Benchnotes Apr 2001

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… Housing Finance Agency v. Evora,</i> 255 B.R. 336 (D.
Mass. 2000)</a>, a chapter 13 plan was confirmed that provided that the secured
creditor would receive the value of its secured claim ($80,000) over the life
of the plan. The unsecured balance of the claim was previously discharged under
chapter 7. The chapter 13 plan provided for payments totaling $99,640.20,
which was the $80,000 secured claim plus interest at 9 percent. Approximately
two years later, the debtors sought to modify the plan to provide for payment in
full of the $80,000 through a refinancing of the property, which had doubled
in value. The creditor filed an objection and sought to have the property and its
secured claim revalued in light of the increase in the value of the property.
Relying on cases that did not permit debtors to shift the risk of depreciation of
collateral to the creditor, the bankruptcy court refused to allow the finance company
to shift the burden of appreciation to the debtors. The district court held that
there was nothing in the Bankruptcy Code or in case law to suggest that a secured
claim could be re-determined. Noting that while §1329(a)(1) provides that a
plan may be modified to increase or reduce the amount of payments, there is no
provision that a plan may be modified to increase or reduce the amount of a secured
claim. Further, valuation of the secured claim was adjudicated by the order of
confirmation and is <i>res judicata</i> as to claim determination. Thus, the court found
that §1327(a) binds the creditor to the amount originally allowed and there is
no provision for a "second bite at the apple." The court also rejected the argument
that if a plan is being modified pursuant to §1329, providing for an acceleration
of payments, it must still meet the provisions of §1325(a) and must distribute
the secured value as of the effective date of the modification, noting there was
absolutely no case law to endorse this reading of the statute and, in fact, there
were a number of courts that had adopted the opposite view.

</p><h3>Franchise Agreement Rejection Does Not End Debtor's Obligation</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… Speedy Inc. v. Morse,</i> 256 B.R. 657 (D. Mass. 2000)</a>,
District Judge Gorton addressed an issue raised by a franchisor seeking relief from
the automatic stay in order to enforce its rights under a non-compete clause in
a franchise agreement with the chapter 7 debtor. It was uncontested that the
franchise agreement had been rejected as a result of the debtor's failure to assume.
However, the court held that rejection of the franchise agreement did not terminate
the debtor's obligation under the non-compete clause, noting that the very purpose
of the covenant is to govern the relationship between the parties after the demise
of the underlying contract. Further, the court held the right to enforce that the
non-competition provision is not a "claim" under §105(5)(b).

</p><h3>Recoupment Against Fraudulent Transfer Not Applicable</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Rand Energy Co.,</i> 256 B.R. 712 (Bankr. N.D. Tex.
2000)</a>, Bankruptcy Judge Steven A. Felsenthal addressed a complaint brought
to recover a pre-petition overpayment. The debtor had originally brought a motion
to compel turnover of the overpayment and belatedly asserted a fraudulent transfer
claim. The court, having reviewed the standards of the Fifth Circuit for
amendment, allowed the fraudulent transfer claim to be prosecuted. The court found
that it was uncontested that the defendant had overpaid two invoices for services
in connection with the drilling of the Dyess Well. Apparently, it was also
uncontested that after the bankruptcy filing, the defendant discovered the overpayment
and, rather than returning funds to the debtor, applied the overpayment to
pre-petition and post-petition services on the Williamson Well. The defendant tried
to argue that the transfer should be treated like a retainer or a deposit.
Unfortunately, under these facts, neither party realized the overpayment was made
and, therefore, neither party intended to treat it as a deposit on services related
to a different well or as a retainer against generalized future services.
Accordingly, the court found there was no general issue of material fact of value
and that the debtor did not receive any value for the transfer of funds as a
result of the overpayment. The defendant moved for set-off. Relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… v.
Newton,</i> 737 F.2d 1343 (5th Cir. 1984)</a> and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re J.R. McConnell
Jr.,</i> 934 F.2d 662 (5th Cir. 1991)</a>, which support the proposition
that a creditor cannot set-off the value of property deemed transferred as a
fraudulent conveyance against its pre-petition claim, the court deemed the relief
requested. However, those cases do recognize the right to recoup against a
fraudulent transfer. However, in this case, the defendant had not alleged a
recoupment, and there were separate contracts for the two wells. Thus, recoupment
would not be applicable. Finally, the court did rule in favor of the defendant,
finding that the administrative claim for the post-petition well services would not
be subject to disallowance under §502(d).

</p><h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Kitty Hawk Inc.,</i> 255 B.R. 428 (Bankr. N.D. Tex.
2000)</a> (claims under Worker Adjustment and Retraining Notification Act (WARN)
for failure to provide allegedly requisite 60-day notice prior to laying employees
off one or two days before chapter 11 filing arose pre-petition and are not
entitled to priority under §507(a)(3));

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Seddon,</i> 255 B.R. 815 (Bankr. W.D.N.C. 2000)</a>
(Civil Service Retirement System (CSRS) benefits are excluded from the
bankruptcy estate of the federal employee/plan participant, and such exclusion also
applies to benefits payable to a plan participant's ex-spouse pursuant to a marital
property settlement);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Kayes,</i> 255 B.R. 819 (Bankr. E.D. Va. 2000)</a> (as
ERISA-qualified plans do not become part of the bankruptcy estate, the Internal
Revenue Service cannot claim to be secured because it has an alleged lien on such
property);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Petrucci,</i> 256 B.R. 704 (Bankr. D. N.J. 2001)</a>
(non-dischargeable complaint constituted "informal proof of claim" as being in the
nature of a written demand on estate that was filed with the bankruptcy court and
expressed intent to hold debtor liable); and

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Southern Cinemas Inc.,</i> 256 B.R. 520 (Bankr. M.D.
Fla. 2000)</a> (statutory cap on claim of lessor for damages resulting from
termination of lease applies to claims against debtors/lessors and against debtors/
guarantors).</li>