Benchnotes Jun 2002
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<h3>"Insured vs. Insured" Exclusions in D&O Liability Policy</h3>
<p><img src="/AM/images/letters/i.gif" align="LEFT" border="0" hspace="5" vspace="5">n <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Molten Metal Technology Inc.,</i> 271 B.R. 711 (Bankr. D. Mass.
2002)</a>, the bankruptcy court addressed whether it has jurisdiction over a trustee's
adversary seeking a determination that the "insured vs. insured" exclusion in the D&O
liability policies purchased by the debtor were not triggered when the trustee, acting
on behalf of the bankruptcy estate (but not on behalf of the debtor), asserted
claims against the debtor's officers and directors. The court held that the matter was
not core and that it could exercise only "related to" jurisdiction. The bankruptcy
court recommended to the district court that the trustee's claims against the officers
and directors not be excluded from coverage under the relevant insurance policies based
on the "insured vs. insured" exclusions. While the opinion is grounded on Massachusetts
law, it contains an exhaustive analysis of "insured vs. insured" exclusions contained
in many D&O policies.
</p><h3>Gov't. Funds for Crop Losses Are Not Estate Property</h3>
<p>"Timing is Everything" is the theme of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Vote,</i> 276 F.3d 1024 (8th
Cir. 2002)</a>. The debtor did not plant a crop in 1999 because the soil was
saturated. In September, the debtor filed chapter 7. In October, Congress passed
the Omnibus Consolidated Appropriations Act, which in turn funded the Market Loss
Assistant Payment program and the Crop Disaster Program, both in order to compensate
farmers for 1999 losses related to crop disasters. Between November 1999 and
April 2000, the debtor received in excess of $33,000 in payments under these
programs. The trustee filed an unsuccessful motion to compel turnover of the funds.
On appeal, the Eighth Circuit held that, as of the commencement of the case, the
debtor had no rights in any of the payments because, simply put, they did not exist
on the date of the filing of the bankruptcy case, <i>citing</i> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Schmitz,</i> 270
F.3d 1254 (9th Cir. 2001)</a>. In that case, the Ninth Circuit found
that profits from a debtor's sale of fishing quotas were not property of the bankruptcy
estate where the debtor had filed more than one year before the promulgation of the
regulations that entitled him to the fishing quota rights.
</p><h3>Covenant Not to Compete on Personal Services Contract Enforceable</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Alongi,</i> 272 B.R. 148 (Bankr. D. Md. 2001)</a>, the
chapter 7 debtor entered into a pre-petition personal services contract that contained
a covenant not to compete. The personal services agreement was deemed rejected as a
result of the chapter 7 trustee's failure to assume the contract within 60 days.
The chapter 7 debtor then filed a declaratory judgment action regarding her right and
obligations under the agreement. Bankruptcy Judge <b>E. Stephen Derby</b> analyzed the
effect of rejection under §365, noting that the rights and obligations of a debtor
and a non-debtor party to an executory contract are essentially the same after
rejection of the contract as they would have been if the contract was breached by the
debtor pre-petition. The court noted that because a rejected contract is treated as
breached and not terminated, the respective rights and obligations that arise as a
result of the effective breach must be analyzed under state law and under the contract
in question. Under the terms of the contract, the breach did not trigger the covenant
not to compete. Those provisions were triggered upon termination of the contract.
Termination of the contract was not actually initiated until the debtor sent the letter
of resignation, which was not effective until 90 days from the date of the letter.
As a result, the non-competition provisions were activated post-petition, and any
claims arising from these provisions were post-petition claims and were not subject to
the chapter 7 discharge. Thus, the covenant not to compete was enforceable and
damages for breach of that provision could be awarded pursuant to state law.
</p><h3>Undue Hardship for Student Loans</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Speer,</i> 272 B.R. 186 (Bankr. W.D. Tex. 2001)</a>,
Bankruptcy Judge Frank R. Monroe addressed the "undue hardship" standard for
dischargeability of a student loan debt. The debtor had incurred the debt to pay for
vocational training at a trade school that "supposedly provided instruction in aircraft
mechanics and repair." The court noted that of the 50 students in the debtor's
graduating class, less than five were able to pass the mandatory federal test and
secure employment. The court noted that the debtor had attempted other post-graduate
education, albeit unsuccessfully, and was currently employed as a carpenter
assistant/roofer working 40 hours a week in a market that was showing signs of
weakening. The job required him to be outside eight hours a day in temperatures that
could exceed 90 degrees, building houses with closets that were larger than the
travel trailer he lived in. The court noted the travel trailer was owned by his
mother and that his parents often helped with expenses, including the purchase of a
replacement refrigerator. The court also noted that the student loan lender's
pre-petition behavior in granting forbearances was in direct contrast to its
post-petition activities where, as a general rule, the lender rarely agreed to any
type of settlement "even when it is obvious the debtor cannot repay the total debt
with interest within the debtor's lifetime. The most often-heard excuse is that there
is no one at the agency with authority to "make a deal." The court then attempted
to reconcile the undue hardship standard with the underlying fresh-start policy of the
Bankruptcy Code. In addition, the court addressed the standards set forth in
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. New York State Higher Educational Service Corp.,</i> 831 F.2d 395
(2nd Cir. 1987)</a>, which Judge Monroe characterized as "let's make it as tough
as humanly possible to discharge a student loan." The court found that all the tests
were satisfied and that excepting the debt from discharge would impose an undue hardship
within the meaning of §523(a)(8).
</p><h3>Creditor Exception Precluded by §523</h3>
<p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Standing Order with Reasons Regarding Objections to Discharge under 11
U.S.C. §727 and Purported Settlement of Actions,</i> 272 B.R. 917 (W.D.
La. 2001)</a>, involved the appeal of a standing order entered by the bankruptcy
court that precluded the settlement of any complaint to deny the debtor's discharge if
combined with a §523 action, except on payment to the creditor class as a whole.
In other words, a creditor who filed an exception to dischargeability with an
objection to discharge would be precluded, under the standing order, from settling a
§523 or other exception to discharge action. On appeal, the district court held
that while the bankruptcy court is authorized to issue case-appropriate remedies to
resolve the friction between §§727 and 523, it could not issue a standing order
that modified existing substantive rights. As the bankruptcy rules do not prohibit
settlement of a §523 complaint when combined with §727 action, the standing order
inappropriately modified existing substantive rights of creditors.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cincinnati Cordage & Paper Co.,</i> 271 B.R. 264 (Bankr.
S.D. Ohio 2001)</a> (severance benefits that arose from pre-petition executive
employment agreements do not qualify as administrative expense claims, even though the
post-petition services were beneficial to the orderly liquidation of the debtor's
assets);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bame,</i> 271 B.R. 354 (Bankr. D. Minn. 2001)</a>
(marshalling could be enforced against the taxing authorities that had liens again real
estate, thus reducing the unsecured claims of the taxing authorities);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Flooring America Inc.,</i> 271 B.R. 911 (Bankr. N.D. Ga.
2001)</a> (reclaiming seller will not be granted an administrative claim when there
is an undersecured lien on all inventory);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cain,</i> 272 B.R. 304 (Bankr. D. Wyo. 2001)</a> (creditor
with actual knowledge of chapter 7 is guilty of willful violation of automatic stay
due to failure to prevent state court from setting hearing on motion filed
pre-petition);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Welzel,</i> 275 F.3d 1308 (11th Cir. 2001)</a> (over-secured
creditor is entitled to reasonable fees as part of its secured claim, and the balance
of unreasonable contractual fees are to be treated as an unsecured claim);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Mishrer,</i> 276 F.3d 375 (7th Cir. 2002)</a> (absent
exceptional circumstances, bankruptcy court may not use its equitable powers under
§105 to supplement the six statutory requirements for confirmation of a chapter 13
plan); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Marvel Entertainment Group Inc.,</i> 273 B.R. 58 (D. Del.
2002)</a> (debtor's subsidiary was unsuccessful in attempt to obtain the value of lost
future net operating losses generated by subsidiary while it was a member of parent's
consolidated tax group).
</li></ul>
<hr>
<h3>Footnotes</h3>
<p><small><sup><a name="1">1</a></sup></small> Board-certified in business bankruptcy by the American Board of Certification. <a href="#1a">Return to article</a>
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