Influential Insiders Not Liable for Encouraging Filings

In In re Transcolor Corp., 258 B.R. 149 (Bankr. D. Md. 2001), Bankruptcy Judge James F. Schneider addressed the issue of whether a party who has been injured by actions taken in a bankruptcy case may assert a cause of action in state court against insiders who allegedly caused the debtor to file bankruptcy. In this case, one debtor claimed that it was injured when a second debtor filed bankruptcy and rejected the first debtor's lease. The first debtor asserted that filing bankruptcy by the second debtor was done pursuant to the "counsel or influence" of alleged insiders and that those insiders are liable for the damage caused to the first debtor as a result of the rejection of a lease with the second debtor, asserting interference with contractual relations. The claim was based on the proposition that the defendants/ alleged insiders wrongfully caused the second debtor to file bankruptcy and to then reject the lease with the first debtor. The court held that parties who counsel or influence the debtor to file bankruptcy (whether or not they are insiders) are not subject to liability in a collateral proceeding brought in state court for having given such advice, counsel or persuasion to cause the filing to be made. "If the law were otherwise, there would be an endless array of lawsuits against insiders and others alleged to be in control of debtors who file proper bankruptcy petitions." The court noted that anyone who disputes whether a bankruptcy petition should have been filed may move to dismiss the petition or to oppose, in the same forum, actions that they believe are against their interest. Judge Schneider relied on the decision of Koffman v. Osteoimplant Technology Inc., 182 B.R. 115 (D. Md. 1995), in which the court held that state law tort claims for malicious prosecution and abuse of process brought against a creditor for the alleged bad-faith filing of an involuntary bankruptcy petition were barred by reasons of federal pre-emption.

Change of Venuefor Avoidance Action

In In re Bennett Funding Group Inc., 259 B.R. 243 (N.D.N.Y. 2001), District Judge Kahn addressed a motion for change of venue arising out of an avoidance action against a transferee of stock options based on allegedly fraudulent transfers from the debtor. The defendants asserted that the venue should be transferred pursuant to 28 U.S.C. §§1406(a) and 1404(a). The court noted that the venue is "a personal privilege to each defendant, which can be waived and is waived...unless a timely objection is interposed." Defendants wishing to challenge the propriety of venue must do so at the onset of litigation. In this case, defendants failed to assert that venue was improper in their answer to the original complaint. Defendants also interposed 10 counter-claims seeking various forms of relief, filed a motion to withdraw the bankruptcy reference to the district court and, after that motion was decided, began to conduct discovery. In light of these facts, the court conclusively determined that the defendants waived their ability to object to propriety of venue under 28 U.S.C. §1406(a). However, the court noted that §1404(a) is not a personal privilege that a party may waive. Instead, the decision to transfer is left to the "broad discretion of the district court and is determined upon notions of convenience and fairness on a case-by-case basis." Judge Kahn noted that a court inquiry of a transfer under §1404(a) is two-fold: (1) The court must first determine whether the action sought to be transferred is one that "might have been brought" in the suggested transferee court, and (2) the court must determine whether, considering the convenience of the parties and witnesses and the interest of justice, a transfer is appropriate. In this case, there was a forum selection clause, which the defendants negotiated under the assumption that it would cover all litigation arising out of the promissory notes. The court found that the forum selection clauses "figure centrally" in this court's analysis of whether, in the interest of justice, to transfer the case as there is a "heavy presumption" in favor of enforcing forum selection clauses in the Second Circuit. Once a forum selection clause is deemed valid, the burden shifts to the plaintiff to demonstrate exceptional facts explaining why he should be relieved from his contractual duty. In this case, the plaintiff asserted that because there were claims of fraudulent inducement and fraud surrounding the execution of the promissory notes, the forum selection clauses should not be enforced. Additionally, the plaintiff argued that because the trustee's claims are not derivative of the debtors, the trustee should not be bound by the choice of forum. The court noted that in order to invalidate a forum selection clause, the trustee was required to show that the fraud relates to the forum selection clause specifically and not simply to the contract as a whole. No such showing has been made. The court noted that it was "loath" to transfer a bankruptcy action pursuant to a forum selection clause when the majority of the matters alleged constitute core proceedings in the Bankruptcy Code. Transferring a core matter that is not "inexplicably intertwined" with non-core matters adversely impacts the strong public policy in centralizing all core matters in the bankruptcy court. However, where the district court has already withdrawn the reference, "the policy behind centralizing core matters in a bankruptcy court is not applicable." Thus, the court refused to conclude that the trustee's argument regarding derivative status impacted against enforcement of the forum selection clause against the trustee. The court ruled that pursuant to 28 U.S.C. §1404(a), the case would be transferred and the forum selection clause would be enforced.

Due-on-sale Mortgage Clauses

In In re Trapp, 260 B.R. 267 (Bankr. D. S.C. 2001), the debtor filed a chapter 13 petition after the debt on a home mortgage had been accelerated due to non-payment. The residence had been transferred to the debtor without the consent of the mortgagee in an apparent disregard of a due-on-sale clause. The court found that there was no evidence that the debtor knew about the due-on-sale clause or contemplated bankruptcy prior to ownership of the property. The mortgagee objected to the chapter 13 plan, asserting that since the debtor was not a party to the contract, the debtor could not file a plan to prevent the mortgagee from asserting any of its rights. Bankruptcy Judge John E. Waites held that under the decision of Johnson v. Home State Bank, 501 U.S. 78 (1991), which approved "chapter 20," the Supreme Court held that privity is not required in order to establish a "claim" in a bankruptcy, and thus eliminated the requirement of privity in order to allow that a chapter 13 debtor who owns real property can cure the mortgage through the plan even if there was no privity between the debtor and the mortgagee. Having lost that issue, the mortgagee then argued that the debtor's plan could not cure the arrears in the mortgage and recommence monthly payments, since the debt had been accelerated. The court held that where the debt was accelerated solely due to the debtor's default in payments, the Bankruptcy Code does not prohibit the curing of such a default through a chapter 13 plan. It noted that it was not deciding whether a chapter 13 plan could cure an arrearage if the acceleration had been triggered by the due-on-sale clause rather than payment defaults. The court also held that assuming that the release from the co-debtor stay was granted, the mortgagee could pursue a claim against the original mortgagor on the note but could not foreclose its lien on the residence.

Miscellaneous

Picciotto v. Schreiber, 260 B.R. 242 (D. Mass. 2001) (neither counsel for the unsecured creditors' committee nor an individual member of the committee owes a fiduciary duty to individual unsecured creditors);

Salem v. Paroli, 260 B.R. 246 (S.D.N.Y. 2001) (Rooker-Feldman Doctrine prohibited review of the state court decision that was asserted to have deprived the bankrupt of federal constitutional rights);

In re WLASCHIN, 260 B.R. 306 (Bankr. M.D. Fla. 2000) (Soldiers and Sailors Civil Relief Act, which provides that any statute of limitation be tolled for the entire period during which a party seeking tolling is on active duty, was found to be insufficient to toll the serviceman's ex-wife's entire case, but was sufficient to toll the deadlines established by the court for filing complaints relating to discharge or dischargeability);

In re St. Rita's Associates Private Placement, 260 B.R. 650 (Bankr. W.D.N.Y. 2001) (debtor's counsel is not entitled to be compensated for time spent defending its fee application from the debtor's good-faith objection, but was entitled to be reimbursed for expenses that were incurred in a partially successful defense of a fee application);

In re Price, 260 B.R. 653 (Bankr. W.D.N.Y. 2001) (reopening of chapter 7 case to permit debtor to pursue preference claim also reopened time for the filing of the preference action);

In re LIDS Corp., 260 B.R. 680 (Bankr. D. Del. 2001) (administrative expense claims are not subject to the §502(d) disallowance of a claim of any creditor that receives an avoidable transfer and fails to surrender the same); and

In re Lieberman, 245 F.3d 1090 (9th Cir. 2001) (income from non-competition agreement did not qualify as exempt funds from "private retirement plan" under the California exemption statute).