stated that his claim was based on fees for legal services related to the modification
of child support and a judgment as to the amount of arrearage owed. He requested
that the claim be paid as a priority child support claim and not as a general
unsecured claim. Upon a review of the information provided on the face of the
proof of claim, and the documents attached thereto, the court agreed that the
creditor had identified himself as the holder of a prepetition claim for maintenance,
alimony, or support, and that the proof of claim adequately specified its priority
as based on child support. The claim was thus entitled to priority status under
11 U.S.C. § 507(a)(7). Although the debtor intended to treat the claim
as a general unsecured clam, neither the debtor’s listing of a claim in
the chapter 13 schedules, nor the terms of a confirmed plan controlled or changed
the status of an otherwise allowable proof of claim. The allowed proof of claim
was controlling. Although the creditor was bound by the terms of the confirmed
plan, his allowed priority claim was not provided for by the plan, and was not
subject to discharge. In re Fiore, 2003 Bankr.
LEXIS 171, — B.R. — (Bankr. E.D. Mo. February 13, 2003) (Barta,
C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:507.09 [back
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Deferred university tuition was not
a loan absent written agreement or other promise to repay and was dischargeable.
Bankr. C.D. Cal. PROCEDURAL POSTURE:
Plaintiff debtor brought an adversary proceeding against defendant university
seeking a determination that the debt he owed to the university for unpaid
tuition was discharged in his chapter 7 case. The issue was whether tuition
was a loan and therefore not dischargeable pursuant to 11 U.S.C. §
523(a)(8). OVERVIEW: The parties stipulated that the
money owed was not for a loan made, insured or guaranteed by a governmental
unit nor was the money for a loan made under any program funded in whole
or in part by a governmental unit. The bankruptcy court found that the
debtor executed no promissory notes prior to or contemporaneous with his
enrollment. There were no agreements to repay in the future any credit
extended at the time of enrollment. There also was no sum certain, only
a statement of fees per credit hour. There were no agreements prior to
or contemporaneous with the debtor’s enrollment indicating that
the university permitted the debtor to attend classes and pay for the
tuition and other expenses at a later date. The agreement and the deferred
payment request that the debtor signed merely stated that he was responsible
for fees and tuition. No liquidated sums were stated and the debtor made
no promises that he would repay any sums in the future. The bankruptcy
court held that the transaction did not constitute a loan within the meaning
of 11 U.S.C. § 523(a)(8). Navarro v. University of Redlands
(In re Navarro), 2002 Bankr. LEXIS 1206, 284 B.R. 727
(Bankr. C.D. Cal. October 15, 2002) (Jury, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14 [back
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10th Cir.
Department of Agriculture had no claim against debtors in chapter 12 proceeding as claim was discharged in prior chapter 7 proceeding. B.A.P. 10th Cir. PROCEDURAL POSTURE: A creditor, the United States, Department of Agriculture Farm Services Agency, moved to modify the automatic stay to setoff farm program payments. The United States Bankruptcy Court for the District of New Mexico denied stay relief and the creditor appealed, arguing that despite the debtors’ prior chapter 7 discharge, in the current chapter 12, setoff was available under 11 U.S.C. § 553(a) because it held an in rem foreclosure judgment. OVERVIEW: A stipulation provided that the government did not waive its rights to setoff or recoupment. The appellate panel found that when the chapter 7 discharge entered, under 11 U.S.C. §§ 348 and 727(b), all debts that arose before the chapter 7 was filed were discharged. Since the discharge was entered the debtors had no personal liability for their debt to the government, and the government had no claim, as defined under 11 U.S.C. §§ 101(5) and (12), against the debtors. Because the debtors had been discharged of personal liability for their debt before commencement of the chapter 12, there was no claim of such creditor against the debtors. It followed that because the government had no claim against the debtors, it had nothing to setoff under 11 U.S.C. § 553(a) against what it owed to the debtors under the farm programs. The government had no in personam prepetition claim against the debtors due to the discharge. Section 553(a) was limited to the personal liability of the debtors. The case did not involve the allowance of an in rem claim. Rather, the court was dealing with a setoff in the context of enforcing a discharge. United States v. Myers (In re Myers), 2002 Bankr. LEXIS 1194, 284 B.R. 478 (B.A.P. 10th Cir. October 22, 2002) (Bohanon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:553.03 [back to top]
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11th Cir.
Manufacturer that was jointly liable with debtor
on asbestos claim and made partial payment was not entitled to subrogation.
Bankr. M.D. Fla. PROCEDURAL POSTURE: In prepetition
asbestosis bodily injury lawsuits, defendant manufacturer and the debtor
were joint judgment defendants. Subsequently, the manufacturer purchased
and was assigned bodily injury judgments against itself and the debtor.
On summary judgment, the manufacturer sought to be paid out of funds remaining
in a reserve account held for the supersedeas judgment creditors under
the theory of subrogation under 11 U.S.C. § 509. OVERVIEW:
The manufacturer had been found liable with the debtor. Damages were liquidated
by judgment; thus, there was no question of a contingent claim if the
manufacturer sought contribution. The manufacturer did not pay the entire
underlying judgment of the supersedeas bond creditors, but the payment
was sufficient to discharge the judgment creditor’s claim against
itself and the debtor. The manufacturer rejected contribution and elected,
under 11 U.S.C. §§ 502(e)(1)(C) and 509(a), to assert subrogation.
There was no basis in contract for reimbursement. 11 U.S.C. § 509
established a specific nonexclusive test for allowing a subrogation claim.
Either under section 509 or a Florida theory of equitable subrogation,
the manufacturer was not entitled to subrogation. It was primarily liable
with the debtor and, under each theory, it could not be subrogated for
paying its own debts. Further, to allow the manufacturer to be subrogated
to funds specifically segregated for bodily injury claimants it was found
to have injured would be unjust. The payment by the manufacturer did not
unjustly enrich the debtor. The creditors of both the debtor and the manufacturer
were benefited by disallowing the claims. Celotex Corp. v.
Allstate Ins. Co., 2003 Bankr. LEXIS 151, 289 B.R. 460 (Bankr.
M.D. Fla. February 10, 2003) (Baynes, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:509.01 [back
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Tax liability of debtor involved
in illegal telemarketing operation was nondischargeable due to willful
failure to file. Bankr. M.D. Fla. PROCEDURAL
POSTURE: Plaintiff debtor filed a chapter 7 petition. The debtor
commenced an adversary action against defendant United States and sought
a determination that the debtor’s federal tax liabilities were dischargeable.
The federal government objected to the discharge pursuant to 11 U.S.C.
§ 523(a)(1)(C) on the ground that the debtor willfully attempted
to evade or defeat his tax liability. OVERVIEW: The debtor
and others were involved in an illegal telemarketing operation. The debtor
was later convicted and served a prison sentence. The government argued
that the debtor should not receive a discharge from his liability for
the tax years in issue related to the illegal activities because he willfully
attempted in any manner to evade or defeat such tax, pursuant to 11 U.S.C.
§ 523 (a)(1)(C). The court applied a two-part test and found that
the government proved the mental state test where the debtor had a duty
to file income tax returns because he earned substantial income subject
to federal income tax liability during the tax years in question. The
debtor also knew that he had such a duty because he requested extensions
of time to file his tax returns during each of the four years. The debtor
failed to show any impediment that affected his ability to timely file
his tax returns. The debtor knew he needed to file the tax returns and
voluntarily and intentionally failed to do so. The court rejected the
debtor’s position and found that the government also met the conduct
test. Passavant v. United States (In re Passavant),
2003 Bankr. LEXIS 159, — B.R. — (Bankr. M.D. Fla. January
27, 2003) (Jennemann, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07[4] [back
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Debtors’ tax liability excepted
from discharge due to willful attempts to evade or defeat taxes along
with evidence of substantial income and large expenditures. Bankr.
S.D. Fla. PROCEDURAL POSTURE: The debtors filed
an adversary proceeding seeking to determine the dischargeability of their
federal income tax liabilities for 1995, 1996, and 1997. The creditor,
the United States Internal Revenue Service (“IRS”), contended
that the debtors’ tax liabilities fell within the exception to discharge
found in 11 U.S.C. § 523(a)(1)(C), that the debtors willfully attempted
to evade or defeat their taxes. OVERVIEW: Debtor husband,
a doctor, earned a substantial income. Returns were filed only after the
IRS contacted debtors. Although no taxes were withheld, no estimated tax
payments or other payments were made. Debtors failed to explain where
their substantial income had gone, and had dealt extensively with cash.
Large checks were written to their adult daughter, but there was no substantiation
to the assertion that the checks were for repayments of loans or loans
to the daughter. Large checks were written to purchase property in the
daughter’s name. Credit card statements showed large charges for
their daughter’s wedding reception. Debtors drove luxury cars, and
paid for cars for their daughter and son-in-law. Debtors had spent large
amounts of money traveling to India several times a year. Several of the
badges of fraud were present. Debtors knew of the duty to file returns
and pay taxes. They had discharged certain taxes in a prior bankruptcy.
While debtors made payments of $250,000, their income had exceeded $2.8
million. Immediately after the prior bankruptcy, they failed to timely
file their tax returns and pay their taxes. The exception in 26 U.S.C.
§ 523(a)(1)(C) applied. Hassan v. United States (In re
Hassan), 2003 Bankr. LEXIS 99, — B.R. — (Bankr. S.D.
Fla. January 15, 2003) (Lessen, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.07[4] [back
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