Daily Development for
Friday, January 9, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

One more DD for the bankruptcy mavens then back to our regular programming. Here are two cases dealing with post plan accession in wealth of the debtor. Plus a "bonus" at the end. As before,

BANKRUTPCY; CHAPTER 12 PLAN; WAIVER OF UNSECURED CLAIM; POST-PETITION INHERITANCE: Debtor's inheritance two years after confirmation may be available to Chapter Twelve creditors, but creditors who failed to object to confirmation of a plan that did not provide for payment of their unsecured claims may not participate.

First Nat. Bank v. Allen, 118 F.3d 1289 (8th Cir. 1997)

Some time later after the confirmation, the creditors received notice of a post-confirmation proceeding (at which they made no objection), resulting in an order which was served on them, in which the lack of any provision for their unsecured claims was explicit. There was, as well, evidence that the creditors had knowingly traded away their unsecured claims in exchange for more generous treatment of their secured claims in the plan.

Under section 541(a)(5), the debtor's inheritance would have been includable as property of the estate only to the extent received within 180 days after the petition. This case did not discuss whether, under Section 541, the receipt of the inheritance more than 2 years after the 180 day cut-off nonetheless increased the debtor's post-confirmation "disposable income" which was to be made available to pay creditors under the terms of a Chapter 12 plan, thereby justifying an increase in the plan payment schedule. See section 1222(a)(1).

BANKRUPTCY; REORGANIZATION; BIFURCATION OF CLAIM; FEDERAL TAX LIENS: Debtor may pay off an IRS lien claim in the amount allowed as a secured claim in a Chapter 13 bankruptcy case, where that result was plainly called for under the plan, even though the property had subsequently increased in value.

In re Talbot, 124 F.3d 1201 (10th Cir. 1997).

The Court of Appeals ordered the IRS to "disgorge" the additional pay-off it had received from ransoming its lien release certificate in the escrow established for a post-confirmation sale of the property arranged by the debtor. The Tenth Circuit held, it did not have to consider whether this result constituted improper "lien stripping," for the reason that the IRS never raised the lien-stripping objection at confirmation. Under section 1327, the terms of the confirmed Chapter 13 plan were binding on the IRS; and the agency had no basis for claiming "sovereign immunity" in light of Bankruptcy Code Section 106(a)(1).

Bonus Case (Just in case you're wondering what liability a lawyer might have if the lawyer can't explain why the client comes out worse due than anticipated following bankruptcy:)

ATTORNEY/CLIENT; MALLPRACTICE; BANKRUPTCY: It was malpractice for a bankruptcy debtor's attorney not to discover that the post-confirmation amended loan documents so not conform to the terms of the plan of reorganization.

Thomas Jefferson Construction Company, Inc. v. Martinez, 1997 U.S.Dist. LEXIS 9848 (E.D.la. 1997).

At the closing, counsel relied on a representation by the creditor's lawyer that the amended "note was in order and appropriate," however, the date of plan confirmation was misrepresented in the note, with the effect that $215,000 of post-confirmation payments were accounted for in the amended note as pre-confirmation, adequate protection payments which under the terms of the plan did not reduce principal. Debtor's counsel, who had just been released from the hospital for exhaustion following confirmation in the bankruptcy case, failed to note the discrepancy.

Reporter's Comment: Why did the debtor decide to take it out on its lawyer rather than simply seek reformation of the documents? The attorney incurred the malpractice action as a counterclaim, in his suit for unpaid fees.

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