Benchnotes Oct 2004

<h4>Post-petition Loan Not in Ordinary Course Under §364</h4>

<p>In <i>In re Ockerlund Construction Co.,</i> 308
B.R. 325 (Bankr. N.D. Ill. 2004), Bankruptcy Judge <b>Jacqueline P. Cox</b> addressed the often
painful intersection of tough laws and hard facts in the context of
administrative claims. In this case, the debtor's president provided
a post-petition loan "emergency advance" so the debtor could
complete a school construction project and pay post-petition premiums due
on the debtor's employees' health and dental insurance. The
court noted that the obligations that gave rise to the "emergency
advance" would have either qualified as post-petition business
expenses made in the ordinary course of business or would have given rise
to an administrative claim. However, the question before the court was
"whether this advance qualified as a valid post-petition extension of
credit to the debtor in accordance with 11 U.S.C. §364(a)-(b)."
The court noted that because prior court approval had not been obtained,
the resolution depended on whether the credit was obtained "in the
ordinary course of business"—not whether the funds were used
for §503(b) administrative expenses. The court found that the
pleadings, evidence and argument failed the "vertical"
dimensions test with regard to "ordinary course of business."
The court also found that while some courts have retroactively approved a
post-petition loan under §§364(b) and 105(a), even those courts
have held that retroactive approval "should be reserved for truly
extraordinary and unusual circumstances." In contrast, other courts
"have gone so far as to say that the case law under the 1898
Bankruptcy Act countenancing retroactive approval on equitable grounds has
been eviscerated under the current Bankruptcy Code." Judge Cox noted
that "equitable powers under 11 U.S.C. §105(a) do not override
specific Bankruptcy Code provisions" and held that retroactive
approval was not permissible and the administrative claim was disallowed.
The next issue was whether the president had a general unsecured claim or
was not eligible for any distribution at all. Relying on <i>Matter of Alafia Land Development Corp.,</i> 40 B.R. 1 (Bankr. M.D. Fla. 1984), the court held, <i>inter alia</i> that
while the definition of "claim" is broad enough to
"encompass an unauthorized post-petition loan," the definition
of "creditor" requires a right to payment prior to the order
for relief. As a result, a holder of a post-petition "claim"
that is not entitled to administrative expense priority cannot be a
creditor, cannot file a proof of claim, and even if he could file one,
cannot by definition have an "allowed" claim as of the petition
date.

</p><h4>Claims Under Labor Agreement Must Be Paid as Administrative Expense</h4>

<p>In <i>In re Colorado Springs Symphony Orchestra Association,</i> 308 B.R. 508
(Bankr. D. Colo. 2004), Bankruptcy Judge <b>Howard
R. Tallman</b> addressed the interrelationship
between §§508(b), 507(a) and 1113 in the context of claims under
a collective bargaining agreement (CBA), which arose post-petition and
pre-rejection. The court held that the two-pronged test that is generally
applied in deciding whether a claim is allowable as an administrative
expense is inapplicable in the context of post-petition obligations arising
under a CBA. Instead, post-petition obligations under a CBA must be paid as
administrative expenses at a rate provided for under the CBA, to the extent
that bargaining unit members complied with their obligations under the CBA.

</p><h4>Shareholder Not a Signatory Is Not Liable Under CBA</h4>

<p>In <i>Hunter v. Philpott,</i> 373 F.3d 873 (8th Cir. 2004), employee benefit funds
brought an adversary proceeding seeking a determination that a
co-shareholder of a corporation should be liable for "fiduciary
defalcation" arising out of the corporation's failure to make
contributions to the funds as required by a CBA. The debtor/shareholder was
not a signatory of the CBA and had not otherwise "assumed status of
trustee with respect to any specific <i>res</i>." As a result, the court held that the debtor did
not stand in a "fiduciary capacity" to the funds within the
meaning of the dischargeability exception.

</p><h4>Environmental Cleanup Administrative Priority Denied</h4>

<p>In <i>In re Insilco Technologies Inc.,</i> 309 B.R. 114 (Bankr. D. Del.
2004), Bankruptcy Judge <b>Kevin J. Carey</b> addressed the issue of whether "the costs to be
incurred by a state environmental agency to clean up an ongoing
environmental hazard on real property once owned and occupied" by the
debtors should be granted administrative expense priority. The court held
that where the debtor has no interest in the property, and any cleanup will
not preserve any estate assets or provide a benefit to the estate since the
property is not property of the estate, "an administrative claim
cannot be allowed."

</p><h4>Standards for Permissive Abstention</h4>

<p>In <i>In re Coho Energy Inc.,</i> 309 B.R. 217 (Bankr. N.D. Tex. 2004), the
debtor filed a post-confirmation adversary proceeding asserting breach of
certain pre-petition operating agreements and pre-petition tortious
conduct. Bankruptcy Judge <b>Barbara J. Houser</b> addressed a motion to dismiss or, in the alternative, for
permissive abstention. Relying on <i>In re Craig's Stores of Texas Inc.,</i> 266 F3d 388
(5th Cir. 2001), and <i>In re U.S. Brass Corp.,</i> 301 F.3d 296 (5th Cir. 2002), the court held that
where the claims dealt with the debtor's pre-petition relationship
with the defendants, the plan contemplated the prosecution of the claims,
and the distribution of the debtor's share of any recovery would be
distributed to creditors; the prosecution of the claims will impact
compliance with or completion of the plan, and thus the tests for
post-confirmation subject matter jurisdiction were satisfied. However, the
court also held that the permissive abstention was appropriate, there was
no basis for federal jurisdiction other than §1334, this was a
non-core proceeding where state law issues "do not merely
predominate, they overwhelm," and the action sought damages for
pre-petition breaches of pre-petition contracts and alleged pre-petition
tortious conduct.

</p><h4>Abstention Appropriate After Dismissal of Debtor/Defendant</h4>

<p>In <i>In re United Petroleum Group Inc.,</i> 311 B.R. 307 (Bankr. S.D. Fla.
2004), Chief Bankruptcy Judge <b>Robert A. Mark</b> held that subsequent dismissal of debtors/ defendants
did not oust bankruptcy court of subject-matter jurisdiction where initial
removal was proper. Courts are prohibited from relying on post-removal
events in determining subject-matter jurisdiction. However, the court did
have to consider the current status of the case in deciding whether
abstention was required under the mandatory abstention provisions of 28
U.S.C.A. §1334(c)(2). As a result, once the debtor/defendants were
dismissed and despite the fact that remaining defendants raised defenses
based on releases contained in the debtors' confirmed chapter 11
plan, there wasn't federal jurisdiction since the outcome of the
claims asserted against these non-debtor third parties would have no effect
on the assets available for distribution to the creditors of the confirmed
chapter 11 cases. The court found that all elements for mandatory
abstention were present and ordered a remand of the proceeding.

</p><h4>Personal Jurisdiction Satisfied by Federal Contacts</h4>

<p>In <i>In re L.D. Brinkman Holdings Inc.,</i> 310 B.R. 686 (Bankr. N.D. Tex.
2004), Chief Bankruptcy Judge Steven A. Felsenthal addressed issues related to personal
jurisdiction over a defendant to a pre-petition cause of action relating to
an alleged breach of contract. The debtor filed an adversary proceeding
seeking to collect on a contract for the sale of goods, and the defendant
asserted that it had no contacts, other than the adversary proceeding, with
the state of Texas, and as a result, the defendant could not be sued in the
U.S. District Court for the Northern District of Texas, invoking Fed. R.
Civ. P. 12(b)(2) made applicable by Fed. R. Bankr. P. 7012. The debtor
asserted that the "forum jurisdiction" is the United States,
not the state of Texas. The court held that even though the merits of the
claim may be determined by the application of state law, the federal court
had subject-matter jurisdiction under the Bankruptcy Code as liquidation of
the claim could have a conceivable effect on the administration of the
bankruptcy estate. Once the issue of federal subject-matter jurisdiction
was resolved, "the determination of personal jurisdiction becomes a
matter of federal contacts, not state contacts" and held that the
defendant had minimum contacts with the United States, relying on <i>Busch v. Buchman, Buchman &amp; O'Brien Law Firm,</i> 11 F.3d 1255 (5th Cir. 1994).

</p><h4>Miscellaneous</h4>

<ul>
<li> <i>In re Parker,</i> 308 B.R. 129
(Bankr. D. Conn. 2004) (while post-bar date amendment to taxing
authority's proof of claim was permitted, the claim was disallowed
due to the binding effect of confirmed chapter 13 plan);

</li><li> <i>In re Ivani,</i> 308 B.R. 132 (Bankr.
E.D.N.Y. 2004) (<i>Rooker-Feldman</i> prohibited bankruptcy court from adjudicating motion
seeking to hold debtor's ex-spouse in violation of the automatic stay
where state court, in exercise of its concurrent jurisdiction, had
previously determined that proceedings by ex-spouse were not subject to
automatic stay);

</li><li> <i>In re APF Co.,</i> 308 B.R. 183 (Bankr.
D. Del. 2004) (payments made on a promissory note were made on an
antecedent debt and thus were for reasonably equivalent value and could not be avoided as a
fraudulent conveyance under §548(a)(1)(B));

</li><li> <i>In re Jay,</i> 308 B.R. 251 (Bankr.
N.D. Tex. 2003) (under Texas law, a deed or deed of trust that is void
cannot pass title or any other interest even to an innocent purchaser);

</li><li> <i>In re Golek,</i> 308 B.R. 332 (Bankr.
N.D. Ill. 2004) (proceeds that a chapter 13 debtor received upon
post-confirmation sale of his residence did not constitute
"disposable income");

</li><li> <i>In re Renaud,</i> 308 B.R. 347 (8th
Cir. BAP 2004) (all-terrain vehicle was a "motor vehicle" for
purposes of certificate of title laws relating to perfection of liens);

</li><li> <i>In re Lawson,</i> 308 B.R. 417 (Bankr. D.
Neb. 2004) (board member and president of credit union breached his
fiduciary duties when he obtained loan in violation of credit union's
rules);

</li><li> <i>In re Wilcox,</i> 310 B.R. 689 (Bankr.
E.D. Mich. 2004) (fiduciary duties that chapter 7 debtor owed to his
corporation, based on his status as officer and director, did not cause him
to stand in "fiduciary capacity" to corporation with respect to
his causing corporation to guarantee a debt incurred by business started by
debtor and his wife);

</li><li> <i>In re Regan,</i> 311 B.R. 270
(Bankr. D. Colo. 2004) (where debtors caused their wholly owned corporation
to fail to remit to subcontractor trust funds that it received from
property owners and to instead use funds for payment of corporation's
general operating and debtors' personal living expenses, claims of
subcontractor were excepted from discharge as debt for debtors'
defalcation while acting in a fiduciary capacity);

</li><li> <i>In re Pittsburgh-Canfield Corp.,</i> 309
B.R. 277 (6th Cir. 2004) (creditor with disallowed reclamation claim was
unsecured creditor that could not invoke the equitable doctrine of
marshalling); and

</li><li><i>In re Banco Latino International,</i> 310 B.R 780 (S.D. Fla. 2004) (reversal of bankruptcy court decision
allowing creditors that deliberately chose to not file contingent
indemnification claims prior to expiration of bar date to file untimely
claims once the amount of the indemnification claims became fixed as a
contravention of "excusable neglect" standard for allowance of
untimely claims in chapter 11 cases).
</li>