Benchnotes Dec/Jan 2004

<h4>Personal Injury Claim Subject to Bankruptcy Court Jurisdiction</h4>

<p>In <i>In re UAL Corp.,</i> 310 B.R. 373 (Bankr. N.D. Ill. 2004), Chief Bankruptcy Judge <b>Eugene R. Wedoff</b> was asked to rule on the validity of a personal injury tort claim. The court initially held that 28 U.S.C. §157(b)(2)(B)'s exception to core jurisdiction prevented the court from determining only the amount and not the validity of such claims and, on the claim before him, did not prevent the court from disallowing a claim against the debtor airline on the grounds that it did not arise from an "accident" as required under the Warsaw Convention. The court also held that §157(b)(5) "effectively allows a personal injury claim to remain subject to bankruptcy court jurisdiction until a party seeks withdrawal of the reference from the district court. And even then, it requires transfer of a claim only for trial. Both of these aspects of the provision allow for <i>pretrial</i> consideration of personal injury tort claims by the bankruptcy court, including a determination that such a claim is legally unenforceable." In the alternative, the court held that 28 U.S.C.A. §157(c)(1) had "related to" jurisdiction to make a recommendation to the district court as to the legal validity of a claim, as the allowance or disallowance of a claim would "plainly affect allocation of property among creditors."

</p><h4>Grounds for Abstention Explained</h4>

<p>In <i>In re Laroche Industries Inc.,</i> 312 B.R. 249 (Bankr. D. Del. 2004), a post-petition sale contract provided that disputes under the agreement would be resolved by the bankruptcy court. The debtor brought an adversary proceeding against the purchaser seeking to compel payment of a portion of the purchase price that had been withheld due to potential environmental liabilities. Subsequent to the sale, a plan was substantially consummated that provided that all remaining assets were re-vested in the debtor and the bankruptcy case was closed. The debtor moved to re-open the bankruptcy case to pursue a claim against the purchaser for the withheld funds. In response, the purchaser filed a motion for mandatory and permissive abstention and an action in state court regarding the same dispute. Chief Bankruptcy Judge Mary F. Walrath held that the
debtor's claim constitutes a core proceeding and thus did not meet
the requirements for mandatory abstention. The court identified 12 factors
that are relevant to the issue of mandatory abstention: (1) the effect or
lack thereof on the efficient administration of the estate, (2) the extent
to which state law issues predominate over bankruptcy issues, (3) the
difficulty or unsettled nature of applicable state law, (4) the presence of
a related proceeding commenced in state court or other non-bankruptcy
court, (5) the jurisdictional basis, if any, other than §1334, (6) the
degree of relatedness or remoteness of the proceeding to the main
bankruptcy case, (7) the substance rather than the form of an asserted
"core" proceeding, (8) the feasibility of severing state law
claims from core bankruptcy matters to allow judgments to be entered in
state court with enforcement left to the bankruptcy court, (9) the burden
of the court's docket, (10) the likelihood that the commencement of
the proceeding in bankruptcy court involves forum shopping by one of the
parties, (11) the existence of a right to a jury trial and (12) the
presence of non-debtor parties. The court held that the majority of the
factors favored abstention. The court then addressed the argument that the
bankruptcy forum selection clause constituted a waiver of the
purchaser's right to seek abstention. Recognizing that the
forum-selection clause was valid, the court then addressed the issue of
whether the clause prevented the bankruptcy court from abstaining. Judge
Walrath held that the forum-selection clause prevented the purchaser from
seeking permissive abstention, but the waiver did not prevent the court
from <i>sua sponte</i>
exercising its discretion and abstaining from hearing the action. An
additional reason for the ruling was the court's concern regarding
post-confirmation jurisdiction. Relying on <i>In
re Resorts Int'l. Inc.,</i> 372 F.3d 154 (3d
Cir. 2004), Judge Walrath found that "we cannot conclude that we have
jurisdiction. Although this case involves a contract executed by the debtor
pre-confirmation (as opposed to the post-confirmation retention agreement
in <i>Resorts</i>), we
find that the factors that the Third Circuit used in concluding that the
court lacked jurisdiction are applicable here. The resolution of this
lawsuit will not result in any additional recovery or affect the estate
(who have now largely exchanged their creditor status for shareholder
status). The suit will not interfere with the imple-mentation with the
plan, since it has been completely consummated."

</p><h4>D&amp;O Liability Cancellation Deemed Non-core</h4>

<p>In <i>In re National Century Financial Enterprises,</i> 312 B.R. 344 (Bankr.
S.D. Ohio 2004), Bankruptcy Judge Donald E. Calhoun Jr. addressed the issue
of whether a proceeding involving the ability of an insurer to cancel a
directors' and officers' liability policy is core or non-core.
While the policy was issued pre-petition, the debtor sought to exercise a
right to extend post-petition. A dispute arose as to whether the extension
covered claims allegedly discovered during the extended post-petition
period or whether the policy was void for misstatements allegedly made in
the application. The court held that this was a state law dispute that
could arise outside of bankruptcy and did not invoke any substantive right
created by bankruptcy law, and that there was no evidence that the D&amp;O
policy was a necessity or otherwise integral to a successful reorganization, distinguishing the facts of <i>In re Heaven Sent Ltd.,</i> 50 B.R. 636 (Bankr.
E.D. Pa. 1985). As a result, the action was not a core proceeding.

</p><h4>No Need for Avoidance Proceeding Where Payments Already Recovered</h4>

<p>In <i>In re Cybridge Corp.,</i> 312 B.R. 262 (D. N.J. 2004), District Judge Cooper
addressed the question of whether 11 U.S.C. §550(d) "empowers
the courts to prohibit a trustee from recovering under §550(a) from a
transferee that has already returned to the estate that which was taken in
violation of the Code," an issue of apparent first impression. Prior
to the appointment of the trustee and without knowledge of the bankruptcy
court, the defendant gave the debtor $192,200 and collected $163,847 from
accounts receivable that belonged to the estate. The district court
affirmed the bankruptcy court's finding that the defendant "had
already paid the sum that the trustee would later seek in the avoidance
proceeding." The district court also affirmed the holding that the
trustee's right to recover under §550(a) had already been
established, in essence allowing an "equitable credit." The
district court also rejected the argument that allowing such a credit
circumvented §726 by, in effect, granting a super-priority status as
to the post-petition amount advanced by the defendant.

</p><h4>District Court Upholds Lender Claim to Gap Payments</h4>

<p>In <i>In re Bankvest Capital Corp.,</i> 375 F.3d 51 (1st Cir. 2004), the
unsecured creditors' committee brought an adversary proceeding to
avoid payment made during the "gap period" to a fully secured
lender. The lender was aware of the involuntary petition and apparently
accepted the payments in violation of the automatic stay. After the
adversary proceeding was brought, the lender sold a portfolio of loans,
which included the "then-existing balances of the loans"
between the lender and the debtor. The sale agreement "purported to
transfer...all of the lender's claims and rights, including
bankruptcy claims, whether known or unknown, arising under or in connection
with the loan documents." A plan was confirmed that was not objected
to by the lender or the purchaser of the loan portfolio. At trial, the
lender argued that the avoidance "would be for naught" because
the lender would acquire a valid claim under §502(h) in the exact
amount of the avoided payment, since the lender was fully secured as of the
time of the gap transfer. The bankruptcy court rejected this argument,
holding that the transfer of the loan portfolio divested the lender of any
claim upon return of the gap payments. On appeal, the district court held
that the lender had not sold the claim to the gap payments but remanded the
case for a determination of what sanctions, if any, should be imposed for
acceptance of the gap payments. The First Circuit conducted a detailed
review of the language of the agreement selling the loan portfolio and
affirmed the holding that the lender did not sell the gap claim. However,
the court also held that a determination under §502(h) is determined
and allowed "the same as if such claim had arisen before the date of
the filing of the petition." As of the petition, the lender had not
sold the loan portfolio, and its claim was fully secured. "What
happened to the [lender's] security after it received the gap
payments is essentially irrelevant."

</p><h4>Miscellaneous</h4>

<ul><li><i>In re Enewally,</i> 368 F.3d 1165 (9th Cir. 2004) (chapter 13 debtor cannot both bifurcate mortgage lien into secured and unsecured claims and repay the secured claim over a period longer than the term of the plan).

</li><li><i>In re Holt,</i> 310 B.R. 675 (Bankr. N.D.
Tex. 2004) (as with proof of mailing, proof of electronic notice presumes
receipt of the notice, which presumption must be rebutted by proof of how
counsel's office processes electronic notice in order to support a
finding that the office did not receive the notice);

</li><li><i>In re Price,</i> 370 F.3d 362 (3rd Cir.
2004) (chapter 7 debtors have "fourth option" to retain motor
vehicles while continuing to make regular monthly payments without
redeeming vehicles or reaffirming the debt);

</li><li><i>In re Holyoke Nursing Home Inc.,</i> 372
F.3d 1 (1st Cir. 2004) (prior overpayments that provider received in excess
of what it had earned by providing services to Medicare patients were part
of the "same transaction" as provider's claim against
government for medical services that it provided in later years, and
government's recovery of overpayments by reducing pre- and
post-petition payments was a permissible "recoupment," not a
preferential transfer or a violation of the automatic stay);

</li><li><i>In re Busch,</i> 311 B.R. 657 (Bankr.
N.D.N.Y. 2004) (judgment creditor who prevailed on sexual harassment claims
failed to show that debtor who permitted hostile environment and who made
sexual advances to creditor had intent to harm creditor by, <i>inter alia,</i> causing
creditor to resign from job);

</li><li><i>In re Peregrine Systems Inc.,</i> 311
B.R. 679 (D. Del. 2004) (public has right to challenge sealing even of
documents that were not considered by court as part of judicial decision);

</li><li><i>In re Brown,</i> 311 B.R. 721
(Bankr. W.D. Pa. 2004 ) (petition was filed when first presented to clerk
for filing, not at time it was formally accepted by clerk after
debtor's attorney took typewritten document to scanner in public area
of clerk's office and scanned petition into clerk's electronic
filing system);

</li><li><i>In re Kelly,</i> 312 B.R. 200 (1st Cir. B.A.P. 2004) (undue hardship for the
discharge of student loans is measured as of the date of the trial); and

</li><li><i>In re Ghidoni,</i> 99 Fed. Appx. 517 (5th Cir. 2004) (not published in the <i>Federal Reporter</i>) (the debtor
validly released the creditor and the trustee from future liability arising
from the bankruptcy case).
</li>