Benchnotes Nov 1997

Benchnotes Nov 1997

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"Good Faith" and Debtor Lifestyle

In In re Weber, 209 B.R. 793 (Bankr. D. Mass. 1997), the U.S. Trustee objected to confirmation of a chapter 11 doctor's plan which paid a five percent dividend to unsecured creditors, alleging that the plan did not meet the good faith requirement of §1129(a)(3). Bankruptcy Judge Henry J. Boroff noted that the debtor did not allow his "financial difficulties to adversely affect his lifestyle," which included a primary residence on a golf course and a Cape Cod vacation home. In the 22 months following the filing, the debtor had expended more than $150,000 in non-mortgage expenses. The debtor unsuccessfully argued that because post-petition wages were not property of the estate, there was no bad faith in his expenditures or his planned lifestyle, since there was no breach of any fiduciary duty. The court held that, in a chapter 11, the good faith standard requires a "sufficient" financial commitment, which was not met where "the debtor's conduct both offends the integrity of the system and sends a wrong message to the public."

Paralegals at §341 Meeting

In In re Maloney, 209 B.R. 844 (Bankr. N.D. Pa. 1997), the issue before the court was whether a paralegal, employed in the office of counsel for a creditor, would be permitted to question a debtor at a §341 meeting. Pending before Bankruptcy Judge John J. Thomas was a motion to reconvene the first meeting of creditors. At the initial §341 meeting, the trustee did not allow the paralegal to question the debtor, asserting that allowing such an opportunity "would constitute aiding a non-lawyer in the unauthorized practice of law in contravention of Pennsylvania Rules of Personal Conduct." The court noted the majority of cases had held that the questioning of a debtor by a non-lawyer employee of a corporate creditor did not constitute the unauthorized practice of law, relying upon the administrative rather than the adjudicative nature of the proceeding. The court also noted some argued that the original purpose of the first meeting was to assist in the administration of the debtor's estate. However, he further noted that "if this conclusion was ever valid, I submit, it is no longer timely" after the 1994 amendments in which the scope of the meeting was specifically altered to include the examination of the debtor as to discharge issues, the rationale behind the choice of filing and cross-examination on reaffirming liabilities. The court held that the negotiation of a reaffirmation agreement may not constitute the practice of law in some states but, in Pennsylvania, significant deference is given to the negotiation process. Further, the court held that negotiation of reaffirmation agreements in today's environment may provide a more compelling rationale for the decision that such negotiations are the practice of law. Judge Thomas concludes that it is "inescapable that congressional amendments have refined the first meeting into a battleground where guile and strategy will win the day. These amendments have expanded the scope of inquiry at the §341 meeting so as to lend significant strategic value to the creditor's examination." He held that the examination of a debtor at the first meeting of creditors is consistent with the practice of law as that term is interpreted in Pennsylvania. The court then went on to analyze whether state law "must yield" if inconsistent with the bankruptcy statutes and §343, in particular, concluding that "while creditors can examine the debtors and attorneys for creditors can examine the debtors, no authority exists under §343 to allow an employee of an attorney for a creditor such opportunity." Therefore, the motion to reconvene the §341 meeting to allow an attorney's employee to question the debtor was denied.

Reach of State Court Jurisdiction

In re Beardslee, 209 B.R. 1004 (Bankr. D. Kan. 1997), and Matter of Pope, 209 B.R. 1015 (Bankr. N.D. Ga. 1997), both involved the application of the "Rooker-Feldman Doctrine," which springs from two U.S. Supreme Court cases, Rooker v. Fidelity Trust Co., 263 U.S. 4013, 44 S.Ct. 149, 68 L.Ed.2d. 362 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d. 206 (1983). The Rooker-Feldman Doctrine recognizes that U.S. district courts are courts of original jurisdiction, not courts of appellate jurisdiction. Accordingly, when a state court has jurisdiction to decide a federal question, the U.S. district court (and thus the U.S. bankruptcy court) has no subject matter jurisdiction to review the state court's decision on that question. Both of the decisions note that state courts can have subject matter jurisdiction over civil proceedings arising under, arising in or related to bankruptcy cases. In the area of family law, the doctrine is apparently being raised with increasing frequency. In Beardslee, Bankruptcy Judge John T. Flannagan held that the doctrine prevented the bankruptcy courts from hearing an adversary proceeding brought by a chapter 7 debtor alleging his ex-wife violated the discharge injunction when, after obtaining relief from the automatic stay, she procured an order from the state divorce court reforming its pre-petition decree to require the husband to sell the former marital home and to use the sale proceeds to pay discharged debts. In Pope, Bankruptcy Judge W. Homer Drake Jr. held that the doctrine prevented him from hearing a proceeding where the former spouse of a chapter 11 debtor returned to state court and successfully obtained a determination that a divorce-related debt was non-dischargeable. The debtor subsequently filed an adversary complaint, seeking a determination from the bankruptcy court that the debts were dischargeable and a finding that the former spouse violated the automatic stay by returning to state court without first obtaining relief from stay. The court found that the Rooker-Feldman Doctrine directed that, even if the state court decision was wrong, only the Supreme Court has the power to reverse or modify that judgment.

Subrogation

In In re The Medicine Shoppe, 210 B.R. 310 (Bankr. N.D. Ill. 1997), Bankruptcy Judge Jack B. Schmetterer addressed a claim for subrogation under 11 U.S.C. §509(a). A former officer and guarantor of the chapter 7 debtor's secured indebtedness filed a proof of claim alleging that his claim was secured as a result of the bank's sale and assignment of the loan to him or, alternatively, that he was subrogated to the bank's rights as a result of an involuntary payment of the debt when the bank debited his savings account. The trustee objected to the secured nature of the claim but did not object to the subrogation claim. The court, relying upon In re Slamans, 69 F.3d 468, 473 (5th Cir. 1995), noted that 11 U.S.C. §509(a) has three basic elements: (1) the guarantor or surety must be "liable with the debtor on (or have secured)"; (2) "a claim of a creditor against the debtor"; and (3) "pay such claim." The doctrine of equitable subrogation has a more stringent five-part test: (1) a payment that was made to protect subrogee's own interest; (2) the payment by the subrogee was not voluntary; (3) the debt paid was one for which the subrogee was not primarily liable; (4) the entire debt was paid; and (5) subrogation will not injure the rights of others. The court found that by applying either of the tests, the claimant was entitled to subrogation under §509(a). The trustee unsuccessfully argued the claimant had a right to file only an unsecured claim for reimbursement. However, the court noted that §§502 and 509 permit a guarantor to elect between a claim for reimbursement under §502 or a claim of subrogation under §509 at the claimant's (not the trustee's) option. The court found that the trustee's state law arguments do not and cannot defeat the expressed provisions of the Bankruptcy Code

Miscellaneous

  • Matter of T-H New Orleans Limited Partnership, 116 F.3d, 790 (5th Cir. 1997), (contract rate was appropriate "cram down" interest rate for purposes of confirmation of chapter 11 debtor's plan of reorganization);
  • In re United Health Care Organization, 210 B.R. 228 (S.D.N.Y. 1997), (affirmed 90-day injunction from suit against debtor's principals where suit sought to foreclose source of funding necessary to chapter 11 liquidation and proposed settlement of bankruptcy case);
  • In re Patient Educ. Media Inc., 210 B.R. 237 (Bankr. S.D.N.Y. 1997), (under federal copyright law, chapter 11 debtor could not assign its non-exclusive license to use copyrighted photographs without photographer's consent even where such assignment would maximize assets available to creditors);
  • In re James, 210 B.R. 276 (Bankr. S.D. Miss. 1997), (chapter 13 debtor may sue and be sued, and chapter 13 debtor controls whether and on what terms to settle a pre-petition lawsuit although any settlement must be noticed to all creditors and any amount paid must be to the debtor and his trustee as joint payees);
  • In re Guth, 210 B.R. 294 (Bankr. N.D. Ohio 1997), (contractual relationship between attorneys to "split" legal fees does not establish fiduciary relationship);
  • In re Serrato, 117 F.3d 427 (9th Cir. 1997), (bankruptcy trustee is not an officer of the United States so as to extend the time to file a notice of appeal to 60 days under Rule 4(a) under the Federal Rules of Appellate Procedure);
  • In re Narragansett Clothing Co., 210 B.R. 493 (Bankr. 1st Cir. 1997), (maximum compensation allowable under §326(a) is awarded to chapter 11 trustee only in cases in which results obtained and benefits realized by the estate are exemplary);
  • In re Ward, 210 B.R. 531 (Bankr. E.D. Va. 1997), (trustee is entitled to setoff exempt funds in his possession against the value of non-exempt funds the debtors failed to turnover to trustee);
  • In re Collins, 210 B.R. 538 (Bankr. N.D. Ohio 1997), (former chapter 7 trustee could recover compensation for services rendered prior to conversion to chapter 13 as a post-petition pre-confirmation administrative claim if services were reasonable and necessary and provided some benefit to the estate);
  • In re Wilson, 210 B.R. 544 (Bankr. N.D. Ohio 1997), (debtor's engagement ring was revocable gift given in contemplation of marriage and therefore not property of the estate subject to turnover);
  • In re Gateway Apparel Inc., 210 B.R. 567 (Bankr. E.D. Mo. 1997), (creditors' committee has standing to seek time for assumption of leases); and
  • In re Figter Ltd., 118 F.3d 635 (9th Cir. 1997) (secured creditor who purchased unsecured claims would be allowed to separately vote each of the unsecured claims purchased in good faith).
Journal Date: 
Saturday, November 1, 1997