Benchnotes Dec/Jan 2002

<h3>Escrow Deposits for Damages</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re New Breed Realty Enterprises Inc.,</i> 278 B.R. 314 (Bankr.
E.D.N.Y. 2002)</a>, Bankruptcy Judge Carla E. Craig addressed the issue for
a motion for relief from stay to permit delivery of a deposit in escrow as payment
for damages resulting from the failure of the debtor to close a sale for the purchase
of shares of a corporation. The motion also sought permission to sell the shares to
another party. The court found the relevant facts were not in dispute: (1) the
contract related to the sale of shares of all of the issued and outstanding stock of
a non-debtor entity of such entity; (2) the entity was the sole owner of a parcel
of residential real estate located in New York; (3) the pre-petition contract
allowed for purchase price by the debtor of $6 million, with a $300,000
deposit; (4) the contract had a "time being of the essence" provision providing that
the seller was entitled to the entire deposit held in escrow as liquidated damages
should the debtor fail to close on or before Aug. 1, 2001; and (5) the
day before the closing deadline, the debtor filed for protection under chapter 11.
By the time the motion for relief was heard, the 60-day statutory grace period
under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… U.S.C. §108(d)</a> had expired, but the debtor argued that the court
had the authority to extend the debtor's performance period beyond such 60-day
statutory period. The debtor also argued that regardless of the "time is of the
essence" clause in the agreement, §365(d)(2) allows the debtor-in-possession to
assume an executory contract at any time prior to confirmation of a plan. The debtor
therefore argued that it retained its interest in the shares as well as its interest
in the $300,000 deposit held in escrow. The court held that as the time to
tender the deposit and close the sale was extended only for 60 days pursuant to
§108(b), and as that period had expired, §108(b) provides no assistance to
the debtor unless the court granted an extension of time beyond the 60-day statutory
period. Without holding that it had the authority to extend the cure period, the
court held that the debtor had not shown that such an extension had been granted.
Further, the debtor had not made a timely motion for extension of the statutory grace
period, nor had the debtor alleged that there was any wrongdoing or other circumstance
that would justify such an extension of time. Therefore the relevant inquiry was
whether the debtor is barred from assuming the agreement where the debtor is in default
of a non-monetary obligation. The court held that the debtor's failure to close the
sale on or before the time-of-the-essence closing date including any extension of date
provided by the §108(b) statutory grace period, constituted a non-monetary default
that could not be cured because it was "an historical fact." The court then held that
as a result of this inquiry, the debtor was barred from assuming the agreement by
§365(b)(1), as the debtor was in default of a non-monetary obligation that by
definition was incapable of being cured. The court held that where a default is
non-monetary and is not curable, the debtor is precluded from assuming an executory
contract if the default was material or if the default caused "substantial economic
detriment." Relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Joshua Slocum Ltd.,</i> 922 F.2d 1081 (3rd
Cir. 1990)</a>, interpreting New York law, the court held that a party's failure
to perform by the closing date specified in the contract does not constitute a material
breach unless the other party has effectively declared time to be of the essence.
Where there is such a declaration, each party must tender performance unless the time
for performance is extended by mutual agreement. The court held that if the debtor
was permitted to assume the agreement under §365, "the debtor would be circumventing
the effect of a material provision that bears to the fundamental right to remain in
or end a contractual relationship." As a result, the court held that the debtor did
not have the right to assume the agreement under §365(d)(1)(2) because it
could not cure as required by §365(d)(1).

</p><h3>Simultaneous Chapter 7/13 Cases</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Strohscher,</i> 278 B.R. 432 (Bankr. N.D. Ohio 2002)</a>,
Bankruptcy Judge Richard L. Speer addressed the issue of a debtor attempting to
maintain a chapter 7 and a chapter 13 case simultaneously. After an extensive
review of authorities, the court applied that the underlying principle that a debtor
may only file a subsequent bankruptcy case after first receiving a discharge in the
initial case is one that will be applied. However, the court also held that an
exception could be created if the debtor "can demonstrate exceptional and unique
circumstances which would necessitate the granting of extraordinary relief." The court
pointed to an example that fits within the exception: <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Strause,</i> 97 B.R.
22 (Bankr. S.D. Cal. 1989)</a>, in which the debtor's discharge was unduly
delayed as a result of an error on the part of the clerk of the court.

</p><h3>Creditor Must Give Notice to Be "Known Creditor"</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Eagle-Picher Industries Inc.,</i> 278 B.R. 437 (Bankr. S.D.
Ohio 2002)</a>, Bankruptcy Judge Burton Perman addressed the claims of a
pre-confirmation creditor who asserted, <i>inter alia,</i> breach of contract, common-law
contribution and indemnification. The court found the debtor satisfied its burden of
showing that it had mailed notice of the hearing on confirmation of its proposed plan.
The court also held that any pre-confirmation administrative expense was also discharged
as a result of confirmation and the failure of the creditor to file an administrative
claim. Perhaps most important, the court held that the debtor's mere knowledge of the
existence of the creditor was insufficient to make that creditor a "known creditor" who
must be given actual notice of actions in the bankruptcy case. Rather, in order to
become a "known creditor," it must be shown that the creditor's claim and not just the
identity was known to the debtor.

</p><h3>Unauthorized Withdrawal of Funds</h3>

<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Delisle,</i> 281 B.R. 457 (Bankr. D. Mass. 2002)</a>,
Bankruptcy Judge <b>Joel B. Rosenthal</b> held that a debt arising out of a debtor's
unauthorized withdrawal of funds from a joint account would be excepted from discharge.
The court held that under Massachusetts law, all parties to a joint account have the
legal right to withdraw all or part of the funds; however, this legal right to
withdraw pertains only to rights of parties vis-a-vis the bank, and does not prevent
parties from entering into a separate agreement. The court noted that the determination
of the extent of interest in the joint accounts is dependent primarily on the parties'
intentions, which is a question of fact that may be established by oral evidence.
In this case, there was credible evidence that the plaintiff and the debtor had an
agreement that the funds in the account were to be used by the 24-year-old
debtor/defendant for her personal use and for the 80-year-old plaintiff's care if
his health deteriorates, and that in either event, prior to withdrawing such funds,
the debtor was required to obtain the plaintiff's permission. The court noted that "no
reasonable person would believe that an 80-year-old man, with potentially failing
health, would grant a gift of tens of thousands of dollars to someone he had known
for less than 30 days." The court also noted that the fact that the debtor withdrew
$45,000 from the joint account and transferred the entire amount into a personal
account led him to the conclusion that the debtor was attempting to conceal the
transfer of the funds from the plaintiff.

</p><h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re University Towers Owners' Corp.,</i> 278 B.R. 302 (D. Conn.
2002)</a> (as a determination of the reasonableness of fees and expenses claimed by
an over-secured creditor is for the most part a factual question, the bankruptcy court
is granted a substantial degree of discretion in making such a determination);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Cruisephone Inc.,</i> 278 B.R. 325 (Bankr. E.D.N.Y.
2002)</a> (as a matter of right, a creditor may withdraw a proof of claim without
judicial approval if (1) done so prior to the filing of an objection or complaint
instituting an adversary proceeding or acceptance or rejection of the debtor's plan; or
(2) if a creditor has not otherwise participated significantly in the bankruptcy
case);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re G-I Holdings Inc.,</i> 278 B.R. 376 (Bankr. D. N.J.
2002)</a> (bankruptcy court could exercise "related to" jurisdiction over determination
as to whether insurance policies provided coverage for environmental claims asserted against
debtor by state and federal government agencies and by private parties);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Kidron Inc.,</i> 278 B.R. 626 (Bankr. N.D. Fla. 2002)</a>
(while unsuccessful bidder was not entitled to recover, as administrative expense, due
diligence, financing and closing expenses of kind typically incurred by any creditor
participating in auction sale, creditor did make "substantial contribution" to estate, and
would be allowed administrative expense claim for legal expenses incurred in compelling flow
of due diligence information);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Worldwide Direct Inc.,</i> 280 B.R. 819 (Bankr. Del.
2002)</a> (general reservation of right in chapter 11 plan to objection to
stockholders' claims on any ground was sufficient to reserve right to seek mandatory
subordination of claims under §510(b)); and

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Maldun Mills Industries Inc.,</i> 281 B.R. 493 (Bankr. D.
Mass. 2002)</a>, and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re ACT Manufacturing Corp.,</i> 281 B.R. 468
(Bankr. D. Mass. 2002)</a> (cases set forth principles and tentative guides for
fee applications in Judge Rosenthal's court).
</li>