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Recent Cases in the Bankruptcy Court Western District of New York Archives

Retainer agreement governs attorney fees for responding to turnovers: Kasperek and Martinelli

In re: Kasperek Bk 08-11760 & In re Martinelli Bk 08-11761 (Decision January 15, 2009; Judge Bucki, Buffalo: Two potential asset cases where the trustee (John Ring) requested turnover of documents and assets. The debtors' attorney apparently demanded additional fees from each client before he would represent them in the turnover motion. The attorney did not file a supplemental 2016 statement. The attorney did not appear at the initial turnover motion, and the trustee brought a motion to disgorge. The attorney did appear at the adjourned turnover date and all turnover matters were resolved. Judge Bucki concluded that an attorney may structure his retainer arrangement as he or she sees fit, but is obligated by its terms. In this case, the 2016 statement stated the attorney would "render legal services for all aspects of the bankruptcy case." The judge stated that this certainly would include responding to a turnover motion. The judge ordered to attorney to compensate the trustee $500 for the cost of bringing the turnover motions and the disgorgement motions. Whatever the Rule 2016 statement (and attorney's retainer agreement) says, the court will enforce.

Fixtures and the homestead exemption: Grucza

In re Grucza 09-11140 (Decision Sept. 9, 2009, Judge Kaplan): Is a pile of cinder blocks similar to storm windows stored in the garage or more like a not-yet-installed hot tub? Or perhaps like George Washington's statute? Or Cleopatra's Needle? Judge Kaplan wrestled with the issue of when stuff becomes a fixture of real estate and, therefore, eligible for the homestead exemption. Here the debtors' back yard was falling off a cliff, and they bought a load of cinderblocks in order to build a retaining wall. The petition was filed before the wall went up, and the trustee wanted to sell the block - for $7,000 - as unexempt personal property. The judge ruled the blocks were fixtures, at least in this particular case.Judge Kaplan reviewed colorful pre-Civil War cases which said that fixtures don't have to be cemented to the ground; if they are heavy enough, gravity constitutes sufficient attachment (such as General Washington's statute and the ancient Egyptian obelisk erected in Central Park and (mis)named after the last Pharaoh of the Ptolemaic dynasty. So if the debtors here had piled their blocks one onto the other to hold back erosion, it would have been a fixture. And things that are removed temporarily from a building, such as storm windows stored in the garage during the summer, do not lose their fixture status while unattached. So, the Court reasoned, material intended to become fixtures, such as shingles to fix the roof, lumber to repair a wall, and the new furnace waiting to replace the clunker in the basement, would be considered fixtures as they sit on site, waiting installation. That is, unless they are intended for extravagant improvement or aesthetic upgrade. Like a new hot tub. Or evidence of fraudulent intent. In any case, this is a clear victory for procrastinating do-it-yourselfers.

Filing of claims in reopened cases

In re J&S Conveyor, Inc. 95-22963(Decision August 11, 2009; Judge Ninfo, Rochester). Complicated decision in an old, reopened case. The debtor corporation filed Chapter 11 Oct. 27, 1995. Apparently the corporation was the beneficiary of a life insurance policy that was listed on Schedule G (Executory Contracts) but not on Schedule B, line 9 (Assets – Interests in insurance policies.) The Chapter 11 debtor entered into a typical "cash collateral" agreement with the bank that had a security interest in all its assets, including its cash and receivables. Some creditors filed claims in the Chapter 11 case. A year later, the case was converted to Chapter 7, and a Chapter 7 notice to creditors of the trustee hearing was mailed out. That notice stated that there was no need for creditors to file claims at that time. The trustee filed a report stating there were no assets to be distributed to creditors, and the case was closed as a no-asset case in November 1998. Apparently the life insurance policy vested, in an amount of over $350,000. The case was reopened in September of 2006 to administer the life insurance proceeds (which has a complicated history, but that's another story.) A new notice to creditors was sent out by the Court Clerk, requesting claims to be filed. Claims in the reopened case: After the new claims deadline (or bar date) passed, the trustee objected to both the old claims filed in the original Chapter 11 and the new claims filed in the reopened Chapter 7. Had these motions succeeded, all the money would have gone to bankruptcy administrative claims and to the owner of the shares of the corporation. The trustee's argument was that, by 2006, the statute of limitations had run on the debts owed by the corporation in 1995 and, therefore, none of the creditor claims were valid anymore. Judge Ninfo ruled that the claims filed in the original Chapter 11 case were still valid, that the passage of time did not eliminate the validity of those claims when they were first filed. The judge ultimately ruled that the claims filed in the reopened Chapter 7 case were also valid, although this determination was against his better judgment. The judge believes that claims must be valid at the time they are filed, not merely as of the petition date, so claims filed years after the statute of limitations had run were no longer valid (the six year New York statute of limitations was tolled, or suspended, while the original Chapter 11 & converted Chapter 7 cases were pending, but the statute resumed when the case was closed in 1998.) However, the judge acknowledged, at the urging of the United States Trustee, that the 1996 clerk's notice instructed creditors not to file claims, and it would be inequitable to punish creditors for following the instructions of the Court Clerk. The Court reluctantly allowed these claims.Scheduling insurance policies: When a case is closed, as this case was in 1998, all assets listed on the schedules that have not been administered by the trustee are deemed abandoned back to the debtor. In this case, the life insurance was listed on Schedule G ("executor contracts") but not on Schedule B, where line 9 specifically asks for interests in insurance policies to be set out. The Court ruled that this asset was not deemed abandoned in 1998 because it was not properly listed on Schedule B.Informal proof of claim: To make a long complicated story short, the rights of the shareholder in this case to claim superior rights in the life insurance policy depended on whether the cash collateral agreement entered into at the beginning of the Chapter 11 case could be considered the filing of an informal proof of claim. The court ruled that it was not, as it failed to meet one of the four tests of an informal proof of claim: it failed (in the Court's view) to evidence the creditor's intention to hold the debtor personally liable on the debt in question.

PMSI car loan includes roll-over debt: Peaselee appeal

Peaslee (2nd Circuit Oct. 9, 2009): Peaslee is a Western District of New York Chapter 13 case appealed all the way to the Second Circuit Court of Appeals in New York City, which, in turn, certified the central issue of the case to the New York State Court of Appeals. In chapter 13, a car loan must be treated as fully secured, and paid in full as a secured claim, no matter how much the car is worth, if the loan is less than 2 1/2 years old and if it is a "purchase money security interest" (pmsi). PMSI is what is sounds like, a security interest that is granted to the lender in return for financing the purchase of something (a non-pmsi is a security interest given to a lender against property the borrower already owned.) When a borrower buys a car and finances the purchase with a car loan, the lender gets a lien against the car; that is a pmsi. In Peaslee, the question was whether the portion of a car loan that was rolled over from a prior car loan was pmsi. Often when a car buyer trades in an old car for a new one, the old car has a loan against it and the trade-in value of the old car is less than the amount of that loan. Often in that case the balance on the old loan that is not paid off by the trade-in is rolled over into the loan for the new car, so the borrower now owes all the money for the new car plus something left over from the old car. In Peaslee, the debtor argued that the rollover portion of the old car loan should not be treated as a pmsi, but rather should be treated as an unsecured loan because it exceeded the value of the new car. The Bankruptcy Court (In re Peaslee 358 BR 545 (Judge Ninfo 2006), agreed with the debtor but, on appeal, the District Court reversed (373 BR 272, Judge Larimer 2007.) The case was appealed to the Second Circuit, which concluded that the definition of what is a pmsi is a state law issue, and they "certified" that question to New Yorkss highest court, the Court of Appeals (that is, the federal Court of Appeals asked the state court for a definitive interpretation of state law.) The Court of Appeals concluded that under New York's Uniform Commercial Code, the rolled-over balance on the old loan was part of the consideration in purchasing the new car, and so the whole loan should be considered pmsi (In re Peaselee, 13 NY 3rd 75.) Once the Second Circuit received that certified decision, it issued a short decision October 9, 2009 that for Chapter 13 purposes, the whole car loan, including the roll-over, was pmsi and had to be treated as fully secured.

Pay advice case 2: Ober

In re: Jeffrey T. Ober (Bk 06-00704; decision June 27, 2008; Judge Bucki in Buffalo): Section 521 of the Bankruptcy Code (11 USC Sect. 521(a)(1)(B)(iv) requires a debtor to dile with the bankruptcy court "copies of all pay advices or other evidence of payment received within 60 days" of the filing of the bankruptcy petition. 11 USC sect. 521(i)(1) further states that if information required to be filed by the debtor, including pay advices, is not filed within 45 days of the petition date, "the case shall be automatically dismissed." In Ober, the case was filed April 3, 2006, but pay advices were filed only through March 2, so the last 30 days of pay advices were missing. Never the less, no one objected to the petition while it was in Chapter 13. The chapter 13 plan was confirmed, after notice to all creditors, and a later amended chapter 13 plan was confirmed, again after notice to all creditors. After two years in chapter 13, the case was converted to Chapter 7. Only then did someone - the new chapter 7 trustee - object to the case and claim that the petition should be treated as if it had been automatically dismissed two years earlier. The court did not indicate how it would have ruled if the question had been presented back at the beginning of the case. Instead the court decided that it was far too late for the trustee to claim the case should be treated as if it were dismissed. The chapter 7 trustee's predecessor - the chapter 13 trustee - should have objected to the case earlier, before the plan was confirmed, twice, after notice to all creditors. Interestingly, the case made no reference to Judge Ninfo's Riffle case.

Pay Advice case 4: Gilbert

In re Gilbert 08-12922 (Decision April 10, 2009; Judge Bucki, Buffalo) Another pay advice case. Here the debtor did not file with the court pay advices within 45 days of the petition date but did provide them to the trustee at the 341 hearing. The trustee apparently reviewed and returned the pay stubs without comment, and then filed a dismissal motion when the 45 day deadline passed. Judge Bucki ruled that the motion was legally sound but the trustee, having accepted the stubs without comment, was equitably estopped from moving to have the case deemed dismissed. Not mentioned in the case: Could the UST or another party have made the motion? Could they still?

Pay Advice case 3: Catania

Catania Bk 08-13478 (Decision December 10, 2008; Judge Bucki, Buffalo: Case dismissed "automatically" due to failure to file pay advice. Chapter 7 filed August 7. Pay stubs were filed for the period June 12 to July 3, and nothing between July 3 and August 7. Debtor attorney attempted to correct the error Sept. 7, but erroneously filed the same pay stubs as before. HELD: Court had no discretion, case must be deemed to have been automatically dismissed 46 days after filing. Sect. 521(a)(1)(B)(iv) requires pay advice for the 60 days prior to filing be filed with the court, or the case is automaticallly dismissed 45 days after filing. As there were no pay advices for the month prior to filing, and as the missing pay advice could not be derived from YTD (compare this to Judge Bucki's Wojda case or Judge Ninfo's Riffle case) or the trustee estopped from claiming the case is dismissed (Judge Bucki's Ober and Gilbert cases), this case must be considered dismissed pursuant to Sect. 521(i).

Pay advice case 1: Riffle (affirmed by District Court)

In re Stephen R & Lora P. Riffle (Bk 07-22372; decision January 24, 2008; Judge Ninfo). Section 521 of the Bankruptcy Code (11 USC Sect. 521(a)(1)(B)(iv) requires a debtor to file with the bankruptcy court "copies of all pay advices or other evidence of payment received within 60 days" of the filing of the bankruptcy petition. 11 USC Sect. 521(i)(1) further states that if information required to be filed by the debtor, including pay advices, is not filed within 45 days of the petition date, "the case shall be automatically dismissed." In Riffle, the debtor filed his last pay stub, plus a year-to-date summary of income received in each paycheck. A creditor filed a motion asking for the case to be considered automatically dismissed because the debtor did not file all four of his bi-weekly pay stubs for the 60 day period prior to filing his case. The court, however, agreed with the debtor and the trustee that the items that were filed were, in this case, sufficient "other evidence of payment" to verify the debtor's income. The court also specifically stated that, for any Rochester bankruptcy case, if a debtor files any evidence of payment, the case will not be considered to be automatically dismissed unless another party files a motion within 30 days of the expiration of the 45 day "automatic dismissal" date. NOTE: THIS CASE WAS AFFIRMED ON APPEAL (United States District Court for the Western District of New York (Case 08-CV-6082; decision August 7, 2008; Judge Siragusa)


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