Benchnotes Feb 2002
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<h3>Contractual Indemnity Clauses</h3>
<p>In
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. Planet Hollywood Intern. Inc.,</i> 269 B.R. 543 (Bankr.
D. Del. 2001)</a>, the court held that proofs of claim seeking damages for breach
of rejected executory contracts were sufficient on the surface to include claims for
attorneys' fees under the contractual indemnity clauses. Further, the successful
objections to the debtors' motion to assume the contracts in question, which included
requests for relief from stay to enforce contractual termination rights, including a
right to attorneys' fees, was sufficient to qualify as informal proofs of claim. The
court then addressed the substance of the request and held that attorneys' fees are
not independently recoverable under the Bankruptcy Code. Thus, since the attorneys'
fees were incurred in successfully opposing the debtors' motion to assume the contracts,
a matter peculiar to federal bankruptcy law, the creditors were not entitled to an
award of such attorneys' fees under the clause in the personal service agreements
granting the creditors a right to reasonable attorneys' fees arising from or in any
way related to the debtors' breach of such contracts, absent evidence of any bad faith
or harassment by the debtors in having sought to assume these contracts.
</p><h3>Income Tax Refund Ownership</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re First Central Financial Corp.,</i> 269 B.R. 481 (Bankr.
E.D.N.Y. 2001)</a>, the bankruptcy court dealt with a dispute between the
liquidator of an insurance company (a subsidiary of the debtor) and the chapter 11
trustee of the debtor involving their competing claims to a federal income tax. The
court held that it had core jurisdiction over the dispute as being akin to a turnover
proceeding and, as such, a matter that concerned the administration of the estate
under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §157(b)(2)(A)</a>, (E) and (O). After deciding the
jurisdictional issue, the court then turned to the question of who owned the refund.
"It is necessary to examine whether the debtor owns the property absolutely,
conditionally or merely through some lesser relationship, such as a bailment, agency
or consignment, whereby the goods actually belong save for the debtor's right to
possession, completely to another." The debtor and its subsidiary functioned within the
framework of a tax allocation agreement. Under state corporation law, parties are free
to allocate among themselves ultimate tax liability by virtue of a tax allocation
agreement. Thus, the tax allocation agreement between the debtor and its subsidiary
governed their obligations, as among themselves, for payment of federal income taxes
and, more importantly, provided for the allocation of tax refunds received by the
taxpaying group. The first issue considered by the court then was whether the
subsidiary insurance company was entitled to the entire amount of the tax refund under
the tax allocation agreement since all of the income in question pursuant to which the
losses provided shelter had been generated by the subsidiary insurance company.
</p><p>Analyzing the question under state law of New York and under the tax allocation
agreement, the court concluded that under the terms of that agreement the subsidiary
insurance company was not entitled to receive from the debtor/trustee the entire amount
of the tax refund but only an amount "equal to the amount of the tax refund that
FCIC (the subsidiary insurance company) would have received from the IRS if its
taxes had been calculated on a stand-alone basis." The court then concluded that the
insurance company's receiver would have been entitled to receive an amount less than the
total amount of the tax refund received by the debtor/trustee from the IRS. Next,
the court had to determine whether the subsidiary insurance company is a "trust
beneficiary" or an unsecured creditor with respect to the amounts due to it under the
tax allocation agreement. The court concluded that the tax allocation agreement did not
create a trust and further concluded that the remedy of the imposition of constructive
trust was not available under these particular facts and circumstances. As a result,
the subsidiary insurance company had a claim as an unsecured creditor in the bankruptcy
case with respect to any portion of the funds that the insurance company liquidator
could prove up, subject to further objection.
</p><h3>Government Class 5 Priority Claims</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Gordon Sel-Way Inc.,</i> 270 F.3d 280 (6th Cir. 2001)</a>,
the court addressed the debtor's attempt to compel the turnover of a tax refund against
which the government claimed a right of setoff. The government filed pre-petition
claims against the debtor for the debtor's failure to pay tax penalties. These claims
became part of the Class 5 priority claims under the confirmed plan. After
confirmation, the debtor filed a claim objection, successfully seeking, <i>inter alia,</i>
subordination of the government's claim. After the bankruptcy court's initial
subordination of the government's tax penalty claims, the debtor quickly distributed
its liquidated assets to other Class 5 creditors without setting aside any assets to
pay the government in the event that the subordination decision was later overturned,
creating a situation in which the government clearly could be treated differently than
other Class 5 creditors. The first issue was the question of sovereign immunity.
The court held that under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §§106(a)</a>, (b) and (c) and 505,
the government had waived its sovereign immunity with respect to proceedings properly
under §505(b). Next, the court found that pursuant to §157(b)(1), this
was a core proceeding since the resolution of the dispute clearly affected the
adjustment of the debtor-creditor relationship. Further, the court found that under
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §1142</a> and the provisions of the debtor's confirmed chapter 11
plan, the bankruptcy court had post-confirmation jurisdiction of the dispute. Finally,
the court held that the prerequisites for establishing a setoff claim were established
where the debtor had failed to protect the government's Class 5 unsecured claim.
</p><h3>Sale Partnership Interest</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Morgan Sangamon Partnership,</i> 269 B.R. 652 (Bankr. N.D.
Ill. 2001)</a>, the court held that an individual chapter 7 debtor's interest in
the debtor partnership could not be assumed and assigned sufficient to convey to the
purchaser the standing of partner with the authority to file an involuntary petition
against the partnership. Under applicable state partnership law, the other partners did
not have to accept the new partner or substitute the new partner without their
consent, and thus, the purported sale by the individual debtor's chapter 7 trustee
of that debtor's partnership interest gave the purchaser only an economic interest in
the partnership; it did not give him a "partner" with the authority of a partner.</p>
<h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Sand & Sage Farm and Ranch Inc.,</i> 266 B.R. 507 (Bankr.
D. Kan. 2001)</a> (under Kansas law, center pivot irrigation system was a fixture
and not equipment);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Coleman Enterprises Inc.,</i> 266 B.R. 423 (Bankr. D. Minn.
2001)</a> (creditors may seek removal of a debtor from "fast-track" status for a
small business reorganization);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Indian Motorcycle Co. Inc.,</i> 261 B.R. 800 (B.A.P. 1st
Cir. 2001)</a> (§502(c) may not be used to estimate debtor's post-petition tax
liability);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Asset Recovery Group Inc.,</i> 261 B.R. 825 (Bankr. W.D.
Pa. 2001)</a> (as a matter of law, a party may recoup regardless of whether there
was some sort of overpayment);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Kujawa,</i> 270 F.3d 578 (8th Cir. 2001)</a> (more than
$65,000 in sanctions upheld against creditor/attorney for unethical behavior in
using confidential financial data gained while serving as the debtor's attorney to
orchestrate the filing of an involuntary chapter 7 petition against the debtor);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Toth,</i> 269 B.R. 587 (Bankr. W.D. Pa. 2001)</a> (cause
existed to dismiss chapter 11 case where debtor had no income or any business to
reorganize and depended entirely on the successful litigation of a lender liability claim
in order to fund a plan);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Scobee,</i> 269 B.R. 678 (Bankr. W.D. Mo. 2001)</a> (where
debtor had adjusted income sufficient to pay approximately 27 percent of general
unsecured debt in a 36-month debt adjustment plan under chapter 13, chapter 7 will
be dismissed on U.S. Trustee's motion as a "substantial abuse" pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §707(b)</a> unless the debtor filed a motion to convert to chapter 13);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Smith,</i> 269 B.R. 629 (Bankr. E.D. Tex. 2001)</a>
(proposed purchasers of debtor's home obtained pre-petition judgment of specific
performance and then moved to prohibit the chapter 13 debtors from rejecting the
pre-petition contract, successfully arguing that the contract was no longer executory
since specific performance had been required);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. State Farm Fire & Cas. Co.,</i> 270 F.3d 778 (9th
Cir. 2001)</a> (judicial estoppel bars the debtor from seeking a recovery on an
unscheduled claim against his insurer for bad faith and breach of contract arising from
the insurance company's failure to pay claims for losses allegedly caused by vandalism
and theft as the debtor had sufficient knowledge of enough facts to know that a
potential cause of action existed but failed either to amend his schedules to disclose
the cause of action as a contingent asset); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re American White Cross Inc.,</i> 269 B.R. 555 (Bankr. D.
Del. 2001)</a> (the terms of the confirmed plan controlled treatment of creditors
who failed to timely assert rights under a subordination agreement).
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