In In Growe Ex Rel Great Northern Paper v. Bilodard, 325 B.R. 490 (D.
Maine 2005), a defendant in an adversary proceeding filed by a chapter 7 trustee
seeking recovery of a preference or fraudulent conveyance moved for withdrawal
of the reference solely on the basis of a refusal to consent to a jury trial
in front of the bankruptcy judge. Chief District Judge Signal found that immediate
discretionary withdrawal of the reference was not required, as the proceedings
were at an early stage and the trustee was asserting similar “core”
claims in more than a dozen similar actions. The motion was denied, with leave
to re-file when the bankruptcy court could certify that the adversary proceeding
was ready for trial. This is a variation on the procedure whereby the reference
is withdrawn but the bankruptcy court is designated by the district court to
handle all pretrial matters, including ruling on dispositive matters. The decisions
in In re Ha-Lo Industries Inc., 326 B.R. 116 (Bankr. N.D. Ill. 2005),
and In re Holcomb Health Care Services LLC, 329 B.R. 622 (Bankr. M.D.
Tenn. 2004), show the dilemma that defendants may face in trying to preserve
a right to a jury trial. Following the reasoning in Blackwell v. Deloitte
& Touche LLP, 279 B.R. 818 (Bankr. W.D. Tex. 2002), Bankruptcy Judge
Jack B. Schmetterer in Ha-Lo held that a party may waive its right
to a jury trial by failing to timely move to withdraw the reference. In Ha-Lo,
the adversary proceeding had been scheduled for trial for more than six months,
several pre-trial issues had been adjudicated, discovery had closed and a pretrial
status conference was scheduled in a few weeks. In Holcomb, a pre-trial
order had been entered, which provided that all “parties consent to final
disposition of this contested matter by the bankruptcy court.” In an amended
pre-trial order, the defendants unilaterally included an issue as to whether
the reference should be withdrawn for a trial before a jury. However, despite
these contrary positions, the defendants did not ever file a motion to withdraw
the reference. Accordingly, Chief Bankruptcy Judge George C. Paine II
held that any right to a jury trial had been waived.

Chapter 13 Debtor’s Pre-Pay Motion Is Not a Plan Modification
 In In re Miller, 325 B.R. 539 (Bankr. W.D. Pa. 2005), Bankruptcy Judge
Warren W. Bentz considered a chapter 13 debtor’s motion to refinance
the debt securing her principal residence and to use the proceeds to pre-pay
all remaining obligations under her plan, which did not provide for payments
to unsecured creditors. The chapter 13 trustee objected, arguing that the motion
constituted a modification of the chapter 13 plan and/or that the “best
efforts” test of §1325(b)(1)(B) was, in essence, a continuing obligation
and that the debtor should continue to use any disposable income created by
the refinancing to make plan payments. The court rejected both arguments, holding
that a voluntary early pay-off of a confirmed plan is not a modification where
the debtor does not seek any change in the payment amount and “actually
increases the economic worth by paying the contractual obligations due under
a confirmed plan earlier than promised.” Further, following In re Richardson,
283 B.R. 783 (Bankr. D. Kan. 2002), Judge Bentz held that “absent a change
in the debtor’s financial fortunes, the debtor’s pre-petition creditors
are entitled only to those distributions provided under the confirmed plan.”
A contrary result was reached in In re Keller, 329 B.R. 697 (Bankr. E.D.
Cal. 2005). In Keller, the unsecured creditors had been promised “no
less than a 31.5 percent dividend” from the debtor’s disposable
income. As with Miller, the plan did not provide for any increased payment
to creditors as a result of the sale or refinancing of the residence. Unlike
Miller, however, the Keller plan mandated that “unless all
allowed unsecured claims are paid in full, the plan shall not terminate earlier
than the stated term or 36 months, whichever is longer.” The Keller
debtors also did not file a motion to modify their plan. Chief Bankruptcy Judge
Michael S. McManus cast the issue as “whether it is permissible
to pay off a chapter 13 plan within a significantly shorter period of time than
required by the confirmed plan.” Disagreeing with cases that permit pre-payment
of plan payments without a plan modification, Judge McManus held that such a
position would also allow a debtor to unilaterally cease making monthly payments
and pay all plan obligations in one lump sum in the last month of the plan.
“So, the debtors in this case have a choice. Their motion to borrow will
be approved but if they also wish to complete their confirmed plan with an accelerated
lump sum payment, it must be sufficient to pay unsecured claims in full. Alternatively,
assuming the debtors are able to convince the court that, given their particular
economic circumstances, payments for less than three years without paying unsecured
claims in full satisfies §1325(a)(3), they must modify their plan.”

Creditors’ Committee Can’t Sustain Disputes of Enterprise Value
 In In re Heilig-Meyers Co., 328 B.R. 471 (E.D. Va. 2005), the creditors’
committee appealed from a decision that the debtors were solvent at the time
of the alleged preferential transfers. During the trial, the bankruptcy judge
was unable to “wholly endorse” the conclusions reached by the two
valuation experts, who had a disparity of more than $550 million. The bankruptcy
court undertook its own balance-sheet analysis, starting with the debtors’
balance sheet prepared according to GAAP, then reduced that amount to reflect
accounts that were delinquent by more than 90 days. Next, the court modified
the values, asset by asset, to more accurately reflect the debtors’ financial
condition based on other available evidence and then drawing on the “best
elements” of each expert’s report while rejecting any reliance on
liquidation values or values that took into account post-petition events. Finally,
the bankruptcy court relied on one of the expert’s business enterprise
valuation to corroborate the court’s balance-sheet test. District Judge
Spencer was unconvinced that the finding of solvency was “clearly erroneous.”
 Sarbanes-Oxley Retroactive: Fraud Claims Excepted from Discharge
 In In re Weilein, 328 B.R. 553 (Bankr. N.D. Iowa 2005), the issue was
the applicability of §523(a)(19)—which makes a debtor’s obligations
on securities fraud claims nondischargeable—to pending cases. Chief Bankruptcy
Judge Paul J. Kilburg held that there is “no doubt” that Congress
intended to make this section, adopted as part of the Sarbanes-Oxley Act in
2002, applicable to all securities fraud judgments, orders or settlement agreements
that arose after the enactment of Sarbanes-Oxley, regardless of whether they
arose before or after the filing of the bankruptcy petition. As a result, counterclaims
asserting securities fraud issues were excepted from discharge and remained
viable in a state court action as such claims did not have to be reduced to
a judgment, order or settlement prior to the commencement of the bankruptcy
case.
 Miscellaneous

• In re Pettle, 410 F.3d 189 (5th Cir. 2005) (bankruptcy court
did not abuse its discretion by not granting creditor relief from judgment based
on creditor’s voluntary decision to dismiss nondischargeability proceeding);
• In re Strada Design Assoc. Inc., 326 B.R. 229 (Bankr. S.D.N.Y.
2005) (chapter 7 debtor’s legal malpractice and breach-of-contact causes
of action for negligent advice related to filing for relief under chapter 7
constituted property of the estate);
• In re The IT Group Inc., 326 B.R. 270 (Bankr. D. Del. 2005)
(payments by general contractor to subcontractors did not constitute a transfer
of the debtor’s interest in property under §547, as funds were subject
to a statutory trust);
• In re Hechinger Inv. Co. of Delaware Inc., 326 B.R. 282 (Bankr.
D. Del. 2005) (pre-petition payments made to creditor pursuant to agreement
between the debtor and creditor, which reduced credit terms, did not qualify
as payments made within the ordinary course of business);
• In re Mirant Corp., 326 B.R. 354 (Bankr. N.D. Tex. 2005) (creditors’
committee entitled to expedited production under Rule 2004 due to imminent ex-piration
of statute of limitations);
• In re Dairy Mart Convenience Stores Inc., 411 F.3d 367 (2d Cir.
2005) (ex parte Young exception applied to assertion of sovereign immunity
by state officials, who refused to recognize the debtor’s timely filing
of reimbursement claim under §108).

• In re Smith, 325 B.R. 498 (Bankr. D. N.H. 2005) (obligation
on automobile lease had to be included in unsecured debt for purposes of calculating
eligibility for chapter 13); and
• In re 5900 Associates L.L.C., 326 B.R. 402 (E.D. Mich. 2005)
(debtor was not liable for fees and expenses incurred by bankruptcy counsel
in previously dismissed chapter 11, where bankruptcy court never entered an
order approving such fees).

Journal Authors

Deborah D. Williamson

Journal Date

Wednesday, February 1, 2006 - 12:00

Bankruptcy Rule

valuation

2006

none