Recent Bankruptcy Decisions from the Appellate Courts - July 2005
as published in the Norton Bankruptcy Law Advisor
THIRD CIRCUIT
Sovereign Bank v. Schwab (In re Kirby)
--- F.3d ----, 2005 WL 1579503 (3d Cir. July 6, 2005)
Holding: Rent was not property of the estate where creditor had foreclosed on and took title to the rental properties and notified tenants that it would begin directly collecting rent pre-petition. The fact that a state court had appointed the creditor as receiver of the properties as part of the foreclosure did not change the analysis because § 543 requires only the turn over of property that belongs to the debtor, and here the rents belonged to the creditor.
FOURTH CIRCUIT
Logan v. JKV Real Estate Servs. (In re Bogdan)
--- F.3d ----, 2005 WL 1561512 (4th Cir. July 6, 2005)
Holding: Bankruptcy trustee, as assignee of creditors victimized by debtor's fraudulent scheme, has standing to sue debtor's co-conspirators for the benefit of the estate. Court rejected the co-conspirator' in pari delicto defense because the trustee stood in the shoes of the victimized creditors, not the wrongdoing debtor, and there is very little likelihood of a surplus case where the proceeds of the trustee's suit against the co-conspirators would be distributed to the debtor.
FIFTH CIRCUIT
In re Ramba, Inc.
--- F.3d ----, 2005 WL 1581076 (5th Cir. July 7, 2005)
Holding: Debtor in involuntary bankruptcy case paid amounts owed petitioning creditors in order to obtain an agreed dismissal of the case and, thus, move forward with sale of certain assets. Two months later, debtor filed a voluntary Chapter 7. The Court held that the payment to a petitioning creditor in the involuntary case was an avoidable preference. Creditor raised the new value defense arguing that the payment resulted in the debtor obtaining dismissal of the involuntary case and the ability to sell assets. The payment was "on account of an antecedent debt" under § 547(b)(2) even though it served additional purposes. Additionally, the sale of assets that resulted from the payment was a secondary or tertiary effect of the immediate benefit - dismissal of the involuntary case - conferred by the creditor on account of the transfer. Such an effect cannot be considered in analyzing the new value defense. Since dismissal of the involuntary case is not a recognized category of new value under § 547(a)(2), the Court rejected the defense.]
SIXTH CIRCUIT
In re American HomePatient, Inc.
--- F.3d ----, 2005 WL 1620380 (6th Cir. Jul 11, 2005)
Holding: Damages for breach of executory stock purchase contract were properly calculated as of the bankruptcy petition date pursuant to §§ 365(g)(1) and 502(g). Plain language of § 502(g) that the claim be "determined" as if it had arisen pre-petition defeated creditor's argument that claim could arise pre-petition but be calculated post-petition.
Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors (In re Made in Detroit, Inc.)
--- F.3d ----, 2005 WL 1579704 (6th Cir. July 1, 2005)
Holding: Debtor's appeal of confirmation of creditor's liquidating plan was moot because stay pending appeal was denied and debtor's property was sold to a good faith purchaser. A finding that a purchaser did not take in good faith requires proof of the purchaser's fraud or collusion or an attempt by the purchaser to take grossly unfair advantage of other bidders, and no such proof existed in this case.
SEVENTH CIRCUIT
United Airlines, Inc. v. HSBC Bank USA, N.A. (In re United Airlines, Inc.)
--- F.3d ----, 2005 WL 1743787 (7th Cir. July 26, 2005)
Holding: The functional aspects of an agreement determine whether it is a "lease" under § 365 or a secured loan subject to being stripped down. To the extent monthly payments cover another month's use of a productive asset, the agreement is a lease, but to the extent monthly payments represent the cost of funds for capital assets or past operations, the agreement is not a lease. The agreement in this case was not a lease under § 365 because: (1) the debtor's "rent" was not measured by the market value of the subject property but by the amount the debtor had borrowed, (2) the debtor owed the rent even if it lost possession or use of the property, (3) the repayment schedule includes a balloon payment, which is a common feature of secured credit but not leases, (4) at the end of the "lease" the creditor's interest in the property would terminate and the debtor would receive its full interest in the property without additional payment, and (5) if the debtor prepays, the creditor's interest in the property would terminate and the debtor would receive its full interest in the property.
Belda v. Marshall (In re Belda)
--- F.3d ----, 2005 WL 1743791 (7th Cir. July 26, 2005)
Holding: An appeal to determine the validity of a Chapter 13 plan was held moot. While the appeal to the Circuit Court was pending, the Bankruptcy Court dismissed the case because the debtor was in substantial default on his required payments and there was no replacement plan before the Bankruptcy Court.
EIGHTH CIRCUIT
Clauss v. Church (In re Church)
--- F.3d ----, 2005 WL 1719838 (8th Cir. July 26, 2005)
Holding: Debtor's pre-petition attorney seeking to have fee owed for legal services held non-dischargeable under § 523(a)(2)(A) failed to show that his reliance on the debtor's false statements was justifiable. Debtor had promised not to request discharge of the debt, and the attorney claimed that he provided services based on this promise. In light of the attorney's knowledge and expertise, the attorney failed to prove that he could justifiably rely on this promise. Moreover, the attorney failed to prove that he provided any of his services after the promise.
NINTH CIRCUIT
In re AB Liquidating Corp.
--- F.3d ---, 2005 WL 1668683 (9th Cir. July 19, 2005)
Holding: Debtor's $1 million security deposit was applied to the landlord's $2 million claim as capped by § 502(b)(6), and not to the landlord's $5 million gross breach of lease claim. The Ninth Circuit rejected the landlord's argument that this result, dictated by the Second Circuit in Oldden, contravenes the plain language of § 502. Section 502 is ambiguous as to the application of security deposits, and Congress explicitly embraced Oldden in the legislative history.
Pilate v. Burrell (In re Burrell)
--- F.3d ---, 2005 WL 1606483 (9th Cir. July 11, 2005)
Holding: A creditor's appeal of a dischargeability judgment became moot when the bankruptcy trustee obtained a separate determination of the debt's nondischargeability on other grounds.
TENTH CIRCUIT
Lang v. Lang (In re Lang)
--- F.3d ----, 2005 WL 1595691 (10th Cir. July 8, 2005)
Holding: Bankruptcy Court properly determined that the failure to comply with the deadline for the filing of a notice of appeal due to the press of other business was not excusable neglect and, thus, properly denied Rule 8002(c) motion for extension of time.
