Recent Bankruptcy Decisions from the Appellate Courts - October 2005

as published in the Norton Bankruptcy Law Advisor

FIRST CIRCUIT

In re Marrama
--- F.3d ----, 2005 WL 2840634 (1st Cir. Oct. 31, 2005)
Holding:  Bankruptcy Court properly denied debtor’s motion to convert case from Chapter 7 to Chapter 13 where debtor had acted in bad faith by concealing assets and transfers in his statements and schedules.  Section 105(a) enables the Court to take necessary actions to prevent abuse, and Section 706(a) does not establish an absolute right to convert.

THIRD CIRCUIT

Century Indemnity Co. v. Congoleum Corp.
--- F.3d ----, 2005 WL 2559715 (3rd Cir. Oct. 13, 2005)
Holding:  Insurers had standing to challenge retention of debtor’s special insurance counsel because the retention of counsel had due process implications regarding the validity of a plan of reorganization that could directly affect the rights of the insurers.  Counsel’s representation of agents of the debtor who were adverse to the debtor and its financial interest precluded absolute loyalty to the debtor in violation of § 327.

FOURTH CIRCUIT

Coleman v. Community Trust Bank, et al.
--- F.3d ----, 2005 WL 2665798 (4th Cir. Oct. 20, 2005)
Holding:   Bankruptcy Court erroneously ruled that deeds of trust would be only partially avoided, to the extent necessary to pay claims and administrative claims of the estate.  Clear language in § 544 requires all-or-nothing avoidance despite "for the benefit of the estate" language in § 550 recovery statute.

FIFTH CIRCUIT

In re Cahill
--- F.3d ----, 2005 WL 2530016 (5th Cir. October 12, 2005)
Holding:  Bankruptcy Court did not abuse its discretion in awarding reduced attorneys fees to debtor’s counsel pursuant to § 330(a)(2).  The Court properly used the lodestar method to calculate reasonable fees and then applied the factors of § 330(a)(3) to adjust downward, considering that the case was a typical Chapter 13 and that counsel spent too much time on the case, duplicated work, and was unprepared for the confirmation hearing.

S.E.C. v. Great White Marine & Recreation, Inc.
--- F.3d ----, 2005 WL 2604454 (5th Cir. Oct. 14, 2005)
Holding:  After District Court abstained from and dismissed involuntary bankruptcy case, there was no bankruptcy estate, and the receiver appointed by the District Court was not bound by the Bankruptcy Code’s provisions regarding the distribution of estate assets.

SIXTH CIRCUIT

In re Cooper
--- F.3d ----, 2005 WL 2648960 (6th Cir. Oct. 18, 2005)
Holding:  Bankruptcy Court properly denied debtor’s motion to convert case from Chapter 7 to Chapter 13 where debtor had acted in bad faith by making false and inconsistent statements in statements and schedules and during trial testimony.  A Chapter 13 petition may be dismissed for lack of good faith, so conversion to Chapter 13 under § 706(a) may be denied for lack of good faith.

Ruskin v. DaimlerChrysler Svcs. N. America, LLC (In re Adkins)
425 F.3d 296 (6th Cir. Oct. 4, 2005)
Holding:  Debtor could not reclassify a secured creditor’s claim from secured to unsecured after confirmation of Chapter 13 plan when the debtor defaulted on plan payments and the creditor repossessed and sold the collateral at a price insufficient to satisfy the existing secured claim.  This extended the Court’s previous holding in In re Nolan, 232 F.3d 528, where the Court held that a debtor could not reclassify the secured creditor’s claim when the debtor voluntarily relinquished collateral.  Even though this case involved involuntary repossession, the Court reached the same result.

SEVENTH CIRCUIT

Ill. Dept. of Rev. v. Hayslett/Judy Oil, Inc.
--- F.3d ----, 2005 WL 2649994 (7th Cir. Oct. 18, 2005)
Holding:  Debtor’s Illinois Motor Fuel Tax liability is a non-dischargeable “trust fund tax” pursuant to § 507(a)(8)(C), and not a potentially dischargeable excise tax pursuant to § 502(a)(8)(E), because the tax is imposed on the consumer and then held in trust by the retailer for the state.

EIGHTH CIRCUIT

Reynolds v. Pennsylvania Higher Education, et al.
425 F.3d 526 (8th Cir. Oct. 10, 2005)
Holding:  Debtor’s multiple student loans were dischargeable, despite her ability to pay some of the loans, because failure to discharge the debts would adversely impact the debtor’s fragile mental health and thus cause her undue hardship pursuant to § 523(a)(8).

NINTH CIRCUIT

In re Pluma
--- F.3d ----, 2005 WL 2840441 (9th Cir. Oct. 31, 2005)
Holding:  Circuit Court affirmed without comment the decision of the Bankruptcy Appellate Panel (“BAP”).  The BAP found it acceptable to reject a similar loan approach and apply a formula rate to determine the interest rate that would be paid under a Chapter 13 Plan to a taxing authority for its claim secured by the debtor’s real property.  The BAP rejected the Bankruptcy Court’s application of the formula rate approach, however.  The Bankruptcy Court had added a risk factor of only 0.01% to the prime rate.  The BAP found that the Bankruptcy Court had not properly evaluated the risk of default given the negative financial attributes of the debtor and remanded the case for a proper determination of the formula rate.

Dwyer v. Duffy
--- F.3d ----, 2005 WL 2559714 (9th Cir. Oct. 13, 2005)
Holding:  Objection filed on Monday after Thanksgiving in the Bankruptcy Court for the Northern District of California was timely filed, despite stated deadline of Friday after Thanksgiving.  The Friday after Thanksgiving is a legal holiday in California bankruptcy courts pursuant to Bankruptcy Rule 9006 because it is a “judicial holiday” pursuant to Section 135 of the California Civil Procedure Code.

TENTH CIRCUIT

Cadwell v. Joelson (In re Joelson)
--- F.3d ----, 2005 WL 2722891 (10th Cir. Oct. 24, 2005)
Holding:  Debtor’s oral false representations were not statements respecting the debtor’s financial condition and, thus, were non-dischargeable under § 523(a)(2)(A).  In order to obtain a loan, the debtor had orally represented that she owned certain property and that she would be able to borrow money from her brother to repay the loan.  The Court held that “statement respecting the debtor’s . . . financial condition” must be strictly limited to statements that present a picture of the debtor’s overall financial health.  The statements at issue here related only to ownership of certain assets or the availability of a certain source for repayment and did not present a picture of the debtor’s overall financial health.

Houlihan Lokey Howard & Zukin Capital v. Unsecured Creditors’ Liquidating Trust (In re Commercial Fin. Svcs., Inc.)
--- F.3d ----, 2005 WL 2746699 (10th Cir. Oct. 25, 2005)
Holding:  Bankruptcy Court properly exercised discretion to find the fee request of a committee financial advisor unreasonable and award reduced compensation under § 330.  Although the advisor typically calculated its fee on a monthly basis, the Bankruptcy Court used an hourly rate to examine the reasonableness of the request. The Circuit Court found this appropriate given the advisor’s failure to present evidence of comparable monthly fees that would allow for a reasonableness determination and given the flexibility in fee determinations granted the Court by § 330.  The Bankruptcy Court also acted appropriately in determining what fees to award the advisor by altering the rates charged by the advisor in other cases when those rates included success fees and by looking to the rates charged by other advisors in the case, even though the advisor argued that these other advisors were of an allegedly inferior class.