Selected Topics in Creditor's Rights

By
Richard R. Gleissner

VI. Creditors' Rights and Restrictions in Bankruptcy

A. Dismissal or Conversion of Case Sections 348, 349, 706, 707,1307(c), 1112

Conversion and dismissal are delineated in each of the three major forms of bankruptcy (Chapters 7, 11 and 13). The general effect of a dismissal or conversion is found in Sections 348 and 349 of Title 11 of the United States Code of Laws (the "Bankruptcy Code"). Hereinafter, references to a Section shall be a reference to a section within the Bankruptcy Code unless otherwise specified.

A.1. Conversion

A.1.1 From Chapter 7 to Another Chapter

Section 706(a) provides that the debtor may convert a Chapter 7 case to a Chapter 11, 12, or 13 as long as the case has not been previously converted from another chapter. Waivers that prohibit the conversion of bankruptcy cases to or from a Chapter 7 are unenforceable. As it relates to creditors or other parties in interest, they may make a motion to convert a case under Chapter 7 to only Chapter 11. See Section 706(b) (allowing for conversion to Chapter 11); Section 706(c) (prohibiting conversion to Chapter 12 or 13 without debtor's consent). The creditor bears the burden of showing conversion to Chapter 11 will benefit all of the parties in interest and the decision on whether to convert is left to the sound discretion of the trial court. See 124 Cong. Rec. H11,098 (September 28, 1978); S.17414 (October 6, 1978). Conversion is contingent on the eligibility of the debtor to be a proper debtor under the new chapter. Section 706(d).

A.1.2. From Chapter 7 to Chapter 13

A Chapter 7 Debtor may convert his case to a Chapter 13 even after the debtor has received a Chapter 7 discharge. In re Young, 237 F.3d 1168 (10th Cir. 2001); In re Mosby, 244 B.R. 79 (Bankr. E.D. Va. 2000); but see In re Hauswirth, 242 B.R. 95 (Bankr. N.D. Ga. 1999) (debtor can only receive one discharge and Chapter 7 discharge must first be vacated or Chapter13 case must be filed in a separate case).

For plan purposes, under 706(a) the conversion date from a Chapter 7 to a Chapter 13 is the date of the order providing for the conversion, not the date the motion is filed. In re Calder, 973 F.2d 862 (10th Cir. 1992).

A.1.3. Creditors Rights in Motion to Convert.

In the case of In re Finney, 992 F.2d 43 (4th Cir. 1993), the Fourth Circuit had before it a debtor that had refused to cooperate with the Chapter 7 Trustee and had engaged in post-petition undisclosed transfers of his assets. This activity cost the debtor his Chapter 7 discharge. The debtor moved to convert the case to a Chapter 11. The Fourth Circuit held that the court could dismiss the Chapter 11 case or reconvert the case to a Chapter 7 if it found subjective bad faith or that the Chapter 11 was objectively futile. However, the Fourth Circuit also held that the debtor was entitled to a hearing on the issue of objective futility.

A.1.4. From Chapter 13 to another Chapter

Section 1307(a) gives the debtor an absolute right to convert a Chapter 13 into a Chapter 7. Also, Section 1307(b) gives the debtor the absolute right to dismiss his Chapter 13 case. The only time this right is restricted is when the debtor had previously converted the case from another Chapter to Chapter 13. Since the debtor has the absolute right to dismiss, most creditors do not seek to convert the case to another Chapter. Nevertheless, Section 1307(c) does provide certain enumerated reasons for converting the case to Chapter 7 or dismissing the case in the best interests of the creditors if the moving part can show (1) unreasonable delay (2) nonpayment of the required fees and charges (3) failure to timely file a plan; (4) failure to commence making payments; (5) denial of confirmation; (6) a material default; (7) revocation of the order of confirmation; (8) termination of the current plan pursuant to its own terms; or (9) if the U.S. Trustee's office requests conversion because of the debtor failure to provide certain required information. Section 1307(c). Similarly, the case can be converted to Chapter 11. Section 1307(d). If the debtor is a farmer, the case cannot be converted without the debtor's consent. Section 1307(e).

A.1.5. From Chapter 11 to another Chapter.

Section 1112(a) also gives the debtor the ability to convert a Chapter 11 to a chapter 7 unless

1. The debtor is no longer the debtor in possession,

2. The case was commenced as an involuntary case, or

3. The case was converted on someone else's request.

Section 1112(b) states that the court, the Trustee or any party in interest can move to convert the case to a Chapter 7 and the Court may so convert the case after notice and hearing. The moving party bears the burden of showing cause for the conversion.

A court may convert a case from a Chapter 11 to a Chapter 7 if the debtor seeks Chapter 11 protection for subjective bad faith or if the case is objectively futile. Finney v. Smith, 141 B.R. 94 (E.D. Va. 1192) aff'd and modified 992 F.2d 43 (4th Cir. 1993).

In the case of In re Phoenix Medical Technology, Inc., C/A No. 00-07253-W (Bankr. D.S.C. 3/30/2001), the South Carolina Bankruptcy Court, the Court found that sufficient cause existed to convert the Chapter 11 case to a Chapter 7 through a two-step process: (1) the Court examined whether "cause" exists to dismiss the Chapter 11 proceeding or convert it to a Chapter 7 and (2) the Court examined whether to dismiss or convert was in "the best interest of creditors and the estate." The Court found the following facts supported conversion (1) there had never been any prospect of rehabilitation of Debtor's business, (2) during the bankruptcy case, Debtor had continued to borrow substantial sums of money beyond its revenues from its primary secured creditor and post-petition lender for the stated purpose of preserving and eventually selling its assets for the benefit of all of its creditors, (3) the format of borrowing was approved based upon the assurances of counsel and the representation that the liquidation would be quick, to minimize expense, and produce a dividend to unsecured creditors; however, the delay in the case was overall unreasonable and while Debtor had incurred a significant post-petition debt, only limited sales had taken place; (4) debtor failed to timely act in regards to the motions filed in the case requesting the Court's approval of the post-petition financing agreement and borrowed funds prior to court approval and (5) the Court was further concerned that the arrangement involving the payment of Debtor counsel's fees tainted his independence in the case.

In the case of In re Carowinds Boulevard Homes, Inc., C/A No. 00-10572-W (Bankr. D.S.C. 12/20/2000)(JW), the Court denied the creditors' Motion to Convert the Chapter 11 case to a Chapter 7 even though (1) the Debtor improperly used a secured parties collateral, (2) the debtor was significantly out-of-trust, (3) the Debtor made untruthful statements regarding the location of the collateral, and (4) the present management's failed to distance itself from the pre-petition management. In so denying, the Court recognized that conversion is a drastic remedy and noted that the case was only 21 days old at the time of the hearing on the Motion to Convert. Even though the Court refused to convert the case, the Court did order the appointment of a Chapter 11 Trustee.

However, in the case of In re Long Bay Dunes Homeowners Association, Inc., C-99-06930-W (Bankr. D.S.C. 11/8/1999), the South Carolina Bankruptcy Court granted the Motion to Dismiss the Chapter 11 Bankruptcy. The Court applied the two-pronged test set forth by the Fourth Circuit in Carolin and considered whether the reorganization was objectively futile and whether the case was filed in subjective bad faith. The Court concluded that there was no valuable ongoing business activity to protect by filing a Chapter 11 and that a confirmation of the plan could not be met pursuant to §1129 because the only unimpaired class had indicated their objection to the plan.

Timing seems to have a great deal to do with the success of a motion to dismiss or convert. Local Rule 2081-1(c) of the South Carolina Bankruptcy Court provides that a debtor has 180 days from the date of the petition to file a plan and disclosure statement. If the debtor fails to meet this deadline, this alone justifies the conversion or dismissal of a case.

After the Chapter 11 plan has been confirmed the debtor is no longer a debtor in possession and cannot convert the case into a Chapter 7. In re T.S.P. Indus., Inc., 120 B.R. 107 (Bankr. N.D. Ill. 1990).

1.A.6. Effect of Conversion

The effect of Conversion is governed by Section 348. A conversion constitutes a new order for relief, but does not change the petition's filing date. A claim arising after the original order for relief but after conversion is treated as a pre-petition claim (that still may be entitled to priority status as an administrative claim).

Conversion of a case does not reset the period for objecting to the debtor's exemptions. In re Bell, 225 F.3d 203 (2d Cir. 2000). However, the conversion from a Chapter 11 to a Chapter 7 generates a new period for filing complaints objecting the discharge of a debt. F & M Marquette Nat'l Bank v. Ritchards, 780 F.2d 24 (8th Cir. 1985).

Conversion of the case does not change rulings made during the previous chapter proceeding and would not revive a lien set aside during the previous chapter proceeding. In re Cooke, 169 B.R. 662 (Bankr. W.D. Mo. 19994). Also, some case law holds that a confirmed plans of reorganization bind creditors, not just in cases that are converted but also in state court proceedings. See McNaughton-McKay Electric Co., Inc. v. Andrich, 482 S.E.2d 564 (S.C. Ct. App. 1997) (creditor had to adjust amount claimed by the amount agreed to in confirmed plan of reorganization).

Lastly, under 348 (f) if a debtor converts a chapter 13 into a chapter 7 the property's valuations and allowed secured claims will apply in the converted case (reduced by the amount paid in the Chapter 13).

A.2. Dismissal

A.2.1. Creditors Rights to Seek to Dismiss Chapter 7.

Under Section 707(a) a Court may dismiss a Chapter 7, only after notice and a hearing and after a finding of cause (such as unreasonable delay and nonpayment of any fees). Under Section 707(a), Courts often differ on what is cause (lack of good faith , bad faith, etc.) to dismiss a case. Cases often show that dismissal may not be always appropriate where the debtor acted in bad faith or is abusing the bankruptcy system and the dismissal will only serve to injure creditors. See generally In re Turpen, 244 B.R. 431 (B.A.P. 8th Cir. 2000); In re Simmons, 200 F.3d 738 (11th Cir. 2000).

A.2.2. The Court and U.S. Trustee Substantial Abuse Determination in Chapter 7.

Under Section 707(b), the Court or an United States Trustee (not a creditor) can move to dismiss the case if the debtor's debts are primarily consumer debts and the petition is a substantial abuse of Chapter 7. Primarily consumer debt has been defined as more than 50% of the total debt. In re Stewart, 175 F.3d796 (10th Cir.1999).

Determining if substantial abuse exists under the circumstances include evaluating factors such as: (1) sudden illness, calamity, disability, or unemployment; (2) cash advances for consumer purchases in excess of the ability to pay; (3) excessive family budget; (4) accurate reflection of the debtor's true financial status in the debtor's schedules and statement of income and expenses; (5) the debtor's good faith; (6) if the debtor enjoys a stable source of future income; (7) if the debtor is eligible for a chapter 13; (8) if state remedies exist to ease the financial troubles; (9) the degree of relief available through private negotiation; and (10) if the debtor's expenses are able to be reduced without depriving him of necessities. In re Stewart, 175 F.3d 796 (10th Cir. 1999).

2.A.3. Dismissal in Chapter 13.

Under Section 1307, after notice and hearing a party in interest or the United States Trustee may dismiss a chapter 13 case for cause if the dismissal is in the best interest of the creditors and the estate. Section 1307(c) provides ten (10) examples of cause for dismissal or conversion. The last two can only be exercised by the United States Trustee.

2.A.4. Dismissal in Chapter 11.

Section 1112 also allows a party in interest or the United States Trustee to dismiss the case after notice, and a hearing where cause is established. A dismissal under 349(a) is normally without prejudice and the debtor can refile and obtain discharge from those debts that were previously filed in first case. The court can dismiss the case with prejudice which forbids the debtor from freely discharging her debts for a specified period of time. A dismissal "revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case." 349(b)(3).

In the case of In re Hartley, 187 B.R. 506 (Bkrtcy. D.S.C. 1995), the Court dismissed Debtor's Chapter 13 based upon debtors and debtor's spouses previous filings. However, in the case of In re Heath, 188 B.R. 17 (Bkrtcy. D.S.C. 1995), the Chapter 13 debtor's case was not dismissed for lack of good faith, just because the husband had filed a previous Chapter 13. The court did not impute this filing to this debtor because of a divorce and general animosity towards each other.

As it relates to dismissals with prejudice, in the case of In re Marett, 96-72959-W (Bkrtcy.D.S.C. 11/13/96), the court dismissed Chapter 13 with prejudice for 180 days and sanctioned debtor for repetitive filing and for lack of feasibility, failure to pay and failure to file documents and provide information.

If the original bankruptcy is dismissed, the creditor in a subsequent case, can recalculate his claim and interest on that original claim. In re Whitmore, 154 B.R. 314 (Bankr. D. Nev. 1993). The dismissal of a case reinstates a void lien unless the court orders otherwise. In re Sadler, 935 F.2d 918 (7th Cir. 1991).

Dismissal of a case does not immediately strip the bankruptcy court of jurisdiction over a related adversary proceeding. In re Porgis, 44 F.3d 159 (2nd Cir. 1995).

If a confirmed Chapter 13 case is dismissed, then the funds must still be dispersed pursuant to the plan and not returned to the debtor. In re Bell, 248 B.R. 236 (Bankr. W.D. N.Y. 2000).

Creditors should note that they can move for dismissal under 1307 or 1112. Also that they can move that the case be dismissed with prejudice. Furthermore, a dismissal frees up all property encumbered by the bankruptcy.

B. Appointment of a Trustee or Examiner

Section 321 dictates who may serve as a trustee while 322 governs the Trustee's qualifications and bonds. Section 323 provides that the Trustee is the representative of the estate and that he has the capacity to both sue and be sued.

B.1. The Trustee's Ability to Waive the Debtor's Attorney-Client Privilege

The Trustee can waive a corporate debtor's attorney client privilege for prepetition communications. Commodity Futures Trading Comm,n v. Weintraub, 471 U.S. 343 (1983). Whether he can waive an individual debtor's attorney client privilege for prepetition communications is presently uncertain.

The decision by the United States Supreme Court in Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 105 S.Ct. 1986, 85 L.Ed. 2d 372 (1985) is recognized as a seminal case in the area of attorney-client privilege. In Weintraub, the Supreme Court held that the attorney-client privilege was available to a corporation, that the privilege passed from the corporation management to a Chapter 7 Trustee, and that the privilege could be waived by the Chapter 7 trustee for pre-petition attorney-client communication. The Supreme Court left the issue of an individual debtor's assertion of a privilege to the courts to decide on a case-by-case basis. That Court noted that:

Weintraub, 471-U.S. at 356-357, 105 S. Ct. at 1995.

Several courts since Weintraub have considered the issue of the Trustee's rights to waive the individuals' attorney client privilege. The Bankruptcy Court for the District of Colorado in In Re Foster, 217 B.R. 631 (Bankr. Colo. 1997) provides the most thoroughly reasoned case on the issue of passage of attorney-client information in an individual chapter 7 case. That court held:

Id. at 635. In Foster, the trustee was requesting the turnover of recorded information relating to the debtor's property and financial affairs in order to pursue causes of actions for breach of promissory note, breach of consulting agreement, breach of personal guarantee, fraud in the inducement and general fraud. The Court found that neither the attorney-client privilege, the work-product doctrine nor the constitutional rights asserted by the debtor, bar the production of documents requested by the trustee from debtors' counsel. The Court concluded that "the right to assert, or to waive, the attorney-client privilege, passes from the debtor to a bankruptcy trustee where . . . it involves recovery of assets of the estate in the nature of pre-petition civil action." Id. at 638.

Similarly, in the case of In Re Bazemore, 216 B.R. 1020 (Bankr. S.D.Ga. 1998), the Court confronted the issue of whether or not the trustee in a Chapter 7 individual bankruptcy has the authority to waive the attorney-client privilege of the debtor and require the debtor's insurance company appointed attorney to be deposed regarding his representation of the debtor in the state court action. The Court concluded that the examination would aid the trustee in determining whether the bankruptcy estate of the debtor had a cause of action against the attorney and the insurance company for malpractice or bad faith. The Court concluding that the trustee could waive the privilege and held:

Id. at 1025.

Lastly, In Re Smith, 24 B.R. 3 (Bankr. S.D. Fla. 1982) is also a case with facts similar to this case. In Smith, a wrongful death state judgment caused the debtor to file for bankruptcy. The trustee was attempting to depose the debtor to determine if the estate might have a cause of action for bad faith refusal to settle and malpractice against the liability insurance carrier and appointed attorney of the debtor. The Court held that "any attorney-client privilege which the debtor had passes by operation of the law to the bankruptcy trustee." Smith, 24 B.R. at 5. (Citing O.P.M. Leasing Services, Inc., 13 B.R. 64 (S.D.N.Y. 1981); Citibank, N.A. v. Andros, 666 F.2d 1192 (8th Cir. 1981); and In re Blier Cedar Co., Inc., 10 B.R. 993 (Bankr. Me. 1981). In Smith, the debtor refused to answer a number of questions at his 2004 examination invoking his privilege through his attorney. The Court noted in Smith that the debtor's position was argued primarily by the insurance company lawyers who defended the debtor in the wrongful death action.

Nevertheless, there is a line of cases finding that a trustee does not have the power to waive the attorney-client privilege of the individual debtor and these cases focus on personal harm to or control over the debtor. See e.g. In Re Silivio, 27 B.R. 28 (Bankr. S.D. Fla. 1982) (Where an individual owner of the stock of a bankruptcy corporation also filed for bankruptcy, the trustee could not waive the privilege for the individual because the disclosure could involve criminal conduct and thus, loss of personal freedom).

B.2. The Appointment of a Trustee

B.2.1. The Chapter 7 Trustee

Section 701 provides for the immediate appointment of a Chapter 7 interim trustee. In South Carolina, this Trustee is appointed from a panel of private trustees. If a creditor is uncomfortable with the appointed trustee, the creditor can then call for the election of a new trustee under Section 702. This creditor must be a fixed unsecured creditor entitled to a distribution of property of the estate. The creditor cannot be an insider. This election is held at the 341 first meeting of creditors. A candidate is elected the new trustee if 20% of those unsecured creditors vote for him and he receives a majority of votes of the creditors who hold a majority of the claims. If a vacancy occurs, a new trustee will be elected or appointed under 703.

The Trustee in a Chapter 7 case has the authority to bring law suits under state law or federal law and may, with court order, continue the conduct of the debtor's business. Further, the Court may allow a Chapter 7 Trustee to transfer an avoiding power to a creditor if the creditor is pursuing interests common to the benefit of all creditors. In re P.R.T.C., 177 F.3d 774 (9th Cir. 1999).

B.2.2. Chapter 11 Trustee

Section 1104 governs the appointment of a trustee or examiner in chapter 11 cases. The trustee replaces the debtor in possession to operate the business and manage the reorganization efforts. An examiner investigates the business without replacing the debtor in possession. Upon request of a party in interest and after notice and a hearing the court must order the appointment of a trustee for a showing of cause or if the appointment is in the best interest of creditors, equity holders, and the estate. An examiner may also be appointed in the same way for the same basic circumstances. An examiner MUST be appointed if the unsecured debts exceed 5 million dollars. The Court can terminate the trustee or examiner pursuant to Section 1105. Section 1106 provides the specific duties of the trustee or examiner, which incorporates many of the applicable provisions of the Chapter 7 trustee, including investigating the debtor in possession and the business and filing reports, etc. The Court may appoint an examiner sua sponte. In re First Am. Health Care of Georgia Inc., 208 B.R. 992 (Bankr. S.D. Ga. 1996).

Factors in determining if there is cause to appoint a Trustee include: (1) the existence and materiality of any misconduct on the part of the debtor-in-possession; (2) the evenhandedness in dealings with insiders or affiliates; (3) the existence of preferences or fraudulent transfers; (4) the unwillingness or inability of management to pursue the estate's causes of action; (5) conflicts of interest on the part of management of the debtor-in-possession; and (6) self-dealing by management or waste of corporate assets. In re Intercat, Inc. 247 B.R. 911 (Bankr. S.D. Ga. 2000). Even though the code specifically enumerates these reasons, a court need not find any of the enumerated subsections in 1104(a)(1) to appoint a trustee. It is sufficient that the appointment be in the best interest of creditors. In re Oklahoma Refining Co., 838 F.2d 1133 (10th Cir. 1988).

Neither a debtor nor a debtor's principal have standing to bring an adversary proceeding after a chapter 11 trustee has been appointed. In re Dawnwood Properties, 209 F.3d 114 (2d Cir. 2000).

B.2.3. The Chapter 13 Trustee

Section 1302 governs both the standing trustee and Chapter 13 trustee appointed to particular cases. Section 1302(b) delineates the trustee's responsibilities and incorporates many of the duties of a chapter 7 and/or 11 debtor in possession. The trustee is required to appear before the court at the Chapter 13 confirmation hearing and upon any modification. The trustee must also monitor payments under the plan.

Creditors should be aware of the trustee's responsibilities under the appropriate bankruptcy chapter. If the creditor is unhappy with the trustee, then that creditor may be able to get the trustee removed or later take legal action against the trustee.

3. Determination of Secured Status and Valuation of Security Interest

C.1. Amount of Secured Claim

Section 506 determines the amount of a secured claim. Section 506(a) provides that a creditor with a right of setoff or a lien has a secured claim ONLY to the amount subject to setoff or the value of the collateral. Section 506(b) states that if the collateral's value is greater than the amount of the claim, then the amount of the secured claim is the amount of the setoff or that amount of the collateral along with any interest or expenses of the creditor. Under Section 506(c) the trustee may recover from the collateral the reasonable and necessary costs of securing the estate, like insurance. Finally, Section 506(d) voids liens that are secured by claims that are not properly allowed in bankruptcy proceedings. But see In re Virello, 98-03751-W (Bkrtcy.D.S.C. 3/31/99) (a Chapter 7 debtor does not have standing to use 506(d) to void a lien on real property which is abandoned or likely to be abandoned and therefore of no benefit to the estate).

C.2. Valuation Hearing or Confirmation Hearing

Creditors can call for a section 506(a) valuation hearing or the hearing may accompany the confirmation hearing as long as Bankruptcy Rule 3012 is properly followed. If amount in collateral is greater than amount on lien, then creditor is in good shape and is oversecured. If the value of the collateral is less then amount of the debt, the creditor is undersecured. For oversecured creditors, under 506(b) post petition interest is permitted and the recovery of fees and costs may be permitted when they are reasonable and are provided for in the agreement under which the claim arose. See Rake v. Wade, 508 U.S. 464, 113 S.ct. 2187, 124 L.ed. 2d 424 (1993) (Chapter 13 debtor required to pay postpetition, preconfirmation interest to oversecured creditor holding mortgage on principal residence regardless of whether mortgage provides for such interest).

C.3. Value is the Replacement Value

The value used by the Courts is the replacement value. Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S.Ct. 1879, 138 L.Ed. 2d 148 (1997). Valuation of collateral securing a creditor's claim is flexible and is not limited to a single point in time for purposes of determining whether a creditor is entitled to accrue interest under 506(b). In re T-H New Orleans Ltd. Partnership, 116 F.3d 790 (5th Cir. 1987).

C.4. Attorney Fees are Reasonable Attorney Fees

As it relates to attorney fees awarded in a foreclosure action, in the case of In re Epps, 99-00026-W (Bkrtcy. D.S.C. 7/9/99), the Court held that the debtor was precluded from challenging a pre-petition state court award of attorney's fees pursuant to the Rooker-Feldman Doctrine. Nevertheless, Court allowed the Chapter 13 Trustee to challenge the reasonableness of the attorney's fees.

D. Adequate Protection of Secured Creditor's Interests

D.1. Secured Creditors are entitled to Adequate Protection

Adequate protection is protection afforded to the holders of secured claims. The concept of adequate protection preserves the secured creditors position at the time of bankruptcy. Section 361 provides three ways to provide adequate protection over a property interest. Adequate protection may be achieved by using cash payments, replacement liens, or any other method that provide an equivalent of the entity's interest in property.

D.2. Relief from the Automatic Stay for Lack of Adequate Protection.

Section 362(d)(1) states that a party in interest (a creditor) can move to lift the stay for cause, including a lack of adequate protection in the property. Section 506 is intertwined with 361 as the valuation of the collateral is very important in determining if the creditor is adequately protected. 363(e) provides that the court will stop the sale/lease of property to maintain adequate protection. Finally 364(d) allows a second lien to be given to obtain additional credit as long as adequate protection is given to the existing lien holder.

D.3. What constitutes adequate protection?

The following could provide adequate protection: a large equity cushion, requirement of payments to the creditor, or a interest in a stream of future rents. Section 361 protects a broad range of creditor interests and will depend on the factual situation in each case concerning both the nature and the use of the collateral. A substantial equity cushion can obviate the need for any other adequate protection. In re Mellor, 734 F.2d 1396 (9th Cir. 1984).

The statutory scheme of Section 361 indicates that adequate protection is intended to encompass a broad range of creditor interests and does not mandate an interpretation of the creditor's interest as a whole of the economic bargain. It is clearly susceptible to differing applications over a wide range of fact situations and will depend on the nature of the collateral and the proposed use of the collateral. In re Briggs Transp. Co., 780 F.2d 1339 (8th Cir. 1985).

E. Obtaining relief from the Automatic Stay

E.1. General Rules for Relief

Relief from the automatic stay is governed by 362(d). A party in interest may move for relief of the stay, which the court will properly grant after notice and a hearing. To get relief from the stay the creditor must satisfy both parts of the 362(d) test. First, the stay can be lifted for cause, including a lack of adequate protection and second, if the debtor does not have equity in the property and the property is not needed for an effective reorganization. 362(d)(3) then provides specific rules when the bankruptcy concerns a single asset real estate case. 362(e) provides that thirty days after the motion for relief, the stay shall be lifted unless the court after both notice and a hearing orders the stay to continue in effect pending the conclusion of or as a result of a final determination of 362(d).

All liens including, including those senior and junior to the movant's lien, are considered in determining whether the debtor has equity in the property. In re Indian Palms Assoc., 61 F.3d 197 (3d Cir. 1995).

For property to be necessary for an effective reorganization, there must be reasonable possibility of a successful reorganization within a reasonable time. United Savings Ass'n of Texas v. Timbers of Inwood Forest Assoc., Ltd. 484 U.S. 365(1988).

E.2. Automatic Stay and Marital Disputes

The bankruptcy court may properly lift the automatic stay in an equitable distribution suit if (1) the state court has special expertise in handling domestic matters, (2) judicial economy is promoted because the state proceedings may be completed quickly and inexpensively, and (3) the entry of the judgment in state court does not harm the estate or the interests of other creditors because the bankruptcy court retains jurisdiction to determine the amount the former spouse is to be paid on the claim. In re Robbins, 964 F.2d 342 (4th Cir. 1992); In re Dole, 96-77677-W (Bkrtcy.D.S.C. 2/21/97) (Court modified automatic stay to allow the state family court to decide issues related to support, equitably division of marital property and to allow the debtor to obtain a divorce decree.

As it relates to a creditor's rights in marital disputes, in the case of In re Koenig, C/A No. 00-11188-W (Bankr. D. S.C. Dec. 7, 2001) a Creditor had a claim against Debtor's estranged husband secured by a note on which Debtor was not liable sought relief from stay to pursue foreclosure of the collateral in Debtor's possession. In Debtor's Chapter 13 plan, she treated the debt by providing that it was to be paid outside of the plan by her estranged husband. The estranged husband failed to make payments for several months. When Creditor sought relief from the stay, Debtor objected because Creditor failed to file an objection to its treatment in the plan. The Court rejected the argument, finding that a line of cases Debtor cited were inapposite to the circumstances of this case and that there is no res judicata effect of the plan because its language is insufficient to extinguish Creditor's lien nor did it clearly prohibit Creditor from foreclosing its lien. Moreover, the Court determined Creditor was not adequately protected, no payments are being made to Creditor, and there is no equity cushion.

E.3. Pre-Petition Agreements Waving Automatic Stay

In South Carolina, the Bankruptcy Courts generally will enforce a knowing and voluntary waiver of the automatic stay. See In re Darrell Creek Associates, L.P., 187 B.R. 908 (Bkrtcy. D.S.C. 1995) (waiver-of-stay agreement executed prepetition by a Chapter 11 debtor provided cause for lifting the automatic stay to allow the mortgagee to foreclose.) However, in circumstances where the debtor performs under the terms of the agreement, the Bankruptcy Court will retain jurisdiction to determine the extent to which the automatic stay has been waived. In the case of In re Drawdy, No. 01-04844-W (Bankr. D.S.C. 09/20/01), the creditor sought to enforce a pre-petition waiver agreement, included in a state court order, whereby Debtors waived their right to object in the event Creditor sought relief from the automatic stay. Nevertheless, the Court reasoned it was not barred because (1) the waiver provision was operative only in the event of Debtors's default of the agreement and the Court found that Debtors complied with the agreement; (2) the state court did not determine the issue of the automatic stay's applicability; and (3) the waiver agreement is not self-executing but is only one factor a court considers when determining whether relief from stay is appropriate. The Court ruled that the agreement was not enforceable because Debtors had performed according to its modified terms. The Court denied Creditor's motion for relief from stay. See Also, In re Riley, 188 B.R. 191 (Bkrtcy. D.S.C. 1995)(A prepetition forbearance agreement that was executed by a Chapter 13 debtor-mortgagor and a mortgagee and which contained a waiver of stay provision did not continue beyond the cure of default that existed when the agreement was entered.)

E.4. Creditor's Rights Upon Foreclosure Sale

In the case of In re Holmes, 99-08796-B (Bankr. D.S.C. 11/23/1999), the mortgage creditor filed a motion for relief from the automatic stay. Prior to the filing of the Chapter 13 petition, a foreclosure action had terminated, with the mortgage creditor as the successful bidder at the foreclosure sale. Even though the Master's Deed was signed, it had yet to be recorded. The Court relied on precedent to conclude that upon foreclosure on the property, the debtor is divested of any interest, including the equity of redemption; thus, the property in question was no longer property of the bankruptcy estate. As a result, the Court concluded that such facts constituted sufficient "cause" to grant relief from the stay pursuant to §§362(d)(1). However, the Court recognized that the debtor had raised a significant question regarding whether the service of the Summons and Complaint in the foreclosure action was effective. In applying the Rooker-Feldman doctrine, the Court concluded that the determination of proper service was left to the state courts; however, to provide an opportunity for the debtor to address the issue of proper service with the state court, the Court granted the Motion but made it effective at a later date.

Similarly, in the case of In re Watts, C/A No. 00-06791-W (Bankr. D.S.C. 10/27/2000) the United States of America, on behalf of the Rural Development, filed a Motion to Terminate Automatic Stay. In this case, a judgment of foreclosure and sale had been entered in the United States District Court and the property had been sold at the foreclosure sale. Debtor objected to the Motion arguing that the sale was not fully completed and further asserting that, pursuant to Section 1322(c)(1), she had the right to cure the mortgage arrears owed to the Creditor because the sale was yet to be completed under applicable non-bankruptcy law. First, the Court followed precedent in this district to hold that the property no longer constituted property of the estate and Debtor possessed neither a legal nor an equitable interest in the property once the auctioneer''s hammer fell. Furthermore, as it related to §§1322(c)(1), the Court recognized that courts interpreting this section were split in their decisions, but it ultimately adopted the reasoning of the courts that have held that the language of §§1322(c)(1) is clear and unambiguous in establishing the date of the actual foreclosure sale as the cut-off date for curing mortgage defaults. The Court once again emphasized that upon the falling of the gavel, the debtor was left with bare legal title and "''[t]he additional steps of obtaining court approval, awaiting the expiration of any cure period . . . , paying the purchase price, and recording the deed may be necessary to consummate the sale, but that does not alter the fact that the purchaser''s right to acquire the property has intervened." The Court ultimately found that relief from the automatic stay pursuant to §§362(d) was warranted.

E.5. Creditor's rights upon repossession.

Generally, repossessed property remains property of the estate. Property in the hands of a creditor is subject to a turnover action by the debtor or trustee. If the creditor fails to voluntarily turnover the property, he may be subject to sanctions, such as attorney fees. However, the creditor could force the issue by bringing a motion for relief from the stay because of lack of adequate protection.

In the case of Jennings v. R & R Cars and Trucks (In re Jennings), No. 01-02330-W; Adv. No. 01-80044-W (Bankr. D.S.C. 9/17/01) the court found that the creditor failed to voluntarily turn over the property and entered an Order that determined damages for failing to turnover and violation of the automatic stay. Previously, in an adversary proceeding, the Court ordered the Creditor to return the vehicle, lawfully repossessed prepetition. By the time the Order was entered, Debtors's case had been dismissed, but the Court later vacated the dismissal order. Afterward, Debtors brought a contempt action against Creditor claiming it failed to comply with the turnover order. The Court found Creditor in contempt and again ordered it to return the vehicle immediately to Debtors. In determining damages, the Court considered the effect of the dismissal of the case and held that the vacation of the dismissal did not retroactively reinstate the automatic stay during the period when the case was dismissed; however, by reinstating the case, the automatic stay was simultaneously reimposed from the date of reinstatement. Therefore, the Creditor was liable for damages for violating the automatic stay after the case was reinstated as well as during the time before the dismissal when the evidence proved that Creditor knew about the turnover action. The Court also considered whether damages might be negated because Creditor orally notified Debtors that the vehicle was available for Debtors to take possession. After examining prior cases in this District and in rejecting this argument, the Court held that Section 542(a) placed an affirmative duty on creditors in possession of estate property to deliver it to the estate. Regarding the issue of when turnover is required, the Court held that the duty to turn over is triggered upon a debtor's notification to the creditor of the bankruptcy filing, written demand for turnover, and proof of insurance.

E.6. The Automatic Stay and Third Parties.

Generally, the filing of a bankruptcy petition protects the debtor. However, under some limited number of circumstances, the automatic stay is extended to protect partners of a general partnership, the general partner of a limited partnership, and officers, directors and principals of a corporations, where the judgment against these would be a judgment against the corporation itself. Unless, one of these exceptional circumstances exist, the automatic stay will not generally be extended to include third parties.

In the case of In re Kinard, C/A No. 01-03621-W (Bankr. D. S.C. Nov. 21, 2001), the Creditor motioned for relief from the automatic stay with respect to Debtor's collateral, a 5.7 acre vacant parcel of land generating no income, as well as collateral pledged by a third party who had not filed for bankruptcy protection. Debtor objected to the motion and sought an injunction protecting the third party. The Court first decided that Debtor's automatic stay does not extend to the third party or its collateral; consequently, the foreclosure process could continue against the third party's collateral. In addition, the Court declined to grant the extraordinary relief of issuing an injunction to protect the third party because Debtor failed to demonstrate irreparable injury to the Debtor, lack of substantial harm to others if the injunction were granted, the promotion of public interest by issuing the injunction, and a reasonable likelihood of successful reorganization.

In the case of In re Ragin, C/A No. 99-11323-D (Bankr. D.S.C. 3/3/2000), the Court granted the Motion for Relief from the Automatic Stay and the Motion for Relief from Co-Debtor Stay filed by the Bank. The Bank was the holder of a second mortgage lien on a parcel of real property. The Note was signed by both Debtor and a third party, but the property that secured the Note was solely owned by the third party. The Court held that, in addition to the relief granted under Section 1301(c), the Bank was also entitled to a modification of the automatic stay for purposes of completing its Foreclosure Action.

E.7. Creditor's Rights in Single Asset Real Estate Cases

In the case of In re Kinard, C/A No. 01-03621-W (Bankr. D. S.C. Nov. 21, 2001), the Court granted relief from the automatic stay pursuant to Section 362(d)(2). Debtor argued that the real property collateral will appreciate in the future and that its later sale will be the only way for him to reorganize. The Court ruled that, in order for property to be necessary for reorganization, a debtor must show a reasonable possibility of a successful reorganization and this possibility must be based on more than speculation. The Court found that the potential sale of the real property was too speculative. In addition, the court ruled that Creditor is entitled to relief from the stay pursuant to Section 362(d)(3) because the real property collateral is single asset real estate and Debtor failed to file a plan of reorganization or make monthly payments to secured creditors within the ninety day period prescribed by the code section. Debtor argued the real property is not single asset real estate because it is vacant land that does not presently generate income. The Court disagreed, ruling that raw land generating no income falls within the definition of single asset real estate. Finally, the Court ruled that relief from the stay was appropriate pursuant to Section 362(d)(1) because Debtor's reorganization is objectively futile and because the case was filed in subjective bad faith, evidenced by repeat filings intended to stave off foreclosure sales.

E.8. Creditor's Rights and Purchases Just Prior to Bankruptcy

In the case of In re Madden, 99-08282-W (Bankr. D.S.C. 12/21/1999) the Court denied Creditor's Motion for Relief from the Automatic Stay even though the Debtor filed a Chapter 13 bankruptcy proceeding approximately two months after purchasing a truck and Debtors made no payments prepetition on the vehicle. The Court found that the truck was necessary for an effective reorganization, thus precluding relief from the stay pursuant to §§362(d)(2) because Debtors worked separate shifts and needed the vehicle for transportation. Furthermore, the Court found that even though the time between the purchase of the truck and the filing of the bankruptcy case was short, there were no indications that the bankruptcy was filed in bad faith thus precluding relief from the stay pursuant to Section 362(d)(1).

E.9. Annulling the Automatic Stay to Correct Mistakes

Generally, the Bankruptcy Court is a court of equity. If a creditor makes a mistake, such as mistakenly satisfying a mortgage the Court will grant the relief necessary to allow the creditor to correct his mistake, so long as it does not harm another creditor. In the case of In re Scott, C/A No. 00-07468-W (Bankr. D.S.C. 1/1/2001), the court went so far as to annul the automatic stay so as to allow the creditor to properly file its mortgage. The Creditor filed a Motion seeking the annulment of the automatic stay to validate the post-petition perfection of a mortgage on Debtor's home. Debtor had mortgaged his property and subsequent to the execution of the mortgage, the creditor forwarded the mortgage for filing in the proper office, but failed to include necessary information; therefore, the mortgage was never properly recorded pre-petition. Debtor argued that if the automatic stay was annulled in this case, the creditor would be permitted to better its position post-petition in that its lien would be perfected against third parties. Debtor also argued that the post-petition validation of the recording would prevent Debtor of his ability to file an avoidance action under Section 544. The Court found that in Chapter 7 cases a debtor does not ordinarily have standing under the strong-arm provision of Section 544(a). Having decided that Debtor could not have brought a Section 544 action in this case, the Court next addressed the issue of whether the stay could have been retroactively annulled. The Court found that "cause" existed as required by Section 361(d)(1) to annul the stay retroactively to allow the perfection of the creditors' mortgage and further found that there was no equity in the property and it was not necessary for reorganization, thus warranting retroactive relief from the automatic stay also pursuant to Section 362(d)(2).

E.10. Creditor's Rights when Subsequent Owner files Bankruptcy

In the case of In re Trapp, C/A No. 00-09987-W (Bankr. D.S.C. 1/5/2001), the mortgagee had entered into a Mortgage and Note with the Brewers, who subsequently sold the mortgaged property to Debtor, without the Mortgagee's consent nor knowledge. Debtor then filed for relief under Chapter 13 and proposed to cure the arrears on the debt and recommence monthly payments to the Mortgagee. The Mortgagee filed a Motion to Modify Stay and Objection to Plan of Reorganization asserting that it was entitled to relief from the automatic stay pursuant to 11 U.S.C. §§362(d)(1) and (2) to permit it to proceed in State Court with foreclosure and eviction proceedings and further objecting to any treatment in Debtor's Chapter 13 Plan on the grounds that there is no debtor-creditor relationship between Debtor and Mortgagee and that therefore the mortgage debt was not a "claim". Furthermore, the mortgagee argued that the Plan may not cure and reinstate Mortgagee's claim, which was accelerated upon the expiration of the right to cure. The Court first concluded that a Chapter 13 debtor who is not in contractual privity with the mortgagee can repay a mortgage lien through the plan because the mortgagee holds a "claim" against the debtor's estate, even though there is no privity between the mortgagee and the debtor. Furthermore, the Court concluded that the fact that the debt to the Mortgagee was accelerated due to debtors' default did not prohibit the curing of such default through the Chapter 13 Plan.

F. Unexpired Leases and Executory Contracts

Unexpired Leases and Executory Contracts are governed by Section 363 and 365. Section 363 governs the postpetition use, lease and sale of estate property. This section also governs "cash collateral." Section 363(b) provides the Trustee with the ability to "use, sell or lease" estate property outside the ordinary course of the estate. Section 363(c) provides the trustee with instances when the property can be sold, leased or used pursuant to the ordinary course of business. The Trustee must also lease all property pursuant to any relief granted from the stay.

Section 365(a) specifically provides the Trustee with the ability to assume, or reject any debtor's executory contract or unexpired lease. Note that neither "executory contract" nor "unexpired lease" is defined in the Bankruptcy Code. Subsections (b), (c) and (d) state limitations on the Trustee's power to assign or assume a lease or executory contract. If the executory contract or lease is in default, the Trustee still may assume the contract or lease, but the trustee must either cure, compensate, or provide adequate assurance of future performance under the lease. The Court must usually approve these assignments.

The court uses a business judgment standard in determining whether to approve a rejection, assumption or assignment. In re G.I. Indus., 204 F.3d 1276 (9th Cir. 2000). An executory contract or unexpired lease becomes property of the estate when it is assumed by the trustee. Id.

A creditor with an interest in the lease does not have standing to raise a section 365(d)(4) contention that the property covered in the lease is not part of the bankruptcy estate. In re James Wilson Assoc., 965 F.2d 160 (7th Cir. 1992).

Section 365(b)(1)(B) does not create an independent right to a fee award. To recover fees the lessor must demonstrate that the lease contains a clear contractual provision allocating the right to collect fees, the provision is lawful, and that the losses are for actual pecuniary losses resulting from the defaults under the lease - attorneys actions were taken primarily to collect sums due under the lease or to enforce an obligation of the leasee. In re Shangri-La, Inc., 167 F.3d 843 (4th Cir. 1999).

G. Priorities

Priorities are governed by Section 507. Section 507(a) delineates the categories of claims that are entitled to priority in bankruptcy cases. Pursuant to 104(b) the dollar cap on some priority claims increases every 3 years to correspond to the Consumer Price Index. 507 mandates the order of payment of these (unsecured/partially secured) creditors. Practice dictates that each subsection of 507(a) is to be fully paid to the creditors before moving on to the next subsection. If the debtor delineates all of his funds, then that last subsection's creditors are paid pro-rata. All later creditors receive nothing. Priorities should be given a narrow, strict interpretation. In re Birmingham-Nashville Express Inc., 224 F.3d 511 (6th Cir. 2000).The 9 priority subsections are as follows:

1. Administrative expenses under Section 503(b) - These expenses include the "actual, necessary costs and expenses of preserving the estate, including wages, salaries or commissions, certain fines and taxes. Administrative expenses also may include bank charges, insurance, assumed lease obligations, leases, executory contracts. Such things as a prepetition pension plan, lump sum employment contracts and criminal fines or environmental penalties are not administrative expenses. Once a lease is assumed, even if later rejected, its an administrative expense. In re Klein Sleep Prods, Inc. 78 F.3d 18 (2d Cir. 1996). A broker's commission is a proper administrative expense after the broker has delivered a ready and willing buyer pursuant to the brokerage contract. In re Ferncrest Court Partners Ltd., 66 F.3d 778 (6th Cir. 1995). "Creditors may not claim lump sum payments, as administrative expenses, due upon termination pursuant to their employment contracts with the debtor because (1) the claims did not arise from a transaction with the debtor possession; (2) the consideration supporting the right to payment was neither supplied nor beneficial to debtor in possession; and (3) the payments were not actual and necessary costs and expenses of preserving the estate." In re Comm. Fin. Servs. , 246 F.3d 1291 (10th Cir. 2001).

2. Unsecured Claims under 502(f)- in involuntary cases claims that arise after commencement but before the order of relief that arise in the ordinary course of the debtor's business or financial affairs receive priority status. These are known as involuntary gap creditors.

3. Unsecured claims for wages, salaries and commissions- Up to $4,650.00 per individual or corporation for salaries, wages and commissions earned within 90 days of filing the petition or the end of the debtor's business (whichever occurs first) receive 3rd priority. These claims arise with all types of employees from the traditional to home nursing care workers.

4. Unsecured claims for contributing to an employee benefit plan- These claims must arise from services given within 180 days before the filing of the petition or the end of the debtor's business. The total amount allowed is now $4,650.00 (the maximum amount allowed under subsection 3) multiplied by the number of employees covered under the plan less the actual distributions these employees previously received under subsection (a)(3).

5. Unsecured claims of those who raise/store grain or are fishermen- Each such individual may have a priority claim of up to $4, 650.00.

6. Consumer Creditors priority- This priority is for consumers who have deposited money for the purchase, lease or rental of property or services. The property or services must be for personal, household or family use. Each individual may have a claim of up to $2,100.00. This priority is to cover the debtor's inexpensive couch or microwave on lay-a-way.

7. Alimony and Child Support debts- All "support" debts receive 7th priority. These debts are also nondischargeable. Note that this priority may not encompass debts incurred with property settlements. 507(a)(7)(B) specifically provides for priority only for "alimony, maintenance or support."Guardian ad litem fees and expenses are also given priority under this subsection.

8. Unsecured Governmental Claims/Tax Claims- Income taxes for which a return is due within 3 years before the filing of the case are given priority under subsection 8. To receive priority, the tax assessment must also be within 240 days before the filing date. All property taxes due in the year before the commencement of the case also receive 8th priority. The question of when a tax is assessed is a matter of federal law, so that when federal taxes are in dispute, the Court must look to the definition of the Internal Revenue Code, which provides that assessment is the notation in the Secretary of the Treasury's records. State law assessment occurs when the liability becomes final under state law. In re Lewis, 199 F.3d 249 (5th Cir. 2000).

9. Unsecured Claims to the FDIC- Any unsecured claim to the FDIC or related entity for failing to maintain capital receive 9th priority.

Section 507(b) gives a "superiority" status to secured claims that have received adequate protection but still incur a claim. Finally, 507(d) provides that any subrogated entity does not receive the priority rights of the official holder.

H. Reaffirmation

Reaffirmation is an agreement provided for under Section 524(c) where the debtor and the creditor consensually agree that the debtor is going to reaffirm the debt. So even though the debtor receives a discharge, the debtor is still bound to the pay the total debt. A Reaffirmation agreement should involve a renegotiation of the debt and the terms and/or total debt may be different from the original debt. Reaffirmations should contain an attorney affidavit whereby the attorney states that he examined and investigated the reaffirmation to his client. Reaffirmations are not supposed to pose an undue hardship on the debtor. If the reaffirmation is not evidenced by the proper paperwork, the reaffirmation can be annulled. Reaffirmations are related to Redemptions and the concept of "Ride Through". Section 722 allows a debtor to "redeem tangible personal property intended primarily for personal, household, or family use." Redemption permits the debtor to "pay off" the loan or the collateral. The amount needed for a redemption may be reduced if a debtor can use some of his state or Section 506 exemptions. A reaffirmation or a redemption agreement will not be approved if the agreement will cause "undue hardship" on the debtor pursuant to 524(a)(6)(A)(i). 521(2)(A) provides that a creditor and debtor may agree to "ride through" the bankruptcy for a particular debt. Ride-through is not very advantageous to the creditor and is also not permitted in all circuits.

If the code requirements of 524(c) and (d), including the requirement that it be entered into prior to discharge are not met, even if it is signed by the parties, a reaffirmation agreement is unenforceable. In re Kinion, 207 F.3d 751 (5th Cir. 2000).

A reaffirmation agreement should involve a renegotiation of the debt and the terms may be different than the original contract terms. In re Strong, 232 B.R. 921 (Bankr. E.D. Tenn. 1999).

I. Discharge and Objection to Discharge

Generally, one of the primary purposes of the United States Bankruptcy Code (Title 11 of the United States Code of Laws) is to provide individual debtors with a "fresh start." The fresh start is provided by (1) allowing the debtor to keep certain minimal assets and (2) discharging the debtor from his obligations to pay his debts. Generally, courts construe objections to the debtor's discharge against the objector and liberally in favor of the debtor. See, e.g., In re Scarlata, 979 F.2d 521 (7th Cir.1992); In re Hunter, 780 F.2d 1577 (11th Cir. Fla. 1986); Rosen v. Bezner, 996 F.2d 1527 (3d Cir. 1993) (Section 727 is construed liberally in favor of the debtor); Insurance Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108 (3d Cir. 1995) (same).

However, discharge is a privilege granted to the honest debtor and not a right accorded to all bankrupts and as the Supreme Court once said discharge is only for the "honest but unfortunate debtor." Grogan v. Garner, 498 U.S. 279, 112 L. Ed. 2d 755, 111 S. Ct. 654 (1991); In re Burgess, 955 F.2d 134 (1st Cir. Mass. 1992); see also In re Horridge, 127 B.R. 798 (S.D. Tex. 1991) (discharge not a matter of right); In re Pimpinella, 133 B.R. 694 (Bankr. E.D.N.Y. 1991) (same). While some have suggested that the debtor should use pre-exemption planning to "go as far as you can," this attitude does not comport well with the idea of the honest but unfortunate debtor. Cristol, A., Cassidy, W. and Walden, A. Exemption Planning: How Far May You Go?, 48 S.C.Law. R. 715, 742 (1997). With the recent change relating to the Individual Retirement Account (an "IRA"), providing for an unlimited exemption for IRA's under South Carolina law, we may see an increase in pre-petition planning by debtor. See In re Outen, 97-08675-W, (March 18, 1998) (IRA is included as exempt under South Carolina homestead exemptions); but see Rowland v. Strickland, 362 S.E.2d 892 (Ct App. 1987) (judgment creditor may attach IRA account as not exempt from alienation). With this increase in pre-petition planning, we may see an increase in complaints objecting to the discharge of the debtor's obligations.

Section 727 provides for the denial of the debtor's discharge in Chapter 7 cases. Section 1328 provides for the denial of the debtor's discharge in Chapter 13 cases. Section 523 provides for the non-discharge of certain obligations under certain conditions. This discussions will focus on Section 523.

Section 523 provides that certain specific obligations of the debtor may be excepted from discharge under two conditions. The first condition is that the debt must be determined to be not subject to a discharge. The second condition is that the obligation must meet certain criteria. This paper will first discuss the practical aspects of the trial of issues relating to the discharge and then will discuss the substantive criteria used to determine whether the debt will be discharged.

I.1. The Practical Aspects of Objecting to Discharge

I.1.1. Bring a Law Suit.

Under Section 523(a), a creditor, or someone standing in the creditor's shoes, must object to the discharge of a particular debt through an adversary proceeding. Rule 7001, Fed.R. Bankr. P. See also In re Kennerley, 995 F.2d 145, 146-47 (9th Cir. Cal. 1993) (A motion to lift the automatic stay is not either a valid complaint to determine dischargeability or a motion to extend the deadline under Bankr. R. 4007(c)).

I.1.1.1 Standing.

To obtain standing to bring a complaint objecting to discharge, the plaintiff must show (1) it is a creditor, (2) it is the assignee of a creditor,(See Westbank v. Grossman (In re Grossman), 174 B.R. 972 (Bankr. N.D. Ill. 1994) (assignment of judgment rights)) or (3) it is subrogated to the claims of a creditor. Subrogation may occur in relation to nondischargeable taxes, as discussed below and when the debts ordinarily would not be dischargeable but they are paid by some insurance company or surety. Old Republic Sur. Co. v. Richardson (In re Richardson), 178 B.R. 19 (Bankr. D.D.C. 1995) (public policy behind exceptions to discharge for breach of fiduciary duty is punitive in nature and intended to discourage improper conduct; public policy would be frustrated if debtor could avoid liability by allowing surety to cover a debt and then discharge the debt to the surety in bankruptcy; whether plaintiff had fiduciary relationship with the debtor irrelevant). See In re Snellgrove, 15 B.R. 149 (Bankr. S.D. Fla. 1981) (debt to surety nondischargeable to extent of debtor's embezzlement of creditor's funds).

I.1.1.2 Class Actions.

Although not seen in the District of South Carolina, Bankruptcy Courts have permitted class action suits to challenge the dischargeability of similarly situated debts. Santa v. Lebner (In re Lebner), 197 B.R. 180 (Bankr. D. Mass. 1996). In so finding, the Bankruptcy Court for the District of Massachusetts indicated that a majority of the bankruptcy courts addressing the issue agreed to allowing the suits through class actions.

I.1.1.3 Jurisdiction.

Objections to discharge are core proceedings. 28 USC §158(b)(2)(I) and (J). In South Carolina, these core proceedings have been referred to the Bankruptcy Court for determination. 28 USC §157 (on allowing referrals). Under Code § 523(c), the Bankruptcy Court has exclusive jurisdiction to determine the dischargeability of debts for: (1) Section 523(a)(2) (debts created by false pretenses, false representation, actual fraud, or by use of a false financial statement); (2) Section 523(a)(4) (debts for fraud or defalcation while acting in a fiduciary capacity, or for embezzlement, or larceny); (3) Section 523(a)(6) (debts for willful and malicious injury by the debtor to another entity or to the property of another entity); and (4) Section 523(a)(15) (certain debts arising from divorce or separation which are not excepted under Code § 523(a)(5)). Other courts are given concurrent jurisdiction for the remaining objections to discharge.

I.1.1.4. Abstention.

In those situations where another court has jurisdiction, the Bankruptcy Court could abstain from hearing a dischargeability issue. See 28 USC § 1334 (discussing both discretionary and mandatory abstention). In a practical sense this abstention is most often used in questions dealing with the dischargeability of claims involving multiple personal injury suits (see In re Robbins, 964 F.2d 342 (4th Cir. N.C. 1992); Wood v. Fiedler, 548 F.2d 216 (8th Cir. Minn. 1977); Austin v. Wendell-West Co., 539 F.2d 71 (9th Cir. Wash. 1976)) or in family support obligations where state courts are more familiar with the criteria for measuring support requirements. Brothers v. Tremaine (In re Tremaine), 188 B.R. 380 (Bankr. S.D. Ohio 1995) (abstaining from dischargeability proceeding under Code § 523(a)(5) with respect to alleged alimony). Sometimes it is used relating to tax claims but the abstention in tax claims seems to be limited to situations involving no asset chapter 7 cases. See In re Gossman, 206 B.R. 264 (Bankr. N.D. Ga. 1997); Shapiro v. United States (In re Shapiro), 188 B.R. 140 (Bankr. E.D. Pa. 1995) (Court abstained from hearing debtor's adversary proceeding to determine amount of nondischargeable debt where such determination would have no effect on creditors in the no-asset bankruptcy case which had been fully administered). If another court renders a determination on dischargeability, that determination is given preclusive effect in the bankruptcy court. E.g., In re Galbreath, 83 B.R. 549 (Bankr. S.D. Ill. 1988).

I.1.2. Bring the Suit Timely.

I.1.2.1 Within 60 days after the first date set for the meeting of creditors.

For causes of action within the exclusive jurisdiction of the bankruptcy court, the complaint objecting to discharge must be filed "not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a)." Fed.R. Bankr. P. 4007(c). A motion to extend the 60-day period must be made prior to the end of the period and must be made by the creditor. Fed. R. Bankr. P. 9006(b)(3) permits an enlargement of time. If you don't bring the complaint, no amount of excusable neglect will save the creditor and unless the creditor relies upon an incorrect bar date being provided by the court, the bankruptcy court will not allow the late filing of a claim objecting to discharge. Neeley v. Murchison, 815 F.2d 345 (5th Cir. 1987); In re Alton, 837 F.2d 457 (11th Cir. 1988); In re Anwiler, 958 F.2d 925 (9th Cir. 1992), cert. denied, 121 L. Ed. 2d 171, 113 S. Ct. 236 (1992) (court has equitable power to permit untimely filing where the clerk gave an incorrect bar date); Themy v. Yu (In re Themy), 6 F.3d 688 (10th Cir. 1993) (courts have "almost uniformly allowed an out-of-time filing when the creditor relies upon a bankruptcy court notice setting an incorrect deadline"). Some courts have held that a late filed complaint denies the court of jurisdiction and the case is dismissed even if the defense of failure to timely file is not raised by the debtor. Dollinger v. Poskanzer, 146 B.R. 125 (D.N.J. 1992) (bar date for filing dischargeability complaint is jurisdictional, and thus debtor's failure to plead untimeliness in answer is not a waiver of time bar); But see In re Santos, 112 B.R. 1001 (Bankr. 9th Cir. 1990) (dischargeability complaint bar date is not jurisdictional, and thus debtor can waive defense of untimeliness). Still other courts have found other exceptional circumstances to allow them to accept late-filed objections to discharge. See In re Dewalt, 961 F.2d 848 (9th Cir. 1992) (unscheduled creditor's late-filed complaint acceptable because notice of bankruptcy filing only 7 days before the bar date was insufficient under Code § 523(a)(3)(B), the court required at least 30 days' notice or knowledge of the bankruptcy to satisfy Section 523(a)(3)(B)); In re Crumley, 73 B.R. 996 (Bankr. E.D. Tenn. 1987) (due process required acceptance of creditor's late filed Section 523(a)(2), (4) or (6) objection because creditor was without notice of bar date); Shaheen v. Penrose (In re Shaheen), 174 B.R. 424 (E.D. Va. 1994) (30-day notice required by Bankruptcy Rule applied to objections to discharge and thus late filed complaint was timely where creditor received notice of bankruptcy only 12 days before bar date).

For dischargeability issues not within the exclusive jurisdiction of the bankruptcy court, under Rule 4007(b), these complaints may be filed at any time. There is no bar date for filing complaints based on alimony and child support, driving while intoxicated, student loans, and taxes. These types of debts are not automatically discharged. Thus, in these instances, a debtor may have an incentive to bring the complaint in the form of a declaratory judgment action.

Under Bankruptcy Rule 1019(2), if a Chapter 11 case is converted to Chapter 7, a new filing period commences. If the Chapter 11 case partially concluded by way of a confirmed plan, that confirmed plan discharged the debt and the new time period can be used only for post confirmation issues of discharge. In re Pavlovich, 952 F.2d 114 (5th Cir. La. 1992) (conversion to Chapter 7 after confirmation of individual debtor's Chapter 11 plan precludes creditors whose claims were dealt with under the plan from challenging discharge or dischargeability; however, creditor may challenge discharge based on post-confirmation conduct). Further, if a case started as a Chapter 7, converts to a Chapter 11 and then is converted back to a Chapter 7, there is some authority that the reconversion will not start a new period. See, e.g., F & M Marquette Nat. Bank v. Richards, 780 F.2d 24 (8th Cir. Minn. 1985) (reconversion did not start new period); In re Jones, 966 F.2d 169 (5th Cir. Tex. 1992) (reconversion did start a new period for filing objections to discharge pursuant to Fed. R. Bankr. P. 1019(2) and 4004).

I.1.2.2. If you don't know the bar date, find it out.

A creditor with actual notice of the bankruptcy but not the bar date must take reasonable steps to ascertain the bar date or lose the right to object. In re Sam, 894 F.2d 778 (5th Cir. 1990); In re Rhodes, 61 B.R. 626 (Bankr. 9th Cir. Cal. 1986).

I.1.2.2 File the Complaint or File the Extension.

On the bar date, the creditor must file the complaint or the extension. Some courts have held that the motion is made upon filing. See In re Miller, 188 B.R. 1021 (Bankr. S.D. Fla. 1995) (motion to extend bar date pursuant to Bankruptcy Rule 4007(c) is "made" when filed with court, not when served on debtor). However other courts hold that a motion is "made" when it is served on the debtor as long as the motion is filed within a reasonable time after service. E.g., In re Friscia, 123 B.R. 9 (Bankr. E.D.N.Y. 1991). The Eleventh Circuit has adopted the former approach and requires the filing of the motion. Coggin v. Coggin (In re Coggin), 30 F.3d 1443 (11th Cir. Ala. 1994).

I.1.2.3. Others can't obtain an extension for the creditor.

The Chapter 7 panel trustee and the Chapter 13 panel trustee doesn't have the ability to get an extension on behalf of creditors to object to discharge. In re Farmer, 786 F.2d 618 (4th Cir. 1986); Vaccariello v. Lagrotteria, 43 B.R. 1007 (N.D. Ill. 1984); but see Marshall v. Demos (In re Demos), 57 F.3d 1037 (11th Cir. 1995) (the court "validly entered" order granting motion by Chapter 7 trustee to extend the time for all creditors to file objections to discharge).

I.1.3. Allege the entire factual basis for the creditor's claim.

An amendment to a complaint objecting to discharge that changes the legal theory or adds another claim arising out of the same transaction or occurrence relates back to the original complaint. In re Tester, 56 B.R. 208 (W.D. Va. 1985) ( Code § 523(a)(4) complaint permitted to be amended to add § 523(a)(6) claim). Thus, if the creditor has alleged all of the factual basis for asserting an objection to discharge, the creditor stands a better chance of the court determining in its favor that "the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." Fed. R. Civ. P. 15(c)(2). For a discussion of the application of Bankruptcy Rule 7015 (which incorporates Fed. R. Civ. P. 15 ); see also Flexi-Van v. Perez (In re Perez), 172 B.R. 284 (Bankr. E.D.N.Y. 1994)(amendment in discharge context); In re Gunn, 111 B.R. 291 (Bankr. 9th Cir. Cal. 1990) (complaint alleging §§ 523(a)(2)(A) and (B) and 727(a)(5) causes of action amended after two years of discovery to allege § 727(a)(3) and (4) because all claims arose out of same transaction); CIT Group/Factoring Mfrs. Hanover, Inc. v. Srour, 138 B.R. 413 (Bankr. S.D.N.Y. 1992) (action under Code § 727(a)(2) and (4) amended to seek relief under § 523(a)(4), because claims arose out of the same conduct, transaction or occurrence); Bank of Chester County v. Cohen, 139 B.R. 327 (Bankr. E.D. Pa. 1992) (complaint originally filed under § 523(a)(2)(A) amended to assert Section 523(a)(2)(B) and 727(a)(2)(A) where actions in the amended complaint were based on the same conduct, transaction and occurrence as the original); but see In re Union Bank of Middle East, Ltd., 127 B.R. 514 (E.D.N.Y. 1991) (amendment of Code § 523(a)(2)(A) complaint to include § 523(a)(4) claim not allowed); In re Harrison, 71 B.R. 457 (Bankr. D. Minn. 1987) (§ 727(a) claim was not sufficiently similar to § 523(a)(6)); Rufenacht, Bromagen, & Hertz, Inc. v. Russell, 69 B.R. 394 (D. Kan. 1987) (§ 727 complaints may be timely amended to assert a § 523 claim); In re McClellan, 60 B.R. 719 (Bankr. E.D. Va. 1986) (amendment from § 727(a)(2) relief to action under § 523(a)(2) was not allowed); In re Grant, 45 B.R. 262 (Bankr. D. Me. 1984) (§ 727 complaint could not be amended to allege § 523 cause of action because of "insufficient identity" between claims).

I.1.4. Don't ask for a jury trial

Discharge proceedings are equitable actions tried without juries. In re Hallahan, 936 F.2d 1496 (7th Cir. 1991); In re Johnson, 110 B.R. 433 (Bankr. W.D. Mo. 1990); but see In re Jensen, 946 F.2d 369 (5th Cir. 1991) (in dicta suggesting that debtor did not waive the right to a jury trial but denying debtor jury trial because creditor filed a proof of claim regarding the debt); Longo v. McLaren (In re McLaren), 3 F.3d 958 (6th Cir. Ohio 1993). Even when the creditor seeks a money judgment, the bankruptcy court gets to make the determination. In re McLaren, 3 F.3d 958 (6th Cir. 1993); In re Hallahan, 936 F.2d 1496 (7th Cir. 1991); Harris v. U.S. Fire Ins. Co., 162 B.R. 466 (E.D. Va. 1994); Citibank (South Dakota) N.A. v. Fisher (In re Fisher), 186 B.R. 70 (Bankr. W.D. Ky. 1995).

In situations involving personal injury torts, the claim must be determined by the District Court and the parties are still entitled to a jury trial on the claim itself. See 28 U.S.C. §1411. Nevertheless, the question of discharge is determined by the court. See In re Thompson, 140 B.R. 979 (N.D. Ill. 1992).

I.1.5. The Creditor has the burden of proof.

The creditor has the burden to prove that the claim is not subject to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L. Ed. 2d 755 (1991).

I.1.5.1. Collateral Estoppel.

If a state court has already made a determination, the Creditor may be benefitted by the doctrine of collateral estoppel or issue preclusion. Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991). But you still need to show that the elements of the claim made in state court are the same elements associated with the Bankruptcy Court's determination of dischargeability. In re Tsamasfyros, 940 F.2d 605 (6th Cir. Ohio 1981). The elements of issue preclusion are (1) the issue to be decided by the bankruptcy court is identical to that involved in the prior litigation, (2) the issue was actually litigated, (3) the issue was determined by a valid and final judgment, (4) the determination of the issue was essential to the judgment, and (5) the standard of proof in the prior litigation was at least as high as the standard in the present litigation. Spilman v. Harley, 656 F.2d 224 (6th Cir. Ohio 1981). The application of issue preclusion will be discussed with the substantive aspects of the suit below.

I.1.6. Use caution when settling nondischargeable obligations.

It has been held that where an obligation was created from embezzlement and this obligation is settled through a promissory note to repay and release, the debt has been held to be dischargeable absent fraud surrounding the note. In re West, 22 F.3d 775 (7th Cir. 1994); but see United States v. Spicer, 57 F.3d 1152 (D.C. Cir. 1995), cert. denied, 116 S.Ct. 701, 133 L. Ed. 2d 658 (1996) (type of debt is not altered through settlement agreement as settlement "makes the dishonest debtor no more honest, and no more entitled to relief").

I.2. The Substantive Aspects of Objecting to Discharge

Section 523(a) provides that the following debts are not discharged: (1) certain kinds of taxes, (2) claims created by certain wrongful acts of the debtor, (3) unlisted and unscheduled claims; (4) claims resulting from the fraud or defalcation by a fiduciary, (5) alimony, maintenance and support for a spouse or child, (6) willful and malicious injury, (7) fines, penalties and forfeitures to a governmental unit, (8) student loans, (9) claims of wrongful death or personal injury resulting from the operation of a motor vehicle while intoxicated, (10) claims surviving prior bankruptcies, (11 and 12) claims relating to federally insured depository institutions, (13) restitution orders, (14) debts incurred to pay a tax that wasn't dischargeable, (15) claims associated with a divorce degree or settlement agreement not provide for in Section 523(5), (16) post petition fees or assessments by homeowners associations, (17) fees for filing cases, motions, complaints or appeals, and (18) funds owed to a state or state agency for support. This paper will discuss each of these sections in turn.

I.2.1. Certain taxes.

The following taxes and customs duty are excepted discharge:

(A) Taxes and duties entitled to priority;

(B) Taxes for which a return was never filed or was late-filed less than two years before the bankruptcy case commenced; and

(C) Taxes associated with the debtor's filing of a fraudulent return or willful attempt to evade or defeat a tax. 11 U.S.C. §523(a)(1). Other than these specifically enumerated exceptions, taxes are generally discharged in bankruptcy. If the underlying tax obligation is not dischargeable, pre-petition interest, post petition interest and penalties on these taxes are not dischargeable. In re Larson, 862 F.2d 112 (7th Cir. 1988) (pre-petition interest); In re Hanna, 872 F.2d 829 (8th Cir. 1989)(post petition interest); In re Burns, 887 F.2d 1541 (11th Cir. 1989) (post petition interest); 11 USC § 523(a)(7) (fines, penalties, and forfeitures payable to a governmental unit are exempt from discharge); but see In re Woodward, 113 B.R. 680 (Bankr. D. Or. 1990) (citing cases holding that post-petition interest is dischargeable). Non compensatory tax penalties are generally dischargeable.

I.2.1.1 Priority Taxes.

Section 523(a)(1)(A) excepts from discharge the debtor's obligation to pay: (1) withholding taxes, (2) recently incurred taxes, and (3) taxes incurred during the period of time between an involuntary petition and the court's appointment of a trustee or order for relief. 11 USC § 507(a)(2), incorporating 11 USC § 502(f). This section incorporates Sections 507(a)(2) and 507(a)(8) in determining the dischargeability of the taxes. Both secured tax claims and unsecured tax claims are not discharged. See In re Latulippe, 13 B.R. 526 (Bankr. D. Vt. 1981) (the legislative history expresses an intent to make secured, as well as unsecured, tax claims nondischargeable).

To get the bankruptcy court to make a determination of whether certain taxes are dischargable, the debtor may desire to bring the action. See §523(c). Further, the provision in this section that provides for the continuing of the debt beyond bankruptcy "whether or not a claim" has been filed appears to be quite ominous. Specifically, the Tenth Circuit has found that the Internal Revenue Service may make a claim for taxes for a particular year, accept the distribution provided by the Bankruptcy Court, and then audit the records to make additional claims for that same year. DePaolo v. United States ex rel. IRS (In re DePaolo), 45 F.3d 373 (10th Cir. Wyo. 1995).

Generally, the taxes and customs duties excepted from discharge fall within the following categories:

(1) taxes on or measured by income or gross receipts; 11 USC §507(a)(8)(A)

(2) assessed property taxes; 11 USC § 507(a)(8)(B). See also In re Davis, 11 B.R. 621 (Bankr. N.D. Tex. 1981) (the term "assessed" includes the procedure by which the property is listed, valued, and the pro rata tax claim determined).

(3) taxes required to be collected or withheld and for which the debtor is liable in any capacity ("trust fund taxes"); 11 USC § 507(a)(8)(C). See In re King, 117 B.R. 339 (Bankr. W.D. Tenn. 1990) (state sales taxes are nondischargeable trust fund taxes); In re Fernandez, 130 B.R. 757 (Bankr. W.D. Mich. 1991) (100% penalty for failure of responsible party to pay withholding taxes is included in this section rather than Section 523(a)(7) on penalties); United States v. Sotelo, 436 U.S. 268, 98 S. Ct. 1795, 56 L. Ed. 2d 275 (1978) (under Bankruptcy Act 100% penalty on this section and not under penalty section).

(4) certain employment taxes; 11 USC § 507(a)(8)(D).

(5) certain excise taxes; 11 USC § 507(a)(8)(E). See In re Payne, 27 B.R. 809 (Bankr. D. Kan. 1983) (excise tax is a tax "imposed on the performance of an act, the engaging in an occupation or the enjoyment of a privilege"); In re Grynberg, 986 F.2d 367 (10th Cir. Colo. 1993), cert. denied, 114 S.Ct. 57, 126 L. Ed. 2d 27 (1993) (excise taxes include gift taxes); In re Beaman, 9 B.R. 539 (Bankr. D. Or. 1980) (excise tax includes amount to be paid to State in repayment for uninsured debtor's employee's injuries); Yoder v. Ohio Bureau of Workers' Compensation (In re Suburban Motor Freight), 998 F.2d 338 (6th Cir. 1993) (unpaid workers' compensation premiums are excise taxes).

(6) customs duties on certain imported merchandise; 11 U.S.C. §507(a)(8)(F).

(7) any penalty in compensation for actual pecuniary loss. 11 U.S.C. §507(a)(8)(G).

The only type these taxes that aren't limited to a specific period of time (either two years pre-petition or three years prepetition) are "trust fund taxes". Rosenow v. Illinois, Dept. of Revenue, 715 F.2d 277 (7th Cir. Ill. 1983). Most of the taxes are given priority only for a limited time. This temporal aspect also affects the payment of the tax claims. If necessary for an effective reorganization, the court may instruct the taxing authority to apply payments to non-dischargeable taxes prior to applying payments to dischargeable taxes claims. United States v. Energy Resources Co., 495 U.S. 545, 110 S.Ct. 2139, 109 L. Ed. 2d 580 (1990). However, courts have rejected the debtor's request to instruct the taxing authority as to the application of the payments in a Chapter 7 or liquidating Chapter 11 setting. See In re Schilling, 177 B.R. 862 (Bankr. N.D. Ohio 1995) (declining to instruct Internal Revenue Service as to allocation of tax payments between dischargeable and nondischargeable tax obligations in a Chapter 7 case); In re Suburban Motor Freight, 161 B.R. 640 (S.D. Ohio 1993) (not applicable to Chapter 7 corporate debtor); but see In re Deer Park, 136 B.R. 815 (Bankr. 9th Cir. Cal. 1992) (debtor can direct application in liquidating Chapter 11 plan), aff'd, 10 F.3d 1478 (9th Cir. 1993).

If a surety pays the claim, under some cases, that surety is subrogated to the rights of the taxing authority to the extent that the surety's claim is rendered not dischargeable. In re Fields, 926 F.2d 501 (5th Cir. 1991), cert. denied, 112 S.Ct. 371, 116 L. Ed. 2d 323 (1991); In re Waite, 698 F.2d 1177 (11th Cir. 1983), reh'g denied, 703 F.2d 582 (11th Cir. 1983), reh'g denied, 703 F.2d 582 (11th Cir. Ga. 1983) but see National Collection Agency, Inc. v. Trahan, 624 F.2d 906 (9th Cir. 1980) (decided under the bankruptcy act).

I.2.1.2 Late Filed Taxes.

If the Debtor fails to file a return or filed a late return within the two years immediately preceeding the bankruptcy case, Section 523(a)(1)(B) excepts from discharge debts the debts relating to the return. The debtor's intent or lack of knowledge concerning the requirement to pay the tax is not a defense to an objection to discharge under this section. Spain v. United States (In re Spain), 182 B.R. 233 (Bankr. S.D. Ill. 1995). Similarly, even though 26 U.S.C. §602(b)(1) allows the Secretary of the Treasury to prepare a substitute return, this substitute return is not equivalent to the tax payer filing a return. In re Bergstrom, 949 F.2d 341 (10th Cir. Wyo. 1991); In re Pruitt, 107 B.R. 764 (Bankr. D. Wyo. 1989); In re Hofmann, 76 B.R. 853 (Bankr. S.D. Fla. 1987); Delaney v. United States (In re Delaney), 177 B.R. 251 (Bankr. E.D. La. 1994); but see Gless v. USA/IRS (In re Gless), 181 B.R. 414 (Bankr. D. Neb. 1993) (where debtor cooperated with the Secretary of the Treasury in preparing and filing the return).

If the return is filed but the filing is late the government is afforded at least two years to effect collection before the debtor can discharge the debt. At the same time, if the debtor completely fails to file a tax return, taxes for years ending within three years are also excepted from discharge. 11 USC § 507(a)(8)(A)(i) (incorporated into 11 USC § 523 by subsection (a)(1)(A)). The three-year period begins on the date the return is originally due. Pan American Van Lines v. United States, 607 F.2d 1299 (9th Cir. Cal. 1979); In re Wood, 866 F.2d 1367 (11th Cir. Fla. 1989).

I.2.1.3 Fraudulent Return or Willful Attempt to Evade Tax.

Section 523(a)(1)(C) provides that debts for taxes relating to fraudulent returns or for which the debtor "willfully attempted in any manner to evade or defeat such tax" are nondischargeable. Cassidy v. Commissioner, 814 F.2d 477 (7th Cir. 1987). Acts such as (1) claiming an imaginary child as a dependent have been determined to fall within this exception to discharge ( In re Harris, 59 B.R. 545 (Bankr. W.D. Va. 1986)); (2) using false W-2 Forms (In re Gilder, 122 B.R. 593 (Bankr. M.D. Fla. 1990); Ketchum v. United States, 177 B.R. 628 (E.D. Mo. 1995); and (3) titling real property in the names of others to evade the taxes (In re Jones, 116 B.R. 810 (Bankr. D. Kan. 1990).

The Internal Revenue Service has the burden of proof to establish: (1) debtor's knowledge of the falsehood; (2) debtor's intent to evade the taxes; and (3) an underpayment of taxes. Brackin v. United States, IRS, 148 B.R. 953 (N.D. Ala. 1992); In re Kirk, 98 B.R. 51 (Bankr. M.D. Fla. 1989); In re Hopkins, 133 B.R. 102 (Bankr. N.D. Ohio 1991). The court applies a the totality of circumstances test in determining each of these three elements. Berzon v. United States, 145 B.R. 247 (Bankr. N.D. Ill. 1992); In re Kirk, 98 B.R. 51 (Bankr. M.D. Fla. 1989). Intent is inferred from such factors as significant understatements, failure to file returns, habitual late filings, failure to cooperate with the IRS, and implausible or inconsistent behavior. Toti v. United States, 149 B.R. 829 (E.D. Mich. 1993), aff'd, 24 F.3d 806 (6th Cir. Mich. 1994), cert. denied, 115 S.Ct. 482, 130 L. Ed. 2d 395 (1994); In re Jones, 116 B.R. 810 (Bankr. D. Kan. 1990).

The courts hold that any attempt to evade or defeat a tax, including omissions and commissions, and any willful attempt to avoid paying a tax fall within this provision. Toti v. United States (In re Toti), 24 F.3d 806 (6th Cir. Mich. 1994), cert. denied, 115 S.Ct. 482, 130 L. Ed. 2d 395 (1994) (acts of omission and commission fall within Section 523(a)(1)(C)); Bruner v. United States (In re Bruner), 55 F.3d 195 (5th Cir. La. 1995) (following Toti); but see Internal Revenue Code. Haas v. IRS (In re Haas), 48 F.3d 1153 (11th Cir. Ala. 1995) (Congress, which knew how to distinguish between evasion of tax and evasion of payment and this section does not apply to evasion of payment); see generally, Ketchum v. United States, 177 B.R. 628 (E.D. Mo. 1995) (a good discussion of the case law).

I.2.2. For Claims When the Debtor made False Representations.

The dischargeability of claims based upon false representations made by the debtor fall within two categories (1) false representations other than a statement respecting financial condition and (2) false statements relating to financial conditions.

I.2.2.1. Not relating to financial condition.

The distinction between "false pretenses, a false representation, or actual fraud" appears to be the level of intentional conduct. "The 'fraud' referred to . . . means positive fraud, or fraud in fact, involving moral turpitude or intentional wrong . . .". Neal v. Clark, 95 U.S. 704, 24 L. Ed. 586 (1878); In re Black, 787 F.2d 503 (10th Cir. 1986); Stanley H. Silverblatt Electrical Contractor, Inc. v. Marino, 139 B.R. 380 (Bankr. D. Md. 1992). Actual fraud may also form the basis for an objection to discharge under Section 523(a)(6) for willful and malicious injury. See Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853 (1st Cir. 1997) (surveying circuit court opinions from the Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Eleventh circuits interpreting "malicious").

The elements of a cause of action under this portion Section 523(a)(1)(A), appear to be:

1. A present material misrepresentation, either oral or in writing. See In re Buttendorf, 11 B.R. 558 (Bankr. D. Vt. 1981) (promises of future performance are insufficient); In re Bogstad, 779 F.2d 370 (7th Cir. 1985) (an important or substantial misrepresentation is needed); Engler v. Van Steinburg, 744 F.2d 1060 (4th Cir. 1984) (representation may be made orally or in writing); In re Van Horne, 823 F.2d 1285 (8th Cir. Iowa 1987) (silence or concealment may constitute the false representation).

2. Knowledge that the representation is false. In re Colvin, 117 B.R. 484 (Bankr. E.D. Mo. 1990) (discharge granted where mentally challenged debtor did not know the falsity of her statements); see also Morimura, Arai & Co. v. Taback, 279 U.S. 24, 73 L. Ed. 586, 49 S. Ct. 212 (1929) ("reckless indifference to actual facts" is equivalent to intentional misrepresentation).

3. Intent to defraud or deceive. In re Devers, 759 F.2d 751 (9th Cir. 1985); FDIC v. Reisman, 149 B.R. 31 (Bankr. S.D.N.Y. 1993) (intent to deceive may be inferred from surrounding circumstances). This intention is usually determined by the totality of the circumstances surrounding the representation. Sinclair Oil Corp. v. Jones (In re Jones), 31 F.3d 659, (8th Cir. 1994).

4. Justifiable Reliance by the creditor. Field v. Mans, 133 L. Ed. 2d 351, 116 S. Ct. 437 (1995); See Greenfield State Bank v. Copeland, 330 F.2d 767 (9th Cir. Cal. 1964) (no reliance in fact because the loan was granted before the representation); In re Geyen, 11 B.R. 70 (Bankr. W.D. La. 1981) (after the fact representations were not relied upon); City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277 (11th Cir. 1995) (justifiable reliance means a creditor's conduct should be determined by the creditor's own capacity and knowledge); In re Kirsh, 973 F.2d 1454 (9th Cir. Cal. 1992) ("justifiable reliance" is required not "actual reliance" or "reasonable reliance").

5. Damage. In re Collins, 946 F.2d 815 (11th Cir. 1991); In re Siriani, 967 F.2d 302 (9th Cir. 1992).

As to these elements it should be understood that the courts are continually developing the concept of common law fraud and this area will incorporate that development. Wingate v. Attalla (In re Attalla), 176 B.R. 650 (Bankr. D.N.H. 1994) (Section 523(a)(2)(A) "has always been understood to incorporate common law development" of the concept).

I.2.2.2. Relating to Financial Conditions.

Section 523(a)(2)(B) requires that these representations be: (1) in writing, (2) material, (3) reasonably relied upon, and (4) made with the intention to deceive. The second and fourth elements are the same as the elements provided for under Section 523(a)(2)(A).

The first element is that representations relating to financial condition must be in writing. Oral statements relating to financial condition do not form the basis for an objection to discharge. Engler v. Van Steinburg, 744 F.2d 1060 (4th Cir. 1984) (oral statement that property not subject to liens insufficient).

The third element, reasonable reliance, is a higher burden and requires more than just "justifiable reliance." Some courts require the creditor to show that it engaged in further investigation of the written financial statement of the debtor. Kentile Floors, Inc. v. Winham, 440 F.2d 1128 (9th Cir. Ariz. 1971) (creditor "acted unreasonably if it acted upon the . . . statement in extending credit without any further investigation."); see also In re Smith, 424 F. Supp. 858 (M.D. La. 1976); Sweet v. Ritter Finance Co., 263 F. Supp. 540 (W.D. Va. 1967). The further investigation requirement appears to require the creditor to merely follow industry practices in relying upon the financial statement. See In re Patch, 24 B.R. 563 (D. Md. 1982); In re Ardelean, 28 B.R. 299 (Bankr. N.D. Ill. 1983).

In renewal situations, when the false documentation is only part of the renewal, the courts are split on whether a creditor must provide "new money" as a necessary element. In re Gerlach, 897 F.2d 1048 (10th Cir. Colo. 1990) (new money not required); Cho Hung Bank v. Kim (In re Kim), 62 F.3d 1511 (9th Cir. Cal. 1995) (although no additional money was provided, the court required an extension of repayment due date to form consideration associated with nondischargeability under Code § 523(a)(2)). For the courts requiring consideration, some hold that only the amount of the "new money" is except from discharge. In re Barnacle, 44 B.R. 50 (Bankr. D. Minn. 1984); In re Wright, 52 B.R. 27 (Bankr. W.D. Pa. 1985); In re Curl, 64 B.R. 14 (Bankr. W.D. Mo. 1986). Other courts except the debt represented by both the previous obligation and new money. In re Carter, 11 B.R. 992 (Bankr. M.D. Tenn. 1981); In re Greenidge, 75 B.R. 245 (Bankr. M.D. Ga. 1987); In re Duncan, 123 B.R. 383 (Bankr. C.D. Cal. 1991).

When the documentation is part of the original loan procedure, the debt arising from a renewal of the loan is should also be nondischargeable. In re Liming, 797 F.2d 895 (10th Cir. Okla. 1986) (creditor should not be forced to call loan after discovering falsity of financial statement in order to maintain rights). The idea is that a debtor shouldn't be able to benefit from a renewal because the renewal "makes the dishonest debtor no more honest, and no more entitled to relief Congress intended to reserve for the honest debtor." United States v. Spicer, 57 F.3d 1152 (D.C. Cir. 1995), cert. denied, 116 S.Ct. 701, 133 L. Ed. 2d 658 (1996); see also Fuller v. Johannessen (In re Johannessen), 76 F.3d 347 (11th Cir. Fla. 1996) ("the debtor's fraud should not be discharged simply because the debtor entered into a settlement agreement.").

I.2.2.3 Purchasing of luxury goods on the eve of bankruptcy

It is generally thought that when a debtor makes a purchase using a credit card, the debtor is impliedly representing that he intends to pay the credit card company for that purchase. American Express Travel Related Servs. Co. v. Mc Kinnon (In re Mc Kinnon), 192 B.R. 768 (Bankr. N.D. Ala. 1996) (majority of courts have adopted the implied representation theory); Colonial Nat'l Bank USA v. Leventhal (In re Leventhal), 194 B.R. 26 (Bankr. S.D.N.Y. 1996) (same). Because of this general theory, in the Bankruptcy Amendments and Federal Judgship Act of 1984, Congress adopted an subsection (C) to Section 523(a)(2). Basically, Section 523(a)(2)(C) excepts from discharge luxury purchases.

The Bankruptcy Reform Act of 1994 amended Section 523(a)(2)(C) by increasing the monetary values associated with luxury purchases. Specifically, consumer debts of more than $1,000 owing to a single creditor for luxury goods or services which are incurred within 60 days of the bankruptcy petition are now presumed to be excepted from discharge. In addition, if the debtor received aggregate cash advances during the 60 days immediately preceding the bankruptcy of more than $1,000, these advances are presumed to be excepted from discharge. Advances for goods and services reasonably necessary to support the debtor or the debtor's dependents are not "luxury goods and services." In re Koch, 83 B.R. 898 (Bankr. E.D. Pa. 1988); In re Claar, 72 B.R. 319 (Bankr. M.D. Fla. 1987); In re Smith, 54 B.R. 299 (Bankr. S.D. Iowa 1985).

I.2.3. Unscheduled and Unlisted Creditors.

Section 523(a)(3) divides creditors into two categories: (1) those creditors that have claims against the debtor because of the debtor's wrongful acts under Section 523(a)(2), Section 523(a)(4) and Section 523(a)(6), and (2) all other creditors.

I.2.3.1 Creditors having claims "of the kind" specified under 523(a)(2), (4) and (6).

If the creditor is not scheduled and doesn't have knowledge of the bankruptcy in time to file a dischargeability complaint, the creditor's claim is not discharged under this section. Courts have not yet determined the extent to which a creditor must show that his claim is "of the kind" specified under Section 523(a)(2), (4) and (6). Some require a full trial of the claim others require a lesser degree of proof. See Fidelity Nat'l Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913 (Bankr. E.D. Cal. 1995) (full trial with applicable substantive law and proof for unscheduled fraud claim); In re Haga, 131 B.R. 320 (Bankr. W.D. Tex. 1991) (creditor need only show it has "a viable or colorable claim"); In re Thompson, 177 B.R. 443 (Bankr. E.D.N.Y. 1995) (debtor has burden of proof to show not a claim under Section 523(a)(2), (4) or (6)).

I.2.3.2 For creditors with claims not "of the kind" specified under 523(a)(2), (4) and (6).

For the second set of creditors, if the debtor knows of the creditor and fails to list and schedule the creditor, the claim is not discharged by the bankruptcy proceeding, unless the creditor receives notice or has actual knowledge of the filing of the bankruptcy in time to file a proof of claim. If the debtor knows of the creditor and knows the correct address of the creditor, the claim is similarly not discharged if the debtor fails to correctly list the creditor. In re Gelman, 5 B.R. 230 (Bankr. S.D. Fla. 1980) (exception applies where, knowing correct address, debtor gave wrong address and creditor had no actual knowledge of case); Beverly Lumber Co. v. Nicholson (In re Nicholson), 170 B.R. 153 (Bankr. W.D. Mo. 1994) (proper list includes viable addresses); In re Faden, 170 B.R. 304 (Bankr. S.D. Tex. 1994) (notice to subsidiary of creditor insufficient).

I.2.3.3 Notice of Knowledge requirement.

If the creditor has notice or knowledge of the bankruptcy, even though unscheduled and unlist, the creditor bears the burden of finding out the bar dates and filing a proof of claim. In re Price, 79 B.R. 888 (Bankr. 9th Cir. 1987), aff'd, 871 F.2d 97 (9th Cir. 1989). However, the creditor must receive the information by more than rumor. In re Stratton, 29 B.R. 93 (Bankr. W.D. Ky. 1983) (unsubstantiated rumor of bankruptcy is not sufficient); In re Bosse, 122 B.R. 410 (Bankr. C.D. Cal. 1990) (mere statement of intent to file made by debtor insufficient). The knowledge has to be (1) that the case was actually filed and (2) the location of the bankruptcy. In re Layman, 131 B.R. 495 (M.D. Fla. 1991).

If no bar debt for filing proofs of claims is set, such as a no-asset Chapter 7 case, the Bankruptcy Court for the District of South Carolina has held that it is technically never too late to file a timely proof of claim. Thus, the Bankruptcy Court for the District of South Carolina has concluded that an unscheduled creditor in a no-asset Chapter 7 case cannot take advantage of the exception provided by Code § 523(a)(3)(A) and the claim is discharged. In re Gardner, 194 B.R. 576 (Bankr. D.S.C. 1996). The Bankruptcy Court for the District of South Carolina has not addressed the issue of whether the Court should reopen a bankruptcy case where an unscheduled debt was the result of an intentional design, fraud, or improper motive rather than due solely to negligence or inadvertence. Stone v. Caplan (In re Stone), 10 F.3d 285, 291 (5th Cir. 1994) (if part of an intentional design, fraud or improper motive, failure to include claim in no asset bankruptcy would render claim not subject to discharge).

I.2.4. Fraud and defalcation by a Fiduciary, embezzlement or larceny.

If the debtor acted in a fiduciary capacity, Section 523(a)(4) provides that the claims of fraud and defalcation against the fiduciary are not subject to discharge. In addition, all acts of embezzlement and larceny are exempted from discharge whether or not the debtor was acting in a fiduciary capacity.

I.2.4.1 Fraud by a fiduciary.

The fraud associated with a fiduciary's actions appears to be similar to the fraud found in Section 523(a)(2), however, the burden upon the creditor is lessened by the fiduciary's duty of good faith, loyalty and full disclosure. In addition, the creditor appears to have the right to rely upon the fiduciary as a matter of law.

The definition of "fiduciary" includes persons acting under an objectively manifested, pre-existing, and binding relationship. Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L. Ed. 393 (1934); LSP Investment v. Bennett, 989 F.2d 779 (5th Cir. Tex. 1993); Lewis v. Scott (In re Lewis), 97 F.3d 1182 (9th Cir. 1996). The express trust may arise from contract, from statute, or may be inferred from conduct but some courts have required an identifiable trust corpus. Evans v. Pollard (In re Evans), 161 B.R. 474 (9th Cir. 1992) (breach of general fiduciary obligations are insufficient and claim must involve money or property entrusted to the fiduciary). Even though the trust may be inferred, this exception has been held not to apply to equitable, implied or constructive trusts. In re Stone, 91 B.R. 589 (D. Utah 1988); In re Freeman, 101 B.R. 698 (Bankr. E.D. Okla. 1989).

I.2.4.2 Defalcation by a fiduciary.

Defalcation is the "misappropriation of trust funds or money held in a fiduciary capacity; failure to properly account for such funds." Black's Law Dictionary, (5th Ed. 1961); see also In re Matheson, 10 B.R. 652 (Bankr. S.D. Ala. 1981) (using trust fund for any purpose other than the intended purpose constitutes defalcation); In re Duttenhofer, 12 B.R. 926 (Bankr. C.D. Cal. 1981) (inability to account for use of trust funds is defalcation); In re Beach, 13 B.R. 759 (Bankr. M.D. Ala. 1981) (failure to account for and turn over money collected is defalcation); In re Gonzales, 22 B.R. 58 (Bankr. 9th Cir. Cal. 1982) (misapplying construction funds is defalcation). Defalcation does not require an international conduct and may simply be a willful neglect of duty. See In re Moreno, 892 F.2d 417 (5th Cir. 1990).

Upon insolvency, corporate officers and directors are fiduciaries of the creditors of the corporation. In re Bernard, 87 F.2d 705 (2d Cir. N.Y. 1937) (based on common law and statute, the Honorable Learned Hand found a fiduciary relationship between corporate officers and creditors); See also In re Long, 774 F.2d 875 (8th Cir. 1985) (upon insolvency, director has a fiduciary duty owing to creditors); In re Chavez, 140 B.R. 413 (Bankr. W.D. Tex. 1992) (complaint filed against former president and chief executive officer of bank for defalcation); Berres v. Bruning, 143 B.R. 253 (D. Colo. 1992) (common law creates a fiduciary relationship upon insolvency). In this context, defalcation occurs when "a payment by an officer of his own claim, or that of another officer, . . . when he knew that the corporation was insolvent and that the interests of other creditors would be sacrificed for the benefit of its fiduciaries." In re Bernard, 87 F.2d 705 (2d Cir. N.Y. 1937). Defalcation may also occur when the director or officer transfers property to himself or herself. Lawrence T. Lasagna, Inc. v. Foster, 609 F.2d 392 (9th Cir. 1979), cert. denied, 446 U.S. 919, 100 S.Ct. 1853, 64 L. Ed. 2d 273 (1980); In re Metz, 6 F.2d 962 (2d Cir. N.Y. 1925).

Also, general partners of a limited partnership and managing partners are often found to be fiduciaries of the partnership. Bennett v. Bennett (In re Bennett), 989 F.2d 779 (5th Cir. 1993), reh'g, en banc, denied, 993 F.2d 1545 (5th Cir. 1993) (managing partner of limited partnership is a fiduciary); In re Short, 818 F.2d 693 (9th Cir. 1987) (managing joint venturer was a fiduciary); Cundy v. Woods (In re Woods), 175 B.R. 78 (Bankr. D. Colo. 1994) (joint venturers and management committee members have fiduciary obligations). The law is less clear on general partners of a general partnership. See LSP Investment v. Bennett, 989 F.2d 779 (5th Cir. Tex. 1993), reh'g, en banc, denied, 993 F.2d 1545 (5th Cir. Tex. 1993) (citing cases finding the general partner is a fiduciary in footnote 6 and citing cases finding that the general partner is not a fiduciary in footnote 7).

I.2.4.3 Embezzlement.

"Embezzlement" is defined as "the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." Chrysler First Commercial Corp. v. Nobel (In re Nobel), 179 B.R. 313 (Bankr. M.D. Fla. 1995); In re Jardula, 122 B.R. 649 (Bankr. E.D.N.Y. 1990) (quoting Moore v. United States, 160 U.S. 268, 16 S.Ct. 294, 40 L. Ed. 422 (1895)). The establish embezzlement the creditor must show: (1) the appropriation of money or property; (2) for the debtor's use or benefit; and (3) done with fraudulent intent. In re Patton, 129 B.R. 113 (Bankr. W.D. Tex. 1991). For embezzlement, the fraudulent intent is established by a showing of dishonesty in fact. In re Black, 787 F.2d 503 (10th Cir. Utah 1986). This section has been applied to a wide variety of property, not just the embezzlement of money. E.g., In re Mastrangelo, 34 B.R. 399 (Bankr. D. Mass. 1983) (diamonds); In re Berkemeier, 51 B.R. 5 (Bankr. S.D. Ind. 1983) (fertilizer). As with fraud, the intent is usually inferred from the debtor's actions and the totality of circumstances. Hall v. Blanton, 149 B.R. 393 (Bankr. E.D. Va. 1992); In re Beasley, 62 B.R. 653 (Bankr. W.D. Mo. 1986); Savonarola v. Beran, 79 B.R. 493 (Bankr. N.D. Fla. 1987); In re Bevilacqua, 53 B.R. 331 (Bankr. S.D.N.Y. 1985).

I.2.4.4 Larceny.

"Larceny" is defined as the wrongful taking of the property of another with fraudulent intent. In re Rose, 934 F.2d 901 (7th Cir. Ill. 1991). The fraudulent intent in larceny is merely the intent to convert the property to one's own use without consent. In re Shinew, 33 B.R. 588 (Bankr. N.D. Ohio 1983). With Larceny, the wrongful conduct is in the initial taking of the property. With embezzlement, the wrongful conduct is after the property comes into the possession of the debtor. In re Weber, 892 F.2d 534 (7th Cir. Wis. 1989).

In this regard, embezzlement and larceny are similar to the South Carolina criminal acts of breach of trust and larceny at common law. Breach of trust is part of the criminal statutes found at S. C. Code Ann. §16-13-230(1997) ("S.C. Code"). Basically, breach of trust is larceny after trust, which includes all of the elements of larceny (stealing), except the unlawful taking in the beginning. See State v. Owings, 205 S.C. 314, 31 S.E.2d 906 (1944). In the case of State v. Jordan, 255 S.C. 86, 177 S.E.2d 464 (1970), the defendant was given money to purchase stock for the victim. The defendant used some of the money to purchase groceries for himself, rather than to purchase the stock. Thus, he breached the trust and was guilty of the crime of breach of trust. Larceny occurs when the possession of the property is obtained through artifice, trick, or other fraud. State v. McCann, 167 S.C. 393, 166 S.E. 411 (1932).

I.2.5. Alimony, Maintenance and Support

Under Section 523(a)(5), to be exempt from discharge, the obligation to pay support must have some legal basis, such as the obligation of one spouse to pay another. Audubon v. Shufeldt, 181 U.S. 575, 21 S.Ct. 735, 45 L. Ed. 1009 (1901) ("on the natural and legal duty of a husband to support the wife" ); Wetmore v. Markoe, 196 U.S. 68, 25 S.Ct. 172, 49 L. Ed. 390 (1904). If there is no legal duty to support, the obligation may be found to be dischargable. Norris v. Norris, 324 F.2d 826 (9th Cir. Cal. 1963) (annuled marriage does not form legal basis for support); In re Doyle, 70 B.R. 106 (Bankr. 9th Cir. 1986) (payments to non-spouse companion may be discharge). The obligation of a parent to support the child is always found to be non-dischargeable. In re Magee, 111 B.R. 359 (M.D. Fla. 1990); Mullally v. Carter, 67 B.R. 535 (N.D. Ill. 1986) (obligation from paternity action); In re Seibert, 914 F.2d 102 (7th Cir. 1990) (paternity can be determined as part of the dischargeability process).

The issue of whether the obligation is nondischargeable support is determined by federal law. Sylvester v. Sylvester, 865 F.2d 1164 (10th Cir. 1989); In re Harrell, 754 F.2d 902 (11th Cir. 1985); In re Calhoun, 715 F.2d 1103 (6th Cir. 1983); In re Williams, 703 F.2d 1055 (8th Cir. 1983); In re Spong, 661 F.2d 6 (2d Cir. N.Y. 1981); In re Long, 794 F.2d 928 (4th Cir. 1986); Shaver v. Shaver, 736 F.2d 1314 (9th Cir. 1984). Even if state law does not provide for alimony and support, some obligation may still be found non-dischargable under this provision. See In re Nunnally, 506 F.2d 1024 (5th Cir. 1975), reh'g denied, 509 F.2d 576 (5th Cir. Tex. 1975), reh'g denied, 509 F.2d 576 (5th Cir. Tex. 1975) (Texas law does not allow alimony or support, nevertheless obligation held to be non-dischargeable under this provision); In re Biggs, 907 F.2d 503 (5th Cir. 1990) (although no alimony allowed, there are alimony substitutes for dischargeability issues).

The Honorable Learned Hand suggested that the courts are to examine the underlying duty that created the obligation and not the written terms of the obligation in determining whether an obligation is for support. In re Adams, 25 F.2d 640 (2d Cir. N.Y. 1928). Since that opinion, the federal courts have generally examined whether there is an underlying obligation to support and whether the i