Benchnotes Jul/Aug 2000
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<h3>Day-trading Debt Dischargeability</h3>
<p><img src="/AM/images/letters/i.gif" align="LEFT" border="0" vspace="5" hspace="5">n <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rea,</i> 245 B.R. 77 (Bankr. N.D. Tex. 2000)</a>, the creditor-investors brought an adversary proceeding
against a chapter 7 debtor-securities broker, seeking determination that debt arising from the debtor's
day-trading losses was excepted from discharge. Relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Jordon,</i> 927 F.2d 221 (5th Cir. 1991)</a>,
Bankruptcy Judge Steven A. Felsenthal held that the plaintiffs could recover reasonable attorneys' fees
necessary to establish their claim, to the extent authorized by non-bankruptcy law. However, the debtor
conceded the debt including the damages, and thus the litigation concerned only the dischargeability of
that debt. Relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Pipeline Services Co. v. Wilderness Soc'y.,</i> 421 U.S. 240 (1975)</a>, Judge
Felsenthal held that the Bankruptcy Code does not provide for the recovery of attorneys' fees for
dischargeabalty litigation.
</p><h3>Enjoined Guarantor Actions</h3>
<p><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Mendez,</i> 246 B.R. 141 (Bankr. D. P.R. 2000)</a>, involved review of a confirmed plan of
reorganization that provided that actions against a guarantor or co-obligor were enjoined. The plaintiffs
continued their efforts to collect the judgment against such guarantor/co-obligor by filing an action in state
court to attach to the sale of certain realty. The debtors opposed the state court action, claiming that the
plaintiffs were bound by the terms of the confirmed plan, which meant they were enjoined from prosecuting
such a claim as long as the plan was in effect. The state court judge "paralyzed" the plaintiffs' execution
of the judgment. The plaintiffs did not appeal that state court ruling, but instead filed a suit for declaratory
judgment in bankruptcy court stating they were not bound by that provision of the plan. The bankruptcy
court held that it did not have jurisdiction because the state court had already determined the issue. Under
the Rooker-Feldman Doctrine, the court concluded that the relief requested, if granted, would void the state
court's decision or would require the bankruptcy court to determine that the decision was wrong, which
is prohibited under the Rooker-Feldman Doctrine.
</p><h3>State Exemption Provisions</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Stewart,</i> 246 B.R. 134 (Bankr. D. N.H. 2000)</a>, Chief Bankruptcy Judge <b>Mark W. Vaughn</b>
addressed significant legal issues at the "intersection" of New Hampshire law and federal bankruptcy law
regarding exemptions. The court examined the newly enacted New Hampshire exemption provision that
provides that certain assets are exempt from attachment without limitation. The "vexing wrinkle" is that
the statute explicitly provides that there is no exemption from debts arising on or before Jan. 1, 1999. In
<i>Stewart,</i> it was undisputed that most of the debtor's unsecured debts arose before Jan. 1, 1999. The debtor
filed bankruptcy Jan. 29, 1999, after the effective date of the statute. The question before the court was
whether the debtor could elect the state exemption and protect assets from creditors whose claims arose
prior to Jan. 1, 1999. The court conducted a detailed examination of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Weinstein,</i> 164 F.3d 677 (1st Cir.
1999), <i>cert. denied,</i> 119 S.Ct. 2394 (1999)</a>. <i>Weinstein</i> involved a Massachusetts homestead that was
designated by the debtor after the recordation of a judgment. Under Massachusetts law, the homestead
would not be effective against that judgment. <i>Weinstein</i> sought to avoid the judgment lien pursuant to
§522(f). As §522(f) allows the avoidance of a lien only to the extent that such a lien impairs an exemption
the debtor would otherwise be entitled to, the <i>Weinstein</i> court had to decide whether Weinstein was entitled
to the exemption under the Massachusetts Homestead Statute. The <i>Weinstein</i> court held that the
Massachusetts Homestead Statute was pre-empted by §522, which prohibits exempt property from liability
for debts other than those expressly enumerated under §522(c)(1)-(3). Also relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Leicht,</i> 222
B.R. 670 (1st Cir. Bankr. 1998)</a>, the court held that although states can determine the nature and amount
of the property that can be exempted, states may not determine the types of debt to which the exemption
applies as that right has been expressly pre-empted by Congress pursuant to §522.
</p><h3>Excusable Neglect</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re D.A. Elia Const. Corp.,</i> 246 B.R. 164 (Bankr. W.D.N.Y. 2000)</a>, Bankruptcy Judge <b>Michael
J. Kaplan</b> addressed the parameters of "excusable neglect" in connection with the late filing of claims. The
court noted that <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Investment Services Co. v. Brunswick Assoc. Ltd. Partnership,</i> 507 U.S. 380
(1993)</a>, stands for three major propositions: (1) clients may be held accountable for the acts and omissions
of their chosen counsel; (2) excusable neglect is not limited strictly to omission caused by circumstances
beyond the control of the movant; and (3) if the court finds that there was "neglect," then the question of
whether the neglect was "excusable" is an equitable one involving a number of factors. What is also clear
is that if someone chooses to "flout" a deadline, that is not "neglect." The court noted that while neglect
may take the form of an omission, not all omissions are the result of neglect. Omissions may be the result
of choice, mistake, ignorance, naivete, incompetence, accident, coercion, etc. Further, "while one might
'neglect' to read one thing carefully, or neglect to respond to it properly, one may not 'neglect' a whole
sequence and system designed to inform him." The evidence in this case was that counsel (a) ignored every
opportunity and every safeguard that the court, the Code and the Rules set up; (b) obtained erroneous
"understandings" or "beliefs" from someplace else, when all the true answers were available in the public
record or in open court; and then (c) claimed that all of it was "excusable neglect" because admittedly a key
provision in a key notice of a hearing to be held in open court was inconspicuous. The court found that the
argument of excusable neglect was mere pretext, noting that counsel's declaration "pretends that this court's
tireless attention to the notice requirements of the Rules, and perpetual insistence on the conveying of
meaningful information to creditors, is all to be ignored if the court fails to 'catch' a caption—and
typeface—deficiency in what is, admittedly, an important order."
</p><h3>Termination Premiums</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Capital Corp. v. Midcom Communications,</i> 246 B.R. 296 (E.D. Mich. 2000)</a>, the court
addressed what appeared to be two issues of first impression in that jurisdiction: (1) whether, as a matter
of law, a debtor terminates a pre-petition contract for line of credit when it files its chapter 11 petition, since
§365(c)(2) prohibits a debtor-in-possession or trustee from assuming a contract to provide financial
accommodations; and (2) whether the lender's right to receive a premium for early termination was
accelerated, either as a matter of law as an allowable contingent claim under §506(a) or as an allowable
charge under §506(b). Analogizing to the rejection of a lease, District Court Judge Cook affirmed the
bankruptcy court's holding that rejection of a loan contract does not, without more, terminate the
agreement and thereby trigger the right to an early termination premium. Further, although the chapter
11 filing constituted a default that gave the lender the right to terminate the contract, it was undisputed
that "no explicit, outward act of termination ever occurred." As a result, the bankruptcy court held that
the lender did not have the right "to silently terminate the contract." The district court found that the
terms of the contract itself did not authorize termination "amid silence" and affirmed. The court then
addressed the argument of whether the premium should be paid as a contingent, secured claim or secured
charge. The court rejected the argument that the claim was contingent, but held in the alternative that the
lender had an obligation to prove the claim along with a reasonable estimation of its value, and the lender
had failed to establish such a right. As to the argument under §506(b), the court held that there was "little
doubt that the premium had the potential to be a charge, which would be payable under §506(b) if it were
reasonable," however, as no termination had taken place, the charge had not matured and its payment was
not proper.
</p><h3>Unreasonable Conduct of Counsel</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Engel,</i> 246 B.R. 784 (Bankr. N.D. Pa. 2000)</a>, Bankruptcy Judge <b>John J. Thomas</b> addressed
the U.S. Trustee's request for sanctions under Bankruptcy Rule 9011 against a chapter 7 debtor's attorney
for omission and underevaluation of assets on the debtors' bankruptcy schedules. The court noted that the
plain reading of Rule 9011 appears to exclude bankruptcy schedules and statement of affairs from its
provision. However, the court accepted the argument that §105 gives the court separate, inherent powers
to address the complained of conduct. The court noted that sanctions under Rule 9011 merely require a
showing of "objectively unreasonable conduct," a comparatively light burden. In contrast, the court found
that "relying on the inherent authority of a court requires a finding of bad faith." A finding of bad faith
implies the conscious doing of a wrong because of its dishonest purpose or moral obliquity. The court noted
that counsel was a "busy and capable practitioner whose zealous advocacy and 'seat of the pants'
representation has pushed the envelope far beyond the ethical limits that can be tolerated by this court." The
court then examined a lawyer's responsibility in drafting accurate schedules. Applying the Model Rules
of Professional Conduct, the court found that counsel was given ample reason to question the documents
that he filed of record, that counsel had a corresponding obligation to reasonably and expeditiously
investigate the accuracy and to tender amendments if necessary, and finally, if his clients declined to
cooperate in the disclosure, counsel would have had cause to withdraw from the case. The court fined
counsel $2,500 in each of the two cases payable to the Clerk of the Bankruptcy Court and required
reimbursement to the U.S. Trustee for time and expense in bringing the cases to the court's attention.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cox,</i> 243 B.R. 713 (Bank. N.D. Ill. 2000)</a> (portion of a debt corresponding to retail fair-cash
market value of car at the time the debtor converted the non-functioning car into parts is the amount of the
non-dischargeable debt for willful and malicious injury);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bakke,</i> 243 B.R. 753 (Bankr. D. Ariz. 1999)</a> (where a chapter 7 trustee has filed objection to a
creditor's claim, another creditor does not have standing to object to that creditor's claim);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Walton,</i> 243 B.R. 793 (Bankr. N.D. Ala. 1999)</a> (chapter 13 plan could be amended to provide
for surrender of vehicle that was stolen, stripped and eventually recovered such that deficiency was a "mere unsecured claim");
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Scott Wetzel Services Inc.,</i> 243 B.R. 802 (Bankr. N.D. Fla. 1999)</a> (proceeds of typical liability insurance policy are generally not an asset of the estate);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Naturally Beautiful Nails,</i> 243 B.R. 827 (Bankr. N.D. Fla. 1999)</a> (§546(a) provides that the
two-year limitation governed suit by the debtor even if brought under a state fraudulent transfer act that has
a four-year period of limitation);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Larson,</i> 245 B.R. 609 (Bankr. D. Minn. 2000)</a> (timely objection to a chapter 13 plan that stated
the nature and amount of the claim as well as indicating the claimant's intent to hold the debtor liable and
pursue a claim may serve as an informal proof of claim for purposes of determining that the objector is a
party-in-interest with standing to object to plan confirmation); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Angelika Films 57th,</i> 246 B.R. 176 (F.D.N.Y. 2000)</a> (denial of all compensation to chapter
11 debtor's counsel finding that the counsel ceased to be "disinterested" when it filed a motion to assign
the debtor's lease to a principal of the debtor for an amount that was one-fifth of the market value earlier
asserted by counsel).
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