Benchnotes Oct 1998

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Oct 1998

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In In re Carvell, 228 B.R. 178 (Bankr. 1st Cir. 1998), the bank appealed a bankruptcy court order avoiding the

bank's lien. Under applicable state law (Maine), the lien was void due to a failure to give a statutorily required notice

of lien to the debtor within 20 days of its filing. The debtor then contended that the other liens in place were junior

to the avoided lien, which was already of record when the other liens were recorded. The BAP panel agreed that the

lien was a "void" and §551 preserved the avoided lien for the benefit of the estate. However, the junior liens obtained

the benefit of the avoidance. "This case is quite different from, for example, the case where a perfected lien is avoided

as a preference and there are other perfected liens which are junior to the avoided lien. In that situation, without

preservation of the avoided lien, avoidance benefits only the junior lien-holders. That would be a windfall for them

because it gives them a benefit they could not obtain outside of bankruptcy." However, where the avoided lien is one

that is actually void, the avoidance benefits the junior lienholders who retain their liens with priority in accordance

with the priorities under the applicable state law lien statutes.

<h3>Discovery & 5th Amendment</h3>

In In re Hyde, 222 B.R. 214 (Bankr. S.D.N.Y. 1998), the chapter 7 trustee sought possession of certain financial

books and records of one of the businesses that the chapter 7 debtor operated as a sole proprietorship. The debtor

moved to quash the trustee's subpoena on Fifth Amendment grounds. The debtor had turned over the records to the

attorneys who had been retained to represent him in possible criminal investigations. Aside from the fact that the

documents were held to be "property of the estate," the bankruptcy court cited the Supreme Court's decision in

Fisher v. U.S., 96 S.Ct. 1569 (1976) and the subsequent cases in U.S. v. Doe, 104 S.Ct. 1237 (1984), and

Baltimore City Dep't of Social Services v. Bouknight, 110 S.Ct. 900 (1990), and held that enforcing the trustee's

subpoena for production of the documents that had been turned over to the debtor's attorneys would not violate the

debtor's Fifth Amendment privilege "for three separate and independent reasons: (1) the facts revealed by the act of

production are a 'foregone conclusion' [for the most part they had been developed in a 2004 examination]; (2) the act

of production, although testimonial, is not incriminating; and (3) no Fifth Amendment privilege exists as to the

contents of the [documents]." This opinion examines the interrelationship between a bankruptcy case and the Fifth

Amendment privilege, in light of 11 U.S.C. §727(a)(6)(C) "...under which a debtor would be entitled to a discharge

despite his refusal to respond or testify if his refusal was based upon 'the properly invoked privilege against self

incrimination.'"

<h3>Post-petition Payments</h3>

In In re Faberge Restaurant of Florida, Inc., 222 B.R. 385 (Bankr. S.D. Fla. 1997), an involuntary chapter 7 was

filed by three petitioning creditors against the debtor. The debtor made post-petition payments to the petitioning

creditors and then took the position that the payments eliminated those creditors' standing or eligibility under 11

U.S.C. §303(b)(1). The Faberge court held that such post-petition payments will not deprive the court of jurisdiction

or require dismissal, but also noted that some of the post-petition payments constituted evidence that there was a

bona fide debt to such creditors on the petition date, at least in the amount of the payments made.

<h3>Excusable Neglect for Missed Deadlines</h3>

In In re Federated Food Courts Inc., 222 B.R. 396 (Bankr. N.D. Ga. 1998), the debtor's landlord filed a motion

to dismiss the case or for relief from stay so that it could proceed with eviction proceedings against the chapter 11

debtor. One day after the 60-day deadline of 11 U.S.C. §365(d)(4), the debtor moved to extend the time to assume or

reject the lease. In response to the missed deadline, the debtor cited the Supreme Court decision in Pioneer

Investment Svcs. Co. v. Brunswick Assocs. Ltd. Partnership, 113 S.Ct. 1489 (1993), discussing and applying the

doctrine of excusable neglect to missed deadlines provided by the Bankruptcy Rules. As the bankruptcy court

observed, Bankruptcy Rule 9006(b) [the topic of the Pioneer case decision] is a rule governing the enlargement of

time periods that are prescribed in the other Bankruptcy Rules or in court orders. The deadline that the debtor missed

in this case is prescribed by the statute itself in 11 U.S.C. §365(d)(4). Thus, while application of the Pioneer case

factors "might have resulted in a finding of excusable neglect," the court refuses to apply Bankruptcy Rule 9006(b)

and the "excusable neglect" doctrine and standards to the deadline established in the statute itself.

<h3>Counsel's Role to Corporate DIP</h3>

In In Hanasen, Jones, Lela P.C. v. Segal, 220 B.R. 434 (D. Utah 1998), an appeal of a denial of attorney's fees

led District Judge Brett to first consider the role of counsel to a corporate debtor-in-possession (DIP). It is clear that

all counsel owe fiduciary duties of loyalty and care to each client. Prior to the bankruptcy filing, the client is the

corporation. The question was: Who is the client after filing? The analysis was that after the filing, the client is not

the estate—a mere collection of property interests—rejecting both the DIP as "new entity" and "new person" theories

for creating an attorney-client relationship between counsel and its estate. Thus, the client must be the DIP. The next

issue Judge Brett addressed was the duties of counsel and to whom the obligations were owed. Clearly, there are

duties to the client, the DIP. There is also the duty to disclose any conflict of interest, all fee payments and

agreements made after one year before the date of petition and a duty pursuant to Fed. R. Civ. P. 9011 to the client.

However, the court held while the DIP owes a fiduciary duty to the estate and its beneficiaries, there is not and

should not be an imposition of the client's fiduciary duties upon the attorney.

<h3>Partnerships</h3>

In In re Food Gallery at Valleybrook, 222 B.R. 480 (Bankr. W.D. Pa. 1998), the operating general partner filed a

chapter 11 petition without the consent of the other general partner. The petition was treated as an involuntary

petition, and the primary issue before Bankruptcy Judge M. Bruce McCullough was whether the partnership was

generally not paying its debts as they became due. The court held that it would "not condone the efforts of a debtor

who seeks to take advantage of the general prohibition on involuntary petitions by ensuring payment...to its smaller

periodic debt to the exclusion of larger long-term debt." In other words, a debtor is generally not paying its debts

where its funds are being held to keep trade debts current to the detriment of secured creditors. Further, payments by a

general partner will be treated as payments by a third party, thus when the payments are made in part through loans

by a third party, then the payments will not be deemed to be payments by the debtor.

<h3>Miscellaneous</h3>

<ul>

<li> In re Ali, 219 B.R. 653 (Bankr. E.D.N.Y. 1998) (Although judicial or clerical error is not one of the exclusive

grounds for revoking a discharge set forth in §727(d), an unauthorized discharge falls within the province of Fed. R.

Civ. P. 60(a) and never invokes §727(d), but only may be brought after notice in opportunity to be heard);

</li><li> In re A.H. Robins Co., 219 B.R. 710 (Bankr. E.D. Ca. 1998) (State court malpractice action against doctor

did not qualify as "unreleased claim" under chapter 11 debtor-IUD manufacturer's plan and the suit had to be

dismissed);

</li><li> In re Carter Paper Co., 220 B.R. 276 (Bankr. M.D. La. 1998) (Claim that challenged trustee's decision in

administering estate was an inherently "equitable" claim for Seventh Amendment jury trial purposes);

</li><li> Enjet Inc. v. Maritime Challenge Corp., 220 B.R. 312 (E.D. La. 1998) (Fed. R. Bankr. P. 7015 applied to

contested proceeding seeking to prosecute a claim objection filed after the bar date);

</li><li> In re Mann, 220 B.R. 301 (Bankr. N.D. Ohio 1998) (Only five options to responding to request for

admission: object, admit, deny, provide a qualified response or state that, after a reasonable inquiry, the information

known or reasonably obtainable is insufficient to enable the party to admit or deny);

</li><li> In re Yeagley, 220 B.R. 402 (Bankr. D. Kan. 1998) ("Section 546(e) margin payment" includes any payment

to reduce deficiency on margin account made after the margin account is opened and a deficiency exists);

</li><li> In re Ms. Interpret, 222 B.R. 409 (Bankr. S.D.N.Y. 1998) (Proof of claim designation of law firm on proof of

claim for all notices constituted express authorization of firm as agent for service of process);

</li><li> In re Johnson, 222 B.R. 552 (Bankr. 6th Cir. 1998) (Earned income credit was asset of chapter 7 estate);

</li><li> In re Handy Andy Home Improvement Centers, 222 B.R. 571 (Bankr. N.D. Ill. 1998) (Deposit had to be

offset against lessor's maximum allowed claim, not to amounts in excess of statutory cap);

</li><li> In re Kehoe, 221 B.R. 285 (Bankr. 1st Cir. 1998) (Chapter 7 debtors lack standing to appeal election of

trustee);

</li><li> Oles Grain Co. v. Safeco. Insurance Co. of America, 221 B.R. 371 (N.D. Tex. 1998) (Section 322(d)

two-year limitation on proceeding on a trustee's bond pre-empts state law of limitations for actions on a trustee's

bond); and

</li><li> In re Levy, 221 B.R. 559 (Bankr. S.D. Fla. 1998) (Non-immigrant aliens in U.S. on temporary visas cannot

establish permanent residence so as to be entitled to claim state's exemptions).</li></ul>

<hr>

Journal Authors

Deborah D. Williamson

Ronald Hornberger

Journal Date

Thursday, October 1, 1998 - 12:00