Benchnotes Dec/Jan 2000

Benchnotes Dec/Jan 2000

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Cramdown and Lien Avoidance

In In re Kressler, 252 B.R. 632 (Bankr. E.D. Pa. 2000), Bankruptcy Judge Thomas M. Twardowski addressed two issues that frequently occur in chapter 13 cases: (1) Is the holder of a lien that the debtors proposed to cram down and avoid as totally unsecured a "party in interest" with standing to object to confirmation even if that creditor filed an untimely claim, and (2) can the debtor use the plan confirmation process (as opposed to an adversary proceeding) to cram down and avoid the lien? In this case, the secured creditor had filed an untimely proof of claim that the court had disallowed. Thus, clearly before the court was the issue of whether a creditor with a disallowed claim can participate in a chapter 13 confirmation as a "party-in-interest." The court held that disallowing the claim "in no way impacts" the validity of the lien and placed the creditor in no worse a position than any other secured creditor that failed to file a proof of claim—i.e., that after the bankruptcy case was concluded, the creditor may pursue its collateral to satisfy its lien. Further, the debtor had never filed a motion to determine the value of the lien under §506(a) or a complaint to avoid the lien under §506(d). After reviewing Bankruptcy Rules 7001(2), 4003(d) and 3012, the court held that an action to determine the extent, validity and/or priority of a lien or the amount of a secured claim may not be commenced by way of the plan confirmation process, disagreeing with the courts that permit a debtor to avoid a lien solely through the plan confirmation process.

D & O Liability

An area of increasing litigation is claims against the directors and officers of a debtor. In In re Systems Engineering & Energy Management Associates Inc., 252 B.R. 635 (Bankr. E.D. Va. 2000), a chapter 7 trustee filed a complaint with seven counts against the corporate debtor's former director and chief executive officer, certain corporate employees and insiders and the sole shareholders of an alleged alter-ego corporation. The complaint sought to hold the defendants liable on various bankruptcy and state-law theories and to equitably subordinate their claims against the debtor. After the filing of the adversary proceeding, the defendant moved to dismiss the complaint, asserting that the claims were "non-core." Bankruptcy Judge Stephen C. St. John reviewed the general guidelines relating to a determination of "core/non-core" claims and held that a breach of fiduciary duty, improper distribution of corporate assets, usurpation of corporate opportunity, business conspiracy to deprive the debtor and its creditors of assets, business conspiracy to prevent and hinder the debtor from paying its lawful debts, and obligations as they came due and to pierce the corporate veil were all non-core proceedings. However, the court refused to dismiss the adversary proceeding as the proceedings were "otherwise related" such that the court could enter proposed findings of fact and conclusions of law.

Dischargeability of Paternity Arrearages

In In re White, 253 B.R. 253 (Bankr. W.D. Ark. 2000), the issue before the court was the dischargability of obligations for arrearages ordered under a prior state court paternity order. The paternity order provided that, although DNA tests conclusively demonstrated the debtor was not the children's father, he remained liable for accrued child support. Bankruptcy Judge James G. Mixon held that under the terms of §523(a)(5), dischargability is an issue only with regard to obligations accrued "for support of a child of the debtor." Since it had been conclusively established that the child support obligations were not for the support of the child of the debtor, the obligations were dischargeable.

"Bad Faith Per Se" Not Causefor Dismissal in Chapter 7

In In re Padilla, 222 F.3d 1184 (9th Cir. 2000), the court held that "bad faith per se" can properly constitute "cause" for dismissal of a chapter 11 or 13 petition, but not of a chapter 7 petition. Thus, a chapter 7 individual debtor's alleged credit card "bust-out"—i.e., alleged accumulation of debt in anticipation of filing for bankruptcy—is not "cause" for dismissal of a chapter 7 provision, absent any evidence that the debtor violated any technical or procedural requirements of chapter 7. However, given that his debts consisting of credit card debt and a mortgage were solely consumer debts, the debtor's alleged misconduct was of the type contemplated by the more specific bankruptcy code provision of §707(b), which provides for dismissal of a chapter 7 bankruptcy case for substantial abuse.

Trust Beneficiary Lacks Standing to Sue

In In re Stoll, 252 B.R. 492 (9th Cir. BAP 2000), the trustee for the chapter 7 estate engaged brokers to sell a building owned by the estate, and, upon order of the court, the building was sold. The chapter 7 debtor sued in state court, alleging that the real estate brokers' misconduct resulted in a reduced sale price. The case was removed to bankruptcy court by the brokers and, on motion to dismiss, was dismissed, and the decision was affirmed. Ordinarily, a debtor does not have standing to challenge actions affecting the size of the estate because the debtor has no pecuniary interest in property of the estate. However, where the estate will return a dividend to the debtor after all creditors have been paid, the debtor then has an economic interest in the estate that is similar to interests held by the creditors that will be paid from the estate. Under such circumstances, the debtor normally would have standing to complain about the actions of third parties hired by the trustee, but only if the creditors of the bankruptcy estate have standing. The court must look to the nature of the injury for which relief is sought and consider whether it is "peculiar and personal" to the creditor or "general and common" to the estate. In this instance, the debtor's complaint is that the property in question would have sold for more than it did but for the alleged wrongdoing of the brokers. The BAP held that the debtor's position "is analogous to that of a beneficiary of a trust, and that a beneficiary of a trust generally lacks standing to sue third parties on behalf of the trust."


  • Fogel v. Zell, 221 F.3d 955 (7th Cir. 2000) (a significant decision dealing with issues of "knowable" but unnoticed creditors in the context of future claims in a chapter 7 when complicated by the issues of fraudulent transfers and derivative actions);
  • In re Jamo, 253 B.R. 115 (Bankr. D. Me. 2000) (credit union violated the automatic stay when it conditioned reaffirmation of home mortgage on reaffirmation of separate dischargeable unsecured debts);
  • Sharp v. Dery, 253 B.R. 204 (E.D. Mich. 2000) (where eligibility for bonus was conditioned on the debtor's continued post-petition employment, and the debtor had no enforceable claim to bonus on the petition date, no portion of the employee bonus the chapter 7 debtor's employer paid in the exercise of its sole discretion was an asset of the bankruptcy estate);
  • In re Williams, 253 B.R. 220 (Bankr. W.D. Tenn. 2000) (unfair discrimination found in chapter 13 plans that (a) provided for interest on non-dischargeable student loan debt and not on general unsecured claims, (b) classified the debtor's long-term student loan obligations separately from the general unsecured debt, and (c) accelerated the student-loan obligations so as to be paid in full under the plan, but that provided for a 30-percent difference in percentage payments to other unsecured obligations);
  • In re Womack, 253 B.R. 241 (Bankr. E.D. Ark. 2000) (Eleventh Amendment precluded the debtor from suing an agency of the state to recover for sanctions for the agency's alleged violation of the automatic stay, absent its consent or effective waiver);
  • In re Stann, 222 F.3d 216 (5th Cir. 2000) (debtor's wages earned after the filing of a chapter 13 petition and before discharge under chapter 7 are not part of the chapter 7 estate);
  • In re Gerwer, 253 B.R. 66 (9th Cir. BAP 2000) (chapter 7 debtor was not entitled to allocate distributions from the chapter 7 estate to a creditor with both dischargeable and non-dischargeable claims such that the distribution would be allocated first to the non-dischargeable portion of the claim);
  • In re Superior Stamp & Coin Co. Inc., 223 F.3d 1004 (9th Cir. 2000) (so long as the funds were advanced on the condition that they be used to pay the specific creditor, the earmarking doctrine will be applied even though the funds were placed in the debtor's bank account rather than being paid directly to the creditor by the bank); and
  • Walls v. Wells Fargo Bank N.A., 253 B.R. 460 (Bankr. E.D. Cal. 2000) (discharge injunction under §524 is enforceable by civil contempt, but there is no private right of action for violations of the discharge injunction as sole remedy is to seek relief under §524).

Journal Date: 
Friday, December 1, 2000