SW Legal's Case Updates: Bankruptcy

SOUTH-WESTERN LEGAL STUDIES IN BUSINESS CASE UPDATES—BANKRUPTCY

SW Legal's Case Updates is a SW Legal Studies service to provide briefs of the latest state and federal court cases. Review the summaries and, for cases of interest, select the case brief. If you cannot find a case of interest, return to Topic Index or Search.

*Title*	Summary
Injury Claim against Employer Fails Because Not Filed Before Bankruptcy Discharged Briefed Case	Washington high court held that a personal injury claim by a worker against his former employer failed. He was aware of the injury before bankruptcy proceedings began but failed to notify the employer of his possible claim. As an unknown creditor, his claim was discharged by the proceedings. (Updated January 2008)
Former Bank Director Not Insider for Purposes of Preferential Transfer Issues Briefed Case	Appeals court held that a long retired director of a bank, accused to making preferential payments to the bank prior to filing bankruptcy, was not an insider, so there was no preferential treatment issue requiring the bank to repay the money to the bankruptcy trustee. (Updated September 2007)
Trustee May Sue on Behalf of Bankrupt Estate to Try to Recover Looted Funds Briefed Case	Appeals court held that the trustee of a bankrupt firm could sue former executives and attorneys for looting the firm immediately prior to bankruptcy. Such suit need not only be brought by creditors of the bankrupt firm; the trustee can enforce the obligations of executives and attorneys. (Updated June 2007)
Bad Faith by Bankrupt Forfeits Right to Convert from Chapter 7 to Chapter 13 Briefed Case	Supreme Court held that when a Chapter 7 bankrupt was shown to have hidden assets, the bad faith behavior allows the court to prohibit the petitioner from converting to Chapter 13, which was a right otherwise. (Updated May 2007)
Yacht Not a Homestead in Texas Briefed Case	Texas high court held that a yacht, which is mobile, cannot qualify for homestead exemption under the Bankruptcy Code as it is not attached to land. Temporary mooring at a dock does not qualify as attached to land as the boat is capable of sailing away. (Updated March 2007)
Cable Television Service Not Necessary Utility for Bankrupt Briefed Case	Appeals court agreed that a cable television service provider had no obligation to provide service as requested by a customer in Chapter 13. Utility providers must provide service, but cable service is not a necessary utility. (Updated March 2007)
Speech Restrictions in 2005 Bankruptcy Reform Act Unconstitutional Briefed Case	Trial court held that bankruptcy attorneys many not be prevented from advising their bankruptcy clients to take financial actions that are legal under the bankruptcy law. Restriction on advice is unconstitutional under the free speech provisions of the First Amendment. (Updated August 2006)
Trustees in Bankruptcy May Not Sue Parties Who Aided Fraud Committed by Bankrupt Briefed Case	Appeals court held that the rights of a trustee in bankruptcy to sue are the same as the rights the bankrupt had at the time of filing bankruptcy. Hence, the trustee may not sue parties who participated in a fraud committed by the bankrupt. (Updated April 2006)
IRAs and Other Pension Funds Exempt from Bankruptcy Briefed Case	Supreme Court held that IRAs and other funds due to be paid under a plan or contract, based on age or some other specific factor, are protected for the benefit of the debtor in case of bankruptcy. (Updated August 2005)
Homestead Exemption May Apply to Property in Another State Briefed Case	Appeals court held that bankrupts are regarded as residents of the state in which they spent the most time in the180 days prior to filing. That meant the homestead exemption of that state would apply, even though they had sold their home and moved to another state. (Updated August 2005)
Student Debt Obligation Not Relieved Unless Undue Hardship Shown Briefed Case	Appeals court held that a bankruptcy court improperly absolved a student loan debtor of the remaining balance on a debt. Such debts are not absolved unless there is a hearing on the matter involving the creditor and debtor, where the debtor proves undue hardship. (Updated July 2005)
One Day Late; Many Dollars Short Briefed Case	Appeals court held that a claim against a bankrupt company that was filed one day late did not have to be accepted by the bankruptcy court. The claimant knew of the filing deadline and had no good excuse for not filing before the deadline, so the claim is lost. (Updated December 2004)
Argument Not Developed in Bankruptcy Proceedings May Not Be Made on Appeal Briefed Case	Appeals court held that a creditor must advance its arguments during bankruptcy proceedings or it may not raise the arguments on appeal. While a creditor objected to a cigarette allowance for a debtor, the creditor failed to provide a reason for its objection before the bankruptcy court, and so may not raise the argument on appeal. (Updated December 2004)
No Partial Discharge of Student Loans Absent Hardship Briefed Case	Appeals court held that a bankruptcy court improperly allowed partial discharge of student loans. The debtor failed to show that she suffered hardship as she had non-essential expenses such as a cell phone and cable TV, and it was likely that her income would rise in the future. (Updated November 2004)
Independent Examiner May Be Appointed to Review Proposed Changes in Employee Benefits Briefed Case	Bankruptcy court accepted the motion of a union that an independent examiner be appointed to assist the court in reviewing a proposed cut in retirement benefits proposed by an employer in Chapter 11 reorganization. An examiner can help provide an objective review of the finances involved and the timing of the proposed changes. (Updated April 2004)
Debt That May Have Been Obtained by Fraud Not Dischargeable in Bankruptcy Briefed Case	Supreme Court held that where parties had agreed to a settlement of a suit that claimed fraud, and then the debtor filed for bankruptcy, the settlement agreement was not dischargeable in bankruptcy because it may have been obtained by fraud. (Updated July 2003)
Rural Homestead Conditions Defined by State Statute Briefed Case	Appeals court held that a relative of company executives, who was paid a very large sum for managerial duties prior to bankruptcy of the firm, may present the defense of good faith for value before the jury to determine if the payment she received was justified or not. (Updated July 2003)
Jury Will Determine if Good Faith Defense Applies to Alleged Fraudulent Transfer Briefed Case	Appeals court held that a relative of company executives, who was paid a very large sum for managerial duties prior to bankruptcy of the firm, may present the defense of good faith for value before the jury to determine if the payment she received was justified or not. (Updated February 2003)
Chapter 13 Bankruptcy Can Force Cramdown of Home Equity Loan Briefed Case	Appeals court held that under Chapter 13, bankruptcy could force the makers of a home equity loan to accept a cramdown, where the secured portion of the loan shrinks to the actual value of the equity in the home, not the amount of the entire loan. (Updated December 2002)
Repossessed Cars Not Part of Bankruptcy Estate Briefed Case	Appeals court held that creditors of motor vehicles who repossess the vehicles upon payment default are the owners of the vehicles, so long as the repossession takes place before bankruptcy is filed. The vehicles do not become a part of the bankruptcy estate. (Updated September 2002)
Parties Financially Impacted by Bankruptcy Court Decisions Have Standing to Intervene Briefed Case	Appeals court held that under the person aggrieved doctrine, parties who are directly affected by the decision of a bankruptcy court, because they suffer a financial loss, have standing to intervene to appeal the decision of a trustee or bankruptcy court. (Updated September 2002)
Inherited Wedding Rings Not Exempt Property Under State Law Briefed Case	Wyoming high court held that the wedding rings a bankrupt individual had inherited from her mother, which were not used as wedding rings, were not exempt property and so were property of the estate. The state law differs from federal law in this regard, as permitted by the Bankruptcy Code. (Updated April 2002)
Objections to Bankruptcy Plan Must Fall Within Statutory Specifications Briefed Case	Appeals court held that a bankruptcy court must follow the specific steps set for construction of a bankruptcy plan and could not craft requirements for a debtor that are not provided by the statute. The law allows objections to a plan on specific bases; the bankruptcy court must use those bases for evaluating objections. (Updated March 2002)
Student Loans Rarely Dischargeable in Chapter 13 Bankruptcy Briefed Case	Court reversed the bankruptcy court decision that student loans could be discharged. Such discharge is allowed only if there is a showing of undue hardship on the debtor and the creditor must have the opportunity to participate in an adversarial proceeding on the matter. (Updated February 2002)
Bankrupt Had No Duty to Reveal Plans to Sue in Tort After Bankruptcy Briefed Case	Appeals court held that a party who incurred a tort claim while in bankruptcy proceedings, but intentionally waited to file the suit until he was discharged from bankruptcy, is not estopped from pursuing the tort claim, even though it occurred while he was in bankruptcy. (Updated December 1, 2001)
Trustee Not to Be Removed Except for Intentional Misconduct or Negligence Briefed Case	Court refused the request of several creditors to remove the trustee from a bankrupt estate. The creditors believed that the trustee was going to settle a case for far less than could be had by litigation. Court refused to remove the trustee, noting a split in opinion of the creditors, and the lack of evidence of misconduct or negligence on the part of the trustee. (Updated December 1, 2001)
Environmental Lien Not Stayed by Filing Bankruptcy Briefed Case	Appeals court affirmed that a lien filed against property to help secure the recovery of costs for the cleanup of an environmental hazard on debtor's property was exempt from the automatic stay that applied to most liens once bankruptcy is filed. Congress intended for such environmental liens to take priority over earlier perfected liens. (Updated November 1, 2001)
Judgments from Willful and Malicious Torts Are Not Dischargeable in Bankruptcy Briefed Case	Appeals court affirmed that a damage award for a willful and malicious tort is a debt that cannot be discharged in bankruptcy by the tortfeasor. While other tort awards may be discharged in bankruptcy, those that rise to the level of willful and malicious are not. (Updated September 1, 2001)
Unsecured Liens on Property of Bankrupt May be Extinguished Briefed Case	Appeals court held that a valid, recorded lien on real property could be voided in Chapter 13 bankruptcy because the value of the property is not sufficient to provide any security for any part of the lien. (Updated August 1, 2001)
Unionized Workers May File Mechanic's Liens Against Bankrupt Employer to Secure Vacation Pay Briefed Case	Appeals court overturned an earlier decision and held that unionized workers, like non-union workers, have the right to file mechanic's liens against an employer in bankruptcy to secure their claim for unpaid vacation time. Federal labor law does not conflict with this state law provision. (Updated August 1, 2001)
Savings and Loan Capital Requirements Must Be Met Prior to Chapter 11 Briefed Case	Appeals court held that before a savings and loan could enter Chapter 11 reorganization, its owners must provide the capital needed to eliminate its deficit. The owners promised federal regulators they would maintain the capital requirements; that commitment must be met before bankruptcy proceedings. (Updated May 1, 2001)
Failure to List Tort Claim on Bankruptcy Petition Precludes Tort Proceedings Briefed Case	Georgia high court upheld the dismissal of a tort claim filed by a party in bankruptcy against a person involved in an auto accident with them. Since the tort claim was an asset of the estate, and it was not revealed in the listing of assets, the bankrupt party is estopped from pursuing the tort claim as that would be manipulation of the court system. (Updated March 1, 2001)
Intended Use of Property May Control Valuation as Part of Bankrupt Estate Briefed Case	Court upheld the valuation of a parcel of land at a lower value based on its current and intended use by parties in bankruptcy. The parties do not have to convert the land to a higher valued use by subdividing the land, as was requested by a creditor. (Updated February 1, 2001)
Attempt to Collect Rent from Tenant in Bankruptcy Violated Bankruptcy Code Briefed Case	District court held that a landlord was in contempt of the Bankruptcy Code by attempting to collect rent due, which violated the discharge of debt injunction and automatic stay of creditors that occurs in Chapter 7 bankruptcy. (Updated January 1, 2001)
Secured Debt Under Chapter 13 May Not Be Converted by Debtor to Unsecured Debt Briefed Case	Appeals court held that a debtor who is complying with a court-confirmed repayment plan under Chapter 13 may not later convert a secured debt, such as owed on an automobile, to an unsecured debt, so that the debtor can incur more debt. (Updated December 1, 2000)
Workers' Compensation Insurance Premiums Not Entitled to Priority Status Briefed Case	Appeals court affirmed a decision that unpaid workers' compensation insurance premiums were not entitled to the priority status that is allowed for payments to employee benefit plans. Workers' compensation is mandated by state law; it is not a benefit provided voluntarily. (Updated October 1, 2000)
IRS Policy to Refuse All Offers of Compromise from Bankrupt Taxpayers Violates Bankruptcy Code Briefed Case	Bankruptcy judge held that the IRS policy to refuse all offers to compromise on federal tax debts owed by bankrupts violates the anti-discrimination provision of the Bankruptcy Code. Non-bankrupt taxpayers are, at the discretion of the IRS, offered compromises, so the policy must be the same for bankrupt taxpayers. (Updated April 1, 2000)
Asset Transfer to Lawyers at Time of Bankruptcy Filing is Voidable Preference Briefed Case	Appeals court held that the transfer of assets from a bankrupt firm to its legal counsel, on the day bankruptcy was filed, was a voidable preference. The law firm had no right to receive full payment for work previously done or for work to be done for the bankrupt firm, so the assets would be returned and the firm could not represent the bankrupt firm in the proceedings. (Updated October 1, 1999)
New Value May Not Be Granted to Prebankruptcy Equity Holder Over Objection of Impaired Creditors Briefed Case	Supreme Court reversed lower courts approval of a judicial cramdown, where a Chapter 11 reorganization was approved over objection of the primary creditor of the bankrupt, where the reorganization would grant new value to the equity holders of the same organization. (Updated October 1, 1999)
Court Uses "Totality of Circumstances" for Test of Substantial Abuse by Debtor Briefed Case	Appeals court adopted "totality of circumstances" test for bankruptcy proceedings to determine if a debtor has engaged in substantial abuse of the process by filing for Chapter 7 bankruptcy, when in fact there is sufficient income to repay debts. (Updated May 1, 1999)
Bankruptcy Plan Cannot Change Creditor Priorities Set by Statute Briefed Case	Appeals court reversed bankruptcy court decision on Chapter 11 reorganization plan that gave higher priority status to one tax claim over another. Courts cannot weaken the statutory priority rights established by Congress in the bankruptcy code. (Updated April 1, 1999)
Default Interest Rate Due from Date of Default Briefed Case	Appeals court affirmed decision that Chapter 11 reorganization proceedings did not extinguish the terms of a loan that required higher interest payments to be made once default occurred. Stay during bankruptcy did not extinguish the right to higher interest rate payments to creditors. (Updated April 1, 1999)
No Right to Avoid Publicity from Bankruptcy Briefed Case	Chapter 7 debtors not allowed to use their attorney's address in another town in an effort to keep parents and employer from learning of their bankruptcy. Except in rare case, publicity is important part of bankruptcy so that community is on notice. (Updated October 19, 1998)
Student Loans Not Discharged After Seven Years if Good Faith Error in Repayment Suspension Briefed Case	Debtor requested suspension of repayment of student loans while enrolled as part-time student after graduation. Lender mistakenly granted suspension of repayment. Bankruptcy, filed more than seven years after loan repayment should have started, did not discharge student loans since payment extension was erroneously granted in good faith. (Updated October 5, 1998)
Treble Damages for Fraud Not Dischargable in Bankruptcy Briefed Case	Landlord, convicted of fraud in overcharging tenants, is not allowed to discharge the rent overcharges or the treble damages and attorney's fees the tenants won under New Jersey Consumer Fraud Act. Supreme Court noted that the Bankruptcy Code affords relief only to the "honest but unfortunate debtor." (Updated May 29, 1998)
Industry Standards Primary Guide to Determine Preferential Transfers Briefed Case	Debtor construction company paid one supplier shortly before bankruptcy. Whether the payment was to be avoided as a preferential transfer would depend primarily on industry standards, not the ordinary course of business. (Updated May 29, 1998)
Malpractice Judgment Discharged in Bankruptcy Briefed Case	Physician filed for bankruptcy after losing large malpractice judgment to patient. Patient's request that malpractice judgment not be discharged in bankruptcy rejected by Supreme Court because the Code specified that only debts for "willful and malicious injury" are not discharged. (Updated May 29, 1998)
Discharge Standard for Student Loans Set for Sixth Circuit Briefed Case	Chapter 7 bankrupt requested discharge of student loans. Bankruptcy Appellate Panel determined that the Sixth Circuit would adopt the Brunner test to cover claims of undue hardship that would permit student loan discharges. (Updated March 11, 1998)
Claims from Willful Torts Not Relieved in Bankruptcy Briefed Case	When plaintiff sued for sexual battery, an intentional tort, the defendant filed for Chapter 7 bankruptcy. Plaintiff filed adversary proceeding in bankruptcy court seeking that any monetary liability from the tort claim be held nondischargeable under the Bankruptcy Code. Court agreed. (Updated October 15, 1997)