Benchnotes Oct 2004

Benchnotes Oct 2004

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Post-petition Loan Not in Ordinary Course Under §364

In In re Ockerlund Construction Co., 308 B.R. 325 (Bankr. N.D. Ill. 2004), Bankruptcy Judge Jacqueline P. Cox addressed the often painful intersection of tough laws and hard facts in the context of administrative claims. In this case, the debtor's president provided a post-petition loan "emergency advance" so the debtor could complete a school construction project and pay post-petition premiums due on the debtor's employees' health and dental insurance. The court noted that the obligations that gave rise to the "emergency advance" would have either qualified as post-petition business expenses made in the ordinary course of business or would have given rise to an administrative claim. However, the question before the court was "whether this advance qualified as a valid post-petition extension of credit to the debtor in accordance with 11 U.S.C. §364(a)-(b)." The court noted that because prior court approval had not been obtained, the resolution depended on whether the credit was obtained "in the ordinary course of business"—not whether the funds were used for §503(b) administrative expenses. The court found that the pleadings, evidence and argument failed the "vertical" dimensions test with regard to "ordinary course of business." The court also found that while some courts have retroactively approved a post-petition loan under §§364(b) and 105(a), even those courts have held that retroactive approval "should be reserved for truly extraordinary and unusual circumstances." In contrast, other courts "have gone so far as to say that the case law under the 1898 Bankruptcy Act countenancing retroactive approval on equitable grounds has been eviscerated under the current Bankruptcy Code." Judge Cox noted that "equitable powers under 11 U.S.C. §105(a) do not override specific Bankruptcy Code provisions" and held that retroactive approval was not permissible and the administrative claim was disallowed. The next issue was whether the president had a general unsecured claim or was not eligible for any distribution at all. Relying on Matter of Alafia Land Development Corp., 40 B.R. 1 (Bankr. M.D. Fla. 1984), the court held, inter alia that while the definition of "claim" is broad enough to "encompass an unauthorized post-petition loan," the definition of "creditor" requires a right to payment prior to the order for relief. As a result, a holder of a post-petition "claim" that is not entitled to administrative expense priority cannot be a creditor, cannot file a proof of claim, and even if he could file one, cannot by definition have an "allowed" claim as of the petition date.

Claims Under Labor Agreement Must Be Paid as Administrative Expense

In In re Colorado Springs Symphony Orchestra Association, 308 B.R. 508 (Bankr. D. Colo. 2004), Bankruptcy Judge Howard R. Tallman addressed the interrelationship between §§508(b), 507(a) and 1113 in the context of claims under a collective bargaining agreement (CBA), which arose post-petition and pre-rejection. The court held that the two-pronged test that is generally applied in deciding whether a claim is allowable as an administrative expense is inapplicable in the context of post-petition obligations arising under a CBA. Instead, post-petition obligations under a CBA must be paid as administrative expenses at a rate provided for under the CBA, to the extent that bargaining unit members complied with their obligations under the CBA.

Shareholder Not a Signatory Is Not Liable Under CBA

In Hunter v. Philpott, 373 F.3d 873 (8th Cir. 2004), employee benefit funds brought an adversary proceeding seeking a determination that a co-shareholder of a corporation should be liable for "fiduciary defalcation" arising out of the corporation's failure to make contributions to the funds as required by a CBA. The debtor/shareholder was not a signatory of the CBA and had not otherwise "assumed status of trustee with respect to any specific res." As a result, the court held that the debtor did not stand in a "fiduciary capacity" to the funds within the meaning of the dischargeability exception.

Environmental Cleanup Administrative Priority Denied

In In re Insilco Technologies Inc., 309 B.R. 114 (Bankr. D. Del. 2004), Bankruptcy Judge Kevin J. Carey addressed the issue of whether "the costs to be incurred by a state environmental agency to clean up an ongoing environmental hazard on real property once owned and occupied" by the debtors should be granted administrative expense priority. The court held that where the debtor has no interest in the property, and any cleanup will not preserve any estate assets or provide a benefit to the estate since the property is not property of the estate, "an administrative claim cannot be allowed."

Standards for Permissive Abstention

In In re Coho Energy Inc., 309 B.R. 217 (Bankr. N.D. Tex. 2004), the debtor filed a post-confirmation adversary proceeding asserting breach of certain pre-petition operating agreements and pre-petition tortious conduct. Bankruptcy Judge Barbara J. Houser addressed a motion to dismiss or, in the alternative, for permissive abstention. Relying on In re Craig's Stores of Texas Inc., 266 F3d 388 (5th Cir. 2001), and In re U.S. Brass Corp., 301 F.3d 296 (5th Cir. 2002), the court held that where the claims dealt with the debtor's pre-petition relationship with the defendants, the plan contemplated the prosecution of the claims, and the distribution of the debtor's share of any recovery would be distributed to creditors; the prosecution of the claims will impact compliance with or completion of the plan, and thus the tests for post-confirmation subject matter jurisdiction were satisfied. However, the court also held that the permissive abstention was appropriate, there was no basis for federal jurisdiction other than §1334, this was a non-core proceeding where state law issues "do not merely predominate, they overwhelm," and the action sought damages for pre-petition breaches of pre-petition contracts and alleged pre-petition tortious conduct.

Abstention Appropriate After Dismissal of Debtor/Defendant

In In re United Petroleum Group Inc., 311 B.R. 307 (Bankr. S.D. Fla. 2004), Chief Bankruptcy Judge Robert A. Mark held that subsequent dismissal of debtors/ defendants did not oust bankruptcy court of subject-matter jurisdiction where initial removal was proper. Courts are prohibited from relying on post-removal events in determining subject-matter jurisdiction. However, the court did have to consider the current status of the case in deciding whether abstention was required under the mandatory abstention provisions of 28 U.S.C.A. §1334(c)(2). As a result, once the debtor/defendants were dismissed and despite the fact that remaining defendants raised defenses based on releases contained in the debtors' confirmed chapter 11 plan, there wasn't federal jurisdiction since the outcome of the claims asserted against these non-debtor third parties would have no effect on the assets available for distribution to the creditors of the confirmed chapter 11 cases. The court found that all elements for mandatory abstention were present and ordered a remand of the proceeding.

Personal Jurisdiction Satisfied by Federal Contacts

In In re L.D. Brinkman Holdings Inc., 310 B.R. 686 (Bankr. N.D. Tex. 2004), Chief Bankruptcy Judge Steven A. Felsenthal addressed issues related to personal jurisdiction over a defendant to a pre-petition cause of action relating to an alleged breach of contract. The debtor filed an adversary proceeding seeking to collect on a contract for the sale of goods, and the defendant asserted that it had no contacts, other than the adversary proceeding, with the state of Texas, and as a result, the defendant could not be sued in the U.S. District Court for the Northern District of Texas, invoking Fed. R. Civ. P. 12(b)(2) made applicable by Fed. R. Bankr. P. 7012. The debtor asserted that the "forum jurisdiction" is the United States, not the state of Texas. The court held that even though the merits of the claim may be determined by the application of state law, the federal court had subject-matter jurisdiction under the Bankruptcy Code as liquidation of the claim could have a conceivable effect on the administration of the bankruptcy estate. Once the issue of federal subject-matter jurisdiction was resolved, "the determination of personal jurisdiction becomes a matter of federal contacts, not state contacts" and held that the defendant had minimum contacts with the United States, relying on Busch v. Buchman, Buchman & O'Brien Law Firm, 11 F.3d 1255 (5th Cir. 1994).


  • In re Parker, 308 B.R. 129 (Bankr. D. Conn. 2004) (while post-bar date amendment to taxing authority's proof of claim was permitted, the claim was disallowed due to the binding effect of confirmed chapter 13 plan);
  • In re Ivani, 308 B.R. 132 (Bankr. E.D.N.Y. 2004) (Rooker-Feldman prohibited bankruptcy court from adjudicating motion seeking to hold debtor's ex-spouse in violation of the automatic stay where state court, in exercise of its concurrent jurisdiction, had previously determined that proceedings by ex-spouse were not subject to automatic stay);
  • In re APF Co., 308 B.R. 183 (Bankr. D. Del. 2004) (payments made on a promissory note were made on an antecedent debt and thus were for reasonably equivalent value and could not be avoided as a fraudulent conveyance under §548(a)(1)(B));
  • In re Jay, 308 B.R. 251 (Bankr. N.D. Tex. 2003) (under Texas law, a deed or deed of trust that is void cannot pass title or any other interest even to an innocent purchaser);
  • In re Golek, 308 B.R. 332 (Bankr. N.D. Ill. 2004) (proceeds that a chapter 13 debtor received upon post-confirmation sale of his residence did not constitute "disposable income");
  • In re Renaud, 308 B.R. 347 (8th Cir. BAP 2004) (all-terrain vehicle was a "motor vehicle" for purposes of certificate of title laws relating to perfection of liens);
  • In re Lawson, 308 B.R. 417 (Bankr. D. Neb. 2004) (board member and president of credit union breached his fiduciary duties when he obtained loan in violation of credit union's rules);
  • In re Wilcox, 310 B.R. 689 (Bankr. E.D. Mich. 2004) (fiduciary duties that chapter 7 debtor owed to his corporation, based on his status as officer and director, did not cause him to stand in "fiduciary capacity" to corporation with respect to his causing corporation to guarantee a debt incurred by business started by debtor and his wife);
  • In re Regan, 311 B.R. 270 (Bankr. D. Colo. 2004) (where debtors caused their wholly owned corporation to fail to remit to subcontractor trust funds that it received from property owners and to instead use funds for payment of corporation's general operating and debtors' personal living expenses, claims of subcontractor were excepted from discharge as debt for debtors' defalcation while acting in a fiduciary capacity);
  • In re Pittsburgh-Canfield Corp., 309 B.R. 277 (6th Cir. 2004) (creditor with disallowed reclamation claim was unsecured creditor that could not invoke the equitable doctrine of marshalling); and
  • In re Banco Latino International, 310 B.R 780 (S.D. Fla. 2004) (reversal of bankruptcy court decision allowing creditors that deliberately chose to not file contingent indemnification claims prior to expiration of bar date to file untimely claims once the amount of the indemnification claims became fixed as a contravention of "excusable neglect" standard for allowance of untimely claims in chapter 11 cases).
Journal Date: 
Friday, October 1, 2004