Recent Bankruptcy Decisions from the Appellate Courts - May 2006

Publications

Author(s)

Reprinted from the Norton Bankruptcy Law Adviser, with permission of Thomson/West. For more information about this publication please visit www.west.thomson.com.

SUPREME COURT

Marshall  v. Marshall (In re Marshall )
--- S.Ct. ----, 2006 WL 1131904 (U.S. May 1, 2006)
Holding:  Bankruptcy court had jurisdiction over adversary proceeding in which debtor, celebrity Anna Nicole Smith, alleged that her stepson had tortiously interfered with her expected inheritance from her deceased husband.  The Court of Appeals erred in finding applicable the common law probate exception to federal jurisdiction.  Previous statements of the exception have been incoherent, resulting in too broad an application of the exception.  The probate exception preserves state court power to exercise in rem jurisdiction over a res without interference by federal courts.  So, state courts may probate or annul a will and administer a decedent’s estate, and federal courts may not dispose of property that is in the custody of a state probate court.  In this instance, the debtor’s claims were not subject to the probate exception, however, because they did not involve administration of a will or probate of an estate.  Instead, the debtor asserted a widely recognized tort, sought an in personam judgment and did not seek to reach a res in the custody of a state probate court.

FIRST CIRCUIT

DiMaio Family Pizza & Luncheonette, Inc. v. The Charter Oak Fire Ins. Co.
--- F.3d ----, 2006 WL 1461122 (1st Cir. May 30, 2006)
Holding:  Insurance claims of debtors were not "enjoined" or "abated" pursuant to Massachusetts extension of limitation statute as a result of debtors' bankruptcy filing or the appointment of bankruptcy trustees.  First, an automatic stay does not stay claims by the debtor or the trustee.  Second, although the trustees' control over the debtors' estates prevented them from pursuing claims belonging to the estate, the claims themselves could have been asserted by the trustee.

FOURTH CIRCUIT

In re Duncan
--- F.3d ----, 2006 WL 1411755 (4th Cir. May 24, 2006)
Holding:  Both debtor and creditor invoked collateral estoppel to support their respective positions regarding the dischargeability of a Virginia state court wrongful death judgment against the debtor.  The Fourth Circuit held that neither the state court’s wrongful death finding of fact nor the award of punitive damages was based on the same legal standard of "willful and malicious injury" required by § 523(a)(6), because it did not require a finding that the defendant intended to injure the deceased, and thus collateral estoppel did not apply in either party's favor.

FIFTH CIRCUIT

Egleston v. Egleston (In re Egleston)
--- F.3d ----, 2006 WL 1195995 (5th Cir. May 5, 2006)
Holding:  State court’s post-petition order was void under § 524(a)(1) to the extent it was a determination of debtor’s liability for discharged debt.  State court had entered marital settlement agreement between debtor and wife pre-petition, and wife obtained stay relief to enforce certain alimony payments required by the agreement.  State court then entered several orders finding debtor in contempt for failure to pay various amounts.  These orders were partially void under § 524(a)(1) to the extent they determined the debtor’s liability for discharged debt.  State court order requiring debtor to reimburse wife for expenses incurred traveling from Pennsylvania to Louisiana to defend in bankruptcy court the property settlement agreement was not void under § 524(a)(1) because the claim arose post-petition and was not subject to the discharge injunction under § 524(a)(1).

SIXTH CIRCUIT

In re Eagle-Picher Industries, Inc.
447 F.3d 461 (6th Cir. May 05, 2006)
Holding:  Post-petition patent infringement and contract claims against debtor were not discharged by confirmation of plan of reorganization, as they arose from debtor's ordinary course of business, and the terms of the confirmed plan provided that "liabilities incurred in the course of business" would be paid by the reorganized debtor.

SEVENTH CIRCUIT

Peeler v. MCI, Inc.
--- F.3d ----, 2006 WL 1215195 (7th Cir. May 8, 2006)
Holding:  Pre-petition claim for compensation for debtor’s installation and use of telecommunications equipment on claimant’s property was discharged.  Claims arising from post-petition trespasses to repair the equipment could still be adjudicated. 

United Air Lines, Inc. v. U.S. Bank Nat’l Ass’n, Inc. (In re United Air Lines, Inc.)
--- F.3d ----, 2006 WL 1171899 (7th Cir. May 4, 2006)
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.

EIGHTH CIRCUIT

U.S.  v. Goldman
--- F.3d ----, 2006 WL 1359655 (8th Cir. May 19, 2006)
Holding:  Attorney who submitted false and misleading testimony to bankruptcy court in context of client representation impeded bankruptcy proceedings in violation of 18 U.S.C. § 1509 and was subject to sentencing enhancement by his virtue of having abused a position of public trust.

In re Bridge Information Systems, Inc.
--- F.3d ----, 2006 WL 1348556 (8th Cir. May 18, 2006)
Holding:  Preference defendant did not offer evidence sufficient to prove subjective and objective  elements of ordinary course of business defense pursuant to pre-BAPCPA § 542(C)(2)(B) and -(C).  Testimony regarding the defendant’s dealings in the industry did not constitute evidence of the ordinary business terms of the industry as a whole.

Stallings v. Hussmann Corp.
--- F.3d ----, 2006 WL 1300593 (8th Cir. May 12, 2006)
Holding:  District Court abused discretion in applying judicial estoppel to bar debtor's Family Medical Leave Act claim against employer.  First, even though the debtor's failure to list the claim in his Chapter 13 bankruptcy schedules was inconsistent with his later assertion of the claim, there was no judicial acceptance of that position, because the bankruptcy case was dismissed and no discharge occurred.   Second, the debtor did not knowingly omit the claim from the schedules, because the claim had not yet accrued when he filed his bankruptcy petition, and during the bankruptcy case he was ruled against by the U.S. Department of Labor.

Colsen v. United States  (In re Colsen)
446 F.3d 836 (8th Cir. May 4, 2006)
Holding:  Tax forms filed after IRS had prepared substitutes for missing returns, issued notices of deficiency and assessed taxes, interest and penalties constituted “returns,” so debt to the IRS was dischargeable.  One requirement of a “return” is that a document evince an honest and genuine endeavor to satisfy the law.  This determination must be made form the face of the document, not from the circumstances under which the document was filed.  The debtor’s 1040 forms contained data that allowed the IRS to calculate the debtor’s tax obligation more accurately than the IRS’s substitutes had, resulting in abatement of thousands of dollars of tax and interest, so they constituted “returns.”

In re Ladd
--- F.3d ----, 2006 WL 1192953 (8th Cir. May 5, 2006)
Holding:  Res judicata did not prohibit debtors from amending their schedules to claim state exemptions after their claimed federal exemptions were denied.  The federal exemptions were denied by default when the Trustee objected and the debtor did not respond.  When the debtors sought to amend their schedules to claim state exemptions, the Trustee objected asserting that res judicata precluded the amendment.  The Court found that res judicata did not apply because of the significant differences between the homestead exemption under federal and state law.  Under federal law, the question is whether the debtors’ interest in the homestead is worth more than $34,850, but under Minnesota law the question is whether the homestead interest exceeds 160 acres or $500,000.  There was no serious question that the debtors qualified for the state exemption.