Alaska Bankruptcy Reports - Digest Volume 8

Menu    8 ABR 1: Ch. 11, adequate protection, lease or disguised security interest (District Court, Sedwick).

Bankruptcy Court (Ross) affirmed [7 ABR 514]. Creditor entitled to adequate protection payments under 11 U.S.C. 363(e).

After debtor John A. Sankey filed chapter 11, ABCO Leasing filed a motion for adequate protection payments under 11 U.S.C. 363(e) with respect to two lease agreements. Sankey appealed the Bankruptcy Court's order granting ABCO's motion on two grounds: 1) that the agreements were disguised security interests rather than leases; and 2) that ABCO was entitled to adequate protection payments as the holder of a security interest, rather than as a lessor of personal property under 11 U.S.C. 365(d)(10).

Provisions in the leases specified that they were governed by Washington law. The District Court applied that state's version of UCC 1-201(37) to find that the agreements were in fact leases. Although it adopted a different analysis than the bankruptcy court's for determination of whether lessor had retained a meaningful reversionary interest, the district court affirmed the lower court's holding that the agreements were true leases rather than disguised security interests.

Sankey v. ABCO Leasing, Inc. (In re Sankey), 2/19/04.

Robert Crowther, Anchorage, for Sankey; Deborah Crabbe (Foster, Pepper & Shefelman PLLC), Seattle, for ABCO Leasing, Inc

Menu    8 ABR 12: Ch. 7, objection to claim, avoidance of fraudulent transfer under 11 U.S.C. 544(b)(1) and state law (Bankruptcy Court, Ross).

Bankruptcy court allowed the $1.1 million claim of Connie Bennett, the sole owner of debtor corporation Good Taste, Inc., finding that she had provided adequate backup information to support her claim. The court also found that the claim should not be subordinated or treated as a capital contribution. In a related adversary proceeding filed by the trustee, the court found that the pre-petition transfer of a promissory note to Bennett was not fraudulent under Alaska law, and that the trustee had not established that artwork belonging to Bennett had been transferred to her from the corporation. The adversary proceeding was dismissed.

Compton v. Bennett (In re Good Taste, Inc., d/b/a Saucy Sisters Catering), 3/31/04.

Michelle Boutin and Cabot Christianson (Christianson, Boutin & Spraker), Anchorage, for Compton; Gary Sleeper (Jermain, Dunnagan & Owens), Anchorage, for Bennett.

Menu    8 ABR 35: Ch. 7, surcharge under 11 U.S.C. 506(c) (Bankruptcy Court, Ross).

The court resolved a dispute between the trustee and his professionals, and secured creditors, the Atkinsons, re whether the trustee's commission and administrative fees and expenses could be surcharged against the proceeds of Atkinsons' collateral, remote mining claims in Kantishna. The trustee believed at the onset of the case that the mining claims had sufficient value that his administration of these assets would result in a distribution to unsecured creditors after payment of the Atkinsons' lien. The trustee spent 18 years embroiled in a dispute with the federal government and with competing claimants to clear title to and obtain adequate compensation for the mining claims. Ultimately, the net proceeds from liquidation of the mining claims were insufficient to pay both the estate's administrative claims and the Atkinsons in full.

The trustee moved for authority to pay his commission and the fees and costs of his attorneys and accountants from the proceeds under 11 U.S.C. 506(c). The Atkinsons opposed the motion. The bankruptcy court discussed Ninth Circuit case law on 506(c), finding that the circuit has adopted a narrow view of what expenses can be surcharged against proceeds of a creditor's collateral. The expenses must be reasonable, necessary, and have been beneficial to the preservation or disposition of the collateral. No surcharge is permitted for benefits which are incidental or which don't benefit the secured creditor, but the trustee is not required to have only the best interests of the secured creditor in mind when administering the collateral.

The court divided the fees and costs provided by the trustee's attorneys into three parts: 1) those incurred for clearing title and preserving the mining claims, which clearly fell within 506(c) and were allowed in full as a surcharge; 2) those outside of 506(c), which included disposition of personal property on the mining claims, proof of claims analysis and objections and the 506(c) litigation itself, which were not allowed; and 3) those in a "gray area" for general administrative tasks, for negotiations with the government, legislative, administrative and sales efforts, and for validity determination, appraisal process and patent application for which 15% were allowed as a surcharge. The trustee's commission, set at the older rate of 1%, was allowed in full because the court determined that the trustee had provided services benefitting the Atkinsons which were worth more than the commission amount. The accountant's fees and costs, incurred in the preparation of the debtor's past due corporate tax returns, were not a permissible surcharge against the proceeds of the mining claims.

In re Gold King Mines, Inc., 9/27/04.

Cabot Christianson (Christianson, Boutin & Spraker), Anchorage, for the trustee; John Siemers (Burr, Pease & Kurtz), Anchorage, for the Atkinsons.

Menu    8 ABR 64: Ch. 7, application of Deprizio time-barred, 725 trumps 502(d) and 506(d) to preclude trustee's avoidance of judicial lien (Bankruptcy Court, Ross).

Secured creditors Atkinsons held judicial liens against mining claims in Kantishna. Trustee sold estate's interest in mining claims free and clear of the Atkinsons' liens, which liens attached to the sale proceeds. The net proceeds were insufficient to pay the Atkinsons' secured claims ($678,000, including accrued interest) and the administrative expenses in full. Although the statute of limitations on preference actions had expired long ago, the trustee moved to disallow the Atkinsons' secured claims by using Deprizio in combination with 502(d). This would have left the Atkinsons with a general unsecured claim for $240,000, and no entitlement to accrued interest.

In the 1989 Deprizio case, the Seventh Circuit held that a payment made after 90 days but within one year of the filing of the petition, to a non-insider creditor whose loan was guaranteed by an insider of the debtor, could be set aside if all other conditions for a preference under 547(b) were met. The Ninth Circuit adopted Deprizio, but in 1994 amendments were made to 550(c) in an effort to reverse the effect of Deprizio. The transfer at issue in this case occurred well before the 1994 amendments, so Deprizio could still be applied if the trustee could otherwise prove a preference under 547.

Court found that even assuming Deprizio were applicable to the case, the trustee couldn't attack the judgment liens because the statute of limitations for filing a preference action had expired. In addition, although the trustee could have conceivably still used 502(d) as a defense to the Atkinsons' claims, 725 trumps both 502(d) and 506(d). Under 725, allowance or disallowance of the Atkinsons' secured claim was superfluous since the judgment liens had to be paid from the cash proceeds without regard to allowance of the secured claims.

In re Gold King Mines, Inc., 9/29/04.

Cabot Christianson (Christianson, Boutin & Spraker), Anchorage, for trustee Compton; John Siemers (Burr, Pease & Kurtz), Anchorage, for the Atkinsons.

Menu    8 ABR 74: Ch. 7, bankruptcy petition preparer, damages and injunction for violations of 110 (Bankruptcy Court, MacDonald).

The Thompsons had their initial bankruptcy paperwork prepared by We the People Alaska, L.L.C. (WTPA), a franchisee of We the People Forms and Service Centers USA, Inc. (WTPUSA). The Thompsons lived in Alaska at the time they filed bankruptcy, but subsequently moved to Minnesota. In connection with the services provided by WTPA, the Thompsons paid $50.00 for a credit report, $199 for document preparation, $200 for filing fees and $15.00 for copying charges. WTPA gave the Thompsons a bankruptcy workbook to fill out. The debtors' petition, schedules, statements and matrix were prepared from the information they put into the workbook. WTPA faxed the information to a paralegal in Colorado who was employed by WTPUSA. The paralegal prepared the bankruptcy documents and mailed them to WTPA in Alaska, where the Thompsons signed them. The paperwork was then filed with the court. The Thompsons' initial schedule C claimed an Alaska homestead exemption for real property they owned in Minnesota. They subsequently retained counsel and amended their exemptions, taking federal exemptions. The trustee objected to the debtors' amended exemptions.

The debtors filed an adversary proceeding against WTPA and WTPUSA seeking injunctive relief to prohibit certain of the defendants' business practices, and damages for violation of 110. The bankruptcy court found that both defendants had violated 110 and certified 26 specific violations to the District Court. The violations included failure to disclose the names and addresses of all bankruptcy petition preparers (BPPs) who had assisted with the preparation of the Thompsons' bankruptcy documents [ 110(b)(1)], failure to place the social security numbers of the BPPs on the documents [ 110(c)], WTPA's use of the word "legal" in yellow page advertisements and on a sign outside its office [ 110(f)(1)], and WTPA's collection of court fees from the debtors [ 110(g)(1)].

Under 110(i)(1), a debtor can recover actual and statutory damages from a BPP who violates 110. The court found that the Thompsons had no actual damages, but were entitled to statutory damages of $2,000 from each defendant, plus their reasonable attorney's fees and costs. The court also recommended entry of a permanent injunction against both defendants mandating future compliance with all provisions of 110. The court found the Thompsons' alternative ground for relief, for deceptive business practices under AS 45.50.471, meritless and dismissed this count, with prejudice.

Thompson v. We the People, Alaska LLC (In re Thompson), 10/22/2004

Chris Johansen, Anchorage, for Thompson; Richard Lubetzky (Los Angeles) and William English (Anchorage) for We the People.

Menu    8 ABR 87: attorney's fees, administrative expense priority for postpetition fees awarded to prevailing defendant on trustee's avoidance action under 544(b) (Bankruptcy Court, Ross) [related opinion at 8 ABR 12].

Connie Bennett, the debtor's sole shareholder, was awarded attorney's fees and costs for successfully defending against an avoidance action brought by the trustee under 11 U.S.C. 544(b) and the Alaska Fraudulent Transfer Act. The fees were allowable to Bennett as the prevailing party under state law. The trustee didn't dispute Bennett's entitlement to a fee award, but contended the fees should be treated as a general unsecured claim, rather than given administrative expense priority.

Where a bankruptcy matter is decided under state law which permits recovery of attorney's fees, the bankruptcy court generally will follow the state law rule in awarding fees. However, recent Ninth Circuit authority has created an ambiguity regarding whether fees awarded in postpetition litigation based on a prepetition claim should be given administrative expense priority. Some construe the "actual, necessary costs and expenses of preserving the estate" in 503(b)(1)(A) very narrowly, while others have a more liberal interpretation. None of the cases are on point regarding the priority status of a fee award to a defendant as prevailing party in a 544(b) proceeding.

Under the Supreme Court's pre-Code fundamental fairness doctrine of Reading Company v. Brown (fairness to all persons having claims against an insolvent), damages resulting from a receiver's negligence while acting within the scope of his duties during a Chapter XI arrangement were considered to be actual and necessary expenses of the arrangement rather than debts of the bankrupt. This doctrine has survived the enactment of the Bankruptcy Code and produces a just result if a trustee causes harm while seeking to reorganize, the damages for that harm should be part of the freight for seeking to reorganize. The doctrine has been extended in bankruptcies beyond the tort context and can be applied in Bennett's situation. A postpetition action under 544(b) brought by the trustee to avoid a transfer for the benefit of the estate, which proves to be unsuccessful, subjects the estate to an administrative expense for the successful defendant's attorney's fees. Bennett's fee award is entitled to administrative priority status

Good Taste, Inc. d/b/a Saucy Sisters Catering, 10/29/2004

Gary Sleeper (Jermain, Dunnagan & Owens, PC), Anchorage, and Thomas Yerbich, Anchorage, for Connie Bennett; Cabot Christianson (Christianson, Boutin & Spraker), Anchorage, for the trustee.

Menu    8 ABR 102: Ch. 7, attorney's fees against bankruptcy petition preparer awarded under 11 U.S.C. 110; bankruptcy petition preparer's claim for fees under state law rejected (Bankruptcy Court, MacDonald) [after remand from U.S. District Court - related opinion at 8 ABR 74].

The Thompsons filed an adversary proceeding against bankruptcy petition preparers We the People Alaska, L.L.C. and We the People Forms and Service Centers USA, Inc., for injunctive relief and damages for violation of 11 U.S.C. 110. The U. S. District Court entered an order adopting the bankruptcy court's certification finding that the defendants had violated 110, but remanded the matter for a determination of attorney's fees.

The defendants contended they were entitled to an award of fees under state law because they prevailed on the plaintiff's state law claims for deceptive business practices. Their claim was rejected because the plaintiffs' state law claims were based on the same operative facts as their claims for fraudulent, unfair or deceptive acts under 110(i)(1), and federal issues predominated in the action. Additionally, the plaintiffs' action was not "frivolous" as defined under AS 45.50.537(e), and Rule 82 fees could not be awarded because the Thompsons were akin to "private attorneys general" in bringing the enforcement action against the defendants for their violations of 110.

The Thompsons prevailed on six of the ten counts asserted in their complaint, all under 110. Sections 110(i)(1)(C) and (j)(3) mandated that they be awarded reasonable attorney's fees. Because it was impossible to pro-rate the fees requested by the Thompsons' counsel, on an hourly basis, to the counts on which they prevailed, the fees awarded were based on a percentage of the total of possible fines ($13,000.00) that could be imposed against the defendants for their violations of 110. On the theory that a standard contingency fee arrangement would provide for 1/3 of a recovery following trial, the Thompsons' counsel was awarded 1/3 of the total possible fine, or $4,333.00.

Thompson v. We the People, Alaska LLC (In re Thompson), 02/07/2005

Chris Johansen, Anchorage, for Thompson; Richard Lubetzky (Los Angeles) and William English (Anchorage) for We the People.

Menu    8 ABR 107: Ch. 7, monetary sanctions imposed on attorney for failure to comply with LBR 5005-2(c) requiring execution of LBF 37A before petition electronically filed (Bankruptcy Court, Ross).

Monetary sanction of $50 was imposed on debtor's attorney for placing a typed, "/s/" signature on LBF 37A and failing to have the LBF 37A executed before the debtor's petition was electronically filed.

AK LBR 5005-2(c) requires that AK LBF 37A (in the case of an individual or joint petition) or LBF 37B (in the case of a corporate or partnership petition) be executed by both the debtor and the debtor's attorney before a petition is electronically filed. This requirement is no more onerous than the requirement that a petition that is not electronically filed be verified prior to filing. The requirement that the correct form, LBF 37A or 37B, be prepared is a key element in the electronic filing system and provides assurance that the debtor has authorized the papers being electronically filed and agreed to be bound by them.

LBR 5005-2 provides for the imposition of sanctions, including dismissal of a case or loss of electronic filing privileges, if that rule is violated. While the debtor's attorney did not consciously or maliciously disregard the rule, there was a degree of negligence and inattention that called for imposition of the monetary sanction.

In re Etcheverry, 02/14/2005

Valerie Therrien, Fairbanks, for the debtor.

Menu    8 ABR 113: Ch. 7, motion to avoid lien denied due to insufficient notice (Bankruptcy Court, Ross).

The debtor's motion to avoid judicial lien pursuant to 11 U.S.C. 522(f) was denied without prejudice because it was improperly served. Such service on a corporate creditor must be made in accordance with Fed. R. Bankr. P. 7004(b)(3), which requires service on a specified corporate officer, a managing or general agent, or to any other agent appointed to receive process. Service by mail only on a corporate name, and not on an individual as agent for the corporation, does not satisfy the rule.

In re Saunders, 12/27/2004

Jane Pettigrew, Anchorage, for Saunders.

Menu    8 ABR 114: Ch. 7, court determines cabin in Kantishna is personal property (Bankruptcy Court, MacDonald).

The trustee filed a motion to determine that a cabin in Kantishna was property of the bankruptcy estate. The cabin sat on realty acquired by the United States during the pendency of the bankruptcy case. The issue to be determined was whether the cabin was a fixture annexed to the real property, thus belonging to the United States, or personal property belonging to the estate.

Under Alaska law, three tests are applied to determine if property is a fixture: annexation, adaptation, and intent. The Bankruptcy Court found that the cabin had not been permanently annexed to the land. Nor had the realty on which the cabin was located been adapted for the cabin's use. Finally, there was no intent to permanently annex the cabin to the land. The court concluded the cabin was not a fixture and belonged to the bankruptcy estate.

In re Ashbrook, 3/11/2005

Erik LeRoy, Anchorage, for Ashbrook; R. Pomeroy, Anchorage, for the United States.

Menu    8 ABR 123: Ch. 7, motion to reopen adversary proceeding, which court treated as motion for Rule 60(b) relief, denied (Bankruptcy Court, MacDonald).

The plaintiff, William Davis, filed a motion to reopen an adversary proceeding 17 months after it had been dismissed for failure to prosecute. The Bankruptcy Court treated the motion to reopen as one for relief from judgment under Fed. R. Civ. P. 60(b), applicable to bankruptcy cases by Fed. R. Bankr. P. 9024.

Davis, as parent and next best friend of a minor child, filed a civil action in state court against Gildersleeve and others for damages for sexual molestation. After Gildersleeve filed for bankruptcy, Davis commenced a timely adversary proceeding against her to except the debt from discharge. At three scheduling conferences before the court, Davis said he would be pursuing his claim against the debtor's insurance carrier because the debtor had minimal assets. At the final scheduling conference, Davis and Gildersleeve agreed that a judgment of nondischargeability could be entered against her, with a covenant not to execute, in exchange for the debtor's assignment of any claims she might have against her insurance carrier for refusing to defend her. Davis agreed to prepare the settlement documentation. Four months later the court gave notice of intent to dismiss because no settlement documents had been submitted. No party responded and the adversary proceeding was dismissed.

Davis thereafter attempted to prosecute his claim against Gildersleeve in the state court action. Gildersleeve moved for dismissal on the ground that Davis's claim was barred by her discharge. After the state court granted the motion, Davis moved to reopen the adversary proceeding, under 11 U.S.C. 350. Section 350 doesn't apply to adversary proceedings. The court treated the motion as one for relief from judgment under Fed. R. Civ. P. 60(b).

Davis contended the Bankruptcy Court lacked jurisdiction to discharge his claims against Gildersleeve. Dischargeability determinations are core proceedings over which the Bankruptcy Court has jurisdiction. Creditors seeking to except debts from discharge under 11 U.S.C. 523(a)(2), (4), (6) or (15) must seek a timely determination from the bankruptcy court. Federal courts have exclusive jurisdiction to determine these claims and a creditor is barred from further prosecution of such claims in any other forum after a debtor's discharge is entered.

Davis was not entitled to relief under Rule 60(b). His motion to reopen was brought more than one year after the adversary proceeding was dismissed, so he could not obtain relief on the grounds of mistake, inadvertence, excusable neglect, newly discovered evidence, or fraud. The dismissal judgment could not be set aside on the basis that it had been satisfied, released or was void. Finally, Davis could not obtain relief under the Rule 60(b)(6) catchall provision because the discharge of his claim was not due to circumstances beyond his control. His motion to reopen was denied. Only Davis's civil claims against Gildersleeve were discharged, however. Criminal fines and restitution which had been imposed upon her were automatically excepted from discharge under 11 U.S.C. 523(a)(7).

Davis v. Gildersleeve (In re Gildersleeve), 03/15/2005

Vern Rupright, Wasilla, for Davis; Jeff Carney, Wasilla, for Gildersleeve.

Menu    8 ABR 133: Ch. 7, trustees of fringe benefit trusts not entitled to claim wage lien under AS 34.35.435; trustees are limited to employee lien for benefit contributions under AS 23.10.047 (Bankruptcy Court, MacDonald).

Before an involuntary petition was commenced against debtor Ben A. Thomas, Inc., some of the debtor's equipment was sold at auction by Richie Bros. Auctioneers. Wasser & Winters (Wasser) and KeyBank held security interests in some of the equipment sold. The Trustees of the Tongass Timber Trust and the Alaska Loggers Association Retirement Plan (the Trusts) have a claim against debtor Ben A. Thomas, Inc., for unpaid employee fringe benefit contributions and had recorded timber, employee and wage liens against the debtor before the auction occurred. The Trusts had also initiated a lien foreclosure suit before the involuntary petition was filed.

The debtor didn't contest the involuntary petition and, after an order for relief was entered, Richie Bros. interpled the net proceeds from the equipment auction into the court registry. Cross motions for partial summary judgment were filed by Wasser and the Trusts on the issue of whether the Trusts could claim a wage lien under AS 34.35.435. If so, the Trusts' liens would prime the prior recorded security interests of Wasser and KeyBank. Wasser argued that, under general rules of statutory construction, the more specific provisions of AS 23.10.047 governed the Trusts' right to claim a lien in the auction proceeds. The Trusts argued that they were entitled to claim liens under both the employee lien and wage lien statutes.

A wage lien under AS 34.35.435 is for the benefit of employees or laborers to secure amounts due them for services they perform for their employers. An employee's lien under AS 23.10.047 is created when an employer fails to make employee benefit contributions as required under a collective bargaining agreement or other agreement with its employees. Both AS 34.35.435 and 23.10.047 create a statutory lien against all property of an employer, but only the wage lien primes prior recorded interests.

State law controls the validity and extent of statutory liens in bankruptcy. Under settled Alaska law, the provisions giving rise to statutory liens must be strictly construed. Employee benefit trusts aren't included in the class of claimants entitled to assert a wage lien. Under general rules of statutory construction, the more specific employee's lien statute, which creates a lien for benefit contributions, controls. Allowing the Trusts to claim a wage lien would nullify the employee lien statute. Statutes should not be interpreted in a way that renders certain provisions meaningless. The language of AS 23.20.047 is clearly applicable to fringe benefit contributions, and the lien created by that statute is subordinate to prior recorded interests. The Trusts cannot also claim a wage lien. Partial summary judgment granted to Wasser.

Ritchie Bros. Auctioneers (America), Inc. v. Wasser & Winters, et al. (In re Ben A. Thomas, Inc.), 5/06/05.

Patrick Gilmore (Atkinson, Conway & Gagnon), Anchorage, for Wasser & Winters; Eugenia Sleeper (Jermain, Dunnagan & Owens), Anchorage, for the Trusts; Michael Parise (Birch, Horton, Bittner and Cherot), Anchorage, for KeyBank.

Menu    8 ABR 144: Ch. 13 (dismissed), original jurisdiction over property of estate, ERISA preempts state court wrongful termination and bad faith failure to insure claims, remand denied (District Court, Beistline).

After the Jenkins filed a chapter 13 petition, they filed a suit in Fairbanks state court against Johnson, Johnson Dealership, Inc., Motors, Inc. and Fairbanks Nissan, Inc. (the Johnson group), seeking damages for wrongful termination and bad faith failure to insure. The Jenkins allege the Johnson group fired Mr. Jenkins in order to avoid having to pay health insurance benefits. The Johnson group removed the state court action to the bankruptcy court. The Jenkins filed motions to remand and to withdraw the reference. The bankruptcy court issued a report and recommendation to the District Court supporting withdrawal of the reference. After the adversary proceeding was transmitted to the District Court for a ruling on the two motions, the Jenkins' underlying chapter 13 case was dismissed by the bankruptcy court.

Notwithstanding the dismissal of the chapter 13 case, the district court found that remand of the Jenkins' civil action was inappropriate because there was federal jurisdiction over the claims. First, the Jenkins' claims against the Johnson group were property of the bankruptcy estate, over which the district court had exclusive jurisdiction at the time the action was removed. Second, the Jenkins' claims for wrongful termination and bad faith failure to insure were preempted by ERISA, requiring the district court to retain jurisdiction even after dismissal of the Jenkins' chapter 13 case. The motion to remand was denied.

Jenkins v. Johnson (In re Jenkins), 6/06/05.

Mike MacDonald (Downes, MacDonald & Levengood, PC), Fairbanks, for Jenkins; Peter Aschenbrenner and Peter Giannini (Aschenbrenner Law Offices, Inc.), Fairbanks and Anchorage, for Johnson group defendants.

Menu    8 ABR 150: Ch. 7, debtor's attempt to claim and offset preference against nondischargeable credit card debt denied (Bankruptcy Court, Ross).

Debtor Kimberly Adee had a credit card account with Chase Manhattan Bank with a high interest rate. She asked Chase to reduce the interest rate on this account, but the bank refused. On November 30, 2004, Adee and her husband (who did not file bankruptcy) transferred $5,700 from the Chase account to an account with GMAC solely in the husband's name. This transfer left a balance of less than $500 due on the Chase account. Shortly after consulting with a bankruptcy attorney, Adee transferred $5,700 from GMAC back to the Chase account on December 28, 2004. She filed bankruptcy on December 31, 2005.

Chase initiated an adversary proceeding against Adee to except the $5,700 balance transfer made on December 28, 2004, from discharge. Adee argued that, if this advance were excepted from discharge, the earlier payment to Chase for the same amount (made on November 30, 2004, by taking an advance from GMAC) should be considered a preference that she could offset against any nondischargeable liability to Chase.

11 U.S.C. 522(h) permits a debtor to prosecute a preference action when the trustee declines to do so, to the extent that the debtor could claim an exemption in any recovery. The court found that, assuming Adee were entitled to claim a preference offset, it would be limited to the unused amount of her pour-over exemption under 522(d)(5), which was $2,940. But there was no basis to find a preference, because there was no transfer of property of the debtor. In fact, after the November 30th transfer, the debtor was better off because $5,700 of her liability had been transferred to her husband. Even assuming the debtor were jointly liable on the GMAC account with her spouse, the earmarking doctrine would apply and defeat the preference claim. No setoff would be permitted. The $5,700 prepetition advance made by Chase was excepted from discharge.

Chase Manhattan Bank, USA, NA v. Adee (In re Adee), 06/10/2005

David Bundy, Anchorage, for Chase; Jeff Carney, Wasilla, for Adee.

Menu    8 ABR 157: Ch. 11, unperfected assignments of accounts (proceeds from seafood sales) are recoverable as preferences or unauthorized post-petition transfers and subordinate to statutory liens of fishermen and packers. Summary judgment to trustee and Fishers Committee granted (Bankruptcy Court, MacDonald).

In March, 2000, the debtor's predecessor, Triton, entered into contracts to purchase fish processing plants and other assets from the Cherrier Group for $3,351,000. Several addenda to the original contracts were made due to various delays. In May, 2000, a third addendum was entered which allowed Triton to take immediate possession of the processing plants and other assets so it could prepare for the upcoming fishing season. As "additional security" for closing of the purchase, Triton assigned the first $1.7 million of the net proceeds from its seafood sales to the Cherrier Group, to be applied against the purchase price or, if the sale didn't close by July 18, 2000, as compensation to the Cherrier Group for taking the assets off the market. The third addendum specified that the assigned funds would be deposited in an escrow account and would become the property of the Cherrier Group, free and clear of any claims or liens of Triton or its creditors, upon receipt. The Cherrier Group required Triton's sales agent, E&E Foods, to give written acknowledgment of the assignment and escrow provisions of the third addendum. E&E complied with this requirement.

The escrow account was never established. On July 10, 2000, Triton informed the Cherrier Group that it had changed its name to King Fischer Fisheries, that it was facing a cash crunch due to the poor fishing season and that it needed cash to meet payroll and other obligations. It asked for permission to use $300,000 of its fish proceeds to pay operating expenses. Triton proposed modifying the third addendum so that the Cherrier Group would receive the next $500,000 in net proceeds as minimum rent for the assets during the 2000 fishing season. The remaining $1.2 million in net proceeds would still be paid into an escrow account as contemplated by the third addendum. A letter was sent to E&E notifying it of this modification. E&E made pre- and post-petition payments totaling approximately $500,000 to the Cherrier Group consistent with the instructions it was given in the letter. Fishermen and packers who worked for Triton and/or the debtor during the 2000 fishing season were not paid for their work and claimed liens against the fish or the fish proceeds.

King Fisher filed a chapter 11 petition on July 19, 2000, just nine days after the modification to the third addendum was entered. The chapter 11 trustee filed an adversary proceeding to recover the $500,000 paid to the Cherrier Group on the basis that the transfers were avoidable under 544, 547, 548, 549 and 550. The Cherrier Group filed a crossclaim against the Official Fisher Creditors Committee. Motions for summary judgment or partial summary judgment were filed by all parties. The Cherrier Group argued that the funds belonged to it because the third addendum had irrevocably assigned the first $1.7 million of the debtor's fish proceeds to it and had independently obligated the debtor's sales agent, E&E, to pay this sum to it. The trustee asked for partial summary judgment on the issues of preference ( 547) and unauthorized post-petition transfers ( 549). The Official Fisher Creditors Committee requested summary judgment on the issue of whether the statutory liens of the fishermen and packers primed the Cherrier Group's interest in the $500,000. The trustee's and the committee's summary judgment motions were granted; the Cherrier Group's motions were denied.

The court found that the net proceeds from the debtor's seafood sales were accounts under the UCC. An assignment of accounts, whether absolute or for security, is governed by Article 9 of the UCC. An assignment of such accounts is perfected by filing. The Cherrier Group didn't perfect its interest in the debtor's fish proceeds by filing. Its interest in the accounts was subordinate to the trustee's interest as a lien creditor under 544 and to the statutory liens of the fishermen and packers.

The Cherrier Group unsuccessfully advanced two additional theories, the earmarking doctrine and "enabling transferee," to support its claim to the funds. The earmarking doctrine was inapplicable because funds hadn't been lent to the debtor for the exclusive purpose of paying the Cherrier Group, nor were the fish proceeds "new funds." The Cherrier Group was not an "enabling transferee" that had provided essential services to the debtor, but the seller in a failed sales transaction. It was not entitled to retain the funds.

Compton v. Cherrier & King Partnership, et al. (In re King Fischer Fisheries LLC), 06/03/2004

Gary Sleeper (Jermain, Dunnagan & Owens), Anchorage, for Compton; Spencer Sneed (Dorsey & Whitney LLC), Anchorage, for Official Fisher Creditors Committee; John Siemers (Burr, Pease & Kurtz), Anchorage, for the Cherrier Group.

Menu    8 ABR 173: Ch. 7 and 13, application of exigent circumstances and waiver provisions of 109(h) credit counseling requirement (Bankruptcy Court, MacDonald).

Two joint petitions (In re Phipps, Ch. 7, and In re Ace, Ch. 13) which were filed by individual debtors after the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") were dismissed because the debtors were ineligible for bankruptcy relief under 109(h). Under 11 U.S.C. 109(h)(1), individuals cannot be debtors under any chapter of the Bankruptcy Code, as amended by BAPCPA, unless they have received pre-petition credit counseling from an approved agency. Individuals can defer this requirement on the grounds of exigent circumstances, but only if they have requested, but were unable to obtain, this counseling before filing a bankruptcy petition. The debtors didn't qualify for the exigent circumstances deferral because, even though exigent circumstances existed, they had not requested credit counseling before filing.

In an individual chapter 7 case (In re Ridder), a debtor incarcerated at Palmer Correctional Center filed a motion to be relieved from the requirements of 109(h) on the grounds that the restrictive conditions of his incarceration prevented him from obtaining credit counseling. He had no Internet access and his phone privileges were limited to 10 minutes. Under 109(h)(4), a complete waiver of the pre-petition credit counseling requirement can be obtained if a debtor is physically disabled, mentally incapacitated, or on active military duty in a combat zone. Here, the debtor did not qualify for the waiver. The restrictive conditions of the debtor's incarceration did not constitute the type of physical impairment contemplated by 109(h)(4). The debtor had not established that he was so confined that he could not participate in any form of credit counseling, because he testified that he may have been able to get special phone privileges to complete the credit counseling. The debtor's motion for relief from the 109(h) requirements was denied and his petition was dismissed.

In re Phipps, In re Ace, In re Ridder, 11/17/05

Jane Pettigrew, Anchorage, for Phipps; Jeff Carney, Wasilla, for Ace; Paul Paslay, Anchorage, for Ridder; Kay Hill for the United States Trustee.

Menu    8 ABR 182: Ch. 7. It is unnecessary to reopen a closed case in order for a debtor to file a motion to avoid a lien under 522(f). (Bankruptcy Court, MacDonald).

The chapter 7 debtor filed a motion to reopen her bankruptcy case so that she could file a motion to avoid a judicial lien. The motion was denied as unnecessary. The debtor can file a motion to avoid lien without having to first reopen the case.

In re Patterson, 11/29/05

Robert Crowther, Anchorage, for Patterson.

Menu    8 ABR 183: Ch. 7, plaintiff's claims for exception of debt from discharge under 523(a)(4) and (a)(6) dismissed, but judgment entered on plaintiff's claim for revocation of discharge on basis of fraud, where debtors failed to disclose a business that they had owned within 6 years of the filing of their petition (Bankruptcy Court, MacDonald).

In 1996, debtors Kwan Su Yi and Tina Yi purchased a grocery store in Anchorage with plaintiff Jung Lee's former husband, Sang Lee. In 1998, the debtors purchased Sang Lee's interest in the store. A purchase contract and other documents were prepared and signed by the parties, and the debtors made payments to Sang Lee on the purchase contract through December, 2001. The debtors tried to keep the business afloat by borrowing money from friends and relatives. In January, 2002, they decided to sell the business to Shin Kang. Kang paid the debtors $100,000 over a 6 month period for the purchase of the store. The debtors used this money for living expenses and to repay some of the loans they had received from friends and relatives.

The Lees divorced and the plaintiff received the balance of her husband's interest in the purchase contract with the Yis. The debtors never made any payments to the plaintiff after she acquired this interest, in spite of repeated requests. After the plaintiff obtained a judgment for the outstanding debt against the Yis in state court, the Yis filed a chapter 7 petition. They didn't list the plaintiff on their schedules and Lee was unaware of the bankruptcy filing until she tried to enforce her judgment in state court. The Yis had by this time obtained their discharge.

Lee initiated an adversary proceeding against debtors seeking both exception of her debt from discharge under 11 U.S.C. 523(a)(2) and (a)(4), and revocation of the debtors' discharge for fraud under 11 U.S.C. 727(d)(1). Lee's complaint was timely under 523(a)(3) and Fed. R. Bankr. P. 4007(b) because she hadn't been scheduled as a creditor in the Yi's bankruptcy case and wasn't aware of the bankruptcy filing until after the deadline found in Fed. R. Bankr. P. 4007(c) had expired.

Lee was required to prove her 523(a) and 727(d) claims by a preponderance of the evidence. Her claim for exception of debt from discharge under 523(a)(4) failed because the Yis weren't trustees or fiduciaries for Lee, nor had they committed embezzlement or larceny. Lee's 523(a)(6) claim also failed. An intentional breach of contract is not a willful and malicious injury unless it is accompanied by tortious conduct. Additionally, the debt couldn't be excepted on the grounds of willful and malicious injury to a security interest held by Lee. The inartfully drafted purchase documents didn't create a security interest. Even assuming the documents had been sufficient to create a security interest, the Yis were unaware that such an interest existed.

Although Lee's 523(a) claims were dismissed, the debtors' discharge was revoked for fraud under 727(d). A material false oath is grounds for revocation of discharge. A false oath is material if it affects administration of the bankruptcy estate by misleading or concealing transfers that could be attacked as preferences or fraudulent transfers. The debtors made a material false oath when they failed to list their ownership of the grocery store and their business income from the store on their statement of financial affairs. They also failed to list Lee, their largest unsecured creditor and the one with knowledge of the sale of the business, in their schedules. The lack of disclosure precluded interested parties from investigating the sale transaction and possible fraudulent transfers. The Yi's discharge was revoked because it was obtained through fraud.

Lee v. Yi (In re Yi), 1/6/06

M. Gregory Oczkus, Anchorage, for Lee; Ronald A. Offret (Aglietti, Offret & Woofter), Anchorage, for Yi.

Menu    8 ABR 193: Ch. 7, liability portion of debtor's insurance policy, although not property of bankruptcy estate under 541(a), could be administered by trustee under terms of settlement agreement (Bankruptcy Court, MacDonald).

Debtor Allvest Corporation provided a "Community Service Patrol" for the Municipality of Anchorage. In 1995, Wassilie William Alexie died from injuries he received from Allvest employees. Evelyn Brown is the personal representative of Alexie's estate. Other individuals, "the J.W. creditors," were injured by Allvest employees in 1996. In 1997, Brown and the J.W. creditors filed suits in state court to recover damages from Allvest. After these suits were filed, in 1998, Allvest's principal, William Weimar, sold the corporation's assets and transferred the funds received to separate corporations and trusts.

After Brown and the J.W. creditors obtained substantial judgments against Allvest, they filed complaints in aid of execution against Weimar to recover the Allvest assets on fraudulent transfer and other grounds. Allvest had liability insurance for the periods when the injuries to Alexie and the J.W. creditors were sustained, but the state court judgments weren't paid by the insurer because it was insolvent and undergoing liquidation. Brown and the J.W. creditors filed claims in this liquidation proceeding.

In May, 2002, the J.W. creditors seized $490,000 from Allvest. Brown commenced an involuntary chapter 11 proceeding against Allvest in October, 2002. Allvest consented to bankruptcy relief and moved for conversion of the case to chapter 7. Weimar thereafter removed both state court actions to the bankruptcy court. The J.W. creditors moved for remand and for relief from stay. The state court actions remained in the bankruptcy court, however, and were ultimately dismissed after Weimar, the chapter 7 trustee, Brown and the J.W. creditors entered into an agreement resolving all claims against Weimar. The settlement was hastily negotiated and entered in December, 2002. Approval of the agreement before year end was critical, because it permitted Weimar to receive substantial tax advantages. The agreement was approved by the bankruptcy court after a lengthy hearing on December 31, 2002.

A dispute subsequently arose as to whether Brown's claim against Allvest's liability insurance could be administered by the trustee. The trustee says Brown's claim is property of the bankruptcy estate by operation of law. Brown says the claim is her separate property and did not come into the bankruptcy estate. The J.W. creditors say Brown's claim, as well as their own claim against Allvest's insurer, became estate property under the settlement agreement.

Allvest had a $1 million liability insurance policy in effect at the time Alexie was injured. The claim Brown made against Allvest's liability insurance was not estate property under 11 U.S.C. 541(a). While there is some authority for finding that liability policies are estate property, this finding has generally been made in the context of mass tort bankruptcies where several claimants are competing for the proceeds of a debtor's liability policy. Here, because there were just two tort claimants, each asserting a claim against a separate policy, the considerations found in mass tort bankruptcies didn't apply. Allvest's policy was a liability rather than an indemnity policy and, under controlling Ninth Circuit law, it was not property of the estate under 541(a).

Brown's insurance claim came into the estate by way of the settlement agreement, however. The settlement agreement had broad provisions that specified that the chapter 7 trustee would retain all insurance claims, including the insurance claims held by Brown and the J.W. creditors on account of their judgments. The agreement also contained a formula for distributing the settlement proceeds to Brown and the J.W. creditors. The formula was inconsistent with 726(a) and had no provision for a credit or setoff of any insurance recoveries received by these creditors. Under the agreement, the insurance proceeds came into the estate and Brown and the J.W. creditors would look only to the bankruptcy estate for payment of their claims.

The settlement agreement was an integrated agreement and extrinsic evidence could be examined to determine its meaning. The parties didn't specifically discuss the insurance claims during negotiation of the settlement, but the trustee's motion to approve the settlement stated that the bankruptcy estate would retain recoveries from insurance companies with respect to the tort claims asserted by Brown and the J.W. creditors. The trustee believed the insurance claims belonged to the estate by operation of law. After the settlement agreement was approved by the court, the J.W. creditors have proceeded on the assumption that the insurance claims were estate property. Brown has produced no compelling extrinsic evidence to the contrary. The insurance claim came into the estate under the settlement agreement, to be administered by the trustee.

In re Allvest Corporation, 1/12/06

John Siemers (Burr, Pease & Kurtz), Anchorage, for trustee Ken Battley; Erik LeRoy (Anchorage), for Brown; Steve Shamburek, Anchorage, for the J.W. Creditors.

Menu    8 ABR 210: Ch. 11 (dismissed). No jurisdiction to interpret court-approved settlement agreement after bankruptcy has been dismissed, in subsequently filed adversary proceeding between two creditors (Ninth Circuit).

Bankruptcy Court [7 ABR 308] and District Court [7 ABR 486] reversed. Bankruptcy court, which had approved settlement agreement while chapter 11 case was pending, lacked jurisdiction to interpret that agreement in an adversary proceeding between two creditors brought after the bankruptcy case was dismissed.

Appellant Sea Hawk obtained a judgment for $2 million against Valdez Fisheries Development Association (VFDA) for breach of contract. After the judgment was entered, the State of Alaska, Division of Economic Development, called VFDA's loans and VFDA transferred $2 million in cash and accounts receivable to the State. Sea Hawk petitioned the state court to recover the assets as fraudulent conveyances.

After the state court denied VFDA's motion for a stay of Sea Hawk's judgment, VFDA filed a chapter 11 petition. During the pendency of the bankruptcy, VFDA and Sea Hawk entered a settlement agreement that provided for dismissal of all pending litigation between the two parties, with prejudice. The agreement also provided that the bankruptcy court would have continued jurisdiction to interpret the settlement agreement. The State wasn't party to the settlement agreement. After the bankruptcy court approved the settlement, VFDA's chapter 11 case was dismissed.

Sea Hawk returned to state court to obtain a ruling on its fraudulent conveyance claim against the State. The State argued that Sea Hawk's claim had been extinguished by the settlement agreement. The state court declined to interpret the settlement agreement and required the parties to obtain a ruling on this issue from the bankruptcy court. The Alaska Supreme Court affirmed. Sea Hawk moved to reopen VFDA's bankruptcy case and, at that court's direction, filed an adversary proceeding against the State. The bankruptcy court held that it had jurisdiction over the dispute as a "related to" proceeding. The district court affirmed the finding of jurisdiction, but on the ground that the court had retained jurisdiction under the settlement agreement. Sea Hawk appealed to the Ninth Circuit.

The Ninth Circuit found that the bankruptcy court lacked jurisdiction. There was no "related to" jurisdiction under 28 U.S.C. 1334(b). A civil proceeding is related to a bankruptcy if its outcome could conceivably have any effect on the estate being administered in bankruptcy. The issue of whether the settlement agreement had released Sea Hawk's claims against the State had no impact on the debtor's rights or liabilities or upon the administration of the bankruptcy estate. Nor was there a close nexus between the dispute and the bankruptcy estate, which was closed. The bankruptcy court could have retained jurisdiction over the dispute if the fraudulent conveyance claim had been removed to that court while VFDA's bankruptcy case was pending, but could not assert jurisdiction over the claim after the main case had been dismissed.

The bankruptcy court also lacked ancillary jurisdiction over the dispute. Under Kokkonen v. Guardian Life Ins., 511 U.S. 375 (1994), ancillary jurisdiction exists (1) to permit a single court to dispose of factually interdependent claims or (2) to enable a court to vindicate its authority and effectuate its decrees. If a settlement agreement has lead to the dismissal of a case, the court has jurisdiction to vindicate its authority or effectuate its decree if its dismissal order explicitly retained jurisdiction or incorporated the terms of the settlement agreement. The bankruptcy court's order in the VFDA case did neither. There was no retained jurisdiction. The interpretation and enforcement of the settlement agreement should be left to the state court.

Sea Hawk Seafoods, Inc., v. State of Alaska (In re Valdez Fisheries Development Ass'n, Inc.) 2/22/06.

Menu    8 ABR 218: Ch. 11, deficiency claim, commercially reasonable disposition of collateral (Bankruptcy Court, MacDonald).

Debtor Baxter was an excavating contractor. He financed the purchase of a Volvo 120C loader through CIT. The security agreement he entered contained a provision that permitted CIT to sell or lease the collateral at any time and location of its choosing, provided CIT acted in good faith and in a commercially reasonable manner.

After Baxter defaulted on his loan, CIT sued him in state court and obtained a default judgment in November, 2002. CIT repossessed the loader in May, 2003, barged it to Seattle, Washington, and then transported it to Bothell, Washington, where it was stored until it was sold in early 2004 for $72,000. CIT mailed a notice of its intent to dispose of the loader to Baxter by regular and certified mail. The certified mail was returned to CIT unclaimed.

CIT filed a claim for a deficiency balance of $111,026.61 in Baxter's chapter 11 case. Baxter objected to the claim on two grounds: lack of notice regarding disposition of the collateral and failure to dispose of the collateral in a commercially reasonable manner. CIT's notice to Baxter was found to be sufficient because it had been sent to an address which Baxter had held out to be a place of receipt for communications. However, CIT failed to satisfy provisions of the UCC which require a secured party to dispose of collateral in a commercially reasonable manner. CIT made no effort to timely liquidate the collateral in Alaska, an obvious market for this type of equipment. Instead, CIT incurred inordinate time and expense shipping the loader to a saturated market in the Lower 48, where it sold for less than half of its value. CIT offered no business justification for disposing of the loader in this manner. Its claim was inflated and would be adjusted in accordance with AS 45.29.626(a). CIT's claim was allowed in the sum of $71,384.05.

In re Baxter, 03/15/06

Erik LeRoy, Anchorage, for Baxter; Fred Odsen (Hughes Bauman Pfiffner Gorski & Seedorf, LLC), Anchorage, for CIT.

Menu    8 ABR 225: Ch. 7, substantive abuse under 11 U.S.C. 707(b) [pre-BAPCPA], mitigating circumstances (Bankruptcy Court, MacDonald).

Debtor Olmstead is 59 years old and resides in Bethel, Alaska. He works as a medical technologist for the Yukon-Kuskokwim Health Corporation. His chapter 7 schedules reflected credit card debt of more than $116,000 and a monthly income surplus of $1,150. His gross income exceeded $85,000 in 2005, $79,000 in 2004, and $69,000 in 2003, but included retention bonuses of about $12,500 that he would no longer receive.

The United States Trustee filed a motion to dismiss Olmstead's chapter 7 petition on the grounds of substantial abuse under 707(b). While courts have primarily looked at a debtor's ability to fund a chapter 13 plan when determining substantial abuse, this factor alone isn't dispositive. A court should consider the totality of a debtor's circumstances, including whether the debtor has the likelihood of sufficient future income to fund a plan, whether the bankruptcy filing was due to illness or other calamity, whether the debtor's proposed budget is extravagant, and whether the debtor has misrepresented his financial condition.

Olmstead had mitigating circumstances which supported a chapter 7 filing. He is an aging worker with no pension or retirement benefits other than Social Security. He is a heavy smoker. His employer is downsizing and his job may be in jeopardy. He receives premium wages because of the location where he currently works. If he had to relocate to find new work, his wages would be significantly less and he would have to pay all relocation costs. Under the circumstances, there was no substantial abuse. The United States Trustee's motion was denied.

In re Olmstead, 05/09/06

Robert Crowther, Anchorage, for Olmstead; John Ruebelmann (Trial Attorney, Office of the United States Trustee), Anchorage, for the United States Trustee.

Menu    8 ABR 229: Ch. 7, non-core proceeding, damages for fraudulent or negligent misrepresentation, punitive damages, Rule 82 attorney fees (Bankruptcy Court, MacDonald).

While litigation was pending in state court against Allvest Corporation, Allvest's sole shareholder and president, William Weimar, sold the assets of the corporation and began a series of asset transfers to separate corporations and trusts. Weimar also received a $13 million distribution from Allvest. Judgments in excess of $3 million were subsequently entered in the state court actions against Allvest.

The judgment creditors filed supplemental complaints in aid of execution against Weimar and other entities to recover the Allvest assets, alleging alter ego, fraudulent transfer and other grounds. One of the judgment creditors also filed an involuntary chapter 11 petition against Allvest. Allvest consented to entry of an order for relief. Its motion to convert to chapter 7 was granted. Weimar removed the state court suits bankruptcy court and then negotiated a settlement with the chapter 7 trustee, Battley, and the judgment creditors. Integral to the settlement was Weimar's transfer of a vessel and other assets to the trustee. Weimar was to receive significant tax benefits by transferring these assets before year end. Settlement discussions were held throughout the month of December and, after a lengthy hearing on December 31, 2002, the bankruptcy court approved the settlement.

An express condition of the settlement was that Weimar accurately represent the value of his assets, including the vessel that was to be transferred to the trustee. Weimar grossly understated the value of the vessel. He told the trustee he had paid $600,000 for it, when he had only paid $335,00. He also failed to disclose two surveys that had been done on the vessel and told the trustee the vessel had been listed for sale for five months without an offer when, in fact, the vessel had been listed for at least one year without any offers. Weimar also understated the amounts he had invested in real property in Montana.

The trustee expected to be able to liquidate the vessel for between $600,000 and $1 million. After the settlement was approved, he contacted the boat broker in Florida who held the listing for the vessel. Battley learned that Weimar had removed valuable personal property and fixtures from the vessel, reducing its marketability. He also learned that the broker felt the vessel was substantially overpriced. Battley reduced the asking price to $795,000, although the broker felt the listing was still too high. The vessel received no offers. It suffered hurricane damage and was sold "as is" over the Internet. The trustee ultimately recovered $308,000 for the vessel, consisting of sale proceeds and an insurance recovery.

Battley filed an adversary complaint against Weimar seeking to recover damages on breach of contract and misrepresentation theories. Battley asked for compensatory damages, punitive damages, costs and attorney's fees. After trial, the bankruptcy court issued a report and recommendation to the United States District Court because the case was a non-core, related proceeding. The bankruptcy court found that the trustee had established claims for fraudulent and negligent misrepresentation. The court recommended damages be awarded to Battley based on the difference between the vessel's actual value and the value represented by Weimar. No damages would be awarded for Weimar's misrepresentations regarding the Montana real property, however, because the trustee hadn't established damages with reasonable certainty. Finally, while an award of punitive damages was not warranted, the trustee was entitled to prejudgment interest, costs, and attorney's fees in accordance with Alaska Civil Rule 82(b)(1).

Battley v. Weimar (In re Allvest), 02/27/06

Patrick Gilmore (Atkinson, Conway & Gagnon, Inc.), Anchorage, for Battley; Spencer Sneed (Dorsey & Whitney, LLP), Anchorage, for Weimar.

Menu    8 ABR 251: Ch. 7, core/non-core proceeding; rejected executory contract not property of bankruptcy estate (Bankruptcy Court, MacDonald).

Schweitzer and Katmai Pro Shop entered an aircraft lease/purchase agreement in April, 2003. Katmai filed a chapter 11 petition in September, 2003. Its motion to reject the lease/purchase agreement was granted in March, 2004. In May, 2004, Katmai filed an adversary complaint against Schweitzer seeking damages for breach of contract, breach of the covenant of good faith and fair dealing, conversion, trespass to chattel, negligence, and punitive damages. After Katmai's bankruptcy case converted to chapter 7, trustee Battley substituted in as plaintiff.

The claims asserted by the trustee were non-core proceedings over which the bankruptcy court had "related to" jurisdiction. Schweitzer asserted the lease/purchase agreement wasn't an asset of the bankruptcy estate, a bankruptcy law defense which was a core proceeding. Because both core and non-core issues were involved in the proceeding, the bankruptcy court issued proposed findings of fact and conclusions of law to the District Court for de novo review.

The lease/purchase agreement was an executory contract. Katmai's rejection of the contract prevented it from becoming an asset of the estate. Rejection of an executory contract is retroactive to the date the petition was filed. The trustee therefore lacked standing to assert claims for post-petition breaches of the lease/purchase agreement or for breach of the implied covenant of good faith and fair dealing. The trustee's tort claims also failed for lack of evidence. Because the dispositive issues in the case were determined under federal bankruptcy law rather than state law, no Rule 82 attorney's fees would be awarded.

Battley v. Schweitzer (In re Katmai Pro Shop, Inc.), 5/10/06.

William Artus, Anchorage, for Battley; Erik LeRoy,Anchorage, for Schweitzer.

Menu    8 ABR 258: Ch. 7, arrest and fines as sanction for contempt (Bankruptcy Court, MacDonald).

Trustee moved for sanctions against debtor for her failure to comply with a judgment and an order of contempt. The judgment directed the debtor to instruct her siblings to turnover property in Thailand to the trustee so it could be sold. A subsequently entered contempt order provided for a per diem fine plus a money judgment of $80,000 if the debtor didn't comply with the prior judgment within 60 days. The debtor was served with the contempt order but failed to comply with its terms. The trustee requested that the monetary sanctions be assessed and that a warrant for the debtor's arrest be issued.

The court declined to issue an arrest warrant, finding that the judgment and contempt order were too vague to enforce. Orders must be sufficiently specific that those who must obey them will know what is required. The trustee's judgment simply directed the debtor "to instruct" her siblings to sign the property over to the trustee. It didn't specify how the instructions were to be given. The debtor's assertion that she had told her siblings over the telephone to deed the property to the trustee could conceivably satisfy the terms of the judgment and order.

Due to the lack of specificity in the judgment and order, the trustee couldn't establish by clear and convincing evidence that the debtor had violated their terms. Additionally, a contempt order could not properly be issued against the debtor to compel the conduct of her siblings, Thai nationals who were not under the court's jurisdiction. Finally, the per diem fine would not be imposed because bankruptcy courts can only impose civil, not criminal, sanctions. Civil sanctions must be either compensatory or designed to coerce compliance. They cannot be punitive. Because the debtor's discharge had already been denied and she earned only minimal income, the per diem sanction would have no coercive effect upon her. But the remaining monetary sanction, which represented the estimated value of the Thai property, was compensatory in nature and would be imposed if the debtor failed to appear at a continued hearing and sign written instructions to her siblings, prepared by the trustee.

Compton v. Moyer (In re Moyer), 5/31/06.

Michelle Boutin (Jermain, Dunnagan & Owens, P.C.), Anchorage, for Compton; Siriporn Moyer, Pro Se Debtor.

Menu    8 ABR 269: Ch. 7, negligence in care of leasehold is not willful and malicious injury (Bankruptcy Court, MacDonald).

Rental house occupied by the debtors and their six children was left in poor condition. The landlord obtained a judgment for damages in state court for $24,332. After the bankruptcy was filed, the landlord sued the debtors to except the judgment from discharge as willful and malicious injury.

A creditor has the burden of proof to establish an exception to discharge by a preponderance of the evidence. Negligent or reckless conduct doesn't fall within the willful and malicious exception to discharge. Nondischargeability under 523(a)(6) requires a deliberate or intentional injury. The damages to the home were the result of years of hard use by a large family, rather than a deliberate, intentional injury. The landlord's complaint was dismissed, with prejudice.

McBride v. McAlpin (In re McAlpin), 06/01/06.

Blake Chupka, Ketchikan, for McBride; David Rosendin, Ketchikan, for McAlpin.

Menu    8 ABR 272: Ch. 13, objection to claim; fraud/punitive damages; burden of proof (Bankruptcy Court, MacDonald).

Debtor Callison objected to claims filed by members of the Basargin family. All of the claimants were fishermen who had used Callison's services as a fishing broker before the bankruptcy was filed. Problems arose in some of the transactions. The Basargins sued Callision in state court but none of their claims were liquidated at the time Callison's petition was filed. They filed substantial claims in Callison's bankruptcy case "for fraud and theft from trust account." Some also requested punitive damages. No supporting documentation was filed with any of the Basargin's claims.

An evidentiary hearing was held on the debtor's objections to the Basargins' claims. A proof of claim provides some evidence as to its validity and amount. A party objecting to a claim must produce sufficient evidence to establish facts which tend to defeat the claim by probative force equal to the allegations of the claim itself. The ultimate burden of persuasion in establishing a claim rests with the claimant.

State law governs the substance of a claim, and circumstances of fraud must be pled with particularity, specifying the time and place where the fraud occurred. Damages for fraud can't be speculative or contingent. With one exception, the Basargins' claims failed because the evidence in support of their claims was inconclusive and lacked sufficient detail to establish damages. No punitive damages were allowed because the Basargins failed to establish, by clear and convincing evidence, that Callison's conduct was outrageous or reckless.

In re Callison, 07/17/2006

Frank Cahill, Anchorage, for the debtor; Joe Kashi, Soldotna, for Basargins.

Menu    8 ABR 282: Ch. 7, standard of review, interpretation of settlement agreement (District Court, Burgess).

Bankruptcy Court (MacDonald) affirmed [8 ABR 193]. A settlement agreement between Brown, the J.W. creditors, and the trustee, and approved by the bankruptcy court, transferred Brown's pre-petition claim against the receiver for an insolvent insurance company to the bankruptcy estate.

Brown and the J.W. creditors obtained substantial prepetition state court judgments against debtor Allvest. The judgment creditors also filed claims against the receiver of Allvest's insolvent insurance carrier. Brown and the J.W. creditors removed their state court actions against Allvest to the bankruptcy court. These actions were resolved by a settlement agreement between Brown, the J.W. creditors and the trustee which was approved by the bankruptcy court.

After the agreement was approved, a dispute arose regarding its interpretation. Brown moved for a determination that the settlement agreement didn't encompass her claim against the insurance receiver. The J.W. creditors filed a cross-motion, arguing that the claim was property of the bankruptcy estate. The bankruptcy court ruled in favor of the J.W. creditors and Brown appealed.

The issue on appeal was whether the settlement agreement transferred Brown's claim against the receiver for the insurance company to the bankruptcy estate. The District Court applied a clearly erroneous standard of review to the bankruptcy court's factual findings and a de novo standard to review the bankruptcy court's interpretation of the settlement agreement.

The settlement agreement was an integrated agreement. The bankruptcy court correctly examined the entire agreement as well as extrinsic evidence to determine its meaning, and concluded that the agreement encompassed Brown's claim against the receiver. Where the bankruptcy court resorted to extrinsic evidence, its interpretation of the agreement must be upheld unless clearly erroneous. It is clear from the record that there were significant unresolved issues at the time the agreement was made. The agreement was a global agreement which intended to resolve all claims and disputes. There may have been a mistake in the parties' understanding regarding whether the claims against the receiver belonged to the bankruptcy estate by operation of law. A mutual mistake may be grounds for reformation of an agreement, but the elements of reformation must be shown by clear and convincing evidence. Brown didn't satisfy this standard. Further, a mistake as to whether the claim was already part of the bankruptcy estate doesn't establish a mistake as to the intent of the parties that the claim be included in the agreement. The agreement may be an imperfect agreement, but the bankruptcy court's determination was not clearly erroneous and is affirmed.

In re Allvest Corporation, 7/31/06

John Siemers (Burr, Pease & Kurtz), Anchorage, for trustee Ken Battley; Erik LeRoy, Anchorage, for Brown; Steve Shamburek, Anchorage, for the J.W. Creditors.

Menu    8 ABR 293: Ch. 7, exception from discharge under 523(a)(4); denial of discharge under 727(a)(2) (Bankruptcy Court, MacDonald).

Bethel Native Corporation (BNC) filed an adversary proceeding against debtor Hoffmann seeking to except its debt from discharge under 11 U.S.C. 523(a)(4) and to deny Hoffmann's discharge under 727(a)(2). Hoffmann counterclaimed for sanctions under 362(h), contending BNC's complaint violated the automatic stay. Judgment for BNC; Hoffmann's counterclaim dismissed with prejudice.

Hoffmann was a broker and property manager in Anchorage, and the sole owner/director of Hoffmann Commercial, Inc. (HCI). BNC was one of his clients. On Hoffmann's recommendation, BNC invested in income property as a limited partner. Hoffmann and HCI were general partners. The investment fared poorly. BNC lost its initial investment plus loans it had made to the limited partnership. Hoffmann also owed BNC rent from an office building he was managing for BNC. After suing Hoffman and HCI in state court, BNC recovered a judgment of about $670,000.

HCI filed a chapter 11 petition, which was dismissed on motion of the U.S. Trustee. While BNC's claim was still pending in state court, HCI transferred all its assets to a corporation owned 100% by Hoffmann's wife. After the transfer, HCI ceased business operations and Hoffmann filed his chapter 7 petition. BNC's adversary complaint was filed shortly thereafter.

BNC claimed Hoffmann's debts to it arose from fraud or defalcation while Hoffmann was acting in a fiduciary capacity. For a debt to be excepted from discharge under 523(a)(4), an express or technical trust must exist. State law determines whether such a trust relationship exists between the debtor and the creditor. The trust must exist prior to the time of the debtor's alleged wrongdoing. Hoffmann, as a general partner and broker, was a fiduciary under Alaska law and within the meaning of 523(a)(4).

Defalcation is the misappropriation of trust funds or the failure to properly account for such funds. Under 523(a)(4), defalcation includes the innocent default of a fiduciary who fails to account for money received, as well as intentional or negligent defaults. BNC established that substantial funds were entrusted to Hoffmann, which shifted the burden to Hoffmann to render an accounting. Hoffmann failed to accurately account for the funds he received. BNC's debts in the amount of $507,000 are excepted from discharge.

BNC also claimed Hoffmann's discharge should be denied under 727(a)(2) because HCI, within one year of the date of Hoffmann's petition, transferred substantially all of its assets to a corporation wholly owned by Hoffmann's wife. Hoffmann contended 727(a)(2) didn't apply because only corporate property was transferred. A person who uses a corporation to commit fraud should not be permitted to hide behind the corporate veil. Abundant grounds existed for piercing the corporate veil in Hoffmann's situation, and his discharge would be denied.

Hoffmann's counterclaim for sanctions under 362(h) was meritless. BNC didn't violate the automatic stay by filing its adversary complaint. Such claims are contemplated by the Bankruptcy Code. Hoffmann's counterclaim would be dismissed with prejudice.

Bethel Native Corporation v. Hoffmann (In re Hoffmann), 8/08/06.

Eugenia Sleeper (Jermain, Dunnagan & Owens), Anchorage, for Bethel Native Corporation; William Artus, Anchorage, for Hoffmann.

Menu    8 ABR 301: Ch. 11, default judgment, collateral estoppel (Bankruptcy Court, MacDonald).

Debtor-in-possession Precious Gifts objected to a claim filed by Robert Merry, d/b/a B. Merry Studios. Merry had obtained a prepetition default judgment against the debtor in excess of $80,000. Precious Gifts contended it only owed Merry a fraction of this amount. Merry argued that the state court judgment precluded litigation of the claim in the bankruptcy court.

Applicable state law determines the collateral estoppel effect of a state court default judgment in a bankruptcy proceeding. Alaska requires 3 elements before collateral estoppel can be applied: privity of parties, identical issues, and a final judgment on the merits in the first action. Default judgments in Alaska don't satisfy the third element because they don't entail a full and actual litigation of the underlying factual issues. Trial on the merits is preferable to a default judgment.

Cases cited by Merry to support his contention that the default judgment should be given preclusive effect were distinguishable. Merry's state court complaint alleged damages of $16,000. There were no allegations to support his claims for restocking fees or factoring fees and late charges, nor did Merry provide any documentary evidence to support these claims when he moved for the state court default judgment. Merry's damages were not actually litigated in state court and the default judgment didn't preclude the bankruptcy court from determining the debtor's objection to his claim on the merits.

In re Precious Gifts on Sixth, Inc., 8/21/06.

David Bundy, Anchorage, for Precious Gifts; Darrell Thompson, Anchorage, for Robert Merry.

Menu    8 ABR 308: Ch. 7, exemption under 522(d)(11)(D), personal injury settlement (Bankruptcy Court, MacDonald).

The debtors and their children were injured in an automobile accident. Their vehicle was rear ended by a large Ford van. They retained an attorney and sued the driver of the van in state court. The debtors subsequently filed a joint chapter 7 petition. Their case trustee retained the debtors' attorney as special counsel to prosecute the claim on behalf of the estate. The trustee received an offer to settle which netted approximately $59,000 for the estate after payment of special counsel's fees and costs. The debtors each claimed a full exemption in the settlement proceeds, $18,450, under 522(d)(11)(D). The trustee objected to their exemption, claiming at least a portion of the settlement was compensation for pain and suffering or actual pecuniary loss, outside the scope of this subsection.

Section 522(d)(11)(D) permits a debtor to exempt payments received in compensation of actual bodily injury. A debtor does not need to sustain permanent injuries to be entitled to this exemption. The debtors both suffered painful soft tissue injuries which still require treatment. Their injuries are personal bodily injuries within the meaning of the statute. While no portion of the settlement constituted compensation for medical expenses, damage to the vehicle, or lost earnings, the evidence produced at the hearing established that a significant portion was allocable to pain and suffering. Pain and suffering damages aren't exempt under 522(d)(11)(D). The court found that a reasonable allocation of the estate's net share of the settlement was 70% to pain and suffering and 30% to actual bodily injuries. The debtors were each permitted to exempt 15% of the net proceeds. The estate would retain the balance.

In re Buscano, 10/20/06.

Greg Oczkus, Anchorage, for Buscano; William Artus, Anchorage, for trustee Battley.

Menu    8 ABR 313: Ch. 7, marshaling of assets (Bankruptcy Court, MacDonald).

Debtor Ferrari owned two homes at the time he filed his chapter 7 petition, his residence and a rental home. Both properties were subject to judicial liens and federal tax liens. The IRS held a first priority, statutory lien for taxes and Arctic Builder's Supply ("ABS") held a junior, judicial lien in both properties.

Ferrari's motion to avoid the judicial liens against his home, including the lien of ABS, was granted. Ferrari initially intended to have the case trustee sell the home and pay the net proceeds to the IRS in satisfaction of its priority tax lien. He made this representation in his motion. Ferrari subsequently decided to retain the home and work out an offer in compromise with the IRS. The trustee moved to sell the rental property, with the net proceeds from that sale going to the IRS's priority lien. ABS objected and moved to compel the trustee to instead pay the judicial liens from the proceeds of the rental property. ABS also sought an order compelling the trustee to sell the debtor's home to pay the IRS's priority tax lien.

The bankruptcy court rejected ABS's request to marshal the debtor's assets. Marshaling is an equitable doctrine designed to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor. State courts have refused to apply the doctrine where homestead exemptions would be destroyed. Federal courts have also refused to apply the doctrine where one of the funds is exempt under state law. The result of ABS's proposal would be that the IRS's first lien would be paid from the debtor's homestead rather than the rental property. This is an inequitable result which would not be allowed. Additionally, the fact that the debtor contemplated selling his home to pay the IRS lien when he moved to avoid ABS's judicial lien didn't lock him into this course of action. He was entitled to avoid judicial liens under 522(f) regardless of the ultimate disposition of his home. ABS's motion would be denied. The sale proceeds from the rental property would be applied to the IRS's first tax lien.

In re Ferrari, 10/24/06.

Michelle Boutin (Jermain, Dunnagan & Owens, P.C.), Anchorage, for Ferrari; Stephen Baker ( Special Assistant U.S. Attorney), Anchorage, for Internal Revenue Service; John Siemers (Burr, Pease & Kurtz), Anchorage, for trustee Barstow; Grant Watts (Holmes, Weddle & Barcott, P.C.), Anchorage, for Arctic Builder's Source.

Menu    8 ABR 317: Ch. 7, assumption/assignment of lease (Bankruptcy Court, MacDonald).

Valdez Heli-Ski Guides was started in 1998 by the late Doug Coombs and his wife. The business offered guided skiing via helicopters to mountains in the Valdez area. The business leased some cabins and a helicopter pad from Chugach Wilderness Outpost. The lease contained extensive covenants, as well as a provision requiring Outpost's consent to its assignment.

Valdez Heli-Ski Guides was sold to Scott Raynor in 2001, with Outpost's consent. Raynor operated the business successfully until 2005 when, according to Raynor, a helicopter company failed to provide the helicopters he needed to operate the business for the season. Valdez Heli-Ski Guides filed a chapter 7 petition in September, 2006. Trustee Kenneth Battley moved to sell the business to a new corporation formed by Raynor for $11,500. Battley also moved to assume and assign the Outpost lease to Raynor's new corporation. Outpost objected to the assumption and assignment of its lease. One of the debtor's major creditors objected to the proposed sale.

11 U.S.C. 365 governs the assignment and assumption of executory contracts and unexpired leases. Subsection (c) precludes the assumption and assignment of the Outpost lease if applicable law would excuse Outpost from accepting performance from an entity other than the debtor and Outpost won't consent to the proposed transaction. The Outpost lease provides that Outpost's consent to any assignment "shall not be unreasonably withheld."

Even though Raynor's new corporation had the ability to pay the nominal annual lease payment, Outpost's refusal to consent to the assignment was reasonable under the circumstances. Raynor's new corporation lacked capital. Outpost made a commercially reasonable decision to reject the proposed assignment because the undercapitalized corporation could not give sufficient assurances that it could satisfy the substantial covenants contained in the lease. Nor could the new corporation provide adequate assurance of future performance, as required under 365(f). Because the trustee couldn't assume and assign the lease, his motions would be denied.

In re Valdez Heli-Ski Guides, LLC, 11/3/06.

Cabot Christianson (Christianson & Spraker), Anchorage, for Valdez Heli-Ski Guides, LLC; Erik LeRoy, Anchorage, for trustee Battley; Karmyn Olmstead (Davis, Wright Tremaine LLP), Anchorage, for Evergreen Helicopters of Alaska, Inc.; William Bixby (Bixby Franciosi, P.C.), Valdez, for Chugach Wilderness Outpost, Inc.

Menu    8 ABR 321: Ch. 13, projected disposable income (Bankruptcy Court, MacDonald).

The debtors proposed a plan which provided for monthly payments of $514.00. The trustee opposed confirmation and recommended that monthly plan payments be increased to $1,051.82. The "disposable income" amount shown on Line 58 of Form 22C, $1,349.70, was higher than the monthly plan payment figure proposed by either the debtors or the trustee.

At issue in this case was how to determine the debtors' projected disposable income under 1326(b) for purposes of plan confirmation. The debtors have seasonal fluctuations in income. The figure shown on Line 58 of Form 22C was not representative of their actual annual income. The Form 22C calculations distorted and overstated their ability to pay creditors.

Post-BAPCPA, several courts have examined this issue. This court concurs with the majority view. The debtors' projected disposable income is their anticipated income during the term of the plan, rather than an average of their income for the 6 months preceding filing. The figures on Line 58 of Form 22C are not the sole criteria to be used in determining projected disposable income. For below-median debtors, the figures on Schedule I can be used to calculate this amount. For above-median debtors, the IRS guidelines incorporated into 707(b)(2) must be used to determine projected disposable income.

Because there was insufficient evidence to determine the debtors' projected disposable income, the court set a status conference to discuss the scheduling of future proceedings. If the debtors want to propose a projected disposable income figure that is different from the amount shown on Line 58 of Form 22C, they must provide specific evidence to show that the numbers on the form aren't accurate projections of their future finances.

In re Bossie, 12/12/2006

J. Mitchell Joyner, Anchorage, for the debtor; Larry Compton, Anchorage, Trustee.

Menu    8 ABR 325: Ch. 7, exemption of tax refund and vacation pay (Bankruptcy Court, MacDonald).

The debtors elected state exemptions. They claimed $400 in accrued vacation pay exempt under AS 09.38.030(a) and (e), contending the vacation pay was traceable to exempt wages under AS 09.38.060(b). They also claimed a $2,300 tax refund exempt on the same basis. The trustee objected to these exemptions.

Exemption laws are remedial in character and should be liberally construed in favor of the debtor. While the accrued vacation pay and tax refund could be traced to exempt wages, the exempt wages are limited to the debtor's weekly net wages not to exceed $438 under AS 09.38.030(a). The debtors are only entitled to the pro-rata vacation pay for one week, not for the weeks or months preceding the filing. As it appears their vacation pay accrued for 3 to 6 months prior to filing, their exemption of this asset under AS 09.38.030(a) will be disallowed. For the same reason, the debtors' exemption of their tax refund fails. They would only be entitled to the pro-rata portion of their refund attributable to the week before they filed, which would be a negligible amount. The vacation pay and tax refund also cannot be exempted under any of the five subdivisions contained in AS 09.38.030(e).

The debtors rely on In re Cedor, 337 F.Supp. 1103 (D.N.D.Cal. 1972) to support their position. This Bankruptcy Act case was overruled by the Supreme Court's decision in Kokoszka v. Belford, 417 U.S. 642 (1974). Cedor doesn't support the debtors' claim of exemption. The trustee's objection to the debtors' exemption of the tax refund and vacation pay will be sustained.

In re Henrickson, 3/05/2007

Erik LeRoy, Anchorage, for trustee William Barstow; Robert McFarlane, Anchorage, for the debtors.

Menu    8 ABR 331: Ch. 7, bankruptcy court abstained from determining trustee's complaint for subdivision and partition of real property (Bankruptcy Court, MacDonald).

Trustee Kenneth Battley filed a complaint for subdivision and partition of real property. The defendant moved to dismiss for failure to state a claim. Court found that dismissal was warranted, but on other basis.

Trustee was essentially seeking specific performance of a contract to sell land, a purely state law claim. 28 U.S.C. 1334(c) permits a court to abstain from hearing a state law claim in the interests of comity with state courts or respect for state law. Applying the Republic Reader factors endorsed by the Ninth Circuit, abstention was appropriate here. There were no bankruptcy law issues to be resolved, only state law issues. There was no independent basis for federal jurisdiction of the trustee's claim other than 28 U.S.C. 1334. The trustee's claim was not a core proceeding, and the defendant was a non-debtor party. There might be a right to a jury trial. Weighing all the Republic Reader factors, court concluded interests of justice and comity with state courts would be served by abstention. The proceeding would be dismissed, without prejudice, so the trustee could pursue his claim in state court.

Battley v. Dyas (In re Kuenzi) 2/7/07.

William Artus, Anchorage, for Battley; Eric Conard, Palmer, for Dyas.

Menu    8 ABR 335: Ch. 7, self-executing language of 523(a)(8) doesn't preclude creditor from bringing adversary complaint to except student loan from discharge (Bankruptcy Court, MacDonald).

Key Bank filed an adversary complaint against the debtor to except a state court judgment from discharge. The judgment represented amounts due on a student loan. The debtor moved to dismiss the proceeding on the ground that there was no case or controversy requiring adjudication because 11 U.S.C. 523(a)(8) is self-executing.

Section 523(a)(8) excepts student loans from discharge unless undue hardship is shown. A creditor is not required to bring an action to determine dischargeability of a student loan, but may do so if it wishes. Fed. R. Bankr. P. 4007(a) permits both debtors and creditors to file a complaint to determine the dischargeability of any debt.

The court disagrees with the debtor's contention that there is no real case or controversy here. Key Bank filed its complaint in response to the debtor's bankruptcy filing. The bank's complaint is not a proceeding under the federal Declaratory Judgment Act and the Supreme Court's decision in Maryland Casualty Co. v. Pacific Coal doesn't apply. The debtor's motion to dismiss will be denied.

Key Bank USA v. Karjala (In re Karjala) 2/28/07.

Marc Jakubovic (Winner & Associates, P.C.), Anchorage, for Key Bank; Chris Johansen, Anchorage, for Karjala.

Menu    8 ABR 338: Ch. 7, trustee's objection to amended exemption of personal injury claim overruled; debtor's motion to abandon uninsured motorist claim denied (Bankruptcy Court, MacDonald).

After the debtor was injured in an automobile accident in January, 2003, he was unable to continue in his line of work as a cook. He retained attorney Mozhe Zorea to pursue his personal injury ("PI") claim and to help him file bankruptcy. Kingery filed his chapter 7 petition in April, 2003. He scheduled a potential PI claim with a value of zero. No exemption in the PI claim was taken.

Trustee Kenneth Battley retained Zorea to pursue the PI claim on behalf of the estate. Kingery was unhappy with Zorea. He found new counsel for his bankruptcy case as well as for his PI claim. The trustee substituted Kingery's new PI counsel, Michael Schneider, to handle the PI claim for the estate. Schneider received a settlement for full policy limits, $73,159, from the insurer of the other driver involved in the accident. After the court approved the settlement, Kingery amended his schedules to list the settlement amount as the value of the PI claim, and to exempt $27,465 of the settlement under 11 U.S.C. 522(d)(11)(D) and (d)(5).

The trustee objected to Kingery's amended exemption, claiming it was too late and prejudicial to creditors. Kingery, in turn, moved for abandonment of his claim for additional damages from his own insurer under the underinsured motorist ("UIM") and medical payment provisions of his policy. Kingery contended these were post-petition claims, not property of the estate.

Fed. R. Bankr. P. 1009(a) permits a debtor to amend schedules at any time before the case is closed, as a matter of course. Leave to amend may be denied on a showing of the debtor's bad faith or prejudice to creditors. There is no showing of bad faith on Kingery's part. Simple delay in amending schedules is not prejudicial to creditors, nor is prejudice shown because a claimed exemption will be granted. Exemptions should be liberally construed to enhance a debtor's fresh start. The trustee's objection to Kingery's amended exemptions was overruled.

Property of the estate includes causes of action belonging to the debtor at the time the petition is filed. Kingery says the claims he has against his own insurer, for UIM and medical payment coverage, are post-petition claims, not assets of the estate. He relies on Curran v. Progressive NW Ins. Co. and John's Heating Serv. v. Lamb for this contention. Both cases are unpersuasive. In Curran the court interpreted AS 28.20.455, holding that an insured must exhaust all underlying liability coverage before recovering UIM benefits. The exhaustion requirement is a condition precedent to recovery under the UIM policy. Kingery's UIM claim was a contingent claim which existed at the time the petition was filed. Such claims are property of the bankruptcy estate.

The court in Lamb discussed the applicability of the "discovery rule" to toll a statute of limitations. The holding in Lamb didn't alter the date on which the cause of action accrued; it simply tolled the statute of limitations on the action until all elements of the claim were discovered. Kingery's motion for abandonment was denied as to the UIM claim and as to the portion of his medical payment coverage attributable to prepetition medical expenses, but granted as to the medical payment coverage attributable to postpetition medical expenses.

In re Kingery, 3/30/07.

William Artus, Anchorage, for Battley; Frank Cahill, Anchorage, for Kingery.

Menu    8 ABR 346: Ch. 13, attorney's lien recorded against the debtor's home is invalid (Bankruptcy Court, MacDonald).

Meddleton represented debtor Rodvik in a contentious divorce proceeding. Meddleton withdrew from representation in November, 2004, before trial. In January, 2005, Meddleton filed a notice of attorney's lien in the divorce action and recorded the notice in the Anchorage Recording District. One month later, Rodvik represented himself at the divorce trial. The divorce decree subsequently awarded Rodvik the marital residence. After Rodvik filed chapter 13, in March of 2006, he filed an adversary proceeding to invalidate Meddleton's lien against the residence.

Common law attorney's liens aren't recognized in Alaska. The requirements of AS 34.35.430 must be met to have a valid attorney's lien. AS 34.35.430(a)(4), which provides for an attorney's lien upon a judgment, creates a charging lien. The attorney's lien statute doesn't provide for recordation of the lien. The lien authorized by AS 34.35.430(a)(4) is a lien upon the judgment only. It is perfected by filing the lien in the court where the judgment is entered and giving notice of the lien to the party against whom the judgment is entered. Post-judgment enforcement of the lien should be sought through the courts.

While the attorney's lien statute is remedial and should be liberally construed, the provisions which give rise to statutory liens must be strictly construed. The attorney's lien statute doesn't provide for recordation of an attorney's lien. Meddleton's lien against the debtor's home is invalid. The debtor's motion for summary judgment will be granted. The debtor is entitled to his costs. Because applicable state law resolved the issues presented, the debtor is also entitled to an award of attorney's fees.

Rodvik v. Meddleton (In re Rodvik), 4/17/07.

Robert Crowther, Anchorage, for Rodvik; Mary Ellen Meddleton, Anchorage, on her own behalf.

Menu    8 ABR 351: Ch. 13, post-BAPCPA strip down, valuation of vehicle (Bankruptcy Court, MacDonald).

Debtor purchased a pick up truck in 2004 for $22,019. She financed the vehicle through Denali Alaskan Federal Credit Union (DAFCU). She bought the truck for the purpose of using it in her job as a newspaper and mail delivery person. While so employed, debtor had several accidents which damaged the truck substantially. She didn't have the truck repaired because she couldn't afford to pay the $500 deductible for collision repairs. Debtor filed chapter 13 in September, 2006. She stopped working as a delivery person in November, 2006, when she started to drive school buses for Mat-Su School District. DAFCU filed a claim for $18,401: $13,450 secured and balance of $4,591 as general unsecured. Debtor filed an amended chapter 13 plan which proposed to strip down DAFCU's lien to $5,810 and moved to value DAFCU's security interest in the vehicle.

Pre-BAPCPA, a chapter 13 debtor could bifurcate a car loan under 11 U.S.C. 506(a). BAPCPA changed the valuation of car loans in chapter 13 cases. Section 1325(a) was amended by adding a "hanging paragraph" just after subsection (a)(9). The hanging paragraph prohibits a debtor from bifurcating a car loan if the loan was a purchase money security interest, the debt was incurred within 910 days of the date the petition was filed, the collateral for the loan was a vehicle, and the vehicle was acquired for the debtor's personal use. The issue in this case was whether the debtor purchased the vehicle for personal use.

The debtor's intent at the time of purchase determines whether personal or business use was intended for a vehicle. Using a vehicle to commute to and from work is a personal rather than business use. But if the debtor is required to use the vehicle in the course of her employment, this may take the vehicle out of the personal use category. Here, the debtor purchased the truck with the intention of using it in her newspaper and mail delivery business. She used the car for this purpose for more than 2 years, often racking up more than 100 miles in a day. She deducted vehicle-related expenses on her income tax returns. Given the substantial business use for the vehicle, the hanging paragraph doesn't apply to the debtor and she can bifurcate DAFCU's claim.

If the debtor's truck were in good condition, the blue book value would be $12,425. The truck is not in good condition. Deducting estimated repair costs of about $5,333 from the blue book value leaves a balance of $7,092. This is the amount of DAFCU's secured claim under 506(a). The balance of DAFCU's claim is a general unsecured claim. The court's findings are limited solely to valuation and do not reach the issue of whether the debtor has proposed a confirmable plan. Given the debtor's failure to repair the vehicle, she may have difficulty meeting the good faith requirement of 1325(a)(7).

In re Garrison, 6/1/07.

Chris Johansen, Anchorage, for debtor; David Clark, Anchorage, for Denali Alaskan Federal Credit Union.

Menu    8 ABR 356: Ch. 7, alter ego; denial of discharge; exception to discharge for fraud/defalcation; expert witness (B.A.P. Ninth Circuit).

Bankruptcy Court [8 ABR 293] affirmed. Hoffman appealed the bankruptcy court's judgment denying his discharge under 727(a)(2) and excepting the debt of Bethel Native Corporation (BNC) from discharge under 523(a)(4).

Hoffman was a licensed real estate broker and property manager in Anchorage. He was also the sole shareholder and director of Hoffman Commercial, Inc. (HCI). HCI managed some of BNC's Anchorage properties. In 1995, Hoffman and HCI formed Central Park Limited (CPL) to invest in real property in New Mexico. Hoffman and HCI were general partners; BNC was one of the limited partners. When CPL experienced financial problems, BNC lent it $70,000 and co-signed with Hoffman on a $350,000 line of credit. These amounts were never repaid.

HCI filed for chapter 11 relief in January, 2003. After its case was dismissed, BNC sued Hoffman and HCI in state court. That court awarded BNC damages of $669,423.41 in January, 2005. Before the state court judgment was entered, HCI transferred all its assets to a corporation owned 100% by Hoffman's wife. After the transfer, HCI ceased business operations and Hoffman filed his chapter 7 petition. BNC filed an adversary proceeding in the bankruptcy court seeking denial of Hoffman's discharge under 727(a)(2) and exception of its debt from discharge under 523(a)(4). Hoffman's motion for partial summary judgment was denied. At trial, Hoffman's motion in limine to preclude testimony from BNC's expert witness was denied. The bankruptcy court entered judgment in favor of BNC. Hoffman's motion for new trial or reconsideration was denied. He filed a timely appeal to the BAP.

Hoffman argued that the bankruptcy court's denial of his motion for partial summary judgment was reviewable on appeal. Denial of a summary judgment motion is not separately reviewable after a trial on the merits. Further, Hoffman had a chance to fully litigate the issues, and hasn't shown how he was prejudiced by the court's denial of his summary judgment motion.

Hoffman also argued that the bankruptcy court abused its discretion in denying his motion in limine. Hoffman sought to exclude testimony from BNC's expert witness regarding the value of certain property management contracts. The bankruptcy court denied the motion in limine, but made no findings with respect to its ruling. Hoffman contended the witness wasn't qualified to testify as an expert. He also argued that the witness's review of the property management contracts provided an insufficient basis for an opinion as to their value. He didn't provide any specifics to establish that the requirements of FRE 702 weren't met, however. He also failed to show how he was prejudiced by the admission of the expert's testimony and report. Further, denial of discharge under 727(a)(2) simply requires a disposition of property with intent to hinder, delay or defraud a creditor; no finding as to value of the transferred property is required. It was enough for the bankruptcy court to find that HCI's most valuable assets, the management contracts, were transferred for a promise to pay taxes and attorney's fees. Bankruptcy court didn't abuse its discretion in denying the motion in limine.

Hoffman argued that the bankruptcy court erred in denying his discharge under 727(a)(2). The bankruptcy court denied his discharge because it found that it was appropriate to disregard HCI's corporate identity and that the transfer of HCI's assets to AREC was a transfer by Hoffman intended to hinder BNC. Hoffman contended denial of discharge was inappropriate because the transferred property didn't belong to him but to HCI. The bankruptcy court relied on several factors to support its alter ego finding. Although Hoffman pointed to factors which he felt would contradict this finding, he failed to show that the alter ego finding was clearly erroneous.

Hoffman's next issue on appeal was whether the bankruptcy court erred in excepting BNC's debt from discharge. A creditor must establish three elements for nondischargeability under 523(a)(4): an express trust, that the debt was caused by fraud or defalcation, and that the debtor was a fiduciary to the creditor at the time the debt was created. Defalcation under 523(a)(4) includes an innocent failure to account for partnership funds. A fiduciary bears the burden of explaining the disposition of funds entrusted to him. Hoffman didn't contest the fact that he was a fiduciary, but argued that BNC's debt should not have been excepted from discharge because he adequately accounted for partnership funds. The law imposes a heavy burden to account for trust funds with specificity. Hoffman's summary explanations as to income and expenses didn't meet this burden. Hoffman didn't show clear error.

Hoffman's final issue on appeal was whether the bankruptcy court abused its discretion in denying his motion to amend judgment or for a new trial. A Rule 59(e) motion should be granted only if the movant can show manifest error of fact or law, or newly discovered evidence. Hoffman didn't make this showing and has shown no abuse of discretion. The bankruptcy court's judgment is affirmed.

Bethel Native Corporation v. Hoffman (In re Hoffman), 5/9/07.

Eugenia Sleeper (Jermain, Dunnagan & Owens, P.C.), Anchorage, for Bethel Native Corporation; William Artus, Anchorage, for Hoffman.

Menu    8 ABR 370: Ch. 13, automatic termination of stay under 362(c)(3) (B.A.P. Ninth Circuit).

Bankruptcy Court affirmed. Genaro filed a chapter 13 petition in March, 2006, which was dismissed in May, 2006. She filed a second chapter 13 petition on June 9, 2006. More than 30 days after the second petition was filed, on July 28, 2006, Wells Fargo filed a motion to confirm that the stay had terminated automatically by operation of 362(c)(3). One day before the hearing on Wells Fargo's motion, Genaro filed a motion for continuation of the stay. The bankruptcy court entered an order confirming the termination of the stay. Genaro's motion for reconsideration was also denied. Genaro appealed.

The bankruptcy court's legal conclusions are reviewed de novo. Genaro argued that the bankruptcy court didn't correctly apply 362(c)(3) in her case. Statutory interpretation begins with the plain meaning of the statute. In reading 362(c)(3) as a whole, the meaning is clear: if a debtor files a petition that is dismissed within one year of filing a subsequent petition, and no motion and hearing to extend the duration of the stay is completed within 30 days of the filing of the subsequent petition, the stay automatically terminates on the 30th day after the filing of the subsequent petition. Genaro didn't satisfy the requirement of obtaining an extension of the stay within the 30 day period.

Genaro says 362(c)(3) shouldn't apply to her because her current filing wasn't in bad faith. Subsection (c)(3) has two requirements, though, and only one of them is good faith. Genaro didn't satisfy the second requirement, that she extend the duration of the stay within 30 days of her second filing. Even though this result may cause harm to Genaro, the statute is clear and must be applied as written.

Pro se litigants aren't excused from compliance with substantive laws or rules. Further, as Genaro's excerpts of record didn't include any relevant papers on the bankruptcy court's denial of her motion for reconsideration, any issues regarding the order denying reconsideration are deemed waived. The bankruptcy court's order is affirmed.

Genaro v. Wells Fargo Bank, N.A. (In re Genaro), 5/14/07.

Brenda Genaro, Pro Se, Anchorage; Richard Ullstrom (Routh & Crabtree, apc), Anchorage, for Wells Fargo.

Menu    8 ABR 379: Ch. 7, allowance of vehicle ownership expense on means test form for vehicle owned free and clear (Bankruptcy Court, MacDonald).

Vesper filed chapter 7 and, on her amended means test calculation (Official Form 22A), claimed transportation ownership expenses for two vehicles owned free and clear. The United States Trustee (UST) contended these expenses were improper and filed a motion to dismiss for abuse under 707(b)(1) and (2). Debtor opposed the motion.

The means test calculation is applied to individual debtors. The test is codified in 707(b)(2). Section 707(b)(2)(A)(ii)(I) provides that the debtor's monthly expenses "shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards," and the debtor's actual monthly expenses for certain other categories. A national standard is applied for vehicle ownership costs that a debtor may claim under the means test. When Vesper filed bankruptcy, the applicable national allowances for vehicle ownership costs were $471 for the first vehicle and $332 for the second vehicle. Vesper deducted both amounts on her amended means test form even though she wasn't making a car payment for either vehicle.

There is a sharp division on this issue within the Ninth Circuit and nationally. The majority of courts addressing the issue have found in favor of the debtor. The pro-debtor cases have their roots in In re Fowler, 349 B.R. 414 (Bankr. D. Del. 2006). In that case, the court found, under the plain meaning of the statute, that the debtor could take the vehicle ownership deduction even though he didn't have a car payment. The court found that the use of the word "applicable" instead of "actual" in the statute, as well as prior legislative history, supported this interpretation.

The Nevada bankruptcy court reached the opposite conclusion in In re Slusher, 359 B.R. 290 (Bankr. D. Nev. 2007). That court found that the use of "applicable" in the statute meant that courts should interpret the National Standards as the IRS would. It concluded that reference to IRS publications was appropriate, and those publications don't allow a deduction for vehicle ownership expenses unless the debtor has an actual car payment. The only appellate decision to date on this issue, In re Ross-Tousey, 2007 WL 1466647 (E.D. Wis. 2007) agreed with Slusher. The district court held that a debtor must first have a car payment before the allowance is "applicable."

Collier supports the majority view, particularly in light of the legislative history. The bankruptcy court found the Fowler line of cases more persuasive for the same reason. The court also noted that Official Form 22A and the information on the U.S. Trustee web site were consistent with this interpretation of 707(b)(2)(A)(ii)(I). Also, other provisions in that subsection support the view that Congress cherry picked from, rather than adopted wholesale, the IRS standards when creating the means test. Given the difference between the two schemes the IRS guidelines are for the purpose of collecting delinquent taxes while the means test is applied to determine whether debtors can repay at least a portion of their debts in bankruptcy this makes sense. Adopting the Fowler view, the bankruptcy court found that the debtor could deduct the vehicle ownership expenses on her amended means test form. As the total of all allowable deductions exceeded the debtor's monthly income, the presumption of abuse did not arise. The UST's motion to dismiss was denied.

In re Vesper, 6/27/07.

Valerie Therrien, Fairbanks, for debtor; Kay Hill, Anchorage, for Office of the United States Trustee.

Menu    8 ABR 392: Ch. 11, single asset real estate, relief from stay, collateral estoppel (Bankruptcy Court, MacDonald).

Terraces Subdivision filed a chapter 11 petition. Terraces' major asset was Checkpoint Subdivision, 40 acres of real property with a scheduled value of $18 to 20 million. Checkpoint consisted of an undeveloped northern portion and a partially developed southern portion. Charles Aalfs was scheduled as Terraces' primary secured creditor, holding a disputed claim of between $3.5 and 9 million.

Because Checkpoint was "single asset real estate" under 101(51B), Terraces was subject to the relief from stay provisions of 362(d)(3), which require the court to grant relief from stay to a creditor whose claim is secured by single asset real estate unless the debtor either files a plan or starts making monthly payments on the secured claim. The debtor must perform one or the other option within 90 days after the order for relief or 30 days from the date the court determines the debtor is subject to 362(d)(3).

Terraces filed motions to extend the 362(d)(3) deadline and for a priming loan. Aalfs opposed both motions. Before a final hearing on these motions, Terraces filed a chapter 11 plan. At the final hearing, both Terraces and Aalfs provided expert testimony regarding Checkpoint's value. After the hearing, the court made oral findings that Terraces' plan had a reasonable possibility of being confirmed within a reasonable time, that Checkpoint had a value of more than $12 million, and that Aalfs would be adequately protected even if the priming loan was allowed. Orders were entered granting the motion for priming loan and denying the motion for further extension of the 362(d)(3) deadline as moot.

Aalfs subsequently moved for relief from stay on the grounds that Terraces hadn't satisfied 362(d)(3) because the pending plan didn't have a reasonable chance of being confirmed within a reasonable time. Aalfs argued that the plan was unfeasible, would not satisfy his secured claim and violated the absolute priority rule. He contended the plan deficiencies mandated relief from stay.

The court determined that, notwithstanding its prior oral findings, collateral estoppel would not preclude Aalfs from raising the issue of whether Terraces' plan had a reasonable chance of being confirmed within a reasonable time. The prior hearing had focused on Checkpoint's valuation. Terraces' plan had been reviewed only summarily in that context. Aalfs hadn't been given a full and fair opportunity to litigate the issues raised in his motion for relief from stay during the prior hearing.

The standard for evaluating a plan under 362(d)(3) is that the plan have a reasonable possibility of being confirmed within a reasonable time. To make this determination, a full blown confirmation hearing isn't required but the debtor must at least propose a plan that is arguably confirmable. The court agreed that Terraces' pending plan wasn't confirmable because it didn't provide for full payment of Aalfs' claim. However, the court retained discretion even under 362(d)(3) to fashion less than absolute stay relief. Based on the value given to Checkpoint, it appeared possible that Terraces could propose a plan that would pay Aalfs in full as well as provide substantial payments to its other creditors. The court set a deadline for Terraces to obtain confirmation of a plan. Failure to obtain confirmation by the deadline would result in termination of the stay without further action by Aalfs or the court.

In re The Terraces Subdivision, LLC, 8/02/07.

John Siemers (Burr, Pease & Kurtz), Anchorage, for debtor; David Bundy, Anchorage, for creditor Charles Aalfs.

Menu    8 ABR 399: Ch. 7, substantive consolidation, joint administration (Bankruptcy Court, MacDonald).

The debtor was a co-trustee for a substantial trust. He misappropriated more than $50 million from the trust and went on a wild spending spree, acquiring businesses, aircraft, a yacht, several vehicles and motorhomes. One of the entities he purchased, Security Aviation, bought rocket launchers for some of the aircraft that had been purchased. This purchase resulted in an FBI investigation and the filing of criminal charges against Security Aviation and one of its employees for possession of unregistered destructive devices. The debtor ran out of money and had to liquidate some of the aircraft he had purchased to pay for the cost of defending against the criminal charges. The other co-trustees of the trust discovered the debtor's misappropriation and sued to remove him as a trustee.

The debtor filed a chapter 7 petition. He listed 13 business entities, including Security Aviation, as d/b/a's on his petition. The debtor's chapter 7 trustee, William Barstow, assumed management of Security Aviation and placed it into chapter 11. Barstow filed a motion for substantive consolidation of the debtor's d/b/a's, nunc pro tunc to the date the petition was filed. Alternatively, Barstow asked for joint administration of the debtor's and Security Aviation's bankruptcy cases, nunc pro tunc.

The primary purpose of substantive consolidation is to ensure the equitable treatment of all creditors. The bankruptcy court has discretion to order nunc pro tunc consolidation, but this power should be used sparingly and tailored to the needs of the particular case. No opposition to consolidation was filed with regard to nine of the debtor's 13 d/b/a's. None of these entities were operating at the time debtor's bankruptcy was filed. Each one was owned, operated and controlled by the debtor and had no separate identity. Substantive consolidation was granted as to these entities, nunc pro tunc to the date the debtor's petition was filed.

The trustee requested "partial" substantive consolidation of the debtor's case with Security Aviation and another entity, MTI. The court can order partial substantive consolidation. The burden is on the movant to show this relief is appropriate, and is exacting. The Ninth Circuit has adopted two alternative tests to determine whether substantive consolidation is appropriate: 1) whether creditors dealt with entities as a single economic unit and didn't rely on their separate entity in extending credit, or 2) whether the affairs of the debtor are so entangled that consolidation will benefit all creditors. The trustee hadn't satisfied either test. Further, the trustee's reason for seeking nunc pro tunc consolidation as to Security Aviation was to retain the ability to assume a hanger lease. This basis for seeking consolidation was moot because the lease had already been assumed and assigned in connection with a sale of other assets. The trustee hasn't specified what other potential benefits would arise from consolidation. Partial consolidation of Security Aviation and MTI would be denied.

The trustee's alternative motion to jointly administer the debtor's and Security Aviation's cases would also be denied. Joint administration is a procedural tool, used as a matter of convenience. In considering whether to grant such relief, the court must give consideration to protecting creditors of different estates against potential conflicts of interest. Given that there are potential claims between the two estates regarding inter-company debts, a potential conflict exists. Also, combining the dockets of the two bankruptcy cases would create confusion among the creditors of the other entities which were being consolidated with the debtor's estate. Convenience to the trustee and his counsel was not a sufficient basis for joint administration.

In re Avery, 9/14/07.

Gary Spraker (Christianson & Spraker), Anchorage, for the trustee and Security Aviation; Jan Ostrovsky (Crocker Kuno Ostrovsky LLC), Seattle, for Paul Stockler; Stuart Rader (Ingaldson, Maassen & Fitzgerald, P.C.) Anchorage, for Robert Kane; David Bundy, Anchorage, for Trustees of the May Smith Trust.

Menu    8 ABR 410: Ch. 11, a post-petition award of Rule 82 attorney's fees entered against a debtor in a state court action that was initiated prepetition is not an administrative expense (Bankruptcy Court, MacDonald).

Creditor Air USA filed claim in Security Aviation's chapter 11 case which included an unliquidated priority portion for any attorney's fees which might be awarded to it as prevailing party under AK Civil Rule 82. The potential fee award arose from a state court action that the debtor had filed against Air USA prepetition. Air USA contended such an award would be a 503(b)(1) administrative expense. The debtor objected, contending that any Rule 82 fee award should instead be treated as a general unsecured claim.

Administrative expenses include the actual and necessary costs of preserving the estate. The claimant bears the burden of proof and must show that the debt arose from a post-petition transaction and benefitted the estate. An exception to this rule was recognized by the Supreme Court in Reading v. Brown. The Court said actual and necessary expenses of preserving the estate included costs incident to the trustee's operation of a business and held that damages arising from a trustee's negligence in operating the debtor's business were administrative expenses, even though such expenses didn't benefit the estate. The "Reading exception" is based on an important statutory objective: fairness to all persons having claims against an insolvent.

The Ninth Circuit recognizes the Reading exception, but no circuit court decision has extended this exception to cover debts incurred by a trustee's non-wrongful post-petition action to liquidate a chapter 7 bankruptcy estate. In two recent Ninth Circuit decisions, Kadevich and Abercrombie, the court found that post-petition fee awards to creditors based on prepetition claims did not fall within the Reading exception and were general unsecured claims. The Ninth Circuit has intimated that there may be instances where a trustee's unsuccessful, continued prosecution of a prepetition claim would result in the successful litigant's fees being treated as an administrative expense. The court has cited as example cases where the trustee's litigation was found to be meritless or frivolous. In the instant case, absent a finding that the trustee's continued prosecution of the state court action was meritless or frivolous, any Rule 82 attorney fees awarded to Air USA would be a general unsecured claim. The trustee's objection to the priority portion of Air USA's claim was sustained.

In re Security Aviation, Inc., 8/27/07.

Gary Spraker (Christianson & Spraker), Anchorage, for Security Aviation; Greg Silvey (Guess & Rudd P.C.), Anchorage, for Air USA.

Menu    8 ABR 421: Ch. 7, preliminary injunction, attorney-client privilege (Bankruptcy Court, MacDonald).

Court issued preliminary injunction against Robert Kane's attorney, directing attorney to produce bank records for any account that held funds "derived from, or related to, any Kane Entity or Avery Entity." Kane moved for reconsideration. Court concluded attorney-client privilege asserted by Kane didn't apply to attorney's bank records and checks.

Bankruptcy trustee has extensive powers to investigate a debtor's financial affairs, and can examine any entity with regard to a debtor's acts or financial condition. Under 542(e), any person holding records relating to a debtor's financial affairs can be compelled to disclose those records to the trustee. The trustee's power to compel is "subject to any applicable privilege." The burden of proof to establish the privilege rests on the person asserting the privilege.

Not all communications between an attorney and his client are privileged. A communication must be made in confidence for the privilege to attach. Bank statements and checks aren't privileged communications. Also, the bare financial details of a fee arrangement between an attorney and client aren't privileged. Kane failed to establish that the records requested by the trustee were privileged. The motion to reconsider was denied.

Barstow v. Stockler (In re Avery), 1/19/07.

Cabot Christianson (Christianson & Spraker), Anchorage, for Barstow; Stuart Rader (Ingaldson, Maassen & Fitzgerald, P.C.), Anchorage, for Kane.

Menu    8 ABR 425: Ch. 7, pro se debtors' motion for sanctions for stay violation denied without prejudice due to improper service and insufficient notice (Bankruptcy Court, Ross).

Pro se debtors moved for sanctions under 362(h) against Affordable Loan Company, alleging the loan company had continued to harass and threaten them after petition was filed. A notation on the debtors' notice of motion indicated that it had been faxed to the loan company.

While the debtors' request for a hearing on the motion was premature, court denied motion for several reasons. First, the motion wasn't properly served. It had to be served in accordance with Fed. R. Bankr. P. 9014 and 7004. Service by mail is permitted by these rules; service by fax is not. Second, assuming the loan company was a corporation or partnership, service of the motion must be made upon an officer, managing or general agent, with a copy to the loan company, per Fed. R. Bankr. P. 7004(b)(3). Finally, the debtors used a cursory form of notice. An appropriate form of notice is AK LBF 11, which is required to be used under local rule.

Unrepresented debtors must comply with the bankruptcy rules, even though they may be complicated. The loan company is entitled to due process. The motion is denied.

In re Herman, 5/15/07.

Pro Se Debtors, Anchorage.

Menu    8 ABR 429: Ch. 7, student loan excepted from discharge, 523(a)(8) is self executing (Bankruptcy Court, Ross).

Summary judgment granted to ACPE. Debtor's student loans were not discharged in her prior bankruptcy, even though ACPE didn't seek to except the loans from discharge in that bankruptcy. Section 523(a)(8) is self-executing. Student loans were excepted from discharge.

Anagick-Walters v. Alaska Commission on Postsecondary Education (In re Anagick-Walters), 7/10/07.

Pro Se Debtor, Anchorage; Mary Ellen Beardsley (Office of the Attorney General), Anchorage, for ACPE.

Menu    8 ABR 431: Ch. 7, motion to abandon, sufficiency (Bankruptcy Court, Ross).

The debtor's unopposed motion to compel the trustee to abandon estate's interest in inventory, equipment, parts and supplies would be denied. The cursory motion contradicted information in the schedules which indicated there might be value in the assets. No good business reason for abandonment was stated in the motion. Local rules require more information about the property to be abandoned as well as a clear and concise statement of the reasons in support of the motion. Further, while failure of an adverse party to object may be deemed an admission that a motion is well taken, the court retains discretion to find that a motion is not well taken. The debtor was given the option of requesting a hearing on the motion, which the court would treat as a motion for reconsideration, or filing a more complete motion.

In re Comtec Business Systems, Inc., 9/11/07.

Terry Draeger (Beaty & Draeger, Ltd.), Anchorage, for Debtor.

Menu    8 ABR 433: Ch. 7, objection to claim, assignment of Exxon claim (Bankruptcy Court, MacDonald).

Trustee objected to secured claim filed by ADF, contending that UCC in effect at time ADF acquired interest in debtor's Exxon claim precluded the creation of a security interest in a commercial tort claim. Trustee argued claim should be allowed as a general unsecured claim.

Trustee was attacking validity of ADF's asserted lien. The federal bankruptcy rules typically require this type of claim objection to be resolved by way of an adversary proceeding rather than contested matter. Due to fact that issues had been fully briefed and ADF's counsel was ready to proceed on the merits, however, the court determined the objection could be resolved without the need for a more formal adversary proceeding.

Debtor had entered into an agreement with ADF in 1995 for repayment of a $130,000 debt. As security for the debt, debtor assigned ADF all of his right, title and interest in the first $130,000 of his Exxon claim. Two UCC-1 financing statements were filed and notices of assignment of the claim were sent to Exxon and Keller Rohrback. Debtor filed his chapter 7 petition two years later. At the time debtor executed the assignment, the UCC provided that Article 9 didn't apply to a transfer of a claim arising out of tort. Trustee argued that this exclusion prohibited the creation of a security interest in a tort claim. Court concluded UCC may have excluded this transaction from Article 9, but didn't prohibit the transaction altogether. UCC provides that common law applies where UCC's provisions do not. Before UCC was amended to extend Article 9 security interests to commercial tort claims, common law recognized the assignment of commercial tort claims. No special format is required to make an assignment, so long as the parties' intent is clear. The debtor's assignment of his Exxon claim to ADF was valid. The trustee's objection was overruled.

In re Shangin, 10/01/07.

Gary Spraker (Christianson & Spraker), Anchorage, for Trustee; James Davis, Bellevue, Washington, for ADF.

Menu    8 ABR 439: Ch. 7, trustee entitled to recover for prepetition breach of settlement agreement (Bankruptcy Court, MacDonald).

Debtor Valdez Heli-Ski Guides entered into a contract with defendant to provide helicopters and pilots for debtor's Valdez helicopter skiing operation. The debtor terminated the contract after defendant failed to provide services in a timely manner as required by the contract. The debtor and defendant entered into a prepetition settlement agreement for $40,000.00. The defendant failed to honor the agreement. Valdez Heli-Ski Guides filed for chapter 7 relief. The trustee sued the defendant on the settlement agreement and recovered a judgment for $40,000.00. Because the claim was governed by state law, the trustee also recovered prejudgment interest and attorney's fees as provided under Alaska law.

Battley v. Last Frontier Air Ventures, Inc. (In re Valdez Heli-Ski Guides, LLC.) 10/22/07.

Erik LeRoy, Anchorage, for Battley; Chris Johansen, Anchorage, for Last Frontier Air Ventures.

Menu    8 ABR 445: Ch. 11, surveying firm must turn over electronic records to chapter 11 debtor (Bankruptcy Court, MacDonald).

Chapter 11 debtor based its confirmed plan of reorganization on sale of lots in subdivision. LanTech performed survey work on the subdivision before the case was filed for which it was not fully paid. Debtor demanded turnover of LanTech's AutoCad electronic files for use post-petition to assist with preparation of the lots for sale. LanTech refused. Court found that debtor was entitled to turnover of electronic files under 542(e), just as debtor would be entitled to turnover of electronic files from attorneys, accountants and other professionals.

In re The Terraces Subdivision, L.L.C. 12/5/07.

John Siemers (Burr, Pease & Kurtz), Anchorage, for the debtor; Thomas Gingras (Eide & Gingras, P.C.), Anchorage, for LanTech, Inc.

Menu    8 ABR 449: Ch. 11, judgment creditor's motion for dismissal or conversion of debtors' chapter 11 proceedings denied (Bankruptcy Court, MacDonald).

Debtor Zaruba and his related entities joined forces with Huna Totem Corporation to develop a cruise ship port in Hoonah. Zaruba was manager of the project. Hoonah invested heavily in the port but lost confidence in Zaruba. It purchased 30% of Zaruba's 51% interest and dismissed Zaruba as manager. Upon reviewing the books of the venture, Huna accused Zaruba of overcharging. A nine day arbitration ensued. The arbitrator found against Zaruba for $388,000.00. Zaruba attempted to vacate the award in state superior court but lost. He sought a stay of execution and lost. Zaruba appealed the superior court judgment and filed for chapter 11.

Huna alleged that Zaruba's chapter 11 case was a bad faith filing, done in lieu of posting an appeal bond. Because Zaruba had business assets that were still leased to Huna, and satisfaction of Huna's judgment would severely disrupt the debtor's business, the court refused to dismiss the case on bad faith grounds.

Huna also sought dismissal on the grounds that the debtor was incapable of proposing a feasible plan and the chapter 11 estate was losing money. The court rejected Huna's arguments, finding that the debtors had substantial assets with which to fund a plan. It also found that Huna had not demonstrated substantial loss and diminution of the estate. The motions to dismiss or convert were denied.

In re Zaruba; In re Koma Equipment Leasing, LLC; In re Koma Sales Company, LLC 12/28/07.

Cabot Christianson (Christianson & Spraker), Anchorage, for the debtors; Daniel Bruce (Baxter, Bruce & Sullivan, P.C.), Juneau, for Huna Totem; Mark Northrup (Graham & Dunn P.C.), Seattle, for Alaska Pacific Bank; Wayne Dawson (Coryell Dawson, LLC), for Alaska USA Federal Credit Union.

Menu    8 ABR 461: Ch. 7, debtor attorney awarded $250.00 for breach of automatic stay by telephone company (Bankruptcy Court, MacDonald).

Bankruptcy attorney Brock Weidner filed for chapter 7 relief and failed to list ACS as a creditor. ACS billed Weidner for his account. Weidner later amended his schedules to include ACS and gave ACS a copy of his 341 notice. ACS billed Weidner again after it had knowledge of his chapter 7 filing. It did not discontinue service, however. ACS's second billing, made after knowledge of Weidner's bankruptcy filing, was a technical violation of the stay. Weidner was entitled to damages of $250.00, the amount of his adversary filing fee.

Weidner v. Alaska Communications Systems Group, Inc. (In re Weidner) 1/31/08.

Brock Weidner, Juneau, for himself; Martha Beckwith, Anchorage, for Alaska Communications Systems.

Menu    8 ABR 477: Ch. 11, completion of three construction projects for parishes in rural Alaska found to be in the ordinary course of Chapter 11 religious corporation's business (Bankruptcy Court, MacDonald).

Debtor CBNA serves the northern half of Alaska with 46 missions and parishes. It filed for chapter 11 relief after more than 140 lawsuits had been filed against it by indivuduals seeking compensation for sexual abuse by clergy working for CBNA in its remote parishes.

CBNA solicits donations for its mission through the Alaskan Shepherd newletter. It had solicited and received funds for three projects: a water treatment system in Kalskag, with an estimated cost of $11,000; structural improvements and additions to a church in Kotlik, at an estimated cost of $46,000; and the construction of the foundation, walls and roof for a new church in Scammon Bay, anticipated to cost $463,000. CBNA sought authority to apply $237,000 in restricted and unrestricted funds to continue work on these projects during the 2008 construction season. For the new church in Scammon Bay, CBNA also intended to solicit $210,000 in additional funds and apply for a grant of $75,000 so it could enclose the structure before winter arrived.

The UCC objected to the projects. It contended the projects were not essential to health or safety and were not in the ordinary course of the debtor's business. The UCC also argued that the debtor should not finance such projects unless it started paying damages for the sexual abuse claims.

The Code allows a chapter 11 debtor to engage in the ordinary course of business. Here, the projects fell within the ordinary course of the debtor's business. Over the past 30 years CBNA had renovated 16 churches and built 28 new ones. It had also engaged in projects throughout the parish to address health and safety concerns. CBNA's proposed projects were of the type that had occurred in the past in the usual operation of the debtor's business. The construction activity was consistent with the reasonable expectations of CBNA's creditors. The horizontal and vertical dimension tests for the ordinary course of business were met.

The UCC raised several additional issues, which were reserved for consideration at a later date within the context of an appropriate adversary proceeding. These issues included: whether "restricted" donations received by CBNA through the Alaskan Shepherd were true trust funds, whether the improvements to the parishes were property of the estate or the parishes, the trust status of real or personal property held by CBNA, whether the parishes have a separate legal existence and whether Canon law or civil law would govern resolution of these issues, whether the Religious Freedom Reservation Act applies to the construction projects, and whether the court has jurisdiction over diocesan assets. Additionally, the UCC's hearsay objection as to CBNA's summary reports, to the extent that such summaries purported to show the donative intent of the individuals listed on the reports, was reserved for later determination. It was unnecessary to reach these issues in determining whether CBNA could use the funds in the ordinary course of business.

In re Catholic Bishop of Northern Alaska, 4/18/08.

Susan G. Boswell (Quarles & Brady LLP), Tucson, AZ, and Michael Mills (Dorsey & Whitney LLP), Anchorage, for the debtor; James I. Stang (Pachulski Stang Ziehl & Jones LLP), Los Angeles, CA, and David Bundy, Anchorage, for the Unsecured Creditors Committee; Ford Elsaesser (Elsaesser Jarzabek Anderson Marks Elliott and McHugh, CHTD.), Sand Point, ID, for Catholic Church Communities of Northern Alaska.

Menu    8 ABR 492: Ch. 11, judicial economy weighed in favor of granting relief from stay for cause, so that summary judgment motions filed prepetition in insurance company's non-core, related proceeding, a declaratory judgment action concerning the existence of an insurance policy, could be determined (Bankruptcy Court, MacDonald).

In January of 2006, Continental Insurance Company filed a declaratory judgment action in federal district court seeking to establish that it had no liability for sexual abuse claims made against the debtor CBNA and to recover its defense costs. Faced with a growing number of state court sexual abuse claims, CBNA filed for chapter 11 relief on March 1, 2008. At the time of the chapter 11 filing, cross-motions for summary judgment were pending in the district court action.

Continental moved for relief from stay so that the district court could determine the pending motions. CBNA and the Official Committee of Unsecured Creditors opposed the motion. They contended the motion was premature because a motion to refer the declaratory judgment action to the bankruptcy court had been filed and the claims bar date had not yet passed.

The district court declaratory judgment action is a non-core, related proceeding. Cause for lifting the automatic stay exists when a non-core, related proceeding is pending in another court and the interests of judicial economy would be served. The determination of Continental's liability under its insurance contracts will aid, not discourage, the reorganization process. Relief from stay granted.

In re Catholic Bishop of Northern Alaska, 6/27/08.

Susan G. Boswell (Quarles & Brady LLP), Tucson, AZ, for the debtor; Robert B. Orgel (Pachulski Stang Ziehl & Jones LLP), Los Angeles, CA, and David H. Bundy, Anchorage, for the Unsecured Creditors Committee; Charles R. Ekberg (Lane Powell PC), Seattle, WA, Laura K. McNally (Grippo & Elden, LLC), Chicago, IL, and Sarah E. Lorber (Seyfarth Shaw LLP), Chicago, IL, for Continental Insurance Company.

Menu    8 ABR 499: Ch. 13, chapter 13 petition filed after foreclosure sale but prior to recordation of trustee's deed by debtors with substantial tax liabilities dismissed as a bad faith filing (Bankruptcy Court, MacDonald).

Debtor Edward Burke, a mortgage broker, and his wife fell behind on their mortgage payments. Cluff purchased their home at a foreclosure sale and a trustee's deed was issued the next day. Between the date the trustee's deed was issued and the time Cluff received and recorded the deed, the Burkes filed for chapter 13 relief. They sued Cluff in bankruptcy court, alleging his recordation of the trustee's deed was an unauthorized post-petition transfer. They continued to reside in home, rent and payment free, after the foreclosure. Cluff responded by objecting to confirmation of the debtors' plan and moving for dismissal on bad faith grounds.

The court found that Cluff had standing to object to the debtor's plan and move for dismissal. He was a "person aggrieved" because his property interests had been detrimentally affected. He paid been denied possession of a home he had purchased at a foreclosure sale due to the debtors' conduct and chapter 13 filing.

The debtors' plan, schedules and statements were riddled with errors and inconsistencies. It was impossible to get an accurate picture of the debtors' income. Additionally, the debtors had substantial unpaid tax liabilities which were not covered in the plan. The proposed plan also didn't include rent or mortgage payments. The court concluded the debtors lacked the ability to fund a plan which would pay these liabilities.

The inaccuracies in the debtors' filings, the problems with their plan, and their approach to dealing with Cluff smacked of inequity. The debtors' contention that they were proceeding in good faith because no rent or mortgage payments could be considered due until their adversary action against Cluff was resolved, was meritless. The debtors had no right of redemption after the foreclosure sale occurred. They were divested of their interest in the home at the time of the foreclosure sale and execution of the trustee's deed. Looking at the totality of circumstances, the court concluded the petition was filed in bad faith. Confirmation was denied and the case was dismissed.

In re Burke, 7/7/08.

Gary Spraker (Christianson & Spraker), Anchorage, for Michael Cluff; J. Mitchell Joyner, Anchorage, for the debtors.

Menu    8 ABR 510: Ch. 7, a claim based upon a $151,561.00 promissory note issued to cover negative capital account when LLC member resigned found not unconscionable or subject to equitable subordination (Bankruptcy Court, MacDonald).

Debtor Lara Baker was a member of Sequestered Solutions Alaska, LLC. He resigned to avoid a possible conflict of interest concerning a contract with the State of Alaska. At the time of his resignation he had a negative capital account of $151,561.00. He signed a note for that amount payable in 2016, to avoid a tax liability. SSA filed a claim based on the note in Baker's chapter 7 case. The trustee initiated an adversary proceeding against SSA, seeking to either disallow its claim or have it equitably subordinated to the claims of other unsecured creditors.

SSA's operating agreement did not permit unilateral withdrawal and return of units, but SSA allowed Baker to do so. That was sufficient consideration for the note. The fact that accountants disagreed over the tax effects of Baker's resignation did not mean the note lacked consideration. The transaction was not unconscionable.

In the Ninth Circuit, creditor misconduct is required to establish equitable subordination in most cases. There was no showing of creditor misconduct with SSA's claim. Nor was SSA an "insider" under the Code, subject to elevated scrutiny. SSA's claim was allowed, after setoff of Baker's claim against it for a loan extended prepetition. The determinative date for calculating the setoff was the date Baker's bankruptcy case converted from chapter 13 to 7.

Battley v. Sequestered Solutions Alaska, LLC (In re Baker), 7/15/08.

William Artus, Anchorage, for Battley; Joseph Henri, Anchorage, for Sequestered Solutions Alaska, LLC.