Recent Bankruptcy Decisions from the Appellate Courts - January 2006

FEATURED CASES

Central Virginia Community College v. Katz
---S.Ct. ----, 2006 WL 151985 (S. Ct. Jan. 23, 2006)
Holding:  The Bankruptcy Clause of the U.S. Constitution contemplates limited subordination of state sovereign immunity in the context of bankruptcy, notwithstanding contrary dicta in Seminole Tribe.  Because preference recovery is a historically core aspect of the administration of bankruptcy estates, state sovereign immunity is not a defense to a preference action pursuant to §§ 547 and 550(a), regardless of whether a preference claim is an action ancillary to a bankruptcy court’s in rem jurisdiction.  (Thomas, Roberts, Scalia, and Kennedy, dissenting)

ACandS, Inc. v. Travelers Casualty and Surety Co.
--- F.3d ----, 2006 WL 133546 (3rd Cir. Jan 19, 2006)
Holding: Arbitration award which diminished the estate of the debtor violated the automatic stay pursuant to § 362 and was thus void ab initio.  Arbitration initiated by the debtor against its insuror should have been suspended by the arbitration panel when the insuror raised defenses that would effectively terminate the debtor's insurance coverage and thus threaten the assets of the estate. (Alito, J.)

SECOND CIRCUIT

MBNA America Bank, N.A. v. Hill
--- F.3d ----, 2006 WL 172213 (2d Cir. Jan. 25, 2006)
Holding:  Bankruptcy Court did not have discretion to deny the contractually required arbitration of the debtor's class action claim against her credit card company for willful violation of the automatic stay pursuant to § 362(a).  Despite being a "core" bankruptcy proceeding, the objectives of the Bankruptcy Code would not be threatened by arbitration because (1) the debtor's estate had been fully administered and her debts discharged; (2) the class action aspect nullified the direct relationship to her bankruptcy case; and (3) the automatic stay was not so similar to a court injunction that only the Bankruptcy Court could enforce it.

THIRD CIRCUIT

Stoe v. Flaherty
--- F.3d ----, 2006 WL 156985 (3rd Cir. Jan. 23, 2006)
Holding:  District Court erred in its determination that 28 U.S.C. § 1334(c)(2) does not apply to removed cases.  District Court further erred in ruling that a back wages case against a bankrupt debtor but based solely on Pennsylvania's Wage Payment and Collection Law "arises under" or "arises in" a bankruptcy case, even where the defenses are related to federal bankruptcy law, because it was not the type of claim that could only be entertained in bankruptcy.

In re NutraQuest, Inc.
--- F.3d ----, 2006 WL 147499 (3rd Cir. Jan 20, 2006)
Holding:  When considering a proposed settlement pursuant to Bankruptcy Rule 9019(a), factors for a court to consider are the same for claims against the debtor as for claims by the debtor: "(1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors."

In re A & P Diversified Technologies Realty, Inc.
--- F.3d ----, 2006 WL 133492 (3rd Cir. Jan 19, 2006)
Holding:  Section 506(b) does not entitle creditor to attorneys fees, where contractual attorneys fees provision was merged into creditor's judgment against debtor, and neither state law nor judgment provided for award of fees.

Cohen v. KB Mezzanine Fund II, LP (In re Submicron Sys. Corp.)
--- F.3d ----, 2006 WL 27476 (3d Cir. Jan. 6, 2006)
Holding:  At a § 363 sale, § 363(k) allows a secured creditor to credit bid up to the full face value of its claim, even when the collateral securing the claim has no economic value.

Mintze v. American Gen. Fin. Svcs., Inc. (In re Mintze)
--- F.3d ----, 2006 WL 45844 (3d Cir. Jan. 10, 2006)
Holding:  Bankruptcy Court erred in denying creditor's motion to compel arbitration of debtor's adversary proceeding seeking to rescind loan agreement containing arbitration provision.  The adversary proceeding did not raise a statutory claim under the Bankruptcy Code, so no inherent conflict existed between arbitration of the debtor's claims and the underlying purposes of the Bankruptcy Code.

FOURTH CIRCUIT

Jacksonville Airport, Inc. v. Michkeldel, Inc.
--- F.3d ----, 2006 WL 133550 (4th Cir. Jan 19, 2006)
Holding:   Creditor was properly excluded from voting on Chapter 11 Plan, where the creditor successfully litigated a state court claim against the debtor but failed to respond to the debtor's motion to disallow the claim.    

FIFTH CIRCUIT

In the Matter of Burgess
--- F.3d ----, 2006 WL 205043 (5th Cir. Jan. 27, 2006)
Holding:  Crop disaster relief payment to debtor, which was the result of a law enacted after the debtor filed bankruptcy, was not part of debtor's estate pursuant to § 541, even though it was payable for crop damages that occurred pre-petition, because property of the estate is determined at the commencement of the case, and the debtor had no legal right to receive the payment until the law was enacted. 

In the Matter of Ramba, Inc.  
--- F.3d ----, 2006 WL 158674 (5th Cir. Jan. 23, 2006)  
Holding:   Because debtor had no equity in fully secured collateral, debtor's sale of the collateral two months prior to filing bankruptcy did not constitute a preferential transfer of "an interest of the debtor in property" pursuant to § 547(b).  A separate payment, which was a transfer of an interest of the debtor in property, was not in the ordinary course of business pursuant to § 547(c)(2), because the invoices paid were more than 180 days old in the context of an industry standard of 120 days, which was a significant difference.

SEVENTH CIRCUIT

In re Kmart Corp.  
--- F.3d ----, 2006 WL 12985 (7th Cir. Jan. 4, 2006)  
Holding:  Debtor was not in breach of obligations under pre-petition contract, so contract could be assumed under § 365.  Even though non-debtor party to contract purported to terminate contract after debtor allegedly breached post-assumption, resulting in state court litigation, federal jurisdiction existed to determine whether a breach existed pre-assumption and whether the contract had been assumed properly.

EIGHTH CIRCUIT

In re Phillips 
--- F.3d ----, 2006 WL 38939 (8th Cir. Jan. 9, 2006) 
Holding:   Bankruptcy Court properly sanctioned debtor's attorney pursuant to Rule 9011 for failing to obtain debtor's authorization before filing Chapter 13 petition, but money sanctions and criminal reference to U.S. Attorney's office were abuse of discretion in light of attorney's good intentions and immediate offer to rectify situation.

U.S. v. Gurley
--- F.3d ----, 2006 WL 141658 (8th Cir. Jan 20 2006) 
Holding: After debtor objected to a creditor's proof of claim and moved to withdraw the reference and litigate in District Court pursuant to 28 U.S.C. § 157(d), District Court retained jurisdiction to issue summary judgment against debtor on claim objection pursuant to 28 U.S.C. § 1334(b), despite creditor's never having filed complaint or having served debtor.

NINTH CIRCUIT

In re DeRoche
--- F.3d ----, 2006 WL 91470 (9th Cir. Jan. 17, 2006) 
Holding:  Arizona statute awarding attorneys fees to successful defendant in litigation brought by state government entity did not entitle debtor to attorneys fees after successfully defending discharge litigation against Arizona Industrial Commission pursuant to § 507(a)(8)(E).  State law did not govern the discharge proceedings, and the federal bankruptcy rule is that each party bears its own attorneys fees.

City & County of San Francisco v. PG & E Corp.
--- F.3d ----, 2006 WL 44315 (9th Cir. Jan. 10, 2006) 
Holding:   Government action that included restitution claim to recover for debtor funds transferred to parent corporation in violation of California Business and Professions Code could not be removed to Bankruptcy Court from state court.  The exception to removal for government police or regulatory actions under 28 U.S.C. § 1452(a) is interpreted consistently with the automatic stay exception for government police or regulatory actions under § 362(b)(4).  The pecuniary purpose test was satisfied because, even though the claim was for restitution, the primary purpose of the claim was not to protect the government's pecuniary interest because funds recovered would flow to the debtor, not the government.  The public policy test was also satisfied because the restitution claim was part of a law enforcement action that sought to effectuate public policy, not adjudicate private rights.

TENTH CIRCUIT

Bryant v. JCOR Mech., Inc. (In re Electron Corp.)
--- F.3d ----, 2006 WL 45843 (10th Cir. Jan. 10, 2006) 
Holding:  Payment to builder could not be avoided as a preference.  Builder's state law materialman's lien fixed when the builder provided goods and services, but was not perfected because the builder accepted the alleged preferential payment.  Assuming the transfer had not been made, as required by § 547(b)(5)(B), the lien would have been perfected, so the payment did not allow the builder to receive more than it would have in a case under Chapter 7.

ELEVENTH CIRCUIT

Official Committee of Unsecured Creditors of PSA, Inc., v. Edwards
--- F.3d ----, 2006 WL 212219 (11th Cir. Jan. 30, 2006) 
Holding:  Trustee bringing RICO claim on behalf of debtor's estate was subject to in pari delicto defense based on debtor's wrongdoing pursuant to the plain meaning of § 541(a), which gives a bankruptcy trustee no greater rights or interests than the rights and interests of the debtor.

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