Benchnotes Sep 2004

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Sep 2004

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<h4>Discharge of Student Loan Does Not Implicate 11th Amendment</h4>
InTennessee Student Assistant Corporation v. Hood, 124 S.Ct. 1905 (May 17, 2004), the Supreme Court concluded that
the exercise by a bankruptcy court of its in
rem jurisdiction over a discharge dispute
involving a state-held student loan does not infringe upon the
state's sovereignty. Further, the court held specifically that the
adversary proceeding initiated by the debtor seeking a hardship discharge
determination is not a suit against the state and that the application of
the Bankruptcy Rules regarding service of summons and complaint on the
state does not render the adversary suit one against the state for Eleventh
Amendment purposes.

<h4>National Interest Rate "Plus" Appropriate for Cramdown Loan</h4>

In Till v. SCS Credit Corp., 124 S.Ct. 1951 (May 17, 2004), the
Supreme Court concluded that the "formula approach" that
requires adjustment of the national prime interest rate based on a risk of
non-payment is the appropriate method for determining the adequate rate of
interest on a cramdown loan in a chapter 13 plan. The court concluded that
the "formula approach" has none of the defects of the
"coerced loan," the "presumptive contract rate" or
the "cost of funds" approaches, and that all three of these
approaches should be rejected "since they are complicated, impose
significant evidentiary costs and aim to make each individual creditor
whole rather than to insure that a debtor's payments have the
required present value." Under the formula approach, the court looks
to the national prime rate and then makes an adjustment to that prime rate
to account for the greater non-payment risk that bankrupt debtors typically
pose.

<h4>Bidder Objects to Debtor's Reallocation of Deposits</h4>

In re Clark Retail
Enterprises Inc., 308 B.R. 869 (Bankr.
N.D. Ill. 2004), involved a bidder who successfully bid on some but not all
stores sold by the debtor. The bidder objected to the debtor's
reallocation of deposits that the bidder had made in connection with bids
that were not accepted. The court held that the reallocation was not
permitted under the sale procedures and that the debtor had no enforceable
claim for the additional sums that the objecting bidder was required to pay
to meet its obligations.

<h4>Tax Overpayments Are Property of the Estate</h4>

In In re Nichols, 309 B.R. 41 (Bankr. D. Ariz. 2004), prior to filing its
chapter 7 petition, the debtor made an election to apply any tax
overpayments (refunds) to future tax liabilities. These "future tax
liabilities" would be post-petition liabilities. The court held that
the election was irrevocable, but that by making these elections, the
debtor taxpayers received credits that either would reduce their future tax
liabilities or, if there were no future tax liabilities, would result in
refunds. The court held that these credits were property of the estate and
that the value of those credits had to be turned over to the trustee. The
court declined to follow United States v.
Pritchard (In re Block), 141 B.R. 609 (N.D.
Tex. 1992), and Grant v. United States (In re
Simmons), 124 B.R. 606 (Bankr. M.D. Fla. 1991),
and followed the "binding precedent for this court" found in United States v. Sims (In re Feiler), 218 F.3d 948 (9th Cir. 2000).

<h4>Employer Stock Option Plan Proceeds Property of the Estate</h4>

In In re Carlton, 309 B.R. 67 (Bankr. S.D. Fla. 2004), the chapter 7 debtor
was a participant in his employer company's stock option plan. In
addition to salary, the debtor also received stock options pursuant to the
plan. The plan provided that "the grant of options to any particular
employee under the plan is neither in lieu of salary nor based on an
employee's performance or management control in the company. Rather,
the plan is offered by the company as an incentive in addition to salary to
attract and retain employees by encouraging stock ownership in the
company." At the date of the filing of the bankruptcy case, the
debtor owned rights to purchase 10,000 shares of common stock under the
stock option plan. Of these shares, 2,600 had become exercisable, but the
debtor had neither exercised the accrued options nor purchased any shares.
The court observed that the case law on the treatment of stock options in
bankruptcy is limited. However, the court cited the following cases that
hold that the debtor's employee stock options awarded pre-petition
constitute assets that become property of the estate upon the filing of the
case, even if the debtor only becomes entitled to actually exercise the
options post-petition. Allen v. Levey (In re
Allen), 226 B.R. 857 (Bankr. N.D. Ill. 1998); In re Lawton, 261 B.R. 774
(Bankr. M.D. Fla. 2001); and In re Dibiase, 270 B.R. 673 (Bankr. W.D. Tex. 2001). The court noted
that it found no contrary cases. Based on these cases, the court held that
stock options that had accrued and were exercisable by the debtor
pre-petition belonged, in their entirety, to the estate, and that the
entire value of any proceeds realized post-petition by virtue of the
debtor's exercise of options and sale of stock had to be turned over
to the trustee by the debtors. Further, the court held that it did not have
to attempt to allocate what portion of the options was attributable to the
debtor's pre-petition work and what was attributable to the
debtor's post-petition work.

<h4>Foreclosed Property Subject to Automatic Stay</h4>

In In re Cueva, 371 F.3d 232 (5th Cir. 2004), there was a foreclosure sale
of property owned by the debtor that was part of the debtor's
bankruptcy case. Therefore, the property was subject to the automatic stay
pursuant to 11 U.S.C. §362. The purchaser purchased a one-half
interest in the property at a foreclosure sale and subsequently purchased
the other one-half interest. The property in question was subject to a
lien, and the debtor defaulted on his note on the property. The lienholder
obtained an order for foreclosure. The debtor then filed for bankruptcy
protecton. The debtor's attorney faxed notice of the bankruptcy
filing to the lienholders some three to four hours prior to the
foreclosure. Thus, the lienholders were charged with notice of the filing
of the bankruptcy some three to four hours prior to the foreclosure.
Lienholders' attorneys did not notify the substitute trustee of the
fact of the bankruptcy filing, and the foreclosure sale went forward as
noticed. The purchaser and another party, purchaser two, agreed that they
each would purchase an undivided one-half interest in the property. They
were the successful bidders at the foreclosure sale. Thereafter, the
purchaser learned of the debtor's pre-sale bankruptcy filing, but
purchased purchaser two's one-half interest after having learned of
it. The purchaser then brought an adversary proceeding in bankruptcy court
seeking a declaration from the court and relief from the automatic stay to
the effect that his and purchaser two's post-bankruptcy purchase of
the real property at the foreclosure sale was valid and not voided by the
automatic stay. The Fifth Circuit holds that actions to enforce any lien
against property of the estate are invalid whether or not a creditor acts
with knowledge of the stay. 11 U.S.C. §362(a)(4) and In re Calder, 907 F.2d 953, 956
(10th Cir. 1990), cited with approval in In re
Jones, 63 F.3d 411, 412 n. 3 (5th Cir. 1995).
The court then observed that pursuant to §362(d), the bankruptcy
courts, under certain conditions, may grant relief from stay by
"terminating, annulling, modifying or conditioning such stay."
11 U.S.C. §362(d). The Fifth Circuit pointed out that §362
provides no exception for bona fide purchasers. Because §362 does not
prohibit a debtor from disposing of property belonging to the bankruptcy
estate, §549 provides additional protection to the estate for
post-petition transactions neither subject to §362(a) nor authorized
by the court." Cueva at 236. Further, §549(c) gives to a "bona fide
purchaser" a defense to a trustee's avoidance powers under
§549(a). After some discussion, the court holds that §549(c)
"is not an exception to the automatic stay imposed by
§362...." Cueva at 238. The court discusses with approval In re Pierce, 272 B.R. 198
(Bankr. S.D. Tex. 2001), and an unpublished order of the district court
affirming the bankruptcy court's decision that a foreclosure in
violation of the automatic stay is invalid unless the stay is retroactively
annulled, and that §549 is inapplicable to acts taken in violation of
the stay.

<h4>Miscellaneous</h4>

<ul>
<li>In re Twin City Power Equipment Inc., 308 B.R. 898 (Bankr. C.D. Ill. 2004) (debtor's
"dealer agreement" with the manufacturer also included the
manufacturer's agreement to finance the debtor's acquisition
of sufficient inventory of the manufacturer's products so that the
debtor would be able to operate as an authorized dealer. This constituted a
"financial accommodation" agreement that was integral to the
dealer agreement. Thus, the agreement was not assumable by the debtor in
that it was in the nature of a "financial accommodation
agreement." See 11 U.S.C. §365(c)(2));

</li><li>In re Artra Group Inc., 308 B.R. 858 (Bankr. N.D. Ill. 2003) (litigation had
been brought pre-petition between the debtor and its insurers.
Post-petition, the debtor sought to employ an expert witness with regard to
such litigation. The litigation concerned the debtor's entitlement to
certain insurance proceeds. The court found that the "expert
witness" was not a person who appeared to have any discretion or
autonomy with respect to the administration of the debtor's estate.
The court found that the proposed expert witness was not a
"professional person" whose employment had to be approved by
the court);

</li><li>In re Gutierrez, 309 B.R. 488 (Bankr. W.D. Tex. 2004) (the court holds
that an attorney with a claim for unpaid attorney's fees allowed by
court order in a prior chapter 13 case was not barred from representing the
debtor in the new chapter 13 case. The court overruled the objection to the
attorney's claim in the new chapter 13 case);

</li><li>In re Porrazzo, 307 B.R. 345 (Bankr. D. Conn. 2004) (suggestion that a
minimal standard of living necessitates that a debtor rely solely on
reasonably convenient public transportation "is a non
sequitur");

</li><li>In re Braught, 307 B.R. 399 (Bankr. S.D.N.Y. 2004) (failure to take
affirmative action to vacate judgment signed by state court judge
post-petition was a "willful" violation of the stay creating
liability for actual damages and attorney's fees);

</li><li>In re Valley Historic Ltd.
Partnership, 307 B.R. 508 (Bankr. E.D. Va.
2003) (discussion of allowance of "reasonable" attorney's
fees claimed by indenture trustee);

</li><li>In re Takeout Taxi Holdings
Inc., 307 B.R. 525 (Bankr. E.D. Va. 2004)
(mailing of notice of hearing on motion seeking approval of sale of assets
does not cure failure to serve motion itself);

</li><li>In re Adams, 307 B.R. 549 (Bankr. N.D. Tex. 2004) (addresses issues
related to "cure" of defects of requirements for home-equity
loan);

</li><li>In re Mulder, 307 B.R. 637 (Bankr. N.D. Ill. 2004) (complaint that
asserted that the debtor had "willfully and maliciously"
breached contract was sufficient to state claim to except resulting debt
from discharge);

</li><li>In re Joelson, 307 B.R. 689 (Bankr. 10th Cir. 2004) (oral
misrepresentations as to ability to generate income are statements of
financial condition, but misrepresentations concerning ownership of assets
and identity of debtor were not statements of financial condition that had
to be in writing);

</li><li>In re Fonke, 310 B.R. 809 (Bankr. S.D. Tex. 2004) (a chapter 13 debtor
does not have an absolute right of dismissal where there is pending before
the court a motion to convert the case or where there are allegations of
fraud or bad faith); and

</li><li>Shared Network Users Group v.
Worldcom Tech., 309 B.R. 446 (Bankr. E.D. Pa.
2004) (28 U.S.C. §1452 governs removal of actions once a bankruptcy
petition is filed. The separate time limits contained in §1452 govern;
the 30-day rule under 28 U.S.C. §1446 does not govern. A counterclaim
by the debtor may be included in the removal where the notice of removal
includes the entire state court action to be removed).
</li>

Journal Authors

Deborah D. Williamson

Ronald Hornberger

Journal Date

Wednesday, September 1, 2004 - 12:00

Bankruptcy Rule

2004