Benchnotes Feb 2000
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In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Greater Southeast Community Hospital Foundation,</i> 237 B.R. 518 (Bankr. D. D.C. 1999)</a>, Bankruptcy Judge <b>S. Martin Teel Jr.</b> addressed the issue of
whether the automatic preservation of an avoided lien under §551 applies to property sold
pre-petition, subject to the lien that was subsequently avoided post-petition. The debtor sold
receivables prior to the filing of the bankruptcy. The purchaser asserted that the pre-petition
purchase of the accounts receivable removed them from the bankruptcy estate such that §551
could not be used. After analyzing the interaction of §§541, 544, 550 and 551, the court held
that the Bankruptcy Code "plainly provides that §551's exception applied to such avoided liens
in property sold by the debtor pre-petition." The court then held that even if the statute was
ambiguous (a position he did not adopt), bankruptcy policy as reflected in the Bankruptcy Act
favored allowing an avoided lien to be preserved for the benefit of the estate. Further, the
legislative history of the statute mandated that any ambiguity be resolved against the
purchaser's interpretation. The court concluded that, assuming there was a pre-petition sale of
the accounts receivable, §551 applied and the avoided lien was preserved for the benefit of the
estate.
</p><h3>Computing Trustee Commissions</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Goido,</i> 237 B.R. 562 (Bankr. E.D.N.Y. 1999)</a>, Bankruptcy Judge <b>Stan B. Bernstein</b> addressed the issue of what is included in computing a trustee's commission from settlement of
a pre-petition personal injury cause of action. The action settled for $520,000 in actual and
compensatory damages for permanent disability suffered by the debtor. The court-approved
settlement provided for direct payment to personal injury counsel of the one-third contingency
fee and reimbursable costs. In addition, the workers' compensation carrier was directly
reimbursed $40,000 for medical and related expenses advanced on the debtor's behalf. The
balance of $299,577.13 was remitted to the trustee. The trustee was seeking a commission of
$16,705.95, calculated on the statutory formula under §326(a), excluding only the funds to be
received by the debtor, but including funds distributed to the contingency fee counsel and the
workers' compensation carrier. The trustee argued that it was "only as a matter of
convenience" that the fees to counsel and the workers' compensation carrier were paid directly
by the settling defendant. If he had known that he would not be entitled to a commission on direct
payments, he never would have provided that all of the settlement proceeds be paid to the estate.
The court noted that the trustee "misses the point" and further noted that while disbursements
to holders of secured claims are included in a compensation base, there should not be a
commission paid on proceeds that are subject to a constructive, charging or equitable lien that
would include plaintiff's counsel and the insurance carrier. The court also noted that the
statutory maximum is still subject to the discretion of the court. The court held that "routine
oversight of the debtor's personal injury action" does not justify a large premium above
computed time charges by including a distribution to counsel or workers' compensation
insurance carrier.
</p><h3>Chapter 7 Trustee Fee Caps</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Arius Inc.,</i> 237 B.R. 843 (Bankr. N.D. Fla. 1999)</a>, Bankruptcy Judge Arthur B.
Briskman addressed the issue of the proper method for calculating a chapter 7 trustee's fee cap
when there was more than one trustee, specifically addressing whether disbursements made by
the interim trustee should be used in calculating the fee cap for the elected chapter 7 trustee.
The U.S. Trustee took the position that the fee cap should only apply to disbursements made by
the elected trustee and should not include disbursements made by the interim trustee. The court
construed the plain meaning of §326(c), which provides that the total compensation for both
the interim and elected trustee "may not exceed the maximum compensation prescribed for a
single trustee," and then applied the language of §326(a), which provides that the trustee cap
include "all monies disbursed or turned over in a case by the trustee and that the policy of the
Bankruptcy Code is to draw no distinction between interim and elected trustees." The court held
that the clear intent of Congress was to establish one fee cap for each bankruptcy estate for all
trustees serving in that case. "The single fee cap is not based upon the amount each trustee
brought into the estate, but rather it is based upon the total disbursements in the case. It not
only would be unfair, but also inequitable, to rule inconsistently with Congress's clear intent in
drafting the fee cap statute."
</p><h3>Credit Card Dischargeability</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Reid,</i> 237 B.R. 577 (Bankr. W.D.N.Y. 1999)</a>, Chief Bankruptcy Judge Michael J.
Kaplan addressed the issue of whether a credit card debt was non-dischargeable as incurred
under false pretenses, pursuant to §523(a)(2)(A). The court had previously held that §523(a)(2)(A) does not require that the five-prong
common law test of fraud and deceit be satisfied. The debtor wife/cardholder turned over her
credit cards, line of credit and PIN number to her husband to use at his discretion and judgment
without limitation. She also handed over to her husband "convenience checks" endorsed in
blank, "all in utter disregard of the amount of debt incurred." The court examined in detail the
factual circumstances, including the fact that approximately $50,000 of the $71,000 in credit
card debt was incurred in the six months prior to consultation with bankruptcy counsel. The
wife had asserted that by virtue of her upbringing and choice, she had no information on the
status of their financial condition. She and her husband both denied having contemplated
bankruptcy until after the credit card debts had been incurred. The court found that
"something short of a willful and malicious injury constitutes a false pretense or actual fraud
and that something short was present in this case." The court held that "a credit card issuer
does not 'assume the risk' that a cardholder will empower and assist someone else to run up the
cards and then, after filing bankruptcy, be able to sustain a claim that having chosen to act deaf,
dumb and blind is a complete defense to a §523(a)(2)(A) action."
</p><h3>Post-petition Interest for Creditor's Claims</h3>
<p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Alls,</i> 238 B.R. 914 (Bankr. M.D. Ga. 1999)</a>, addressed the co-debtor stay found in
§1301(c). In this case, the debtor's chapter 13 plan proposed to pay in full the principal and
all pre-petition interest, but made no provision for the payment of post-petition interest. The
creditor moved for relief from the automatic stay, arguing that the plan did not propose to pay
the creditor's claim in full. Bankruptcy Judge <b>James D. Walker Jr.</b> noted that
§1322(b)(1) allows separate classification of the co-debtor's unsecured claims but does not
authorize the payment of post-petition interest on such claims. The court held that the debtor's
plan must propose to pay the claim in full in order to continue the co-debtor stay, because none
of the three exceptions to §502(b)(2)'s prohibition against payment of post-petition interest
existed. Thus, the "claim" cannot include post-petition interest and consequently cannot receive
disbursements of interest from the chapter 13 trustee. Therefore, the co-debtor creditor was
stayed in collection of its interest against the co-debtor until the conclusion of the case, when
the claim for post-petition interest may be pursued.
</p><h3>Debtor Incompetency</h3>
<p>In a case of apparent first impression, Bankruptcy Judge Jerry Venters addressed the issue of
whether a guardian <i>ad litem</i> may be appointed by a bankruptcy court for general administration
of a case (as opposed to appointment of a guardian for an adversary proceeding) in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Moss,</i>
239 B.R. 537 (Bankr. W.D. Mo. 1999)</a>. Noting a dearth of cases, the court looked to Fed. R.
Bankr. P. 1016, which provides that the death and incompetency of the debtor shall not abate a
liquidation under chapter 7. In such an event, the estate shall be administered and the case
concluded "in the same manner, so far as possible as if the death or incompetency had not
occurred." The court held that it must address two issues: 1) what is meant by incompetency as
it applies to a bankruptcy case and not an adversary proceeding, and 2) what is meant by "in the
same manner, so far as possible." Incompetency in the sense of mental incompetency is not
mentioned or defined in the Bankruptcy Code. Bankruptcy Rule 7017 deals with the appointment
of a guardian <i>ad litem</i> for adversary proceedings in the event the debtor is a minor and
incompetent, but neither Bankruptcy Rule 7017 or 1016 indicates what definition of
incompetency should be used. Relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Moody,</i> 105 B.R. 368, 371 (S.D. Tex. 1989)</a>,
Judge Venters determined that incompetency should be made by reference to state law and found
the evidence clearly supported a finding of incompetency under the Missouri standard. As to the
issue of "in the same manner, so far as possible," the court found that the rule clearly
contemplates that a bankruptcy court may take extraordinary steps in order to administer the
estate of a debtor who has died or is incompetent. Thus, in the event of incompetency, the
question was whether it was possible to proceed in the same manner as if the incompetency had
not occurred. If it was not, was the appointment of a limited guardian an appropriate measure?
The court found that it "would be impossible to proceed with the case in a manner that
adequately protects the debtor's rights." The court then found the appointment of a limited
guardian was necessary to conserve judicial resources and facilitate judicial economy, with
authority for doing so under §105 and the liberal manner in which Rule 7017 has been
interpreted for authorizing a guardian <i>ad litem</i> to file a bankruptcy petition for a minor or
incompetent.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Spielfogel,</i> 237 B.R. 555 (Bankr. E.D.N.Y. 1999)</a> (bankruptcy courts have inherent
power to "depart from the letter of a local rule" regardless of whether the particular rule
specifically grants the court the power to deviate from such rule);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Simmons,</i> 237 B.R. 672 (Bankr. N.D. Ill. 1999)</a> (the official bankruptcy forms are not
part of the Federal Rules of Bankruptcy Procedure and do not have the force or effect of either
the Bankruptcy Code or the Bankruptcy Rules);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hayes,</i> 183 F.3d 162 (2nd Cir. 1999)</a> (attorney-client relationship, without more,
constitutes a "fiduciary" relationship within the meaning of the discharge exception under
§523(a)(4), relying upon <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cochrane,</i> 124 F.3d 978, 984 (8th Cir. 1997)</a>);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Ginsburg,</i> 238 B.R. 358 (Bankr. N.D. Ohio 1999)</a> (excusable neglect, even if available
to extend the deadline for filing non-dischargeability complaints, would not be permitted to
allow late filing where the creditor's attorney had actual knowledge of the debtor's bankruptcy
filing roughly two weeks before the bar date);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rappond,</i> 238 B.R. 442 (Bankr. E.D. Ark. 1999)</a> (debtor/lessee obligation in a covenant
not to compete was not a debt discharged in chapter 7 and lessor could have the stay lifted to
proceed with a state court lawsuit to enforce the covenant); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Mohawk Greenfield Motel Corp.,</i> 239 B.R. 1 (Bankr. D. Mass. 1999)</a> (action by
Massachusetts Commission Against Discrimination enjoining debtor from future acts of
employment discrimination and entering back-pay award in favor of ex-employee was "mere
enforcement of strong public policy against discrimination and protecting the public's safety
and welfare" and not subject to the automatic stay).
</li>
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