Benchnotes May 2006

<h4>Defendant Knowledge No Substitute for Service of Complaint</h4>

<p>Rule 4(m) of the Federal Rules of Civil Procedure requires dismissal without
prejudice or service by a date specific unless a summons and complaint is served
within 120 days of the filing of the complaint. The court may extend the time
for service "if the plaintiff shows good cause for the failure." In
<i>In re Dyer</i>, 330 B.R. 271 (Bankr. M.D. Fla. 2005), Chief Bankruptcy Judge
<b>Paul M. Glenn</b>, relying upon <i>AIG Managed Market Neutral Fund v. Askin
Capital Management, L.P.</i>, 197 F.R.D. 104, 108 (S.D.N.Y. 2000), held that
in making the "good cause" determination the court should look at
whether the plaintiff had (a) moved for an extension of time in which to serve
under Fed. R. Civ. P. 6, (b) acted with substantial diligence and good faith
and (c) failed to effect service due to "some minor neglect." "When
the failure is due to the plaintiff's inadvertence or half-hearted efforts,
however, no good cause should be found." Actual knowledge of the case (as
opposed to service of the complaint) is not equivalent to showing good cause.
The court then considered whether to dismiss or set a specified date for service
for the dischargeability complaint at issue. The court considered: (a) whether
the statute of limitations would bar a refiled action, (b) whether the defendant
attempted to evade service or to conceal defects in service, (c) whether the
defendant would be prejudiced by the extension of time to effect service and
(d) whether the defendant had actual notice of the claims asserted in the complaint.
In this case, dismissal was appropriate where there was a bar to refiling after
the plaintiff took no action to effect service for months after receiving notice
of the consequences of such a failure, and the debtor/defendant had filed her
case more than 19 months earlier with the resulting prejudice of the "delay
in receiving all of the benefits of her discharge."

</p><p><b>Lessee's Argument Considered Collateral Attack on Confirmation Order </b>
</p><p>In <i>In re Optical Technologies Inc.</i>, 425 F.3d 1294 (11th Cir. 2005),
the debtor had entered into pre-petition leases as lessor and then assigned
those leases to finance companies. As a result, the leases were technically
between non-debtors. A plan was confirmed that modified these pre-petition leases
to the benefit of the assignee. The plan also provided for a release and a waiver
of claims and defenses by lessees against the assignee and enjoined the lessees
from prosecuting any claims against the assignees. The lessees scheduled as
creditors were served with the disclosure statement, a summary of the plan and
the order that set the confirmation hearing but failed to appear at the confirmation
hearing. Some lessees claimed that some of the leases had expired pre-petition
and thus the plan could not modify leases that were no longer in effect. Other
lessees argued that they were not given sufficient information or notice that
the plan would modify the leases. The bankruptcy court, expressing concerns
about the notice to the lessees, rejected the assignee's <i>res judicata</i>
argument and granted summary judgment that the modifications were not binding
upon the lessees. On appeal, the district court reversed, holding that the confirmation
order was <i>res judicata</i> and rendered the lessees' defenses as collateral
attacks on the confirmation order. Finding that the confirmation order was not
a "plain usurpation of power" and rejecting the due process and expired
lease arguments, the district court held that the lease modifications contained
in the plan were binding upon the lessees. The Eleventh Circuit affirmed the
district court, holding that the due process notice requirement had been satisfied
and any argument that the plan did not apply even to leases that allegedly expired
pre-petition was an impermissible collateral attack on the confirmation order.
</p><p><b>Totality of the Circumstances Justified Dismissal of Ch. 13</b>
</p><p>In <i>In re Sullivan</i>, 326 B.R. 204 (BAP 1st Cir. 2005), the issue was whether
a chapter 13 bankruptcy case could be dismissed based on the debtor's bad faith.
The debtor had previously filed three other chapter 13 bankruptcy cases, which
were all dismissed by either the debtor or the bankruptcy court, based on the
debtor's failure to propose a confirmable plan. In dismissing the debtor's fourth
bankruptcy case, the bankruptcy court found that it was appropriate to dismiss
a chapter 13 case based on bad faith applying a totality-of-the-circumstances
analysis. In determining whether it was appropriate to uphold the bankruptcy
court's decision, the Bankruptcy Appellate Panel (BAP) held that there are two
stages where the debtor must exercise good faith – at the filing of the
petition and in proposing a plan. In affirming the dismissal, the BAP held that
the bankruptcy judge had appropriately applied the totality-of-the-circumstances
test in dismissing the debtor's case based on bad faith.
</p><p><b>Miscellaneous</b>

</p><p>• <i>In re Douglas</i>, 330 B.R. 245 (Bankr. S.D. Cal. 2005) (once court
determines that debt is actually in nature of support, there is no "unusual
circumstances exception" to dischargeability determination and court should
simply enter order excepting debt from discharge);<br>
• <i>In re Duncan</i>, 331 B.R. 70 (Bankr. E.D.N.Y. 2005) (pre-petition
consent judgment resolving suit for debtor's violation of obligations as alleged
fiduciary under ERISA was entitled to preclusive effect in subsequent non-dischargeability
proceeding); <br>
• <i>In re Earned Capital Corp.</i>, 331 B.R. 208 (Bankr. W.D. Pa. 2005)
(bankruptcy court had post-confirmation core jurisdiction over state court claim
brought by investors in a Ponzi-type scheme for alleged malpractice by accountants
during bankruptcy case); <br>
• <i>In re Carnes</i>, 331 B.R. 229 (Bankr. W.D. Pa. 2005) (as a hypothetical
purchaser of real property under §544(a)(3), the trustee is deemed to have
conducted a title search of real property, paid value for property and perfected
his interest in property as of the date of the commencement of the bankruptcy
case); <br>

• <i>GBL Holding Co. Inc. v. Blackburn/Travis/Cole Ltd.</i>, 331 B.R.
251 (N.D. Tex. 2005) (action by pre-petition prospective purchaser of chapter
11 debtor's property seeking to compel specific performance was rendered moot
after bankruptcy court granted trustee's motion to sell property free of interest
of prospective purchaser); <br>
• <i>In re Ottawa River Steel Co.</i>, 331 B.R. 340 (Bankr. N.D. Ohio
2005) (nothing in Bankruptcy Rules prevents court from delaying date for order
of relief after the filing of an involuntary petition even if it affects commencement
of two-year statute of limitations on avoidance actions); <br>
• <i>In re Payne</i>, 331 B.R. 358 (N.D. Ill. 2005) (federal income tax
return filed after IRS had already assessed tax for tax year in question still
qualified as a "return" under §523(a)(1)(B)(i) where return was
complete on its face and was accompanied by a good-faith offer by a financially
troubled debtor/taxpayer to settle tax debt); <br>
• <i>In re Kreisler</i>, 331 B.R. 364 (Bankr. N.D. Ill. 2005) (noncompliance
with Fed. R. Bankr. P. 3001(e)(2), governing transfer of claims, resulted in
prejudice to unsecured creditors and constituted cause to equitably subordinate
alleged secured claim); <br>

• <i>In re Lary</i>, 331 B.R. 493 (Bankr. M.D. Ga. 2005) (three-day notice
required by Fed. R. Bankr. P. 7055 prior to entry of judgment by default not
given where motion for entry of default filed on Thursday and default judgment
signed on Sunday); <br>
• <i>In re Starzer</i>, 331 B.R. 444 (Bankr. E.D. Cal. 2005) (conservator
of person and estate of judgment creditor created a fiduciary relationship under
California law). <br>
• <i>In re Ybarra</i>, 424 F.3d 1018 (9th Cir. 2005) (post-petition award
of attorney fees and costs in favor of chapter 7 debtor's former employer arising
out of unsuccessful pre-petition state court lawsuit that was prosecuted post-petition
found nondischargeable as post-petition obligation); <br>
• <i>In re McClelland</i>, 332 B.R. 90 (Bankr. S.D.N.Y. 2005) (counterclaims
asserted by debtor against pre-petition attorneys are not subject to jury trial
on issues of alleged negligence and legal malpractice); <br>

• <i>In re Mirant Corp.</i>, 332 B.R. 139 (Bankr. N.D. Tex. 2005) (discount
rate chosen to reduce claim to present value should be the risk of nonperformance
at the time of the contract and should not be determined on the basis of risks
associated with dealing with debtors post-petition or after confirmation); <br>
• <i>In re Fuzion Technologies Group Inc.</i>, 332 B.R. 225 (Bankr. S.D.
Fla. 2005) (as a matter of law, in pari delicto defense does not apply to action
brought by chapter 7 trustee against law firm that represented debtor/corporation
pre-petition in claim related to alleged failure to render appropriate advice
with respect to whistleblower letter concerning CEO); and <br>
• <i>In re Edgewater Medical Ctr.</i>, 332 B.R. 166 (Bankr. N.D. Ill.
2005) (because the receiver and custodian who filed the bankruptcy petition
on behalf of the debtor would not have been subject to the affirmative defenses
of <i>in pari delicto</i>, dual agency or ratification under applicable state
law, debtor granted summary judgment as to such defenses in suit against former
management companies and their sole general partner).