Recent Bankruptcy Decisions from the Appellate Courts - December 2005

FIRST CIRCUIT

In re Rivera Torres
--- F.3d ----, 2005 WL 3451538 (1st Cir. Dec. 16, 2005)
Holding:   First Circuit reversed the Bankruptcy Court’s order granting debtors damages for emotional distress from the IRS’ violation of the automatic stay pursuant to § 105 and § 524, on two separate statutory interpretation grounds.  First, when Congress amended § 106(a)(3) to subject a sovereign waiving its immunity to an “order, process, or judgment” of the Bankruptcy Court, Congress did not “definitely and unequivocally” include the remedy of emotional distress damages, because they were not available as relief under § 105 and § 524 at the time.  Second, the legislative history shows that when Congress subjected an immunity-waiving sovereign to “an order or judgment awarding a money recovery” in § 106(a)(3), it did not “definitely and unequivocally” include emotional distress damages, because Congress was abrogating cases that involved more traditional money damages.

SECOND CIRCUIT

Whelton v. Educational Credit Management Corporation
--- F.3d ----, 2005 WL 3436663 (2nd Cir. Dec. 15, 2005)
Holding:   The Second Circuit held that student loan liability survived a Chapter 13 plan purporting to discharge the debt because the creditor had not been given notice via service of an adversary proceeding.  The Court joined the growing consensus  among the circuits that a mere declaration of discharge of student loan debt in a Chapter 13 plan, without service and prosecution of an adversary proceeding complaint to determine dischargeability, is void as a violation of § 523(8) and Bankruptcy Rules 7001(6), 7003, and 7004.

THIRD CIRCUIT

In re Armstrong World Industries
--- F.3d ----, 2005 WL 3544810 (3d Cir. Dec. 29, 2005)
Holding:  Transfer of junior creditor class’s warrants to debtor’s equity interest holders, over the objection of the impaired and more senior class of unsecured creditors, violated the absolute priority rule pursuant to § 1129(b)(2)(B), despite the fact that the unsecured creditors were not an intervening or intermediate class between the transferors and transferees.

FOURTH CIRCUIT

In re Frushour
--- F.3d ----, 2005 WL 3557398 (4th Cir. Dec. 30, 2005)
Holding:   Fourth Circuit adopted the three-part Brunner undue hardship test for discharge of student loans in Chapter 7 cases pursuant to § 523(a)(8).  Debtor failed to prove second and third Brunner factors - that circumstances would prevent her from payment long-term, and that she attempted to repay the loans in good faith - because she was capable of earning higher wages, and because she chose not to participate in a consolidation program that would have reduced her monthly payments.

Collier v. United States (In re Charco, Inc.)
--- F.3d ----, 2005 WL 3372719 (4th Cir. Dec. 13, 2005)
Holding:  If state law requires filing of a judgment in order for it to have priority over any one class of creditors, then Treasury Department regulations governing the priority of IRS tax liens require filing of the judgment for it to have priority over an IRS tax lien.  State law in this case required filing for the judgment to have priority over a certain class of creditors.  The plaintiff had obtained a judgment against the debtor but filed it after the IRS filed its tax lien.  Accordingly, the IRS lien was entitled to priority.

FIFTH CIRCUIT

In re Belsome
--- F.3d ----, 2005 WL 3540133 (5th Cir. Dec. 28, 2005)
Holding:   Louisiana state law exemption for tools did not apply to the debtor’s school bus, which was subject to Louisiana’s more specific motor vehicles exemption.

In re Quinlivan
--- F.3d ----, 2005 WL 3469702 (5th Cir. Dec. 20, 2005)
Holding:   Bankruptcy Court’s discharge exception ruling pursuant to § 523 was premature, where relevant misrepresentations were made by purported agent of debtor, and ruling lacked analysis of state law of agency.

Barron v. Countryman
--- F.3d ----, 2005 WL 3302449 (5th Cir. Dec. 7, 2005)
Holding:  Bankruptcy Court erred in disgorging pre-petition fees paid to debtors' counsel in 167 cases.  The payments were advance payment retainers in which the debtors had no interest after they were paid to counsel.  Since the fees were not paid from the debtors' estates, approval under § 330 was not required.  Bankruptcy Court did not err in disgorging post-petition fees, however.  Debtors' counsel had received the post-petition payments from his clients without Court approval.

In re West Delta Oil Co.
--- F.3d ----, 2005 WL 3220291 (5th Cir. Dec. 1, 2005)
Holding:  Bankruptcy Court abused its discretion in awarding fees to debtor's counsel who held interest adverse to the estate.  Counsel actively pursued investments in a company attempting to purchase debtor's assets.  Although counsel reached no firm agreement with the company and the plan to sell assets to the company was ultimately withdrawn, payment of any compensation to counsel would violate § 327(e).  Counsel was, in essence, representing both seller (i.e. the debtor) and buyer (i.e. himself).  This gave counsel a predisposition to reduce the price of the estate's assets to the detriment of the estate, creditors and equity stakeholders.  This interest was adverse, should have been disclosed under Rule 2014(a) and requires denial of compensation.

SEVENTH CIRCUIT

In re Payne
--- F.3d ----, 2005 WL 3406462 (7th Cir. Dec. 14, 2005)
Holding:  A filing submitted to the IRS that does not evince an honest and genuine endeavor to satisfy the law does not constitute a "return," and § 523(a)(1)(B)(i) prohibits discharge of the tax liability of a debtor submitting such a filing.  The Seventh Circuit held that the debtor's filing was not a "return" because it was filed more than five years after it was due and only after the IRS had already calculated the debtor's tax obligation and initiated collection efforts.  Moreover, the debtor did not pay the amount of tax calculated on the return.  Accordingly, the debtor had not made a reasonable effort to satisfy the law and was not entitled to discharge of his tax liability.

In re Sidebottom
--- F.3d ----, 2005 WL 3336536 (7th Cir. Dec. 9, 2005)
Holding:  Debtor was prohibited from filing a Chapter 13 petition while his Chapter 7 case was still pending.  The two cases covered the same debts, and there is general agreement that a debtor may not maintain two or more concurrent actions with respect to the same debts. 

In re Resource Technology Corp.
--- F.3d ----, 2005 WL 3336525 (7th Cir. Dec. 9, 2005)
Holding:  Debtor's contractual rights could not be transferred to creditors whose claims were secured by the contract, which contained an anti-assignment clause.  The creditors argued that the contract could be abandoned to them under § 554, but the Court found that there was no property interest to abandon because the debtor never performed its obligations under the contract, and any rights under the contract were conditioned on debtor performing its obligations. 

EIGHTH CIRCUIT

In re Marlar
--- F.3d ----, 2005 WL 3488457 (8th Cir. Dec. 22, 2005)
Holding:   Debtor’s status as a farmer, against whom an involuntary case cannot be filed pursuant to § 303(a), was not a jurisdictional issue but constituted an affirmative defense which debtor waived by participating in his bankruptcy case for five years.

NINTH CIRCUIT

Miles v. Okun (In re Miles)
--- F.3d ----, 2005 WL 3358843 (9th Cir. Dec. 12, 2005)
Holding:  Section 303(i) completely preempts state law tort causes of action for damages predicated on the wrongful filing of an involuntary bankruptcy petition.  The Bankruptcy Court, thus, appropriately denied plaintiffs' motion to remand the action to state court.  The Bankruptcy Court also appropriately concluded that plaintiffs lacked standing to recover damages because they were relatives of the debtors rather than the debtors themselves.  Recovery under § 303(i) is limited to the debtor against whom an involuntary petition is filed.

In re Salazar
--- F.3d ----, 2005 WL 3299827 (9th Cir. Dec. 5, 2005)
Holding:  A "deposit" under § 507(a)(6) includes payment in full.  The creditors had pre-paid in full for the debtor to install a residential swimming pool.  When the petition was filed, the debtor was half-way through the project.  The Court held that a portion of the payment was entitled to priority under § 507(a)(6) as a deposit because the plain and ordinary meaning of "deposit" included payment in full. 

TENTH CIRCUIT

In re Kunz
--- F.3d ----, 2005 WL 3418291 (10th Cir. Dec. 14, 2005)
Holding:   Issue of fact existed as to whether a bank was a “director” and therefore an “insider” of debtor pursuant to § 101(31), where debtor was a “director emeritus” of the bank.  The fact that the debtor’s title included the word “director” was nondispositive, because the term “director” in § 101(31) requires a degree of control that the Bankruptcy Court would have to determine by a weighing of facts.