Benchnotes Jul/Aug 2001

<h3>Influential Insiders Not Liable for Encouraging Filings</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Transcolor Corp.,</i> 258 B.R. 149 (Bankr. D. Md. 2001)</a>,
Bankruptcy Judge James F. Schneider addressed the issue of whether a party who has
been injured by actions taken in a bankruptcy case may assert a cause of action in
state court against insiders who allegedly caused the debtor to file bankruptcy. In
this case, one debtor claimed that it was injured when a second debtor filed
bankruptcy and rejected the first debtor's lease. The first debtor asserted that filing
bankruptcy by the second debtor was done pursuant to the "counsel or influence" of
alleged insiders and that those insiders are liable for the damage caused to the first
debtor as a result of the rejection of a lease with the second debtor, asserting
interference with contractual relations. The claim was based on the proposition that the
defendants/ alleged insiders wrongfully caused the second debtor to file bankruptcy and
to then reject the lease with the first debtor. The court held that parties who
counsel or influence the debtor to file bankruptcy (whether or not they are insiders)
are not subject to liability in a collateral proceeding brought in state court for
having given such advice, counsel or persuasion to cause the filing to be made. "If
the law were otherwise, there would be an endless array of lawsuits against insiders
and others alleged to be in control of debtors who file proper bankruptcy petitions."
The court noted that anyone who disputes whether a bankruptcy petition should have been
filed may move to dismiss the petition or to oppose, in the same forum, actions that
they believe are against their interest. Judge Schneider relied on the decision of
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… v. Osteoimplant Technology Inc.,</i> 182 B.R. 115 (D. Md.
1995)</a>, in which the court held that state law tort claims for malicious
prosecution and abuse of process brought against a creditor for the alleged bad-faith
filing of an involuntary bankruptcy petition were barred by reasons of federal
pre-emption.

</p><h3>Change of Venuefor Avoidance Action</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Bennett Funding Group Inc.,</i> 259 B.R. 243 (N.D.N.Y.
2001)</a>, District Judge Kahn addressed a motion for change of venue arising out
of an avoidance action against a transferee of stock options based on allegedly
fraudulent transfers from the debtor. The defendants asserted that the venue should be
transferred pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… U.S.C. §§1406(a)</a> and 1404(a). The court
noted that the venue is "a personal privilege to each defendant, which can be waived
and is waived...unless a timely objection is interposed." Defendants wishing to
challenge the propriety of venue must do so at the onset of litigation. In this
case, defendants failed to assert that venue was improper in their answer to the
original complaint. Defendants also interposed 10 counter-claims seeking various forms
of relief, filed a motion to withdraw the bankruptcy reference to the district court
and, after that motion was decided, began to conduct discovery. In light of these
facts, the court conclusively determined that the defendants waived their ability to
object to propriety of venue under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… U.S.C. §1406(a)</a>. However, the court
noted that §1404(a) is not a personal privilege that a party may waive.
Instead, the decision to transfer is left to the "broad discretion of the district
court and is determined upon notions of convenience and fairness on a case-by-case
basis." Judge Kahn noted that a court inquiry of a transfer under §1404(a) is
two-fold: (1) The court must first determine whether the action sought to be
transferred is one that "might have been brought" in the suggested transferee court,
and (2) the court must determine whether, considering the convenience of the parties
and witnesses and the interest of justice, a transfer is appropriate. In this case,
there was a forum selection clause, which the defendants negotiated under the assumption
that it would cover all litigation arising out of the promissory notes. The court
found that the forum selection clauses "figure centrally" in this court's analysis of
whether, in the interest of justice, to transfer the case as there is a "heavy
presumption" in favor of enforcing forum selection clauses in the Second Circuit. Once
a forum selection clause is deemed valid, the burden shifts to the plaintiff to
demonstrate exceptional facts explaining why he should be relieved from his contractual
duty. In this case, the plaintiff asserted that because there were claims of
fraudulent inducement and fraud surrounding the execution of the promissory notes, the
forum selection clauses should not be enforced. Additionally, the plaintiff argued that
because the trustee's claims are not derivative of the debtors, the trustee should not
be bound by the choice of forum. The court noted that in order to invalidate a forum
selection clause, the trustee was required to show that the fraud relates to the forum
selection clause specifically and not simply to the contract as a whole. No such
showing has been made. The court noted that it was "loath" to transfer a bankruptcy
action pursuant to a forum selection clause when the majority of the matters alleged
constitute core proceedings in the Bankruptcy Code. Transferring a core matter that
is not "inexplicably intertwined" with non-core matters adversely impacts the strong
public policy in centralizing all core matters in the bankruptcy court. However, where
the district court has already withdrawn the reference, "the policy behind centralizing
core matters in a bankruptcy court is not applicable." Thus, the court refused to
conclude that the trustee's argument regarding derivative status impacted against
enforcement of the forum selection clause against the trustee. The court ruled that
pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… U.S.C. §1404(a)</a>, the case would be transferred and the forum
selection clause would be enforced.

</p><h3>Due-on-sale Mortgage Clauses</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Trapp,</i> 260 B.R. 267 (Bankr. D. S.C. 2001)</a>, the
debtor filed a chapter 13 petition after the debt on a home mortgage had been
accelerated due to non-payment. The residence had been transferred to the debtor
without the consent of the mortgagee in an apparent disregard of a due-on-sale
clause. The court found that there was no evidence that the debtor knew about the
due-on-sale clause or contemplated bankruptcy prior to ownership of the property. The
mortgagee objected to the chapter 13 plan, asserting that since the debtor was not
a party to the contract, the debtor could not file a plan to prevent the mortgagee
from asserting any of its rights. Bankruptcy Judge John E. Waites held that under
the decision of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… v. Home State Bank,</i> 501 U.S. 78 (1991)</a>, which
approved "chapter 20," the Supreme Court held that privity is not required in
order to establish a "claim" in a bankruptcy, and thus eliminated the requirement of
privity in order to allow that a chapter 13 debtor who owns real property can cure
the mortgage through the plan even if there was no privity between the debtor and
the mortgagee. Having lost that issue, the mortgagee then argued that the debtor's
plan could not cure the arrears in the mortgage and recommence monthly payments,
since the debt had been accelerated. The court held that where the debt was
accelerated solely due to the debtor's default in payments, the Bankruptcy Code does
not prohibit the curing of such a default through a chapter 13 plan. It noted
that it was not deciding whether a chapter 13 plan could cure an arrearage if the
acceleration had been triggered by the due-on-sale clause rather than payment
defaults. The court also held that assuming that the release from the co-debtor stay
was granted, the mortgagee could pursue a claim against the original mortgagor on the
note but could not foreclose its lien on the residence.

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

<p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… v. Schreiber,</i> 260 B.R. 242 (D. Mass. 2001)</a> (neither
counsel for the unsecured creditors' committee nor an individual member of the committee
owes a fiduciary duty to individual unsecured creditors);

</p><p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… v. Paroli,</i> 260 B.R. 246 (S.D.N.Y. 2001)</a> (Rooker-Feldman
Doctrine prohibited review of the state court decision that was asserted to have
deprived the bankrupt of federal constitutional rights);

</p><p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re WLASCHIN,</i> 260 B.R. 306 (Bankr. M.D. Fla. 2000)</a>

(Soldiers and Sailors Civil Relief Act, which provides that any statute of limitation
be tolled for the entire period during which a party seeking tolling is on active
duty, was found to be insufficient to toll the serviceman's ex-wife's entire case,
but was sufficient to toll the deadlines established by the court for filing complaints
relating to discharge or dischargeability);

</p><p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re St. Rita's Associates Private Placement,</i> 260 B.R. 650 (Bankr.
W.D.N.Y. 2001)</a> (debtor's counsel is not entitled to be compensated for time
spent defending its fee application from the debtor's good-faith objection, but was
entitled to be reimbursed for expenses that were incurred in a partially successful
defense of a fee application);

</p><p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Price,</i> 260 B.R. 653 (Bankr. W.D.N.Y. 2001)</a> (reopening
of chapter 7 case to permit debtor to pursue preference claim also reopened time for
the filing of the preference action);

</p><p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re LIDS Corp.,</i> 260 B.R. 680 (Bankr. D. Del. 2001)</a>
(administrative expense claims are not subject to the §502(d) disallowance of
a claim of any creditor that receives an avoidable transfer and fails to surrender
the same); and

</p><p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Lieberman,</i> 245 F.3d 1090 (9th Cir. 2001)</a> (income from
non-competition agreement did not qualify as exempt funds from "private retirement plan"
under the California exemption statute).

</p>