Benchnotes Dec/Jan 2000
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<h3>Cramdown and Lien Avoidance</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Kressler,</i> 252 B.R. 632 (Bankr. E.D. Pa. 2000)</a>, Bankruptcy Judge Thomas M. Twardowski
addressed two issues that frequently occur in chapter 13 cases: (1) Is the holder of a lien that the debtors
proposed to cram down and avoid as totally unsecured a "party in interest" with standing to object to
confirmation even if that creditor filed an untimely claim, and (2) can the debtor use the plan confirmation
process (as opposed to an adversary proceeding) to cram down and avoid the lien? In this case, the secured
creditor had filed an untimely proof of claim that the court had disallowed. Thus, clearly before the court
was the issue of whether a creditor with a disallowed claim can participate in a chapter 13 confirmation as
a "party-in-interest." The court held that disallowing the claim "in no way impacts" the validity of the lien
and placed the creditor in no worse a position than any other secured creditor that failed to file a proof of
claim—<i>i.e.,</i> that after the bankruptcy case was concluded, the creditor may pursue its collateral to satisfy
its lien. Further, the debtor had never filed a motion to determine the value of the lien under §506(a) or a
complaint to avoid the lien under §506(d). After reviewing Bankruptcy Rules 7001(2), 4003(d) and 3012,
the court held that an action to determine the extent, validity and/or priority of a lien or the amount of a
secured claim may not be commenced by way of the plan confirmation process, disagreeing with the courts
that permit a debtor to avoid a lien solely through the plan confirmation process.
</p><h3>D & O Liability</h3>
<p>An area of increasing litigation is claims against the directors and officers of a debtor. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Systems
Engineering & Energy Management Associates Inc.,</i> 252 B.R. 635 (Bankr. E.D. Va. 2000)</a>, a chapter 7
trustee filed a complaint with seven counts against the corporate debtor's former director and chief
executive officer, certain corporate employees and insiders and the sole shareholders of an alleged alter-ego
corporation. The complaint sought to hold the defendants liable on various bankruptcy and state-law
theories and to equitably subordinate their claims against the debtor. After the filing of the adversary
proceeding, the defendant moved to dismiss the complaint, asserting that the claims were "non-core."
Bankruptcy Judge Stephen C. St. John reviewed the general guidelines relating to a determination of
"core/non-core" claims and held that a breach of fiduciary duty, improper distribution of corporate assets,
usurpation of corporate opportunity, business conspiracy to deprive the debtor and its creditors of assets,
business conspiracy to prevent and hinder the debtor from paying its lawful debts, and obligations as they
came due and to pierce the corporate veil were all non-core proceedings. However, the court refused to
dismiss the adversary proceeding as the proceedings were "otherwise related" such that the court could enter
proposed findings of fact and conclusions of law.
</p><h3>Dischargeability of Paternity Arrearages</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re White,</i> 253 B.R. 253 (Bankr. W.D. Ark. 2000)</a>, the issue before the court was the dischargability
of obligations for arrearages ordered under a prior state court paternity order. The paternity order provided
that, although DNA tests conclusively demonstrated the debtor was not the children's father, he remained
liable for accrued child support. Bankruptcy Judge James G. Mixon held that under the terms of §523(a)(5),
dischargability is an issue only with regard to obligations accrued "for support of a child of the debtor."
Since it had been conclusively established that the child support obligations were not for the support of the
child of the debtor, the obligations were dischargeable.
</p><h3>"Bad Faith Per Se" Not Causefor Dismissal in Chapter 7</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Padilla,</i> 222 F.3d 1184 (9th Cir. 2000)</a>, the court held that "bad faith per se" can properly
constitute "cause" for dismissal of a chapter 11 or 13 petition, but not of a chapter 7 petition. Thus, a
chapter 7 individual debtor's alleged credit card "bust-out"—<i>i.e.,</i> alleged accumulation of debt in
anticipation of filing for bankruptcy—is not "cause" for dismissal of a chapter 7 provision, absent any
evidence that the debtor violated any technical or procedural requirements of chapter 7. However, given
that his debts consisting of credit card debt and a mortgage were solely consumer debts, the debtor's
alleged misconduct was of the type contemplated by the more specific bankruptcy code provision of
§707(b), which provides for dismissal of a chapter 7 bankruptcy case for substantial abuse.
</p><h3>Trust Beneficiary Lacks Standing to Sue</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Stoll,</i> 252 B.R. 492 (9th Cir. BAP 2000)</a>, the trustee for the chapter 7 estate engaged brokers
to sell a building owned by the estate, and, upon order of the court, the building was sold. The chapter 7
debtor sued in state court, alleging that the real estate brokers' misconduct resulted in a reduced sale price.
The case was removed to bankruptcy court by the brokers and, on motion to dismiss, was dismissed, and
the decision was affirmed. Ordinarily, a debtor does not have standing to challenge actions affecting the
size of the estate because the debtor has no pecuniary interest in property of the estate. However, where the
estate will return a dividend to the debtor after all creditors have been paid, the debtor then has an economic
interest in the estate that is similar to interests held by the creditors that will be paid from the estate. Under
such circumstances, the debtor normally would have standing to complain about the actions of third parties
hired by the trustee, but only if the creditors of the bankruptcy estate have standing. The court must look
to the nature of the injury for which relief is sought and consider whether it is "peculiar and personal" to
the creditor or "general and common" to the estate. In this instance, the debtor's complaint is that the
property in question would have sold for more than it did but for the alleged wrongdoing of the brokers.
The BAP held that the debtor's position "is analogous to that of a beneficiary of a trust, and that a
beneficiary of a trust generally lacks standing to sue third parties on behalf of the trust."
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Zell,</i> 221 F.3d 955 (7th Cir. 2000)</a> (a significant decision dealing with issues of "knowable"
but unnoticed creditors in the context of future claims in a chapter 7 when complicated by the issues of
fraudulent transfers and derivative actions);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Jamo,</i> 253 B.R. 115 (Bankr. D. Me. 2000)</a> (credit union violated the automatic stay when it
conditioned reaffirmation of home mortgage on reaffirmation of separate dischargeable unsecured debts);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Dery,</i> 253 B.R. 204 (E.D. Mich. 2000)</a> (where eligibility for bonus was conditioned on the
debtor's continued post-petition employment, and the debtor had no enforceable claim to bonus on the
petition date, no portion of the employee bonus the chapter 7 debtor's employer paid in the exercise of its
sole discretion was an asset of the bankruptcy estate);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Williams,</i> 253 B.R. 220 (Bankr. W.D. Tenn. 2000)</a> (unfair discrimination found in chapter 13
plans that (a) provided for interest on non-dischargeable student loan debt and not on general unsecured
claims, (b) classified the debtor's long-term student loan obligations separately from the general unsecured
debt, and (c) accelerated the student-loan obligations so as to be paid in full under the plan, but that
provided for a 30-percent difference in percentage payments to other unsecured obligations);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Womack,</i> 253 B.R. 241 (Bankr. E.D. Ark. 2000)</a> (Eleventh Amendment precluded the debtor
from suing an agency of the state to recover for sanctions for the agency's alleged violation of the automatic
stay, absent its consent or effective waiver);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Stann,</i> 222 F.3d 216 (5th Cir. 2000)</a> (debtor's wages earned after the filing of a chapter 13 petition
and before discharge under chapter 7 are not part of the chapter 7 estate);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Gerwer,</i> 253 B.R. 66 (9th Cir. BAP 2000)</a> (chapter 7 debtor was not entitled to allocate
distributions from the chapter 7 estate to a creditor with both dischargeable and non-dischargeable claims
such that the distribution would be allocated first to the non-dischargeable portion of the claim);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Superior Stamp & Coin Co. Inc.,</i> 223 F.3d 1004 (9th Cir. 2000)</a> (so long as the funds were
advanced on the condition that they be used to pay the specific creditor, the earmarking doctrine will be
applied even though the funds were placed in the debtor's bank account rather than being paid directly to
the creditor by the bank); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Wells Fargo Bank N.A.,</i> 253 B.R. 460 (Bankr. E.D. Cal. 2000)</a> (discharge injunction under
§524 is enforceable by civil contempt, but there is no private right of action for violations of the discharge
injunction as sole remedy is to seek relief under §524).</li></ul>
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