Recent Bankruptcy Decisions from the Appellate Courts - June 2006



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


Howard Delivery Service, Inc. v. Zurich American Ins. Co.
126 S.Ct. 2105 (June 15, 2006)
Holding:  Employer/debtor's unpaid workers' compensation premiums did not give rise to § 507(a)(5) priority claims for claims related to an "employee benefit plan," despite ERISA’s definition of "employee benefit plan" as including such premiums.  The concept of an "employee benefit plan" pursuant to § 507(a)(5) is limited to wage substitutes, and workers' compensation premiums serve primarily to limit the liability of the employer rather than to compensate the employee for services rendered.


Ball v. A.O. Smith Corp.
--- F.3d ----, 2006 WL 1579545 (2nd Cir. June 9, 2006)
Holding:  Award of sanctions against attorney/debtor supported application of collateral estoppel to establish malice pursuant to § 523(a)(6) exception to discharge.  Pursuant to Fifth Circuit law, a violation of 28 U.S.C. 1927 requires a finding of conduct that is both unreasonable and for an improper purpose, which matches the bankruptcy definition of "malice" as wrongful and without just cause or excuse.


In re Oakwood Homes Corp.
449 F.3d 588 (3rd Cir. June 9, 2006)
Holding:  District Court erroneously held that § 502(b) was clear and unambiguous in requiring the discounting of all pre-petition claims to present value.  The Third Circuit reversed the "double discounting" of certain claims to present value where post-petition interest had been disallowed.


In re Official Cmte. of Unsecured Creditors
--- F.3d ----, 2006 WL 1737620 (4th Cir. June 27, 2006)
Holding:  Bankruptcy court has power to recharacterize an allowed claim as equity rather than debt, even in the absence of inequitable conduct by the claimant.  Recharacterization is within the broad powers afforded the court by § 105(a) and facilitates the application of the priority scheme set forth in § 726.  A court may consider many factors in determining whether to recharacterize a claim.  In this case, the bankruptcy court appropriately recharacterized the claim based on the claimant’s insider status vis-à-vis the debtor, the lack of a fixed maturity date for the purported loan, the fact that the debtor was not required to repay the claimant until the debtor became profitable, the debtor’s history of unprofitability and the claimant’s history of assuming the debtor’s losses.  The fact that the transactions between the debtor and the claimant involved the sale of inventory rather than the advance of funds did not prohibit the recharacterization of the claim.  


In re Hedquist
--- F.3d ----, 2006 WL 1652704 (8th Cir. June 16, 2006)
Holding:  Bankruptcy Court did not err in dismissing debtors’ Chapter 11 case under § 1112(b)(2) based on the debtors’ inability to effectuate a plan.  Debtors admitted that the reason for their bankruptcy filing was to set aside a final, non-appealable state court judgment, which the Bankruptcy Court could not set aside.

Gulfcoast Workstation Corp. v. Peltz (In re Bridge Info. Sys. Inc.)
--- F.3d ----, 2006 WL 1716193 (8th Cir. June 23, 2006)
Holding:  Transferee failed to establish ordinary business term prong of the ordinary course defense to a preference action under § 547(c)(2).  Debtor’s pre-petition payments included remittance advice – directing the invoices to which the transferee was to apply the debtor’s payments.  Transferee’s evidence at trial related to the ordinary course of business between the debtor and transferee, but did not prove whether the use of remittance advice was the prevailing practice among similarly situated members of the industry. 

DeBold v. Case
--- F.3d ----, 2006 WL 1725968 (8th Cir. June 26, 2006)
Holding:  In dispute as to the ownership of property in an involuntary Chapter 7 case, trustee had initial burden of proving that property belonged to the estate. 


In re Zilog, Inc.
--- F.3d ----, 2006 WL 1642752 (9th Cir. June 15, 2006)
Holding:  Pro se claimants' late-filed claim could be deemed timely pursuant to excusable neglect, where debtor's counsel's e-mail communication to claimant about the bankruptcy was not calculated to give notice to file claims.  Wording and structure of the e-mail conveyed unfair and inaccurate impression that no action was necessary.  Whether claim was discharged by confirmed plan depends on when it arose, i.e. when it came within claimant's "fair contemplation," as in the discovery rule.


In re Fernandez-Rocha
--- F.3d ----, 2006 WL 1586583 (11th Cir. June 12, 2006)
Holding:  Doctor/debtor's state-law obligation to maintain malpractice insurance, escrowed funds, or letter of credit did not create fiduciary relationship to patient or otherwise constitute a separate debt to patient.  Doctor's malpractice-related debt to patient could not therefore be characterized as a "defalcation while acting in a fiduciary capacity" that would except the malpractice debt from discharge pursuant to § 523(a)(4).

Ajaka v. BrooksAmerica Mort. Corp.
--- F.3d ----, 2006 WL 1765425 (11th Cir. June 29, 2006)
Holding:  District court erred in granting summary judgment to defendants on theory of judicial estoppel in Chapter 13 debtor’s post-confirmation action for rescission and damages under the Truth in Lending Act.  Debtor was not aware of the cause of action until post-confirmation, but when the debtor learned of the cause of action his attorney made demand on the creditor for rescission.  The creditor then initiated an adversary proceeding in the bankruptcy case more than six weeks before the deadline to object to confirmation, and this adversary proceeding put all creditors on notice of the cause of action.  Summary judgment on judicial estoppel was inappropriate because questions of material fact existed as to the debtor’s intent to manipulate the judicial system given that creditors were not prejudiced by the debtor’s failure to disclose the cause of action. 

In re Bracewell
--- F.3d ----, 2006 WL 1814367 (11th Cir. June 30, 2006)
Holding:  Post-petition crop disaster payment to Chapter 7 debtor is not property of the estate.  The legislation authorizing the payment was enacted after the case was converted from Chapter 12.  Although the payment was made on account of pre-petition crop losses, the debtor’s property interest in the payment did not come in existence or accrue until the legislation became law.  The payment was not property of the estate because the debtor’s estate under § 541(a)(1) cannot be greater than the property rights the debtor had at the commencement of the case.  Additionally, the payment was not proceeds of property of the estate under § 541(a)(6) because the debtor had no legal entitlement to a future payment at the time the case was converted.