Georgia Bankruptcy Blog

Jason Braswell of Morgan & Morgan in Athens, Georgia passed along is case of  In re Carter , Case No. 3:07-CV-50, Ch. 13 Case No. 06-30846 (M.D. Ga.) (click here for .pdf), wherein Judge Land affirmed the Bankruptcy Court's ruling that surrender of "910 vehicles" constitutes full satisfaction of the claim. 

This issue has been discussed in more detail here and here.  Judge Massey and Judges Bonapfel and Diehl of the Northern District have held that surrender does not constitute full satisfaction.

Update 2/19/08 - The Eighth Circuit Court of Appeals has held that the creditor retains the right to assert a deficiency claim.

Tarpon Point, LLC v. Wheelus, Adv. No. 07-3022, 2008 WL 372470 (Bankr. M.D. Ga. Feb 11, 2008) (Walker).  Plaintiffs alleged that the debt owed by Debtors was nondischargeable pursuant to § 523(a)(4), defalcation while acting as a fiduciary.  The issue was whether the Debtors had a fiduciary duty sufficient to invoke this section merely because there were members and managers of a Georgia limited liability company.   The Court held that this was insufficient to come within the definition of fiduciary in § 523(a)(4). 

Plaintiffs offered no evidence of a contractual trust, but instead pointed to O.C.G.A. §§ 14-11-301 and 23-2-58 as the basis for Debtors' fiduciary capacity. Section 14-11-301(a) provides that “every member is an agent of the limited liability company for the purpose of its business and affairs[.]” The statute makes no mention of a trust res or any fiduciary obligations. It may establish a commercial relationship, but it does not establish a fiduciary relationship for purposes of § 523(a)(4). In fact, the only duties imposed on managers of an LLC by Georgia law are set forth in § 14-11-305, which provides in relevant part: “A member or manager shall act in a manner he or she believes in good faith to be in the best interests of the limited liability company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” O.C.G.A. § 14-11-305(1) (emphasis added). This variation of the business judgment rule imposes nothing in the way of fiduciary obligations and cannot be the basis for a fiduciary defalcation claim.
Section 23-2-58, the second statute cited by Plaintiffs, provides:

Any relationship shall be deemed confidential, whether arising from nature, created by law, or resulting from contracts, where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc.

Any relationship shall be deemed confidential, whether arising from nature, created by law, or resulting from contracts, where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc.

This is the sort of broad definition of fiduciary duties that is outside the scope of § 523(a)(4). Young, 91 F.3d at 1372. Considering this statute for purposes of fiduciary defalcation, the court in Blashke v. Standard (In re Standard), 123 B.R. 444 (Bankr.N.D.Ga.1991), noted it “generally describes certain relationships as confidential, the result of which is that parties in those relationships have greater reason to rely on representations of the other party. Nothing in this statute creates a technical or express trust or imposes trust-like duties....” Id. at 455. As a result, Plaintiffs cannot rely on this statute to prove fiduciary capacity.
For the foregoing reasons, the Court concludes Plaintiffs have failed to prove the existence of a technical trust-either by contract or statute-and, as a consequence, cannot prove fiduciary defalcation by Debtors. Therefore the Court will enter judgment for Debtors.

In re McDaniel, No. 06-62786, 2007 Bankr. LEXIS 3390 (August 24, 007)(CRM).  The United States Trustee filed a motion to dismiss under §707(b)(2) and (b)(3) based on  presumption of abuse and totality of circumstances.  The Court held that 1) the debtor could deduct secured debt payments on the means test even where he intended on surrendering the collateral (this included payments for rental properties owned by the debtor), 2) The debtor could not take the ownership deduction for a vehicle that was not leased or subject to a secured claim, and 3) the totality of circumstances did not support dismissal after the court considered a child on the way.

 In re Doran, Ch. 13 Case No. 07-42460, 2007 Bankr. LEXIS 4009 (Bankr. N.D. Ga. October 30, 2007)(MGD).  Debtor did not overcome presumption of bad faith in her third case in one year by clear and convincing evidence.  Prior cases were dismissed for failure to perform duties of debtor, and she did not show chance in financial circumstances.  Therefore, she was not entitled to imposition of automatic stay

In re Dean, No. 07-71556, 2007 Bankr. LEXIS 3429 (Bankr. N.D. Ga. August 21, 2007)(PWB).  Debtor not entitled to disqualification of Bankruptcy judge merely because he filed a pro se lawsuit against the judge,  the Court itself, Chapter 13 trustee, State of Georgia, and usual cast in such lawsuits.  The Court held that the debtor presented no evidence of bias or impartiality outside of the case, and that judge-shopping through threatening or fling lawsuits was not permissible.

Goodman v. Southern Horizon Bank (In re Norsworthy), Adv. No. 06-1070, 2007 Bankr. LEXIS 3726 (Bankr. N.D. Ga. September 4, 2007)(WHD).  In an preference action filed by the Chapter 13 Trustee, summary judgment was granted to the Trustee where debtor granted bank a security interest in his residence within the preference period.  Because this property would have been the only non-exempt asset shared by creditors in a hypothetical Ch. 7, the Bank necessarily received more than it would have in the Ch. 7.

In re Cox, 2007 WL 4355254, No. 07-10787-JDW (Bankr. M.D.Ga. Nov 29, 2007).  Prison is no excuse for not completing the financial management course, as required in §727(a)(11) and §109(h)(4).

The Court agrees with [ In re Rendler, 368 B.R. 1 (Bankr.D.Minn.2007)] that an incarcerated debtor is prevented from obtaining a financial management course by his personal circumstances; not by a physical disability. Mr. Cox's restrictions are imposed by the state, not by some physical impairment and, therefore, cannot be the basis of exemption from the financial management course. Furthermore, the Court is not persuaded it has the authority to waive the financial management course requirement in circumstances other than those expressly stated in the Bankruptcy Code. 

Even though the Court cannot waive the financial management course requirement for Mr. Cox, Debtors are not without recourse. Ms. Cox's discharge will be unaffected by Mr. Cox's failure to take the course. In addition, when Mr. Cox completes his prison sentence, he may be able to reopen his bankruptcy case, take the financial management course, and file the necessary certificate of completion. Making such a late filing would be dependant on a showing of excusable neglect pursuant to Federal Rules of Bankruptcy Procedure 1007(c) and 9006(b), which is a question for another day.

In re Foreman, No. 01-21400, 2007 WL 4170629 (Bankr. S.D. Ga. Nov. 26, 2007).  From the Westlaw blurb -

Wrongful death action which arose postconfirmation, when Chapter 13 debtor's husband was killed, and which no party asserted would have to be successfully prosecuted to enable debtor to fulfill her plan, was not included in “property of the estate,” and debtor was not required to amend her schedules in order to disclose this postconfirmation asset to court.

In re McIntosh,  2007 WL 4146058 (Bankr. M.D.Ga., Nov. 19, 2007) --

Debtor has presented testimony that he did not operate a business after April 1996 and, thus, could not have incurred any sales tax after that date. Debtor further presented testimony that he met with representatives of Creditor on more than one occasion to determine the amount of outstanding sales tax he owed, and that he paid those amounts in full. The Court finds Debtor's testimony credible and sufficient to refute the prima facie validity of Creditor's claim for sales tax. Creditor presented no evidence in response to Debtor's testimony and, thus, cannot meet its burden to prove its claim by a preponderance of the evidence. Therefore, the Court will disallow Creditor's claim of $11,305 for sales tax. However, Creditor's $461 claim for income tax will be allowed because Debtor did not challenge that portion of the claim.

 In re Amron Technologies, Inc., Ch. 7 Case No. 06-50508, 2007 Bankr. LEXIS 3234 (Bankr. M.D. Ga. September 18, 2007).  The issue before the Court was whether an oversecured creditor could claim post-petition attorneys fees when she was not otherwise entitled to collect them under state law.

The following is a brief summary of the facts: The creditor was an oversecured creditor, the note provided for payment of attorney fees, all attorney fees were incurred post-petition, the fees were limited to time actually spent protecting the security interest, and the creditor never sent Debtor a demand for payment indicating her intent to collect attorney fees and advising Debtor that the fees could be avoided by payment of the debt in full within 10 days of the notice.  The Trustee argued that because Ms. LeGrand never sent a 10-day letter required by O.C.G.A. §13-1-11,  her claim for attorney fees is unenforceable under state law and, consequently, she was not  entitled to recover attorney fees as part other secured claim.

The question, then, is whether post-petition attorney fees should follow the same path set out in Welzel for pre-petition attorney fees. If so, they must first pass through § 502, which allows only claims enforceable under applicable law. According to the Trustee's argument, Ms. LeGrand's claim for attorney fees must be disallowed because she never sent the 10-day notice. If the claim is disallowed, the analysis ends, and § 506 never enters the picture. However, the Trustee's argument is inconsistent with the Supreme Court's decision in Ron Pair.

In re Davis, Ch. 13 Case No. 07-50761, 2007 Lexis 3175 (Bankr. M.D. Ga. September 12, 2007).

On February 26, 2005, Debtor purchased a new 2005 Chevrolet Trail Blazer ... Debtor financed the purchase by entering into a Retail Installment Sale Contract ...GMAC holds a purchase money security interest in Debtor's truck. Debtor purchased the truck for his personal use. Under the contract, Debtor was to pay the amount financed, $ 39,079.49 plus interest of 4.9%, by making seventy-two monthly payments of $ 628.83 beginning on April 13, 2005.... Debtor filed a petition under Chapter 13 of the Bankruptcy Code on April 4, 2007. The current balance of Debtor's obligation to GMAC is $ 30,627.44. Debtor offers to pay this amount plus interest of 4.9 % through his proposed Chapter 13 plan. GMAC contends that it is entitled to receive interest on its claim at the prime rate, which the parties stipulate is 8.25 %. ...

"Although the Court [in Till] was dealing specifically with a 'strip-down' case, it is widely understood that its decision applies to all cramdown cases under Section 1325(a)(5)(B)." In re Grunau, 355 B.R. at 336.

In the case at bar, Debtor's Chapter 13 plan proposes to cram down the claim secured by his truck over the objection of the holder of the claim, GMAC.  Debtor offers to pay the claim plus interest of 4.9%. The Court is persuaded that Debtor must pay the full amount of GMAC'S claim plus interest as required by Till. GMAC has agreed to accept the prime rate (8.25%) with no upward adjustment for risk. Debtor's proposed Chapter 13 plan fails to pay the Till rate.

In re Spratling, No. 06-40614, 2007 WL 3102154 (Bankr. M.D. Ga. October 19, 2007).

Following up on the case of Graupner v. Nuvell Credit Corp., Case No. 4:07-CV-37, 2007 U.S. Dist. LEXIS 46144 (M.D. Ga. June 26, 2007), where the Court held that a security interest still qualified as a purchase money security interest even though it included negative equity from a trade-in,  the Middle District held that the financing of an extended warranty or gap insurance also does not mean the security interest becomes non-purchase money --

The Uniform Commercial Code (“UCC”) comment to the purchase money security interest provision expands the meaning of “price” beyond simply the “sticker” cost of the collateral. The comment provides that:

[T]he definition of “purchase-money obligation,” the “price” of collateral or the “value given to enable” includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney's fees, and other similar obligations. The concept of “purchase-money security interest” requires a close nexus between the acquisition of collateral and the secured obligation.FN21

FN21. U.C.C. comm. n. 3 to O.C.G.A. 11-9-103 (2002).

Applying the close nexus standard to the case at hand leads the court to believe that gap insurance should be included in the PMSI. Debtor and Creditor entered into a contract for both the vehicle and the gap insurance at the same time, and the gap insurance would not exist without the vehicle. Further, the only function of the gap insurance is to protect debtor's investment in the vehicle. Therefore, the court holds that there is a sufficiently close nexus between the acquisition of the car and the gap insurance, and gap insurance should be considered part of the PMSI. 

Applying the O.C.G.A. § 10-1-31(a)(1) definition of “cash sale price” to the facts of this case, the monies paid on Debtor's behalf for the extended service contract and gap insurance are part of the purchase price of Debtor's new vehicle for purposes of O.C.G.A. § 11-9-103, Georgia's purchase money security interest statute. The other requirements of O.C.G.A. § 11-9-103 being met, Fargo's security interest in the vehicle is one of purchase money. Thus, § 506 does not apply to allow the debtor to modify the amount of the secured obligation in a Chapter 13 plan.

In re Beasley, Case No. 07-40280, 2007 WL 2986124 (Bankr. M.D. Ga. October 9, 2007).  The issue was whether a Chapter 13 debtor could bifurcate a secured claim into secured and unsecured portions pursuant to §506 of the Code, pursuant to the "hanging paragraph" of §1325.  Ironically, the "new" (now 2 year old) law provides less protection to secured lenders when their collateral is not entirely under the debtor's control.

There has been much debate in bankruptcy courts around the country as to the meaning and effect of the “hanging paragraph” provision added to § 1325(a) by BAPCPA. This Court has held, along with the majority of courts considering the section, that the hanging paragraph of § 1325(a)(*) simply has the effect of precluding debtors from bifurcating certain undersecured claims using § 506, as was common practice prior to the October 17, 2005 effective date of this BAPCPA provision.

Whatever the conclusion courts reach regarding the effect or meaning of the hanging paragraph, each court must determine whether the section applies by inquiring whether the four requirements of the section are satisfied: (1) the creditor has a purchase money security interest; (2) the debt was incurred within 910 days preceding the filing of the debtor's case; (3) the collateral for the debt consists of a motor vehicle; and (4) the motor vehicle was acquired for the personal use of the debtor. ...

Applying the Solis standard in this case leads to the conclusion that the Impala was not acquired for the debtor's personal use. At the time of the acquisition, the car was acquired solely for the wife's use. The Debtor has testified that he has never driven the vehicle or used it for his own purposes. The situation in this case is analogous to the Dodge Neon acquired in Solis, inasmuch as in both cases the Debtor never intended to use the car at the time of acquisition, and never made any substantial use of the car thereafter. Therefore, there was intended no significant or material portion of the use of the vehicle for the Debtor's benefit, and the use of the Chevy Impala cannot be characterized as “personal use.” ...

While the court does not necessarily approve of the result in the case at hand, Congress must be presumed to know what it is doing when it passes legislation. Debtors' taking advantage of an apparent loophole in the legislation is not necessarily bad faith. Citi had an opportunity to object to confirmation of Debtor-Wife's plan and failed to do so. There is no basis for denying confirmation of Debtor's plan based on bad faith, because he is only attempting to do what the code allows him to do.

Graupner v. Nuvell Credit Corp., Case No. 4:07-CV-37, 2007 U.S. Dist. LEXIS 46144 (M.D. Ga. June 26, 2007) (Land).

The issue presented by this appeal is whether the "cramdown" provisions of § 506 of the Bankruptcy Code apply under the facts of this case. The resolution of this issue depends solely upon whether the Creditor obtained a purchase-money security interest as contemplated by § 1325 (a) (*) of the Bankruptcy Code when the total amount financed as part of the Debtor's purchase of his motor vehicle included negative equity. ...

It is undisputed that the debt in this case was incurred within the 910 days preceding the filing of Debtor's petition for bankruptcy protection and that the collateral for the debt was a motor vehicle acquired for personal use. Therefore, if the Creditor possessed a purchase money security interest securing the debt, the cramdown provisions of § 506 do not apply.

Under Georgia law, "[a] security interest in goods is a purchase money security interest . . . [t]o the extent that the goods are purchase money collateral with respect to that security interest." O.C.G.A. § 11-9-103(b)(1). "'Purchase money collateral' means goods that secure[] a purchase money obligation incurred with respect to that collateral." O.C.G.A. § 11-9-103(a)(1) [*6] . "'Purchase money obligation' means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used." O.C.G.A. § 11-9-103(a)(2) .

In this case, the Creditor contends that the "price of the collateral" includes the negative equity that was included in the total amount financed. Debtor responds that the "price of collateral" should include only the purchase price of the vehicle, excluding the negative equity, and since the amount financed was not limited to this amount, the Creditor did not obtain a purchase money security interest for the full value of the debt.

The Court finds that under the facts in this case the price of the collateral included the negative equity. The trade-in of the vehicle was an integral part of the sales transaction. The value of that trade-in along with its accompanying debt affected the ultimate price that was paid for the new pick-up truck. The negative equity is inextricably intertwined with the sales transaction and the financing of the purchase. This close nexus between the negative equity and this package transaction [*7] supports the conclusion that the negative equity must be considered as part of the price of the collateral.  Accordingly, the Court finds that the Creditor has a purchase money security interest for the full amount of its debt. Thus, § 506 shall not apply to modify the amount of the secured obligation.

Update Nov. 14, 2007 -  But see In re Mitchell, 2007 WL 3378229 Bankr. M.D. Tenn. 2007) (under Tennessee law, negative equity is not included in PMSI).

Under Tennessee state law definitions, the financing of negative equity in the form of the debtors' trade-in is not part of the “price” and did not “enable” the debtor to acquire the Chevy Trailblazer. According to state law, therefore, FAFCU holds a partially secured PMSI debt and a partially secured non-PMSI debt. Applying FAFCU's state law-defined status to 11 U.S.C. § 1325(a)(*), the court finds that under the unambiguous statute, FAFCU does not qualify for the narrow exception and may be treated as any secured creditor pursuant to 11 U.S.C. § 1325(a)(5). If however, 11 U.S.C. § 1325(a)(*) is ambigious, the court nonetheless finds that statutory construction rules would favor the narrower interpretation of the exception thereby rendering the hanging paragraphy's narrow exception unavailable to FAFCU.

Douglas v. Educational Credit Management Corp. and United States of America, Adv. Nos. 05-7021, 05-7022, 2007 Bankr. LEXIS 928 (March 14, 2007)(Laney).  In a lengthy and detailed opinion and analysis, the Court found that the debtor was entitled to a discharge of her student loan obligations.  The debtor and her son lived on a spartan budget with no funds available for emergencies.  The debtor was also HIV positive and had significant ongoing medical expenses.  Further, although she was otherwise qualified to teach, a felony conviction several years ago prevented her from getting a teaching job.  The court further found that the debtor's $41/month cable expense, provided the debtor's only recreation and was an educational benefit for her son.  Therefore, the student loan debts were discharged.

By: Scott B. Riddle, Esq.

Tidwell, Ch. 7 Trustee of Amron Technologies, Inc., v. Legrand, et al., Adv. No. 06-5081, 2007 Bankr. LEXIS 1028 (Bankr. M.D. Ga. March 22, 2007) (Walker).  Several parties loaned money to the debtor, memorialized by a single promissory note.  Each defendant contributed a different amount to the amount loaned via the note.  A UCC financing statement was also filed, but it only identified one of the defendants as the secured party. 

The trustee filed an adversary proceeding to determine the validity and extent of the lien.  The Court first held that only the person named on the UCC Financing Statement had a valid perfected security interest in the debtor's assets, as the identity of the secured party was a basic formal requirement of UCC §9-506(a).  The court dismissed the other defendants' argument that the one defendant identified as the secured party was acting in a representative capacity for all of them, as no agency agreement existed. 

The Court then held that the one defendant identified in the UCC Statement as a secured party was secured for the entire amount of the loan, even though she only contributed $10,000 of the $50,000 loan.  Nothing in the Note or Security agreement limited the security interest to the amount contributed by the named secured party. 

General Produce, Inc. v. Tucker, Case No. 06-50092, 2007 Bankr. LEXIS 1322 (Bankr. M.D. Ga. April 10, 2007)(Walker). 

Debtor was the president and primary shareholder of a business that sold produce purchased from the plaintiff.  All transactions were covered by the Perishable Agricultural Commodities Act ("PACA").  Debtor's company sold the produce, but did not submit the proceeds to the plaintiff as required by PACA.  After Debtor filed a bankruptcy petition, the plaintiff filed an adversary claiming that the debt was nondischargeable pursuant to Section 523(a)(4), fraud or defalcation while acting as a fiduciary. 

The Court held that PACA did create a trust, and that as a controlling person, the debtor had personal liability for the sales proceeds.  Further, the debtor's choice to pay other business obligations with the proceeds constituted the defalcation required of section 523(a)(4).  Therefore, summary judgment was granted to the plaintiff and the debt was nondischargeable.

By: Scott B. Riddle, Esq.

Flatau v. The Walman Optical Co. (In re Werner), Adv. No. 06-5101, 2007 Bankr. LEXIS 975 (Bankr. M.D. Ga. March 22, 2007)(Walker). 

Within 90 days of the filing of his Chapter 7 petition, the debtor used his credit card to pay $4,000 to the defendant optical company.  The payment satisfied an obligation of another company, which obligation the debtor had guaranteed.  The Chapter 7 trustee filed suit to recover the payment as a preferential transfer, and a motion for summary judgment.

The key question was whether the payment, via credit card, constituted an interest in the debtor's property, as defined by §547(b).  The court found only one case on point -

In Loveridge v. The Ark of Little Cottonwood, Inc. (In re Perry), 343 B.R. 685 (Bankr. D. Utah 2005), the debtor paid the defendant $ 9,000 by credit card, and the trustee commenced a preference action to recover the payment. The defendant filed a motion to dismiss for failure to state a claim, which the court granted. The only preference element in issue was whether the transfer was of an interest of the debtor in property. Id. at 686-87.

Because "interest of the debtor in property" is undefined by the Bankruptcy Code, the court in Perry applied the definition supplied by the Supreme Court in Begier v. IRS, 496 U.S. 53, 110 S. Ct. 2258, 110 L. Ed. 2d 46 (1990). In Begier, the court defined the term as "property that would have been part of the estate had it not been transferred before the commencement of the bankruptcy proceedings." Id. at 58, 110 S. Ct. at 2263; see also Perry, 343 B.R. at 687 n.6. The Supreme Court noted this definition furthered the fundamental bankruptcy policy of equality of distribution to similarly situated creditors. 496 U.S. at 58, 110 S. Ct. at 2262-63.

Relying on the Begier definition, the court in Perry found that a debtor's use of a credit card does not constitute a transfer of an interest of the debtor in property. 343 B.R. at 688. The court reasoned, "[a]t most, a debtor's credit constitutes merely potential wealth. Creditors of an estate cannot force a debtor to use credit to create liquidity available for distribution." Id.

By: Scott B. Riddle, Esq.

In re Dillard, Ch. 13 Case No. 06-30939, 2007 Bankr. LEXIS 394 (Bankr. M.D. Ga. February 7, 2007)(Hershner).  Hours before the debtor filed her Bankruptcy petition (without getting counseling), the lender conducted a foreclosure sale.  The property was purchased by the lender, who "bid in" the loan amount.  Debtor's case was subsequently dismissed.  A few weeks later, a Foreclosure Deed was filed transferring the lender's interest in the property to another party. 

Debtor filed a second case several months later, after a dispossessory had been issued but before moving out of the property. The Court held that the debtor's interest in the property, including her right of redemption, were extinguished prior to the filing of her second petition.  The Court distinguished the case of In re Geiger, 2006 Bankr. LEXIS 897, Case No. 05-54262 (Bankr. M.D. Ga. March 20, 2006) (Hershner), wherein there was no notation of consideration after the sale and no foreclosure deed was filed prior the bankruptcy petition.

By: Scott B. Riddle, Esq.

In In re Adams, Ch. 13 Case No. 06-51651, 2007 Bankr. LEXIS 616 (Bankr. M.D. Ga. March 1, 2007)(Hershner), the debtor husband purchased a new vehicle within 910 days of the filing of his Chapter 13 petition.  In his plan, Debtor proposed to bifurcate the secured lender's claim into secured and unsecured portions pursuant to 11 U.S.C. §1325(a)(5)(B).  The lender objected on the grounds that the "hanging paragraph" of §1325(a) did not allow such bifurcation.

The evidence showed that the vehicle was purchased by debtor for his spouse, and in fact, it was debtor's spouse who primarily used the vehicle. Debtor's wife was listed on the insurance policy as the sole driver and Debtor only drive it two to three times a month.  Debtor and his spouse separated for a few months prior to the bankruptcy filing, at which time debtor was the primary user of the vehicle, but when they reconciled his spouse was the primary driver.

Based upon the language of the "hanging paragraph," the vehicle was not acquired for the primary use of the debtor, and therefore the lender was not protected. Bifurcation of the claim was allowed.

By: Scott B. Riddle, Esq.

Rob Matson, who represented the debtor, was kind enough to send a copy of Judge Hershner's opinion in In re Bivens, Case No. 06-51778 RFH (M.D. Ga., February 23, 2007).  Judge Hershner, contrary to  Judges Massey,  Bonapfel and Diehl in the Northern District, held that the surrender of a vehicle constitutes full satisfaction of the creditor's claim -

The last paragraph of section 1325(a) provides that for purposes of paragraph (5), section 506 of the Bankruptcy Code shall not apply to a claim that is secured by a purchase money security interest in a motor vehicle on a debt incurred within 910 days preceding the bankruptcy filing if the vehicle was acquired for the personal use of the debtor. The last paragraph of section 1325(a) is sometimes referred to as the unnumbered paragraph or the hanging paragraph. Prior to BAPCPA’s amendment of section 1325(a), a debtor could bifurcate an undersecured claim into a secured claim and an unsecured claim. The last paragraph of section 1325(a), as amended by BAPCPA, prevents bifurcation of certain undersecured claims. Triad Financial Corp. v. Brown, (In re Brown), 346 B.R. 246, 247-48 (Bankr. M.D. Ga. 2006).  Under section 506(a) of the Bankruptcy Code1 a “secured creditor’s claim is to be divided into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral.” Associates Commercial Corp. v. Rash, 520 U.S.
953, 117 S. Ct. 1879, 1884, 138 L.Ed.2d 148 (1997).  ...

 Respondent concedes that Capital One’s secured claim is protected from bifurcation by the hanging paragraph. ... Capital One does not oppose  the surrender but contends that it is entitled to file an unsecured claim for any deficiency that remains after it disposes of the vehicle.

By Scott B. Riddle, Esq.

In In re Firstline Corp., 2007 Bankr. LEXIS 286 (Bankr. M.D. Ga. January 25, 2007)(J. Walker), the Chapter 11 plan proposed by the Chapter 11 Trustee included the following provision, applicable to the Debtor, the Trustee, the Committee, the Committee's individual members acting in their capacity as members of the Committee, the Debtor's Chief Restructuring Officer, and the Debtor's, the Trustee's, and the Committee's respective advisors, attorneys, consultants or professionals (the "Exculpated Persons")  --

The Exculpated Persons shall not have or incur any liability to any Person served with a copy of this Plan or otherwise having notice regarding the filing of the Plan, including, without limitation, the Debtor, for any act taken or omission made in good faith in connection with or in any way related to, or arising out of, the Bankruptcy Case...except for gross negligence, willful misconduct, or breach of fiduciary duty as determined by the Bankruptcy Court. The Exculpated Persons shall have no liability to any Person served with a copy of this Plan or otherwise having notice regarding the filing of the Plan for actions taken in good faith under or relating to this Plan...except for gross negligence, willful misconduct, or breach of fiduciary duty as determined by the Bankruptcy Court. Further, the Exculpated Persons shall not have or incur any liability to any Person served with a copy of this Plan or otherwise having notice regarding the filing of the Plan for any act or omission in connection with or arising out of their administration of this Plan or the property to be distributed under this Plan or the operations or activities of the Debtor, the Trustee or the Liquidating Agent, except for gross negligence, willful misconduct, or breach of fiduciary duty as determined by the Bankruptcy Court. Without limiting the foregoing, the Exculpated Persons shall not have or incur any liability to any Person entitled to a distribution under this Plan if insufficient funds are present to pay that Person that which it is entitled to under this Plan. Notwithstanding anything to the contrary contained herein, none of the Exculpated Persons shall be released or otherwise free from liability on account of any Avoidance Action held by or belonging to the Estate....

The Debtor will indemnify, hold harmless and reimburse the Exculpated Persons from and against any and all losses, Claims, causes of action, damages, fees, expenses, liabilities, and actions for which liability is limited pursuant to Sections 12.4 and 12.5 of this Plan, and the losses, Claims, expenses, etc. of the Exculpated Persons shall be paid from the Estate Assets as they are incurred by the Exculpated Persons. All rights of the Exculpated Persons indemnified pursuant to this Section shall survive confirmation of this Plan.

An objection to confirmation was filed by the Debtor's sole equity holder.  The Court found that the Exculpation Provision was appropriate -

The exculpation and indemnity provisions at issue are not prohibited by the Bankruptcy Code, they do not offend public policy, and they are not unreasonable. In fact, similar standards are applied outside of bankruptcy in accordance with the business judgment rule. See O.C.G.A. § 14-2-830 (2003) (relieving a director from liability to the corporation or shareholders for actions taken in performing the duties of his office if he acts in a manner he believes to be in the best interests of the company and he exercises the care of a prudent person in a like position and like circumstances).

The circumstances of this case are particularly suited to such provisions. In an opinion and order appointing a trustee in this case, entered on May 25, 2006, the Court has already detailed [the Debtor's equity holder's] efforts to obstruct the case and frustrate the efforts of the chief reconstruction officer. Based on his prior conduct, it is reasonable to anticipate that [he] may seek to express any continuing dissatisfaction through litigation.

Because the exculpation and indemnification clauses do not affect the exculpated parties' liability for gross negligence, willful misconduct, or breach of fiduciary duty, they are appropriate in this case. Furthermore, the clauses are necessary to discourage any frivolous litigation.

 

By: Scott B. Riddle, Esq.

In re Howard, 351 B.R. 251, Adv. No. 05-5160, 2006 Bankr. LEXIS 2319 (Bankr. M.D. Ga. September 21, 2006)(Hershner).   Prior to the filing of the debtor's Bankruptcy petition, a foreclosure sale was conducted on debtor's residence. The purchaser was the high bidder, and arranged to meet the lender's attorney at the lender's office the next morning to pay the purchase price and obtain the foreclosure deed. It is not disputed that the purchaser had sufficient funds on deposit with the lender to pay the purchase price.  On the same day as the foreclosure sale, the purchaser obtained insurance on the property and visited the residence to tell the debtor that he had purchased the property. The debtor informed the purchaser that the property could not have been sold because the debtor had filed bankruptcy.  Based on this, the purchaser did not go to the lender the next morning as scheduled.  Instead, the purchaser gave the lender a check and obtained a foreclosure deed over a week later.  In fact, the debtor had not filed a Bankruptcy petition prior to the foreclosure and then the purchaser visited him, but instead filed the day after the sale.  The debtor sought to set aside the foreclosure as violating the automatic stay.

The Court set aside the sale. The language of the Deed to Secure Debt (which was not the standard Fannie Mae/Freddie Mac form) provided that the debtor would be divested of his rights and equity when the lender gave the purchaser "good and sufficient title in Fee Simple."  It was undisputed that the Bank gave the purchaser title over a week after the sale, and after the Bankruptcy petition was filed. The lender is bound by the terms of of its deed to secure debt, and therefore, the debtor was entitled to summary judgment and the  foreclosure sale was set aside.

Update: Motion for Interlocutory Appeal filed by the Bank was denied.  The Citizens Bank of Cochran and Herbert Davis v. Howard, No. 5:06-CV-357,  2006 U.S. Dist. LEXIS 87898 (M.D. Ga. December 5, 2006).

In In re West, Ch. 7 Case No. 05-32033, 2006 Bankr. LEXIS 2440 (Bankr. M.D. Ga. October 2, 2006) (Hershner), the debtors filed a Chapter 7 petition.  Creditors subsequently alleged that the debtors' schedules and statement of financial affairs were inaccurate and failed to list significant assets, and filed a dischargeability action under §523 and §727. 

Debtors then filed a motion to convert to a Chapter 13, and the creditors objected based upon the lack of good faith.  The court noted that other courts disagree on whether a debtor has an absolute right to convert from Chapter 7 to Chapter 13.  However, based upon the clear, unambiguous language of §706, the Court held that debtors did have the right to convert to a Chapter 13.  The issue raised by the creditors could be raised at the confirmation hearing on the debtors' Chapter 13 plan.

Moore v. Fred's Stores of Tennessee, Inc., No. 4:05-CV-133, 2006 WL 2374768 (M.D. Ga. August 16, 2006)

Prior to filing his bankruptcy petition, Debtor filed a lawsuit against the Debtor for violations of the Fair Labor Standards Act.  While the action was pending, Debtor filed his Chapter 7 (Case No. 06-40115 (Bankr. M.D.Ga.), but failed to disclose the FLSA lawsuit as an asset.  As a result, Defendant filed a motion to dismiss based upon judicial estoppel, leading the Debtor to amend his bankruptcy schedules to disclose the asset.  He also entered into an agreement with the Chapter 7 Trustee to exempt up to $5,000 of any recovery against the Defendant.

The District Court first determined that the Debtor was judicially estopped from pursuing the FLSA lawsuit based upon his failure to initially list the lawsuit on his bankruptcy schedules -- 

This omission could not have been inadvertent. ... The present lawsuit was filed on November 21, 2005, and he filed his bankruptcy petition only three months later on February 28, 2006. Furthermore, Plaintiff made no attempt to amend his bankruptcy schedule to disclose the claims in this action until after Defendant filed a Motion to Dismiss the present action for lack of standing and because of judicial estoppel. See Barger, 348 F.3d at 1297 (explaining that amending the schedule after the defendant has filed for summary judgment "deserves no favor" because it suggests that "a debtor should consider disclosing potential assets only if he is caught concealing them") (citation omitted). Under these circumstances, Plaintiff is judicially estopped from asserting these claims.

 The Court then determined that the Trustee could not pursue the claims on behalf of the Estate under the proposal agreed to by the Trustee and Debtor --

Although the record is not entirely clear, a fair reading of that record reveals that the bankruptcy trustee for some reason agreed to exempt $5,000.00 of any claim that Plaintiff may have in this lawsuit. The ultimate effect of that exemption would be to permit Plaintiff to recover all or a portion of his FLSA claim notwithstanding his failure to disclose the claim in a timely manner in the bankruptcy proceeding. Moreover, enforcement of that agreement would be contrary to the purposes of the doctrine of judicial estoppel. Therefore, it is clear that in light of this Court's finding that Plaintiff is judicially estopped from pursuing his FLSA claims, the bankruptcy trustee cannot be allowed to pursue such claims if the result of that pursuit would be for the Plaintiff to benefit in any way from any such recovery by the trustee.

 Finally, the Court addressed the issue of whether the Trustee could pursue the claims in the absence of an agreement with the Debtor to exempt $5,000 --

In this case, the Plaintiff did not list his FLSA claim as exempt property when he filed his petition initially. As explained previously, he did not list the claim at all. However, the trustee has now agreed with the debtor that $5, 000. 00 of his FLSA claim shall be exempt. If Plaintiff's FLSA claim is less than the exemption of $5,000.00, then it is clear that it does not belong to the trustee. ... Therefore, even though Plaintiff is judicially estopped from personally recovering on his FLSA claim and thus may not have had a colorable basis for the exemption, this does not void the exemption as to the trustee and permit the trustee to pursue an otherwise exempt claim. 
The present record is silent as to the total amount of Plaintiff's FLSA claim. Therefore, the issue presently before the Court is whether the trustee has standing to pursue Plaintiff's FLSA claim, with $5,000.00 of the claim being exempt (but not recoverable by the debtor), when the total value of the FLSA claim is unknown at this time.
A party seeking to invoke the jurisdiction of the federal court has the burden of establishing that it has standing to pursue its claim. ... For the trustee to establish standing in this case, she must establish that the FLSA claim she seeks to pursue exceeds the exemption amount of $5,000.00. The record is silent as to the value of the FLSA claim, and it would be sheer speculation to conclude that it exceeds $5,000.00. Therefore, the Court finds that the trustee has failed to establish standing to pursue this claim. Accordingly, Plaintiffs' motion to substitute the bankruptcy trustee as a party is denied.

Hall v. Jackson, Adv. No. 05-5170, 2006 WL 2457847 (Bankr. M.D. Ga. August 23, 2006)(Hershner).

Prior to the Debtor's bankruptcy filing in September 2005, she had borrowed significant funds via personal loans from the Plaintiff (Debtor's sister) and through the use of Plaintiff's credit cards with permission.  Debtor continuously promised to pay Plaintiff back, and to either obtain a home equity loan or sell her residence in order to get the funds necessary to repay the loans.  

Plaintiff filed an adversary proceeding requesting that the debt be excepted from discharge pursuant to 11 U.S.C. §523(a)(2)(A).

Plaintiff testified that she would not have made the loans except for Defendant's promise that she would obtain a home equity loan or sell her residence. Plaintiff testified that she allowed Defendant to use the credit cards to make her house payments because Defendant's residence was the way that Plaintiff was to be repaid. Plaintiff testified that she continued to allow Defendant to use her credit cards because Plaintiff was “too far in to stop.”

The court, after a trial, found the debt to be dischargeable --

The evidence shows that Defendant was, on a regular basis, pleading for financial help from Plaintiff. The Court can only conclude that Plaintiff knew that Defendant was in severe financial distress. .... The Court is persuaded that Defendant simply did not have the financial resources to honor her promise to obtain a home equity loan or sell her residence. As stated by Collier on Bankruptcy, the failure to perform a mere promise is not sufficient to make a debt nondischargeable. The Court is persuaded that Defendant honestly intended to repay Plaintiff's loans. The Court from the evidence presented at trial finds no fraudulent intent on the part of Defendant. The Court is persuaded that Defendant's obligation is dischargeable under section 523(a)(2)(A).
 

In In re Murray, No. 05-48017, 2006 WL 2457851 (Bankr. M.D.Ga. August 22, 2006), the debtor owner of a "910 vehicle,"  argued (1)  that the creditor did not qualify for secured treatment under §1325(a)* because part of its claim included an extended warranty, document fee and title fee, in addition to the "price" of the actual vehicle; (2) The claim could be bifurcated pursuant to new §1325(a)*; and (3) the creditor was not entitled to "prime plus risk factor" mandated by the US Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465 (2004).  The court disagreed with debtor on all counts.

(1) The court, after analyzing state law (§OCGA 11-9-103, definition of "price"), common practice and meaning, the nature of the items at issue, and noting the absence of contrary authority,  found that under state law, "price" did include the items included in the purchase, and therefore, the creditor had a valid security interest covered by Section 1325(a).

(2) The court followed the reasoning of the majority of courts that have reached the issue, including  In re Brown, 2006 Bankr. LEXIS 476, Case No. 05-21764 (Bankr. S.D. Ga. March 27, 2006)(Dalis), concluding --

Considering this legislative history, the grammatical structure of § 1325(a)(*), and the definitions of the terms “allowed” and “secured” found elsewhere in the Code, the Court holds that the only sound conclusion is that a claim qualifying under § 1325(a)(*) may be considered an “allowed secured claim” for purposes of § 1325 and would be, therefore, subject to the present interest requirement of § 1325(a)(5).

(3) With respect to debtor's third alternative argument, that the creditor was not entitled to "prime plus risk factor" mandated by the US Supreme Court in Till, and that Till was abrogated by new 1325(a)* the Court held --

In other cases concerning § 1325(a)(*), creditors have made the argument that with the enactment of BAPCPA and § 1325(a)(*), Till has been abrogated. There is simply no basis for this contention. No provision of BAPCPA prohibits the modification of secured creditors' rights under § 1322(b)(2). Had Congress intended to create an absolute safe-harbor for secured creditors holding claims qualifying under § 1325(a)(*), like it provided for home mortgages under § 1322(b)(2), Congress could have done so, but it did not. Section § 1325(a)(*) neither addresses the issue of interest nor prohibits the modification of claims qualifying under that section. Section 1325(a)(*) only says that § 506 is not available to bifurcate secured claims qualifying under that section. BAPCPA did not amend § 1322(b)(2) with its grant of leeway to amend; therefore, the right to do so still exists. Further, there is no mention of interest or of Till in any of the legislative history of the amendments to § 1325. Clearly, therefore, Till, with its mandate regarding the payment of post-petition interest, is not abrogated. Secured claims qualifying under § 1325(a)(*) shall be paid at the interest rate set forth in Till so as to satisfy the present value requirement of § 1325(a)(5).

In re Bonner, No. 06-50472, 2006 Bankr. LEXIS 1497 (Bankr. M.D. Ga. July 19, 2006) (Hershner).

Debtor entered into a pre-petition closed-end lease for a used 1997 Cadillac.  The lease provided for a set number of payments (36), with an option to purchase for $1,962.50 at the end of the lease.  The debtor's Chapter 13 plan proposed to pay the value of the vehicle, plus interest, on the basis that the lease was really a disguised security agreement because of the de minimus option price at the end of the lease.  Debtor presented evidence that the vehicle would only be worth $1,000-$1,500 at the end of the lease and not worth the option price.  The lessor objected to the plan.

The court found the lease was a true lease under Georgia state law --

Respondent signed a Closed End Motor Vehicle Lease with a term of thirty-six months. Respondent must surrender possession of the vehicle at the end of the lease term, unless Respondent exercises his option to purchase. Respondent is not obligated to purchase the vehicle or to renew the lease. Respondent may have to pay a substantial charge if he terminates the lease early.  Respondent must pay $ 1,962.50 to exercise his option to purchase at the end of the lease. The vehicle has not been maintained and is on "its last legs." At the end of the lease the vehicle will be worth less than the option price. The Court is not persuaded that Respondent, at the end of the lease, can purchase the vehicle for a nominal price as that term is used in O.C.G.A. § 11-1-201(37).

The Court is persuaded that the lease agreement is a true lease and not a security agreement.

In re Tom's Foods, Inc., No. 05-40683, 2006 Bankr. LEXIS 1323 (Bankr. M.D.Ga. July 13, 2006).

The Responsible Liquiditating Officer of Debtor sought production of e-mails between former principal of the debtor and an attorney who also served on the debtor's board of directors.  The corporate shareholder who had possession of the e-mails refused to produce on the basis of attorney-client privilege.  The court found the e-mails were not privileged.

"The party invoking the attorney-client privilege has the burden of proving that an attorney-client relationship existed and that the particular communications were confidential. In order to show that communications made to an attorney are within the privilege, it must be shown that 'the communication was made to him confidentially, in his professional capacity, for the purpose of securing legal advice or assistance.' 'The key question in determining the existence of a privileged communication is "whether the client reasonably understood the conference to be confidential."'
...

Turning to the case at bar, the Court, from its in camera review, is not persuaded that the e-mails at issue are protected by the attorney-client privilege or the joint-defense privilege. The e-mails were widely distributed by Mr. Divin. Several e-mails were sent to persons who were not officers or directors of Debtor. Six e-mails were sent to persons affiliated with Heico, an entity separate and distinct from Debtor. Five e-mails were sent to persons by blind copy. The Court is not persuaded that the e-mails were confidential communications between Mr. Divin and Mr. Meadows.

In the Court's view, the e-mails sought guidance from Mr. Meadows on how Debtor's Board of Directors and management should respond to Debtor's financial distress. The substance of the e-mails concerned matters within Debtor's business affairs.

11 U.S.C. §522; Judicial Lien; Lien Avoidance

In re Smith, 2006 Bankr. LEXIS 877, Case No. 05-60736 (Bankr. M.D.Ga. May 16, 2006) (Laney)

Prior to filing of the debtors' joint bankruptcy petition, the judgment creditor caused a judicial lien on the debtors' real property. The judicial lien, securing a debt of $27,394, was subordinate to a first mortgage of $35,000 and senior to a second mortgage in the amount of $155,521. The value of the property, without deductions for liens or exemptions, was $187,455. Debtors filed a motion to avoid the second-priority judicial lien pursuant to § 522(f) on the grounds that the lien impaired the debtors' exemption; however, debtors did not actually claim the exemption on their schedules.

The issue before the court was "whether the judicial lien of the judgment creditor's lien may be avoided in its entirety where the judicial lien was subordinate to a consensual, non-avoidable first mortgage lien, is senior to consensual, non-avoidable second mortgage lien, and there remains no equity in the property."

The exemption was impaired under the formula set forth in § 522(f)(2)(A), as the sum of the judicial lien, all other liens and the debtors' exemptions exceed the value of debtors' interest in the property in the absence of any liens. Accordingly, the court held that if the debtors amended their schedules to claim their state-law exemptions in the real property, they could avoid the judicial lien in its entirety pursuant to §522(f)(2).

Fed.R.Fed.P. 59(e); Motion to Alter or Amend Judgment

Waller v. Frost, 2006 U.S.Dist LEXIS 19925 (M.D. Ga. April 17, 2006)

The District Court affirmed the Bankruptcy Court's dismissal of the debtor's case and the debtors moved for reconsideration. The court looked to the substance of the motion and determined it was based upon Rule 59(e) and not Rule 60(b). The debtors did not present arguments of a "strongly convincing nature" so as to be entitled to relief, and did not assert a change in controlling law or newly discovered evidence. The motion was denied.

O.C.G.A. §§ 11-1-201(9), 11-2-403(2); Buyer in the Ordinary Course

First National Bank of South Georgia v. Ayers Aviation Holdings, Inc., 2006 Bankr. LEXIS 675, Adv. No. 01-1003 (Bankr. M.D. Ga. March 31, 2006)(Laney)

The basic relevant facts of a case that is otherwise factually and procedurally complicated are as follows. Seller, which was in the business of selling aircraft and avionics, sold an aircraft to the debtor, with the two engines on the aircraft encumbered by a prior security interest od the secured creditor. The aircraft was delivered to the debtor in the summer of 1999 but the bill of sale was submitted until May 2000. The debtor's principal testified that the consideration for the aircraft was, at least in part, in satisfaction of a prior obligation the debtor owed to the seller and through the transfer of avionics to the seller before and after the transfer of the aircraft.

O.C.G.A. §11-2-403(2) generally allows a merchant of the goods at issue to transfer the property to a buyer in the ordinary course of business. O.C.G.A. § 11-1-201(9) excludes from the definition of "buyer in the ordinary course" a person that "acquires goods …. for or in total or partial satisfaction of a money debt…" The court found that a monetary debt owed to the debtor existed before the aircraft was transferred and that the debtor paid for the aircraft with the satisfaction of that debt. Therefore, the debtor was not a "buyer in the ordinary course" of the encumbered engines. The court further declined to "fractionalize" the transfer, labeling a transferee a buyer in the ordinary course to the extent the purchase price was not in satisfaction of a money debt. Such an interpretation would constitute an improper judicial amendment to § 11-1-201(9). Therefore, the secured creditor maintained all rights of ownership in the engine.

11 U.S.C. § 1325; Good Faith; Feasibility

In re Roberts, 339 B.R. 807, Case No. 05-11325 (Bankr. M.D. Ga. March 17, 2006)

The creditor objected to the debtor's plan on the grounds that it was not proposed in good faith and it was not feasible. The creditor presented several instances where the debtor failed to list debts or property, and evidence of other inaccuracies and ambiguities in the initial schedules and petition.

The court found that the case was dominated by debtor's family issues, where relations may not be clearly defined or documented. While that did not excuse errors and omissions, the court concluded that the debtor had not abused the provisions, spirit or purpose of Chapter 13. The court also found that the errors and omissions were corrected prior, and the debtor would have gained no advantage from the inaccuracies. Therefore, the court declined to dismiss or deny confirmation for lack of good faith. As the debtor was current with payments at the time of the hearing and no evidence indicated she would be unable to fund the plan. Therefore, the creditors feasibility challenge was without merit.

11 U.S.C. §362, 541; Automatic Stay; Property of the Estate

In re Geiger, 2006 Bankr. LEXIS 897, Case No. 05-54262 (Bankr. M.D. Ga. March 20, 2006) (Hershner)

The secured creditor held a foreclosure sale of the debtor's real property approximately one hour prior to the filing of the debtors Chapter 13 petition. The creditor was the highest bidder, but there was no tender of consideration of the bid amount, no internal notation of the bid on the creditor's records, and no execution of a deed of foreclosure. The creditor filed a motion to validate the sale, contending that the foreclosure sale was final upon its acceptance of the highest bid and, therefore, debtor had no interest in the property as of filing.

The court denied the motion. Federal law dictates whether an interest in property is property of the estate, while state law governs the nature and existence of the interest. Under Georgia law, the highest bidder obtains no interest in the foreclosed property merely by submitting the highest bid. Here, no deed was transferred and the creditor could point to no objective standard to show that a transfer occurred or that the debtor's interest in the property was terminated prior to the filing of the petition.

11 U.S.C. §§541, 544; Property of the Estate; Georgia RICO

In re Stewart, 2006 U.S. Dist. LEXIS 11356, Case N0. 3:05-CV-41 (M.D. Ga. March 14, 2006)(Land)

Prior to the debtor's bankruptcy filing, the creditor filed a state court action against debtor and others based upon allegations that the debtor fraudulently transferred assets to family members. The creditor subsequently added a claim under Georgia RICO and subsequent to the bankruptcy filing, requested that the automatic stay be lifted to pursue the claim against the non-debtors. The Chapter 7 trustee opposed and claimed that the RICO claim was property of the estate. The Bankruptcy Court granted the motion to lift stay and the trustee appealed.

The District Court affirmed the Bankruptcy Court order. The trustee succeeds to the rights of the debtor and has standing to bring suits that the debtor could have brought outside bankruptcy. However, the trustee is also limited by certain defenses that could have been raised against the debtor. Under the theory of "in pari delicto" is an equitable defense that provides that a plaintiff who has participated in wrongdoing may not recover damages from the wrongdoing. Here, the debtor is alleged to have participated in the wrongful acts. The Eleventh Circuit Court of Appeals has held that a trustee is barred from asserting a federal RICO claim against a debtor's co-conspirators where the debtor was an active participant in the activities, and the District Court stated that there was no reason why the same rule should not apply to Georgia RICO cases since the Georgia statute was modeled upon the federal statute. The Court further held that the trustee could not used §544 to pursue the claims because the claims are neither actual nor potential property of the estate.

11 U.S.C. §541; Property of the Estate; Contract for Deed

In re Beacham, 2006 Bankr. LEXIS 05-51927, Adv. No. 05-51927 (Bankr. M.D. Ga. February 17, 2006)(Hershner)

Debtor entered into a pre-petition Contract for Deed providing that upon completion of payments and satisfaction of their obligation, the seller would convey title to the real property to the debtor. The debtor, after placing a mobile home on the property, defaulted pre-petition and the seller sent a notice of termination and demanded possession of the real property. The debtor then filed a Chapter 13 petition and filed an adversary seeking to determined the validity, priority and extent of the seller's lien.

The court held that the Contract for Deed, while rarely used in Georgia, provided the debtor rights which were not terminated pre-petition. The debtor had no abandoned the property and was not in adverse possession. See In re Verdi, 244 B.R. 494 (Bankr. M.D. Ga. 2000). Further, the court found unpersuasive the seller's argument that its claim was secured by the debtor's primary residence and thus could not be modified pursuant to §1322(b)(2), as the seller claimed an interest in only the real property and not the mobile home. Therefore, the rights of the seller could be modified. Summary judgment for the seller was denied

11 U.S.C. §§ 541, 548; Property of the Estate; Fraudulent Conveyance

Webster v. Cape, 2006 Bank. LEXIS 185 (Bankr. M.D. Ga. February 10, 2006)(Hershner).

Prior to the filing of his bankruptcy petition, the debtor's mother died. Her will stated directed that the debtor could live in her home as long as he wanted, then the house would be sold and the proceeds divided between the debtor and his sister. The sister subsequently filed a Chapter 7, but did not list in her schedules her interest in the home as she apparently did not believe she owned an interest in the home. The debtor subsequently moved and, without consideration, transferred title to the home to his sister. At the time of the transfer, the sister's bankruptcy case had been closed but the case was subsequently re-opened.

The debtor subsequently filed a Chapter 7 petition, and his trustee filed an action against the sister and her trustee to recover one-half of the interest in the home. The trustee of the sister's estate cross-claimed against the sister to recover the other one-half interest for her bankruptcy estate.

Since the sister's title to the home related back to the date of her mother's death, her one-half interest was property of her estate and must be surrendered to the trustee of her estate. With respect to the fraudulent conveyance claim asserted by the debtor's trustee, the parties agree that the transfer was made within one year of the filing of debtor's petition and that the debtor received less than equivalent value, but disputed whether the debtor was insolvent at, or after, the time of the transfer. The court analyzed the debtor's finances and determined that the transfer of his one-half interest rendered him insolvent under the Code's balance sheet test. Therefore, the debtor's trustee was entitled to recover the other one-half interest from the sister.

11 U.S.C. §101(12A); Debt Relief Agencies; Attorneys

In re McCartney, 336 B.R. 588 (Bankr. M.D.Ga. January 12, 2006) (Hershner)

Debtor's counsel filed a Motion to Determine Attorney Status, seeking a determination that attorneys who practice before the court were no "debt relief agencies" under §101(12A) of the Code. Since no party has threatened to enforce the statute against the attorney, and he has sustained no real, actual or direct harm, he has failed to satisfy the case or controversy requirement. The motion was dismissed.

Fed. R. Bankr. P. 4007(c), 9029(a); 11 U.S.C. 523; Timeliness of Dischargeability Complaint; Local Rules

Askew v. Patel, 2006 U.S. Dist. LEXIS 5201, Case No. 4:05-CV-118 (M.D. Ga. January 30, 2006)(Land).

Plaintiff filed a complaint to determine dischargeability against the debtor. The Local Rules in place at the time required that the complaint be filed in both electronic format and in paper form. By administrative order of the Bankruptcy Court, the filing date would be the date on which the paper copy was received and if no paper copy was received, the electronic document would be deleted.

Plaintiff filed its complaint electronically on the last day to file dischargeability complaints, but the paper copy was not received until after the deadline. The Bankruptcy Court dismissed the complaint as untimely. The District Court reversed, finding that documents are generally deemed "filed" when under the clerk's possession and control, even if the filing is not in the proper form or in compliance with other prerequisites for maintaining an action. Further, Rule 9029(a)(2) provides that local rules shall not be enforced in such a manner that causes a party to lose rights because of a nonwillful failure to comply. Since the complaint was in the possession of the clerk by the deadline and there was no evidence of willful or contemptuous conduct on the part of plaintiff, the complaint was deemed timely filed.

11 U.S.C. § 510; Equitable Subordination

Westek Georgia, LLC v. Oglesbee, 332 B.R. 850, Adv. No. 04-5058 (Bankr. M.D.Ga. October 6, 2005)(Hershner)

Defendants were the owners of the parent company of a manufacturing company. After the manufacturing company experienced financial difficulties, Debtor purchased substantially all of the assets of the company and assumed most of its financial obligations. As consideration, Debtor paid $300,000 at closing and entered into non-competition agreements with the Defendants whereby Defendants were to be paid $1,080,000. Payments under the non-competition agreements were the primary vehicle to pay for the assets, and the Defendants took a security interest in the transferred assets.

The Debtor's business was not successful and Debtor filed suit against the Defendants for fraudulently misrepresenting the company's liabilities. Creditors subsequently filed an involuntary petition against the Debtor, and Debtor filed an adversary seeking subordination of the Defendants' claims and the cancellation of their security interest.