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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 8, 2002

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

 

1st Cir.

§ 507(a)(1) Bankruptcy court's denial of administrative priority status to defendants' claim for costs was reversed.
Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.) (B.A.P. 1st Cir.)

§ 541(a)(1) Legal malpractice claims against debtor's bankruptcy attorneys were property of debtor's estate.
Tomaiolo v. Rodolakis (In re Tomaiolo) (D. Mass.)


2d Cir.

§ 507(a)(1) Bankruptcy court's denial of administrative priority status to defendants' claim for costs was reversed.
Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.) (B.A.P. 1st Cir.)

§ 541(a)(1) Legal malpractice claims against debtor's bankruptcy attorneys were property of debtor's estate.
Tomaiolo v. Rodolakis (In re Tomaiolo) (D. Mass.)


3d Cir.

§ 105(a) Bankruptcy court denied adversary defendant's motion to disqualify debtors' counsel.
Kaiser Group Int'l, Inc. v. Nova Hut (In re Kaiser Group Int'l, Inc.) (Bankr. D. Del.)

§ 502(c) Debtors entitled to summary judgment to estimate the creditor's claim at zero.
In re Genesis Health Ventures, Inc. (Bankr. D. Del.)


4th Cir.

§ 362(b) Debtor was required to respond to discovery in a civil contempt matter.
America Online, Inc. v. CN Productions, Inc. (E.D. Va.)


5th Cir.

28 U.S.C. § 157(e) Bankruptcy court denied jury demand in adversary proceeding brought by debtors to assume and assign noncompetition agreement.
Sentry Operating Co. v. Billings (In re Sentry Operating Co.) (Bankr. S.D. Tex.)


6th Cir.

§ 506(d) Debtors not allowed to use section 506(d) to avoid creditor's unsecured lien on debtors' residence.
Bessette v. Bank One (In re Bessette) (Bankr. E.D. Mich.)

§ 1141(a) "Collateral attack doctrine" precluded state court litigation after confirmation.
Pratt v. Ventas, Inc. (W.D. Ky.)

Rule 9024 Bankruptcy court denied mortgagee's motion for relief from default judgment obtained by trustee.
Wilson v. Cassidy (In re Cassidy) (Bankr. N.D. Ohio)


7th Cir.

§ 106(a) Court struck debtor's claim for determination of dischargeability of state tax debt after finding section 106(a) unconstitutional.
Claxton v. United States (In re Claxton) (Bankr. N.D. Ill.)

§ 330(a)(3) Attorney's request for additional compensation was granted in part.
In re Fry (Bankr. C.D. Ill.)


8th Cir.

§ 541(a)(6) Court of Appeals affirmed decision that real estate commissions paid to debtor after her bankruptcy filing belonged to her bankruptcy estate.
Parsons v. Union Planters Bank (In re Parsons) (8th Cir.)


9th Cir.

§ 522(b)(2)(A) Under state (Nevada) exemption statute, joint husband and wife debtors could each claim exemption for up to $4,500 worth of equity in same vehicle.
In re Longmore (Bankr. D. Nev.)


11th Cir.

§ 362(d) Contractor entitled to relief from automatic stay to complete foreclosure proceeding.
In re Madden (Bankr. M.D. Fla.)

§ 503(b) Claim based on utility refund obtained by creditor on debtor's behalf not entitled to treatment as administrative expense.
In re Moltech Power System, Inc. (Bankr. N.D. Fla.)

§ 523(a)(5) Debtor's obligation to pay legal fees to former wife's attorney held nondischargeable.
Drewell v. Smith (In re Smith) (Bankr. N.D. Fla.)



D.C. Cir.

§ 362(d) Contractor entitled to relief from automatic stay to complete foreclosure proceeding.
In re Madden (Bankr. M.D. Fla.)

§ 503(b) Claim based on utility refund obtained by creditor on debtor's behalf not entitled to treatment as administrative expense.
In re Moltech Power System, Inc. (Bankr. N.D. Fla.)

§ 523(a)(5) Debtor's obligation to pay legal fees to former wife's attorney held nondischargeable.
Drewell v. Smith (In re Smith) (Bankr. N.D. Fla.)



Collier Bankruptcy Case Summaries

1st Cir.

Bankruptcy court's denial of administrative priority status to defendants' claim for costs was reversed. B.A.P. 1st Cir. Defendants in an action commenced by the chapter 7 trustee appealed the bankruptcy court's determination that costs awarded to them by the district court were not entitled to administrative priority. The trustee had sued the defendants, alleging that a prepetition leveraged buyout of the debtor was a fraudulent transaction. The defendants prevailed against the trustee after a jury trial, and the district court awarded costs pursuant to Fed. R. Civ. P. 54(d). The bankruptcy court denied the defendants' request that the costs be recognized as administrative expenses and ruled that the defendants' entitlements were general, unsecured claims. The B.A.P. reversed, holding that the defendants' claims for costs were entitled to administrative priority under the express, unambiguous terms of section 507(a)(1). The B.A.P. rejected the trustee's argument that the word "and" in section 507(a)(1) must be read to require that any such assessment be accompanied by, or bound up with, a section 503(b) claim. As charges assessed against the estate, the defendants' claims for costs assessed by the district court after their successful defense of the trustee's action fit the statute precisely. Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.), 2002 Bankr. LEXIS 81, 272 B.R. 510 (B.A.P. 1st Cir. February 1, 2002) (Haines, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:507.03

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Legal malpractice claims against debtor's bankruptcy attorneys were property of debtor's estate. D. Mass. The chapter 11 debtor appealed from two related bankruptcy court decisions. The first decision held that the debtor's state court legal malpractice claims belonged to the bankruptcy estate and ordered the debtor to turnover control of the malpractice action to the trustee. The second decision refused to stay the turnover order pending the debtor's appeal for lack of likelihood of success of the appeal. The district court affirmed. The court held that the legal malpractice claims were part of the debtor's bankruptcy estate because events that led up to the claims occurred before the debtor's chapter 11 filing and because the resulting harm affected his estate as well as the debtor separately. The district court concluded that the debtor was or should have been aware that his attorneys were acting negligently before his bankruptcy filing, and that the bankruptcy judge correctly found that the malpractice claims had a substantial connection to events that occurred before the debtor filed for bankruptcy. The court also determined that even if the debtor's malpractice claim had not "accrued" under state (Massachusetts) law at the time of his filing, his claims were sufficiently in existence at the time of filing to have become part of his estate. Tomaiolo v. Rodolakis (In re Tomaiolo), 2002 U.S. Dist. LEXIS 2038, 280 B.R. 1185 (D. Mass. February 6, 2002) (O'Toole, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:541.08

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2d Cir.

Creditor allowed to dismiss section 727 claim in exchange for debtor's consenting to creditor's section 523 nondischargeability claim. Bankr. S.D.N.Y. Prior to the debtor filing for bankruptcy, the debtor sued his then wife for divorce. A judgment of divorce was entered, establishing the parties' financial rights and obligations in connection with their divorce. A year later, the debtor filed for chapter 7 relief. The debtor's former spouse, who was a creditor in the debtor's bankruptcy, then filed an adversary proceeding seeking to deny dischargeability of her claims against the debtor under section 523(a) and seeking to deny the debtor's discharge under section 727(a). The trustee also commenced an adversary proceeding objecting to the debtor's discharge. After the debtor and creditor reached a settlement, the creditor filed a motion seeking entry of a final order and judgment providing that the creditor's claims against the debtor would be nondischargeable under various subsections of section 523(a) and that the creditor's objection to the debtor's discharge under section 727(a) would be dismissed with prejudice. The trustee objected to the settlement on the grounds that it was improper for the creditor to use the threat of denial of discharge under section 727(a) in order to extract a favorable settlement of the creditor's claims under section 523(a). After a hearing on the matter, the bankruptcy court found that any per se prohibition on compromise of section 727(a) actions was entirely inconsistent with Rule 7041. The court also found that such a position was inconsistent with the time-honored judicial policy that favors consensual dispute resolution and the right that a plaintiff has to decline to continue prosecuting a claim. However, the court also noted that, pursuant to Rule 7041, before any settlement connected with the dismissal or withdrawal of section 727(a) claim can be approved, the court must be satisfied that the action is not a sham effort by the creditor to receive payment solely for himself on account of a section 727(a) claim that is representative in nature. The court then approved the parties' settlement even though the creditor was agreeing to dismiss her section 727(a) claims as a quid pro quo for the debtor agreeing to the nondischargeability of the creditor's claims. The court reasoned that the trustee's timely-commenced adversary proceeding objecting to the debtor's discharge stood as adequate protection for the interests of the other creditors. Hass v. Hass (In re Hass), 2002 Bankr. LEXIS 65, 273 B.R. 45 (Bankr. S.D.N.Y. January 24, 2002) (Hardin, Jr., B.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:7041.02

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3d Cir.

Bankruptcy court denied adversary defendant's motion to disqualify debtors' counsel. Bankr. D. Del. Prior to its representation of the chapter 11 debtors, a law firm maintained an attorney-client relationship with an entity that was later named as a defendant in an adversary proceeding filed by the debtors. Specifically, the law firm had previously provided a draft memorandum to the adversary defendant on the issue of the creation of an information barrier for the defendant's equity desk. Sometime thereafter, the debtors approached the law firm regarding legal representation for disputes with a third party. The law firm learned that the adversary defendant had guaranteed a loan to the third party, and that the adversary defendant had filed a proof of claim in the debtors' chapter 11 case. Recognizing the potential conflict, the law firm terminated its representation of the adversary defendant before agreeing to represent the debtors. The adversary defendant moved to disqualify the law firm based on an alleged conflict of interest. The bankruptcy court denied the defendant's motion to disqualify the law firm. The court found no potential for the exchange of the adversary defendant's confidences and secrets in relation to the adversary proceeding. Moreover, the court concluded that the adversary defendant waived any conflict that may have existed when it requested a "Chinese Wall," and the law firm established the wall without any further objection from the defendant. The court also found that the adversary defendant's delay in filing its motion to disqualify was not justified. Kaiser Group Int'l, Inc. v. Nova Hut (In re Kaiser Group Int'l, Inc.), 2002 Bankr. LEXIS 96, 272 B.R. 846 (Bankr. D. Del. January 2, 2002) (Katz, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:105.01

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Debtors entitled to summary judgment to estimate the creditor's claim at zero. Bankr. D. Del. The debtors, who were pharmaceutical providers, supplied pharmacy services to nursing home residents. To ascertain whether appropriate credits were being afforded to the nursing home residents, the administrators at one nursing home inquired about the manner in which the debtors afforded credits for drugs returned to the Medicaid program. The debtors informed the administrators that no credit was being given to Medicaid patients for the return of unused pharmaceuticals. Following the nursing home's termination of its relationship with the debtors, the nursing home administrators conducted an audit that revealed that the debtors had not properly credited returned pharmaceuticals to Medicare, private pay and private insurance programs. The nursing home then filed a qui tam action under the False Claims Act, based on the premise that the debtors and their predecessor knowingly failed to credit Medicaid for unused pharmaceuticals that were returned to, and later resold by, the debtors. The United States declined to intervene in the qui tam action, and the nursing home elected to continue the action. After the debtors filed for chapter 11 relief, the nursing home, as a creditor, filed a proof of claim in the amount of $324 million in the debtors' bankruptcies. The bankruptcy court entered an order confirming the debtors' plan of reorganization, which scheduled the creditor's claim as a general unsecured claim. The debtors then moved to have the creditor's claim estimated under section 502(c) to fix the amount of the allowed claim and to permit payment of allowed claims in accordance with the confirmed plan. The debtors also moved for summary judgment to estimate the claim at zero, arguing that neither federal nor New Jersey Medicaid agencies had promulgated any regulation or reimbursement policy relating to the return of unused medications that could be used by the creditor to support its False Claims Act complaint. After a review of the statutory, regulatory and policy framework of the Medicaid program and the factual record presented by the creditor, the court concluded that the debtors were correct in their argument and that summary judgment was warranted in favor of the debtors. In re Genesis Health Ventures, Inc., 2002 Bankr. LEXIS 74, 272 B.R. 558 (Bankr. D. Del. January 24, 2002) (Wizmur, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.04

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4th Cir.

Debtor was required to respond to discovery in a civil contempt matter. E.D. Va. AOL, an internet access provider, obtained an injunction and damages against entities for delivering unsolicited junk mail to its customers. In the course of a subsequent contempt proceeding, it obtained the names of third parties who were conspiring with the defendants and sought discovery from them. After a motion to compel the discovery was filed against the conspirators, one of the individuals filed a chapter 7 petition. Despite the imposition of the automatic stay, the magistrate judge required the debtor to respond to discovery in the contempt action. Upon the debtor's appeal, the district court held that although no formal contempt order had been entered, the proceeding was instituted to uphold the dignity of the court so that the automatic stay did not apply. Even though the automatic stay precluded continuance of the action for damages, since the information sought in discovery related solely to the contempt issues, the automatic stay did not prevent AOL from prosecuting its motion to compel discovery. America Online, Inc. v. CN Productions, Inc., 2002 U.S. Dist. LEXIS 1607, 272 F. Supp. 879 (E.D. Va. January 31, 2002) (Ellis, D.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:362.05[2]

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5th Cir

Bankruptcy court denied jury demand in adversary proceeding brought by debtors to assume and assign noncompetition agreement. Bankr. S.D. Tex. Before filing its chapter 11 petition, the debtors purchased two funeral homes. In connection with the purchase, the debtors executed a promissory note and the sellers signed a "goodwill" or noncompetition agreement. Thereafter, the debtors' chapter 11 case was commenced, and the bankruptcy court confirmed a plan that provided for payment of part of the note and discharge of its remainder. Notwithstanding the discharge of part of the note, the debtors filed an adversary proceeding against the sellers and sought to assume and assign the noncompetition agreement. The sellers demanded a jury trial, and the debtors objected. The debtors also moved for partial summary judgment. The bankruptcy court struck the sellers' jury trial demand. The court also denied the debtors' motion for partial summary judgment because of a factual issue as to whether one of the sellers was a "stockholder" against whom the agreement could be enforced. On the jury trial issue, the court surveyed applicable case law and found that for reasons of efficiency, a bankruptcy court may hear motions to assume contracts and try related adversary proceedings simultaneously, as long as the two issues are treated as conceptually separate proceedings. The court also found that in such cases, the contract issues may be decided by the bankruptcy court without a jury if, and to the extent that, the creditor has filed a proof of claim and all contract issues must be decided in order to allow or to disallow the proof of claim. In this case, the sellers had filed proofs of claim, and a determination as to the enforceability of the noncompetition agreement was necessary to determine the allowance or disallowance of their claims. In addition, the matter was brought as an adversary proceeding, which obviated the concern that the contract issues not be tried in a summary proceeding brought to assume or to reject an executory contract. Sentry Operating Co. v. Billings (In re Sentry Operating Co.), 2002 Bankr. LEXIS 83, 273 B.R. 515 (Bankr. S.D. Tex. February 1, 2002) (Steen, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
1:3.08

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6th Cir.

Debtors not allowed to use section 506(d) to avoid creditor's unsecured lien on debtors' residence. Bankr. E.D. Mich. The debtors filed a voluntary petition for relief under chapter 7. On their schedules, the debtors indicated that they were the fee simple owners of residential real estate with a current market value of $55,000. The debtors claimed a $16,495.87 exemption in this property pursuant to section 522(d)(1). The debtors' schedules also indicated that the creditor, a bank, held two recorded mortgages on the property and that there was a balance owing of $58,504.13 on the first mortgage and $14,399.15 on the second mortgage. The debtors then filed an adversary complaint seeking to avoid the creditor's second mortgage on the property, arguing that the court must first deduct from the value of the property the amount of the debtors' claimed homestead exemption, and next the amount owing on the first and second mortgages. The debtors further argued that, because there was no collateral securing the creditor's second mortgage, the mortgage was void pursuant to section 506(d). The creditor filed a motion to dismiss the debtors' complaint for failure to state a claim, contending that the creditor's allowed secured claims could not be avoided under section 506(d) and, therefore, the creditor's liens were unaffected by the debtors' claimed exemption. After a hearing on the creditor's motion, the bankruptcy court found that section 522(d)(1) expressly states that the dollar amount of a debtors' claimed exemption is to be applied only to the value of the debtor's interest in the property, that is the debtors' equity in the property. The court then found that, even assuming that the creditor's second mortgage was wholly unsecured, the court must grant the creditor's motion to dismiss because the debtors could not use section 506(d) to avoid a consensual wholly unsecured junior mortgage. Bessette v. Bank One (In re Bessette), 2001 Bankr. LEXIS 1822, 269 B.R. 644 (Bankr. E.D. Mich. October 30, 2001) (Spector, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:506.06

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"Collateral attack doctrine" precluded state court litigation after confirmation. W.D. Ky. During the pendency of various state court actions, the defendant company filed a chapter 11 petition. The confirmed chapter 11 plan provided for discharge of the obligations, an injunction against continuance of the actions and releases of liability for related entities and individuals. The state court plaintiffs took no action in the chapter 11 case other than filing proofs of claim and, instead, filed an action in another district alleging that the debtor engaged in fraudulent acts with regard to the bankruptcy case and that the bankruptcy court lacked jurisdiction to confirm the plan, which provided for releases of nondebtors. Upon the debtor's motion to enforce the automatic stay within the context of the district court litigation, the district court held that the creditors were barred from collaterally attacking the confirmation order. Rather than circumventing the process established by statute, the creditors were required to make their assertions before the bankruptcy court and, thereafter, through the appellate process. The district court specifically declined to rule on whether the bankruptcy court had jurisdiction to confirm a plan which provided for releases of nondebtors. Pratt v. Ventas, Inc., 2002 U.S. Dist. LEXIS 1670, 273 B.R. 108 (W.D. Ky. February 1, 2002) (Heyburn, C.D.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1141.02

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Bankruptcy court denied mortgagee's motion for relief from default judgment obtained by trustee. Bankr. N.D. Ohio The chapter 7 trustee brought an adversary proceeding against the debtors' mortgagee. The adversary complaint alleged that the mortgagee's recorded mortgage, which was listed in the debtors' schedules as a secured claim, was invalid because it was not executed in accordance with applicable state (Ohio) law. The mortgagee failed to plead or otherwise respond to the adversary complaint, and the trustee moved for and obtained a default judgment against the mortgagee. The mortgagee then filed a motion requesting that the court set aside the default judgment pursuant to Rule 9024. The mortgagee's motion explained that approximately two months before the trustee's alleged service of the summons and complaint by mail to its post office box address, the mortgagee transferred the servicing rights and responsibilities for all its loans to a third party. The mortgagee also noted that approximately one month before the trustee's alleged service, it requested that the post office forward all mail deliverable to its post office box address to the third party. Finally, in an affidavit attached to the mortgagee's motion, the mortgagee's director of office services stated that to the best of her knowledge, the mortgagee never received a copy of the complaint or any other documents related to the adversary proceeding. The bankruptcy court denied the mortgagee's motion for relief from the default judgment. The court held that the mortgagee failed to carry its burden of demonstrating that its failure to respond to the trustee's complaint was the product of mistake, inadvertence or excusable neglect, and that, even if the mortgagee were able to provide facts sufficient to establish mistake, inadvertence, surprise or excusable neglect, it had not made a plausible argument that it had a meritorious defense. The court explained that the mortgagee's mere assertion that its failure to file a timely answer was due to "mistake, inadvertence, surprise, or excusable neglect" caused by a change in a routine business arrangement, without any elucidation, did not warrant relief. Wilson v. Cassidy (In re Cassidy), 2002 Bankr. LEXIS 84, 273 B.R. 531 (Bankr. N.D. Ohio February 5, 2002) (Shea-Stonum, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
10:9024.01

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7th Cir.

Court struck debtor's claim for determination of dischargeability of state tax debt after finding section 106(a) unconstitutional. Bankr. N.D. Ill. The debtor filed for chapter 7 relief and scheduled $30,000 in back taxes owed to the state of Illinois and $300,000 in back taxes owed to the United States. The state of Illinois filed no claim in the bankruptcy and did not willingly participate in the bankruptcy proceedings in any way. The debtor received a general discharge and the bankruptcy case was closed. A month later, the debtor filed a motion to reopen the case for the purpose of filing an action to declare dischargeability of the back taxes. The motion to reopen was granted and the debtor then filed an adversary complaint. Count I of the complaint asserted dischargeability of the taxes owed to the United States, and Count II of the complaint asserted dischargeability of the taxes owed to the state of Illinois. The state of Illinois then moved to dismiss Count II on the ground that it had sovereign immunity under the Eleventh Amendment of the United States Constitution from defending the suit in the bankruptcy court. In responsive briefs, the debtor argued that, under the Bankruptcy Clause of the Constitution, Illinois and all other states originally ceded their immunity in the area of bankruptcy law to the federal government. He also argued that congress effectively abrogated all state immunity under 11 U.S.C. § 106(a). In reviewing the current state of the law, the bankruptcy court noted that the Supreme Court has not dealt directly with the issue of sovereign immunity in bankruptcy. However, the court noted that most lower court opinions issued since Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996) have held section 106(a) unconstitutional because Congress failed to act pursuant to a valid exercise of power since it used the authority of Article I rather than the authority of section 5 of the Fourteenth Amendment. After finding that the debtor's suit as pleaded in Count II was inconsistent with Supreme Court precedent regarding sovereign immunity, the court struck Count II without prejudice. The court then noted that the debtor had the option, if he wished and was able, to amend his complaint and plead to meet the requirements of Ex Parte Young, 209 U.S. 123 (1908), and seek equitable relief to enjoin the appropriate state official for the state of Illinois from engaging in conduct (tax collection) that would violate the debtor's discharge under federal law. Claxton v. United States (In re Claxton), 2002 Bankr. LEXIS 71, 273 B.R. 174 (Bankr. N.D. Ill. January 30, 2002) (Schmetterer, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
2:106.02-.05

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Attorney's request for additional compensation was granted in part. Bankr. C.D. Ill. The attorney for several chapter 13 debtors filed a motion for additional fees beyond the local review level of $1,000 for each case. The attorney provided itemized lists of each activity, a description of the nature and substance of the work performed and the time spent on the work. The bankruptcy court granted the attorney's motion, in part, and denied the motion, in part, holding that the debtors' attorney was entitled to receive additional compensation only for necessary services performed within a reasonable time and for a reasonable rate. The court noted that reasonable time spent on an activity did not necessarily include all time actually expended. The court did not award compensation for time spent on purely clerical functions, which were already included in the attorney's overhead costs. Certain of the attorney's time entries lumped services together, as well, making it impossible for the court to determine the reasonableness of the time claimed. In re Fry, 2001 Bankr. LEXIS 1739, 271 B.R. 596 (Bankr. C.D. Ill. December 27, 2001) (Fines, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
3:330.04

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8th Cir.

Court of Appeals affirmed decision that real estate commissions paid to debtor after her bankruptcy filing belonged to her bankruptcy estate. 8th Cir. The debtor appealed from an order of the B.A.P. for the Eighth Circuit that affirmed the bankruptcy court's decision that real estate commissions paid to her after her bankruptcy filing belonged to her bankruptcy estate. The Court of Appeals for the Eighth Circuit affirmed. The court held that the bankruptcy court correctly determined that the commissions were earned prepetition under applicable state (Missouri) law; thus, they were property of the debtor's estate. The court also held that contrary to the debtor's assertions, the debtor's postpetition services did not render the commissions excludable from her bankruptcy estate under section 541(a)(6). The court found that the debtor failed to present evidence to establish that the real estate contract terms were altered by postpetition events so as to alter her protectable interest in receiving the commissions. The court also rejected the debtor's argument that the commissions were not subject to garnishment under state law because they had not actually been paid when she filed her chapter 7 case. Finally, the court held that the bankruptcy court did not err in allowing an exemption for 9.7 percent of the commissions as compensation for the debtor's postpetition personal services. The court found that the debtor failed to provide evidence to show that a different percentage was appropriate. Parsons v. Union Planters Bank (In re Parsons), 2002 U.S. App. LEXIS 2176, 280 F.3d 1185 (8th Cir. February 11, 2002) (McMillian, C.J.).

Collier on Bankruptcy, 15th Ed. Revised
5:541.17

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9th Cir.

Under state (Nevada) exemption statute, joint husband and wife debtors could each claim exemption for up to $4,500 worth of equity in same vehicle. Bankr. D. Nev. The chapter 7 trustee objected to the joint husband and wife debtors' claimed exemptions in a motor vehicle. Each debtor claimed an exemption in the same vehicle under the state (Nevada) exemption statute in the amount of $4,500. The trustee objected to the claimed exemptions and argued that exemptions may not be aggregated in the same vehicle. The trustee also argued that the debtors' intention to retain a second vehicle counted as one exemption despite the fact that the vehicle was overencumbered. The bankruptcy court overruled the trustee's objection. The court held that the plain language of the applicable exemption statute (Nev. Rev. Stat. § 21.090(1)(f)) permitted each debtor to exempt up to $4,500 worth of equity in a single motor vehicle, and the overencumbered second vehicle did not "count as one exemption," as urged by the trustee. The court found that nothing in the applicable exemption statute prevented a married couple from stacking their motor vehicle exemptions in the same vehicle. The court also concluded that the trustee's argument that the debtors' intention to retain the second vehicle meant it should be counted as one exemption was flawed based on the plain language of the applicable exemption statute. The court explained that the statute, which provided for an exemption in one vehicle if the judgment debtor's equity in the vehicle did not exceed $4,500, extended to a debtor's equity interest in the vehicle, and not to the vehicle itself. In re Longmore, 2001 Bankr. LEXIS 1749, 273 B.R. 633 (Bankr. D. Nev. May 17, 2001) (Riegle, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:522.10

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11th Cir.

Contractor entitled to relief from automatic stay to complete foreclosure proceeding. Bankr. M.D. Fla. A contractor entered into a prepetition contract with the debtor for the construction of her home. The contractor recorded a "notice of commencement" in the county public records. By virtue of applicable state (Florida) law, the contractor was in privity with the debtor, and had a lien against the home to secure any monies that were due and owing it for labor, services and materials it required and furnished to build the home. The contractor fully performed its contract, the home was built, and the debtor failed to pay the full amount due under the contract. The contractor then recorded its lien, which caused it to be perfected under state law. In addition, by operation of law, the lien related back to the filing of the notice of commencement, and took priority over a mortgage that was recorded after the notice of commencement was filed. The contractor commenced a state court foreclosure action to satisfy its lien and obtained a final judgment, although the state court reserved judgment to conduct a subsequent hearing to determine costs and attorneys' fees. Before such a hearing could be held, the debtor filed her chapter 13 case. The contractor moved for relief from the automatic stay in order to complete the foreclosure action. The bankruptcy court held that the contractor was entitled to relief from the stay and would be granted such relief unless the debtor furnished adequate protection within 20 days of the court's order. The court concluded that it was not necessary for the contractor to have recorded a certified copy of the final judgment entered by the state court in the foreclosure action to establish the validity of its secured status, and rejected the debtor's argument that state law (Fla. Stat. § 713.21(5)) provided to the contrary. In re Madden, 2001 Bankr. LEXIS 1750, - B.R. - (Bankr. M.D. Fla. August 10, 2001) (Paskay, B.J.).

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

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Debtors entitled to summary judgment to estimate the creditor's claim at zero. Bankr. D. Del. The debtors, who were pharmaceutical providers, supplied pharmacy services to nursing home residents. To ascertain whether appropriate credits were being afforded to the nursing home residents, the administrators at one nursing home inquired about the manner in which the debtors afforded credits for drugs returned to the Medicaid program. The debtors informed the administrators that no credit was being given to Medicaid patients for the return of unused pharmaceuticals. Following the nursing home's termination of its relationship with the debtors, the nursing home administrators conducted an audit that revealed that the debtors had not properly credited returned pharmaceuticals to Medicare, private pay and private insurance programs. The nursing home then filed a qui tam action under the False Claims Act, based on the premise that the debtors and their predecessor knowingly failed to credit Medicaid for unused pharmaceuticals that were returned to, and later resold by, the debtors. The United States declined to intervene in the qui tam action, and the nursing home elected to continue the action. After the debtors filed for chapter 11 relief, the nursing home, as a creditor, filed a proof of claim in the amount of $324 million in the debtors' bankruptcies. The bankruptcy court entered an order confirming the debtors' plan of reorganization, which scheduled the creditor's claim as a general unsecured claim. The debtors then moved to have the creditor's claim estimated under section 502(c) to fix the amount of the allowed claim and to permit payment of allowed claims in accordance with the confirmed plan. The debtors also moved for summary judgment to estimate the claim at zero, arguing that neither federal nor New Jersey Medicaid agencies had promulgated any regulation or reimbursement policy relating to the return of unused medications that could be used by the creditor to support its False Claims Act complaint. After a review of the statutory, regulatory and policy framework of the Medicaid program and the factual record presented by the creditor, the court concluded that the debtors were correct in their argument and that summary judgment was warranted in favor of the debtors. In re Genesis Health Ventures, Inc., 2002 Bankr. LEXIS 74, 272 B.R. 558 (Bankr. D. Del. January 24, 2002) (Wizmur, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
4:502.04

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Debtor's obligation to pay legal fees to former wife's attorney held nondischargeable. Bankr. N.D. Fla. The debtor and his former wife obtained a divorce before the debtor filed his chapter 7 petition. The final judgment of dissolution in the divorce action required that the debtor pay 75 percent of his ex-wife's attorney's fees. After the debtor commenced his chapter 7 case, his former wife's attorney filed an adversary proceeding in his bankruptcy case seeking a determination that the debt for legal fees owed by the debtor to the attorney was nondischargeable under section 523(a)(5). The bankruptcy court held that the state court's holding that the former wife was entitled to attorney's fees constituted a showing of her need for support and rendered the fee award nondischargeable in bankruptcy. The court noted that the dischargeability of fee awards is a matter of federal law, but state law provides guidance in determining whether the awards may be considered in the nature of "support." The court further noted that under state (Florida) law, a former spouse is entitled to an award of attorney fees based on relative need and ability to pay; thus, an award of attorney's fees in Florida may be characterized as support for the former spouse. Drewell v. Smith (In re Smith), 2002 Bankr. LEXIS 101, 273 B.R. 669 (Bankr. N.D. Fla. January 10, 2002) (Killian, B.J.).

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

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D.C. Cir.

Chapter 13 trustee's distributions to unsecured creditors' were made before it was "practicable" and contravened section 1326(a)(2). Bankr. D.C. Cir. The chapter 13 debtors' bankruptcy schedules reflected governmental claims that were small enough to allow the trustee to make distributions to unsecured creditors without falling short of amounts necessary to eventually pay the governmental claims. The trustee commenced plan payments to general unsecured creditors prior to the expiration of the governmental claims bar date. Faced with the subsequent filing of unexpectedly large governmental claims entitled to payment under the plan, the trustee moved to modify the debtors' plan postconfirmation. The proposed modification increased plan payments in order to ensure sufficient funds to pay allowed secured and priority claims in full and brought the pro rata distribution paid on governmental entities' general unsecured claims to the same percentage as already paid on nongovernmental entities' general unsecured claims. The bankruptcy court denied the trustee's motion to modify the plan. The court held that the distributions were made by the trustee before it was "practicable" to do so in contravention of section 1326(a)(2), and the appropriate remedy was for the trustee to recover excess payments made on general unsecured claims, not to amend the plan. The court explained that in choosing to make distributions, the trustee assumed the risk that governmental claimants' secured and priority claims might prove to be so large as to render the distributions made on the nongovernmental general unsecured claims prejudicial. The court also stated that it would be appropriate, on motion of an affected creditor, to consider requiring the trustee to reimburse the estate if she was unable to recover the distributions made in error. In re Wilson, 2001 Bankr. LEXIS 1785, - B.R. - (Bankr. D.C. Cir. December 6, 2001) (Teel, B.J.).

Collier on Bankruptcy, 15th Ed. Revised
8:1326.02[2]

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