2008 – March

In re Carr; Case No. 05-11697-RGM; March 19th, 2008

Who can file pleadings for the debtor?

When a party to a case is represented by counsel, counsel and counsel alone should be filing the pleadings.  In addition to this error, the motion alleged that Wachovia Bank, the trustee of a trust established under the will of Robert A. Geary.  The question at issue was whether the trustee ought to be compelled to make a distribution.  The court notes that the will is probated in the Circuit Court for the City of Chesapeake and that this is a matter of state law; therefore, the court declined to exercise jurisdiction over the matter.

In re Hernandez; Case No. 07-11413-RGM; March 3rd, 2008

Fiduciary obligation of debtor’s business nondischargeable as to debtor

The simple non-delivery of funds does not necessarily equate to embezzlement, larceny, or a willful and malicious injury.

However, where there is an applicable trust agreement with a corporate entity, the obligations of which are guaranteed by the debtor who is also an officer and person in control of the corporation’s operations in which the defalcation occurred, the debtor’s obligation under the guarantee agreement is not dischargeable under 11 USC § 523(a)(4).

In re Marcano; Case No. 07-12857-RGM; March 3rd, 2008

Service of Objections

Objections to claims must be served pursuant to FRBP 7004.  In this case, service of objection must be to the attention of a particular officer or director.

In re Nuval; Case No. 07-13524-RGM; March 3rd, 2008

Reaffirmation Agreement Failure

If counsel fails to execute part C of the reaffirmation agreement, court review of the agreement is not necessary.

In re Rivas; Case No. 07-13377-RGM; March 3rd, 2008

Reaffirmation Agreement Ability to Make Payments

In reaffirmation agreements, the checking of the boxes by counsel is not determinative when the reaffirmation on its face shows the debtor is unable to make the payments.

In re Rodriguez; Case No. 07-13577-RGM; March 3rd, 2008

Reaffirmation Agreement Failure and Creditor Identity

This matter was before the court on a proposed reaffirmation agreement under §524 that was not fully completed.  Therefore the court determined that the reaffirmation was not effective.  This case also pointed to an interesting issue of the juidical person who is the creditor.  The court noted that the reaffirmation identifies “Branch Banking & Trust Company or one of its affiliates (hereafter collectively BB&T)” and then the reaffirmation was signed by Pretice Faircloth, who identified himself as “Asst. Vice President” under the name “BB&T Bankruptcy,” which the court notes does not appear to be a juridic entity and there is nothing else to indicate that Mr. Faircloth is authorized to enter into a reaffirmation agreement on behalf of the specific creditor to whom the debtor is indebted.

In re Rowe Furniture; Case No. 06-11143-SSM; March 4th, 2008

Informal Proof of Claim From Claim Filed in Debtors Parent Company’s Bankruptcy

This matter was before the court on the motion by Riverside Claims, LLC (“Riverside”) to allow a total of thirteen claims it filed after the claims bar date as amendments of claims that were timely-filed in the related case of the debtor’s parent holding company.  Riverside had filed claims in the parent companies case, but after the claims bar date for this case had run, and on the last day to object to the claims in the parent companies case, the parent company objected to the claims on the grounds that liability for those claims lie with the Debtor in this case.  Upon realizing its error, Riverside re-filed its claims in the present case and brought this motion to have them allowed as amendments to claims filed in the case of the parent company.

Except in Chapter 11 cases—in which certain claims are deemed filed if listed on the debtor’s schedules—a creditor desiring to receive distribution in a bankruptcy case must file a proof of claim.  11 USC §501(a), FRBP 3002(a).  The conversion of a chapter 1 case to a chapter 7 gives rise to a new time period for filing claims. FRBP 1019(2).  In a chapter 7 case, claims must normally be filed within 90 days of the first date set for the meeting of creditors.  FRBP 3002(c).

Bankruptcy courts have long exercised their equitable powers to allow creditors who have filed some other pleading in the case within the claims bar date that clearly sets forth the creditor’s claim, to have such pleading treated as an “informal” proof of claim that can be “amended,” after the claims bar date, by filing a formal proof of claim.  Fyne v. Atlas Supply Co., 245 F.2d 107 (4th Cir. 1957); see also Davis v. Columbia Constr. Co. (In re Davis), 936 F.2d 771 (4th Cir. 1991)(“For an amended claim to be allowed in the absence of a prior written informal claim, the creditor in question must undertake some affirmative action to constitute sufficient notice that he has a claim against the estate.”).  The District Court, in Dabney v. Addison, 65 B.R. 348 (E.D. Va. 1985) sets forth the following list of representative, but not exhaustive, activities of the creditor that would be considered sufficient notice of the creditor’s claim against the estate:

1.         sending bills to a trustee demanding to be paid;

2.         filing an objection to a trustee’s motion to sell property containing evidence of the creditor’s security interest in the property to be sold;

3.         attending and being an active party at the meeting of creditors; and

4.         an exchange of letters between the trustee and the creditor seeking payment from the estate.

However, notice of the creditor’s claim would not be found merely by proving knowledge on  the part of the trustee of the asserted claim or a mere listing of the claim by the debtor in the debtor’s schedules.  Rather, the essence of being able to find an informal proof of claim is some evidence that the creditor has made a demand in the case which “manifests the creditor’s intention to hold the debtor liable.” In re A.H. Robins Company, Inc., 118 B.R. 436, 439 (Bankr. E.D. Va. 1990).

In this case, Riverside did, prior to the claims bar date, file a pleading in which it identified itself as “the transferee of claims against the Debtors in the amount of approximately $300,000.00.”  The court then decided that, given the Fourth Circuit’s liberal view with respect to informal proof of claim, this court will find that the objections to the sale of the debtor’s assets was sufficient to constitute notice of a claim against the estate.

In re King; Case No 07-12498-RGM; March 6th, 2008

Reaffirmation Not Fully Completed

This matter was before the court on a proposed reaffirmation agreement under §524 that was not fully completed.  Therefore the court determined that the reaffirmation was not effective.

In re Pertis; Case No. 04-14471-RGM; March 6th, 2008

Joint Owner’s Agreement to Settle Home and Approval by Court

This case was before Judge Mayer on a motion to approve a settlement between the debtor and herself relating to the division of the proceeds of sale of their former marital home.  The non-debtor party, Ms. Herrick, asserts that the debtors failure to make post-petition payments should be taken into account in the distribution of the proceeds of the sale.

In Virginia, when adjusting accounts between joint tenants, the party who makes the mortgage payment is credited with one-half of the mortgage payments and the party that is not in possession is credited with one-half the fair rental value of the property.  In this case, there was an agreement for possession in return for certain compensation, so the aforementioned principal is not applicable.

A normal state court proceeding would have taken into account the unpaid mortgage payments by the debtor, however, it is not proper when the rights of third parties (the creditors in this case), are affected, as they are in a bankruptcy proceeding.

The debtor’s interest in the property became property of the estate while Ms. Herrick’s did not.  The debtor had exclusive possession of the property, but also had the obligation to make all mortgage payments when due.  When he failed to honor this obligation post-petition, he became in default of the property settlement agreement and divorce decree.

The court noted that Ms. Herrick does have a claim against the debtor for the unpaid mortgage, it is not a pre-petition claim and is not payable from the bankruptcy estate.  However, it will not be discharged by the bankruptcy either.

Ms. Herrick also argued that she and the debtor held the real property as partners and that the partnership obligations must be settled before the proceeds of the partnership can be disbursed to the two partners.  While as a principal of law this is true, co-owners are not automatically partners.  The Virginia Code defines partnersihip to mean “an assoiciation of two or more persons to carry on as co-owners a business for profit.”  VA Code. § 50-73.79.  The facts in this case show that the debtor and Ms. Herrick were not engaged in a business.  They were not sharing profits or losses nor contributing money, labor or goods to a common venture.  Their contract was not one to create a partnership and carry on a joint business, but rather to separate and carry on their individual lives.  There was no partnership and, thus, no partnership accounts to be settled before net surplus of partnership assets are distributed to the partners.

To the extent that the settlement agreement purported to give Ms. Herrick additional compensation over ½ of the proceeds, the agreement provided for a payment of an obligation that was not dischargeable in this bankruptcy case.  In short, the debtor sought to spend other people’s money, i.e., his pre-petition creditors’ money, to pay a post-petition debt to his former spouse.

The motion is granted to the extent one-half of the net proceeds of sale taking into account the judgment lien deducted by the settlement agent.

In re Stewart; Case No. 07-10860-RGM; March 7th, 2008

Relationship Between Fiduciary Duty In and Out of Bankruptcy and Non-Dischargeability

This case was before Judge Mayer on a motion for summary judgment filed by the debtor.  The Plaintiff in this case filed an adversary proceeding asserting that a judgment it had obtained in District Court in Oregon was nondischargeable under §§523(a)(4) and (a)(6) of the Bankruptcy Code.

Secton 523(a)(4) and its predecessors have long narrowly construed the scope of fiduciary relationships encompassed by them.  There must be a technical or express trust which predates and exists apart from the act creating the liability.  Agents, bailees, brokers, factors, partners and similarly situated persons are generally excluded.  4 Collier on Bankruptcy ¶523.10[1][d].  See KMK Factoring, LLC v. McKnew(In re McKnew), 270 B.R. 593, 624 (Bankr.E.D.Va. 2001).  The court determined that the debtor’s duty in this case was akin to the fiduciary duty partners owe each other and does not fall within the parameters of §523(a)(4).  The court notes that while there is a fiduciary duty, it is not a pre-existing trust relationship.

The court also noted that the debtor’s argument with respect to punitive damages, which argued that because the arbitrator found that the debtor lacked the necessary willfulness or reckless disregard the debt cannot be dischargeable under §523(6).  Importantly the court points out that the arbitrator used a different standard of proof (“clear and convincing” instead of “preponderance of the evidence”) and was therefore not dispositive with respect to the nondischargeability.

The court finished with an enlightening footnote, citing the Supreme Court, that pointed out that the validity of a creditor’s claim is determined by rules of state law and the issue of nondischargeability is a matter of federal law governed by the Bankruptcy Code.  Grogan v. Garner, 498 U.S. 279 (1991).

In re Dawson; Case No. 07-14025-RGM; March 10th, 2008

Reaffirmation Not Completed. .  .Again

This matter was before the court on a proposed reaffirmation agreement under §524 that was not fully completed.  Therefore, the court determined that the reaffirmation was not effective.

In re Stewart; Case No. 07-11414-RGM; March 12th, 2008

Appropriateness of Counsel Testimony

In this matter, the parties are getting ready for trial and have filed their witness lists pursuant to the pre-trial order.  The court, in this sua sponte opinion, reminded counsel of Rule 3.7 of the Virginia Rules of Professional Conduct that prevents them from being witnesses except where “(1) the testimony relates to an uncontested issue; (2) the testimony relates to the nature and value of legal services rendered in the case; or (3) disqualification of the lawyer would work substantial hardship on the client.”

In re Nwoke; Case No. 07-10324-SSM; March 18th, 2009

Time For Filing Dischargeability Complaint

This case was before the court on the motion of Tenacity Settlements, LLC (“Tenacity”) for leave to file a complaint to determine the dischargeability of Tenacity’s claim against the debtor to recover a payment made by mistake.  Tenacity was not listed as a creditor and not given notice of the bankruptcy case.  This complaint to determine dischargeability was filed after the date to file complaints to determine dischargeability.  However, “a complaint to determine dischargeability of an unlisted debt under § 523 (a)(3), Bankruptcy Code, may be filed ‘at any time.’”  FRBP 4007(b).  However, a complaint to determine the dischargeability of a debt for embezzlement or larceny under §523(a)(4) is governed by §523(c) and must be filed no later than 60 days after the first date set for the meeting of creditors.  FRBP 4007(c).

Although the court is empowered to extend the time “for cause,” the motion to extend the time must be filed “before the time has expired.”  Id. Regardless of the circumstances, the court has no power, after the bar date for filing a complaint has passed, to extend the time to file a complaint to determine dischargeability of a claim alleged to be excepted from discharge under § 523(a)(4).

A complaint to determine the dischargeability under § 523(a)(3), of an unlisted debt is not subject to § 523(c) and may be filed “at any time.”  FRBP 4007(b).

Because there is no bar date for filing a complaint to determine dischargeability of an unscheduled debt, a creditor needs no extension of time or leave of court to file such a complaint.  However, to the extent the motion seeks leave to file a complaint under §§523(a)(6) or 523(a)(4), it must be denied because the §523(a)(6) exception does not apply to end-of-plan discharges in chapter 13 cases and because the court has no power, after the bar date has passed, to extend the time to file  a complaint under § 523(a)(4).

In re Carr; Case No. 05-11697-RGM; March 19th, 2008

Who Can File Pleadings for Debtor?

When a party to a case is represented by counsel, counsel and counsel alone should be filing the pleadings.  In addition to this error, the motion alleged that Wachovia Bank, the trustee of a trust established under the will of Robert A. Geary.  The question at issue was whether the trustee ought to be compelled to make a distribution.  The court notes that the will is probated in the Circuit Court for the City of Chesapeake and that this is a matter of state law; therefore, the court declined to exercise jurisdiction over the matter.

In re US Airways, Inc.; Case No. 04-13819-SSM; March 27th, 2008

Notice of Bankruptcy Case

In a chapter 11 case, a debtor that continues in business following confirmation of a plan or reorganization is discharged from all debts arising prior to confirmation. 11 U.S.C. § 1141(d).  However, before such a claim can be discharged, creditors must be afforded adequate notice of the bankruptcy case, as well as of the deadline set for filing claims against the debtor.   Zurich American Ins. Co. v. Tessler (In re J.A. Jones, Inc.), 492 F.3d 242, 249(4th Cir. 2007).

They type of notice that is required depends on whether a creditor is “known” or “unknown.”  Creditors whose identities are actually known to the debtor or are reasonably ascertainable by the debtor are deemed to be “known creditors” and are entitled to actual notice of the bankruptcy filing.  An “unknown creditor,” by contrast, is one whose identity or claim is wholly conjectural, or whose interests or whereabouts cannot be determined by the debtor after exercising reasonable diligence.  An unknown creditor need not be given actual notice, and constructive notice, such as by newspaper publication, will suffice.

“Reasonable diligence” by the debtor, in attempting to ascertain the identity of its creditors does not require a level of impracticality and does not require a vast, open-ended investigation; rather, the debtor’s search should be concentrated on its own books and records.