Benchnotes Nov 2001

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Nov 2001

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In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Vote, 261 B.R. 439 (8th Cir. BAP 2001)</a>, the chapter
7 trustee moved to compel turnover payments that the debtor farmer received
post-petition, pursuant to a disaster-relief program that was enacted after the
petition date. The court noted that §541(a)(1), although broad in scope, is
not without limits; it is restricted by the plain language of the statute to interests
that exist as of the commencement of the case and is further limited by scope and
definition given to the phrase "all legal and equitable interests." Although the
payments were tied to the pre-petition failure of the debtor's crops, as of the
commencement date the debtor had "at most, an expectation [that] Congress would enact
legislation authorizing such payments," which expectation did not rise to the level of
any "legal or equitable interest" in property. Thus, the motion for turnover was
denied.

<h3>Claims Against Trustee for Estate Administration Mishandling</h3>

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Richman v. Batt, 265 B.R. 416 (E.D. Pa. 2001)</a>,
District Judge Buckwalter addressed the intersection of claims brought against the
chapter 7 trustee for the mishandling of the administration of the estate and claims
filed against the bankruptcy trustee based on acts committed for the purpose of
operating the debtor's business. The court noted that the Barton doctrine, which arose
out of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Barbour, 104 U.S. 126, 129 (1881)</a>, precludes a
party from bringing suit against a court-appointed bankruptcy trustee for acts done in
an administrative capacity without first obtaining leave from the court that appointed
the trustee. The court noted that there is a narrow exception to this rule under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §959(a)</a>, which authorizes suit in a non-appointing court without leave
from the appointing court where the suits were based on acts of the trustee committed
for the purpose of operating a debtor's business. The court noted that the exception
would be appropriate in situations where, for example, a plaintiff brings a negligence
case against a trustee operating a debtor's retail store in which the plaintiff was
injured. The court noted that under the facts of this case, where the cause of
action was asserted for a breach of the trustee's duties while serving as the trustee
of the bankruptcy estate (although "faintly sounding" in breach of fiduciary duty and
fraud), appear to be wholly unrelated to carrying on the debtor's business and
therefore do not fit within the statutory exception. As the claims do not fit within
the statutory exception, the plaintiff is required to seek leave of the appointing
court, and failure to obtain leave of the appointing court left the court with only
one recourse, which was to dismiss the case.

<h3>Arbitration Award Claims</h3>

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Robinson, 265 B.R. 722 (6th Cir. BAP 2001)</a>, addresses the
increasingly interesting intersection between arbitration and bankruptcy. In this case,
the issue on appeal was (a) whether the bankruptcy court abused its discretion or
otherwise erred when it decided there were no grounds warranting revocation of an
arbitration award and (b) whether the bankruptcy court erred when it ruled that res
judicata barred the debtor's objection to the claim. Pre-petition, the debtor/farmer
entered into contracts obligating him to deliver a certain amount of grain to Landmark,
whose contracts contained an arbitration clause and that further provided that the decision
and award shall be "final and binding." Prior to the filing of the bankruptcy petition,
Landmark had cancelled the contract, the debtor responded with a claim for damages, and
the action was ultimately referred to arbitration. The arbitrators found that the debtor
had breached the contracts and awarded Landmark in excess of $219,000. The debtor
did not file a motion to vacate the award, and Landmark did not file a judicial action
to confirm the award. Subsequently, the debtor filed chapter 12, Landmark filed a
claim based on the arbitration award, and the debtor objected. The bankruptcy court held
that the debtor had failed to allege or prove any specific facts warranting a revocation
of the arbitration award and also found that res judicata precluded the bankruptcy court
from addressing the merits of the debtor's objection to the claim. The BAP examined
each of the debtor's arguments challenging the arbitration award. It initially noted that
the bankruptcy court was without subject-matter jurisdiction to review the decision of the
state court, as the debtor in Landmark had "signed contractual documents" and that
"reasonable minds cannot differ on the question of whether the arbitration clause is
included in the contracts." Pursuant to the Rooker-Feldman doctrine, a state court
decision that refers contractual disputes to arbitration is beyond collateral attack in the
bankruptcy court. Additionally, any complaint that the debtor was forced into arbitration
rather than judicial proceedings was also held to be beyond bankruptcy court or BAP
jurisdiction, regardless of the debtor's arguments that the arbitration clause was allegedly
hidden or that he was not otherwise fully informed. The court then reviewed the debtor's
argument that the arbitration was flawed because of an inherent bias, noting that
pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §10(a)(2)</a>, in order to establish bias, there must be
a showing of "evidence partiality." Relying on Sixth Circuit precedent, the court found
that the debtor did not satisfy his burden to show that "a reasonable person would have
to conclude that an arbitrator was partial to one party to the arbitration." The court
then addressed whether the arbitrators had exceeded their authority. The Sixth Circuit
has previously stated that such an argument must be grounded in the Federal Arbitration
Act and that a federal court may set aside an arbitration award only upon a finding
that certain statutory or judicial grounds are present. Merely arguing that the arbitrators
misinterpreted the contracts at issue or that the arbitrators made a mistake, either of
fact or of law, fails. The court also held that the absence of pre-bankruptcy judicial
confirmation of an arbitration award is "not significant." Judicial confirmation may be
important for collection purposes under the FAA, but it is not required for purposes
of recognizing the arbitration award.

<h3>Rooker-Feldman Doctrine and Res Judicata</h3>

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Brazelton Cedar Rapids Group LC, 264 B.R. 195 (Bankr.
N.D. Iowa 2001)</a>, the creditor obtained a pre-petition state court default
judgment. Subsequent to the filing of the chapter 11 case, the debtor objected to
the allowance of the creditor's claim. The bankruptcy court proceeded under two separate
theories. First, looking at the Rooker-Feldman doctrine, the court concluded that the
debtor had had an opportunity to present its defense in the state court case but failed
to do so. The bankruptcy court held that by objecting to the creditor's claim, the
debtor was now attempting to convince the bankruptcy court that the state court was wrong
in finding that the debt exists. Thus, a finding in favor of the debtor on its
objection to the creditor's claim necessarily would entail overturning the state court
judgment and, thus, violates the tenets of the Rooker-Feldman doctrine. Thus, the
court found that it did not have subject-matter jurisdiction to hear and consider the
debtor's objection to the amount of the claim. The court then went on to consider the
question of claim preclusion. The Rooker-Feldman doctrine and claim preclusion are closely
related legal concepts. However, claim preclusion is a narrower doctrine because it
requires a finding of res judicata and thus a finding that there was a final judgment
on the merits. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Ferren, 227 B.R. 279 (8th Cir. BAP 1998)</a>,

aff'd., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 559 (8th Cir. 2000) (per curiam)</a>. "Additionally,
res judicata requires an examination of the law of the state in which the judgment was
entered to determine whether that state would give that judgment preclusive effect against
the claims asserted in the federal action, while Rooker-Feldman is based solely on
federal law. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Furthermore, the court must find that the party against whom the
defense is raised had a full and fair opportunity to pursue its claim in the previous
state court proceeding. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; In contrast, Rooker-Feldman does not concern itself with
whether procedural due process existed in the state court proceedings. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Finally,
claim preclusion is an affirmative defense, whereas Rooker-Feldman is a jurisdictional rule
and cannot be waived by the waiving party. Id." The court went on to hold that under
applicable state law, the debtor would be precluded from disputing the default judgment,
and thus, that the debtor was precluded from attempting to assert defenses in the
bankruptcy court by way of its claims objection.

<h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cooper, 263 B.R. 835 (Bankr. S.D. Ohio 2001)</a>
(pre-petition personal injury attorney who had knowledge of debtor's chapter 7 filing,
but settled claim without ever seeking the approval of the bankruptcy court or chapter
7 trustee, was jointly and severally liable to the estate for the full amount of
settlement proceeds);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Shade, 263 B.R. 861 (C.D. Ill. 2001)</a> (fleeting
embarrassment as a result of violation of the automatic stay does not allow for
compensatory damages but may nevertheless entitle individual debtor's entitlement to
attorney fees and punitive damages under §362(h));

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hartz Foods Inc., 264 B.R. 33 (Bankr. D. Minn.
2001)</a> (fact that seller did not follow its demand for reclamation by commencing
adversary proceeding to reclaim goods did not extinguish its rights under state law or
reclamation provision of the Bankruptcy Code);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Carlson, 265 B.R. 346 (Bankr. D. R.I. 2001)</a> (filing
of the 2004 notice against the chapter 7 individual debtor in a related chapter
7 does not violate the automatic stay since the 2004 is not an act against the
debtor, but is merely a discovery proceeding in the corporate bankruptcy case of the
company of which the debtor was the majority shareholder and president and who was an
appropriate person to be examined under Rule 2004 in the corporate case);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, Roebuck & Co. v. Spivey, 265 B.R. 357 (E.D.N.Y.
2001)</a> (while consensual redemption agreements do not require bankruptcy court
approval, the bankruptcy court has the power in appropriate circumstances to require
judicial approval of even consensual redemption agreements; however, an order rejecting
such a consensual redemption agreement solely on grounds that no motion for approval has
been filed was an abuse of discretion);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Singer Furniture Acquisition Corp., 265 B.R. 458 (Bankr.
M.D. Fla. 2001)</a> (Rule 9011 sanctions are not imposed on the corporate
debtor's president where the president relied on the advice of counsel, did not provide
attorneys with any false information and was not shown to be motivated by ill will
or malice. However, sanctions were imposed on the law firm representing the debtor
as the interpretation of the purpose of chapter 11 and the legitimacy of filing of
a petition was purely a legal matter that even a sophisticated businessman was not
expected to know and reliance on counsel was justified);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Merlo, 265 B.R. 502 (Bankr. S.D. Fla. 2001)</a>
(proposed debtor who did not hold resident alien status and who is not entitled to
obtain a social security number could nevertheless file for chapter 13 relief even
though there is no social security number to disclose);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Lernout & Hauspie Speech Products N.V., 264 B.R. 336
(Bankr. D. Del. 2001)</a> (§510(b), which provides for mandatory
subordination of claims arising from the purchase and sale of securities of the debtor
or debtor's affiliates, may be subject of a subordination action even where the claim
has not yet been allowed and the appropriate procedural vehicle for such a subordination
issue is a contested matter rather than an adversary proceeding);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Parffrey, 264 B.R. 409 (Bankr. S.D. Tex. 2001)</a> (once
the debtor has completed his payments under a confirmed chapter 13 plan, the court has
no discretion other than to grant discharge, notwithstanding failure of debtor to pay
post-petition taxes); and

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re O'Connor, 258 F.3d 392 (5th Cir. 2001)</a> (under Louisiana
law, a partnership agreement was not assumable absent the partner's consent; the
agreement passed through bankruptcy unaffected to the debtor and not the trustee).
</li></ul>

<hr>

Journal Authors

Deborah D. Williamson

Ronald Hornberger

Journal Date

Thursday, November 1, 2001 - 12:00

Bankruptcy Rule

2001