Collier Bankruptcy Case Update August-13-01
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 13, 2001
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 2d Cir.
ß 547(c)(2) Transferors failed to meet burden of proof.
Katz v. Leonard P. Drabkin Irrevocable Trust (In re Van Dyck) (Bankr. D. Conn.) 081027
3d Cir.
ß 105(a) Bankruptcy court erred in enjoining telecommunications provider from terminating service to debtor.
MFS Telecom, Inc. v. Motorola, Inc. (In re Conxus Communications, Inc.) (D. Del.) 081001ß 106(a) Eleventh Amendment barred dischargeability proceeding.
Askey v. Pennsylvania (In re Askey) (Bankr. W.D. Pa.) 081002ß 362(b)(2) Former spouse was entitled to pursue contempt action.
Gunther v. Glabb (In re Glabb) (Bankr. W.D. Pa.) 081007ß 1101(2) District court properly dismissed appeal from confirmation order as equitably moot.
Nordhoff Invs. v. Zenith Elecs. Corp. (3d Cir.) 081030
5th Cir.
ß 523(a)(4) Court of Appeals affirmed district court’s decision that undisputed summary judgment evidence established debtor’s willful breach of fiduciary duty and defalcation.
Office of Thrift Supervision v. Felt (In re Felt) (5th Cir.) 081017ß 541(a)(1) Insurance proceeds were property of the estate.
Equinox Oil Co. v. Antihill Constr. Co. (In re Equinox Oil Co.) (E.D. La.) 081024
6th Cir.
ß 522(b)(2)(A) Tennessee debtors could claim exemption for uninsured motorist benefits in addition to personal bodily injury exemption.
In re Thompkins (Bankr. W.D. Tenn.) 08101428 U.S.C. ß 1412 Change of venue was affirmed.
Jahraus v. Armbrust (In re Armbrust) (W.D. Ky.) 081041
7th Cir.
ß 363(f) Lease was not extinguished by sale.
Precision Indus., Inc. v. Qualitech Steel SBQ, L.L.C. (In re Qualitech Steel Corp.) (S.D. Ind.) 081008ß 502(a) Claim was determined by confirmed plan.
In re Duggins (Bankr. C.D. Ill.) 081011ß 1322(c) Debtor could cure the arrearage of his mortgage despite foreclosure sale.
In re Spencer (Bankr. N.D. Ill.) 08103128 U.S.C. ß 158(a) Court lacked jurisdiction over appeal.
In re Bond (7th Cir.) 081036
8th Cir.
ß 329(a) Order of disgorgement was not abuse of discretion.
Schroeder v. Rouse (In re Redding) (B.A.P. 8th Cir.) 081003ß 362(a)(6) Failure to reinstate driver’s license was not a violation of the stay.
Kimsey v. Suski (In re Kimsey) (Bankr. E.D. Ark.) 081006ß 506 Trustee could not avoid lien asserted by bank against Arkansas debtor’s property.
Meeks v. First Bank of S. Ark. (In re Tracy’s Flowers and Gifts, Inc.) (Bankr. W.D. Ark.) 081012ß 523(a)(6) Debt arising from gunshot wound held dischargeable.
Maxwell v. Price (In re Price) (Bankr. E.D. Ark.) 081020ß 523(a)(8) Creditor’s collection costs were not approved.
Lester E. Cox Med. Ctrs. v. Penn (In re Penn) (Bankr. W.D. Mo.) 081021ß 1322(c) Relief from stay was properly granted.
Montgomery v. Dennis Joslin Co. II, L.L.C. (In re Montgomery) (B.A.P. 8th Cir.) 08103228 U.S.C. ß 1334(c) Abstention motion granted where state law issues predominated and individual defendants were entitled to jury trial.
Krigel’s, Inc. v. Ary Jewelers, L.L.C. (In re Krigel’s, Inc.) (Bankr. W.D. Mo.) 081040
9th Cir.
ß 362(a)(1) Service of subpoena upon debtor did not violate the stay.
Groner v. Miller (In re Miller) (B.A.P. 9th Cir.) 081004ß 362(a)(3) Motion for sanctions against the debtor did not violate the stay.
Groner v. Miller (In re Miller) (B.A.P. 9th Cir.) 081005ß 523(a)(8) Partial discharge was allowable.
Saxman v. United States Department of Educ. (In re Saxman) (W.D. Wash.) 081022ß 554(a) Debtor’s false schedules precluded technical abandonment of assets.
Spear v. Schafler (In re Schafler) (N.D. Cal.) 081029
10th Cir.
28 U.S.C. ß 158(a) Bankruptcy court did not abuse discretion in imposing sanctions against adversary defendant.
Weinman v. Shaker Express, Inc. (In re W. Pac. Airlines, Inc.) (D. Colo.) 081037
11th Cir.
ß 523(a)(5) Attorney’s fees were excepted from discharge.
Blackburn-Gardner v. Edwards (In re Edwards) (Bankr. M.D. Fla.) 081019
Collier Bankruptcy Case Summaries
2d Cir.
Transferors failed to meet burden of proof. Bankr. D. Conn. The chapter 7 trustee filed adversary proceedings to avoid and recover preferential transfers from the debtor to insiders within the one-year period prior to the petition date. Two trusts, which had been established for the benefit of the debtor’s chief executive officer and his descendants, extended credit to the debtor in various forms, including general cash flow loans. The debtor made several repayments to the trusts within the year before it filed the petition. After the trustee established the elements of preferential transfers, the trusts asserted that the loan transfers were made according to ordinary business terms. The bankruptcy court granted judgment in favor of the trustee, holding that the trusts failed to meet their burden of proof on the ordinary course of business defense. The court received no evidence of general lending terms or practices in the debtor’s industry, or other relevant market group.Katz v. Leonard P. Drabkin Irrevocable Trust (In re Van Dyck), 2001 Bankr. LEXIS 685, 263 B.R. 167 (Bankr. D. Conn. June 13, 2001) (Dabrowski, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.04[2]
3d Cir.
Bankruptcy court erred in enjoining telecommunications provider from terminating service to debtor. D. Del. An entity that provided telecommunications services to the chapter 7 debtors, which were paging companies, appealed from a bankruptcy court order that enjoined it from terminating telecommunications services to the debtors’ estate. At the outset, the district court determined that the appeal was not moot. The court explained that while the injunction at issue had long since expired, the issue of the disbursement of funds that were to be applied against charges incurred by the debtors during the injunction’s duration remained. The parties were likely to contest this issue in a subsequent proceeding if it was not resolved. The district court then proceeded to the merits of the appeal and reversed. The court held that the bankruptcy court erred in utilizing section 105 to enjoin the appellant from exercising its rights to terminate telecommunications services to the debtors under section 366. The court explained that because the debtors defaulted postpetition, the appellant had the right under section 366 to terminate service to the debtors. The court concluded that the bankruptcy court did not apply section 105 appropriately when it restricted the appellant’s rights (even for a short period of time) and, at the same time, expanded the debtors’ rights beyond the protections afforded by section 366. The district court was not persuaded that 'exigent circumstances' cited by the bankruptcy in support of its reason for the injunction justified a departure from the Bankruptcy Code.MFS Telecom, Inc. v. Motorola, Inc. (In re Conxus Communications, Inc.), 2001 U.S. Dist. LEXIS 8144, 262 B.R. 893 (D. Del. June 4, 2001) (Farnan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:105.02
Eleventh Amendment barred dischargeability proceeding. Bankr. W.D. Pa. During a marital separation, the debtor wife received welfare assistance for herself and her children. Based upon this aid, the debtor husband became obligated to the state (Pennsylvania) department of welfare for child support. The debtors reconciled, filed a chapter 13 case, and, ultimately, converted to chapter 7. The debtors sought a determination that the welfare obligation was dischargeable and the state moved to dismiss for lack of subject matter jurisdiction. The bankruptcy court held that the state was immune from suit pursuant to the Eleventh Amendment because section 106(b) violated the U.S. Constitution by waiving the state’s sovereign immunity. Accordingly, the complaint was dismissed.Askey v. Pennsylvania (In re Askey), 2001 Bankr. LEXIS 699, 261 B.R. 160 (Bankr. W.D. Pa. February 14, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:106.02[1]
Former spouse was entitled to pursue contempt action. Bankr. W.D. Pa. During the course of their divorce and child custody proceeding, the state court awarded attorney’s fees in favor of the debtor’s former spouse. When the debtor failed to pay the fees, the former spouse sought a declaration from the bankruptcy court that she could prosecute a state court motion for contempt against the debtor. She asserted that the legal fees owed to her were in the nature of support. She also stated her intention to garnish the debtor’s wages. Applying a totality of the circumstances test, the bankruptcy court held that since the former spouse sought to collect a prepetition support obligation and would only seek garnishment of the debtor’s wages, the proceeding was within the scope of the section 362(b)(2) exception to the automatic stay. Garnishment of the debtor’s wages would not affect property of the chapter 7 estate since any salary earned postpetition was not property of the estate.Gunther v. Glabb (In re Glabb), 2001 Bankr. LEXIS 698, 261 B.R. 170 (Bankr. W.D. Pa. March 5, 2001) (Markovitz, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.05[2]
District court properly dismissed appeal from confirmation order as equitably moot. 3d Cir. After the bankruptcy court conditionally confirmed the chapter 11 debtor’s plan, one of the debtor’s significant minority shareholders and an equity committee that represented the interests of other minority shareholders appealed to the district court. The district court dismissed the appeal as equitably moot, a judicially created doctrine. The minority shareholder and equity committee appealed. The United States Court of Appeals for the Third circuit affirmed. The court held that the district court accurately analyzed each of the five factors of the equitable mootness test (i.e., whether the reorganization plan was substantially consummated, whether a stay was obtained, whether the relief requested would affect the rights of the parties not before the court, whether the relief requested would affect the success of the plan and the public policy of affording finality to bankruptcy judgments), appropriately balanced the factors and did not abuse its discretion in concluding that the doctrine of equitable mootness should apply to the appellants’ claims. The Court of Appeals noted that the district court gave serious consideration to issues of fundamental fairness that the debtor may have abused, and was 'somewhat reluctant' to preclude appellate review of those issues. Nevertheless, and after considering the equitable mootness factors, the district court decided that dismissal of the appeal on equitable mootness grounds was appropriate.Nordhoff Invs. v. Zenith Elecs. Corp., 2001 U.S. App. LEXIS 13864, – F.3d – (3d Cir. June 21, 2001) (Nygaard, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1101(2).01
5th Cir.
Court of Appeals affirmed district court’s decision that undisputed summary judgment evidence established debtor’s willful breach of fiduciary duty and defalcation. 5th Cir. A creditor filed an adversary complaint, seeking a determination that a debt arising from a federal district court judgment was nondischargeable under several subsections of section 523, including section 523(a)(4). After a federal district court declared a portion of the debt nondischargeable, the debtor appealed. The United States Court of Appeals for the Fifth Circuit reversed, and remanded. The district court was to consider any evidence that the debtor was denied the opportunity to present when that court granted summary judgment in favor of the creditor, sua sponte, and without giving 10 days’ notice. Following remand, the district court again entered a final judgment in the creditor’s favor and declared a portion of the debt nondischargeable. The debtor appealed and challenged the merits of the district court’s conclusion that based upon the undisputed summary judgment evidence, the debtor’s breaches of his fiduciary duties were willful and, thus, constituted defalcation under section 523(a)(4). The United States Court of Appeals for the Fifth Circuit affirmed. The court held that there was no genuine dispute that the evidence established the debtor’s 'willful' breach of the duty to the creditor, and given the debtor’s actual and imputed knowledge of his duty to make full and truthful disclosures in certain offering materials, the debtor’s misstatements and omissions demonstrated, at a very minimum, the recklessness required for a finding of defalcation under section 523(a)(4). The court also held that the law of the case doctrine precluded reconsideration of the issues of the debtor’s fiduciary status, his breach of his fiduciary duties or the creditor’s standing to pursue the action.Office of Thrift Supervision v. Felt (In re Felt), 2001 U.S. App. LEXIS 13801, – F.3d – (5th Cir. June 21, 2001) (DeMoss, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10[1]
Insurance proceeds were property of the estate. E.D. La. The chapter 11 debtor appealed the bankruptcy court’s determination that insurance proceeds paid for the cleanup of an oil spill at one of the debtor’s wells were not property of the estate. The debtor was the beneficiary of an indemnification policy that had been procured to provide reimbursement for the cost of cleaning up contaminants. Numerous companies provided services and equipment to the debtor in response to the prepetition spill, with the expectation that they would have been paid by either the debtor or its insurer. The bankruptcy court concluded that the purpose of the cleanup insurance was to protect the third parties and, accordingly, the proceeds were payable directly to the remediation creditors. The district court reversed, holding that the proceeds of the indemnification policy were property of the estate. The court pointed out that the plain language of the policy stated that payment was to be made to the assured, the debtor.Equinox Oil Co. v. Antihill Constr. Co. (In re Equinox Oil Co.), 2001 U.S. Dist. LEXIS 8165, – B.R. – (E.D. La. June 11, 2001) (Berrigan, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.10
6th Cir.
Tennessee debtors could claim exemption for uninsured motorist benefits in addition to personal bodily injury exemption. Bankr. W.D. Tenn. The chapter 7 debtors filed a motion seeking to require the trustee to disburse to them, as exempt, proceeds from insurance paid as a result of a prebankruptcy automobile accident. The debtors claimed the proceeds as exempt pursuant to applicable provisions of the state (Tennessee) exemption statute. The trustee argued that the debtors could not claim an exemption in uninsured motorist benefits paid as a result of a personal injury under one provision of the state exemption statute (Tenn. Code Ann. ß 26-2-110) because those benefits exceeded a separate $7,500 maximum personal bodily injury exemption provided for in another provision of the state exemption statute (Tenn. Code Ann. ß 26-2-111(2)(B)) and a $15,000 cap contained in another provision (Tenn. Code Ann. ß 26-2-111(2)). The bankruptcy court overruled the trustee’s objection. The court reasoned that uninsured motorist coverage, contracted for by Tennessee residents, provided coverage for accidental injury to the beneficiaries of such policies, and that Tennessee authority considered such coverage to be accident insurance. The court then held that the accident insurance exemption allowed to Tennessee residents was in addition to the personal bodily injury exemption.In re Thompkins, 2001 Bankr. LEXIS 707, 263 B.R. 223 (Bankr. W.D. Tenn. June 13, 2001) (Brown, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10[5]
Change of venue was affirmed. W.D. Ky. The debtors appealed the bankruptcy court order granting the creditors’ motion for change of venue and transferring their adversary proceeding against the debtors to a different district. The creditors and witnesses relevant to the claims were located in the transferred district, as were the debtors until shortly before they filed for bankruptcy. The actions that formed the basis of the creditors’ claims occurred in the transferred district and the subject of the adversary proceeding had previously been partially litigated in the transferred district. The district court affirmed, holding that the bankruptcy court correctly concluded that the adversary proceeding should be transferred. The court noted that while the debtors could be inconvenienced by having to litigate the proceeding in a different district, that burden was vastly outweighed by the factors favoring the transfer.Jahraus v. Armbrust (In re Armbrust), 2001 U.S. Dist. LEXIS 8222, – B.R. – (W.D. Ky. June 15, 2001) (Simpson, III, C.D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:4.04
Claim was determined by confirmed plan. Bankr. C.D. Ill. The chapter 13 debtors objected to the proof of claim filed by an undersecured creditor to the extent that the secured claim amount exceeded the amount provided by their confirmed plan. Three days prior to the confirmation hearing, the creditor had filed its proof of claim with the stated value of the collateral, a projection television, at a higher amount than the value stated in the debtors’ plan. The debtors did not object to the proof of claim prior to confirmation, and the plan was confirmed, without objection, by the creditor. The bankruptcy court sustained the debtors’ objection, holding that the creditor was bound by the plan’s valuation of the collateral, notwithstanding that the creditor filed a proof of claim stating a higher value before confirmation and no objection to the claim was filed before confirmation. The court determined that Congress accorded primacy to the confirmed plan, not to the proof of claim. The creditor received adequate notice that its rights would be modified by the plan, and valuation of the secured claim was properly determined through the plan confirmation process.In re Duggins, 2001 Bankr. LEXIS 684, 263 B.R. 233 (Bankr. C.D. Ill. June 12, 2001) (Perkins, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.02
Debtor could cure the arrearage of his mortgage despite foreclosure sale. Bankr. N.D. Ill. Eleven days after his home was sold at a foreclosure sale and before the sale was confirmed, the debtor filed a chapter 11 petition in bankruptcy. The plan provided for a cure of the arrearage and continued payments on the mortgage. The mortgagee, purchaser of the residence at the foreclosure sale, sought relief from stay in order to have the sale of the residence confirmed by the state court. Following the majority view espoused in the district, the bankruptcy court held that the debtor had a right to cure the arrearage on the mortgage until the foreclosure sale was completed by entry of a state court order confirming the sale. The court rejected the minority view that the application of section 1322(c) was solely a matter of federal law. Rather, the statute referred to state law, which provides that a judicial foreclosure sale is not complete until confirmed by the state court. Moreover, that interpretation was in keeping with congressional intent to permit debtors to retain the use and benefit of their homes. Since the sale had not been confirmed by the state court at the time the chapter 13 petition was filed, the debtor was entitled to cure the arrearage and keep his residence.In re Spencer, 2001 Bankr. LEXIS 700, 263 B.R. 227 (Bankr. N.D. Ill. June 5, 2001) (Altenberger, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.15
Court lacked jurisdiction over appeal. 7th Cir. The attorney for various chapter 13 debtors appealed the district court’s denial of her motion to reopen an appeal of the bankruptcy court’s denial of her request for fees in excess of the presumptive maximum. After the bankruptcy court limited the attorney’s fee award, the attorney appealed to the district court. The district court remanded the matter to the bankruptcy court for further explanation of its ruling. Due to the delayed response by the bankruptcy court, the attorney filed a motion to reopen appeal. Before the district court could address the merits of the motion to reopen the appeal, the bankruptcy court issued its additional findings. The district court then denied the motion to reopen the appeal as moot and directed the attorney to file another motion if she still wanted the appeal reopened. The attorney filed a second motion to reopen in the district court more than 10 days after the bankruptcy court entered its final order. The district court denied the second motion to reopen the appeal on its merits. The Court of Appeals for the Seventh Circuit vacated the district court’s decision denying the second motion to reopen the appeal, holding that because the attorney did not file a timely notice of appeal, the district court lacked jurisdiction to entertain the appeal. The matter was remanded with instructions to dismiss the motion for lack of jurisdiction.In re Bond, 2001 U.S. App. LEXIS 13740, 254 F.3d 669 (7th Cir. June 20, 2001) (Cudahy, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02[2]; 10:8002.02; .03
8th Cir.
Order of disgorgement was not abuse of discretion. B.A.P. 8th Cir. The attorney for the chapter 7 debtors appealed the order of the bankruptcy court directing him to disgorge a substantial portion of the fees he received for his costs and services to the estate. When the debtors filed a chapter 13 petition, the attorney filed a statement under Rule 2016(b) disclosing what the debtors had paid him. When the debtors converted to chapter 11, the attorney neglected to file an application for his employment; however, he received additional payments during the pendency of the case. The case subsequently converted to chapter 7, and the trustee sought an order directing disgorgement of the fees. The bankruptcy court found the fees to be reasonable in amount, but, based upon the failure to disclose the fee payments, ordered that the attorney disgorge the fees to the trustee. The bankruptcy court provided for payment of the fees on a subordinated, nonpriority basis. The B.A.P. affirmed, holding that the disgorgement of fees was an appropriate sanction for the attorney’s failure to comply with the disclosure requirements of section 329 and Rule 2016.Schroeder v. Rouse (In re Redding), 2001 Bankr. LEXIS 687, 263 B.R. 874 (B.A.P. 8th Cir. June 21, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:329.03; 9:2016.15
Failure to reinstate driver’s license was not a violation of the stay. Bankr. E.D. Ark. The debtor incurred numerous fines for traffic violations and, when he failed to pay them, the municipality obtained suspension of his state driver’s license. The debtor filed a chapter 13 petition and provided for payment of the fines through his chapter 13 plan. Despite the provision for payment, the state refused to reissue the driver’s license, prompting the debtor to file an adversary proceeding for contempt, asserting that the failure to reissue the license was a violation of the automatic stay and the antidiscrimination provision of section 525. The bankruptcy court held that since the driver’s license had been suspended prepetition, the state was not obligated to reissue the license upon the filing of the chapter 13 bankruptcy case. Since all of the acts by the debtor and the city were concluded prior to the filing of the petition, the city was entitled to continue to enforce its regulatory power. Likening the situation to cases in which the debtor is incarcerated prepetition, the court concluded that there was no requirement in the Bankruptcy Code, including section 362, that a governmental unit reinstate a privilege simply because the debtor later filed a bankruptcy case.Kimsey v. Suski (In re Kimsey), 2001 Bankr. LEXIS 657, 263 B.R. 244 (Bankr. E.D. Ark. June 11, 2001) (Scott, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[8]
Trustee could not avoid lien asserted by bank against Arkansas debtor’s property. Bankr. W.D. Ark. The chapter 7 trustee filed an adversary complaint to determine the priority, validity and extent of a lien asserted by a bank against the debtor’s accounts, inventory and equipment. The trustee alleged that the bank’s asserted security interest did not attach because no security agreement existed that expressly granted a security interest. The bank argued that under the 'composite document rule,' the specific language in the financing statement, promissory note and loan application provided for a security interest in the collateral. The bankruptcy court held that because the financing statement created or provided for a security interest in the debtor’s personal property, was signed by the debtor and contained a description of the collateral, it was a valid, enforceable security agreement under controlling state (Arkansas) law. The court noted that the Arkansas Supreme Court had not decided the issue of whether language actually conveying a security interest was necessary to create a security interest. However, the court determined that the Arkansas Supreme Court would adopt the 'broad view' and hold that any language asserting that specific personal property is encumbered as security for a debt creates or provides for a security interest under the Arkansas Code(citing Collier on Bankruptcy 15th Ed. Revised).Meeks v. First Bank of S. Ark. (In re Tracy’s Flowers and Gifts, Inc.), 2001 Bankr. LEXIS 710, 264 B.R. 1 (Bankr. W.D. Ark. June 12, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.01
Debt arising from gunshot wound held dischargeable. Bankr. E.D. Ark. A claimant, who was shot by the chapter 7 debtor, filed an adversary proceeding seeking a determination that the debt that resulted from the gunshot wound was excepted from the debtor’s discharge under section 523(a)(6). The bankruptcy court held that because the claimant failed to establish by a preponderance of the evidence that the debtor’s act resulting in the injury was willful, the debt was dischargeable. The court noted that although the debtor entered a guilty plea to third-degree battery, an examination of the statute under which this plea was entered revealed that the debtor could have been admitting to either intentional, reckless or negligent conduct that caused the claimant’s injury. The court found that in this case, which involved the word of one party against the other, the undisputed circumstantial evidence of the debtor’s intent was insufficient to allow the court to draw an inference of willfulness.Maxwell v. Price (In re Price), 2001 Bankr. LEXIS 711, – B.R. – (Bankr. E.D. Ark. June 14, 2001) (Mixon, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.12
Creditor’s collection costs were not approved. Bankr. W.D. Mo. The creditor filed an adversary proceeding objecting to the discharge of a student loan and requesting a judgment for costs and expenses incurred in collecting the student loan. The chapter 7 debtor objected to an award of any expenses incurred, arguing that she never intended to discharge the student loan and should not have to pay the costs and expenses associated with the adversary proceeding. The bankruptcy court sustained the debtor’s objection, holding that since the filing of the complaint was not needed in order for the creditor to collect the student loan obligation that the debtor never disputed, never tried to discharge and continued to pay, the creditor’s request for its costs, expenses and attorney’s fees incurred in bringing the action was denied. The student loan debt was nondischargeable at the time the debtor filed for bankruptcy and remained nondischargeable until otherwise determined. Lester E. Cox Med. Ctrs. v. Penn (In re Penn), 2001 Bankr. LEXIS 686, 262 B.R. 788 (Bankr. W.D. Mo. May 24, 2001) (Federman, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.14
Relief from stay was properly granted. B.A.P. 8th Cir. The chapter 13 debtor appealed a bankruptcy court order granting the secured creditor relief from the automatic stay to recover possession of real estate. After the creditor was the successful bidder at the sale of the debtor’s homestead and received a deed in its favor, the debtor filed a petition for relief. The creditor subsequently objected to confirmation of the debtor’s plan and filed a motion for relief from the automatic stay to commence an unlawful detainer proceeding against the debtor in state (Missouri) court. The bankruptcy court rejected the debtor’s argument that the property and her relationship with the creditor were subjected to the cure-and-reinstatement remedies, notwithstanding the foreclosure sale, and granted the creditor relief. The B.A.P. affirmed, holding that section 1322(c)(1) expressly prohibited the debtor from using the cure-and-reinstatement provision to unseat the secured creditor from its status after the foreclosure sale. With bankruptcy remedies unavailable to the debtor, the bankruptcy court did not err in granting the motion for relief.Montgomery v. Dennis Joslin Co. II, L.L.C. (In re Montgomery),2001 Bankr. LEXIS 673, 262 B.R. 772 (B.A.P. 8th Cir. June 15, 2001) (Kishel, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.15
Abstention motion granted where state law issues predominated and individual defendants were entitled to jury trial. Bankr. W.D. Mo. The chapter 11 debtor brought an adversary proceeding against individual defendants and a corporation, arising out of a dispute over a stock purchase agreement. The debtor’s complaint alleged various counts, including breach of contract, fraudulent misrepresentation and alleged violations of a bankruptcy court order that approved the debtor’s disclosure statement and confirmed the debtor’s plan. The defendants filed a motion requesting that the bankruptcy court abstain from further proceedings in the matter pursuant to 28 U.S.C. section 1334(c)(1). Primarily because state law issues predominated the action and at least two individual defendants were entitled to a jury trial, the bankruptcy court granted the abstention motion. The court concluded that abstention was no less efficient than taking the case to the district court, which was the only other alternative if the defendants continued to assert their right to a jury trial. The court also concluded that the matter would likely require the presence of nondebtor parties and that the defendants were not forum shopping. Finally, the court declined to resolve the issue of whether the proceeding was core or non-core (because the weight of the relevant factors tipped in favor of abstention), but stated that if called upon to decide the issue, it would find that the action was non-core because it was based on questions of state law.Krigel’s, Inc. v. Ary Jewelers, L.L.C. (In re Krigel’s, Inc.), 2001 Bankr. LEXIS 709, 263 B.R. 280 (Bankr. W.D. Mo. June 8, 2001) (Venters, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:3.05[1]
9th Cir.
Service of subpoena upon debtor did not violate the stay. B.A.P. 9th Cir. Although the creditor’s suit against the debtor and her nondebtor husband for fraud was stayed during the pendency of the chapter 13 cases, the creditor continued the litigation against the nondebtor husband. In order to prosecute its case, the creditor required the testimony of the debtor and, accordingly, served a third-party subpoena upon the debtor. When the debtor thrice failed to respond, the creditor sought sanctions in the state court. In response, the debtor filed a motion for sanctions in the bankruptcy court alleging that the issuance of the subpoena and request for sanctions was a violation of the stay. The bankruptcy court determined that, despite the nature and purpose of the subpoena, the creditor violated the stay by serving the subpoena and, therefore, awarded sanctions. The B.A.P. reversed, holding that the creditor was entitled to serve the debtor with a third-party subpoena to pursue discovery against a nondebtor. The requests were framed as discovery pertaining only to the claims against the nondebtor husband and the creditor did not seek to prosecute its claim against the debtor. Accordingly, even though the information could ultimately be used against the debtor, the automatic stay did not preclude the creditor from obtaining discovery information from the debtor regarding litigation against the nondebtor defendant. Groner v. Miller (In re Miller), 2001 Bankr. LEXIS 672, 262 B.R. 499 (B.A.P. 9th Cir. May 29, 2001) (Montali, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3][d]
Idaho debtors properly claimed homestead exemption for contiguous 13-acre property that was acquired as three separate parcels. Bankr. D. Idaho The chapter 7 trustee objected to the debtors’ claim of a homestead exemption under state (Idaho) law for 13 contiguous acres of property that the debtors acquired as three separate parcels. The trustee argued that the debtors’ parcels should be subdivided to allow the debtors a home in which to live but also preserve the remaining land for the benefit of the bankruptcy estate. The trustee was not specific as to what property should be severed from the homestead. However, the court presumed her argument to be either that the exemption should apply only to one acre upon which the debtors’ dwelling house actually sat or that the most recently acquired parcel should be excluded. The bankruptcy court overruled the trustee’s objection. The court noted that under the Idaho exemption statute, there is no limit to the size of a property that may be claimed exempt as a homestead, although the exemption is limited to the net value of the land and improvements up to a maximum of $50,000. Thus, the court held that without regard to when the debtors acquired the three parcels, the zoning requirements or the boundary lines for the individual parcels, the debtors properly claimed their property exempt under Idaho law. The court noted that the parcels were contiguous, that the debtors actually resided on the property and that they utilized the parcels as a single property.In re Zantman, 2001 Bankr. LEXIS 708, – B.R. – (Bankr. D. Idaho April 10, 2001) (Pappas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:522.10[2]
Investors were perfected despite failure to obtain possession of security instruments. 9th Cir. The debtor real estate investor purchased residential mortgages, financing the purchases by borrowing from other investors and assigning the mortgages to the investors as security. The debtor, however, retained possession of all documents, including the security interests assigned to the investors. Upon the filing of the involuntary bankruptcy petition, the trustee sought to avoid security interests of the 132 investors on the grounds that, since they did not have possession of the security interests, no perfection was properly effected under state (California) law. Although a number of the investors failed to answer the complaint, some of the investors defended, asserting that a statutory exception to the possession requirement protected their security interests. The bankruptcy court held that the statutory exception applied and ruled in favor of the investors who had appeared in the proceeding. Despite holding in favor of the answering investors, the bankruptcy court entered judgment against the defaulting defendants. The district court reversed in part, concluding that the statutory exception did not apply but that the bankruptcy court properly entered default judgment against the defaulting parties. The Court of Appeals for the Ninth Circuit reversed, holding that the investors were not required to have possession of the security instruments because debtor was a broker who sold a promissory note, serviced the note and recorded the documents. The only element of the statutory exception at issue was whether the debtor 'sold' the notes within the meaning of the statute. Analyzing the statute and the legislative history, the Court of Appeals concluded that the use of the term 'sale' in the exception included assignment of the security interest because the state legislature adopted a more expansive definition of sale, rather than the conventional meaning of 'sale.' The court also rejected the trustee’s assertion that a constructive trust theory should apply.Neilson v. Chang (In re First T.D. & Inv., Inc.), 2001 U.S. App. LEXIS 13582, 253 F.3d 520 (9th Cir. June 19, 2001) (Paez, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:544.05
10th Cir.
Bankruptcy court did not abuse discretion in imposing sanctions against adversary defendant. D. Colo. The defendant in an adversary proceeding brought by the chapter 7 trustee appealed from a bankruptcy court order that imposed sanctions against it. The single issue on appeal was whether the bankruptcy judge abused his discretion in imposing sanctions. The court explained that to constitute an abuse of discretion, a ruling must be arbitrary, capricious or whimsical. The court also stated that an abuse of discretion may occur when the trial judge fails to articulate a reason for his decision and one is left to guess because the reasoning is not apparent from the record. Applying the foregoing standards, the district court concluded that the clear justification for the trial judge’s rulings eliminated even a suggestion of abuse of discretion, affirmed the bankruptcy court’s decision and entered judgment in the trustee’s favor for costs and attorney’s fees expended on the defendant’s frivolous appeal. The court noted, among other things, that the defendant refused or failed entirely to comply with the court’s scheduling order, failed to respond to the trustee’s motion in limine, failed to produce documents relevant to the evidence it sought to introduce at trial and offered testimony in its offer of proof that was indisputably hearsay. The court also noted that the facts recited by the defendant in its opening brief were misleading and incomplete, that the defendant failed to file a reply brief despite a court order to do so and that the defendant’s failures in this regard were 'entirely consistent with [its] insouciant disregard of rules and orders throughout the litigation.'Weinman v. Shaker Express, Inc. (In re W. Pac. Airlines, Inc.), 2001 U.S. Dist. LEXIS 8102, 263 B.R. 345 (D. Colo. June 7, 2001) (Kane, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 1:5.02[2]
11th Cir.
Attorney’s fees were excepted from discharge. Bankr. M.D. Fla. The attorney that represented the chapter 7 debtor’s former wife filed a complaint to determine the dischargeability of attorney’s fees awarded to her in the parties’ divorce proceedings. The state (Florida) court ordered the debtor to pay his former wife permanent monthly alimony payments, as well as child support. The state court compared the parties’ incomes and, finding that there was a need for and an ability to pay attorney’s fees, ordered the debtor to pay the attorney’s fees and costs. The bankruptcy court awarded judgment to the attorney, holding that the award of attorney’s fees was in the nature of support and was nondischargeable pursuant to section 523(a)(5). The attorney’s fees were awarded based on the need of the former wife and the debtor’s ability to pay. The court further noted that the fees were awarded in conjunction with alimony and child support.Blackburn-Gardner v. Edwards (In re Edwards), 2001 Bankr. LEXIS 705, 261 B.R. 523 (Bankr. M.D. Fla. April 19, 2001) (Funk, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.11
Collier Bankruptcy Case Update January-7-02
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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.
January 7, 2002
CASES IN THIS ISSUE
(scroll down to read the full
summary)
- 1st Cir.
§ 524(a)(2) Allegations regarding creditor’s continued collection of discharged debt were sufficient to defeat motion to dismiss. Singleton v. Wells Fargo Bank, N.A. (In re Singleton) (Bankr. D.R.I.)
§ 541(a)(1) Pledged stock was property of the chapter 11 estate.
In re Country Estates Nursing Home, Inc. (Bankr. D. Mass.)
2d Cir.
§ 523(a)(4) Business partner’s fiduciary duty to creditor was imputed to debtor.
Zois v. Cooper (S.D.N.Y.)§ 1322(b) Fire insurance proceeds were required to be applied to principal balance on the mortgage.
In re Denario (Bankr. N.D.N.Y.)
3d Cir.
§ 362(b)(4) United States’ action seeking civil penalties for environmental violations was exempt from automatic stay.
United States v. LTV Steel Co. (W.D. Pa.)§ 506(c) Neither the debtor nor the creditors’ committee had standing to seek surcharge of collateral.
In re Concord Mktg., Inc. (Bankr. D.N.J.)§ 547(b)(2) Committee met its burden of proving that the debtor’s transfers were for or on account of an antecedent debt.
Official Comm. of Unsecured Creditors of Contempri Homes, Inc. v. Seven D. Wholesale, Inc. (In re Contempri Homes, Inc.) (Bankr. M.D. Pa.)§ 727(b) Debtors’ personal obligations to pay postpetition property assessments were discharged.
Eno v. Indian Country Campsites Recreation and Maint. Fund (In re Eno) (Bankr. M.D. Pa.)Rule 8002 Under the specific facts, lack of awareness of filing deadline caused by unknowing failure of firm’s calendar system constituted excusable neglect.
Sonders v. Mezvinsky (In re Mezvinsky) (Bankr. E.D. Pa.)
4th Cir.
§ 523(a)(2)(A) Dischargeability of debtor’s credit card debt was affirmed.
Citibank N.A. v. Parker (4th Cir.)28 U.S.C. § 1738 Bankruptcy court’s nondischargeability judgment was void because it altered a prior state court judgment.
Heckert v. Dotson (In re Heckert) (4th Cir.)
6th Cir.
§ 109(e) Debtor was ineligible for chapter 13 relief because claims against him exceeded allowable amount.
In re Faulhaber (Bankr. W.D. Mich.)§ 362(h) Bank’s motion for relief from punitive damage award was denied.
In re Dunning (Bankr. N.D. Ohio)Rule 9019(a) Court of Appeals held that district court did not err in refusing to seal settlement agreement.
Friedman v. Mitan (In re Polemar Constr. Ltd. P’ship) (6th Cir.)Rule 9024 Debtor’s attempts to relitigate previously-rejected arguments were properly denied by reviewing court.
Javens v. Ruskin (In re Javens) (6th Cir.)
7th Cir.
§ 547(b) Prepetition transfers were avoidable and trustee was allowed to recover sums.
Krol v. The Finishing Company (In re H. King & Assoc.) (Bankr. N.D. Ill.)
8th Cir.
§ 362(a) Automatic stay precluded district court authority over motion for temporary restraining order.
United Steelworkers of America v. LTV Steel Mining Co. (D. Minn.)§ 1325(a)(3) Criminal assault debt did not defeat debtor’s good faith.
In re Gillespie (Bankr. N.D. Iowa)
9th Cir.
§ 1325(a)(4) Forgiveness of debt was estate property.
In re Profit (Bankr. D. Nev.)
11th Cir.
§ 502(a) Debtor’s objection to IRS’ claim overruled.
In re Jones (Bankr. M.D. Fla.) 011009
Collier Bankruptcy Case Summaries
1st Cir.
Allegations regarding creditor’s continued collection of discharged debt were sufficient to defeat motion to dismiss. Bankr. D.R.I. The creditor moved to dismiss the adversary proceeding brought by the chapter 7 debtor that alleged violations of the discharge injunction. After the debtor filed her petition, she signed a reaffirmation agreement on her credit card debt at the creditor’s request, but the agreement was never executed or filed by the creditor. Because the debtor made postdischarge payments to the creditor without an enforceable reaffirmation agreement, she complained that the continued collection of the prepetition debt violated section 524(a)(2). The bankruptcy court denied the motion to dismiss, holding that sufficient facts were alleged in the debtor’s complaint to support her claim that the creditor had violated the discharge injunction. To establish a prima facie violation of the discharge order, the debtor had to allege that the creditor knew a discharge order was in place and that the creditor intended the conduct that constituted a violation of the order.Singleton v. Wells Fargo Bank, N.A. (In re Singleton), 2001 Bankr. LEXIS 1467, 269 B.R. 270 (Bankr. D.R.I. November 13, 2001) (Votolato, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:524.02[2]
Pledged stock was property of the chapter 11 estate. Bankr. D. Mass. An individual who was a shareholder and director of several nursing homes pledged his stock as security for various obligations. When he defaulted on the loans and the secured parties sought foreclosure of the interest in the stock, the director filed a chapter 11 petition. Soon thereafter, the secured parties purported to vote the director’s stock and removed the individual as a director. In spite of his 'removal,' approximately one month later, the director signed chapter 11 petitions on behalf of the nursing homes. The secured parties sought dismissal of the nursing homes’ chapter 11 cases on the basis that the filings were unauthorized. Specifically, the secured parties asserted that the director, having been removed, did not have the authority to place the nursing homes in chapter 11. The director defended by asserting that the secured parties’ act of voting his shares, and, therefore, his removal, was a violation of the automatic stay. The bankruptcy court held that the stocks, although pledged, were property of the individual director’s chapter 11 estate. Since the secured parties had not, prior to the filing of the chapter 11 petition, foreclosed upon the shares, the debtor had a right to redeem the shares and, thus, the shares were property of the estate. By exercising the voting rights to remove the director, the secured parties violated the automatic stay in the director’s case, rendering the vote to remove the director void. Accordingly, the director had the authority to sign the petitions and the cases would not be dismissed.In re Country Estates Nursing Home, Inc., 2001 Bankr. LEXIS 1381, 268 B.R. 316 (Bankr. D. Mass. September 28, 2001) (Feeney, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:541.06
2nd Cir.
Business partner’s fiduciary duty to creditor was imputed to debtor. S.D.N.Y. The chapter 7 debtor appealed the bankruptcy court’s order declaring the creditor’s judgment debt nondischargeable under section 523(a)(4). The creditor had sued the debtor, her psychiatrist, and his business partner, her former lawyer, in state (New York) court for breach of fiduciary duty and fraud. After the debtor and the creditor’s lawyer formed a partnership, in part to manage the affairs of the creditor, the lawyer misappropriated the creditor’s funds through fraudulent payments to himself, the debtor and their partnership. The state court determined that the findings in an earlier disciplinary proceeding against the debtor’s partner were dispositive of the same issues against the debtor under the doctrine of collateral estoppel. The bankruptcy court subsequently adopted the state court holding that the debtor was collaterally estopped from claiming that he neither embezzled nor committed fraud or defalcation while acting in a fiduciary capacity within the meaning of section 523(a)(4). On appeal, the debtor argued that the bankruptcy court erred in imputing his business partner’s fiduciary duty as the creditor’s lawyer to himself. The district court affirmed, holding that the bankruptcy court properly imputed the business partner’s fiduciary duty to the creditor to the debtor and did not err in declaring the debt nondischargeable under section 523(a)(4). The debtor not only knew of the fraudulent activity, but he also took part in it. The court noted that the debtor’s reprehensible behavior toward the creditor, including revealing to his business partner her intimate secrets learned through her psychiatric sessions, placed the debtor outside the reach of the fresh start policy.Zois v. Cooper, 2001 U.S. Dist. LEXIS 16983, 268 B.R. 890 (S.D.N.Y. October 10, 2001) (Jones, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.10
Fire insurance proceeds were required to be applied to principal balance on the mortgage. Bankr. N.D.N.Y. After the mortgagee filed a state court action to foreclose upon its lien interest on the debtor’s real property, the property suffered fire damage. When the debtor filed a chapter 13 petition, the mortgagee filed a proof of claim that included an arrearage claim of over $35,000. Asserting that the debtor would be unable to cure this arrearage, the mortgagee filed a motion for relief from stay in order to continue with its foreclosure proceedings in state (New York) court. In response, the debtor modified the chapter 13 plan to apply the insurance proceeds from the fire damage to the arrearage. The bankruptcy court held that the modified plan could not be confirmed because, pursuant to state law, the fire insurance proceeds could only be applied to reduce the principal balance of the mortgage. Relief from stay was denied, however, because the debtor was current in her payments to the chapter 13 trustee and cause was not shown.In re Denario, 2001 Bankr. LEXIS 1371, 267 B.R. 496 (Bankr. N.D.N.Y. January 4, 2001) (Gerling, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1322.06
3d Cir.
United States’ action seeking civil penalties for environmental violations was exempt from automatic stay. W.D. Pa. The debtor owned and operated a coke production plant. In 1997, the county health department issued notices of violation as a result of certain air emissions at the plant. The United States commenced this suit in 1998 to recover a civil penalty for the alleged violations. In 2000, the debtor filed a chapter 11 petition. The official committee of unsecured creditors moved to intervene in the United States’ civil action. The debtor took the position that the automatic stay operated to stay that action, but the United States argued that the seeking of civil penalties for environmental violations was an exercise of police or regulatory power that fell within the exception of section 362(b)(4). The bankruptcy court held that the suit was exempt from the stay, emphasizing that, in line with the statutory language, the United States was not seeking to enforce a money judgment, which would be limited by the statute, but rather was seeking entry of a civil penalty judgment for violations of environmental laws, which fell squarely within the police and regulatory powers exception of the statute. The court also found that the action fit within the police powers exception as defined by the pecuniary interest and public policy test, since the environmental laws were enacted to public safety and the resultant civil penalties designed as a deterrent. The court also ruled that the committee had no right to intervene, because the United States’ action could not be deemed a case under chapter 11.United States v. LTV Steel Co., 2001 U.S. Dist. LEXIS 18367, – B.R. – (W.D. Pa. November 7, 2001) (Cindrich, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362
Neither the debtor nor the creditors’ committee had standing to seek surcharge of collateral. Bankr. D.N.J. The assets of the chapter 11 debtor were sold and the case converted to chapter 7. During the pendency of the chapter 7 proceedings, the chapter 7 trustee assigned its right to pursue any cause of action under section 506 to the debtor and the creditors’ committee. The debtor and committee sought to surcharge the secured creditors’ collateral for attorneys’ fees and other professional services related to preserving and disposing of the debtor’s assets. The creditors objected to the motion, asserting that neither the debtor nor the committee had standing to bring a motion to surcharge the collateral. The committee analogized its ability to file the motion to the ability of a committee to pursue preference actions under the appropriate circumstances and with court approval. The bankruptcy court held that the Supreme Court’s opinion in Hartford Underwriters Ins. Co. v. Union Planters Bank, 520 U.S. 1, 120 S.C. 1942, 147 L. Ed.2d 1, 43 C.B.C.2d 861 (2000) clearly and unambiguously precluded the debtor and the committee from seeking to surcharge the secured creditor’s collateral. Hartford did not distinguish between different kinds of obligations for which surcharge may be sought, so it was irrelevant that the parties sought to surcharge for approved professionals’ fees rather than a vendor’s costs. Moreover, while Hartford did not preclude a party from seeking permission to file a motion under section 506(c) in the trustee’s stead, neither the debtor nor the committee had sought such approval and the court was not inclined to retroactively grant such relief. Finally, since the assignment was outside of the ordinary course of the trustee’s duties, and no motion had been filed, noticed or heard, the assignment would not be considered (citing Collier on Bankruptcy, 15th Ed. Revised).In re Concord Mktg., Inc., 2001 Bankr. LEXIS 1363, 268 B.R. 415 (Bankr. D.N.J. October 12, 2001) (Gambardella, C.B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:506.05
Committee met its burden of proving that the debtor’s transfers were for or on account of an antecedent debt. Bankr. M.D. Pa. The official committee of unsecured creditors filed an adversary proceeding against the chapter 11 debtor’s supplier, seeking to avoid certain transfers pursuant to section 547. The parties had a modified cash on delivery arrangement whereby once the debtor’s credit limit with its supplier was reached, the supplier would not deliver goods unless a payment approximating the amount of the newly shipped goods was made at or near the time of delivery. The payments were then applied to aged invoices in order to approximate or equal the amount of the material delivered to the debtor. The parties stipulated that all elements under section 547(b) were established except whether or not the transfers were for or on account of an antecedent debt owed by the debtor. The bankruptcy court entered judgment in favor of the committee, holding that all payments made within 90 days of the petition were made for or on account of antecedent debt between the parties. All of the payments made were posted to aged invoices and none were applied to the current invoices for current material shipped. The advances of new value were nevertheless used to offset a portion of the preferences under section 547(c)(4).Official Comm. of Unsecured Creditors of Contempri Homes, Inc. v. Seven D. Wholesale, Inc. (In re Contempri Homes, Inc.), 2001 Bankr. LEXIS 1472, 269 B.R. 124 (Bankr. M.D. Pa. October 17, 2001) (Thomas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03[4]
Debtors’ personal obligations to pay postpetition property assessments were discharged. Bankr. M.D. Pa. The chapter 7 debtors brought an adversary proceeding against the property association fund after the fund continued to send them invoices for postpetition annual assessments. The debtors neither used nor rented the property or the trailer, which was upon the camp lot. The bankruptcy court entered judgment in favor of the debtors, holding that the postpetition property association assessments were barred by the debtors’ discharge. The court noted a split of authority on the issue and concluded that the debtors’ continuing personal obligations to pay the future assessments were discharged. Nevertheless, the annual assessment was a covenant running with the land and, as such, constituted a continuing lien upon the premises that could be enforced in the same manner as mortgages were foreclosed.Eno v. Indian Country Campsites Recreation and Maint. Fund (In re Eno), 2001 Bankr. LEXIS 1463, 269 B.R. 319 (Bankr. M.D. Pa. June 29, 2001) (Thomas, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 6:727.13
Under the specific facts, lack of awareness of filing deadline caused by unknowing failure of firm’s calendar system constituted excusable neglect. Bankr. E.D. Pa. The bankruptcy court entered an order in connection with complaints seeking to deny the debtor a discharge. Counsel for the debtor received a copy of the order and immediately transmitted the substance of the order to the debtor, who then instructed her counsel to file an appeal. The debtor’s counsel agreed to file the appeal and noted the appeal bar date in his firm’s calendar, which was a computerized system accessible to all members of the firm and which was linked to the firms email system. The firm’s computers became infected by a computer virus that was apparently transmitted through e-mail attachments from unknown sources. The virus corrupted data stored on the firm’s server and, ultimately, outside specialists were required to repair the system. During the disruption of the firm’s computer system, the debtor’s calendared appeal bar date was erased. The debtor’s counsel was not aware of the damage to the calendaring system until after the deadline for filing the debtor’s appeal, and he filed the appeal two days after the bar date, along with a motion for extension of time pursuant to Rule 8002. In assessing whether the circumstances constituted excusable neglect for purposes of Rule 8002, the court found that the failure of a firm’s automated calendar system may be a basis to excuse the late filing of an appeal where the technical failure is externally caused and unknown to the attorney, provided that there are no other reminders of his duty to file that make complete reliance on the automated calendar system unreasonable. After noting that its test was highly fact sensitive and was not intended to shift personal responsibility from people to machines, the court found that the circumstances constituted 'excusable neglect,' and allowed the debtor’s appeal, because the debtor’s counsel’s firm had made immediate and full efforts to discover the extent of the computer problem and correct it, and that counsel for the debtor had acted promptly to file his notice of appeal once he became aware that the virus had erased entries in his calendar. Sonders v. Mezvinsky (In re Mezvinsky), 2001 Bankr. LEXIS 1468, – B.R. – (Bankr. E.D. Pa. October 5, 2001) (Weissignund, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:8002.02
4th Cir.
Dischargeability of debtor’s credit card debt was affirmed. 4th Cir. The creditor appealed the district court’s order affirming the bankruptcy court’s order declaring the debtor’s credit card obligation dischargeable. The debtor had incurred additional charges on her credit card after she conferred with her bankruptcy attorney and before she filed her petition. The first month after she decided to file for bankruptcy, the debtor paid her balance in full, but made minimal payments on subsequent charges. The debtor testified that she intended to pay her credit card bill when she incurred the prepetition charges and that she had sufficient cash in her bank account and income from her husband’s business to do so. The district court affirmed the bankruptcy court’s conclusion that the debtor established that she intended to pay her debt when she incurred it. The Court of Appeals for the Fourth Circuit affirmed, holding that the bankruptcy court’s factual finding that the debtor intended to pay the charges when she incurred them was not clearly erroneous. The record also supported the finding that the debtor believed she would be financially able to pay her credit card bills.Citibank N.A. v. Parker, 2001 U.S. App. LEXIS 24599, – F.3d – (4th Cir. November 16, 2001) (per curiam).
Collier on Bankruptcy, 15th Ed. Revised 4:523.08
Bankruptcy court’s nondischargeability judgment was void because it altered a prior state court judgment. 4th Cir. The chapter 7 debtor appealed the district court’s order affirming the bankruptcy court’s entry of a judgment order with respect to a nondischargeable debt that a state (West Virginia) court had already reduced to judgment. Four years before the debtor filed his petition, the creditor obtained a state court judgment against the debtor for wrongful discharge from employment. The bankruptcy court subsequently declared that the judgment was nondischargeable and entered its own judgment in the creditor’s favor, plus prepetition interest at the state rate and postpetition interest at the federal rate. The debtor asserted that the judgment was void for lack of jurisdiction because the bankruptcy court entered a judgment on an already existing state court judgment, which was beyond the scope of its powers in the proceeding to determine dischargeability. The Court of Appeals vacated the district court’s judgment and remanded the case, holding that the bankruptcy court erroneously issued its own judgment on the debt to replace the state court judgment previously obtained. The lower courts failed to accord the state judgment the full faith and credit required by 28 U.S.C. § 1738 by changing both the interest rate and the initial effective collection deadline of the judgment owed by the debtor.Heckert v. Dotson (In re Heckert), 2001 U.S. App. LEXIS 24597, 272 F.3d 253 (4th Cir. November 16, 2001) (Widener, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:523.06
6th Cir.
Debtor was ineligible for chapter 13 relief because claims against him exceeded allowable amount. Bankr. W.D. Mich. The judgment creditors objected to the debtor’s motion to convert his case from chapter 7 to chapter 13, asserting that he was ineligible for chapter 13 relief. The creditors had sued the debtor, their investment advisor, for alleged securities law violations and received a prepetition district court default order; however, the debtor’s intervening bankruptcy petition stayed entry of the default judgment. The debtor’s original schedules listed the creditors’ claim as a noncontingent, liquidated, unsecured debt in an amount greater than the limits set forth in section 109(e). After the objection was filed, the debtor amended his schedules, changing the creditors’ claim from a stated amount to 'unknown' and the description of the claim to 'contingent, unliquidated and disputed.' The bankruptcy court sustained the objection, holding that the debtor was ineligible for relief under chapter 13 because his recharacterization of the creditors’ claim was not made in good faith. The court noted that it could rely upon the debtor’s representations of the amounts set forth in his schedules only if he had made an honest effort to set forth the amount of each claim. The court concluded that the claim was readily ascertainable and that the debtor was simply attempting to restate the claim so that the debts owed by him on the date of the petition did not exceed the maximum amount set by section 109(e).In re Faulhaber, 2001 Bankr. LEXIS 1465, 269 B.R. 348 (Bankr. W.D. Mich. November 7, 2001) (Hughes, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 2:109.06
Bank’s motion for relief from punitive damage award was denied. Bankr. N.D. Ohio The bank moved for relief from the bankruptcy court’s order, which found it in violation of the automatic stay and imposed punitive damages. Despite the fact that the debtor had personally informed the bank of his filing, the bank offset amounts due for a deficiency balance two days after the petition date. The bank claimed that it had made no effort to collect any debt owed to it by the debtor, and all deposits into checking accounts were applied to negative balances without regard to any bankruptcy filings, as a matter of course. The bankruptcy court imposed punitive damages for the willful violation of the stay and allowed the bank an opportunity to purge a portion of the award by demonstrating that it examined its procedures and considered how to avoid similar future violations. The bank argued that the court lacked authority to enter a remedial order and could not force it to reveal such propriety information. The bankruptcy court denied the bank’s motion for relief from judgment, holding that the punitive damage award against the bank for its willful violation of the automatic stay was authorized and appropriate. Allowing the bank to purge most of its damage award if, in good faith, it examined its policies and procedures with an openness to making appropriate changes, served the intended purpose of punitive damages of avoiding mistakes in the future, encouraging compliance with the Code and protecting both the bank and the debtor. The fact that the bank chose not to avail itself of the option did not make the remedy improper.In re Dunning, 2001 Bankr. LEXIS 1466, 269 B.R. 357 (Bankr. N.D. Ohio October 3, 2001) (Shea-Stonum, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.11
District court reversed bankruptcy court’s denial of trustee’s motion seeking authority to settle section 727 proceeding. D. Vt. The chapter 7 trustee filed an adversary proceeding against the chapter 7 debtors seeking to deny their discharge pursuant to section 727(a)(4)(A). The parties reached an amended settlement, and the trustee moved for approval of the amended settlement. The bankruptcy court denied the trustee’s motion, and held that settlement or compromise of section 727 complaints was not authorized under the Bankruptcy Code or Rules. The bankruptcy court reasoned that as a matter of public policy, negotiations concerning a debtor’s right to discharge were repugnant to the integrity of the bankruptcy system. The chapter 7 trustee appealed. The district court reversed, and remanded the proceeding to the bankruptcy court. The district court held that although the bankruptcy court’s concerns about protecting the integrity of the bankruptcy system and avoiding the taint of compromise were entirely laudable, a blanket prohibition on settlement of section 727 cases was not justified by the language of the Bankruptcy Code or Rules, the decisions by the majority of courts that have considered the matter or countervailing public policy concerns favoring dispute resolution. The district court remanded the matter to the bankruptcy court with instructions for that court to exercise its judgment and determine whether the terms of the settlement were fair and equitable and in the best interests of the estate, and to fashion case-appropriate terms and conditions, if necessary, to protect other creditors.Wolinsky v. Maynard (In re Maynard), 2001 U.S. Dist. LEXIS 18494, – B.R. – (D. Vt. October 31, 2001) (Sessions, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9019.02
Court of Appeals held that district court did not err in refusing to seal settlement agreement. 6th Cir. The chapter 7 trustee commenced an adversary proceeding against various individuals and entities seeking to recover approximately $500,000 in damages. In April 1997, the parties entered a settlement agreement, which was noticed to creditors, and in September 1997, the bankruptcy court approved the settlement and denied a motion for an order sealing the court file, which had been filed by one of the individuals. The district court affirmed, and this appeal followed. The Court of Appeals for the Sixth Circuit affirmed, holding that the district court had not abused its discretion by refusing to seal the court records. The Court of Appeals reasoned that there was a strong policy favoring public access to judicial proceedings, particularly an order embodying a settlement, and noted that the provisions of the settlement agreement had already been noticed out to parties in interest, so that a material part of what the individual sought to seal had already been disclosed. Friedman v. Mitan (In re Polemar Constr. Ltd. P’ship), 2001 U.S. App. LEXIS 24307, – F.3d. – (6th Cir. November 6, 2001) (Keith, Boggs and Moore, C.J.).
Collier on Bankruptcy, 15th Ed. Revised 10:9019.01, .02
7th Cir.
Prepetition transfers were avoidable and trustee was allowed to recover sums. Bankr. N.D. Ill. The debtor was in the business of designing and building retail displays for various retail chains. When the debtor’s displays required metal finishing, the debtor would ship the fixtures to the creditor’s company. The creditor performed work for the debtor and issued invoices to the debtor. These invoices included customary and usual payment terms of '2% 10 net 30 days.' While the debtor paid the invoices, the debtor testified that it usually paid such invoices by issuing checks to the defendant within 40 to 45 days of the date of the invoice. Within 90 days of the filing of the debtor’s bankruptcy petition, the debtor paid two invoices. The trustee then sought to recover these two payments as preferences. The creditor moved for summary judgment, arguing that the ordinary course of business exception applied. After the court denied the creditor’s motion, the trustee moved for summary judgment. The only preference elements contested by the creditor were whether the debtor was insolvent at the time of transfer and whether the creditor received more than it would have received under a chapter 7 distribution. The court found that the Code presumes a debtor to be insolvent, as a matter of law, during the 90 days prior to the bankruptcy petition and that the creditor had not proved otherwise. The court also found that the trustee’s 402.M statement established that the creditor would have received less under a chapter 7 distribution and that the creditor had not disputed trustee’s statement. Accordingly, the court granted the trustee’s motion for summary judgment and held that the prepetition transfers made by the debtor to the creditor were voidable preferences and that the trustee could recover the amount of the preferences. Krol v. The Finishing Company (In re H. King & Assoc.), 2001 Bankr. LEXIS 1373, – B.R. – (Bankr. N.D. Ill. October 22, 2001) (Squires, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 5:547.03
8th Cir.
Automatic stay precluded district court authority over motion for temporary restraining order. D. Minn. A steelworkers’ union and the debtor, a mining operation and power plant, entered into a collective bargaining agreement under which restrictions were placed upon the debtor’s ability to shut down or sell its operations. When the debtor filed a chapter 11 petition and closed some of its operations, the union sought an order from the bankruptcy court conditioning the closing of the plant upon compliance with provisions of the collective bargaining agreement. The bankruptcy court denied the motion for lack of subject matter jurisdiction. Without moving for relief from the automatic stay, the union filed a motion for a temporary restraining order in the district court, seeking to halt the sale of the power plant until arbitration regarding the collective bargaining agreement was completed. The district court held that the automatic stay prevented the district court from hearing the union’s motion for a temporary restraining order. The court rejected the theory that the bankruptcy court had implicitly lifted the stay in the prior hearing because section 362, by its terms, requires that a motion be filed, noticed and heard in order for relief from stay to be granted. Because the union had failed to file a motion, the automatic stay precluded the district court from granting the union any relief against the debtor. United Steelworkers of America v. LTV Steel Mining Co., 2001 U.S. Dist. LEXIS 17823, – F. Supp. – (D. Minn. October 30, 2001) (Kyle, D.J.).
Collier on Bankruptcy, 15th Ed. Revised 3:362.03[3]
Criminal assault debt did not defeat debtor’s good faith. Bankr. N.D. Iowa In 1996, the debtor was involved in a fistfight that occurred in a bar. Also involved was the creditor, who suffered head injuries and only slowly returned to a normal state of brain function. The creditor received funds from the state (Iowa) victims’ reparation fund and in settlement of claims against the owner of the bar, whose insurer paid the creditor $90,000. The criminal charges brought against the debtor resulted in a civil judgment against him and in favor of the creditor, also for $90,000. Shortly after the creditor began collection efforts, the debtor filed a chapter 13 petition. The schedules included the debt to the creditor as a general unsecured claim. Other scheduled claims included the $90,000 as a potential subrogation claim by the bar’s insurer. The debtor’s amended chapter 13 plan proposed payments of approximately $50 per month for 60 months. The creditor objected to confirmation of the plan, asserting that the plan was not proposed in good faith, as required by section 1325(a)(3). The creditor argued that the debtor filed the petition primarily to avoid paying the punitive damages obligation, that the debtor was previously able to pay $100 per month to the victims’ reparation fund but could now only pay $50 toward monthly plan payments, and that the debtor should not, as a matter of public policy, be able to use chapter 13 to discharge liability resulting from a serious criminal assault. The bankruptcy court confirmed the plan, finding that the debtor’s petition filing was not directed at the creditor but was instead an attempt to support himself and his family. The court also held that a public policy exception for all criminal assaults must not be applied too broadly. The court reasoned that the debtor’s prefiling conduct was not determinative of the good faith issue, as long as the plan represented a good faith effort by the debtor to satisfy creditors’ claims. In re Gillespie, 2001 Bankr. LEXIS 1415, 266 B.R. 721 (Bankr. N.D. Iowa September 5, 2001) (Edmonds, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.04[1]
9th Cir.
Forgiveness of debt was estate property. Bankr. D. Nev. The debtors’ chapter 13 plan was confirmed in 1996. Under the plan, the debtors were to remit their tax refunds to the trustee for the 60-month duration of the plan. The debtors failed to remit their 1998 refund, choosing instead to apply it to their 1999 tax liability. In 1998 and 1999, one codebtor was working for an employer who controlled a trust. Both debtors were in the process of purchasing a home from the trust by paying off a personal note they executed. When the employer died in 1999, his estate forgave the remaining indebtedness on the note in the approximate amount of $146,000 and transferred title to the house to the debtors. Although the debtors never sought to amend their chapter 13 schedules to reflect the debt forgiveness, they included the amount as income on their 1999 tax return. In June 2000, the debtors sold the property for $168,000 and used some of the proceeds to purchase a second home. In December 2000, the trustee filed a motion seeking to modify the chapter 13 plan, based upon the postpetition income. The debtors argued that the plan payments had been made in full and that, consequently, the trustee’s motion was untimely. The debtors also argued that the debt forgiveness was not estate property. Nonetheless, the debtors made the outstanding tax refund payment to the trustee in January 2001 and amended their schedules to reflect their interest in the second home, which they claimed as exempt. The bankruptcy court found as a threshold issue that the trustee’s motion was timely because the debtors, by failing to remit the tax refund when due, had failed to make all required plan payments. The court then went on to hold that, although the sale proceeds did not constitute future earnings or income because they were not part of an anticipated stream of income, the debt forgiveness needed to be analyzed for the purposes of the best interest of creditors test under section 1325(a)(4). The court followed majority opinion and held that the date of modification was the effective date to determine the best interest of creditors, and concluded that the forgiveness of the debt, as represented by the sales proceeds, was property of the estate that must be accounted for at the time of modification. Thus the trustee’s motion was granted, subject to the resolution of the exemption claim.In re Profit, 2001 Bankr. LEXIS 1418, 269 B.R. 51 (Bankr. D. Nev. October 9, 2001) (Zive, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 8:1325.05[2]
11th Cir.
Debtor’s objection to IRS’ claim overruled. Bankr. M.D. Fla. The debtor had owned an automobile dealership and had contracted with another company to also serve as a dealership. When the other dealership closed, the debtor sued the dealership. Ultimately, the debtor settled its claim with the dealership and received a settlement from it. The debtor excluded the settlement from his income and did not pay taxes on the settlement amount. When the debtor filed for relief under chapter 11, the IRS then filed a proof of claim, asserting that the settlement funds were not received by the debtor on account of personal injuries or sickness, as required by section 104(a)(2) of the Internal Revenue Code, and that the funds should not have been excluded from debtor’s income, and, thus, income tax payments. The debtor objected to the IRS’ claim. In ruling on cross-motions for summary judgment, the court found that the funds received by the debtor were actually financial and economic damages related to the debtor’s business losses and that the debtor had improperly characterized the funds as being for personal injuries. Since nothing in the underlying litigation or settlement indicated that funds received by the debtor were for personal injuries, the court granted the IRS’ motion for summary judgment and allowed the IRS’ claim against the debtor. In re Jones, 2001 Bankr. LEXIS 1365, 268 B.R. 865 (Bankr. M.D. Fla. September 6, 2001) (Glenn, B.J.).
Collier on Bankruptcy, 15th Ed. Revised 4:502.03