Benchnotes Apr 1999
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<h3>Recoupment vs. Set-off</h3>
<p><img src="/AM/images/letters/i.gif" align="LEFT" border="0" vspace="5" hspace="5"><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=…;
n re Wiener,</i> 228 B.R. 647 (Bankr. N.D. Ohio 1998)</a>, provides a good summary of the differences
between recoupment and set-off and their uses in the bankruptcy context. One shareholder in a closely held
corporation (who had filed his own bankruptcy) brought an adversary proceeding against a second shareholder in
that shareholder's chapter 7 case, seeking to except a claim from discharge. The claim arose out of an award entered
in an arbitration in connection with the dissolution of the closely held corporation. After reviewing the law of set-off
and recoupment, Bankruptcy Judge Richard L. Speer held that, as the debtor would be able to eliminate the debt,
there would be no debt to except from discharge.
</p><p></p><h3>Contractors and §547</h3>
<p><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Trans-End Technology Inc.,</i> 228 B.R. 181 (Bankr. N.D. Ohio 1998)</a>, reviews the interplay
between <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §547</a> and state statutes enacted in an attempt to protect property owners and subcontractors from
fraud in the construction industry. These statutes generally attempt to create a trust in favor of the beneficiaries of the
statutory trust, the subcontractors and materialmen of a contractor. The trustee inventively argued that because the
trust was created within the preference period, that creation in and of itself was a preferential transfer subject to
avoidance under <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §547(b)</a>. Bankruptcy Judge James A. Williams relied upon <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… v. Ford Motor Co.,</i>
590 F.2d 642 (6th Cir. 1979)</a> and the more recent opinion in <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… v. United States,</i> 68 F.3d 139, 145 (6th
Cir. 1995)</a>, which held that a debtor contractor does not have a sufficient beneficial interest in the funds under the
Trust Fund Act to render those funds property of the estate. Thus, since the effect of the statute is to prevent the
funds from becoming property of the estate, the court concluded that there was no transfer of any property belonging
to the debtor.
</p><h3>Removal from a State Court</h3>
<p>In <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Lawson,</i> 228 B.R. 195 (Bankr. E.D. Tenn. 1998)</a>, Bankruptcy Judge Richard Stair was faced
with the question of what timetable to apply to an attempted removal of a state court action to bankruptcy court after
entry of a discharge order. Rule 9027 of the Federal Rules of Bankruptcy Procedure governs the removal of civil
actions pending in non-bankruptcy courts to the bankruptcy courts and provides a specific timetable for removal.
The question in <i>Lawson</i> is whether the discharge order constituted "an order terminating a stay...under §362 of the
Code." Finding no reported cases on this point, the court noted that §362(c)(2) provides that the automatic stay
remains in effect until the discharge is granted or denied; since the discharge had been granted, the court held that the
automatic stay had been terminated. Thus, the timetable in Rule 9027(a)(2)(B) was triggered and a 30-day time
limit for the filing of a notice of removal of the state court action began. As a result, the removal was not timely and
the state court action was allowed to proceed.
</p><h3>Fraudulent Post-petition Transfers</h3>
<p>In <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Centennial Textiles Inc.,</i> 227 B.R. 606 (Bankr. S.D.N.Y. 1998)</a>, the chapter 7 trustee in a
converted chapter 11 case alleged that there was a fraudulent scheme between one creditor and the debtor's president
to repay a portion of the pre-petition claims by use of fraudulently inflated post-petition invoices. Bankruptcy Judge
Stuart M. Bernstein held that the transfers would be treated as unauthorized post-petition transfers and placed the
burden of proof on the creditor as the party asserting the validity of the transfers. Relying upon <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §549(a)</a>,
the trustee was able to avoid the transfers and recover the value of those transfers from the creditor as the initial
transferee.
</p><h3>Denial of Discharge</h3>
<p>In <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Goodman,</i> 227 B.R. 626 (Bankr. E.D. Pa. 1998)</a>, a chapter 7 trustee sought a denial of
discharge under §727(a)(3) since the debtors admitted that they had thrown away certain documents relating to a
former business. Bankruptcy Judge David A. Scholl found, in essence, "no harm, no foul" since the remaining
records were sufficient to permit the trustee to perform any necessary payment analysis.
</p><h3>Sovereign Immunity</h3>
<p>In <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Chen,</i> 227 B.R. 614 (Bankr. D. N.J. 1998)</a>, the state filed an adversary proceeding to determine
dischargeability of an alleged debt for unemployment compensation received when the debtor was working
part-time. The issue of sovereign immunity was raised on appeal. The decision contains an extensive discussion of
sovereign immunity, when and under what circumstances it can be raised and its effectiveness at various stages of
any litigation. Citing <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… v. Iowa,</i> 95 S.Ct. 553 (1975)</a>, District Judge Orlofsky noted that a state may raise the
defense of sovereign immunity for the first time on appeal but, citing <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… v. Tennessee-Missouri Bridge Com'n,</i> 79
S.Ct. 785 (1959)</a> and <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… Dep't of Corrections v. Schacht,</i> 118 S.Ct. 2047 (1998)</a>, also noted that a state
may also waive its sovereign immunity at its pleasure by a general appearance in litigation. The court found that, by
having commenced the litigation in the bankruptcy court with the filing of an adversary complaint, the state waived
its sovereign immunity.
</p><h3>Exemption for Annuity</h3>
<p>In <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Alexander,</i> 227 B.R. 658 (Bankr. N.D. Tex. 1998)</a>, Bankruptcy Judge <b>John C. Akard</b>
considered the debtors' claim of exemption of the proceeds of a settlement that they had received as a result of the
deaths of two of their children. The settlement was entered into by way of a structured settlement and was paid in
the form of an annuity. The debtors claimed the exemption for the annuity under the <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… Insurance Code,</a>
V.A.T.S. Insurance Code, art. 21.22, which exempts "[A]ll money or benefits of any kind...to be paid or rendered
to the insured or any beneficiary under any policy of insurance or annuity contract issued by a life, health or accident
insurance company..." The court held that Texas Insurance Code does not limit the term "annuity," does not
restrict the source of funds used to purchase the annuity and does not look to the underlying purpose of the annuity.
Thus, in recognition of the strong policy in Texas favoring exemptions, the court concluded that the debtors were
entitled to claim the proceeds of the annuity as exempt.
</p><h3>Withdrawal Liability Under Multi-employer Pension Plan</h3>
<p>In <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… Holdings v. Industrial & Allied Employers Union,</i> 162 F.3d 405 (6th Cir. 1998)</a>, the
Sixth Circuit addressed questions surrounding withdrawal liability under a multi-employer pension plan where there
was a confirmed chapter 11 plan. While the debtor was in payment default, it did not withdraw from the
multi-employer plan until some 18 months after confirmation. There has also been a foreclosure by the debtor's
senior creditor and the entry of a final decree closing the debtor's estate. The court held that, if the plan had a
"claim" for withdrawal liability at confirmation of the debtor's plan, then that claim was discharged and the senior
creditor would be subject to withdrawal liability solely based upon its post-confirmation contribution history. After
a full review of ERISA as amended by the Multi-employer Pension Plan Amendments Act, the Sixth Circuit
concluded that under the facts of this case, "withdrawal liability is not a 'claim' prior to confirmation. Although the
Bankruptcy Code defines 'claim' broadly, the relevant non-bankruptcy law must be examined to see whether a right
to payment, even a contingent right, exists...Withdrawal liability is based on an employer's share of unfunded
vested benefits at withdrawal, not on failure to make required contributions. As a result, there can be no pre-withdrawal breach of ERISA giving rise to a 'right to payment' by a plan."
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Gatea,</i> 227 B.R. 695 (Bankr. S.D. Ind. 1997)</a> (chapter 7 debtor does not have standing to assume or
reject his unexpired commercial lease or to ask for extension of time to assume or reject);
</li><li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Dickerson,</i> 227 B.R. 742 (10th Cir. BAP 1998)</a> (funds received as a result of qualifying for the Earned
Income Credit under the Internal Revenue Code were non-exempt under Oklahoma law as being in the nature of an
overpayment of tax rather than "earnings from personal services");
</li><li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re First Interregional Equity Corp.,</i> 227 B.R. 358 (Bankr. D. N.J. 1998)</a> (excellent review of class proof of
claim and reviewing and applying Rule 23 of the Federal Rules of Civil Procedure as authorized by Bankruptcy
Rule 9014.);
</li><li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Labrum & Doak LLP,</i> 227 B.R. 372 (Bankr. E.D. Pa. 1998)</a> (plan provision for exculpation of liability
purporting to eliminate liability of the unsecured creditors' committee, "former partners" committee and debtor's
counsel and professionals, from liability for all but "willful misconduct or gross negligence" "appears unenforceable
and should be excised");
</li><li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Ltd. Gaming of America Inc.,</i> 228 B.R. 275 (Bankr. N.D. Okla. 1998)</a> (complex plan confirmation
involving substantive consolidation of entities as part of the consolidated plan);
</li><li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Massengill,</i> 227 B.R. 697 (Bankr. S.D. Ind. 1997)</a> (state court suit to collect attorneys' fees for
non-filing spouse is excepted from the automatic stay as a proceeding for the "modification of an order for alimony,
maintenance or support, granting" relief from the stay); and
</li><li><a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… re Shady Grove Tech Center Associates,</i> 227 B.R. 422 (Bankr. D. Md. 1998)</a> (considerations to be used by
the bankruptcy court in deciding whether to enforce a debtor's pre-petition waiver of the right to defend a motion for
relief from stay).
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