In In re Payless Cashways Inc., 287 B.R. 482 (Bankr. W.D. Mo. 2002), Chief Bankruptcy Judge Arthur B. Federman considered a claim by a chapter 11 trustee that an oversecured creditor was not entitled to collect interest at the default rate on the entire debt. Looking to the language of the agreement, the court noted that the credit agreement provided that the lender was entitled to collect at the default rate "on such defaulted amount." The court then held that, while the creditor could collect default interest in addition to its oversecured claim in connection with the debtor's missed $10 million payment, it was not entitled to collected default interest on the entire debt, which was in the excess of $106 million.

Jurisdiction over Patent Infringement Action

A post-confirmation debtor in Cytomedix v. Little Rock Foot, 287 B.R. 901 (N.D. Ill. 2002), filed a patent infringement action, and the defendants moved to dismiss or transfer, arguing that there was no personal jurisdiction and that the proper venue was Arkansas, where the allegedly infringing acts occurred. The court held that the minimum contact standard set out in International Shoe Co. v. Washington, 66 S.Ct. 154 (1945), does not apply in bankruptcy, and there was personal jurisdiction in bankruptcy court over defendants who are U.S. residents. The court held that the bankruptcy venue provisions of 28 U.S.C §1409(a) take precedence over the patent venue provision. The court also found that the debtor had asserted that the patents at issue were its "most significant assets" and "critical" to its success in reorganization. As such, the infringement actions were clearly "related to" bankruptcy jurisdiction.

"Partial Stay" Request Denied

In In re Convenience USA Inc., 290 B.R. 558 (Bankr. M.D.N.C. 2003), a chapter 11 plan was confirmed. A lessor of several locations unsuccessfully sought a "partial stay" pending appeal in order to prevent the debtors from assuming and assigning the lessor's leases pursuant to the confirmed plan. In order to grant such relief, the court held that it would effectively implement a "modified" plan that had not been submitted to or voted on by the creditors. The court examined the question of whether a full stay pending appeal would be granted, reiterating the "hardship balancing" test, which requires that a party seeking a stay pending appeal must show that (1) they will suffer irreparable injury if the stay is denied, (2) other parties will not be substantially harmed by the stay, (3) it will likely prevail on the merits of the appeal and (4) public interests will be served by the grant of the stay pending appeal. Applying this criteria, the court denied the stay pending appeal.

Expert Opinion Did Not Satisfy Burden of Proof

In re KZK Livestock Inc., 290 B.R. 622 (Bankr. C.D. Ill. 2002), was brought to the court on cross motions for summary judgment involving a trustee's motion to avoid transfers as constructively fraudulent as to the creditors. The trustee presented an expert regarding the debtor's alleged insolvency at the time of the alleged fraudulent transfers. An expert may be an expert, but the expert's opinion must be based on actual inquiry or other factual basis. The court found that the expert's opinion concerning the debtor's assets and liabilities was not based on a sound foundation. The expert admitted that he did not consider any of the debtor's financial records, including accounts receivable, accounts payable and tax returns, payroll records or general corporate documents relating to the debtor's corporate structuring, as those records did not exist. The court found that the expert's insolvency analysis failed to meet the standards demanded by the Bankruptcy Code. Apparently, no attempt was made to reconcile the transfers between the debtor company and the debtor's owner and other related entities. Thus, while the expert's opinion was admissible, it did not satisfy the trustee's burden of proof on the issue of insolvency.

"Inequitable Conduct" and Equitable Subordination

In In re Epic Capital Corp., 290 B.R. 514 (Bankr. D. Del. 2003), the resort owner issued bonds to fund a resort on Native American land. Under the bond indenture, the resort owner was to use its best efforts to obtain the consent of the Bureau of Indian Affairs to the imposition of a mortgage on the resort's leasehold interest in the Indian land upon which it operated the resort. The resort owner failed to obtain such approval. A subsequent lender, with knowledge of the trust indenture, entered into a loan transaction with the debtor in good faith and obtained a perfected security interest in the leasehold interest. Upon the lender's prosecution of a motion for relief from stay, the indenture trustee objected and sought to equitably subordinate the lender's interest. The court held that in deciding whether a claim of higher priority should be equitably subordinated, the bankruptcy court should consider the following factors: (1) whether claimant has engaged in some type of inequitable conduct, (2) whether this misconduct has resulted in injury to other creditors and conferred unfair advantage on the claimant, and (3) whether equitable subordination of the claim is consistent with the provisions of the Bankruptcy Code. Further, the court held that the burden of proof on the party seeking to equitably subordinate the claim depends on whether the claimant is an insider or a non-insider. In the case of an insider, the proof is less demanding. However, where the party whose claim is sought to be equitably subordinated is not an insider or a fiduciary, the party seeking to subordinate the claim must prove with particularity egregious conduct such as fraud, spoliation or overreaching. The court held that there are three general categories of behavior that may constitute "inequitable conduct" of the kind warranting the equitable subordination of a superior claim: (1) fraud, illegality or breach of fiduciary duties, (2) undercapitalization and (3) the claimant's use of the debtor as a mere instrumentality or alter-ego. Finally, the court noted that equitable subordination of claims is an extraordinary measure and is not lightly invoked. Under all of the facts and circumstances, the court held that the lender's conduct did not rise to the level of inequitable conduct justifying or supporting an equitable subordination of the lender's lien to the "equitable lien" position.

Section 328 and "Intervening Circumstances"

In In re Airspect Air Inc., 288 B.R. 464 (6th Cir. BAP 2003), the court expanded on §328 and the "intervening circumstances" that would be sufficient to render improvident a bankruptcy court's prior decision to approve the terms and conditions of a professional's employment, holding that the intervening circumstance must be one that would have affected the court's decision in the first place. "It must have been relevant to that decision in some way, rendering it untenable or unwise in hindsight." The bankruptcy court had approved a percentage contingency fee in connection with an alleged pre-petition breach of a lease. Under the lodestar method of calculation, the fees would have been $37,050. Under the contingency-fee agreement, the fees were $189,750. The bankruptcy court found an "intervening circumstance" in that the lease in question was deemed rejected by operation of §365(d)(4) after the contingency fee application was approved. The BAP found that the claim was actionable regardless of whether the lease was terminated, and, as a result, there was not an "intervening circumstance." The BAP also went on to provide clarification as to what should be contained in the initial order approving the engagement in order to preserve to the bankruptcy court the right to review an application under §330 of the Bankruptcy Code, which requires consideration of reasonableness and benefit to the bankruptcy estate, unlike §328. The court distinguished In re B.U.M. International Inc., 229 F.3d 824 (9th Cir. 2000), where the order approving the engagement contained the expressed intentions of the bankruptcy court to conduct a §330 "reasonableness and benefit to the estate" review. The Sixth Circuit BAP distinguished the subsequent decision of In re Circle K Corp., 279 F.3d 669 (9th Cir. 2002), finding that the "Circle K rule" seemed excessive as Fed. R. Bankr. P. 2014(a) does not require that the application and order must specifically invoke such §328. The Sixth Circuit BAP found the Fifth Circuit's view as expressed in In re National Gypsum Co., 123 F.3d 861 (5th Cir. 1997), to be preferable. National Gypsum held that language in a court's retention order purporting to reserve to itself the right to approve the reasonableness should not be construed as an attempt to undercut or condition its approval of a contingent fee contract. "It should not be misused by courts to take back with one hand what the other hand seemingly has given." As a result, the Sixth Circuit BAP held that the procedure for resolving the question of whether an application is approved under §328 or 330 is to review the record in its entirety and determine objectively what the bankruptcy court did.

Miscellaneous

• In re Scott, 287 B.R. 470 (Bankr. E.D. Mo. 2002) (obligation related to educational loan from "for profit" truck driving school not subject to exception from discharge under 11 U.S.C. §528(a)(8));
• In re NHB LLC, 287 B.R. 475 (Bankr. E.D. Mo. 2002) (bankruptcy court is not bound by decision of individual district court in multi-judge district but only by en banc decisions of district court);
• In re Phase I Molecular Toxicology Inc., 287 B.R. 571 (Bankr. D. N.M. 2002) (excellent discussion of equitable subordination in comparison to recharacterization of loans in connection to capital contributions);
• U.S. v. Wheeldon, 313 F.3d 1070 (8th Cir. 2002) (under the Federal Sentencing Guidelines, the governing standard is the intended loss computation rather than actual loss computation, and when applied to defendant convicted of bankruptcy fraud, the intended loss computation is the value of the assets concealed, not the amount of the debt for which discharge was sought);
• In re Zimmer, 313 F.3d 1220 (9th Cir. 2002) (anti-modification protection under 11 U.S.C. §1322(b)(2) is available only to holders of secured claims such that a wholly unsecured claim on a primary residence may be avoided in a chapter 13);
• RCC Technology Corp. v. Sunterra Corp., 287 B.R. 864 (D. Md. 2003) (software license agreement was an executory contract that could be assumed and assigned even though assignability of the software license agreement was clearly prohibited by federal copyright law);
• In re Shenandoah Realty Partners L.P., 287 B.R. 867 (Bankr. W.D. Va. 2002) (plan is binding on non-creditor that proposed and obtained confirmation of plan that allowed it to purchase assets of the debtor);
• In re Smith, 286 B.R. 882 (Bankr. W.D. Tex. 2002) (undersecured creditors could not be compelled to release their security interest without payment of entire debt in full, prior to completion of debtor's chapter 13 plan);
• In re Farmland Industries Inc., 289 B.R. 122 (8th Cir. BAP 2003) (as the high bidder at auction knew that sale would not be final until approved by the bankruptcy court, its "justifiable expectations" as purchaser had not crystallized to the point of certainty, and there would be no abuse of discretion to reopen the bidding);
• In re Harnischfeger Industries Inc., 288 B.R. 79 (Bankr. D. Del. 2003) (section of the Hague Convention on the "Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters" provided authorization for service of preference complaint upon foreign defendant in England by means of first-class U.S. mail); and
• In re Lickman, 288 B.R. 151 (Bankr. N.D. Fla. 2003) (judicial rulings alone do not constitute bias for disqualification purposes).