Prior to filing his chapter 7 petition, debtor and his law partners accepted and guaranteed loans to their law firm by a firm client. Until the funds were received by the firm, debtor did not realize that client was the source of the funds. Client filed a complaint in debtor's bankruptcy seeking non-dischargeability of the loan debt under 11 U.S.C. § 523(a)(4) and (6). With respect to § 523(a)(6), client attempted to impute another law firm member's knowledge of the transaction details to debtor. However, the court held that non-dischargeability under that provision requires the debtor's actual knowledge and, therefore, imputed knowledge was insufficient to satisfy client's burden of proof. Regarding § 523(a)(4), the court held that client must establish that debtor was the trustee of an intentionally created trust, and had control of a trust res. The court concluded that client had failed to establish non-dischargeability under § 523(a)(4) as well, because no fiduciary capacity had been established, and the breach involved was not a breach of trust but, instead, was a breach of a contractual obligation to pay. Although debtor violated a disciplinary rule applicable to attorneys' business dealings with clients, client failed to establish both a clearly defined trust res and an intent to create a trust relationship.
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Title: Irwin v. Arrowsmith (In re Arrowsmith) | Date: Jul-27-1989 | Status: UNPUBLISHED (Judge Boulden) | Case(s): 88PB-0699
Title: Tradex, Inc. v. Volvo White Truck Corp. (In re IML Freight, Inc.) | Date: Jul-17-1989 | Status: APPEAL Unpublished (U.S. District Court, Utah) | Case(s): 84PC-0844
Plaintiff, on behalf of debtor, filed a complaint against defendant seeking recovery of prepetition freight charges for debtor's transportation of goods for defendant. Based on stipulated facts, including that defendant had a valid prepetition claim against debtor that exceeded the valid freight charges, the bankruptcy court concluded that defendant's offset was precluded by the Interstate Commerce Act, which limits defenses that may be asserted in response to a claim for freight charges. Debtor argued that, since defendant had not raised any of the defenses under that Act, it could not claim an offset in the adversary proceeding and was limited to filing a proof of claim in the bankruptcy. The bankruptcy court agreed, and defendant appealed. The district court reversed, holding that 11 U.S.C. § 553 preserved defendant's offset claim in the bankruptcy. Since 11 U.S.C. § 542(b) precludes a turnover of debt that is subject to offset, defendant was entitled to assert its offset claim in defense of plaintiff's turnover claim.
Title: Cascade Energy & Metals Corp. v. Banks (In re Cascade Energy & Metals Corp.) | Date: Jul-7-1989 | Status: UNPUBLISHED (Judge Clark) | Case(s): 88PC-0861
Defendants were awarded a monetary judgment and an equitable lien on debtor's California property by the Utah federal district court, which they recorded in California. Debtor appealed the district court judgment and provided a supersedeas bond that was acceptable to the Utah court. The bankruptcy court determined that a federal judgment could only be perfected and enforced in another state when it became final by appeal or by expiration of the time for appeal, and it then must be registered in the appropriate district court in the state in which its enforcement is sought. Under California law, recording of a document that does not qualify for recording does not provide constructive notice of its existence or its terms. As the lien was not properly perfected, the court concluded that it was subject to avoidance by the chapter 11 debtor-in-possession.
Title: In re Sedgwick | Date: Jul-7-1989 | Status: UNPUBLISHED (Judge Clark) | Case(s): 84C-1985
Debtors claimed that income tax refunds were "disposable earnings" that are subject to exemption under Utah law, and the chapter 7 trustee objected. Relying on Kokoszka v. Belford, 417 U.S. 642 (1974), the court concluded that income tax returns are not disposable earnings and, therefore, could not be exempted from the debtors' estate.
Title: In re Turner, 101 B.R. 751 (Bankr.D.Utah) | Date: Jul-7-1989 | Status: PUBLISHED (Judge Clark) | Case(s): 88C-5093
The court considered whether homeowner fees assessed after the filing of debtor's chapter 7 petition were a debt for which debtor had been released from personal liability by her chapter 7 discharge. Debtor listed the homeowners' association and its prepetition debt in her bankruptcy schedules, and indicated her intent to surrender the property from which the fees arose. The court determined that the association's claim against debtor for her proportionate share of common expenses had arisen when debtor purchased the property, and her obligation continued until she no longer owned the property. Thus, although the association's right to postpetition fees was unmatured and contingent when debtor's petition was filed, it was still a prepetition obligation that was discharged in debtor's bankruptcy. In this respect, the court specifically disagreed with a line of cases from the district of Colorado bankruptcy court.
Title: In re Caldwell, 101 B.R. 728 (Bankr.D.Utah) | Date: Jun-9-1989 | Status: PUBLISHED (Judge Boulden) | Case(s): 88B-7175
Creditor moved for relief from stay, pursuant to 11 U.S.C. § 362(d)(1), and for conversion of debtor's chapter 12 case to a chapter 7 case, pursuant to 11 U.S.C. § 1208(d). The court held that sufficient cause did not exist to grant relief from stay, because creditor had not shown that it had or would suffer harm unless the stay was lifted. In considering § 1208(d), the court held that proof of fraud by clear and convincing evidence was required. The court then found from the evidence that debtor's failure to list assets in his chapter 12 statements and his failure to amend the statement to list assets accurately was intentional and constituted a continued pattern of concealment. Because chapter 12 debtors are given wide latitude in producing and effectuating their plans, with no court-approved disclosure statement, the court held that full disclosure by the debtor has a significantly expanded role in those cases. Finding that debtor's material misstatement of estate assets, coupled with his failure to amend the asset statement when omissions were discovered, indicated an intent to defraud the court and the creditors, the court granted creditor's motion to convert the case to chapter 7.
Title: Walker v. Wilde (In re Walker) | Date: Jun-8-1989 | Status: APPEAL 103 B.R. 281 (D.Utah) (U.S. District Court, Utah) | Case(s): 89PB-0668
Plaintiffs appealed a bankruptcy court order denying their request for relief from the post-discharge injunction of 11 U.S.C. § 524. Plaintiffs sought to recover from the Utah Real Estate Recovery Fund ("Fund") based on debtor's alleged fraud as a realtor. The district court held that, since recovery from the Fund required a final judgment against the realtor, such recovery would violate the § 524 injunction and prejudice debtor's fresh start, concluding that the bankruptcy court had correctly applied a higher standard to motions for relief from the post-discharge injunction than is applied to motions for relief from the automatic stay. The district court also held that the bankruptcy court properly denied plaintiffs' motion for an extension of time to file an objection to dischargeability of their claim, based on In re Green, 876 F.2d 854 (10th Cir. 1989). The bankruptcy court's decision was affirmed.
Title: Am. Sav. & Loan Assoc. v. Weber (In re Weber), 99 B.R. 1001 (Bankr.D.Utah) | Date: Apr-7-1989 | Status: PUBLISHED (Judge Boulden) | Case(s): 87PB-0790
Bank filed complaint against chapter 7 debtors, claiming that its debt should be non-dischargeable under 11 U.S.C. § 523(a)(4) and (6), and that debtors' discharge should be denied under 11 U.S.C. § 727(a)(2) and (7). Bank's claims arose from postpetition improper use of its cash collateral by debtor husband's wholly owned trucking company, in its own chapter 11 bankruptcy. The court held that the trucking company, as a debtor-in-possession, was a fiduciary of a statutory trust imposed by 11 U.S.C. § 1107. The court further found that debtor husband completely controlled the closely held corporation, while debtor wife did not. Therefore, husband was liable for any breach of fiduciary duty by the corporation, but wife was not. Finally, the court found that the corporation's dissipation of bank's cash collateral, which resulted in a substantial loss to bank, was a defalcation under § 523(a)(4) that warranted a non-dischargeable judgment in bank's favor against debtor husband, as well as a general denial of debtor husband's discharge.
Title: Fed. Savings and Loan Ins. Corp. v. Smith (In re LittleTree Inns-Layton, Inc.) | Date: Apr-3-1989 | Status: APPEAL Unpublished (U.S. District Court, Utah) | Case(s): 88PC-0018
The district court considered, on interlocutory appeal, whether the bankruptcy court erred in deciding that creditor's cause of action to recover funds that were transferred by debtor-in-possession to its attorney, allegedly in violation of 11 U.S.C. § 363(c)(2), was a core bankruptcy proceeding. The district court concluded that the bankruptcy court had properly decided that creditor's cause of action was a core matter, since the claim asserted unauthorized use of cash collateral under the bankruptcy code. The district court also rejected appellant's argument that dismissal of the bankruptcy case should also have resulted in dismissal of the adversary proceeding, concluding that the underlying bankruptcy case was closed, rather than dismissed, and therefore the bankruptcy court had discretion to hear the adversary matter. Finally, the district court rejected appellant's claim that creditors cannot recover against third-parties under § 363(c)(2), concluding that a party whose rights were created by bankruptcy law may pursue violations of those rights in the bankruptcy court. The bankruptcy court's order was affirmed.
Title: Scovill v. Beauty, Inc. (In re Scovill) | Date: Mar-14-1989 | Status: UNPUBLISHED (Judge Clark) | Case(s): 88PC-0929
Debtor filed an adversary proceeding against defendant, and defendant filed a motion for abstention, which debtor opposed. The court described the adversary proceeding, in which the parties' claims were essentially identical to ones they had asserted in a prepetition state court action, as a "garden-variety notes receivable action" based entirely on state law, and concluded that such actions were not core bankruptcy proceedings. Finding that all of the requisites of abstention under 28 U.S.C. § 1334(c)(2) had been satisfied, the court indicated that it believed abstention to be mandatory. Alternatively, the court concluded that, even if abstention was discretionary, an analysis of the factors in § 1334(c)(1) also led it to conclude that abstention was appropriate. The court submitted its decision as a report and recommendation to the district court.