Benchnotes Oct 2002
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<h3>Mortgage Servicing Rights and Sales Agreements</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re DMR Financial Services Inc.,</i> 274 B.R. 465 (Bankr. E.D.
Mich. 2002)</a>, Bankruptcy Court Judge <b>Walter Shapero</b> addressed a sale agreement for
mortgage servicing rights. Prior to filing bankruptcy, the debtor entered into a sales
agreement with the purchaser concerning the sale of "servicing portfolios." After filing
chapter 11, the debtor took the position that the contract was a contract to employ
the purchaser as a broker and interim servicer of the mortgages and argued that the
"sale agreement" was an executory contract that could be rejected. The debtor attempted,
through rejection of the contract, to regain possession and ownership of the servicing
rights without returning the purchase price to the purchaser, thus leaving the purchaser
as a general unsecured creditor for $4 million. After analyzing the contract between
the parties, the court held that the sales agreement transferred ownership of the
servicing rights prior to the filing of the bankruptcy case and that the agreement was
not an executory contract that could be rejected by the debtor.
</p><h3>Priority for Severance Claims</h3>
<p>In a case of first impression for the Fifth Circuit, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Phones For All Inc.,</i> 288 F.3d 730 (5th Cir. 2002)</a>, addressed the issue of whether
an employee was entitled to an administrative priority claim based on a severance clause
contained in an employment contract. The employment contract was executed several months
prior to the bankruptcy, and the employee was terminated three weeks after the petition
was filed. The employee argued that his contractual right to severance was an
administrative claim. The Fifth Circuit held that a claim arising under a
pre-petition severance agreement is not entitled to post-petition administrative priority
status, agreeing with the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Circuit (<i>In re Commercial Financial Services Inc.,</i> 246 F.3d 1291, 1294 (10th Cir. 2001)</a>). "To attain such
status, a severance claim 'must have arisen from a transaction with the debtor in
possession' and must then confer a benefit on the debtor's estate." The Fifth Circuit
found the bankruptcy court's reasoning persuasive, noting that "while the general wage
priority section of the Bankruptcy Code clearly specifies and limits priority treatment
of severance payments...the provision according first-priority status to administrative
claims does not.... Congress's omission of severance pay from administrative priority
status must therefore have been deliberate." In addition, the court said that the
employee "earned" the severance pay when he entered into the contract and that the
employee's claim did not represent services that conferred a benefit on the estate.
Thus, under all theories asserted by the former employee, the severance claim was not
entitled to administrative priority.
</p><h3>Chapter Conversion Does Not Restart Objection Period</h3>
<p>In a case of apparent first impression in the Ninth Circuit, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rogers,</i>
278 B.R. 201 (Bankr. D. Nev. 2002)</a>, Bankruptcy Court Judge <b>Linda
B. Riegle</b> held that the conversion of a chapter 13 case to one under chapter 7
does not restart the 30-day period for objections to the debtor's claimed exemptions.
Relying on the Ninth Circuit's opinion in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Smith,</i> 235 F.3d 472 (9th
Cir. 2000)</a>, that conversion from a chapter 11 case to a chapter 7 case does
not create a new 90-day period for objections under Bankruptcy Rule 4003(b),
the court concluded that there is no reason for treating conversion of a case from
chapter 11 to 7 any differently than the conversion of a case from chapter 13
to 7.
</p><h3>General Partner Liable for Debts</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Sewickley Hospitality Ltd.,</i> 278 B.R. 127 (Bankr. S.D.
Tex. 2002)</a>, Bankruptcy Judge Richard S. Schmidt addressed issues concerning the
liability of limited partners on debts incurred by a general partner, acting on behalf
of itself, under Texas partnership law. The debtor, a Texas limited partnership,
contracted with its general partner (K&B) for the management of a hotel property
owned by the debtor. The agreement gave K&B both the sole responsibility and the
sole right to manage the hotel property. K&B failed to pay employee withholding
taxes. In addition to asserting liability against K&B, the IRS claimed that the
debtor was also liable for the unpaid taxes. The court found that K&B was the sole
employer of the employees and undertook its actions as an independent hotel management
company, not in its capacity as the general partner of the debtor. The court also
found that under the Texas Revised Limited Partnership Act, when K&B contracted with
the debtor to be the independent hotel management company, it had the same rights and
obligations as a management company that was not a partner. Since K&B's employment
of the hotel employees was as a non-partner, its retention of these employees was
not an act of the debtor and did not obligate the debtor for any of the tax
liabilities. The court held that the resulting debt for non-payment of the employee
withholding taxes was not an obligation owed by the debtor.
</p><h3>Fiduciary Duties Owed by Debtors' Counsel</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re ICM Notes Ltd. v. Andrews & Kurth LLP,</i> 278 B.R. 117
(S.D. Tex. 2002)</a>, District Judge David Hittner addressed issues concerning
the fiduciary duties owed by a debtor's counsel. The debtor-in-possession
(DIP)entered into a purchase agreement to sell the assets of the corporation,
the debtor subsequently breached the purchase agreement when additional attorney's fees
were included in the final purchase price, and the purchaser terminated the purchase
offer. The debtor's secured creditor sued the DIP's counsel for breach of fiduciary
duties related to the inclusion of the additional attorney's fees in the purchase
agreement. The court held that "whereas an attorney for a DIP may owe a general
fiduciary duty to preserve the bankruptcy estate, this duty cannot be extended to
justify the imposition of a fiduciary duty running from counsel for the DIP
directly to a particular creditor that would support a separate civil action for
breach..." under the circumstances of the case. The court cited <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs.
Foster (In re Dieringer),</i> 132 B.R. 34 (Bankr. N.D. Cal.
1991)</a>, for the proposition that the attorney for the debtor-in-possession
generally owes no fiduciary duties directly to creditors. The opinion contains an
extensive review of cases concerning the duties of counsel for the DIP. As the
court concluded, a "finding that debtor's counsel owes a particular duty to an
individual creditor in a chapter 11 bankruptcy proceeding would prevent counsel from
representing his client in accordance with the provisions of the Bankruptcy Code."
Further, the court observed that a "ruling that counsel of a DIP owes a
fiduciary duty to a particular creditor is contrary to the tenet of the Bankruptcy
Code mandating that debtor's counsel be disinterested."
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Jammo,</i> 283 F.3d 392 (1st Cir. 2002)</a> (creditor's decision
to withhold reaffirmation of secured debt unless debtor agrees to reaffirm other unsecured
debts is not a per se violation of the automatic stay);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re North American Royalties Inc.,</i> 276 B.R. 860 (Bankr. E.D.
Tenn. 2002)</a> (termination of medical and life insurance benefits plan for retirees,
as opposed to rejection of contract, is not subject to the provisions of §1114);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re SAE Young Westmont-Chicago L.L.C.,</i> 276 B.R. 888 (Bankr.
N.D. Ill. 2002)</a> (motion to assume unexpired lease from state agency did not
qualify as "suit" against the state for Eleventh Amendment immunity purposes);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Albert,</i> 277 B.R. 38 (Bankr. S.D.N.Y. 2002)</a>
(non-payment of legal fees, without more, is not usually a sufficient basis to
permit attorney to withdraw from representation);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Williams,</i> 277 B.R. 114 (Bankr. C.D. Cal. 2002)</a>
(creditor holding a preferential transfer in a dollar amount that is "more than
minimal" has an interest materially adverse to that of other unsecured creditors and as
such is not entitled to vote pursuant to §702(a)(2));
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Anton Noll Inc.,</i> 277 B.R. 875 (B.A.P. 1st Cir.
2002)</a> (an "initial transferee" must actually receive the funds, and have full
dominion and control over the funds for their own account, as opposed to receiving
the funds in trust or as an agent);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Personal Finance Corp.,</i> 279 B.R. 523 (S.D. Miss.
2002)</a> (Internet search conducted by defendants held to be "other paper" that started
the 30-day time period for removal pursuant to 28 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §1446(b)</a>);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bethea,</i> 275 B.R. 284 (Bankr. N.D. Ill. 2002)</a>
(former attorneys for chapter 7 debtors did not violate the automatic stay or the
discharge injunction by continuing to pursue collection of their fees pursuant to their
pre-petition retainer with the debtors, post-petition and/or post-discharge);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re WCI Cable Inc.,</i> 274 B.R. 529 (Bankr. D. Ore.
2002)</a> (an arm of the state entitled to assert the sovereign immunity defense
waived that defense when it invoked the jurisdiction of the bankruptcy court by
objecting to the debtor's cash collateral motion and debtor's motion to extend time for
assumption or rejection of non-residential real property leases); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re PRS Ins. Group Inc.,</i> 274 B.R. 381 (Bankr. D. Del.
2001)</a> (debtor's inability to explain the diversion of assets was, at a minimum,
evidence of its incompetence or gross mismanagement, and, at most, evidence of actual
fraud, supporting court appointment of a chapter 11 trustee).
</li>
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