Recent Bankruptcy Decisions from the Appellate Courts - July 2006



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


Jamaica Shipping Co. Ltd. v. Orient Shipping Rotterdam  B.V. (In re Millenium Seacarriers, Inc.)
--- F.3d ----, 2006 WL 2068180 (2d Cir. July 21, 2006)
Holding:  Bankruptcy court did not abuse its discretion when it assumed jurisdiction over an adversary proceeding seeking enforcement of the court’s sale order or when it retained jurisdiction over the adversary proceeding after dismissing the bankruptcy case.  The adversary proceeding was a core proceeding because it amounted to a request that the bankruptcy court enforce an order approving the sale of property.  When the bankruptcy court dismissed the bankruptcy case and was faced with whether to retain jurisdiction over the adversary proceeding, it was required to consider four factors – judicial economy, convenience to the parties, fairness and comity – but was not required to enter explicit findings on those factors.  The bankruptcy court did not abuse its discretion in retaining jurisdiction because judicial economy and convenience to the parties were both served by the court’s interpretation of its own sale order due to the court’s familiarity with the facts. 


In re Udell
--- F.3d ----, 2006 WL 1881442 (3rd Cir. July 10, 2006)
Holding:  Five-year ban prohibiting discharge of Air Force Academy educational debt pursuant to 10 U.S.C. § 2005(d) does not conflict with the “undue hardship” discharge requirement of § 523(a)(8) of the Bankruptcy Code.  Debtor, who had left the Air Force Academy without fulfilling his military service requirement, was obligated to pay for the educational debt and was not entitled to a discharge without a showing of undue hardship, even though more than five years had passed since his dismissal from the Academy.

In re Kaiser Aluminum Corp.
--- F.3d ----, 2006 WL 2061337 (3d Cir. July 26, 2006)
Holding:  When a Chapter 11 debtor seeks to terminate multiple ERISA pension plans simultaneously, the court must determine the collective impact of the plans on the debtor’s ability to continue in business.  Under ERISA, a Chapter 11 debtor may terminate a pension plan if the debtor will be unable to continue in business and pay all its debts pursuant to its bankruptcy plan absent termination of the pension plan.  The Pension Benefit Guaranty Corporation had argued that each plan the debtor sought to terminate must be analyzed individually.  Although the text of ERISA provides no guidance, the court determined that a plan-by-plan analysis could produce absurd or inequitable results in that beneficiaries of terminated plans would likely receive substantially smaller pensions than beneficiaries of plans that remained active.


In re Cortez
--- F.3d ----, 2006 WL 2023117
Holding:  Bankruptcy court should consider post-petition events in evaluating a motion to dismiss under § 707(b) for substantial abuse.  Debtor was unemployed when he filed but was hired to a new job four days later.  The income derived from the new job would likely give the debtor the money to repay a substantial portion of his debts through a Chapter 13 plan.  A debtor’s ability to repay his debts out of future income is a primary factor in determining whether to dismiss for substantial abuse.  Under § 707(b), the “granting of relief” refers to a discharge, not the relief associates with the commencement of the case under § 301, so the court should consider post-petition changes in the debtor’s income.

In re EnRe LP
--- F.3d ----, 2006 WL 2054050 (5th Cir. July 25, 2006)
Holding:  Holder of allowed secured claim arising from a statutory lien, rather than a consensual security agreement, may not recover attorney’s fees and costs under pre-BAPCPA § 506(b).  Creditors performed work on debtor’s oil and gas wells.  Contracts between the debtor and the creditors provided that debtor would pay attorney’s fees and costs in the event of litigation to collect amounts owed under the contracts.  The contracts did not grant a security interest, however.  Instead, the creditors claimed security interests under statutory mineral liens.  The relevant state statutes also provided that claimants recovering under statutory mineral liens may recover attorney’s fees and costs.  Nonetheless, the Court denied attorney’s fees and costs because the secured claim was based on a lien arising out of state law, not out of the parties’ agreement, and § 506(b), pre-BAPCPA, provides for attorney’s fees and costs only when they are “provided for under the agreement.” 


In re Lowenbraun
453 F.3d 314 (6th Cir. July 6, 2006)
Holding:  Libel claim against counsel for Chapter 7 Trustee for allegations of fraudulent transfer was “core” proceeding and not subject to mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2), because counsel’s actions were in furtherance of the administration of the estate, and the fraudulent transfer claim was made in course of the bankruptcy case.

In re Dow Corning Corp.
--- F.3d ----, 2006 WL 2061802 (6th Cir. July 26, 2006)
Holding:  Unsecured creditors may recover post-petition interest at the default rate contained in their contracts with a solvent debtor and may recover attorney’s fees and expenses if provided for in their contracts.  The debtor’s plan was not fair and equitable under § 1129(b)(1) because it violated the absolute priority rule by allowing shareholders to retain millions of dollars while denying unsecured creditors contractual interest at the default rate.  Absent compelling equitable considerations, when a debtor is solvent, the bankruptcy court must enforce the creditors’ contractual rights, and the bankruptcy court abused its discretion by limiting unsecured creditors’ recovery of interest to the non-default rate and denying recovery of attorney’s fees and expenses.


Cannon-Stokes v. Potter
453 F.3d 446 (7th Cir. July 5, 2006)
Holding:  Judicial estoppel barred debtor’s employment discrimination claim, where debtor had omitted the pre-petition cause of action from her bankruptcy schedules.  Because the debtor had signed her petition, her explanation that the omission was due to faulty advice from her bankruptcy attorney was irrelevant.

In re McKinney
--- F.3d ----, 2006 WL 2051319
Holding:  BAPCPA provision allowing direct appeal from bankruptcy court to court of appeals if both courts agree to allow the appeal does not apply to cases pending before the effective date of the provision.

In re United Air Lines, Inc.
453 F.3d 463 (7th Cir. July 6, 2006)
Holding:  Because bond-related obligations in UAL’s ground lease at the Denver International Airport could not be severed from the ground lease pursuant to Colorado law, and because UAL conceded that its ground lease constituted a “true lease” and not a disguised secured transaction, the entire agreement including the bond-related obligations had to be treated as a lease pursuant to § 365.

McCready v. eBay, Inc.
--- F.3d ----, 2006 WL 1881142 (7th Cir. July 10, 2006)
Holding:  Debtor/Plaintiff failed to state a claim for rescission pursuant to § 521 and § 524, because the debtor’s allegation that his reaffirmation agreement was invalid did not allege a injury or request a remedy.

In re Thomas Consolidated Industries, Inc.
--- F.3d ----, 2006 WL 2100517 (7th Cir. July 31, 2006)
Holding:  Trustee’s failure to respond to discovery requests, his conclusory answers to interrogatories, and his lie to the court about his responses warranted dismissal of the trustee’s adversary proceeding complaint pursuant to Bankruptcy Rule 7037.  While the sanction of dismissal is usually preceded by a warning, it was sufficient under these circumstances for the bankruptcy court to have warned the trustee that he might “never get to a trial.”


In re Miller
--- F.3d ----, 2006 WL 2034436 (8th Cir. July 21, 2006)
Holding:  At post-petition foreclosure sale of real property initiated by homeowner’s association, purchaser without relief from stay or notice of bankruptcy may be protected by § 549(c).  That exception to the automatic stay protects those who buy real property for its “present fair equivalent value,” which is a more exacting standard that “reasonably equivalent value.”  Although the price a third-party purchaser pays at a pre-petition mortgage foreclosure sale is considered the per se “reasonably equivalent value” under § 548, under § 549(c) the court must analyze the value of the property, the interest purchased and the amount of and extent of remaining liens to determine whether a purchaser at a post-petition foreclosure sale paid the “present fair equivalent value.”


In re Chauncey
--- F.3d ----, 2006 WL 1868312 (11th Cir. July 7, 2006)
Holding:  Eleventh Circuit upheld denial of discharge to debtor pursuant to § 727(a)(2)(A) and § 727(a)(3), where debtor could not account for her missing financial records and funnelled personal injury settlement proceeds into her Florida home to shield them from and defraud her creditors.

Eastman Kodak Co. v. Atlanta Retail, Inc. (In re Atlanta Retail, Inc.)
--- F.3d ----, 2006 WL 1982782 (11th Cir. July 18, 2006)
Holding:  Failure to raise state law claims in a Chapter 11 case does not bar creditor from bringing claims against co-creditor in a subsequent state court action.  Pre-petition, Kodak agreed to subordinate its loans to those of other lenders.  The debtor, allegedly as part of a secret agreement with secured creditors other than Kodak, later convinced Kodak to loan an additional $30 million that would be used to expand the debtor’s business, but instead the debtor used the money to pay the secured lenders that had priority over Kodak.  After the debtor filed a Chapter 11 petition, Kodak initiated a state court action against another secured creditor alleging breach of contract, fraud and tortious interference with contract.  Kodak did not raise these claims in the debtor’s bankruptcy case even though the bankruptcy court applied the subordination agreement between Kodak and other creditors and confirmed a plan that set the priority of creditors.  The state court defendant and the debtor obtained an injunction from the bankruptcy court barring the state court action.  The Eleventh Circuit reversed, finding claim preclusion inapplicable.  The court found that the equitable subordination and breach of contract damages that Kodak sought were not potential remedies in the contested matters that the bankruptcy court heard, and even though Kodak could have brought an adversary proceeding on these claims, it was not required to do so unless the claims raised in the bankruptcy case arose from the same cause of action as the state court case.  Here, the court stated, the two proceedings were not based on the same cause of action because the crucial facts to the state court action – the alleged fraud perpetrated against Kodak – were ever placed before the bankruptcy court.  The creditor could have brought these facts before the bankruptcy court through a declaratory judgment action against Kodak, but chose not to.