Chapter 7 trustee commenced an adversary proceeding against two defendants to recover an account receivable. Because the debtor owed the first defendant certain sums and that defendant owed monies to the second defendant, the second defendant argued the amount it owed the debtor should be set off. The court determined that the second defendant failed to prove that the triangular setoff rights fell under the mutuality requirement of sec. 553. The trustee was granted a judgment for the full amount owed the debtor.
US Trustee moved for reconsideration of the court's order converting the case from chapter 11 to chapter 7 upon the debtor's motion under sec. 1112(a). The UST argued that, as the debtor was no longer a "debtor in possession" post-confirmation, it no longer had the right to convert the case under sec. 1112(a). The court found that because the post-confirmation debtor was the same entity as the debtor in possession, the debtor was allowed to convert, post-confirmation, to a chapter 7.
Creditor commenced an adversary proceeding seeking to deny the chapter 7 debtor's discharge due to his non-disclosure of personal and financial assets, as well as corporate assets under his control. The court determined the totality of the debtor's mismanagement of both his personal and corporate financial affairs, the debtor 's lack of records, the debtor's concealment of assets, and the debtor's false statements on his schedules and at his meeting of creditors justified the denial of discharge under sec. 727(a)(2), (3), (4)(A), and (7).
Creditor moved for relief from the automatic stay and for an order of payment of secured proceeds held by the chapter 7 trustee. The trustee objected, asking the court to require the creditor to marshal assets of the debtor's principals before resorting to proceeds that were property of the estate. The court sustained the objection. The common debtor requirement of the doctrine of marshaling was met where the principals secured the debtor's note to the creditor with mortgages on their homesteads. The creditor was required to marshal assets with respect to the principals' personal note and was required to satisfy its claim through foreclosure of the principals' real estate even though it was environmentally contaminated.
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.