Law firm that had represented the chapter 11 debtor moved for approval of its representation of a defendant in the chapter 7 trustee's preference proceeding after the case was converted. The court held that the firm could not represent the defendant.
Chapter 7 trustee filed a motion requesting the court order the trustee of the debtor's family trust to turn over cash assets equal to the debtor's present interest in the value of the trust. The trust trustee argued the express primary purpose of the trust, which was to provide and maintain a residence for the debtor's mother, had to be satisfied prior to a distribution of the trust's assets. The court determined the chapter 7 trustee was entitled to an order directing the trust trustee to turn over the debtor's proportionate contribution to the trust, which was a 1/7 interest in the trust cash and a 1/14 interest in the trust real estate.
Chapter 7 debtors brought an adversary proceeding for an order requiring the IRS to reallocate their tax overpayments to the trust fund portion of their tax liability and for a determination that their tax debts had been discharged. The court held that the individual debtor-partners continued to be liable for all taxes incurred by the debtor-partnership following conversion of its chapter 11 case to chapter 7. Penalties and interest assessed against the debtor-partnership for failing to file partnership informational returns were excepted from the discharge of the individual partners. The court further found no appropriate bankruptcy purpose would be served by requiring the IRS to allocate payments made by the debtor-partnership during its chapter 7 case to the trust fund portion of the taxes, and the debtor were not entitled to designate the application of their income tax overpayments.
US Trustee filed a motion for an order vacating and voiding the court's order approving employment of chapter 11 debtors' counsel for failure to make full disclosure as required under Rules 2014(a) and 2016(b). The firm had required the debtors to pay counsel $3,000 per month which would then be placed into trust to ensure there would be available funds to pay the attorney's fees once approved by the court. The court found the fee arrangement was improper and the firm's initial nondisclosure of the arrangement was an intentional omission; therefore, the firm was disqualified from representing the debtors ab initio.