Benchnotes Nov 2002
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<h3>Gap Period Loan Payments</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bankvest Capital Corp.,</i> 276 B.R. 12 (Bankr. D. Mass.
2002)</a>, the committee sought to recover post-petition loan payments the debtor
had made to the lender during the gap period. The lender filed a proof of claim
alleging that as of the petition date, the debtor owed the lender in excess of $15
million plus pre-petition interest calculated at default rates and collection costs. In
its proof of claim, the lender listed the value of the collateral securing the loan
as "undetermined." During the gap period, the lender had received and applied in
excess of $2 million when it knew of the bankruptcy. Thereafter, the lender
conditionally transferred "all right, title and interest" in its claim. The sale
documents indicate that all claims "whether known or unknown" against the borrower also
transferred. After confirmation, the committee, the debtor and the lender continued
"their battle over the post-petition payments." The lender's claim that the plan did
not preserve the avoidance action under §549 was rejected by the court. The court
also noted that once the lender sold its claim, it lacked standing to object to the
plan based on the treatment of those claims, and therefore it could not have been
"lulled into believing that no adversary was to be commenced" or that it was somehow
"duped into withdrawing its objection to confirmation." However, the court found that
since the lender knew it had a potential claim, while too attenuated to give it
standing as a creditor, it was a party in interest and could have objected to the
confirmation order. Bankruptcy Judge <b>Joel B. Rosenthal</b> then found that the lender
had violated the automatic stay by applying the post-petition payments, and that
payments taken in violation of the automatic stay are void. The court also noted that
the return of the post-petition payments would also need to be accompanied by interest
in order to make the debtor whole. The court noted that once a transfer is void
under §549, the party whose transfer is avoided gets a claim under §502(h).
The lender asserted that its secured claim would be resurrected. The committee responded
that it would be only an unsecured claim, but the court noted that both were
incorrect. Having transferred its claim, the lender was held to not have the right
to any claim. The court noted that although the lender would have had a claim secured
by post-petition payments under §502(h), it sold the right to such a claim when
it sold "all claims, whether known or unknown, related to the claim and all proceeds
derived from any claims." Thus, the court held that the lender must turn over the
post-petition payments plus interest, but has no claim against the estate because such
claim was sold.
</p><h3>Amended Admissions Are at Court's Discretion</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Blount,</i> 276 B.R. 119 (Bankr. N.D. Miss. 2000)</a>,
Bankruptcy Judge <b>David W. Houston III</b> held that the court has considerable
discretion in deciding whether to allow a party to withdraw or amend deemed admissions.
However, discretion must be exercised with a balancing of a two-part test, which
requires determination that (1) presentation of merits will be subserved by allowing
withdrawal or amendment, and (2) the party that obtained the admissions must not
be prejudiced in presentation of its case by the withdrawal.
</p><h3>Amendments to Notice of Removal</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Dixon v. First Family Financial Services,</i> 276 B.R. 173
(S.D. Miss. 2002)</a>, District Judge Barbour addressed a situation where actions
commenced against insurers were removed to federal court based on the debtors' bankruptcy
filings. The debtors/ plaintiffs moved to voluntarily dismiss their claims. The
district court held that the debtors/plaintiffs had failed to disclose state law causes
of action, and thus were equitably and judiciously estopped from pursuing their claims
outside bankruptcy. Therefore, the court could exercise core jurisdiction over the
proceedings. Preliminarily to that ruling, the court noted that the action had been
removed pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§1331, 1334</a> and 1452 on the grounds
that certain plaintiffs had filed for bankruptcy. The court also noted that a defendant
may freely amend the notice of removal within the 30-day period prescribed by
§1446(b), but the ability to amend the removal petition after the 30-day time
limit extends only to amendments to correct technical details. For example, it is
not permissible to remedy a flawed removal petition by adding a new basis for federal
jurisdiction. If a defendant seeks to amend a notice of removal after expiration of
the 30-day time period, it may do so only to clarify the jurisdictional grounds.
In this case, the court held that until a motion to remand is decided, a defendant
is free to supplement its notice of removal in order to clarify the jurisdictional
grounds for removal. Further, as defendants timely alleged bankruptcy as a
jurisdictional ground for removal, supplementing the notice of removal to add the names
of other plaintiffs allegedly involved in bankruptcy cases is not a prohibitive addition
of new jurisdictional grounds, but rather a permissible clarification of an existing
jurisdictional ground for which leave of court is not required.
</p><h3>Attorney Fees Not Authorized Upon Conversion to Ch. 7</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Equipment Services Inc.,</i> 290 F.3d 739 (4th Cir.
2002)</a>, the court addressed an issue of first impression in the Fourth Circuit
dealing with the ability of a debtor's counsel to be paid for services rendered after
conversion to chapter 7. The debtor's counsel had filed an application seeking approval
of attorney's fees in the amount of $2,325.00, $1,000.00 of which,
was earned during the chapter 7 case. The U.S. Trustee objected to any award of
fees to the extent they included compensation for services rendered after the case was
converted to chapter 7, arguing that §330(a) makes no provision for counsel of
a chapter 7 debtor to be compensated by the estate. The bankruptcy court agreed with
the trustee and held that the debtor's attorney is not authorized to be paid from the
bankruptcy estate for services rendered after the case was converted. However, the
bankruptcy court held that the pre-petition retainer was property of the bankruptcy
estate to the extent that it exceeded the total fees allowed to debtor's counsel for
all services, including services rendered after conversion to chapter 7. As such,
the chapter 7 fees could be paid from the retainer. The appeals court held that
§330(a) does not permit payment to counsel for a chapter 7 debtor from assets
of the estate under any circumstance. Recognizing that the circuits are split, the
court held that the 1994 version of §330(a) clearly omits the prior
authorization of compensation to the debtor's attorney from a chapter 7 estate,
agreeing with <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Pro-Snax Distributors Inc.,</i> 157 F.3rd 414 (5th
Cir. 1998)</a>. Further, the court held that the pre-petition retainer, as an
asset of the bankruptcy estate, may not be used for payment of fees incurred during
the post-conversion chapter 7 period.
</p><h3>Customer Can Recoup "Single Transaction" from Debtor</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Motors Corp. v. Perry Gas Companies Inc.,</i> 279 B.R. 824
(S.D. Tex. 2002)</a>, District Judge Hughes addressed an appeal by a customer
who asserted a right of recoupment from sums owing to the debtor for natural gas that
it had actually provided under a supply agreement against "cover costs," including plant
downtime the customer incurred when the debtor informed the customer that they would no
longer be delivering gas. The court noted that the claim on account of the gas
supplied and customer's claim for costs of cover arose out of the identical gas
contract, although the claims arose at different times. The court held that this
contract was a single transaction and therefore the customer could recoup the cost of
cover from the account debt that it owed to the debtor.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Enron Corp.,</i> 274 B.R. 327 (Bankr. S.D.N.Y. 2002)</a>
(in considering a motion for transfer of venue, after the court finds the venue
appropriate, a movant must show by preponderance of the evidence that a transfer of
venue would be either in the interest of justice or more convenient for the parties);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Anderson,</i> 275 B.R. 264 (Bankr. W.D. Ky. 2002)</a>
("earmarking" doctrine is not a defense to a preference action where the debtor used
one credit card to pay off another credit card, since the debtor decided which
creditor would be paid);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rousey,</i> 275 B.R. 307 (Bankr. W.D. Ark. 2002)</a>
(debtor's right to payment from IRA is not entitled to an exemption under
§522(d)(10)(E), since the debtor was entitled to withdraw the proceeds from
the IRAs at any time subject to a 10 percent withdrawal penalty);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Murphy,</i> 282 F.3d 868 (5th Cir. 2002)</a> (proper focus in
determining whether a federally guaranteed student loan debt is non-dischargeable is the
determination of the purpose of a loan, not the debtor's use of the loan funds);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cunningham,</i> 278 B.R. 290 (Bankr. M.D. Ga. 2002)</a>
(abstention was appropriate in a no-asset chapter 7 case where the debtor sought a
determination by the bankruptcy court of debtor's state tax liability);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Foreman,</i> 278 B.R. 92 (D. Md. 2002)</a> (even though the
bankruptcy court's written order denying the debtor's motion for stay pending appeal had
not been entered when the debtor's eviction occurred, the eviction rendered the debtor's
appeal moot);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Coleman Enterprises Inc.,</i> 275 B.R. 533 (Bankr. 8th Cir.
2002)</a> (small business election is void <i>ab initio</i> where debtor's aggregate
non-contingent liquidated secured and unsecured debts exceeded the statutory $2 million
ceiling);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Envisionet Computer Services Inc.,</i> 276 B.R. 1 (D. Maine
2002)</a> (party seeking withdrawal of the reference bears the burden of demonstrating
cause for withdrawal);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hechinger Inv. Co. of Delaware Inc.,</i> 276 B.R. 43 (D.
Del. 2002)</a> (§505(a) specifically grants the bankruptcy court authority to
determine the amount or legality of any tax, and there is no requirement that the
debtor must exhaust available state law revenues as a precondition for obtaining the
ruling on such liability including a determination that sales of real property in a
plan confirmation were exempt from state transfer and recording taxes);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Billingsley,</i> 276 B.R. 48 (Bankr. D. N.J. 2002)</a> (where
student loan is non-dischargeable, a private educational institution does not violate
the automatic stay by withholding the transcript of a student/debtor who has defaulted
on the non-dischargeable loan);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Asousa Partnership,</i> 276 B.R. 55 (Bankr. E.D. Pa. 2002)</a>
(counterclaims that could affect allowance or disallowance of proof of claim are part
of the claims' allowance process and subject to the equitable jurisdiction of the
bankruptcy court);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Chari,</i> 276 B.R. 206 (Bankr. S.D. Ohio 2002)</a>
(allegation that recipients of a transfer was the employee/bookkeeper of the debtor
with knowledge of the inner workings of the business, survived a motion to dismiss
on the grounds that the recipient was not an insider as defined in §101(31));
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Barclay,</i> 276 B.R. 276 (Bankr. N.D. Ala. 2001)</a> (chapter
13 debtor can modify confirmed plan to provide for surrender of motor vehicle to creditor
which surrender would be treated as a one-time, lump-sum payment on the secured claim
but surrender would not be in full satisfaction of the secured claim and the deficiency
that remained would be paid as if it were a secured claim);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re The Home Restaurants Inc.,</i> 285 F.3rd 111 (1st Cir.
2002)</a> (where the court has jurisdiction over the subject matter and the parties,
and the complaint states a specific, cognizable claim for relief, and that the
defendant had "fair notice" and opportunity to object, the court has discretion to
order a default judgment without a hearing of any kind, although the court may choose
to hold the hearing to establish the truth of averments in the complaint);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re National/Northway Ltd.,</i> 279 B.R. 17</a> (Bankr. D. Mass.) (the
fact that the creditor had security interest in property owned by non-debtors is not
a legitimate basis for separate classification);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Salter,</i> 279 B.R. 278 (9th Cir. Bankr. 2002)</a>
(Bankruptcy Appellant Panels are authorized by All Writs Act to issue <i>writs of
mandamus</i>);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Estate of Blackwell ex rel I.G. Services,</i> 279 B.R. 818
(Bankr. W.D. Tex. 2002)</a> (party that demanded jury trial and refused to
consent to having it conducted by a bankruptcy court must take additional step of
moving for withdrawal of the reference or potentially wave the right to a jury
trial); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Mitchell,</i> 279 B.R. 839 (9th Cir. Bankr. 2002)</a>
(foreclosure sale conducted in violation of the automatic stay was void and could not
be validated by post-petition recording of deed, and the statutory exception under
§549(c) could not be invoked by one who purchased debtor's property in good faith
at foreclosure sale conducted in violation of the automatic stay).
</li>
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