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

December 10, 2001

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

• 1st Cir.

  § 106(b) Court of Appeals upheld the constitutionality of section 106(b)’s waiver of sovereign immunity.
  Arecibo Cmty. Health Care, Inc. v. P.R. (1st Cir.)

  ---

  2d Cir.

  § 522(b)(2)(A) Deferred compensation plan funds deemed exempt.
  In re Maurer (Bankr. W.D.N.Y.)

  § 523(a)(8) Tuition incentive program fell within the ambit of section 523(a)(8).
  Mehlman v. N.Y. City Board of Educ. (In re Mehlman) (Bankr. S.D.N.Y.)

  28 U.S.C. § 157(b) Core proceeding was remanded for arbitration.
  Cibro Petroleum Prods. v. City of Albany (In re Winimo Realty Corp.) (S.D.N.Y.)

  ---

  3d Cir.

  § 366(a) Utility improperly refused to restore service.
  One Stop Realtour Place, Inc. v. Allegiance Telecom, Inc. (In re One Stop Realtour Place, Inc.) (Bankr. E.D. Pa.)

  § 503(b) Plaintiff’s motion for administrative expense priority granted, in part and denied, in part.
  In re Grand Union Co. (Bankr. D.N.J.)

  ---

  4th Cir.

  § 727(a)(4)(A) Denial of discharge was upheld on appeal because the debtor knowingly made a false oath in his chapter 7 case. Brown v. Presidential Fin. Corp. (In re Brown) (W.D. Va.)

  ---

  5th Cir.

  Rule 9006(b)(1) Creditors demonstrated excusable neglect in late filing of proofs of claim.
  In re Babcock & Wilcox Co. (E.D. La.)

  ---

  6th Cir.

  § 362(b)(4) Automatic stay was applicable to lawsuit.
  Chao v. Hosp. Staffing Servs., Inc. (6th Cir.)

  § 502 Government entitled to offset debtor’s postpetition claim for tax refund against IRS’s prepetition tax penalty claims.
  Gordon Sel-Way, Inc. v. United States (In re Gordon Sel-Way, Inc.) (6th Cir.)

  § 510(c) Court of Appeals refused to equitably subordinate participation interest claims.
  Bayer Corp. v. Mascotech, Inc. (In re Autostyle Plastics, Inc.) (6th Cir.)

  ---

  7th Cir.

  § 553(a) Bank was entitled to setoff against funds in joint account.
  Mottaz v. Union Planters Bank, N.A. (In re Dame) (Bankr. S.D. Ill.)

  § 1322(b)(1) Denial of plan confirmation was upheld on appeal.
  Crawford v. Chatterton (In re Crawford) (W.D. Wis.)

  ---

  8th Cir.

  § 507(a)(8) Debtor could not change status of tax claim from priority to general unsecured claim absent clear notice to the IRS.
  De Jesus v. United States (In re De Jesus) (Bankr. D. Minn.)

  ---

  9th Cir.

  § 1322(b)(1) District court vacated bankruptcy court order that confirmed debtor’s plan and excused her from proving that plan classification favoring her mother did not discriminate unfairly.
  Meyer v. Hill (In re Hill) (B.A.P. 9th Cir.)

  ---

  10th Cir.

  § 510(b) Application of section 510(b) subordination hinged on whether issuer of note was the debtor’s affiliate.
  NationsBank, N.A. v. Commercial Fin. Servs. (In re Commercial Fin. Servs.) (Bankr. N.D. Okla.)

  Rule 9011(b) Sanctions warranted where debtors primary motive in filing multiple chapter 13 petitions was to stop the bank’s foreclosure sales rather than participate in debt adjustment.
  In re Copeland (Bankr. D. Kan.)

  ---

  11th Cir.

  § 362(d) Stay was lifted to permit regulatory proceedings to commence.
  White v. Weatherford (In re Abrass) (Bankr. M.D. Fla.)

  § 522(g) Debtors could not exempt assets that they failed to disclose in initial schedules.
  Henkel v. Green (In re Green) (Bankr. M.D. Fla.)

  § 523(a)(6) Attorney’s fees were recoverable in nondischargeability action based on willful and malicious injury.
  USAA Cas. Ins. Co. v. Auffant (In re Auffant) (Bankr. M.D. Fla.)

  ---

Collier Bankruptcy Case Summaries

1st. Cir.

Court of Appeals upheld the constitutionality of section 106(b)’s waiver of sovereign immunity. 1st Cir. In 1984 the health department of the commonwealth (Puerto Rico) entered into a series of contracts with the debtor, a private entity, for the administration of a hospital. In 1991, the department filed suit against the debtor in superior court, alleging failure to render services pursuant to the contract. Shortly thereafter, the debtor filed its chapter 11 petition, which was later converted to chapter 7. The department filed a proof of claim in the approximate amount of $1.6 million. The trustee commenced an adversary proceeding against the department, based on various state law claims, and arising out of the same contract and operative facts as the superior court action. The department argued that the trustee’s claims were barred by the Eleventh Amendment. The bankruptcy court held that sections 106(a) and (b) were invalid as to the department, reasoning that Congress could not abrogate states’ Eleventh Amendment sovereign immunity by a conditional waiver, namely, by filing the proof of claim. On appeal, the district court affirmed the ruling as to the invalidity of section 106(a), but concluded that waiver of immunity was permissible because it was premised upon the affirmative undertaking of the state to participate in the bankruptcy process. The department asked the court to reconsider its ruling, and during the pendency of that request, the United States Supreme Court decided College Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 144 L.E.2d 605, 119 S.C. 2219 (1999), which reasoned that a constructive waiver approach was incompatible with cases requiring the express waiver of sovereign immunity. The district court upheld the constitutionality of section 106(b), and an appeal followed. The Court of Appeals for the First Circuit reversed, holding that section 106(b) was constitutionally infirm. The debtor moved for a rehearing, which was granted. The department grounded its argument in the College Savings ruling, which stated that the voluntariness of a waiver was destroyed when it was presumptively triggered by 'otherwise lawful activity,' which, the department contended, was the nature of its claim filing. The debtor argued that section 106(b) was a permissible means of obtaining a waiver of sovereign immunity with respect to compulsory counterclaims arising from a proof of claim. The Court of Appeals vacated its prior decision and affirmed the ruling of the district court, holding that the College Savings decision recognized that a state relinquished its sovereign immunity when it voluntarily invoked federal court jurisdiction. The Court of Appeals concluded that the department waived its immunity when it availed itself of federal jurisdiction by filing the proof of claim. The Court of Appeals also held that the waiver was broad in scope, and not restricted to defensive counterclaims for recoupment, because nothing in College Savings purported to impose such restrictions once the waiver was triggered.Arecibo Cmty. Health Care, Inc. v. P.R., 2001 U.S. App. LEXIS 23202, – F.3d. – (1st Cir. October 29, 2001) (Torruella, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:106.06

2d. Cir.

Deferred compensation plan funds deemed exempt. Bankr. W.D.N.Y. In connection with a request made by the court in an earlier decision regarding the debtor’s claimed exemption for certain deferred compensation plan funds, the debtor’s counsel provided the court with a copy of an IRS ruling concluding that, at least as of the end of 1999, the plan was 'qualified' under section 457 of the Internal Revenue Code. The court then held that a section 457-qualified plan is a plan 'on account of age'; thus, the deferred compensation plan funds in this case were deemed exempt. The court analyzed case law interpreting the phrase 'on account of age' and concluded that the phrase seems to require simply that rights and benefits be defined, by statute, by reference to age; it is not necessary that achieving a particular age be a precondition to receiving any rights or benefits.In re Maurer, 2001 Bankr. LEXIS 1330, 268 B.R. 339 (Bankr. W.D.N.Y. August 17, 2001) (Kaplan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:522.10

Tuition incentive program fell within the ambit of section 523(a)(8). Bankr. S.D.N.Y. The creditor was a city (New York) board of education, which provided occupational and physical therapy services to special education students. The creditor created an incentive program providing training in such therapy, whereby a student enrolling in a training program could receive tuition benefits from the incentive program in exchange for accepting employment as directed by the creditor for a number of years commensurate with the years during which the student received tuition payments. The debtor was accepted into the incentive program in 1996. In 1998, the debtor failed two consecutive fieldwork projects and was removed from her occupational therapy program. In 2000, the debtor received a letter from the creditor requesting repayment of approximately $42,000 in scholarship monies. Shortly thereafter, the debtor filed a chapter 7 petition and commenced an adversary proceeding, seeking a declaration that her obligation to the creditor was dischargeable. The debtor argued that the incentive program was not an 'educational benefit program' or 'student loan' within the meaning of section 523(a)(8). The creditor argued that the tuition payments made on the debtor’s behalf were precisely the type of debt barred from discharge by section 523(a)(8). The bankruptcy court ruled for the creditor, holding that the funds paid by the creditor were based on a contract whereby the creditor delivered a sum of money to the debtor, who agreed to return at a future time the rendering of services equivalent to that which was borrowed, constituting a paradigm of a loan as encompassed by section 523(a)(8).Mehlman v. N.Y. City Board of Educ. (In re Mehlman), 2001 Bankr. LEXIS 1340, 268 B.R. 379 (Bankr. S.D.N.Y. October 16, 2001) (Hardin, B.J.).

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

Core proceeding was remanded for arbitration. S.D.N.Y. The public lessor appealed the bankruptcy court’s order denying its motion to compel arbitration of disputes arising under prepetition contracts between the chapter 11 debtor and itself and for a stay of proceedings pending arbitration. Although the leases between the parties provided that any claim arising out of the leases was to be settled by arbitration, the debtor filed an adversary proceeding against the lessor seeking a declaratory judgment with respect to payments made in lieu of taxes. The bankruptcy court concluded that the matter was a core proceeding and refused to compel arbitration of the proceeding. The district court reversed, holding that although the proceeding was core, the bankruptcy court improperly determined that it had discretion to proceed to trial rather than compel arbitration. The bankruptcy court’s determination that the matter was a core proceeding was correct, because the lessor’s codefendant had filed proofs of claim against the estate, and the debtor’s interest in the leases was the single biggest asset of the estate that remained to be liquidated. Nevertheless, because there was no evidence that arbitration of the proceeding would have jeopardized an underlying policy of the Bankruptcy Code, the bankruptcy court lacked the discretion to proceed to trial.Cibro Petroleum Prods. v. City of Albany (In re Winimo Realty Corp.), 2001 U.S. Dist. LEXIS 17500, – B.R. – (S.D.N.Y. October 25, 2001) (Scheindlin, D.J.).

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

3d. Cir.

Utility improperly refused to restore service. Bankr. E.D. Pa. The debtor filed a complaint against the telephone service provider, arguing that the provider wrongly refused to restore telephone service upon the filing of the company’s chapter 11 petition as required by section 366. After the debtor filed its petition and its principal contacted the provider requesting that service be restored, the provider refused to restore service prior to receipt of a cash deposit. The provider subsequently restored service pending receipt of adequate assurances approximately one month later, in accordance with an agreement obtained by the debtor’s counsel. The bankruptcy court determined that the provider violated section 366, holding that the filing of the debtor’s petition required the service provider to restore telephone service prior to obtaining adequate assurance payment. Because the debtor could be entitled to compensatory damages, the court allowed the debtor an opportunity to present further evidence of damages suffered as a result of the violation (citing Collier on Bankruptcy, 15th Ed. Revised).One Stop Realtour Place, Inc. v. Allegiance Telecom, Inc. (In re One Stop Realtour Place, Inc.), 2001 Bankr. LEXIS 1353, 268 B.R. 430 (Bankr. E.D. Pa. October 17, 2001) (Carey, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:366.02

Plaintiff’s motion for administrative expense priority granted, in part and denied, in part. Bankr. D.N.J. Pursuant to a prepetition contract, the plaintiff provided prepetition and postpetition warehousing, ice manufacturing, supply and transportation services to the chapter 11 debtor. After the debtor rejected the contract, the plaintiff moved to obtain administrative expense priority and payment for certain of its claims against the debtor. The debtor opposed this relief on the ground that all of the plaintiff’s claims constituted rejection damages pursuant to section 502(g) and, thus, were not entitled to priority under section 503(b). The bankruptcy court granted the plaintiff’s motion, in part, and denied the motion, in part. The court held that the plaintiff’s claim for excess inventory that had been delivered qualified as an administrative priority expense because it arose postpetition, and was incurred at the request of the debtor and for the benefit of the debtor’s estate. However, the court also held that claims that arose pursuant to 'shortfall' and 'repurchase' provisions contained in the parties’ agreement were not entitled to administrative priority status. The court concluded that the plaintiff’s right to payment under the 'shortfall' and 'repurchase' provisions were part of the plaintiff’s rejection damages and were only entitled to be treated as prepetition unsecured claims.In re Grand Union Co., 2001 Bankr. LEXIS 1326, 266 B.R. 621 (Bankr. D.N.J. August 30, 2001) (Winfield, B.J.).

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

4th. Cir.

Denial of discharge was upheld on appeal because the debtor knowingly made a false oath in his chapter 7 case. W.D. Va. The chapter 7 debtor appealed the bankruptcy court’s order denying his discharge pursuant to section 727(a)(4)(A). The debtor failed to disclose in his schedules and statement of affairs the sale of his residence eight days prior to his petition, the payment of creditors with a portion of the sale proceeds and the transfer of a substantial portion of the proceeds to his wife. The debtor also falsely testified at the meeting of creditors that he had paid a share of the proceeds to the IRS. The district court affirmed, holding that the record adequately supported the bankruptcy court’s finding that the debtor knowingly and fraudulently made a false oath in connection with the case. The omissions in the debtor’s schedules and statement were material because they related directly to the discovery of the debtor’s assets, and the false testimony was material because it falsely construed the disposition of the debtor’s property. Brown v. Presidential Fin. Corp. (In re Brown), 2001 U.S. Dist. LEXIS 17676, – B.R. – (W.D. Va. October 26, 2001) (Wilson, D.J.).

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

5th. Cir.

Creditors demonstrated excusable neglect in late filing of proofs of claim. E.D. La. The debtors filed petitions in February 2000. In April 2000, the district court withdrew the reference of these cases with respect to certain issues, including motions to set a bar date, setting procedure for notifying claimants, and prescribing the form of proofs of claim. On October 6, 2000, the bankruptcy court entered an order requiring persons with settled claims to submit proofs of claim by March 29, 2001. On October 30, 2000, the district court entered an order requiring all personal injury claimants to file proofs of claim by July 30, 2001. On August 20, 2001, the court granted the claimants’ motion for an enlargement of time to file a proof of claim under the 'excusable neglect' provision of Rule 9006(b)(1). The debtors then moved the court to reconsider that decision, arguing that the claimants failed to meet their burden of showing excusable neglect. The court rejected the debtors’ argument and denied the motion to reconsider, holding that the requirements for demonstrating excusable neglect had been met. Namely, (1) the debtors acted in good faith in seeking more time; (2) the claimants’ stated reasons for seeking the motion were sufficient, because the admitted clerical errors and oversight were understandable when their attorney filed nearly 7,000 proofs of claim; and (3) the length of delay was negligible, since the claims were filed only 10 days after the original deadline. In re Babcock & Wilcox Co., 2001 U.S. Dist. LEXIS 16741, – B.R. – (E.D. La. October 11, 2001) (Vance, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9006.06[3]

6th. Cir.

Automatic stay was applicable to lawsuit. 6th Cir. The chapter 7 trustee appealed the district court’s preliminary injunction ordering him to deposit sufficient funds with the clerk of district court. The United States Secretary of Labor filed a lawsuit postpetition in the district court to enforce certain provisions of the Fair Labor Standards Act. The secretary contended that certain of the debtor’s records had been produced in violation of the Act’s wage provisions, because the debtor’s employees had not been paid their wages during the company’s last weeks of operation. The district court allowed the trustee to transfer the records, which were necessary to generate accounts receivable, only upon the payment of the employees’ wage claims. The Court of Appeals for the Sixth Circuit reversed, holding that because the secretary’s lawsuit was not in furtherance of her statutory powers to regulate and enforce labor standards, but rather was designed to promote the private rights of the unpaid workers vis-a-vis other creditors of the estate, the suit did not fall within the police power exception to the automatic stay. Because the automatic stay was applicable, the district court lacked jurisdiction to entertain the secretary’s lawsuit.Chao v. Hosp. Staffing Servs., Inc., 2001 U.S. App. LEXIS 23426, – F.3d – (6th Cir. October 31, 2001) (Boggs, C.J.).

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

Government entitled to offset debtor’s postpetition claim for tax refund against IRS’s prepetition tax penalty claims. 6th Cir. The debtor filed a voluntary petition for relief under chapter 11. The debtor’s plan of reorganization and liquidation called for the debtor to sell all its assets and cease doing business. The IRS had filed claims for unpaid unemployment tax ('FUTA') penalties and, under the reorganization plan, these claims were treated as general unsecured claims. After the plan was confirmed, the debtor paid its unemployment taxes and became entitled to FUTA refunds. Although the IRS agreed that the debtor was entitled to the tax refund, it refused to pay the refund because it argued that the debtor was liable for past tax penalties. The debtor then filed an adversary complaint against the IRS to subordinate the IRS’s claim, and the bankruptcy court granted the debtor’s motion. The IRS appealed the bankruptcy court’s decision and, while this appeal was pending, the debtor liquidated all of its assets (except for the tax refunds) and disbursed the proceeds pursuant to the terms of the plan, except that the debtor did not make any disbursements to the IRS. The bankruptcy court ultimately reversed its ruling regarding subordination of the IRS’s claim but still ruled that the government was not entitled to setoff. The IRS appealed the setoff ruling. On appeal, the district court reversed the bankruptcy court’s ruling and the Court of Appeals for the Sixth Circuit affirmed the district court’s decision. In this case, setoff was permissible because the debtor’s status as a debtor in possession had expired upon confirmation of the plan, and, thus, there was no mutuality problem. Further,because the IRS had not been paid its pro rata share of the monies that were distributed to all unsecured claims, allowing setoff was necessary in order to prevent a situation where the government would be treated worse than other creditors in the same class. Gordon Sel-Way, Inc. v. United States (In re Gordon Sel-Way, Inc.), 2001 U.S. App. LEXIS 22938, – F.3 – (6th Cir. October 26, 2001) (Jones, C.J.).

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

Court of Appeals refused to equitably subordinate participation interest claims. 6th Cir. In 1982, the debtor entered into a long-term, revolving loan agreement with Creditor A, secured by a continuously perfected blanket lien on substantially all the debtor’s assets. Subsequently, Creditors B and C entered into subordinated participation agreements that provided for an extension of funds to allow Creditor A to fund additional borrowings by the debtor. In 1988, the debtor formally asked Creditor D to guarantee a proposed $4 million loan from a separate lender. That proposed loan was characterized as a bridge loan. Creditor D later stated that it was never informed by the debtor that the loans were secured by senior security interests in favor of Creditor A. Creditor B extended the loan, and the debtor granted a security interest in machinery and equipment, second in priority only to Creditor A’s lien. The participation interests of Creditors B and C were disclosed in general terms in the debtor’s audited financial statements. In 1996, the debtor filed a chapter 11 petition, which was later converted to chapter 7. In 1997, Creditor D filed a motion for adequate protection, asserting that it had a security interest in property of the debtor that was second in priority to Creditor A’s security interest, but ahead of the claims of Creditors B and C. The bankruptcy court treated the motion as an adversary proceeding, and the parties filed cross-motions for summary judgment. The court granted summary judgment to Creditors B and C, rejecting Creditor D’s contention that the B and C claims must be equitably subordinated to Creditor D’s claim. Later, the court found that the participation agreements were valid. The district court affirmed, and this appeal followed. Creditor D argued that equitable subordination was mandated because (1) the subordination agreements were essentially 'secret liens' that were concealed from Creditor D; (2) Creditors B and C engaged in inequitable conduct by not putting Creditor D on notice of their claim to share Creditor A’s senior lien position; and (3) the debtor was undercapitalized at the time the subordination agreements were made. The Court of Appeals for the Sixth Circuit affirmed, holding that Creditor D had failed to meet the requirements of equitable subordination pursuant to section 510(c). Specifically, (1) the assertion regarding bridge loans was baseless, since there was no evidence that Creditors B and C used power to control in such a way that they engaged in inequitable conduct, particularly in that the subordination agreements were valid; (2) the notice argument was insufficient, since the loans were discussed in the financial statements within the context of Creditor A’s credit facility; and (3) undercapitalization alone was not adequate to justify subordination of insider claims, which required some additional showing of inequitable conduct.Bayer Corp. v. Mascotech, Inc. (In re Autostyle Plastics, Inc.), 2001 U.S. App. LEXIS 22602, – F.3d. – (6th Cir. October 22, 2001) (Boggs, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.05[1][a]

7th. Cir.

Bank was entitled to setoff against funds in joint account. Bankr. S.D. Ill. The married debtors opened a deposit account in joint tenancy, with the right of survivorship, at the creditor bank. The debtor wife was the chief executive officer of a corporation, which executed a promissory note payable to the creditor in the principal sum of $120,000. The codebtor personally guaranteed payment of the note, which matured in 1999, and remained unpaid. In 2000, the debtors deposited the sum of $15,400 in the joint account and shortly thereafter, the creditor set off deposit account funds of $14,852.18 against the unpaid balance of the note. After the debtors filed their chapter 7 petition, the trustee commenced this adversary proceeding to recover the sum of $7,426.09, representing the debtor husband’s share of the funds. The trustee argued that the account documents did not contractually authorize the creditor to set off funds belonging to the debtor husband, and that state (Illinois) law created only a presumption that each of the owners of a joint account could be treated as the absolute owner of all funds, which presumption could be rebutted by proof that a portion of the funds was owned individually. The bankruptcy court examined the deposit agreement and determined that it unequivocally granted the creditor the right to set off the debtor wife’s obligation under the guaranty against any funds she had at the bank, including funds in a joint account. The court then held that extrinsic evidence of the debtor husband’s ownership of funds was of no bearing, because the creditor was contractually entitled to exercise its right to setoff. Mottaz v. Union Planters Bank, N.A. (In re Dame), 2001 Bankr. LEXIS 1347, 268 B.R. 529 (Bankr. S.D. Ill. October 12, 2001) (Meyers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:553.03

Denial of plan confirmation was upheld on appeal. W.D. Wis. The chapter 13 debtor appealed the order of the bankruptcy court denying confirmation of his proposed plan and dismissing his petition. Under the debtor’s plan, his general unsecured nondischargeable claim for child support assigned to a governmental entity was to be paid before the other unsecured claims. The debtor argued that such discrimination between classes of claims was not unfair, but rather promoted the public policies of encouraging the payment of child support obligations and giving him a fresh start. The district court affirmed, holding that the bankruptcy court did not err when it concluded that the assigned child support obligation could not be classified more favorably than other general unsecured claims. The court noted a split of authority on the issue and followed the line of cases that focused on the disparate treatment received by unsecured claimants not in the favored class.Crawford v. Chatterton (In re Crawford), 2001 U.S. Dist. LEXIS 17473, 268 B.R. 832 (W.D. Wis. July 27, 2001) (Crabb, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05

8th. Cir.

Debtor could not change status of tax claim from priority to general unsecured claim absent clear notice to the IRS. Bankr. D. Minn. The debtor filed a chapter 13 petition, and the IRS was scheduled as a creditor in the case. In the debtor’s plan of debt adjustment, the debtor typed language stating, in part, that 'notwithstanding a creditor’s proof of claim... the classification of tax debts... [are classified] as unsecured... and confirmation of the plan will be considered a determination of proper classification.' The IRS filed several proofs of claim asserting priority status, but the IRS did not object to the debtor’s plan. The debtor’s plan was confirmed, and the debtor made payments as called for under the plan. After the end of the plan term, the trustee filed a motion to dismiss the debtor’s case without discharge because, while the debtor had paid the 'raw-dollar amount' contemplated by the debtor’s plan, the debtor had failed to pay the trustee an amount sufficient to satisfy all allowed priority claims in full, and the maximum term of the debtor’s plan had expired under statute. At the hearing on the trustee’s motion, the debtor indicated that he would file an adversary proceeding against the IRS, seeing declaratory relief regarding the IRS’s claim. The court noted that the debtor had submitted his plan on the standard form mandated by local bankruptcy rules, and the prefatory language on the form clearly preserved the process of formal allowance of claims as the means by which a priority creditor’s actual distribution rights are fixed. The court also found that the IRS’s right to the status of a priority claim and the total amount it was entitled to receive were established by that process. Further, the court found that, had the debtor desired to change the IRS’s claim from priority status to unsecured status, the simple requirements of due process required a clear notice to the IRS. The court then ruled that (1) the IRS’s claim was properly treated as a priority claim, (2) confirmation of the debtor’s plan did not result in the IRS’s claim being transformed to a general unsecured claim, and (3) the debtor was not entitled to discharge under chapter 13 until he paid the trustee sufficient funds to pay the allowed IRS claim in full.De Jesus v. United States (In re De Jesus), 2001 Bankr. LEXIS 1337, 268 B.R. 185 (Bankr. D. Minn. September 28, 2001) (Kishel, B.J.).

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

9th. Cir.

District court vacated bankruptcy court order that confirmed debtor’s plan and excused her from proving that plan classification favoring her mother did not discriminate unfairly. B.A.P. 9th Cir. The chapter 13 trustee appealed a bankruptcy court order that confirmed the debtor’s plan and excused her from proving that a plan classification favoring her mother over other creditors did not discriminate unfairly. The debt arose, apparently, from the debtor’s use of her mother’s personal credit cards. The bankruptcy court held that because of the 'however' clause contained in section 1322(b)(1), which allows a debtor to treat claims for consumer debt with a coobligor differently than other unsecured claims, the ban on unfair discrimination contained in section 1322(b)(1) did not apply. The B.A.P. for the Ninth Circuit vacated the bankruptcy court’s decision and remanded the matter for further proceedings. The court held that the 'however' clause did not apply in this case, because there was no individual who was liable on the relevant debt with the debtor within the meaning of section 1322(b)(1); thus, the bankruptcy court incorrectly premised confirmation on a hypothetical question. The court explained that the 'liable with' requirement of section 1322(b)(1) means that both the debtor and the co-obligor must be liable to some other creditor. In this case, absent evidence that the credit card issuers were parties to any arrangement between the debtor and her mother regarding the use of the mother’s credit cards, the debtor’s mother did not qualify as an individual who was 'liable on the debt with the debtor' (citing Collier on Bankruptcy 15th Ed. Revised).Meyer v. Hill (In re Hill), 2001 Bankr. LEXIS 1323, 268 B.R. 548 (B.A.P. 9th Cir. September 28, 2001) (Klein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 8:1322.05

10th. Cir.

Application of section 510(b) subordination hinged on whether issuer of note was the debtor’s affiliate. Bankr. N.D. Okla. The debtor was engaged in the business of purchasing defaulted consumer loans and receivables, and then attempting to collect them. In 1998, the debtor and creditor entered an agreement whereby the debtor would effectuate the transfer of loan packages to a master business trust, which would issue trust certificates. The creditor would receive a promissory note from one of the certificate holders, in consideration for extending a loan whose proceeds would be redirected to the debtor. The note was to be repaid with proceeds from collections by the debtor on the loans contained in the master trust. The creditor entered the note purchase agreement, after performing a due diligence investigation prior to committing to the proposed agreement, during which the debtor made a number of false or misleading statements to explain its financial status, principally by failing to disclose that it had been relying on bulk sales of loans to an affiliated company at inflated prices to meet its collection goals. Accordingly, the master trust issued trust certificates to a series trust, which in turn issued a series note to the creditor, who transferred $189 million to the debtor. After the debtor filed its chapter 11 petition, the creditor filed an adversary proceeding, arguing that certain funds held by the debtor had been impressed with a constructive or resulting trust in the creditor’s favor and that, consequently, such funds were not property of the estate and were, therefore, within the creditor’s reach. The debtor filed a motion to dismiss, arguing that the creditor’s claim for a constructive trust was essentially a claim for the rescission of the sale of a security and therefore conflicted with section 510(b), which mandated that such rescission claims must be subordinated to other claims. The creditor countered with the assertion that the funds were not estate property because the note’s issuer, the series trust, was not an affiliate of the debtor. The bankruptcy court held that the series note was a security encompassed by the language of section 510(b), but declined to rule whether the creditor’s claim fell within the parameters of subordination as required by that provision. The court found that it could not yet determine as a matter of law whether the series note was a security of the debtor or a security of an affiliate of the debtor. The court concluded that, because the creditor could present a set of facts that would exclude it from the reach of section 510(b) if the issuer of the series note was not an affiliate of the debtor, the adversary complaint could not be dismissed (citing Collier on Bankruptcy 15th Ed. Revised). NationsBank, N.A. v. Commercial Fin. Servs. (In re Commercial Fin. Servs.), 2001 Bankr. LEXIS 1342, 268 B.R. 579 (Bankr. N.D. Okla. October 15, 2001) (Rasure, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.04

Sanctions warranted where debtors primary motive in filing multiple chapter 13 petitions was to stop the bank’s foreclosure sales rather than participate in debt adjustment. Bankr. D. Kan. On the day before the bank was to foreclose against the debtor’s residence, the debtor filed an individual chapter 13 petition, automatically staying the sale. When the debtor’s petition was dismissed, the debtor filed a second chapter 13 petition, stopping a second foreclosure sale. When that petition was dismissed, the debtor’s husband filed his individual petition, stopping a third sale. At a hearing on the bank’s motion for relief from the stay in the third case, the court sua sponte ordered the debtor, his wife and counsel to show cause why sanctions should not be imposed pursuant to Rule 9011. At the show cause hearing, where the debtors and counsel did not appear, the court found that the debtors did not evidence an intent to comply with the rules and procedures of chapter 13 or to complete a plan of debt adjustment. The court also found that their primary motive from the outset was to stop the bank’s foreclosure sales by filing chapter 13 petitions. The court further found that counsel for the debtors failed to show cause why his conduct in filing and participating in the debtors’ multiple filings did not constitute an abuse of the bankruptcy process. After finding that the conduct of the debtors and their counsel constituted an abuse of the bankruptcy system, the court imposed sanctions against the debtors to reimburse the bank for its attorney’s fees, publication costs and other expenses. The court also imposed sanctions against the debtors’ counsel for its participation in the debtors’ abuses.In re Copeland, 2001 Bankr. LEXIS 1344, 268 B.R. 273 (Bankr. D. Kan. June 14, 2001) (Flannagan, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 10:9011.04[8], 06[2], 08

11th. Cir.

Stay was lifted to permit regulatory proceedings to commence. Bankr. M.D. Fla. After the bankruptcy court determined that the chapter 13 debtor had committed actual fraud against the creditor, the creditor moved for relief from the automatic stay to initiate a complaint with the state (Florida) real estate commission. The creditor intended to assert a claim against the debtor, stating that as his company’s real estate broker, she committed fraud resulting in a loss of funds. The creditor further sought to recover a portion of his monetary damages from the state real estate recovery fund, which had been established to reimburse parties defrauded by real estate brokers. The bankruptcy court granted the motion, holding that the creditor demonstrated sufficient cause to justify modification of the automatic stay to allow the filing of a claim before the state regulatory commission. The creditor was entitled to pursue recovery from the fund, and the public deserved protection from the commission’s oversight. The court further noted that in the event the commission revoked or suspended the debtor’s license, she would likely be unable to propose a feasible chapter 13 plan.White v. Weatherford (In re Abrass), 2001 Bankr. LEXIS 1361, 268 B.R. 665 (Bankr. M.D. Fla. September 28, 2001) (Jennemann, B.J.).

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

Debtors could not exempt assets that they failed to disclose in initial schedules. Bankr. M.D. Fla. In January 1999, the debtors, who were married, filed a chapter 7 petition, but failed to disclose various financial accounts whose value was approximately $800,000. In addition, the debtors listed their combined 1998 income as $45,840, but it developed that their income for the four years prepetition was over $2.6 million. It was not until September 2000 that the debtors filed amended schedules disclosing the financial accounts, all of which the debtors designated as exempt. The trustee objected to the claims of exemption, arguing that the debtors were not entitled to exempt the belatedly-scheduled accounts because they deliberately failed to disclose them until 18 months after the original schedules were filed. The trustee asserted that the exemptions were claimed in bad faith and that, pursuant to section 522(g), the debtors were not entitled to exempt recovered property. One debtor explained the omission by stating that the original schedules were signed in blank, with the required information to be entered by their attorneys afterward, and that access to necessary information was frustrated by the FBI’s investigation of one debtor’s medical practice. The trustee also sought denial of the debtors’ discharge pursuant to various subsections of section 727(a), and sought to recover the debtors’ $50,000 wedding gift to their daughter. The bankruptcy court, noting the omission of property in the original schedules and the failure to disclose transfers of estate property worth $300,000, termed the debtors’ pattern of behavior a 'textbook illustration' of when discharge should be denied. The court went on to examine the trustee’s section 522(g) arguments and held that the provision did not apply because the trustee did not actually bring any property into the estate that was not already in the debtors’ possession. But the court followed Eleventh Circuit precedent and determined that the debtors could not exempt property omitted from their initial schedules, because it was clear that the debtors intended to hide assets from the reach of creditors. The court concluded that if the only penalty imposed on the debtors was the requirement to amend schedules once the omissions were detected, dishonesty would be too attractive. The court also found that the trustee was entitled to recover the wedding gift as a fraudulent conveyance and that the debtors were entitled to retain an exempt annuity account because it was listed in the initial schedules.Henkel v. Green (In re Green), 2001 Bankr. LEXIS 1362, 268 B.R. 628 (Bankr. M.D. Fla. July 10, 2001) (Jennemann, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.12[1]

Attorney’s fees were recoverable in nondischargeability action based on willful and malicious injury. Bankr. M.D. Fla. The debtor commenced an action in state (Florida) court against the creditor, her insurance carrier, which had denied the debtor’s claim for a theft loss of a laptop computer. The basis for the denial was that the debtor had (1) intentionally concealed and misrepresented material facts in the investigation of the claim and (2) made false statements or engaged in fraudulent conduct during the investigation. The jury returned a verdict for the creditor, based on both of the creditor’s allegations. Specifically, the jury found that the debtor had made the claim in an inflated amount and that certain supporting documents were either fabricated or materially misleading. Thereafter, the creditor filed a motion for attorney’s fees and costs of approximately $57,000. After the debtor filed a chapter 7 petition, the creditor filed a motion for summary judgment, seeking a determination that the award of attorney’s fees and costs was nondischargeable pursuant to section 523(a)(6). Both parties stipulated that the state court judgment should be given collateral estoppel effect. The bankruptcy court held, as a threshold matter, that the debt resulted from the debtor’s intentional misrepresentation, which was intended to cause injury to the creditor by the prosecution of a false claim. The court went on to find that because the actions of the debtor were willful and malicious, the attorney’s fees and costs were nondischargeable. USAA Cas. Ins. Co. v. Auffant (In re Auffant), 2001 Bankr. LEXIS 1321, 268 B.R. 689 (Bankr. M.D. Fla. October 16, 2001) (Williamson, B.J.).

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

  West's Bankruptcy Newsletter
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 19, 2002

CASES IN THIS ISSUE

• 1st Cir.

  § 362 Former directors of debtor granted relief from stay to use insurance proceeds in defending adversary proceeding.
  In re Cybermedia (Bankr. D. Mass.)

  § 523(a)(10) Amendment of schedules to include creditor in original chapter 7 case was not a determination of dischargeability binding in subsequent filing.
  Osenkowski v. Moretti (In re Moretti) (Bankr. D.R.I.)

  § 541(c)(2) Debtor’s interest in ex-husband’s retirement plan was not property of the estate.
  Ostrander v. Lalchandani (In re Lalchandani) (B.A.P. 1st Cir.)

  ---

  2d Cir.

  § 362(d) Relief from stay granted to allow parties to pursue preliminary injunction against debtors in copyright infringement action.
  In re Deep (Bankr. N.D.N.Y.)

  § 365(d)(2) Decision to assume or reject contracts for transport of natural gas would be properly made two weeks after regulatory ruling on profitability.
  In re Enron (Bankr. S.D.N.Y.)

  ---

  3d Cir.

  § 362 Case reopened for consideration of effect of lender creditor’s post-stay deficiency judgment.
  CIT Small Bus. Lending Co. v. Zinchiak (In re Zinchiak) (Bankr. W.D. Pa.)

  28 U.S.C. § 157(b)(5) Joint tortfeasors’ future claim for contribution against debtor not proper for transfer.
  In re N. Am. Refractories Co. (Bankr. W.D. Pa.)

  ---

  4th Cir.

  § 365(d)(3) Rent, real estate taxes and fees accruing postpetition were priority administrative expenses.
  In re Trak Auto Corp. (Bankr. E.D. Va.)

  § 502 Proof of claim to which there is no objection is deemed allowed despite being late and no motion for leave to file is necessary.
  In re Guidry (Bankr. W.D. Va.)

  § 525(b) Bank’s failure to hire former chapter 11 debtor was not discrimination with respect to employment.
  Stinson v. BB & T Inv. Servs. (In re Stinson) (Bankr. E.D. Va.)

  ---

  5th Cir.

  28 U.S.C. § 1334(b) Debtor’s undisclosed state court litigation properly removed as related to bankruptcy.
  Dixon v. First Family Fin. Servs. (Bankr. S.D. Miss.)

  ---

  6th Cir.

  § 507(a)(8)(A) Timely noticed IRS deficiencies were not discharged in chapter 7 proceeding.
  Pilya v. Comm’r (In re Pilya) (Bankr. S.D. Ohio)

  § 510(a) Mortgage subordination agreement valid and enforceable under section 510(a) and state law.
  Kobak v. Nat’l City Bank (In re Kobak) (Bankr. N.D. Ohio)

  § 523(a)(5) Debtor’s non-traditional obligations to ex-spouse pursuant to divorce decree were not support and were dischargeable. Phelps v. Cordia (In re Cordia) (Bankr. N.D. Ohio)

  ---

  7th Cir.

  § 365(e) Partnership agreement was an executory contract of which only financial interest was transferred in partner’s bankruptcy.
  Sable v. Morgan Sangamon P’ship (Bankr. N.D. Ill.)

  § 727(a)(2)(A) Denial of discharge upheld due to direct and unrebutted evidence of debtor’s intent to defraud.
  In re Kontrick (7th Cir.)

  ---

  8th Cir.

  § 522 Facts of case supported applying doctrine of marshalling to tax liens against homestead.
  Ramette v. U.S. (In re Bame) (B.A.P. 8th Cir.)

  ---

  9th Cir.

  § 110(j)(1) Injunction against petition preparer was a core proceeding not triable to a jury but requiring proper notice to parties. Demos v. Brown (In re Graves) (B.A.P. 9th Cir.)

  § 707(b) Dismissal of petition not warranted absent evidence of substantial abuse.
  Harris v. U.S. Tr. (In re Harris) (B.A.P. 9th Cir.)

  ---

  D.C. Cir.

  § 522(d)(10)(E) Debtor’s IRA exempted from discharge although not yet payable.
  In re Burkette (Bankr. D.D.C.)

  ---

  Collier Bankruptcy Case Summaries

1st Cir.

Former directors of debtor granted relief from stay to use insurance proceeds in defending adversary proceeding. Bankr. D. Mass. PROCEDURAL POSTURE: The debtor filed a chapter 7 petition under the Bankruptcy Code. Plaintiff trustee brought an adversary action against defendants, two former company directors. One former director filed a motion for relief from the automatic stay to use the proceeds from the debtor’s insurance policy to pay the defense costs. The other director moved to join the first motion. The trustee objected to both motions. OVERVIEW: The former directors claimed that as former directors and/or officers of the debtor and as defendants of the trustee’s complaint, they had a contractual right to payment of defense costs and expenses related to the adversary proceeding and any loss resulting from the claims. The insurer was willing to pay the defense costs and expenses incurred, but had not done so because of the trustee’s opposition. The former directors claimed that policy proceeds were not property of the estate and the automatic stay was not applicable because the debtor did not have an interest in the proceeds. The court adopted the logic of the cases holding that directors and liability insurance proceeds were property of the estate. The court found that the insurance policy was of benefit to the estate since the estate was worth more with it than without. The court found that there was cause to lift the automatic stay because the former directors could have suffered substantial and irreparable harm if they were prevented from exercising their rights to legal defense payments. In re Cybermedia, 2002 Bankr. LEXIS 690, 280 B.R. 12 (Bankr. D. Mass. July 2, 2002) (Rosenthal, B.J.).

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

Amendment of schedules to include creditor in original chapter 7 case was not a determination of dischargeability binding in subsequent filing. Bankr. D.R.I. PROCEDURAL POSTURE: In the debtor’s second chapter 7 case, filed more than six years after the first chapter 7, a creditor filed an adversary complaint to determine that her debt was non-dischargeable under 11 U.S.C. § 523(a)(10), arguing that the denial of the debtor’s motion seeking to include the creditor as a creditor in the prior proceeding was res judicata of the dischargeability of her claim in the second proceeding. OVERVIEW: After the first case had been closed, the debtor moved to reopen it to add certain creditors that had not been listed, including the creditor. The bankruptcy court reopened the case conditioned on the debtor paying the creditor’s state court legal fees and costs, which had been incurred while the creditor did not know of the bankruptcy. That order was affirmed on appeal, but the debtor never paid the fees and costs. In the second chapter 7, the court agreed with the debtor that the dischargeability of the creditor’s debt was not determined in the prior bankruptcy, nor was it ever adjudicated in any other court. Res judicata did not apply. It was not alleged that the debtor waived his discharge under 11 U.S.C. § 727(a)(10), or that he was denied a discharge in the prior bankruptcy - either of which was necessary to bring the adversary complaint under 11 U.S.C. § 523(a)(10). The creditor had a misconception that discharge was somehow related to the amendment of schedules. One had nothing to do with the other. In the prior proceeding, dischargeability was never argued. In the prior case, the late scheduling of the debt, if permitted, had no effect on their dischargeability. Osenkowski v. Moretti (In re Moretti), 2002 Bankr. LEXIS 687, 278 B.R. 300 (Bankr. D.R.I. May 22, 2002) (Votolato, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:523.16

2nd Cir.

Relief from stay granted to allow parties to pursue preliminary injunction against debtors in copyright infringement action. Bankr. N.D.N.Y. PROCEDURAL POSTURE: Three debtors were involved in a copyright infringement action with the movants. A debtor filed a chapter 13 petition before a trial status conference. Later the two corporate debtors filed chapter 11 petitions. The movants sought relief from the automatic stay under 11 U.S.C. § 362(d) to permit them to seek the issuance of a preliminary injunction in a pending multidistrict litigation ('MDL') in district court. OVERVIEW: The movants asked the court to consider four factors: (1) the harm to them; (2) the interests of judicial economy; (3) the existence of an alternative forum; and (4) the impact granting the motion would have on the debtors’ reorganization efforts. The court noted that the U.S. Court of Appeals for the Second Circuit had listed twelve factors to consider in whether to lift the automatic stay to allow litigation in another venue. The court found that the interests of judicial economy, and the expeditious and economical resolution of litigation and the balance of harms, weighed in favor of granting the movants’ motion. The court believed that having the MDL court decide the preliminary injunction motion as a matter of law would serve the interests of judicial economy and expedite the resolution of key litigation between the parties. The balance of harms factor also weighed in the movants’ favor. The issue of whether the debtors infringed on the movants’ copyrights would have to be decided by some court. In re Deep, 2002 Bankr. LEXIS 668, 279 B.R. 653 (Bankr. N.D.N.Y. June 18, 2002) (Littlefield, B.J.).

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

Decision to assume or reject contracts for transport of natural gas would be properly made two weeks after regulatory ruling on profitability. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Creditor pipeline owner requested, under 11 U.S.C. § 365(d)(2), that the chapter 11 debtors be compelled to assume or reject executory contracts under which the creditor transported natural gas for or at the debtors’ direction. The creditor also moved for an administrative expense priority under 11 U.S.C. § 503(b)(1)(A) for claims based on the reservation of pipeline capacity. The debtors and the creditors’ committee objected. OVERVIEW: The bankruptcy involved thousands of executory contracts. The debtors were diligently reviewing all of the contracts and needed a reasonable time to decide whether to assume or reject the contracts. Whether or not the contracts were assumed or rejected, if there was a demand for the gas, some entity would utilize pipeline capacity. The contracts could be profitable depending on whether a regulatory agency extended its policy of allowing parties to release the capacity at a profit, a decision that would be made within a few months. Under 11 U.S.C. § 365(d)(2), assumption or rejection could be determined two weeks after that decision. The potential of a benefit to the debtors from the availability of capacity did not entitle the creditor to an administrative expense priority for its claim for periods when the debtors did not use the pipeline or release its capacity. Any claim against the debtors based on the release of pipeline capacity to a third party was only entitled to administrative priority under 11 U.S.C. § 503(b)(1)(A) to the extent that the debtors benefited by that use, but the creditor had received payment for the release of capacity from the third parties. In re Enron, 2002 Bankr. LEXIS 671, 279 B.R. 695 (Bankr. S.D.N.Y. June 28, 2002) (Gonzalez, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.04[2]

3rd Cir.

Case reopened for consideration of effect of lender creditor’s post-stay deficiency judgment. Bankr. W.D. Pa. PROCEDURAL POSTURE: Movant lender filed a motion to reopen a debtor’s bankruptcy in response to a complaint filed in state court by respondent mortgage holder, which had a third mortgage on debtor’s home. At the time the mortgage holder filed the complaint, the debtor received a discharge and the case was closed. In the complaint, the mortgage holder sought a determination that the lender had been paid in full and an order for the lender to satisfy its mortgage. OVERVIEW: The bankruptcy court found that the issues in the state court action involved the effect of the automatic stay during the duration of the bankruptcy case and an interpretation of the bankruptcy court’s orders granting partial and eventually complete relief from stay. During the bankruptcy case, a determination as to the grant of relief from stay as to debtor’s home was deferred. Prior to the granting of relief from stay to allow the lender (and the other lenders) to pursue the home, any action to pursue a deficiency judgment against debtor would have been viewed as an action to enforce the lender’s claim against the home, which the lender could not do. Resolution of the lender’s deficiency judgment claim would have had an affect on the value of the assets, which might have been available for the benefit of other creditors. The determination was therefore relevant to case administration. CIT Small Bus. Lending Co. v. Zinchiak (In re Zinchiak), 2002 Bankr. LEXIS 682, 280 B.R. 117 (Bankr. W.D. Pa. July 3, 2002) (Bentz, B.J.).

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

Joint tortfeasors’ future claim for contribution against debtor not proper for transfer. Bankr. W.D. Pa. PROCEDURAL POSTURE: Asserting claims of contribution and indemnity against the debtors under Miss. Code Ann. § 85-5-7 (1999), two creditors involved in state court asbestos related actions filed motions to transfer the claims asserted against them to the United States District Court for the Western District of Pennsylvania pursuant to 28 U.S.C. §§ 157(b)(5), 1334. OVERVIEW: The creditors, as joint tortfeasors with the debtors, had no contribution claim, as Miss. Code Ann. § 85-5-7(6) (1999) provided for a such a right only as to other defendants in the action. The state court had severed the claims against the debtors. There had been no relief from the automatic stay to proceed with claims against the debtors. A future claim for contribution, if the creditors were held liable in the state court action, and if a contribution claim was established, was not a case or controversy subject to adjudication under 28 U.S.C. § 157(b)(5). Although indemnification claims gave rise to 'related to' jurisdiction under 28 U.S.C. § 1334, the creditors had no contractual right to indemnification. Speculation was not a 'conceivable effect' on the estates. The creditors’ remedy was to file a claim in the bankruptcy case. Although the debtors’ asbestos was allegedly involved, it was not the entire basis for the state actions. There were allegations of one creditor’s direct negligence. Whether the parties were entitled to non-contractual implied indemnity depended on the state court results and was not a basis for finding that they had a cognizable bankruptcy claim. In re N. Am. Refractories Co., 2002 Bankr. LEXIS 669, 280 B.R. 356 (Bankr. W.D. Pa. June 28, 2002) (Fitzgerald, C.B.J.).

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

4th Cir.

Rent, real estate taxes and fees accruing postpetition were priority administrative expenses. Bankr. E.D. Va. PROCEDURAL POSTURE: Several creditors, shopping center landlords, sought payment of postpetition rent, taxes, and other fees as administrative expenses under 11 U.S.C. §§ 365(d)(3), 507(a). The debtor, the creditors’ committee, and some landlords disputed what method should be used to calculate the obligations. The debtor sought to assume and assign one lease; that landlord argued it would disrupt its tenant mix and violate other tenants’ exclusivity provisions. OVERVIEW: The accrual method was adopted to determine the debtor’s liability for all postpetition expenses. Anything accruing after the entry of the order for relief was a postpetition charge that was granted administrative priority under 11 U.S.C. §§ 365(d)(3), 507(a). The debtor’s obligations to pay real estate taxes and common area maintenance charges as 'additional rent' accrued on a daily basis. Under 11 U.S.C. § 365(d)(3), postpetition bills had to be prorated so that the debtor paid, as an administrative expense, only those charges which accrued during the postpetition, pre-rejection period. The landlords were entitled to other charges as allowed under the terms of their respective leases and those charges could include late fees, interest, attorney’s fees, and damages to the premises, without having to show that continued possession benefited the estate. All of the administrative claims would be paid according to the priority under 11 U.S.C. § 507(a); they were not entitled to superpriority status. Due to conflicting messages as to whether the debtor was withdrawing the motion to assume the one lease, that matter was reserved to allow that landlord to present evidence. In re Trak Auto Corp., 2002 Bankr. LEXIS 675, 277 B.R. 655 (Bankr. E.D. Va. March 4, 2002) (Adams, B.J.).

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

Proof of claim to which there is no objection is deemed allowed despite being late and no motion for leave to file is necessary. Bankr. W.D. Va. PROCEDURAL POSTURE: A creditor filed a motion for leave to file a late proof of claim for what it asserted was the correct amount of prepetition arrears. The chapter 13 debtors’ confirmed plan proposed to pay the arrears in a lesser amount. Neither the chapter 13 trustee nor the debtors objected to the motion under 11 U.S.C. § 502(b)(9). OVERVIEW: 11 U.S.C. § 502 provided that a proof of claim filed under 11 U.S.C. § 501 was deemed allowed, unless a party in interest objected. The creditor had not timely filed its claim within 90 days of the first meeting of creditors under Fed. R. Bankr. P. 3002. The court found that untimeliness could be asserted as a defense to tardily filed proofs of claim. The mere fact of tardiness did not appear to axiomatically render the proof of claim disallowed: a filed proof of claim was allowed until an objection was interposed and ruled on by the court under 11 U.S.C. § 502(b)(9). The court found that there was no justiciable issue to address. Nothing in the Bankruptcy Code prohibited the creditor from filing of a late proof of claim and no party had objected to the motion. The filed claim was allowed until an objection was raised, at which time the court would adjudicate the issue. In re Guidry, 2002 Bankr. LEXIS 659, – B.R. – (Bankr. W.D. Va. June 3, 2002) (Krumm, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.01

Bank’s failure to hire former chapter 11 debtor was not discrimination with respect to employment. Bankr. E.D. Va. PROCEDURAL POSTURE: Plaintiff, a chapter 7 debtor, alleged that defendant bank withheld an offer of employment solely because he had been a debtor under Title 11. The bank moved to dismiss the complaint for failure to state a claim. OVERVIEW: The debtor alleged that the bank’s refusal to extend an offer of employment was based solely on the fact that he had been a debtor under Title 11. The debtor contended that the bank’s decision with respect to the debtor’s employment was in violation on 11 U.S.C. § 525(b)(1). The bank argued that discriminatory hiring was not an event proscribed by section 525(b). Debtor admitted that section 525(b) did not explicitly outlaw discriminatory hiring, but argued that the prohibition in the statute against discriminating 'with respect to employment' was broad enough to cover the factual situation set forth in the debtor’s complaint. The bank further argued that since section 525(b) did not specifically include a refusal to hire in its anti-discrimination provision, there was no legal basis to support the complaint. The court concluded that section 525(b) prohibited discrimination with respect to employment, but this prohibition did not include hiring decisions. The court reasoned that it could not give the statute a meaning that harmed the text enacted by Congress and signed by the President. Stinson v. BB & T Inv. Servs. (In re Stinson), 2002 Bankr. LEXIS 662, – B.R. – (Bankr. E.D. Va. April 26, 2002) (Krumm, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:525.04

5th Cir.

Debtor’s undisclosed state court litigation properly removed as related to bankruptcy. Bankr. S.D. Miss. PROCEDURAL POSTURE: Plaintiff borrowers sued defendants, lender and insurers, in state court, alleging that defendants overcharged them and failed to disclose to them pertinent information in regard to life and property insurance that was allegedly required as a condition of loans made by the lender. After defendants removed the case to federal district court, the borrowers moved to strike supplements of defendants to notice of removal, to remand, and to dismiss. OVERVIEW: Defendants removed on the basis that several borrowers were involved in bankruptcy proceedings. The borrowers voluntarily dismissed those borrowers. With their answer, defendants filed supplements to their notice of removal naming three additional borrowers involved in bankruptcy proceedings. The borrowers’ motion to voluntarily dismiss was with respect to those three borrowers, or alternatively to dismiss as to all of the borrowers. The court allowed the supplements, though filed after the 30-day period under 28 U.S.C. § 1446(b) had expired, as a clarification of the jurisdictional grounds for removal. The court found that the borrowers were equitably estopped from dismissing their claims, as the three borrowers involved in bankruptcy proceedings failed to perform their duty to disclose the instant litigation, and because the borrowers engaged in blatant forum shopping. The borrowers’ bankruptcy proceedings were likely to be reopened to administer the undisclosed assets, so that the state court suit was related to their bankruptcy estates, and the district court had subject matter jurisdiction under 28 U.S.C. § 1334(b) and (e). Further, the state case was a core proceeding. Dixon v. First Family Fin. Servs., 2002 U.S. Dist. LEXIS 10783, 276 B.R. 173 (Bankr. S.D. Miss. March 15, 2002) (Barbour, D.J.).

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

6th Cir.

Timely noticed IRS deficiencies were not discharged in chapter 7 proceeding. Bankr. S.D. Ohio PROCEDURAL POSTURE: Chapter 7 debtors reopened their bankruptcy and filed an adversary proceeding against the creditor United States to determine whether their federal income tax liabilities for 1995 and 1996 had been discharged under 11 U.S.C. § 523(a)(1)(A). The United States moved for summary judgment, arguing that the assessment was proper under I.R.C. §§ 6501, 6503(a), 6513. OVERVIEW: I.R.C. § 6501 limited an assessment to a period within three years after the return was filed unless before the expiration of the three years, there was an extension. I.R.C. § 6503(a) suspended the running of the statute of limitations while the Internal Revenue Service ('IRS') was prohibited from making an assessment and for 60 days thereafter. The notice of deficiency was mailed to each the debtors within three years of when the 1996 return was filed, and within three years of when the debtors consented in writing to the extension of time for an assessment for the 1995 tax year. The statute of limitations for making an assessment had not expired when the notice of deficiency was mailed. Once the notice of deficiency was mailed, I.R.C. § 6513 restricted the IRS from making an assessment for 90 days. The debtors filed a petition for redetermination during that 90-day period. The statute of limitations for the assessment of the additional taxes for 1995 and 1996 would not run until 60 days after the final decision by the tax court. The deficiencies remained assessable for purposes of 11 U.S.C. §§ 507(a)(8)(A), 523(a)(1)(A)(iii), and were not discharged by the order of discharge. Pilya v. Comm’r (In re Pilya), 2002 Bankr. LEXIS 666, – B.R. – (Bankr. S.D. Ohio May 6, 2002) (Sellers, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:507.10[2]

Mortgage subordination agreement valid and enforceable under section 510(a) and state law. Bankr. N.D. Ohio PROCEDURAL POSTURE: Plaintiffs, the debtors, filed a petition for relief under the Bankruptcy Code. The debtors filed a complaint, pursuant to Fed. R. Bankr. P. 7001(2), against defendants, two banks, to determine the extent, priority, and amount of liens held against their property. The banks answered the complaint and each claimed that it held the first and best lien. The first bank filed for summary judgment, and the second bank filed a separate motion. OVERVIEW: The court concluded the agreement between the second bank and the debtors was a lien subordination. The second bank had demoted the priority of a lien. The debtors and the second bank executed a subordination agreement whereby the second bank agreed to subordinate its first priority lien to its third priority lien. The first bank’s secured interest held second priority when this subordination agreement was recorded. The court found that the subordination agreement was valid and enforceable pursuant to 11 U.S.C. § 510(a) and state law. The first bank was not a party and the agreement did not intend to subordinate any of the second bank’s interest to the first bank. The second bank’s lien became senior, displacing the first priority lien in an amount equal to the obligation secured by the second bank’s lien. The court found that the recording of the subordination agreement did not result in a positive or negative change to the first bank’s position, thereby leaving the first bank in the same position as it was prior to the recording of the agreement. Kobak v. Nat’l City Bank (In re Kobak), 2002 Bankr. LEXIS 684, 280 B.R. 164 (Bankr. N.D. Ohio June 28, 2002) (Kendig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:510.03

Debtor’s non-traditional obligations to ex-spouse pursuant to divorce decree were not support and were dischargeable. Bankr. N.D. Ohio PROCEDURAL POSTURE: A creditor, the debtor’s ex-wife of debtor, filed an adversary proceeding seeking to have certain debts arising under the parties’ judgment of divorce deemed non-dischargeable pursuant to 11 U.S.C. § 523(a)(5), (15). The obligations included the divorce court’s order that the debtor hold the ex-wife harmless on one half of the marital debts and on vehicle debts, and a debt owed to the ex-wife for a violation of a state court order. OVERVIEW: The divorce decree listed the debts under division of assets and allocation of debt. Temporary spousal support, which was separately considered, had terminated. Only the debt from the violation of the court order was directly payable to the ex-wife, and it was not listed under the support section. The payments were not contingent on other life events. The obligations did not bear the traditional indicia of support and were dischargeable under 11 U.S.C. § 523(a)(5). The debtor and his new wife projected a monthly income of $4,000 during the winter months, and $4,399 in expenses, but the income projection was high, due to reduced work. The debtor’s records supported his testimony that he could not pay the debts. His expenses were reasonable. The debtor’s finances continued to decline and would not improve due to his age, job skills, and health. The ex-wife and her new husband had at least $1,000 of disposable monthly income and equity of $50,000. She had $15,000 of the debtor’s assets which she had not returned. The ex-wife and her new husband had a higher standard of living. Under 11 U.S.C. § 523(a)(15)(B), the benefit of a discharge outweighed the detriment to the ex-wife. Phelps v. Cordia (In re Cordia), 2001 Bankr. LEXIS 1930, 280 B.R. 138 (Bankr. N.D. Ohio December 21, 2001) (Kendig, B.J.).

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

7th Cir.

Partnership agreement was an executory contract of which only financial interest was transferred in partner’s bankruptcy. Bankr. N.D. Ill. PROCEDURAL POSTURE: Appellant, a trustee for a partnership’s pension fund, filed a petition for involuntary bankruptcy against defendant, a partnership, in which he had acquired an interest. The bankruptcy court dismissed the petition, holding that the trustee lacked standing to file an involuntary petition against the partnership under 11 U.S.C. § 303(b). The partner appealed the dismissal and the partnership cross-appealed the court’s denial of attorneys’ fees. OVERVIEW: The partnership was formed for the purpose of owning and managing a single piece of real property. The partnership agreement prohibited the admission of an additional or substitute partner without the written consent of all partners and also contained a partner bankruptcy provision. A partner declared bankruptcy and the trustee purchased the interest from the estate at a public auction. The trustee later attempted to file a petition for involuntary bankruptcy against the partnership. The bankruptcy court concluded that the partnership agreement was an executory contract that fell within the scope of 11 U.S.C. § 365(e)(2), and that the bankruptcy clause was valid and enforceable. The bankruptcy court held that the trustee was not a general partner. The district court found the issue under 11 U.S.C. § 365(e) to be not what was transferred to the bankruptcy estate, but what rights and interests could have be assigned by the estate to a third party. The partnership agreement required the consent of all the partners, as did Illinois law. The bankruptcy court was correct. All the trustee had for his acquisition was a financial interest in the partnership. Sable v. Morgan Sangamon P’ship, 2002 U.S. Dist. LEXIS 12042, 280 B.R. 217 (Bankr. N.D. Ill. June 28, 2002) (Bucklo, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:365.07

Denial of discharge upheld due to direct and unrebutted evidence of debtor’s intent to defraud. 7th Cir. PROCEDURAL POSTURE: Defendant debtor appealed from the judgment of the United States District Court for the Northern District of Illinois, Eastern Division, affirming the denial of the debtor’s discharge under 11 U.S.C. § 727(a)(2)(A) in plaintiff creditor’s underlying adversary proceeding following the debtor’s filing for bankruptcy liquidation. OVERVIEW: The debtor claimed that the creditor’s complaint was untimely, that the bankruptcy court incorrectly concluded that he had waived his objection to the timeliness of the creditor’s complaint because Fed. R. Bankr. P. 4004(a)’s time limit was jurisdictional and not subject to waiver, and that there was a genuine issue of material fact about his intent in transferring his paychecks to his wife in the year before bankruptcy. The court initially held that, although the creditor’s complaint was untimely, the debtor waived his objection to timelines because Fed. R. Bankr. P. 4004(a)’s time limit was subject to waiver and the debtor never contested the timeliness of the creditor’s allegations in his amended complaint. The court further held that there was no genuine issue of material fact about the debtor’s intent because there was direct and unrebutted evidence, from the debtor’s own words, of his intent, and that the bankruptcy court properly denied discharge to the debtor under 11 U.S.C. § 727(a)(2)(A). In re Kontrick, 2002 U.S. App. LEXIS 13596, – B.R. – (7th Cir. July 8, 2002) (Wood, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 6:727.02

8th Cir.

Facts of case supported applying doctrine of marshalling to tax liens against homestead. B.A.P. 8th Cir. PROCEDURAL POSTURE: An involuntary chapter 7 bankruptcy petition was filed against the debtor. The case was converted to chapter 11 and reconverted. Appellee trustee filed an adversary action against appellants, federal and state taxing authorities, seeking an order requiring the taxing authorities to look first to the homestead to satisfy their liens. The taxing authorities appealed the order from the United States Bankruptcy Court for the District of Minnesota. OVERVIEW: The taxing authorities had filed tax liens against the homestead on account of the husband’s tax liabilities and filed proofs of claim against the debtor’s bankruptcy estate. As of the petition date the debtor owned no property to which the liens attached, and their claims were allowed as unsecured claims. The taxing authorities wanted to be paid from the estate funds. The trustee filed the action because if the taxing authorities participated in the distribution of the estate funds, the available funds for other creditors would be reduced. The appellate panel rejected the claim that the doctrine of marshaling should not be applied to governmental agencies engaged in the revenue collection. The panel declined to hold that the application of marshaling to governmental taxing authorities was per se prohibited. It concluded that marshaling must be evaluated on a case by case basis, regardless of whether a taxing authority was involved. The bankruptcy court carefully weighed the relevant factors and determined that requiring the taxing authorities to look first to the homestead for satisfaction of their liens prior to receiving a distribution from the bankruptcy estate was equitable. Ramette v. U.S. (In re Bame), 2002 Bankr. LEXIS 679, 279 B.R. 833 (B.A.P. 8th Cir. July 2, 2002) (Koger, C.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:522.01

9th Cir.

Injunction against petition preparer was a core proceeding not triable to a jury but requiring proper notice to parties. B.A.P. 9th Cir. PROCEDURAL POSTURE: Appellant, a bankruptcy petition preparer, challenged denial of his motion by the United States Bankruptcy Court for the District of Arizona, which treated it as a motion to alter or amend under Fed. R. Civ. P. 59(e). OVERVIEW: The court was asked to harness the proper procedure for exercising authority under 11 U.S.C. § 110(j) to enjoin a bankruptcy petition preparer from preparing petitions. There were four issues. The first was whether an injunction action under 11 U.S.C. § 110(j) was a 'core proceeding;' the court held it was. The second issue was whether there was a right to trial by jury in an injunction action under 11 U.S.C. § 110(j). The court found no such constitutional or statutory right. The third issue was whether a section 110(j) injunction proceeding could be initiated by a court acting under 11 U.S.C. § 105(a). The court held that while an adversary proceeding was ordinarily required, section 105(a) did permit a bankruptcy judge to raise the issue, provided that the bankruptcy petition preparer received certain procedural protections. The fourth issue was if relief from the injunction should have been granted on due process grounds. Since there was no notice that an 11 U.S.C. § 110(j)(2)(B) permanent injunction might have resulted from a hearing, the ensuing injunction was a void judgment that, the bankruptcy court, inter alia, had a duty to vacate under Fed. R. Civ. P. 59(e), 60(b)(4). Demos v. Brown (In re Graves), 2002 Bankr. LEXIS 613, 279 B.R. 266 (B.A.P. 9th Cir. May 30, 2002) (Klein, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 2:101.00

Dismissal of petition not warranted absent evidence of substantial abuse. B.A.P. 9th Cir. PROCEDURAL POSTURE: Appellant bankruptcy debtors petitioned for chapter 7 relief in the form of discharge of unsecured nonpriority debt, but appellee United States Trustee asserted that the debtors stated expenses were unreasonable. The debtors appealed the order of the United States Bankruptcy Court for the Central District of California which granted the Trustee’s motion to dismiss the petition for substantial abuse under 11 U.S.C. § 707(b). OVERVIEW: The debtors contended that their expenses were reasonable and necessary for their maintenance and support, but the Trustee argued that the debtors could reduce their expenses sufficiently to fund a reasonable plan for repaying a substantial portion of their unsecured debt. The bankruptcy appellate panel held that dismissal of the petition for substantial abuse was not warranted since the Trustee failed to produce evidence concerning the unreasonableness of the debtors’ expenses sufficient to support a finding of ability to repay, or any evidence of bad faith. In the absence of such evidence, and in view of the section 707(b) presumption in favor of granting the debtors’ requested relief, the debtors were not required to justify their leases of expensive vehicles or explain their substantial credit card debt. Further, while a proper evidentiary showing might have supported a finding of substantial abuse, the bankruptcy court’s familiarity with the cost of living in area in question was not a substitute for such evidence in judging the reasonableness of the debtors’ lifestyle. Harris v. U.S. Tr. (In re Harris), 2002 Bankr. LEXIS 612, 279 B.R. 254 (B.A.P. 9th Cir. May 14, 2002) (Brandt, B.J.).

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

D.C. Cir.

Debtor’s IRA exempted from discharge although not yet payable. Bankr. D.D.C. PROCEDURAL POSTURE: The debtor filed for relief under chapter 7 of the Bankruptcy Code. The trustee filed an objection to the debtor’s exemption claim of her individual retirement accounts ('IRAs'). OVERVIEW: The debtor claimed that with her pending retirement and uncertain financial condition, her IRAs were reasonably necessary for her support within the meaning of 11 U.S.C. § 522(d)(10)(E). The trustee challenged the exception because the debtor was not retired and because any payments under the IRAs were not reasonably necessary for her support. The court held that an IRA was a 'similar plan' within the meaning of section 522(d)(10)(E) and that that an IRA need not be presently payable for age-related purposes in order to be exempt. The court found that the retirement plans described in section 522(d)(10)(E) were plans which accumulated funds that were to be paid in the future. The statute placed no limitation on when the receipt of the retirement benefit had to occur. The court examined eleven factors to determine what was reasonably necessary for the debtor’s support. It found that the debtor’s advanced age was a significant factor to consider. Any reduction in the debtor’s retirement assets represented a serious threat to the debtor’s financial well-being during her retirement years and the IRAs were reasonably necessary for her support. In re Burkette, 2002 Bankr. LEXIS 677, 279 B.R. 388 (Bankr. D.D.C. April 24, 2002) (Teel, B.J.).

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