When Is a Lien Void?

In In re Carvell, 228 B.R. 178 (Bankr. 1st Cir. 1998), the bank appealed a bankruptcy court order avoiding the bank's lien. Under applicable state law (Maine), the lien was void due to a failure to give a statutorily required notice of lien to the debtor within 20 days of its filing. The debtor then contended that the other liens in place were junior to the avoided lien, which was already of record when the other liens were recorded. The BAP panel agreed that the lien was a "void" and §551 preserved the avoided lien for the benefit of the estate. However, the junior liens obtained the benefit of the avoidance. "This case is quite different from, for example, the case where a perfected lien is avoided as a preference and there are other perfected liens which are junior to the avoided lien. In that situation, without preservation of the avoided lien, avoidance benefits only the junior lien-holders. That would be a windfall for them because it gives them a benefit they could not obtain outside of bankruptcy." However, where the avoided lien is one that is actually void, the avoidance benefits the junior lienholders who retain their liens with priority in accordance with the priorities under the applicable state law lien statutes.

Discovery & 5th Amendment

In In re Hyde, 222 B.R. 214 (Bankr. S.D.N.Y. 1998), the chapter 7 trustee sought possession of certain financial books and records of one of the businesses that the chapter 7 debtor operated as a sole proprietorship. The debtor moved to quash the trustee's subpoena on Fifth Amendment grounds. The debtor had turned over the records to the attorneys who had been retained to represent him in possible criminal investigations. Aside from the fact that the documents were held to be "property of the estate," the bankruptcy court cited the Supreme Court's decision in Fisher v. U.S., 96 S.Ct. 1569 (1976) and the subsequent cases in U.S. v. Doe, 104 S.Ct. 1237 (1984), and Baltimore City Dep't of Social Services v. Bouknight, 110 S.Ct. 900 (1990), and held that enforcing the trustee's subpoena for production of the documents that had been turned over to the debtor's attorneys would not violate the debtor's Fifth Amendment privilege "for three separate and independent reasons: (1) the facts revealed by the act of production are a 'foregone conclusion' [for the most part they had been developed in a 2004 examination]; (2) the act of production, although testimonial, is not incriminating; and (3) no Fifth Amendment privilege exists as to the contents of the [documents]." This opinion examines the interrelationship between a bankruptcy case and the Fifth Amendment privilege, in light of 11 U.S.C. §727(a)(6)(C) "...under which a debtor would be entitled to a discharge despite his refusal to respond or testify if his refusal was based upon 'the properly invoked privilege against self incrimination.'"

Post-petition Payments

In In re Faberge Restaurant of Florida, Inc., 222 B.R. 385 (Bankr. S.D. Fla. 1997), an involuntary chapter 7 was filed by three petitioning creditors against the debtor. The debtor made post-petition payments to the petitioning creditors and then took the position that the payments eliminated those creditors' standing or eligibility under 11 U.S.C. §303(b)(1). The Faberge court held that such post-petition payments will not deprive the court of jurisdiction or require dismissal, but also noted that some of the post-petition payments constituted evidence that there was a bona fide debt to such creditors on the petition date, at least in the amount of the payments made.

Excusable Neglect for Missed Deadlines

In In re Federated Food Courts Inc., 222 B.R. 396 (Bankr. N.D. Ga. 1998), the debtor's landlord filed a motion to dismiss the case or for relief from stay so that it could proceed with eviction proceedings against the chapter 11 debtor. One day after the 60-day deadline of 11 U.S.C. §365(d)(4), the debtor moved to extend the time to assume or reject the lease. In response to the missed deadline, the debtor cited the Supreme Court decision in Pioneer Investment Svcs. Co. v. Brunswick Assocs. Ltd. Partnership, 113 S.Ct. 1489 (1993), discussing and applying the doctrine of excusable neglect to missed deadlines provided by the Bankruptcy Rules. As the bankruptcy court observed, Bankruptcy Rule 9006(b) [the topic of the Pioneer case decision] is a rule governing the enlargement of time periods that are prescribed in the other Bankruptcy Rules or in court orders. The deadline that the debtor missed in this case is prescribed by the statute itself in 11 U.S.C. §365(d)(4). Thus, while application of the Pioneer case factors "might have resulted in a finding of excusable neglect," the court refuses to apply Bankruptcy Rule 9006(b) and the "excusable neglect" doctrine and standards to the deadline established in the statute itself.

Counsel's Role to Corporate DIP

In In Hanasen, Jones, Lela P.C. v. Segal, 220 B.R. 434 (D. Utah 1998), an appeal of a denial of attorney's fees led District Judge Brett to first consider the role of counsel to a corporate debtor-in-possession (DIP). It is clear that all counsel owe fiduciary duties of loyalty and care to each client. Prior to the bankruptcy filing, the client is the corporation. The question was: Who is the client after filing? The analysis was that after the filing, the client is not the estate—a mere collection of property interests—rejecting both the DIP as "new entity" and "new person" theories for creating an attorney-client relationship between counsel and its estate. Thus, the client must be the DIP. The next issue Judge Brett addressed was the duties of counsel and to whom the obligations were owed. Clearly, there are duties to the client, the DIP. There is also the duty to disclose any conflict of interest, all fee payments and agreements made after one year before the date of petition and a duty pursuant to Fed. R. Civ. P. 9011 to the client. However, the court held while the DIP owes a fiduciary duty to the estate and its beneficiaries, there is not and should not be an imposition of the client's fiduciary duties upon the attorney.

Partnerships

In In re Food Gallery at Valleybrook, 222 B.R. 480 (Bankr. W.D. Pa. 1998), the operating general partner filed a chapter 11 petition without the consent of the other general partner. The petition was treated as an involuntary petition, and the primary issue before Bankruptcy Judge M. Bruce McCullough was whether the partnership was generally not paying its debts as they became due. The court held that it would "not condone the efforts of a debtor who seeks to take advantage of the general prohibition on involuntary petitions by ensuring payment...to its smaller periodic debt to the exclusion of larger long-term debt." In other words, a debtor is generally not paying its debts where its funds are being held to keep trade debts current to the detriment of secured creditors. Further, payments by a general partner will be treated as payments by a third party, thus when the payments are made in part through loans by a third party, then the payments will not be deemed to be payments by the debtor.

Miscellaneous

• In re Ali, 219 B.R. 653 (Bankr. E.D.N.Y. 1998) (Although judicial or clerical error is not one of the exclusive grounds for revoking a discharge set forth in §727(d), an unauthorized discharge falls within the province of Fed. R. Civ. P. 60(a) and never invokes §727(d), but only may be brought after notice in opportunity to be heard);
• In re A.H. Robins Co., 219 B.R. 710 (Bankr. E.D. Ca. 1998) (State court malpractice action against doctor did not qualify as "unreleased claim" under chapter 11 debtor-IUD manufacturer's plan and the suit had to be dismissed);
• In re Carter Paper Co., 220 B.R. 276 (Bankr. M.D. La. 1998) (Claim that challenged trustee's decision in administering estate was an inherently "equitable" claim for Seventh Amendment jury trial purposes);
• Enjet Inc. v. Maritime Challenge Corp., 220 B.R. 312 (E.D. La. 1998) (Fed. R. Bankr. P. 7015 applied to contested proceeding seeking to prosecute a claim objection filed after the bar date);
• In re Mann, 220 B.R. 301 (Bankr. N.D. Ohio 1998) (Only five options to responding to request for admission: object, admit, deny, provide a qualified response or state that, after a reasonable inquiry, the information known or reasonably obtainable is insufficient to enable the party to admit or deny);
• In re Yeagley, 220 B.R. 402 (Bankr. D. Kan. 1998) ("Section 546(e) margin payment" includes any payment to reduce deficiency on margin account made after the margin account is opened and a deficiency exists);
• In re Ms. Interpret, 222 B.R. 409 (Bankr. S.D.N.Y. 1998) (Proof of claim designation of law firm on proof of claim for all notices constituted express authorization of firm as agent for service of process);
• In re Johnson, 222 B.R. 552 (Bankr. 6th Cir. 1998) (Earned income credit was asset of chapter 7 estate);
• In re Handy Andy Home Improvement Centers, 222 B.R. 571 (Bankr. N.D. Ill. 1998) (Deposit had to be offset against lessor's maximum allowed claim, not to amounts in excess of statutory cap);
• In re Kehoe, 221 B.R. 285 (Bankr. 1st Cir. 1998) (Chapter 7 debtors lack standing to appeal election of trustee);
• Oles Grain Co. v. Safeco. Insurance Co. of America, 221 B.R. 371 (N.D. Tex. 1998) (Section 322(d) two-year limitation on proceeding on a trustee's bond pre-empts state law of limitations for actions on a trustee's bond); and
• In re Levy, 221 B.R. 559 (Bankr. S.D. Fla. 1998) (Non-immigrant aliens in U.S. on temporary visas cannot establish permanent residence so as to be entitled to claim state's exemptions).