Benchnotes Apr 2001

Benchnotes Apr 2001

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In Massachusetts Housing Finance Agency v. Evora, 255 B.R. 336 (D. Mass. 2000), a chapter 13 plan was confirmed that provided that the secured creditor would receive the value of its secured claim ($80,000) over the life of the plan. The unsecured balance of the claim was previously discharged under chapter 7. The chapter 13 plan provided for payments totaling $99,640.20, which was the $80,000 secured claim plus interest at 9 percent. Approximately two years later, the debtors sought to modify the plan to provide for payment in full of the $80,000 through a refinancing of the property, which had doubled in value. The creditor filed an objection and sought to have the property and its secured claim revalued in light of the increase in the value of the property. Relying on cases that did not permit debtors to shift the risk of depreciation of collateral to the creditor, the bankruptcy court refused to allow the finance company to shift the burden of appreciation to the debtors. The district court held that there was nothing in the Bankruptcy Code or in case law to suggest that a secured claim could be re-determined. Noting that while §1329(a)(1) provides that a plan may be modified to increase or reduce the amount of payments, there is no provision that a plan may be modified to increase or reduce the amount of a secured claim. Further, valuation of the secured claim was adjudicated by the order of confirmation and is res judicata as to claim determination. Thus, the court found that §1327(a) binds the creditor to the amount originally allowed and there is no provision for a "second bite at the apple." The court also rejected the argument that if a plan is being modified pursuant to §1329, providing for an acceleration of payments, it must still meet the provisions of §1325(a) and must distribute the secured value as of the effective date of the modification, noting there was absolutely no case law to endorse this reading of the statute and, in fact, there were a number of courts that had adopted the opposite view.

Franchise Agreement Rejection Does Not End Debtor's Obligation

In Sir Speedy Inc. v. Morse, 256 B.R. 657 (D. Mass. 2000), District Judge Gorton addressed an issue raised by a franchisor seeking relief from the automatic stay in order to enforce its rights under a non-compete clause in a franchise agreement with the chapter 7 debtor. It was uncontested that the franchise agreement had been rejected as a result of the debtor's failure to assume. However, the court held that rejection of the franchise agreement did not terminate the debtor's obligation under the non-compete clause, noting that the very purpose of the covenant is to govern the relationship between the parties after the demise of the underlying contract. Further, the court held the right to enforce that the non-competition provision is not a "claim" under §105(5)(b).

Recoupment Against Fraudulent Transfer Not Applicable

In In re Rand Energy Co., 256 B.R. 712 (Bankr. N.D. Tex. 2000), Bankruptcy Judge Steven A. Felsenthal addressed a complaint brought to recover a pre-petition overpayment. The debtor had originally brought a motion to compel turnover of the overpayment and belatedly asserted a fraudulent transfer claim. The court, having reviewed the standards of the Fifth Circuit for amendment, allowed the fraudulent transfer claim to be prosecuted. The court found that it was uncontested that the defendant had overpaid two invoices for services in connection with the drilling of the Dyess Well. Apparently, it was also uncontested that after the bankruptcy filing, the defendant discovered the overpayment and, rather than returning funds to the debtor, applied the overpayment to pre-petition and post-petition services on the Williamson Well. The defendant tried to argue that the transfer should be treated like a retainer or a deposit. Unfortunately, under these facts, neither party realized the overpayment was made and, therefore, neither party intended to treat it as a deposit on services related to a different well or as a retainer against generalized future services. Accordingly, the court found there was no general issue of material fact of value and that the debtor did not receive any value for the transfer of funds as a result of the overpayment. The defendant moved for set-off. Relying on Mack v. Newton, 737 F.2d 1343 (5th Cir. 1984) and In re J.R. McConnell Jr., 934 F.2d 662 (5th Cir. 1991), which support the proposition that a creditor cannot set-off the value of property deemed transferred as a fraudulent conveyance against its pre-petition claim, the court deemed the relief requested. However, those cases do recognize the right to recoup against a fraudulent transfer. However, in this case, the defendant had not alleged a recoupment, and there were separate contracts for the two wells. Thus, recoupment would not be applicable. Finally, the court did rule in favor of the defendant, finding that the administrative claim for the post-petition well services would not be subject to disallowance under §502(d).


Journal Date: 
Sunday, April 1, 2001