Arbitration Provision Enforcement

In
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Hicks,</i> 285 B.R. 317 (Bankr. W.D. Okla. 2002)</a>,
Bankruptcy Judge Niles L. Jackson addressed the issue of enforcement of an
arbitration provision in connection with claims asserted by a chapter 13 debtor
under the Oklahoma Consumer Protection Act and the Federal Truth in Lending
Act. The court held that a chapter 13 debtor's objection to a
mortgagee's secured claim was core and that claims that arose under the
Oklahoma Consumer Protection Act and the Federal Truth in Lending Act were
non-core. The arbitration agreement expressly provided for the division of
expenses and obligated the debtor to pay one-half the cost of arbitration
proceedings if the debtor was the non-prevailing party. The court held that the
cost structure of the arbitration agreement would effectively preclude the
debtor from vindicating her rights in the arbitration forum and refused to
enforce the arbitration agreement as to either the core or non-core
proceedings.

</p><h3>State Law Setoff Right Subject to "Mutuality"</h3>

<p><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re New Haven Foundry Inc.,</i> 285 B.R. 646 (Bankr.
E.D. Mich. 2002)</a>, Chief Bankruptcy Judge <b>Steven W. Rhodes</b> addressed an interesting twist on the right of
setoff. State law governs the substance of the right of setoff claims. However,
the state law right of setoff is subject to the bankruptcy requirement of
"mutuality," which mandates that the debts must be owed between the
same parties acting in the same capacity but, as the court noted, not
necessarily the same character. In this case, the debtor's obligation to
a creditor originated as a debt owed by the debtor to its subsidiary.
Pre-petition, the debt owed to the subsidiary had been assigned to the creditor
as part of an assignment of the debtor's accounts. The creditor filed a
motion for relief from stay to exercise the right of setoff of the assigned
debt against a debt that the creditor owed to the debtor. A third party creditor
asserted that it had a perfected security interest in all inventory, accounts,
contract rights and accounts receivable, including the amounts owed to the
debtor by the creditor requesting the right of setoff. The secured creditor
unsuccessfully contended that because its lien was "paramount," any
asserted interest of the creditor seeking the right of setoff should be denied.
The secured creditor also unsuccessfully argued that the mutuality requirement
was not satisfied. The court found that under the applicable version of the
UCC, a right of setoff prevails over perfected security interests unless the
account debtor had actual notice of the security interest before the setoff
right arose.

</p><h3>Breach of Contract Claim Against Insurer a Pre-petition Claim</h3>

<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Roberds Inc.,</i> 285 B.R. 651 (Bankr. S.D. Ohio
2002)</a>, Bankruptcy Judge Thomas F. Waldron addressed another
issue related to the right of setoff. The court held that a debtor's
breach of contract claim against an insurer for refusing to pay a claim under a
pre-petition insurance contract arising from an alleged pre-petition theft by
debtor's employees was a "pre-petition claim" for purposes of
setoff in bankruptcy, although the debtor did not file a proof of claim of loss
until after the bankruptcy. Since the claim was not made until after the bankruptcy
petition was filed, the insurer did not deny claim until after the
commencement of the chapter 11 case. The insurer was held to have the right to
setoff indemnification claims against its alleged contract liability on the
insurance policy.

</p><h3>Dischargeability Objection to Corporate Officers' Bankruptcies</h3>

<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Ridsdale,</i> 286 B.R. 225 (Bankr. W.D.N.Y.
2002)</a>, Bankruptcy Judge Michael Kaplan considered an objection
to dischargeability in corporate officers' individual bankruptcy cases.
Corporate funds were used for personal expenses, including payments on a truck
owned by an officer, work on that officer's house, payments on a mortgage
and payments on another officer's race car trailer. There was evidence
that one of the debtors was aware of the other officers'
"abuse" and that it was "okay" with him. The court also
found that one debtor "shrewdly assuaged—defused—the
concerns of other officers in order to facilitate diversion of this
company's assets and value." During this relevant time period, the
officers/debtors formed a separate corporation in Florida, and significant
amounts of equipment and vehicles went to Florida to be used by the new Florida
corporation. The corporation whose equipment and funds were improperly used
never actually filed bankruptcy. The objection to dischargeability was on the
grounds of willful and malicious injury to a creditor of the corporation. The
court noted that there is no comparative negligence or assumption of the risk
in a case of willful and malicious injury since "virtually by definition,
one never assumes the risk of willful and malicious injury." The court
noted that the fiduciary duty of the principals to the creditors of insolvent
corporation is clear. Relying on the Supreme Court decision of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=5…
re Geiger,</i> 523 U.S. 57 (1998)</a>,
the court found that after the plaintiff/creditor acquired a lien on the assets
of the corporation, there was an intentional diversion of the assets of that
corporation to the personal benefit of debtors/defendants/ officers. The
diversion constituted an injury to "property" in which the
plaintiff/creditor had an interest. The court noted that there are a number of
ways to cause willful and malicious injury to "another entity," including
trespassing, vandalizing equipment, interfering with contracts, defaming,
doing bodily injury or using economic power to start a competing business, or
using political or other influence to see that contracts were not awarded or
instigate labor unrest. The court held that the "means may be [a]
combination of facts that individually might be lawful and might not injure any
of the properties, or injure any of the property interests, but collectively
are 'wrongful' and thus non-dischargeable. This is because the
statute does not say 'by unlawful means,' does not say 'by
means of intentional tort' and does not require an injury to
property."

</p><h3>Unexpired Leases Can Be Sold</h3>

<p><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Ames Department Stores Inc.,</i> 287 B.R. 112
(Bankr. S.D.N.Y. 2002)</a>, relates to a motion to approve the sale
of "designation rights" that were described as "the right to
direct the debtors to assume and assign unexpired leases to third parties
qualifying under the Bankruptcy Code, after such non-end users locate ultimate
purchasers of the unexpired leases." After a discussion and analysis under
§§363(b) and 541(a)(1), the court held that the "designation
rights" were valuable property rights of the estate that could be sold.
Further, the sale of such rights would not result in an exemption from the
requirements of §365 of proposed assignment of the leases, and if
applicable, the assumption of a particular lease. The court noted that it had
been provided with 15 orders in other cases around the country approving the
sale of "designation rights." While this was in no way determinative
of the court's analysis, the court did recognize it as persuasive value.
The court reviewed extensively what it referred to as "the only two
reported decisions that have addressed the matter:" <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Ernst Home Ctr. Inc.,</i> 209 B.R. 974 (Bankr.
W.D. Wash. 1997)</a>, <i>appeal dismissed,</i> <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
Brickyard Assoc. Ltd. vs. Ernst Home Ctr. Inc. (In re Ernst Home Ctr. Inc.),</i> 221 B.R. 243 (9th Cir. BAP 1998)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…; 221 B.R. at 248-256</a> (Russell, J.
concurring). The court found that the debtors were not transferring their
powers to actually assume and assign unexpired leases. Rather, the debtors were
realizing the value inherent in the ability to designate for whose benefit and
to whom any such lease would be assumed and assigned. However, any such
designation still would have to be brought to the bankruptcy court for review
under the powers which, at the time, would be exercised under §365,
"subject to the usual requirements for a debtor's exercise of
business judgment and notice and opportunity for parties in interest to be
heard, bankruptcy courts can accommodate evolving ways to maximize value for
creditors."

</p><h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Pasta Café Corp.,</i> 284 B.R. 564
(Bankr. D. Md. 2002)</a> (pre-petition personal property taxes were
not entitled to be treated as administrative expense or to be paid on an
eighth-level priority basis as taxes were secured by personal property and the
priority provision was limited to unsecured tax claims);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Feltman,</i> 285 B.R. 82 (Bankr. D. D.C. 2002)</a>
(disagreeing with <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Dececco,</i> 224 B.R. 202 (Bankr. N.D. Fla.
1998)</a>, the court held that Bankruptcy Rule 1014(b) cannot be
invoked by the bankruptcy court to transfer to itself a case that was filed by
a chapter 7 debtor's wife in another jurisdiction);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Stinson,</i> 285 B.R. 239 (Bankr. W.D. Va. 2002)</a>
(probation against discrimination with respect to employment contained in
§525(b) does not include act of refusing to hire but termination or
discrimination with only respect to current employment); and

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2…
re Silicon Valley Telecom Exchange LLC,</i> 284
B.R. 700 (Bankr. N.D. Cal. 2002)</a> (good discussion of the
difference between setoff and recoupment in contractual relationships).