Benchnotes Oct 2000
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<h3>Timing of Objection to Sales Free and Clear of Liens</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Roberts,</i> 249 B.R. 152 (Bankr. W.D. Mich. 2000)</a>, Bankruptcy Judge <b>Jeffrey R. Hughes</b> addressed
the provision of §363(f)(2) that provides that a trustee may sell property of the estate free and clear of a lien
if, <i>inter alia,</i> such entity consents. In this case, the trustee noticed a sale of property free and clear of liens,
including liens of three junior interest holders. The senior lienholder supported the sale and in fact had
agreed to a "carve-out" for the benefit of the estate. The court noted that the first lienholder's apparent
motivation was to avoid the necessity of having to eliminate the interest of junior lienholders pursuant to
the much lengthier state foreclosure process. One of the three junior lienholders timely objected, appeared
at the hearing and withdrew the objection upon an agreement of a carve-out for its benefit. The other two
junior lienholders neither appeared nor otherwise consented or objected to the motion. The court noted there
was no indication within §363 itself or the underlying legislative history that Congress intended "consent"
to have any meaning other than that which it is commonly understood to have: to give positive assent. The
court rejected the trustee's argument that a failure to timely object to a properly noticed motion is the
deemed equivalent of consent, stating that if Congress had wanted to substitute "does not object" to consent,
there would be no question that the lienholder had the obligation to act if it did not want the property sold
free and clear. Section 102(1)(B)(i) provides that the "after notice and hearing" requirement is satisfied if
a hearing is not timely requested by a party in interest. However, the court rejected the argument that a duty
to request a hearing can be implied from the common meaning of the word "consent." The court noted that
the confusion of what constitutes consent for purposes of §363(f)(2) is due in part to the requirement that
all sales of estate property outside of the ordinary course must be authorized by the court after notice and
hearing. Although it is "tempting" to conclude that §363(b) imposes on the lienholders the same obligation
that any other party in interest has to come forth and object, the court held that "§§363(b) and 363(f)
address entirely different issues" and held that the sale was not free and clear of the non-consenting junior
lienholders.
</p><h3>Security Interest in Crops Cannot Attach Until Planting</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Siemers,</i> 249 B.R. 205 (Bankr. D. Neb. 2000)</a>, Bankruptcy Judge John C. Minahan addressed
the issue of when a security interest is acquired in growing crops. The debtor sought to avoid a security
interest in growing crops as preference under §547. The court held that federal law controls the
determination of when a transfer is deemed to have taken place. Under §547(e)(2), a transfer is deemed
made at the time the transfer is perfected. Under §547(e)(1)(B), a transfer of an interest in property other
than real property is perfected when "a creditor on a simple contract cannot acquire a judicial lien that is
superior to the interest of the transferee." The priority between the security interest and a judicial lien is
controlled by applicable non-bankruptcy law. Under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Uniform Commercial Code §9-301(1)(b)</a>,
a security interest is not perfected until it attaches, and a security interest cannot attach until, among other
things, the debtor has rights to the collateral. Under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… UCC §9-203(5)(a)</a>, a debtor does not have
rights in growing crops until they are planted. Therefore, the creditor did not have a perfected security
interest until the crops were planted. For the purposes of §547, a transfer of the security interest in the crop
is deemed to have taken place when the crop was planted. Under the facts of this case, this occurred within
the 90 days preceding the commencement of the case. The court noted that §547(e)(3) overrides such cases
as <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Merchants of Indiana Inc. v. Union Bank and Savings Co.,</i> 408 F.2d 209 (7th Cir. 1969), <i>cert.
denied,</i> 396 U.S. 827 (1969)</a>, which had concluded that for purposes of bankruptcy preference avoidance,
a transfer of certain security interest and after-acquired property took place not at the time of perfection, but
rather at the time the security interest was granted.
</p><h3>Constructive Trust Created by Pre-petition Transfer</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Paul J. Paradise & Associates Inc.,</i> 249 B.R. 360 (D. Del. 2000)</a>, Senior District Judge
Schwartz addressed issues surrounding the pre-petition transfer of property to a debtor. It appeared
uncontested that the property was transferred so that the debtor could use the property as collateral to secure
financing to construct a home. No money changed hands at the time of the title transfer, nor did the owner
of the property receive a mortgage on the property. Instead, the debtor executed a note in favor of the owner
of the property, although there were no payments made on the note. At no time prior to the filing of the
bankruptcy did the original owner record any instrument indicating any type of interest in the property. The
original owner of the property filed an adversary proceeding seeking a determination of the ownership of
the lot and equitable relief alleging a resulting trust, constructive trust and/or unjust enrichment. The
bankruptcy court and the district court assumed that imposition of a constructive trust would be warranted
under the facts of this case. The courts then focused on two primary arguments: (1) whether the strong-arm
powers of a chapter 7 trustee under §544 are limited to property transfers <i>from</i> the debtor and thus are not
applicable to transfers of real property <i>to</i> a debtor; and (2) if an equitable interest <i>per se </i>defeated by the
strong-arm powers of the trustee is provided under §544(a). The court noted that the Third Circuit had not
addressed "whether or under what circumstances the trustee, standing in the position of a bona fide
purchaser of real property under §544(a)(3), can exercise his or her strong-arm powers to pull into the estate
property that appears to be excluded from the definition of estate property under §541(d)." Noting that the
leading decision of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Quality Holstein Leasing,</i> 752 F.2d 1009 (5th Cir. 1985)</a>, construed §541(d) prior
to the 1984 amendments in holding that §541(d) trumps §544, the court followed the majority view that
instead has held that property that is not property of the debtor's estate under §541(d) may still be brought
into the estate under §544(a).
</p><h3>Replacing Pre-petition Counsel</h3>
<p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Vouzianas,</i> 250 B.R. 478 (E.D.N.Y. 2000)</a>, involved the chapter 7 trustee's attempt to employ
special counsel of his choice to prosecute the debtor's pre-petition personal injury claims and to replace the
pre-petition counsel who had been engaged more than five years prior to the filing of the bankruptcy
petition. The trustee argued that §327(a) mandates that the trustee be authorized to employ counsel of his
choice. The court held that while §327(a) vests in the trustee the right to appoint special <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, §327(a)</a>
is a limited power that does not give the trustee the absolute right to appoint counsel of his choice with
regard to a pre-petition, personal injury cause of action. The district court supported the bankruptcy court's
finding that it was in the best interest of the estate to allow the debtor to have his choice of counsel and not
interfere with the five-year, apparently amicable attorney-client relationship, as that could be detrimental
to successfully culminating the personal injury action.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re American Preferred Prescription Inc.,</i> 250 B.R. 11 (E.D.N.Y. 2000)</a> (absent authorization in
confirmed plan of reorganization, bankruptcy court did not have jurisdiction to enter post-confirmation
order appointing chapter 11 trustee);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Quanalyze Oil & Gas Corp.,</i> 250 B.R. 83 (Bankr. W.D. Tex. 2000)</a> (the appearance
post-hearing [and post-entry of order] of a "better offer" does not constitute grounds for reconsidering a sale
order under either Bankruptcy Rule 9023 or 9024);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Vitt,</i> 250 B.R. 711 (Bankr. D. Colo. 2000)</a> (cause of action under §549 seeking to avoid
allegedly unauthorized post-petition transfer places burden on the transferee to show transfer was valid);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re L. Bee Furniture Co. Inc.,</i> 250 B.R. 757 (Bankr. M.D. Fla. 2000)</a> (the more established the
debtor's relationship with a creditor, the more that the parties will be permitted to deviate from industry
standards and still come within the safe harbor of ordinary course of business exception to preference
complaints);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… States v. Kubrick,</i> 205 F.3d 1117 (9th Cir. 1999)</a> (<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §2 F1.1(b)(4)(B)</a>, which authorizes
a two-level increase to the base offense level for fraud if the offense involved "violation of any judicial or
administrative order, injunction, decree or process not addressed elsewhere in the guidelines," applies to
fraud based on and concealment of assets in ongoing bankruptcy cases);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re LeBeau,</i> 247 B.R. 537 (Bankr. N.D. Fla. 2000)</a> (determination of when reaffirmation agreement
was "made" involves examination of more than the date the writing is signed by the debtor and may be
"made" upon agreement by the parties and commencement of performance by the debtor prior to the
execution of the written agreement);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Celebrity Home Entertainment Inc., </i>210 F.3d 995 (9th Cir. 2000)</a> (the term "disbursements"
includes post-confirmation disbursements in a chapter 11 case for purposes of calculating the U.S.
Trustee's fees during the post-confirmation period); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Noll,</i> 249 B.R. 568 (M.D. Fla. 2000)</a> (an extension of the bar date for filing objections to
discharge does not authorize an extension of the bar date for dischargeability complaints).
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