Benchnotes Jun 1998

Benchnotes Jun 1998

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In In re Smith and Kourian, 216 B.R. 686 (Bankr. 1st Cir. 1997), the court addressed the "careful qualifications" to the "old saw" that "liens pass through bankruptcy unaffected," identified in In re Penrod, 50 F.3d 459 (7th Cir. 1995). In Penrod, the confirmed plan called for monthly payments to the secured creditor but made no mention of a lien on livestock, and the Seventh Circuit held that pre-existing liens do not survive a reorganization when the plan or order confirming it does not mention the liens. In other words, the "default rule" when the plan is silent is that the claim is extinguished. In Smith, the plan provided that the debtor would retain the property "subject to any mortgage liens." Thus, the court found that it need not address the Penrod issue as the lien was preserved by the terms of the debtor’s plan, i.e. the "default rule" never was invoked.

Priority Claims for Rent

In In re MJ 500 Inc., 217 B.R. 93 (Bankr. D. Mass. 1998), Bankruptcy Judge Carol J. Kenner addressed a claim by a landlord for immediate payment of post-petition, pre-rejection rent seeking priority over all other administrative claimants. The landlord relied on In re McCabe, 212 B.R. 21 (Bankr. D. Mass 1996) and the cases on which it was based, including In re Telesphere Communications Inc., 148 B.R. 525 (Bankr. N.D. Ill. 1992) and In re Brennick, 178 B.R. 305 (Bankr. D. Mass. 1995). The chapter 7 trustee successfully distinguished these cases, arguing that McCabe did not hold that the Bankruptcy Code gives "superpriority" treatment to every pre-rejection rent claim but is limited to the circumstances of a case where the debtor-in-possession, despite adequate funds, failed to pay the rent when due and, before the coffers were depleted, the landlord moved quickly for immediate payment. In MJ 500 the funds became available only after the debtor’s default on the rent and immediate payment would prevent payment in full of the pro-fessionals (including the auctioneer) who liquidated the assets and the attendant costs of liquidation. The court found that granting a superpriority under these facts would, inter alia "subvert the liquidation process of chapter 7, and unfairly deprive chapter 7 administrative claimants (including the landlord itself) of payment on their claims..."

Application of Res Judicata

In In re Armstrong, 217 B.R. 192 (Bankr. N.D. Tex. 1997), the chapter 7 trustee brought an adversary proceeding seeking to recover a refund for the debtor’s overpayment of federal income taxes for a pre-petition tax year. The Internal Revenue Service (IRS) asserted the doctrine of res judicata arising out of an adversary proceeding brought by the individual debtor. Following commencement of that earlier litigation, the individual debtor and the IRS had agreed on the amount of the alleged overpayment. However, prior to trial or approval of settlement, the individual debtor realized that the overpayment claim was property of the estate and the automatic stay prevented him from recovering the alleged overpayment. Bankruptcy Judge Stephen A. Felsenthal held that the individual debtor and the bankruptcy estate were not the identical parties and thus the doctrine of res judicata did not apply.

In Marine Midland Bus. Loans v. Miami Trucolor Offset, 217 B.R. 341 (S.D. Fla. 1998), District Judge Gold addressed a claim that a chapter 11 plan confirmation order was a "final judgment on the merits" for res judicata purposes in a creditor’s cause of action against a guarantor of a former chapter 11 debtor’s pre-petition indebtedness. The court, relying upon Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987), held that the cause of action asserted by the creditor arose out of the "same transaction" that was the subject of a guarantor-release provision of the debtor’s confirmed plan. Thus, the plan confirmation order was entitled to res judicata effect as to the creditor’s ability to recover on the guaranty, where the creditor did not dispute that the guaranty at issue was the same in both actions.

Proof of Claim

In In re Value-Added Communications Inc., 216 B.R. 547 (Bankr N.D. Tex. 1997), the state of New York entered into a contract with the debtor for telephone services to New York’s Department of Corrections. The state voluntarily filed a proof of claim for fees arising from the contractual relationship. Thereafter, the trustee sought to recover certain pre- and post-petition payments, and the state moved to dismiss on the grounds of sovereign immunity. The court held that the state had waived immunity by filing a proof of claim asserting a right of payment from the estate.

Attorney Grievance Process

In In re Borowski, 216 B.R. 922 (Bankr. E.D. Mich. 1998), an attorney and former client agreed to a mediated judgment of a malpractice claim. The attorney subsequently filed chapter 7 and received a discharge. After the discharge was granted, the former client filed a grievance based on the previously settled malpractice claim and requested that debtor/attorney be required to pay the full amount of the previous judgment as a condition to the continued practice of law. The bankruptcy court held that the ongoing attempts by the former client and his attorney to use the attorney grievance process to force a payment of the discharged debt violated the discharge injunction and awarded the debtor actual damages, conditioned upon proper supporting documentation.

Automatic Stay & Securities Contracts

In In re Weisberg, 136 F.3d 655 (9th Cir. 1998), the Ninth Circuit considered a client agreement that came within the automatic stay exception provided by 11 U.S.C. õ#167;362(b)(6). During the year after the debtor filed bankruptcy, the stockbroker issued 14 margin calls on the debtor’s account. Neither the debtor nor the bankruptcy trustee responded to any of these margin calls. Pursuant to the margin agreement, the stockbroker liquidated limited shares of the debtor’s stock to cover each margin call and to re-establish the equity ratio in the debtor’s account. At no time did the stockbroker request relief from the automatic stay before liquidating any of the debtor’s stocks in the account. The court of appeals held that the client agreement between the debtor and the stockbroker created mutual, pre-existing debts for purposes of the stockbroker’s right to liquidate stocks securing the debtor’s loan to cover margin calls. The client agreement was also deemed to be a "securities contract" for purposes of the stockbroker’s right to perform setoffs under the automatic stay exception provided for by õ#167;362(b)(6). The court also held that the fact that the securities in the debtor’s margin account were pledged as collateral for a loan was irrelevant.

Employment Agreement & Arbitration Clauses

In In re Bailey, 217 B.R. 523 (Bankr. E.D. Tex. 1997), the bankruptcy court considered whether the commencement of a bankruptcy case interferes with the enforcement of an arbitration clause that is part of the debtor’s employment agree-ment. Pre-petition, the debtor had entered into a written employment agreement which provided that disputes would be subject to arbitration in Utah. The debtor’s bankruptcy case was filed in Texas. The chapter 13 debtor brought an adversary proceeding to recover for the employer’s alleged breach of the employment agreement and the employer sought dismissal and an order compelling enforcement of the arbitration clause. The bankruptcy court relied upon Matter of National Gypsum, 118 F.3d 1056 (5th Cir. 1997), which held that there is no inherent conflict presented by an arbitration clause or its enforcement based solely on the jurisdictional nature of a bankruptcy proceeding and that non-enforcement of an otherwise applicable arbitration provisions turns on the underlying nature of the proceeding. Thus, the court held that "...a bankruptcy court possesses discretion to refuse to enforce an otherwise applicable arbitration provision only insofar as enforcement would conflict with the purpose or provision of the Bankruptcy Code." With respect to the venue provision, the bankruptcy court cited Kevlin Servs. Inc. v. Lexington State Bank, 46 F.3d 13 (5th Cir. 1995) for the proposition that a choice of forum clause in a written contract is presumed valid and enforceable, thus placing upon the debtor the burden of showing that "trial in the contractual forum will be so gravely difficult and inconvenient that [it]...will for all practical purposes be deprived of [its] day in court." Then, citing Arrow Plumbing and Heating Inc. v. North American Mechanical Services, 810 F.Supp. 369 (D.R.I. 1993), the bankruptcy court in Bailey found that the debtor failed to carry its burden, noting that the mere fact that the debtor is in bankruptcy is not sufficient to prevent enforcement of a contractual forum selection clause.

Miscellaneous

In re Little, 216 B.R. 769 (Bankr. E.D.N.C. 1997), (chapter 13 debtor-tax payers’ prior chapter 7 case did not toll õ#167;507(a)(8)(A)(ii) 240-day priority period for IRS tax claim);

In re Southmark Corp., 217 B.R. 181 (Bankr. N.D. Tex. 1997), (bankruptcy courts have equitable jurisdiction to award prejudgment interest on avoided preferential payments);

In re Vettori, 217 B.R. 242 (Bankr. N.D. Ill 1998), (counsel’s performance in previous cases can be considered in determining whether appointment would be in the best interest of the estate and would aid in the administration of the case);

Matter of Krikava, 217 B.R. 275 (Bankr. D. Neb. 1998), (doctrine set forth in Barton v. Barbor, 104 U.S. 126 (1881), requires that leave of the appointing court must be obtained before suit can be brought against a chapter 7 trustee or his counsel);

In re Anes, 216 B.R. 514 (Bankr. M.D. Pa. 1998), (repayments of "loans" from pension plans should not be deducted from calculation of disposable income);

In re Lundy, 216 B.R. 609 (Bankr. E.D. Mich. 1998), (failing to disclose or claim an exemption in a personal injury lawsuit until after conversion to chapter 7 was bad faith sufficient to disallow amended claim of exemption);

In re Eagle-Picher Industries Inc., 216 B.R. 611 (Bankr. S.D. Ohio 1997), (post-confirmation injunction of õ#167;524 invoked and enforced);

In re Lewis, 216 B.R. 644 (Bankr. N.D. Okla. 1998), (debtor awarded a lien against the marital residence during a divorce was found to be "in essence a money judgment constituting the proceeds of his homestead," which were exempt under the state homestead law);

In re Zangara, 217 B.R. 26 (Bankr. E.D.N.Y. 1998), (pre-petition arbitration decision was given preclusive effect by bankruptcy court in proceeding seeking determination of dischargeability of the debtor’s obligation on the arbitration award);

• In In re PhippsBen, 217 B.R. 427 (Bankr. W.D.N.Y. 1998), (while noting the "vast amount of scholarship" to the contrary, the court held that a bankruptcy judge in "Case B" is bound by a decision of just one district judge in "Case A" (if the district has more than one district judge) if the decision in Case A was submitted by the district judge for publication).

Journal Date: 
Monday, June 1, 1998