Benchnotes Dec/Jan 1998

<h3>Classifying Co-signed Consumer Debt</h3>
In <i>In re Chacon,</i> 223 B.R. 917 (Bankr. W.D. Tex. 1998) Chief Bankruptcy Judge Larry E. Kelly addressed the

issue of whether, and if so, under what circumstances a chapter 13 debtor may separately classify co-signed

consumer debt. The court held that such co-signed consumer debt may be separately classified if there is not unfair

discrimination <i>vis-a-vis</i> other unsecured creditors. The factors to consider in determining whether a debtor is unfairly

classifying unsecured claims are as follows: 1) the discrimination must have a reasonable basis; 2) the debtor cannot

carry out a plan without such discrimination; 3) the discrimination is proposed in good faith; and 4) the degree of

discrimination is directly related to the basis of rationale for the discrimination. With regard to the last element, the

court restated it as "does the basis for the discrimination demand that this degree of differential treatment be

imposed." The court also noted that <i>In re Husted,</i> 142 B.R. 72 (Bankr. W.D. N.Y. 1992) added two additional

elements: (1) whether there is a meaningful payment to class discriminated against and (2) the difference between

what the creditors discriminated against would receive as the plan is proposed and the amount they would receive if

there was no separate classification. Judge Kelly found that the debtor had failed to carry its burden of proof and

denied confirmation of the chapter 13 plan. In <i>In re Markham,</i> 224 B.R. 599 (Bankr. W.D. Ky. 1998), Bankruptcy

Judge J. Wendell Roberts cited the holdings that have allowed debtors to pay a co-signed claim at a higher

percentage than other cases, but held that a chapter 13 plan may not separately classify co-signed obligations and in

order to pay such claims at a <i>lower</i> rate.

</p><h3>Separate Classification of Deficiency Claim</h3>

In <i>In re WBA Associate Ltd.,</i> 224 B.R. 40 (Bankr. E.D. Mich. 1998), the debtor attempted to separately classify

the deficiency claim of the first mortgage on its residential apartment from the unsecured deficiency claims held by

the Michigan State Housing Development Authority, which held a second mortgage on the project. The debtor

argued separate classification was supported by both <i>In re U.S. Truck Co.,</i> 800 F.2d 581 (6th Cir. 1986) and <i>In re

Briscoe Enters. Ltd. II,</i> 994 F.2d 1160 (5th Cir. 1993). <i>U.S. Truck</i> recognized separate classification where the

creditor had a "different stake in the future viability of the reorganized company." <i>Briscoe</i> permitted separate

classification where the relationship with the separately classified creditor was "essential to the continued operation

of this housing complex" and that creditor's "non-creditor interest relating to the urban housing program...in its

contribution of rental assistance." Bankruptcy Judge Walter Shapero held that <i>Briscoe, U.S. Truck</i> and other similar

cases "seem to require a relationship which is both sufficiently independent of the debtor/creditor relationship

arising out of the claim and the terms of the payment of that claim so as to permit one to conclude that the play-out

of that non-creditor aspect of the relationship will likely play a significant role in the viability of success of the

reorganization effort." The court found that under the facts of this case, such a relationship is a "mere possibility"

and much too "iffy" or "remote" so as to raise to the level of the required ongoing non-creditor interest, and refused

to confirm the plan.

<h3>Full Disclosure</h3>

In <i>In re Tripp,</i> 224 B.R. 95 (Bankr. N.D. Iowa 1998) Bankruptcy Judge Paul J. Kilburg addressed the issue of

whether discharge may be denied for failure to disclose an asset in a chapter 7 case even though the trustee could not

have disposed of that asset, even if it had been disclosed and the creditors would not have benefited financially. The

trustee had filed an adversary proceeding seeking denial of discharge under §727(a)(2)(A) due to the alleged

concealment and under §727(a)(4)(A) for an alleged failure to disclose. The court held that the Code requires nothing less than a full and complete disclosure of any and all

apparent interests of any kind, regardless of whether there is any specific monetary harm resulting from the false oath,

as it is not for the debtors to determine whether the assets or transactions should be disclosed. After reviewing

relevant case authority, the court found that the failure to disclose 14 to 15 pounds of marijuana with a street value of

approximately $900 per ounce was sufficient grounds for denial of discharge.

<h3>§523(a)(17) Dischargeability Exception</h3>

<i>In re Tuttle,</i> 224 B.R. 606 (Bankr. W. D. Mich. 1998), involved the dischargeability exception of the

relatively new §523(a)(17). The issue before Chief Bankruptcy Judge <b>James D. Gregg</b> was whether the exception

applied to attorney's fees and costs imposed in this case pursuant to the Michigan offer of judgment statute or was

the exception limited to fees, costs and expenses related to cases filed by prisoners pursuant to 28 U.S.C. §1950(b).

Noting that the only other reported decision was <i>South Bend Community School Corp. v. Eggleston,</i> 215 B.R.

1012 (N.D. Ind. 1997), the court undertook a review of the §523(a)(17) applying traditional roles of statutory

construction, as the statute is "not clearly drafted." The court held that the bankruptcy exceptions are to be

construed narrowly and limited the exception to <i>in forma pauperis</i> proceedings and other similar actions brought by

prisoners.

<h3>Miscellaneous</h3>

<ul>

<li> <i>In re Howard Furniture Inc.,</i> 222 B.R. 795 (Bankr. N.D. Miss. 1998) (11 U.S.C. §724(b) permits a chapter

7 trustee to subordinate a pre-petition tax lien to the payment of enumerated priority claims when insufficient funds

exist with which to pay administrative and priority claims, citing <i>In re Dowco Petroleum Inc.</i> 137 B.R. 207

(Bankr. E.D. Tex. 1992));

</li><li> <i>In re Detrano,</i> 222 B.R. 685 (Bankr. E.D.N.Y. 1998) (The bankruptcy court refused to enforce pre-petition

settlement agreement which provided that obligations under the agreement would be non-dischargeable in

bankruptcy as the settlement agreement which was a contract and the clause regarding non-dischargeability was

unenforceable against federal bankruptcy policy);

</li><li> <i>In re LaBRUM &amp; Doak L.L.P.,</i> 222 B.R. 749 (Bankr. E.D. Pa. 1998) (Chapter 11 debtor partnership's

adversary proceeding seeking a declaratory judgment to approve proposed allocation of the tax recapture liabilities

among its existing and former partners is a core matter);

</li><li> <i>In re Litton,</i> 222 B.R. 788 (Bankr. W.D. Va. 1998) (Chapter 11 plan has not been substantially

consummated where the debtor, which had suffered substantial change in circumstances, had made one payment to

the secured lender under the plan but had not made any other payments to other secured, unsecured or priority

creditors and which had not transferred all or substantially all of the property proposed to be transferred by the

original plan could modify plan);

</li><li> <i>In re The Apollo Group,</i> 224 B.R. 48 (Bankr. E.D. Mich. 1998) (Counsel for the debtor out of possession is

not subject to court approval and estate might be obligated to pay for services which benefit the bankruptcy estate as

actual and necessary costs or expense of preserving the estate);

</li><li> <i>In re Sansom,</i> 224 B.R. 49 (Bankr. M.D. Tenn. 1998) (Reasonable reliance is not established when the

creditor allows an extension of credit simultaneously with receipt of financial data);

</li><li> <i>In re Schmitz,</i> 224 B.R. 149 (Bankr. D. Mont. 1998) (Knowing failure to disclose current married name on

bankruptcy schedules is material falsehood sufficient to deny debtor's discharge); and

</li><li> <i>In re Haase,</i> 224 B.R. 673 (Bankr. C.D. Ill. 1998) (Offsetting against the debtor's account after bank

discussed debtor's possible financial difficulties precluded finding that the resulting payment was in the ordinary

course of business).

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