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Collier Bankruptcy Case Update

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

April 15, 2002

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

 

1st Cir.

§ 523(a)(2)(A) Bankruptcy court's determination that obligation was not excepted from debtor's discharge was affirmed on appeal.
Lentz v. Spadoni (In re Spadoni) (B.A.P. 1st Cir.)


2d Cir.

Rule 9024 Debtor's motion for reconsideration of order entered two years earlier was denied.
In re Clark (Bankr. E.D.N.Y.)


3d Cir.

§ 510(b) Subordination of the breach of contract claims asserted by the debtor's shareholders was affirmed on appeal.
Baroda Hill Invs., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.) (3d Cir.)

§ 524 Debtor's only allowed ground for recovery against creditor was for civil contempt.
Beck v. Gold Key Lease, Inc. (In re Beck) (Bankr. E.D. Pa.)


4th Cir.

§ 347(b) Funds not considered "unclaimed" until debtor makes adequate attempt to notify creditors of availability of funds.
In re IBIS Corp. (Bankr. E.D. Va.)

§ 523(a)(7) Previously nondischarged tax penalties constituted allowable claim in debtor's chapter 13 case.
In re Allen (Bankr. E.D. Va.)


5th Cir.

§ 544(b)(1) No fraudulent transfer established where successor trustee failed to present sufficient evidence that stock given was not fair consideration for loan proceeds.
Nordberg v. Cont'l Bank, N.A. (In re Topcor, Inc.) (N.D. Tex.)

§ 727(a)(2) Bankruptcy court's denial of the debtor's discharge was upheld on appeal.
Cadle Co. v. Geter (In re Geter) (N.D. Tex.)


6th Cir.

§ 362(a)(1) State court judgment obtained after commencement of debtor's bankruptcy case merely voidable.
Helfrich v. Thompson (In re Thompson) (Bankr. S.D. Ohio)

§ 502(b)(9) Creditor's claim in chapter 13 case denied as untimely despite lack of notice regarding bankruptcy.
In re Bennett (Bankr. M.D. Tenn.)

§ 523(a)(5) Debtor's complaint to discharge child support debt was premature, as juvenile court had not determined amount of support owed.
Smith v. Sanchez (In re Smith) (Bankr. S.D. Ohio)

§ 524(a)(2) Plaintiffs' appeal from grant of summary judgment to debtor in district court proceeding was moot where discharge injunction barred plaintiff's claims.
Moor v. Madison County Sheriff's Dept. (6th Cir.)

§ 544(a)(3) Trustee unable to avoid mortgage using strong-arm powers.
Logan v. BankAmerica Hous. Servs. (In re DeLong) (Bankr. S.D. Ohio)


7th Cir.

28 U.S.C. § 1334(c) District court rejected creditor's request for mandatory abstention of an action initiated in state court.
Janazzo v. FleetBoston Fin. Corp. (N.D. Ill.)


8th Cir.

§ 362(d) Debtor's failure to obtain stay pending appeal prevented appellate court from ruling on the merits of the appeal.
Dudley v. Powers (In re Dudley) (B.A.P. 8th Cir.)

Rule 8002(a) Debtors appeals dismissed as not timely.
FarmPro Servs. v. Brown (In re Brown) (B.A.P. 8th Cir.)


10th Cir.

§ 110(b)(1) Former attorney found in civil contempt for improper preparation of bankruptcy schedules.
In re Seehusen (Bankr. D. Colo.)


11th Cir.

§ 523(a)(2)(B) Debtor's obligation to lease financing company was not excepted from his discharge.
Lease Corp. of Am. v. Harloff (In re Harloff) (Bankr. M.D. Fla.)

§ 541(a)(1) Certificates of deposit pledged by debtor were property of the estate subject to the bank's security interest.
Jensen v. SunTrust Bank, Southwest Fla. (In re Advanced Golf Design, Inc.) (Bankr. M.D. Fla.)


D.C. Cir.

§ 362(a)(4) Equitable title to property remained fully with the debtor after purchaser defaulted and trustees under deed of trust elected to pursue resale of property.
In re Cooper (Bankr. D.C.)


Collier Bankruptcy Case Summaries

1st Cir.

Bankruptcy court's determination that obligation was not excepted from debtor's discharge was affirmed on appeal. B.A.P. 1st Cir. The creditor appealed the bankruptcy court's ruling that the chapter 7 debtor's obligation to the creditor was not excepted from discharge pursuant to section 523(a)(2)(A). The debtor subleased retail space from the creditor, a long-time friend and business associate, for his business. After falling behind several times with his rent, the debtor promised the creditor that he would pay the back rent. The debtor instead vacated the premises without paying the outstanding rent. The bankruptcy court ruled that the creditor established that the debtor knowingly made false representations regarding the payment of rent, with the intent to deceive the creditor, and the creditor suffered a loss as a result. The bankruptcy court, nevertheless, found that the creditor had not established actual or justifiable reliance on the debtor's promises because the creditor took no action against the debtor until almost two years after the debtor stopped paying rent. The creditor contended that the bankruptcy court did not take into consideration that the parties' friendship affected his perception regarding the debtor's promises to pay. The B.A.P. affirmed, holding that the creditor failed to establish that the bankruptcy court's findings of fact were clearly erroneous or the justifiable standard set forth in the lower court's decision was erroneous. The B.A.P. noted that the bankruptcy court's determination of justifiable reliance was one of mixed law and fact. The bankruptcy court properly considered the parties' relationship and concluded that the creditor did not really believe the debtor's continued promises to pay. The finding that the creditor did not actually rely on the debtor's promises precluded the need for any legal determination that any such reliance was justifiable. Lentz v. Spadoni (In re Spadoni), 2002 Bankr. LEXIS 26, 271 B.R. 703 (B.A.P. 1st Cir. January 9, 2002) (Deasy, B.J.).

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

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2d Cir.

Debtor's motion for reconsideration of order entered two years earlier was denied. Bankr. E.D.N.Y. The chapter 13 debtor filed a motion pursuant to Rule 9024, requesting the bankruptcy court to vacate or modify the stipulation and order withdrawing with prejudice the debtor's objections to the proof of claim of the IRS. The IRS had filed a proof of claim asserting a secured claim, an unsecured priority claim and a general unsecured claim for federal income taxes owed by the debtor for various prepetition years. After the debtor objected to the claim, the IRS filed an amended proof of claim reducing and reclassifying some of the claims and responded that several of the debtor's objections should be denied. The court then approved a stipulation signed by the debtor's attorney and the IRS, whereby the debtor agreed that his objection to the claim was withdrawn with prejudice. Nearly two years after the order was entered, the debtor filed a pro se motion for reconsideration, claiming that his attorney mistakenly stipulated to withdraw his objection to the claim with prejudice. The IRS asserted that the debtor's motion was untimely because the order was not entered "without a contest" within the meaning of Rule 9024. The bankruptcy court denied the debtor's motion, holding that the debtor failed to meet the limitations period and the substantive requirements for obtaining relief from the order under Fed. R. Civ. P. 60(b)(1) or (3). The court noted that unless the order had been entered "without a contest" within the meaning of Rule 9024, the one-year limitations period applied, because the debtor was seeking relief under Fed. R. Civ. P. 60(b)(1) and (3). The objection to the claim was not unilaterally withdrawn, but was settled pursuant to a stipulation that expressly provided that the objection was withdrawn "with prejudice." The debtor's dissatisfaction in hindsight with his counsel's choice to withdraw the objection with prejudice was not grounds for finding the mistake, inadvertence, surprise or excusable neglect necessary to justify relief (citing Collier on Bankruptcy, 15th Ed. Revised). In re Clark, 2001 Bankr. LEXIS 1794, - B.R. - (Bankr. E.D.N.Y. December 7, 2001) (Craig, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:9024

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3d Cir.

Subordination of the breach of contract claims asserted by the debtor's shareholders was affirmed on appeal. 3d Cir. The chapter 11 debtor's shareholders appealed from an order of the district court that affirmed the bankruptcy court's order subordinating their claims against the estate pursuant to section 510(b). The shareholders sold assets of certain businesses to the debtor prepetition, in exchange for shares of the debtor's common stock. The stock purchase agreements required the debtor to use its best efforts to register its stock and ensure that the shares were freely tradeable by a date certain. The shareholders filed proofs of claim alleging that the debtor breached its agreement to use its best efforts to register the stock, and sought damages on the theory that, had the debtor performed its obligation under the contract, they would have sold their shares as soon as the stock became freely tradeable, thereby avoiding the losses incurred when the stock subsequently declined in value. Upon the debtor's objection, the bankruptcy court subordinated the claims, holding that because the shareholders' claims would not have existed but for their purchase of stock, the claims arose from that purchase for purposes of section 510(b). The district court affirmed. The Court of Appeals for the Third Circuit affirmed, holding that the shareholders' claims for breach of the provision in the stock purchase agreement requiring the debtor to use its best efforts to register its stock and ensure that the stock was freely tradeable "arose from" the purchase of the stock for purposes of section 510(b) and was properly subordinated. The court rejected the shareholders' contention that section 510(b) should have been construed narrowly, so that only claims for illegal conduct that occurred at the time of the purchase of the stock were deemed to arise from that purchase. The court considered the legislative history of the statute and the policies underlying the provision before concluding that section 510(b) required some nexus or causal relationship between the claims and the purchase of the securities, but was not limited to claims alleging illegality in the purchase itself. Baroda Hill Invs., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.), 2002 U.S. App. LEXIS 2415, 281 F.3d 133 (3d Cir. February 15, 2002) (Becker, C.J.).

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

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Debtor's only allowed ground for recovery against creditor was for civil contempt. Bankr. E.D. Pa. The creditor moved to dismiss the chapter 7 debtor's class action lawsuit on the ground that there was no private right of action under section 524. The debtor had entered into a prepetition automobile lease with the creditor. The lease was not assumed and the parties never entered into an enforceable reaffirmation agreement. The debtor made all monthly lease payments, was granted a discharge and returned the vehicle to the creditor at the end of the lease. After the creditor attempted to collect an excess mileage charge pursuant to the terms of the lease, the debtor filed a complaint alleging that the creditor violated the discharge injunction and should be held in contempt. The bankruptcy court granted, in part, and denied, in part, the creditor's motion to dismiss, holding that although the excess mileage claims had been discharged, the debtor could not bring a private right of action based on section 524 for himself and on behalf of all others similarly situated seeking damages for the creditor's postdischarge collection activities. The debtor's personal liability for monetary obligations under the lease, including the lump sum final payment for excess mileage, was discharged as a result of the deemed rejection of the lease under section 365(d)(1). The count in the complaint that alleged that the creditor should be held in civil contempt for violating the discharge injunction imposed by section 524(a)(2) was not dismissed (citing Collier on Bankruptcy, 15th Ed. Revised). Beck v. Gold Key Lease, Inc. (In re Beck), 2002 Bankr. LEXIS 98, 272 B.R. 112 (Bankr. E.D. Pa. January 15, 2002) (Sigmund, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:524.02[2], .04

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4th Cir.

Funds not considered "unclaimed" until debtor makes adequate attempt to notify creditors of availability of funds. Bankr. E.D. Va. The debtor filed for chapter 11 relief on February 26, 1992. Its plan of reorganization, which was confirmed on December 7, 1993, provided for periodic payments to the plan trustee, who was then responsible for distributing the payments to creditors. The bankruptcy court approved a compromise allowing the debtor to make a single payment of $1,075,000.00 to the plan trustee, rather than making the periodic payments called for under the plan. The payment was made on February 22, 1995. A final decree was entered in the case on March 8, 1996, reserving continuing jurisdiction in the bankruptcy court in order to allow the trustee to object to claims, file adversary proceedings and make a final disbursement. On March 23, 1995, the plan trustee objected to 19 proofs of claim. When the plan trustee made distributions, he withheld $364,675.47, which represented the disputed claims. Later, the plan trustee also came to be in possession of $23,122.05 in checks returned by the post office as undeliverable and $8,541.66 in outstanding checks that were not returned or cashed. The plan trustee took no significant action to resolve the disputed claims or to locate the missing creditors whose checks had been returned in the mail. Except for a change of address notification filed by the plan trustee in 1998, no papers were filed in the bankruptcy case from May 1, 1995 through June 21, 2000, when the debtor moved to reopen the case to seek an accounting and to claim the undistributed funds held by the plan trustee. In considering the debtor's motion, the court focused on whether the funds paid into the registry qualified as "unclaimed" funds under 11 U.S.C. § 347. After analysis, the court found that the funds represented by the checks returned in the mail did not qualify as "unclaimed" because it could not be presumed that the creditors who were to receive the checks were even aware of the availability of the distributed funds. The court found that the returned checks could only be considered "unclaimed" if there was no response after (1) a reasonable search to locate the creditors who were owed the funds; (2) reasonable notice (such as newspaper publication) was given to such creditors; and (3) the passage of a reasonable period of time, within which it would be expected that interested creditors would seek out the disbursement agent. The court also found that the funds set aside for disputed claims were not "unclaimed" funds. These disputed claims became allowed as a matter of law and should have been paid out when the final decree was entered because the plan did not confer jurisdiction on the court to hear the pending objections after the case was closed. As to the checks that were mailed but not cashed or returned, the court found that these checks were "stale" and constituted "unclaimed" funds that were returnable to the debtor. In re IBIS Corp., 2001 Bankr. LEXIS 1775, 272 B.R. 883 (Bankr. E.D. Va. October 5, 2001) (Mayer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:347.03

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Previously nondischarged tax penalties constituted allowable claim in debtor's chapter 13 case. Bankr. E.D. Va. The debtor filed a voluntary chapter 7 petition and received a discharge on June 17, 1999. In August 1999, the debtor filed a chapter 13 petition. The IRS filed a proof of claim in the chapter 13 case, seeking payment for unsecured priority claims based on income taxes due for 1996, 1997 and 1998, and for penalties on those taxes. The debtor objected to the IRS's proof of claim, arguing that the penalties were not in compensation for any actual pecuniary loss and, therefore, under section 523(a)(1)(A), were not excepted from the debtor's chapter 7 discharge. The IRS agreed that the tax penalties were not in compensation for an actual pecuniary loss, but argued that the penalties were nonetheless nondischargeable because they were imposed with respect to an event, namely, the nonpayment of taxes that occurred within three years of the filing of the debtor's chapter 7 petition. In considering the debtor's objection, the court noted that the Code addresses taxes separately and distinctly from penalties. In analyzing the tax portion of the IRS's claim, the bankruptcy court found that all of the taxes included in the proof of claim were due within three years of the date of the filing of the debtor's chapter 7 petition. Consequently, the taxes for each of the years in question constituted unsecured priority claims that were not discharged in the debtor's chapter 7 case. Regarding the penalties, the court noted that the test for determining the dischargeability of the penalty is based on the date of the underlying transaction or event that gave rise to the penalty, not the dischargeability of the underlying tax. The court then found that, under section 523(a)(7)(B), the penalties were assessed based on the nonpayment of taxes that were due within three years of the debtor's chapter 7 petition date and, consequently, the penalties also were not discharged in the debtor's chapter 7 case. The court further noted that it is possible to have a situation where the underlying tax is discharged but the penalty is not. For example, under 507(a)(8)(B), a property tax would be dischargeable if assessed before the commencement of the case and last payable without penalty more than one year before the filing of the petition. But, under section 523(a)(7)(B), the penalty on such a property tax would not be discharged until three years after the transaction or event giving rise to the penalty. Conversely, pursuant to 523(a)(8)(C), trust fund-type taxes are not dischargeable, but, under section 523(a)(7)(B), the penalty for non-payment of such taxes is dischargeable if the penalty is more than three years old. In re Allen, 2002 Bankr. LEXIS 108, 272 B.R. 913 (Bankr. E.D. Va. January 18, 2002) (Mayer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.13

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5th Cir

No fraudulent transfer established where successor trustee failed to present sufficient evidence that stock given was not fair consideration for loan proceeds. N.D. Tex. In 1983, the debtor company sought to borrow $10 million from Bank A for use as working capital. As collateral for the loan, the debtor agreed to give Bank A 900 shares of common stock in one of the companies controlled by the debtor's principal. Another bank, Bank B, had been holding 468 shares in this same company to secure defaulted loan obligations of the debtor's principal and certain of his companies. In order to provide the collateral required for the loan with Bank A, the debtor arranged for Bank B to transfer the 468 shares it held to Bank A in exchange for the debtor paying $4 million to Bank B to cover the defaulted loan obligations. The loan transaction with Bank A was completed, and the debtor paid Bank B $4 million to cover the defaulted loans, including $1.1 million to cover the defaults of entities unrelated to the debtor. The debtor failed to repay the $10 million loan from Bank A and filed for bankruptcy in 1986. The successor trustee filed an adversary proceeding seeking to avoid the $1.1 million transfer on the basis that the payment constituted constructive fraud under Texas' fraudulent transfer law. The bankruptcy court determined that the trustee failed to establish the elements of constructive fraud, based on the court's finding that the trustee had failed to prove that the transfer was made without fair consideration. Specifically, the trustee failed to establish that on the date of the transfer, the transferred stock was valued at less than the $1.1 million given to repay the overdue interest owed by the unrelated companies. On appeal, the district court found that the bankruptcy court did not err in determining that the successor trustee failed to prove adequate consideration was not received for the loan proceeds. The district court then denied the successor trustee's motions to amend his complaint to conform to the evidence and affirmed the bankruptcy court's final judgment.Nordberg v. Cont'l Bank, N.A. (In re Topcor, Inc.), 2002 U.S. Dist. LEXIS 2220, - B.R. - (N.D. Tex. February 13, 2002) (Lynn, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:544.09

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Bankruptcy court's denial of the debtor's discharge was upheld on appeal. N.D. Tex. The chapter 7 debtor appealed the bankruptcy court's judgment denying her a discharge under section 727(a)(2)(A). At the time the debtor filed her petition, several judgments had been entered against her and various creditors had garnished her bank accounts. The debtor's brother had purchased a vehicle titled in his name but for the debtor's use, and the debtor resided in a home titled in her brother's name. For several years prepetition, the debtor had deposited all or most of her income into accounts held solely in the name of her minor daughter, solely in the name of her mother, or jointly in both her and her mother's names. The bankruptcy court found that the creditor proved by a preponderance of the evidence that the debtor actually intended to hinder, delay or defraud her creditors by concealing her income through transfers to her mother and daughter. The bankruptcy court also found that the debtor had engaged in irregular financial dealings with other family members during a time when she was insolvent and subject to the ongoing collection activity of several creditors. The district court affirmed, holding that the bankruptcy court had ample basis in the record to find that the creditor had met its burden of proof and to find, specifically, that the deposits in question were intended to hinder, delay or defraud the debtor's creditors by concealing her income. The court rejected the debtor's argument that the deposits into the accounts were intended for her sole use and that she intended to make payments to her creditors with the funds. Cadle Co. v. Geter (In re Geter), 2002 U.S. Dist. LEXIS 2151, - B.R. - (N.D. Tex. February 12, 2002) (Fitzwater, D.J.).

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

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6th Cir.

State court judgment obtained after commencement of debtor's bankruptcy case merely voidable. Bankr. S.D. Ohio The debtor filed for chapter 7 relief on June 23, 1998. Three weeks later, the state (Ohio) court entered a judgment in favor of the creditor and against the debtor based on a magistrate's decision in an embezzlement case brought by the creditor. Because the judgment involved more than a ministerial act, it was entered in violation of the automatic stay. However, despite the apparent invalidity of the state court judgment, the debtor did not take any steps to avoid the judgment and the creditor did not seek to have the stay annulled in order to give retroactive effect to the judgment. The creditor later filed an adversary proceeding against the debtor, seeking to have the judgment deemed nondischargeable under section 523(a)(4). After reviewing the entire record for the case, the bankruptcy court concluded that the creditor had established the elements of embezzlement as to one of the checks misappropriated by the debtor. In considering whether the state court judgment could be used to establish the amount of this debt, the bankruptcy court found that it was required to give the state court judgment the same preclusive effect that the judgment would have under Ohio law. The court then found that the judgment was not void, but merely voidable, because the state court had jurisdiction to enter its order. Since the voidable judgment was entitled to res judicata effect, the bankruptcy court also found that the state court judgment could be used to establish the amount of the debt owed to the creditor. Helfrich v. Thompson (In re Thompson), 2001 Bankr. LEXIS 1766, 273 B.R. 143 (Bankr. S.D. Ohio September 28, 2001) (Sellers, B.J.).

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

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Creditor's claim in chapter 13 case denied as untimely despite lack of notice regarding bankruptcy. Bankr. M.D. Tenn. When the debtors filed their chapter 13 petition, their statements and schedules failed to list the creditor. The mailing matrix also did not include the creditor. After the debtors' chapter 13 plan was confirmed and after the bar date for filing claims had past, the creditor learned of the bankruptcy and filed an unsecured claim seeking payment for medical bills totaling approximately $30,000. The trustee filed a motion to disallow the creditor's claim as untimely and the creditor objected to the motion, arguing that, as to this creditor, the court should equitably toll the claims bar date due to the lack of notice. The bankruptcy court found that, under section 502(b)(9), untimely claims are disallowed except to the extent that they are permitted under section 726(a). However, since the exceptions referenced in section 726(a) apply only to tardy claims filed in a chapter 7 proceedings, the court declined to extend the exceptions to late-filed claims in a chapter 13 case. The court then found that remedy of equitable tolling was not available to the creditor and granted the trustee's motion denying the claim. Although the result seemed harsh, the court emphasized that it was only disallowing the creditor's claim under section 502(b)(9) and that it was not passing on whether the creditor's claim was discharged under section 1328 or whether the debtors' discharge should ultimately be revoked for failing to include the creditor in their bankruptcy papers. The court also noted that the opinion did not address any other remedies that might be available to the creditor. In re Bennett, 2001 Bankr. LEXIS 1773, - B.R. - (Bankr. M.D. Tenn. August 23, 2001) (Harrison, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.03[10]

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Debtor's complaint to discharge child support debt was premature, as juvenile court had not determined amount of support owed. Bankr. S.D. Ohio The debtor and his girlfriend lived together for four years. During that time, they had two children together. In 1984, the state (California) court entered an order that reflected the debtor's acknowledgement of paternity. The court also found that the debtor owed a duty of support to the children and had the present ability to do so. However, the court did not enter an award of child support because the debtor and his girlfriend were still living together with the children. The debtor's girlfriend subsequently left him and moved to Ohio. In 1996, the Ohio juvenile court ordered the debtor to pay $100 per week in child support for his two children. The children's mother and the local county child support enforcement agency then filed a complaint against the debtor, seeking child support payments for the children from the time of their births until 1997. After the filing of the child support complaint, the debtor filed a petition for chapter 7 relief and commenced an adversary proceeding, seeking a determination that any forthcoming award for past-due child support was dischargeable. Without the entry of a court order specifically awarding child support, the bankruptcy court found that it was unable to determine the question of dischargeability. The bankruptcy court then dismissed the debtor's complaint as premature, indicating that the debtor could seek to reopen the adversary proceeding once the issue of the past-due child support was finally determined by the state courts. Smith v. Sanchez (In re Smith), 2001 Bankr. LEXIS 1768, 273 B.R. 138 (Bankr. S.D. Ohio September 21, 2001) (Sellers, B.J.).

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

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Plaintiffs' appeal from grant of summary judgment to debtor in district court proceeding was moot where discharge injunction barred plaintiff's claims. 6th Cir. The husband and wife plaintiffs filed a prepetition federal district court action against the chapter 7 debtor/deputy police officer, the county sheriff's office and the county sheriff seeking redress for the debtor's alleged inappropriate conduct with respect to the plaintiff wife. Specifically, the complaint sought redress under 42 U.S.C. §§ 1983, 1985 and 1986 for the debtor's alleged violations of the wife's first, fourth, fifth, eighth and fourteenth amendment rights, and asserted related state law claims. Approximately six months after the plaintiffs' complaint was filed, the debtor commenced his chapter 7 case. The plaintiffs did not object to the discharge of their debt or take any action to set aside or avoid the automatic stay in the debtor's bankruptcy case. Thereafter, the debtor moved to dismiss the district court complaint, but the district court denied the motion as moot because of the automatic stay. The debtor, the sheriff and the sheriff's department then moved for summary judgment in the district court proceeding. The debtor's summary judgment motion did not address the bankruptcy issue, but sought an extension of time to permit filing on that issue. The district court granted the extension, ordered the plaintiffs' response by a stated date and issued an order, sua sponte, that required the plaintiffs to file a status report by a stated date. The plaintiffs filed a response to the debtor's summary judgment motion but failed to file a status report. Thereafter, the district court granted summary judgment to all defendants, dismissed all the federal claims with prejudice and dismissed all the state claims without prejudice. The plaintiff wife appealed. The bankruptcy court held that the issue on appeal was moot because the plaintiff wife's claims were barred by operation of section 524. The court noted that the debtor had been discharged in bankruptcy and had filed his notice of discharge in the district court, and concluded that since the plaintiffs took no steps in either the bankruptcy or district court to set aside or terminate the automatic stay or otherwise obtain an exception to discharge, they failed to preserve their rights against the debtor. Moor v. Madison County Sheriff's Dept., 2002 U.S. App. LEXIS 2630, - F.3d - (6th Cir. February 15, 2002) (Suhrheinrich, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:524.02

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Trustee unable to avoid mortgage using strong-arm powers. Bankr. S.D. Ohio The debtor executed a mortgage in favor of the creditor for real estate located in Ohio. The mortgage was recorded on July 16, 1998. Subsequently, the Ohio legislature enacted a statute, which became effective on June 30, 1999, creating an irrebuttable presumption that any recorded mortgage is properly executed regardless of any actual or alleged defect in the execution of the mortgage, unless certain exceptions applied. The new statute also provided that the recording of the mortgage served as constructive notice of the mortgage to all persons, including a subsequent bona fide purchaser or any subsequent holder of an interest in the property. The debtor filed for chapter 7 relief on September 19, 2000. The trustee then sought to avoid the mortgage given by the debtor to the creditor on the basis that the mortgage was not executed in conformity with Ohio law and, therefore, was illegally recorded. The court found that, under the new Ohio statute, as of June 30, 1999, any recorded mortgage, whether defective or not, served as constructive notice to any bona fide purchaser whose interest arose after that date. Since the trustee's status as a bona fide purchaser arose on September 19, 2000, which was the debtor's petition date, the trustee's interest was not superior to that of the creditor, and the mortgage could not be avoided under section 544(a)(3). Logan v. BankAmerica Hous. Servs. (In re DeLong), 2001 Bankr. LEXIS 1770, 273 B.R. 141 (Bankr. S.D. Ohio September 26, 2001) (Sellers, B.J.).

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

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7th Cir.

District court rejected creditor's request for mandatory abstention of an action initiated in state court. N.D. Ill. The plaintiff creditor filed a motion to remand its action to the state (Illinois) court or, in the alternative, for mandatory abstention. The creditor had filed a class action complaint for tort and for equitable relief against the secured lender in state court. The creditor, an owner of a small retail beverage business, had entered into a merchant processing agreement with the chapter 11 debtor prepetition, allowing the installation of an automatic teller machine on his business premises. Pursuant to the agreement, the creditor's class of merchants was entitled to receive 85 percent of all surcharged transactions as revenue on the terminal. The creditor contended that the debtor had no rights in 85 percent of the fees and had improperly remitted the funds to its secured lender prior to the commencement of its case. The lender filed a separate adversary proceeding to determine the extent of its liens and removed the creditor's action to the district court. The district court denied the creditor's motion, holding that mandatory abstention was not warranted because the creditor failed to present any evidence that the matter could be timely adjudicated in the state court. Factors the court considered in determining the timely adjudication element of mandatory abstention included the backlog of the state court's calendar, the status of the bankruptcy proceedings, the complexity of the issues and whether the state court proceeding would have prolonged the administration or liquidation of the estate. Whether the fees were property of the estate or subject to a constructive trust were traditional subjects within the expertise of the bankruptcy court, which had already provided for a fast-track resolution of the dispute. Janazzo v. FleetBoston Fin. Corp., 2002 U.S. Dist. LEXIS 451, - B.R. - (N.D. Ill. January 9, 2002) (Andersen, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
1:3.05[2]

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8th Cir.

Debtor's failure to obtain stay pending appeal prevented appellate court from ruling on the merits of the appeal. B.A.P. 8th Cir. The chapter 13 debtor appealed the bankruptcy court's order lifting the automatic stay to allow the creditors' foreclosure sale to proceed, as well as the order denying the debtor's motion for reconsideration. As grounds for the creditors' motion for relief from the stay, they alleged that the debtor had not filed a chapter 13 plan, had not filed his schedules and had no means of income with which to fund a plan. The debtor failed to obtain a stay pending appeal and the property was sold. The B.A.P. for the Eighth Circuit affirmed, holding that because no effective relief could be granted the debtor, the issues raised on appeal pertaining to relief from the automatic stay were moot. The sale was not subject to modification by the appellate court absent a stay pending appeal. The court further noted that it was not empowered to give an opinion on moot questions or declare rules of law that could not affect the matter at issue in the case before it. Dudley v. Powers (In re Dudley), 2002 Bankr. LEXIS 106, 273 B.R. 197 (B.A.P. 8th Cir. February 15, 2002) (Schermer).

Collier on Bankruptcy, 15th Ed. Revised
3:362.07; 10:8005

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Debtors appeals dismissed as not timely. B.A.P. 8th Cir. After the debtors filed a chapter 12 petition, they borrowed money from two creditors, Creditor A and Creditor B. The loans were approved by the bankruptcy court and were properly perfected. The debtors then moved to dismiss their chapter 12 case. Two months later, the debtors filed a petition for chapter 13 relief. They later converted the case to one under chapter 11 and then again back to chapter 12. During this second series of cases, Congress enacted a law that provided certain disaster relief payments for the 2000 crop year. The debtors were entitled to relief under the disaster relief program and received $80,000 from the Department of Agriculture. Two separate adversary complaints were then commenced, requesting that the court determine the right to the disaster payments as between Creditor A, Creditor B, the debtors and others. On September 3, 2001, the bankruptcy court issued an opinion that Creditor A's interest was ahead of Creditor B's. On September 13, 2001, Creditor B filed a motion to alter or amend the judgment. The next day, on September 14, 2001, the debtors filed a notice of appeal from the September 3 judgment. On October 12, 2001, the bankruptcy court denied Creditor B's motion to alter or amend the judgment. On October 22, 2001, the bankruptcy court then extended the time for Creditor B to file an appeal from the order denying the motion. However, the October 22 order did not, at least by its terms, extend the time for appealing the September 3 judgment. On November 13, 2001, Creditor B filed an appeal from the September 3 judgment, together with an election to have the appeal heard by the district court. On November 27, 2001, Creditor B amended its notice of appeal, indicating that it was appealing from the October 12 order denying its motion to alter or amend. On review, the B.A.P. found that it lacked jurisdiction over both of the debtors' appeals from the September 3 judgment. As to the first adversary proceeding, the panel determined that, under Rule 8002(a) and (b), although the debtors' notice of appeal was filed 11 days after the entry of judgment (which was one day after the last day of the appeal period), the pendency of Creditor B's timely motion to alter or amend the judgment extended the appeal period until the bankruptcy court's entry of an order disposing of the motion. However, because Creditor B timely elected to have its appeal heard by the district court, the panel concluded that it had been divested of jurisdiction over the appeal. As to the second adversary, the panel noted that, since the debtors' notice of appeal was filed one day late, and since there were no timely postjudgment motions made in this adversary proceeding, the debtors' notice of appeal was simply untimely. FarmPro Servs. v. Brown (In re Brown), 2002 Bankr. LEXIS 107, 273 B.R. 194 (B.A.P. 8th Cir. February 15, 2002) (Kressel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:8002.07

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10th Cir.

Former attorney found in civil contempt for improper preparation of bankruptcy schedules. Bankr. D. Colo. The debtors filed a chapter 7 petition. Their petition and schedules did not list any attorney or law firm representation, and did not list any nonattorney petition preparer. Similarly, the debtors' statement of financial affairs did not list any payments for debt counseling or bankruptcy. However, at a reaffirmation, the debtors testified that they thought that a man named Mr. Lamberson was their attorney and that he had filed the bankruptcy on their behalf. The debtors further testified that it was not until the meeting of creditors that they discovered they were not represented by counsel. As a result of the debtors' testimony at the reaffirmation hearing, the bankruptcy court entered an order directing Mr. Lamberson to show cause why (1) his conduct was not in violation of 11 U.S.C. § 110; (2) his actions did not constitute civil contempt; and (3) his conduct should not be sanctioned. Although Mr. Lamberson did not appear at the show cause hearing, the debtors appeared and testified. Their testimony indicated that they had retained Mr. Lamberson, who at that time was still admitted to practice law, and paid him $2,500 to file their chapter 7 bankruptcy petition. After Mr. Lamberson was disbarred, the debtors paid him an additional $900 for the bankruptcy filing. Also, the debtors had saved $4,500 for taxes and, upon Mr. Lamberson's advice, gave him the money to shelter from the trustee. Following this testimony, the bankruptcy court issued another show cause order. The United States Marshall service was eventually able to locate and serve Mr. Lamberson with the second show cause order. When Mr. Lamberson was brought before the court, he testified that he had received the court's two show cause orders. After a hearing on the matter, the bankruptcy court concluded that Mr. Lamberson had violated section 110(b) by rendering legal advise after he was disbarred and, at a minimum, was a bankruptcy petition preparer and, at worst, was practicing law without a license. The court then ordered a disgorgement of the total fee paid to Mr. Lamberson by the debtors for the purpose of filing their chapter 7 petition. The court also ordered that Mr. Lamberson pay fines in the amount of $1,000 for civil contempt and pay over to the court's registry the amounts being held for the debtors' taxes. The court further certified the matter to the district court for consideration of the violation of the court's local rules and for consideration of criminal contempt. The decision and judgment were also to be sent to the state's Unauthorized Practice of Law Committee and the Committee on Conduct for the United States District Court for review and appropriate action. In re Seehusen, 2001 Bankr. LEXIS 1774, 273 B.R. 636 (Bankr. D. Colo. December 20, 2001) (Brooks, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:110.03

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11th Cir.

Debtor's obligation to lease financing company was not excepted from his discharge. Bankr. M.D. Fla. The creditor filed an adversary proceeding against the chapter 11 debtor, claiming that the debtor made materially false written representations to induce the creditor to enter into certain leases with the debtor's business. The debtor, as sole shareholder and president of his packing company, approved the lease application for radio equipment, and personally guaranteed the obligations under the leases. The lease application stated that the company had an exceptional net worth and that the debtor received a substantial annual income. The credit reports ordered by the creditor showed a number of tax liens on the debtor's business and that the debtor, individually, had a poor payment history. The creditor, nevertheless, approved the leases. The debtor's business subsequently failed to make any of the monthly rent payments required by the lease and the debtor defaulted under each of the guarantees. The bankruptcy court granted judgment in favor of the debtor, holding that the creditor failed to satisfy its burden under section 523(a)(2)(B) because its reliance on the lease application was not reasonable. The credit reports of the debtor and his business raised sufficient red flags that would have required a prudent lender to conduct additional investigation before entering into the lease financing arrangement. Since the creditor and debtor did not have an existing relationship prior to the leases, the creditor had even more reason to investigate further rather than rely solely on the lease application. Lease Corp. of Am. v. Harloff (In re Harloff), 2001 Bankr. LEXIS 1760, 272 B.R. 496 (Bankr. M.D. Fla. August 30, 2001) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:523.08[2]

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Certificates of deposit pledged by debtor were property of the estate subject to the bank's security interest. Bankr. M.D. Fla. The chapter 7 trustee filed an adversary proceeding against the bank, seeking a determination that the bank did not have a valid security interest in certificates of deposit that the debtor had pledged for specific purposes. The debtor had pledged the CDs to secure separate letters of credit issued on its behalf in favor of suppliers of the debtor. The debtor and the bank also had a merchant's charge card agreement, which provided that any charge-backs and repurchases under the agreement were subject to the security interest of the bank on any and all funds of the debtor on deposit with the bank. The first letter of credit had expired and the supplier never drew on the second letter of credit. The bank argued that it had a common law and contractual right of setoff and that the funds were subject to its valid security agreement. Both parties filed cross-motions for summary judgment. The bankruptcy court granted, in part, and denied, in part, the parties' motions for summary judgment, holding that the pledged CDs were property of the estate, but were subject to the extent of the bank's security interest created by the merchant's charge card agreement that encumbered the funds. The original pledges represented special purpose funds designed to serve a specific purpose in favor of specific identifiable parties. Because the suppliers in whose favor the CDs were pledged were no longer able to draw on the letters of credit secured by the CDs, the CDs lost their character as special purpose funds and, thus, were property of the estate subject to the bank's security interest. Jensen v. SunTrust Bank, Southwest Fla. (In re Advanced Golf Design, Inc.), 2001 Bankr. LEXIS 1758, 272 B.R. 776 (Bankr. M.D. Fla. November 2, 2001) (Paskay, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:541.06[7]

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D.C. Cir.

Equitable title to property remained fully with the debtor after purchaser defaulted and trustees under deed of trust elected to pursue resale of property. Bankr. D.C. Before filing her chapter 13 petition, the debtor held equitable title to real property located in the District of Columbia subject to a deed of trust that secured repayment of a promissory note held by a creditor. The deed of trust gave the trustees a power of sale in the event of a default in its terms. Due to a default in the terms of the deed of trust, the creditor caused the trustees to sell the property at a prepetition foreclosure sale. However, the successful bidder at the sale failed to settle on its purchase in accordance with the terms of sale. As a result, the substitute trustees elected to notice a resale of the property, and the property was sold. The debtor's chapter 13 case was commenced one minute before the resale began. Thereafter, the creditor filed a motion in the bankruptcy court seeking a determination that the automatic stay did not apply to the postpetition resale of the property. Alternatively, the creditor sought an annulment of the stay if the stay was held to bar the resale. The bankruptcy court denied the creditor's motion. The court held that upon the first purchaser's default and the election of the trustees under the deed of trust to pursue a resale of the property, the equitable title to the property remained fully in the debtor; thus, the automatic stay applied to the postpetition resale. The court also found that no grounds existed to warrant an annulment of the automatic stay. In re Cooper, 2002 Bankr. LEXIS 123, 273 B.R. 297 (Bankr. D.C. February 5, 2002) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:362.03[6]

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