R & F
Intellectual Property Acquisition, Inc. v. Hantover, Inc. (In re: Dynamic
Tooling Systems,
Inc.);
Case No. 04-15900; Adversary Case No. 06-5476 (Nugent) (June 12, 2007)
REPORT AND RECOMMENDATION TO GRANT HANTOVER, INC.’S MOTION TO
WITHDRAW THE REFERENCE OF THIS ADVERSARY PROCEEDING
• 28 U.S.C. §157(d)
• Fed. R. Bankr. P. 5011
• D. Kan. Rule 83.6.6(f)
Facts:
Debtor Dynamic Tooling Systems, Inc. (“DTS”) was a Wichita machine
shop whose president, developed and patented a rotary cutting tool for deboning
animal carcasses. The tool that was developed has parts that are interchangeable
with those sold by Bettcher Industries, Inc. (“Bettcher”) which
is the acknowledged leader in this narrow field. In June of 2003, DTS entered
into a Distribution Agreement (“Agreement”) with Hantover, Inc.
(“Hantover”) under which Hantover would be DTS’s exclusive
distributor for a period of 10 years in return for which DTS granted Hantover
a perpetual license to use DTS’s intellectual property. Under the terms
of the agreement, when it terminated, Hantover would retain DTS’s perpetual
license so that Hantover could continue to manufacture and sell the knife components
and compete with Bettcher. DTS fell on hard times and filed a Chapter 11 petition
in 2004. Beginning in 2006, Bettcher acquired both secured and unsecured claims
in DTS’s bankruptcy case until it held DTS’s bank’s secured
claim and nearly all of the unsecured claims. Bettcher was a dominant creditor
and adopted a very aggressive posture in the proceedings.
On October 24, 2004, R & F Intellectual Property Acquisition, Inc. (“RF”) a subsidiary of Bettcher, filed a ten-count adversary complaint that is the subject of this matter. RF asserted that Hantover took advantage of its superior market position in the rotary knife industry to cause DTS to enter into Distribution Agreement, an agreement that RF alleges should be void ab inito.
Hantover first requested withdrawal of the reference of the adversary proceeding for cause under 28 U.S.C. §157(d), on December 4, 2006.
Holding:
The Court noted that 28 U.S.C. §157(d) governs
both permissive and mandatory withdrawal of the reference to bankruptcy court
and provides:
The district court may withdraw, in whole or in
part, any case or proceeding referred under this section, on its own motion or
on timely motion
of any party,
for cause shown. The district court shall, on timely motion of a party, so
withdraw a proceeding if the court determines that resolution of the proceeding
requires consideration of both title 11 and other laws of the United States
regulating organizations or activities affecting interstate commerce.
In
determining whether to withdraw the reference for cause, courts typically consider;
1. whether the claims asserted are core or non-core proceedings under
28 U.S.C. § 157(d) and are legal or equitable in nature,
2. whether withdrawal
of the reference will further or diminish the goal of uniform administration
of bankruptcy cases; and
3. whether the matters implicated by the proceeding
are more typically tried in District Court.
The Court noted that even assuming each of the causes of action were core proceedings the real factor was whether Hantover was entitled to a jury trial on the claims and if so, whether Hantover waived its right to a jury trial by filing a proof of claim. The Court concluded that Hantover did not waive its right to a jury trial by filing its proof of claim. The Court recommended that Hantover’s motion to withdraw the reference for cause be granted and that the District Court try all of the matters raised in RF’s complaint.
Lynda C. McCluney; Case No. 06-21175 (Somers) (June 22, 2007)
MEMORANDUM AND ORDER ON MOTION TO DISMISS FOR FAILURE TO FILE PRE-PETITION
TAX RETURN AND MOTION FOR RATIFICATION OF FILING OF TAX RETURNS
• 11 U.S.C. §1307(e)
•
11 U.S.C. §1308
Facts:
Debtor filed for Chapter 13 relief on August 4, 2006. At that time she had
not filed either her 2002 or 2005 Federal Income Tax Returns. When filing her
petition, Debtor was aware that she had not filed her 2005 return. That return
was completed and submitted for filing on August 31, 2006, before September
7, 2006, the date on which the meeting of the creditors was first scheduled
to be held. The fact that the 2002 return had not been filed came to light
when the IRS filed its proof of claim. Debtor acknowledged that the return
had not been filed and proceeded to complete and mail the return on October
25, 2006.
On September 12, 2006, 5 days after the conclusion of the meeting of creditors, the IRS moved to dismiss the case pursuant to 11 U.S.C. §1307(e) and §1308 for failure of the Debtor to file her 2005 tax return. That motion was withdrawn, and the IRS then filed an amended motion to dismiss based upon Debtor’s failure to timely file her 2002 federal return. On January 24, 2007, Debtor filed a motion to ratify, arguing that both the 2002 and 2005 returns had been prepared and filed, so there was no basis to dismiss. The issue before the Court was whether it must dismiss or convert the case pursuant to 11 U.S.C. §1307(e) for Debtor’s failure to file her 2002 return before the conclusion of the meeting of the creditors.
Holding:
The Court found the meaning of 11 U.S.C. §1307(e) very plain and noted
that it is the function of the courts to enforce a statute according to its
terms. If a debtor fails to file a tax return “under 11 U.S.C. §1308,” after
proper motion, notice, and hearing, the Court shall dismiss or convert the
case. The Court noted that consideration of 11 U.S.C. §1308 in its entirety,
not just the duty to file the returns specified, is required when determining
whether grounds to dismiss or convert are established. The Court further noted
that although this has a harsh result for a minor deficiency, the Court must
construe the statute according to unambiguous terms.
The Court held that the Debtor’s failure to file her 2002 federal tax return before the meeting of creditors, provides a basis for dismissal or conversion pursuant to a motion under 11 U.S.C §1307(e), even though the return has now been filed. The record contained no basis for the Court to determine whether under the circumstances of this case the estate’s and creditors’ best interests will best be served by conversion or dismissal. The Court scheduled a status conference to determine future action on the IRS’s motion.
James Edward Puetz and Linda Ristow Puetz; Case No. 06-20756 (Berger) (June 22, 2007)
MEMORANDUM OPINION AND ORDER DENYING CONFIRMATION OF CHAPTER 13 PLAN
• 11 U.S.C. §1325
Facts:
Debtors filed for Chapter 13 relief on June 1, 2006.
The Debtors’ Form
B22C indicated that they were above-median debtors. The Debtors reported annualized
current monthly income of $146,994.60. The median family income for a family
of three was $56,386.00. Debtors completed the disposable income calculation
under 11 U.S.C. §1325(b)(3) and reported monthly disposable income of
$461.20. Debtors Amended Schedules I and J reflected a monthly net income of
$1,425.84. Debtors plan proposed to pay $950.00 per month for 57 months, with
$525.66 being paid towards secured debt, and $424.34 going towards payment
of administrative expenses, priority claims, and unsecured claims. The Trustee
calculated his own Form B22C and arrived at a disposable income number of $871.00.
The difference between the Debtors Form B22C and the Trustees Form B22C stems
from expense deductions for insurance. The Debtors also took deductions for
retirement plan contributions and for retirement plan loan repayments. The
Trustee objected to those because they exceeded the Court’s previous
$500.00 or five percent of monthly gross income limit on contributions to retirement
plans.
Holding:
The Court noted that above-median debtors must deduct
certain expenses from their current monthly disposable income to calculate
their monthly disposable
income, and Form B22C aids Debtors in making that calculation. A debtor’s
monthly disposable income is not the plan payment, it is just one component
of the plan payment. The final plan payment will also include other budgeted
items deducted from current monthly income to be paid through the plan. The
Court noted that schedules I and J show whether a debtor’s plan is feasible,
but they no longer determine disposable income for above-median debtors. The
Trustee objected in this case because the Debtors’ schedules I and J
show more excess income than Debtors Form B22C.
The Court addressed the difference between the Trustee’s interpretation of “unsecured creditors.” The Trustee argued only general unsecured creditors are included in the applicable subsection, 11 U.S.C. §1325(b)(1)(B), while the debtors argued all unsecured creditors, including those holding priority claims, are included. The Court held that unsecured creditors in 11 U.S.C. §1325(b)(1)(B) does not include administrative, priority, or any other actual expense claimants budgeted for under 11 U.S.C. §707(b)(2)(A)(ii)(II)-(V) and (iii)-(iv); however, unsecured creditors do include all other unsecured creditors.
The Court also noted that previous 401(K) limits are no longer supported by the Code. The Trustee’s objection to plan confirmation was sustained.
Justin Wayne Spoonemore and Cassandra Kathleen Spoonemore; Case No. 05-17380; (Nugent) (June 25, 2007)
ORDER REGARDING DOCUMENTS CLAIMED PRIVILEGED BY CREDITOR CIT GROUP
• Fed.
R. Civ. 26
Facts:
This matter was before the Court on a discovery dispute
between the chapter 7 trustee and creditor CIT Group and its attorney. The
discovery in this case
arose in the context of the Trustee’s motion for turnover and sanctions
against the CIT Group for its violation of the stay relief order by commencing
a state court foreclosure action without naming the trustee as an in rem party
in the foreclosure proceedings, taking a deed in lieu from the debtors, and
seizing and exercising control of an asset of the estate without seeking further
stay relief.
Pursuant to a hearing held on May 10, 2007 on the Trustee’s second motion to compel production of documents and this Court’s order that creditor CIT Group submit to the Court for in camera review those documents it was claiming privileged, the Court examined in camera certain written communications between and among CIT Group, Foreclosure Management Corp., and Martin Leigh Laws & Fritzlen, PC to determine the degree and extent to which these documents could be withheld from production by CIT on the basis of the attorney-client privilege or the work product doctrine.
Holding:
In determining whether or not the communications
and documents were protected, the Court applied the federal common law of privilege
because the proceeding
arose incident to a case filed under Title 11 and were related to conduct undertaken
by CIT and its counsel in the course of a bankruptcy case, specifically the
alleged violation of the automatic stay under 11 U.S.C. § 362. The attorney-client
privilege applies when; 1. legal advice of any kind is sought, 2. from a professional
legal adviser in his capacity as such, 3. the communications relating to that
purpose, 4. made in confidence, 5. by the client, 6. are at his instance permanently
protected, 7. from disclosure by himself or by the legal adviser, 8. unless
the protection be waived.
The Court noted that the work product doctrine is governed by federal law as well, both in Fed. R. Civ. P. 26(b)(3) and by case law commencing with the Supreme Court’s decision in Hickman v. Taylor, 329 U.S. 495 (1947). For this doctrine to apply, the Court must be shown that; 1. the protected materials are documents or tangible things, 2. prepared in anticipation of litigation or for trial, and 3. prepared for a party or a representative of the party. If this is shown, then the requesting party must show that it has a substantial need for the material and is unable to acquire its substantial equivalent without undue hardship.
The Court found that CIT failed to prove an attorney-client relationship between it and FMC, and the Court concluded that even the redacted communications that arguably seek or convey legal advice from FMC personnel were discoverable. No attorney-client relationship has been established between FMC and CIT. Therefore the Court imposed sanctions against CIT in the amount of $1,000.00. CIT was directed to produce to the Trustee within five (5) business days in unredacted form the communications that the Court determined were discoverable.
Justin Wayne Spoonmore and Cassandra Kathleen Spoonemore; Case No. 05-17380; (Nugent) (June 26, 2007)
ORDER ASSESSING SANCTIONS AGAINST CREDITOR CIT GROUP AND ITS COUNSEL
ON THE TRUSTEE’S FIRST AND SECOND MOTIONS TO COMPEL
• Fed.
R. Civ. P. 37
• Fed. R. Civ. P. 26(g)
Facts:
The chapter 7 trustee moved for sanctions in connection
with two motions to compel discovery from creditor CIT Group filed in the contested
matter.
The Court conducted a hearing on the first motion to compel on March 8, 2007
and on the second motion to compel on May 10, 2007. The Court granted both
motions to compel, reserving the issue of sanctions. The Court held an evidentiary
hearing on the issue of sanctions on May 23, 2007. The reader is directed to
the Courts May 21, 2007, Order denying Creditor CIT Group/Consumer Finance,
Inc.’s Motion for Summary judgment and the above Order regarding documents
claimed privileged by Creditor CIT Group for a comprehensive review of the
facts.
Holding:
The Trustee’s request for sanctions made with
the first motion to compel, sought an order compelling CIT to answer the
first discovery requests, falls
under Fed. R. Civ. P. 37(a)(4)(A). Fed. R. Civ. P. 37(a)(4)(A) makes an award
of attorney fees mandatory unless nondisclosure, response, or objection are
substantially justified. An evasive or incomplete answer or response is treated
as a failure to answer or respond for purposes of a motion to compel. Fed.
R. Civ. P. 37(a)(4)(A) provides:
If the motion is granted or if the disclosure
or requested discovery is provided after the motion was filed, the court shall,
after affording an opportunity
to be heard, require the party . . . whose conduct necessitated the motion
or the party or attorney advising such conduct or both of them to pay to the
moving party the reasonable expenses incurred in them making the motion, including
attorney’s fees, unless the court finds that the motion was filed without
the movant’s first making a good faith effort to obtain the disclosure
or discovery without court action, or that the opposing party’s nondisclosure,
response, or objection was substantially justified, or that other circumstances
make an award of expenses unjust.
This Court also believed that sanctions were
appropriate under Fed. R. Civ. P. 26(g)(3). That provision states:
If without substantial justification a
certification is made in violation of the rule, the court, upon motion or upon
its own initiative, shall impose
upon the person who made the certification, the party on whose behalf the disclosure,
request, response, or objection is made, or both, an appropriate sanction,
which may include an order to pay the amount of the reasonable expenses incurred
because of the violation, including a reasonable attorney’s fee.
In this
Court’s view, both CIT’s initial objections to the Trustee’s
interrogatories and the deficient privilege log violated Rule 26(g)(2) and
warranted the imposition of sanctions. Because the Court found that CIT’s
and its counsel’s conduct regarding this discovery was not substantially
justified, it concluded that sanctions were warranted and required by Rule
37(a)(4)(A) and (b)(2) and Rule 26(g)(3).
Frontier Farm Credit, PCA. v. Christopher Charles Norris, Mary Beth Norris
(In re Christopher Charles Norris, Mary Beth Norris);
Case No. 05-43551; Adversary
Case No. 06-7005 (Somers) (June 29, 2007)
MEMORANDUM OPINION AND ORDER DENYING IN PART UNITED STATES TRUSTEE’S
MOTION TO DISMISS
• 11 U.S.C. §523(a)(2)(A)
•
11 U.S.C. §523(a)(6)
Facts:
This proceeding was before the Court on the Defendant-Debtors’ motion
for summary judgment. Late in 2003, the Debtors obtained a $150,000.00 revolving
line of credit from Frontier, indicating the purpose of the credit was to refinance
an existing cattle loan of $100,000.00, to use $1,000.00 to buy “PCA
stock,” and to buy cattle with the remaining $49,000.00. Frontier alleged
the Debtors actually used the line of credit for various other purposes. Frontier
sued the Debtors in a Kansas state court and in September 2005, obtained a
default judgment for the balance then due on the line, which was just over
$40,000.00. In that suit, Frontier did not accuse the Debtors of any fraud
or misrepresentation, or of misusing the line of credit. The Debtors contend
they did not defend against the suit because they conceded they owed the amount
of money Frontier sought.
On October 5, 2005, the Debtors filed a joint Chapter 7 bankruptcy petition. Frontier filed a complaint seeking to have its judgment excepted from discharge under 11 U.S.C. §523(a)(2)(A) because of false pretenses, false representations, or actual fraud, and under 11 U.S.C. §523(a)(6) because of willful and malicious injury to Frontier’s property. The Debtors moved for summary judgment, arguing Frontier could not make those claims because it failed to make them in the state court lawsuit.
Holding:
The Debtors contended that Frontier was required to raise in the state court
suit any matters that might except their debt to it from discharge, even though
they did not file for bankruptcy until Frontier had already obtained a judgment.
The Court noted that according to Brown v. Felsen, a 1979 decision, a creditor is free to take the easy route to a state court judgment on the debt, and wait until the debtor actually files for bankruptcy before trying to prove the same debt also involved misconduct that makes it nondischargable. The Court further noted that Frontier’s dischargeability cause of action could be precluded by the prior state court judgment only if the state court had determined the Debtors did not owe Frontier any debt. Since that is not what happened in state court, Frontier may now try to prove the debt established by its judgment should also be expected from the Debtors’ discharge. The Defendant-Debtors’ motion for summary judgment was denied.
J. Michael Morris v. Ameriquest Mortgage Company; Robert A. Morgan; and
Roberta A. Morgan
(In re Robert A. Morgan and Roberta A. Morgan); Case
No. 05-17536;
Adversary Case No. 06-5200 (Somers) (July 3, 2007)
MEMORANDUM AND ORDER ON DEBTORS’ REQUEST FOR ASSESSMENT OF ATTORNEYS
FEES INCURRED IN FILING OBJECTION TO TRUSTEE’S MOTION FOR DEFAULT JUDGMENT
WHICH SOUGHT ASSESSMENT OF COSTS
• Fed. R. Bankr. P. 7054(d)
Facts:
This was an adversary proceeding filed by the Chapter
7 Trustee to avoid and preserve an allegedly unperfected security interest
in Debtors’ manufactured
home located on their homestead property. The Complaint alleged that prepetition
the Debtors entered into a note and mortgage with Ameriquest, but the lien
on the manufactured home was not perfected on the date of filing. The prayer
asked that the Court order the lien on the home avoided and preserved for the
benefit of the estate, to determine rights in the real estate, and to assess
costs of $250.
The Trustee filed a motion for default judgment, the Motion
requested judgment against Debtors regarding the lien and costs of $250, the
amount of filing
fee for an adversary complaint. Debtors objected to the assessment of costs,
and asked the court to award them attorneys fees.
Holding:
Fed. R. Bankr. P. 7054(d), which is applicable in adversary proceedings,
provides for assessment of costs as follows:
Costs Other than Attorneys’ Fees.
Except when express provision therefore is made either in a statue of the United
States or in these rules, costs other
than attorney fees shall be allowed as of course to the prevailing party unless
the court otherwise directs; but costs against the United States, its officers,
and agencies shall be imposed only to the extent permitted by law.
In this case, the Court found it would be inappropriate to assess costs against the debtors, as debtors were only nominal defendants in a dispute between Ameriquest and the Trustee. The Court stated that Chapter 7 Trustees would be expected to refrain from preparing judgments which included the assessment of costs against debtors who were similarly situated in future cases, and the court would consider awaiting attorneys fees to debtors who had to ask the Court to have such a fee assessment set aside.
J. Michael Morris v. Troy A. Wright; Melissa L. Wright; and Linda S. Parks
(In re Troy A. Wright);
Case No. 05-10164; Adversary Case No. 05-5615 (Nugent)
(July 5, 2007)
MEMORANDUM OPINION
• K.S.A. § 23-201
•
11 U.S.C. § 727(d)
•
11 U.S.C. § 541
•
11 U.S.C. § 362
•
11 U.S.C. § 521
•
11 U.S.C. § 542
Facts:
Debtor filed his bankruptcy petition on January 14, 2005. He and his wife
filed for divorce in the District Court of Sedgwick County, Kansas on July
8, 2004. The divorce was still open on the petition date. Prior to the petition
date, debtor and his wife purportedly agreed that they would file a joint income
tax return for 2004 and share equally in any refunds received.
On May 16, 2006 the Trustee made a demand for turnover of $6,691.00 of the 2004 refunds. On May 26, 2006, the Trustee filed his motion for turnover, requesting the Debtor to turnover $6,691.51 of the 2004 tax refunds. The Court issued a turnover order on June 21, 2006, and the Debtor turned over only one-half of the refund. The first turnover order was not appealed and was deemed final.
On July 11, 2006, the Trustee filed another motion for turnover to recover the Debtors’ 2005 tax refund of $270.00 refund plus a $200.00 sanction. No objections were filed and this Court entered an order granting that turnover motion on August 15. This second order was also deemed final.
When the debtor failed to comply with that order, the Trustee filed an adversary proceeding for turnover pursuant to 11 U.S.C. § 542 and to revoke Debtor’s discharge under 11 U.S.C. § 727(d)(2) (failure to surrender estate property) and 11 U.S.C. § 727(d)(3) and 11 U.S.C. § 727(a)(6)(A) (refusal to obey a lawful court order).
Holding:
When a Kansas divorce case is filed, a marital estate
is created pursuant to K.S.A. § 23-201(b). That estate consists of all the property individually
or jointly held by each spouse and includes all property acquired by the spouses
during their marriage. When a divorcing spouse files a bankruptcy petition,
a bankruptcy estate is created by operation of 11 U.S.C. § 541(a). That
estate generally includes all legal or equitable interests of the debtor in
property, wherever located and by whomever held, as of the date of the bankruptcy
petition.
The Court noted that 11 U.S.C. §521(4) and 11 U.S.C. §542(a) require a debtor to turnover his property to the trustee for administration unless that property is exempt. It is the duty of every debtor to turn that property over immediately upon filing, or, in the case of a tax refund, upon coming into possession of the funds. Bankruptcy Code sections 521, 541 and 542 make that abundantly clear. It is no excuse that the funds are subject to division by another court, unless and until the parties claiming an interest in the funds, other than the trustee, seek relief from the stay in this Court to proceed to effectuate the property division in the domestic court.
The Court was firmly persuaded that the debtor intentionally refused to obey both of its turnover orders concerning the tax refunds and that, if immediate remedial action was not taken, his discharge should be revoked under 11 U.S.C. § 727(d)(3). The Court ruled that judgment should be entered on the trustee’s complaint against defendant in the amount of $6,691.51 in connection with the 2004 refund and $270.28 in connection with the 2005 refund.
Demetrius Delayne Reed; Case No. 03-40669-7 (Karlin) (July 9, 2007)
Anthony William Schultz and Tonya Louis Schultz; Case No. 03-42331-7 (Karlin)
(July 9, 2007)
Carlton Delance Love and Lareasha Lynette Love; Case No. 04-42566-7 (Karlin)
(July 9, 2007)
Ronald Gerald Nasca and Sharyn Patricia Nasca; Case No. 07-40098-13 (Karlin)
(July 9, 2007)
MEMORANDUM OPINION AND ORDER
• 11 U.S.C. § 1306
•
11 U.S.C. § 348(f)
Facts:
In all four cases, the debtors originally filed under Chapter 13 and later
converted to Chapter 7 after their plans were confirmed. At issue in each of
the cases was the following sentence contained in the standard order confirming
Chapter 13 plans that has been routinely used in Topeka for many years:
“ In a case which is converted to another Chapter under Title 11 of the
United States Code, property, other than funds which the Chapter 13 Trustee
has on hand, and moneys which have been withheld form the debtor’s wages
not remitted to the Trustee, which are part of the Bankruptcy estate at the
time of conversion, including tax refunds, shall be administered by the successor
Trustee.”
The language in question appears to allow Chapter 7 Trustees to collect post petition tax refunds from debtors in the event a case is converted, regardless of the nature of the conversion. The Court found that three issues must be decided regarding the disputed language. First, does the language conflict with the bankruptcy Code, mandating that it be removed in the future cases? Second, can the Court grant relief from the confirmation order since they sought relief within 10 days of the entry of their confirmation order? The third question is whether Debtors may obtain relief from the confirmation order even though they did not seek relief form the order for several years?
Holding:
The Court noted that it must first decide whether
the language at issue in the confirmation order conflicts with provisions of
the Code. The language
in question clearly indicates that post-petition tax refunds, which would be
part of the bankruptcy estate at the time of conversion pursuant to 11 U.S.C. § 1306(a)(1),
may be administered by the Chapter 7 Trustee upon conversion of the case. This
provision is in direct conflict with 11 U.S.C. § 348(f), which states
that, unless the debtor converts the Chapter 13 case to one under another chapter
in bad faith, the “property of the estate in the converted case shall
consist of property of the estate, as of the date of filing of the petition,
that remains in the possession of or is under the control of the debtor on
the date of conversion.” The language in the standard confirmation order
clearly conflicts with, and improperly expands the reach of 11 U.S.C. § 348(f).
The Court found that the referenced sentence of the standard confirmation order that this Court inherited and adopted is in conflict with 11 U.S.C. § 348(f) of the Bankruptcy Code. For that reason, the Court ordered that the offending sentence be removed from all future confirmation orders.
Via Christi Regional Medical Center, Inc. v. Barry
L. Brown and Valerie J. Brown (Barry L. Brown and Valerie J. Brown);
Case
No. 06-10005; Adversary
Case No. 06-5182 (Somers) (July 10, 2007)
MEMORANDUM AND ORDER FOLLOWING TRIAL DENYING PLAINTIFF’S MOTION
FOR RELIEF FROM STAY AND COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT
• 11 U.S.C. §523(a)(6)
•
K.S.A. §65-406
Facts:
This case concerned Debtors’ liability for the Medical Center’s
claim of $56,629.12 for charges incurred for the treatment of Debtor Valerie
Brown following an automobile accident.
Although Debtors received proceeds from the settlement of a personal injury claim against the driver at fault, they used those funds for living expenses and the purchase of two vehicles, rather than payment of the Medical Center’s charges.
On March 31, 2006, the Medical Center filed an objection to the dischargeability
of its claim pursuant to 11 U.S.C. § 523(a)(6). Debtors contend their
liability to Medical Center is dischargeable. Accordingly, the issues before
the Court at trial were:
1. whether the Medical Center had a lien in the personal
injury settlement proceeds when received by Debtors;
2. whether the Medical
Center had an interest in the two vehicles by way of lien, constructive trust,
or special equity; and
3. whether the Medical Center’s claim is excepted
from discharge by 11 U.S.C. § 523(a)(6).
Holding:
The Court held that the Medical Center did not have
a lien in the settlement proceeds based upon the granting of a security interest
in “health care
receivables.” The Court did find that the Medical Center’s lien
statement was enforceable against the debtor’s wife, and compliance with
the notice provisions to the allegedly liable person and his insurance carrier
are not essential to enforcement against the injured person. The lien was imposed
by operation of the law as provided for in K.S.A. §65-406. The Court further
declined to find that the vehicles were subject to a constructive trust or
that the medical center had a peculiar equity, as such a finding would not
be equitable and would result in the Medical Center receiving special privileges
outside the Bankruptcy Code and Kansas creditor law. The 11 U.S.C. §523(a)(6)
complaint was denied as the evidence presented did not establish a willful
and malicious injury to the Medical Center’s property interest.
|
[The link bar feature is not available in this web] |