Withdrawal of Reference Not Required after Jury Trial Refusal

In In Growe Ex Rel Great Northern Paper v. Bilodard, 325 B.R. 490 (D. Maine 2005), a defendant in an adversary proceeding filed by a chapter 7 trustee seeking recovery of a preference or fraudulent conveyance moved for withdrawal of the reference solely on the basis of a refusal to consent to a jury trial in front of the bankruptcy judge. Chief District Judge Signal found that immediate discretionary withdrawal of the reference was not required, as the proceedings were at an early stage and the trustee was asserting similar “core” claims in more than a dozen similar actions. The motion was denied, with leave to re-file when the bankruptcy court could certify that the adversary proceeding was ready for trial. This is a variation on the procedure whereby the reference is withdrawn but the bankruptcy court is designated by the district court to handle all pretrial matters, including ruling on dispositive matters. The decisions in In re Ha-Lo Industries Inc., 326 B.R. 116 (Bankr. N.D. Ill. 2005), and In re Holcomb Health Care Services LLC, 329 B.R. 622 (Bankr. M.D. Tenn. 2004), show the dilemma that defendants may face in trying to preserve a right to a jury trial. Following the reasoning in Blackwell v. Deloitte & Touche LLP, 279 B.R. 818 (Bankr. W.D. Tex. 2002), Bankruptcy Judge Jack B. Schmetterer in Ha-Lo held that a party may waive its right to a jury trial by failing to timely move to withdraw the reference. In Ha-Lo, the adversary proceeding had been scheduled for trial for more than six months, several pre-trial issues had been adjudicated, discovery had closed and a pretrial status conference was scheduled in a few weeks. In Holcomb, a pre-trial order had been entered, which provided that all “parties consent to final disposition of this contested matter by the bankruptcy court.” In an amended pre-trial order, the defendants unilaterally included an issue as to whether the reference should be withdrawn for a trial before a jury. However, despite these contrary positions, the defendants did not ever file a motion to withdraw the reference. Accordingly, Chief Bankruptcy Judge George C. Paine II held that any right to a jury trial had been waived.

Chapter 13 Debtor’s Pre-Pay Motion Is Not a Plan Modification

In In re Miller, 325 B.R. 539 (Bankr. W.D. Pa. 2005), Bankruptcy Judge Warren W. Bentz considered a chapter 13 debtor’s motion to refinance the debt securing her principal residence and to use the proceeds to pre-pay all remaining obligations under her plan, which did not provide for payments to unsecured creditors. The chapter 13 trustee objected, arguing that the motion constituted a modification of the chapter 13 plan and/or that the “best efforts” test of §1325(b)(1)(B) was, in essence, a continuing obligation and that the debtor should continue to use any disposable income created by the refinancing to make plan payments. The court rejected both arguments, holding that a voluntary early pay-off of a confirmed plan is not a modification where the debtor does not seek any change in the payment amount and “actually increases the economic worth by paying the contractual obligations due under a confirmed plan earlier than promised.” Further, following In re Richardson, 283 B.R. 783 (Bankr. D. Kan. 2002), Judge Bentz held that “absent a change in the debtor’s financial fortunes, the debtor’s pre-petition creditors are entitled only to those distributions provided under the confirmed plan.” A contrary result was reached in In re Keller, 329 B.R. 697 (Bankr. E.D. Cal. 2005). In Keller, the unsecured creditors had been promised “no less than a 31.5 percent dividend” from the debtor’s disposable income. As with Miller, the plan did not provide for any increased payment to creditors as a result of the sale or refinancing of the residence. Unlike Miller, however, the Keller plan mandated that “unless all allowed unsecured claims are paid in full, the plan shall not terminate earlier than the stated term or 36 months, whichever is longer.” The Keller debtors also did not file a motion to modify their plan. Chief Bankruptcy Judge Michael S. McManus cast the issue as “whether it is permissible to pay off a chapter 13 plan within a significantly shorter period of time than required by the confirmed plan.” Disagreeing with cases that permit pre-payment of plan payments without a plan modification, Judge McManus held that such a position would also allow a debtor to unilaterally cease making monthly payments and pay all plan obligations in one lump sum in the last month of the plan. “So, the debtors in this case have a choice. Their motion to borrow will be approved but if they also wish to complete their confirmed plan with an accelerated lump sum payment, it must be sufficient to pay unsecured claims in full. Alternatively, assuming the debtors are able to convince the court that, given their particular economic circumstances, payments for less than three years without paying unsecured claims in full satisfies §1325(a)(3), they must modify their plan.”

Creditors’ Committee Can’t Sustain Disputes of Enterprise Value

In In re Heilig-Meyers Co., 328 B.R. 471 (E.D. Va. 2005), the creditors’ committee appealed from a decision that the debtors were solvent at the time of the alleged preferential transfers. During the trial, the bankruptcy judge was unable to “wholly endorse” the conclusions reached by the two valuation experts, who had a disparity of more than $550 million. The bankruptcy court undertook its own balance-sheet analysis, starting with the debtors’ balance sheet prepared according to GAAP, then reduced that amount to reflect accounts that were delinquent by more than 90 days. Next, the court modified the values, asset by asset, to more accurately reflect the debtors’ financial condition based on other available evidence and then drawing on the “best elements” of each expert’s report while rejecting any reliance on liquidation values or values that took into account post-petition events. Finally, the bankruptcy court relied on one of the expert’s business enterprise valuation to corroborate the court’s balance-sheet test. District Judge Spencer was unconvinced that the finding of solvency was “clearly erroneous.”

Sarbanes-Oxley Retroactive: Fraud Claims Excepted from Discharge

In In re Weilein, 328 B.R. 553 (Bankr. N.D. Iowa 2005), the issue was the applicability of §523(a)(19)—which makes a debtor’s obligations on securities fraud claims nondischargeable—to pending cases. Chief Bankruptcy Judge Paul J. Kilburg held that there is “no doubt” that Congress intended to make this section, adopted as part of the Sarbanes-Oxley Act in 2002, applicable to all securities fraud judgments, orders or settlement agreements that arose after the enactment of Sarbanes-Oxley, regardless of whether they arose before or after the filing of the bankruptcy petition. As a result, counterclaims asserting securities fraud issues were excepted from discharge and remained viable in a state court action as such claims did not have to be reduced to a judgment, order or settlement prior to the commencement of the bankruptcy case.

Miscellaneous

• In re Pettle, 410 F.3d 189 (5th Cir. 2005) (bankruptcy court did not abuse its discretion by not granting creditor relief from judgment based on creditor’s voluntary decision to dismiss nondischargeability proceeding);

• In re Strada Design Assoc. Inc., 326 B.R. 229 (Bankr. S.D.N.Y. 2005) (chapter 7 debtor’s legal malpractice and breach-of-contact causes of action for negligent advice related to filing for relief under chapter 7 constituted property of the estate);

• In re The IT Group Inc., 326 B.R. 270 (Bankr. D. Del. 2005) (payments by general contractor to subcontractors did not constitute a transfer of the debtor’s interest in property under §547, as funds were subject to a statutory trust);

• In re Hechinger Inv. Co. of Delaware Inc., 326 B.R. 282 (Bankr. D. Del. 2005) (pre-petition payments made to creditor pursuant to agreement between the debtor and creditor, which reduced credit terms, did not qualify as payments made within the ordinary course of business);

• In re Mirant Corp., 326 B.R. 354 (Bankr. N.D. Tex. 2005) (creditors’ committee entitled to expedited production under Rule 2004 due to imminent ex-piration of statute of limitations);

• In re Dairy Mart Convenience Stores Inc., 411 F.3d 367 (2d Cir. 2005) (ex parte Young exception applied to assertion of sovereign immunity by state officials, who refused to recognize the debtor’s timely filing of reimbursement claim under §108).

• In re Smith, 325 B.R. 498 (Bankr. D. N.H. 2005) (obligation on automobile lease had to be included in unsecured debt for purposes of calculating eligibility for chapter 13); and

• In re 5900 Associates L.L.C., 326 B.R. 402 (E.D. Mich. 2005) (debtor was not liable for fees and expenses incurred by bankruptcy counsel in previously dismissed chapter 11, where bankruptcy court never entered an order approving such fees).