#Name#, this is your January Edition of the

In this issue:
Welcome!

Welcome to the first on-line edition of the Bankruptcy Section Newsletter. We are excited by all the possibilities that the web edition brings to you! As you will find, the traditional articles and case summaries are still here. But, as we work to expand the newsletter, we will be bringing you the best links, more in-depth materials, and the latest information regarding CLLA business. But, please bear with us. Even with all of our planning, we expect a few growing pains. Please send us your comments and questions. And, if you are having problems reading this, please let us know! Enjoy!

Steven Solomon, Editor
Alan Nahmias, Editor
     

Washington Hot News
January 24, 2002
Some Say Congress Should Strike Bankruptcy Reform Provision.
On January 23rd, it was encouraged that Congress strike a section of H.R. 333 that could help place certain assets beyond the reach of creditors. Section 912 of H.R. 333 would allow a debtor and one favored creditor to engage in a private transaction to remove assets from the corporate bankruptcy estate of a troubled borrower and protect them from other creditors. This year, due to the poor economy, Enron, and other situations, the outlook for passage of bankruptcy reform looks weak.

MORE WASHINGTON HOT NEWS
  
Networking Opportunities

March 9 -12, 2002
Joint NACM-CLLA Legislative Conference
Marriott Gateway Hotel, Alexandria, VA

April 11 - 14, 2002
72nd Annual Chicago Conference
Westin Hotel, Chicago, IL

April 28 - 30
Joint International Conference with FCIB
Jurys Ballsbridge Hotel - The Towers
Dublin, Ireland

May 24 - 27
54th Annual New England Meeting
Cranwell Resort & Golf Club
Lenox, MA

July 12 - 17
108th Annual CLLA Convention
Grand Summit Hotel
Park City, UT

November 14 - 17
82nd Annual New York Conference
Sheraton Hotel
New York, NY

More information available at: www.clla.org
  

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SUA SPONTE
Jay Welford, Chair
Jaffe, Raitt, Heuer & Weiss
Detroit, MI
jwelford@jafferaitt.com

Welcome to 2002. I wish each of you a healthy, a safe and a happy New Year. 2002 is a palindrome-a letter or phrase that reads the same, backward or forward. It does not happen very often. The years 1881 and 1991 are behind us. 2112 and 2222 are yet to come.

We, like the rest of the world, are recovering from the after effects of September 11. "Are we not drawn onward, drawn onward to new era?"

The Commercial Law League and its Bankruptcy Section are moving on to a new era. We have a tremendous number of high quality programs and changes planned for the coming months.

 

CASE ANALYSIS
Exacting Standards Imposed on Creditors Seeking Nondischargeability
Sweeney v. Lombardi (In re Lombardi), 263 B.R. 848 (Bankr. S.D. Ohio 2001)

Elizabeth H. Doucet
Elizabeth H. Doucet & Associates Co., L.P.A.
Columbus, Ohio
doucet-law@worldnet.att.net

The issue of whether a debt is dischargeable or not and under what circumstances it may be dischargeable continues to require more attention by the bankruptcy courts. This issue often arises in the context of a Chapter 7 bankruptcy where the debtor is a construction company. Such was the case in Sweeney v. Lombardi, from the U.S. Bankruptcy Court, Southern District of Ohio



CASE LAW UPDATE
Cathy Vance
Legal Writer, CLLA
Columbus, OH
vance76@earthlink.net

Property of the Estate. During pendency of bankruptcy case, debtor's wrongful discharge suit against his employer settled for $165,000. Debtor argued that $40,000 of settlement was not property of the estate because it represented value of pension contributions that would have been made had his employment continued. Applying mechanical rule, court rejected contention that either ERISA or similar Illinois statute looks to what would or could have happened, but only whether assets actually entered the qualified pension plan. In re Weinhoeft, 2001 U.S. App. LEXIS 27000 (7th Cir. December 21, 2001).

Oversecured Creditors. Oversecured creditor's claim for contractually set attorneys' fees are subject to the reasonableness standard under 11 U.S.C. § 506(b) even though vested prepetition and enforceable under state law. Proper treatment of the claim requires bifurcation, with the amount determined to be reasonable treated as a secured claim and the balance allowed as an unsecured claim. Welzel v. Advocate Realty Invs., L.L.C. (In re Welzel), 2001 U.S. App. LEXIS 26783 (11th Cir. Dec. 17, 2001) (en banc).

 



SUA SPONTE

Welcome to 2002. I wish each of you a healthy, a safe and a happy New Year. 2002 is a palindrome-a letter or phrase that reads the same, backward or forward. It does not happen very often. The years 1881 and 1991 are behind us. 2112 and 2222 are yet to come.

We, like the rest of the world, are recovering from the after effects of September 11. "Are we not drawn onward, drawn onward to new era?"

The Commercial Law League and its Bankruptcy Section are moving on to a new era. We have a tremendous number of high quality programs and changes planned for the coming months.

First, most of you are now receiving this Newsletter by e-mail. Those that have received it by fax likely have not provided the League office with an e-mail address. If you have access to e-mail, just send an email to Editor@clla.org. If you do not have e-mail access, you may continue to receive this newsletter by facsimile, or ask your 10- year old niece or nephew to sign you up. They'll know what to do from there. The switch to an electronic media will permit the Bankruptcy Section to more easily implement many long discussed enhancements to this Newsletter. We also welcome your suggestions ("maps ok -ko spam").

Mark your calendars for the CLLA-NACM joint conference set to be held March 9-12 in Washington DC. This conference will provide a unique opportunity for CLLA members to interact with fellow practitioners who are engaged in the area of credit management around the country. Joint programs include an "Update on Political and Economic Issues," "Evaluating the Health of Accounts Receivable Portfolios," "Basic," and "Advanced Issues in Bankruptcy Law," and a detailed program on the "Anatomy of Composition and Other Out-of-court Agreements." The conference will end with a day on Capital Hill, to provide an opportunity to individually meet with members of the House and Senate. There are many networking events built into the weekend as well. Walk up to someone and introduce yourself as "Madam, I'm Adam."

After you have visited with your aunt Hannah or cousin Radar back home, move on to the Midwest regional meeting, which will be held April 11-14 at the Chicago Westin Hotel. Educational programs will include "Driving the Getaway Car in Financial Fraud Cases," "Get Online or Get Left Behind: Electronic Filing," "An Update on Capital Hill," "Outsourcing in the Future: Is It For You," "Asset Liquidation in the 21st Century" and "MBA Concepts for Lawyers." Spend the evenings socializing in the windy city with your colleagues.

Finally, for some international flavor, attend the joint meeting between the CLLA and the Finance Credit & International Business Association, to be held in Dublin Ireland form April 28-30th. Topics will include worldwide credit, collections and exchange issues. While there, have a few Irish brews until you ask yourself, "Was it a cat I saw."

On the legislative front, the bankruptcy bills faded with the adjournment of Congress. While efforts were made to strip out some of the less controversial provisions of the legislation, the attempts were not enough to garner a response. However, with bankruptcy filings at an all time high in calendar year 2001, it is clear that bankruptcy reform will remain at the top of the legislative calendar when Congress returns.

Have a good year, and please provide your comments and suggestions on how to improve this newsletter. Write to us at editor@clla.org.

Sincerely, your Chairman

Yaj Droflew



Jay Welford
Jaffe, Raitt, Heuer & Weiss
One Woodward Avenue Suite 2400 Detroit, MI 48226
Phone: 313-961-8380 Fax: 313-961-8358
Email: jwelford@jafferaitt.com

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CASE ANALYSIS
Exacting Standards Imposed on Creditors Seeking Nondischargeability
Sweeney v. Lombardi (In re Lombardi), 263 B.R. 848 (Bankr. S.D. Ohio 2001)

The issue of whether a debt is dischargeable or not and under what circumstances it may be dischargeable continues to require more attention by the bankruptcy courts. This issue often arises in the context of a Chapter 7 bankruptcy where the debtor is a construction company. Such was the case in Sweeney v. Lombardi, from the U.S. Bankruptcy Court, Southern District of Ohio

Facts: The facts as set out by the court are clear and not unusual. The Defendant Lombardi had operated a car business for a number of years. In addition he had been in the residential construction business in the 1970s. The Sweeneys, the plaintiffs in the case, owned a piece of real property in the German Village area of Columbus, Ohio which they wanted to renovate. After an architect had drawn up plans for the renovation the architect introduced Ms. Sweeney to Mr. Lombardi.

Initially Lombardi was hired only to do the demolition work involved with the project. He was then engaged to oversee the project and when local people would not work with him he became the general contractor on the project. Lombardi quoted a fee of $140,000-150,000, considerably less than the $190,000 price quoted by the architect to the Sweeneys. The price quoted by Lombardi also included a fee to him of 20 per cent of the cost. Lombardi apparently also represented that he could complete the project in 10 -12 weeks. As a result the Sweeneys entered into an agreement with Lombardi for him to do the work. The court noted that there was never a written agreement between the parties. In the course of the trial of this matter the court noted that Lombardi disputed that he ever agreed to be the general contractor for the project.

Thus in November, 1996 Mr. Lombardi began work on the project. Initially he did the post demolition work. The agreement between the parties was that Lombardi would purchase needed materials with his contractors discount. The Sweeneys would then reimburse him for these purchases in addition to paying him his 20 per cent fee.

By January 1997 Ms. Sweney became concerned about the mounting costs of the project. As a result she testified that she took copies of the plans to 84 Lumber, a regional building supply house. From 84 Lumber she learned there that the amounts she was being charged by Lombardi were in excess of the actual costs. She confronted Lombardi about this to which he responded that she was mistaken. He also promised her a credit of $10,200.00 for any overages.

At trial the testimony was that there were numerous delays in the project. Also in February 1997 the plans for the project disappeared, It took three to four weeks to have them redone and to get the necessary building permits.

In April 1997 the Sweeneys demanded that Lombardi provide completion dates for the projects, which were provided by Lombardi. He noted the overall completion date would be late May, 1997.

The relationship between the Sweeneys and Lombardi deteriorated ; after the Sweeneys refused to advance further funds Lombardi walked off the job in June, 1997. After Lombardi left the Sweeneys learned that many of the subcontractors and materialmen had not been paid and that $4,749.02 was owed to them. After consulting with another contractor the Sweeneys estimated it would cost another $59,180 to complete the renovation as they had wanted. Because of the mounting costs the Sweeneys changed many of the specifications and ultimately ended up with what they considered to be a lower scale project than they had originally wanted.

As if all of the above was not enough there was some $16,923.18 in items that the Sweeneys had paid Lombardi for which never were placed in their German Village property. There were additionally expenses they sought from Lombardi who subsequently filed a Chapter 7 bankruptcy in 1999.

Issues: The court was asked to find that Lombardi's debts to the Sweeneys were nondischargeable under §§ 523(a)(2)(A), (4), and (6) and that the debtor's discharge be denied pursuant to §§ 727(a)(3), (4)(A), (4)(D), and (5).

Analysis: The court only held that those funds paid to Lombardi for materials which were never received or for which he overcharged were non dischargeable. This finding appears to be based on evidence which established that Lombardi made numerous false representations to the Sweeneys on which they relied to their detriment.

However, the court found that the Plaintiffs had failed to provide evidence to support their other claims, For example, under Section 523(a)(6) a plaintiff must show a willful and malicious injury. It is not sufficient if the act is only deliberate or intentional, The court found that a debtor does not commit a "willful or malicious injury" under this section unless he desires to cause the consequences of his act or believes that those consequences are substantially certain to result. As an example, the Court spent some time discussing a fireplace that the Plaintiffs alleged had been converted. The debtor testified that he had placed the fireplace in another construction project because at the time the Sweeneys construction was not ready for the fireplace to be installed. Further there was not evidence that at the time the fireplace was used in another project the debtor had any reason to be believe that a similar fireplace would not be available.

This holding highlights the difficulty creditors will continue to have to support nondischargability claims. The burden rests on the creditor to prove all elements of the case. Thus the evidence must be conclusive, as it was in one portion of the Sweeney case, that false representations were made with an intent to deceive and that the parties justfiably relied on those representations to their detriment. Here the debtor's purchase of materials at one price and then charging Plaintiffs a higher price plus his 20 percent markoff resulted in his undoing.

With regard to the 727 claims the court dismissed the 727 claims finding that Plaintiffs did not provide sufficient evidence.

 

Elizabeth H. Doucet
Elizabeth H. Doucet & Associates, Co., L.P.A
895 S. High Street Columbus, OH 43206
Phone: 614-444-5700 Fax: 614-444-5727
Email: doucet-law@worldnet.att.net

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CASE LAW UPDATE

Property of the Estate. During pendency of bankruptcy case, debtor's wrongful discharge suit against his employer settled for $165,000. Debtor argued that $40,000 of settlement was not property of the estate because it represented value of pension contributions that would have been made had his employment continued. Applying mechanical rule, court rejected contention that either ERISA or similar Illinois statute looks to what would or could have happened, but only whether assets actually entered the qualified pension plan. In re Weinhoeft, 2001 U.S. App. LEXIS 27000 (7th Cir. Dec. 21, 2001).

Oversecured Creditors. Oversecured creditor's claim for contractually set attorneys' fees are subject to the reasonableness standard under 11 U.S.C. § 506(b) even though vested prepetition and enforceable under state law. Proper treatment of the claim requires bifurcation, with the amount determined to be reasonable treated as a secured claim and the balance allowed as an unsecured claim. Welzel v. Advocate Realty Invs., L.L.C. (In re Welzel), 2001 U.S. App. LEXIS 26783 (11th Cir. Dec. 17, 2001) (en banc).

Willful and Malicious Injury. In state court litigation involving federal debt collection statutes and state consumer fraud statutes, jury found generally for creditor and awarded her punitive damages. The court instructed the jury that it could award punitive damages if it found debtor acted with intent to harm or with reckless indifference to creditor's safety. The award was held nondischargeable. Because the punitive damages arose from consumer fraud statutes, jury must have concluded that debtor acted with intent matters of safety are not involved. Additionally, "compensatory fine" imposed against debtor for contempt in creditor's prepetition attempts to collect jury award not discharged because debtor's conduct in failing to comply with court order was willful and malicious. Siemer v. Nangle (In re Nangle), 2001 U.S. App. LEXIS 26274 (8th Cir. Dec. 7, 2001).

Employment of Professionals. Unless a professional is unambiguously employed pursuant to 11 U.S.C. § 328, its fees will be subject to the reasonableness requirement of 11 U.S.C. § 330. Professional must explicitly invoke § 328 in its application and it is preferable that court order also specify that section. Circle K Corp. v. Houlihan, Lokey, Howard & Zukin, Inc. (In re Circle K Corp.), 2001 U.S. App. LEXIS 25972 (9th Cir. Dec. 5, 2001).

Fraudulent Transfers. On eve of bankruptcy, debtor withdrew entire balance of a checking account held jointly with his nondebtor spouse. Debtor gave his wife one-half of the funds, which she redeposited after the debtor filed his bankruptcy petition. Court rejected wife's argument that there was no transfer of the debtor's property because amount she received represented her share of the account. Both debtor and his wife had a right to withdraw the entire balance and, once debtor did so, he became the owner and the amount given to his wife was a transfer of his property. Zubrod v. Kelsey (In re Kelsey), 2001 Bankr. LEXIS 1618 (10th Cir. B.A.P. Dec. 19, 2001).

Excusable Neglect. In determining that untimely notice of appeal was not the result of excusable neglect, and therefore would not be allowed, court considered among relevant factors the fact that counsel could have made use of after-hours facsimile filing, which was available in that district. Cavazos v. Mid State Trust II (In re Hillsborough Holdings Corp.), 2001 Bankr. LEXIS 1590 (Bankr. M.D. Fla. Dec. 10, 2001).

Post-confirmation valuation of collateral. Where chapter 13 plan does not state value of collateral but, instead provides for "100 percent" payment of secured claims, and secured creditor files proof of claim after confirmation, creditor's secured claim may be reduced to zero after creditor repossesses and sells collateral. Under the circumstances, the confirmed plan did not preclude valuation of collateral after confirmation. In re Adams, 2001 Bankr. LEXIS 1593 (Bankr. N.D. Ill. Dec. 4, 2001).

Denial of Discharge. Debtor and his affiliated corporation filed petitions for relief under chapter 7. Debtor signed and verified blank schedules and statement of affairs for corporation with expectation that his attorney would later complete and file same using information included in corporation's prior bankruptcy case. Court held that debtor's conduct constituted the knowing and fraudulent making of a false oath and debtor's discharge was denied. Kavanagh v. Leija (In re Leija), 2001 Bankr. LEXIS 1568 (Bankr. E.D. Cal. Dec. 3, 2001).

Enron Financing Order. 2001 Bankr. LEXIS 1564. A limited amount of information in the Enron bankruptcy case is available on the website for the United States Bankruptcy Court for the Southern District of New York at http://www.nysb.uscourts.gov.


Cathy Vance
Legal Writer, CLLA
Columbus, OH
vance76@earthlink.net

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