Recent Bankruptcy Decisions from the Appellate Courts - August 2006

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

FIRST CIRCUIT

Watman v. Groman (In re Watman)
--- F.3d ----, 2006 WL 2391051 (1st Cir. Aug. 21, 2006)
Holding: Bankruptcy court did not err in denying discharge under § 727(A)(2)(A), which prohibits discharge when the debtor has transferred property of the estate with the intent to hinder, delay or defraud a creditor. Immediately pre-petition, debtor stopped operating his dental practice and opened a new dental practice in the same location with the same patients, employees, furniture, equipment and supplies. Debtor also used prior practice's funds to prepay new practice's expenses pre-petition. The debtor, thus, transferred assets of the prior practice, and those assets had value because the debtor would have had to expend resources to recreate the prior practice. The transfers were made with the intent to hinder, delay or defraud judgment creditor of the debtor and the prior practice in that the debtor took virtually all of the prior practice's assets and transferred them to the debtor's new corporation without paying any consideration.

SECOND CIRCUIT

In re Layo
--- F.3d ----, 2006 WL 2348551 (2nd Cir. Aug 15, 2006)
Holding: Trustee was barred from challenging creditor's mortgage due to res judicata effect of debtor's Chapter 13 plan affirming validity of mortgage lien. Plan determined parties' interests pursuant to § 1327(a), regardless of separate procedures for determining validity of lien pursuant to Bankruptcy Rule 7001(2) and regardless of delay of discharge in Chapter 13 case until all plan payments are made.

Rombro v. Dufrayne (In re Med Diversified, Inc.)
--- F.3d ----, 2006 WL 2458760 (2d Cir. Aug. 25, 2006)
Holding: Claim that debtor failed to issue its common stock in exchange for claimant's stock in another company as required by pre-petition agreement was properly subordinated under § 510(b). Section 510(b) mandates subordination of a claim for damages arising from the purchase or sale of a security of the debtor. Although the claimant never actually received any shares in the debtor, his claim was properly subordinated because the claimant bargained to become a shareholder, not a creditor. Congress intended § 510(b) to allocate to shareholders the risk of bankruptcy because the shareholders receive the benefits of a profitable entity.

THIRD CIRCUIT

Scarborough v. Chase Manhattan Mort. Corp. (In re Scarborough)
--- F.3d ----, 2006 WL 2466859 (3d Cir. Aug. 28, 2006)
Holding: Bifurcation of claim secured by multi-unit dwelling for families other than the debtor does not violate anti-modification provision of § 1322(b)(2). The collateral was a property consisting of two units owned by the debtor. The debtor lived in one unit and rented the other. Section 1322(b)(2) only protects claims secured by real property that is the debtor's principal residence. Since the claim was secured in part by real property that was not the debtor's principal residence, the claim could be bifurcated.

SIXTH CIRCUIT

Rogan v. Bank One, Nat'l Ass'n (In re Cook)
457 F.3d 561 (6th Cir. Aug. 9, 2006)
Holding: Secured lender did not violate the automatic stay when, post-petition, it recorded the assignment of a note secured by the debtor's home. Applying state law, the Court rejected the trustee's argument that perfection of the security interest turned on the recording of the assignment. The Court then held that when the lender recorded the assignment it was not transferring legal title in the debtors' property but was only recording an equitable interest in the property. Since the equitable interest did not belong to the debtors, no violation of the automatic stay occurred.

SEVENTH CIRCUIT

Dick v Conseco, Inc.
--- F.3d ----, 2006 WL 2328635 (7th Cir. August 11, 2006)
Holding: Debtor could terminate CEO's employment contract upon its bankruptcy pursuant to ipso facto clause. Section 365(e)(1) prohibition of bankruptcy-triggered terminations of executory contracts did not apply, because the contract was not an executory agreement pursuant to Indiana law.

EIGHTH CIRCUIT

In re Neal
--- F.3d ----, 2006 WL 2472751 (8th Cir. Aug. 29, 2006)
Holding: Bankruptcy Court erred in placing under seal a list of creditors that included the names of attorneys who made loans to debtor, a former municipal judge with a gambling addiction. The list of creditors is nothing more than a list provided as required by law, and only through speculation as to the motives of the creditor and debtor, which are matters outside the context of the bankruptcy filing, does scandal arise. Accordingly, the list is not "scandalous" under § 107(b)(2). Additionally, the list of creditors is not a government record that must be kept confidential under Rule 9018. Although state disciplinary investigations against attorneys are kept confidential, the list of creditors is not necessarily co-extensive with the list of attorneys under investigation.

In re Cumberworth
--- F.3d ----, 2006 WL 2290565 (8th Cir. Aug. 10, 2006)
Holding: The bankruptcy court properly applied the totality of the circumstances test when it held that requiring debtor to repay her student loans would constitute "undue hardship" pursuant to §523(a)(8), in light of her permanent 100% disability that prevented her from working and increasing her income, her good faith attempt to renegotiate an income-contingent repayment plan, and her good payment history when she was employed. The Department of Education's arguments against discharge - namely, that certain expenses in the debtor's budget were unnecessary, that the combined income of the debtor and her spouse exceeded the poverty level, and that the husband would be able to contribute a portion of his income toward the debt - called for a more stringent test than the totality of circumstances.

U.S. Commodity Futures Trading Commission v. NRG Energy, Inc.
457 F.3d 776 (8th Cir. Aug. 4, 2006)
Holding: District Court of Minnesota had jurisdiction to hear the U.S. Commodity Futures Trading Commission's enforcement action to enjoin the debtor from inaccurately reporting market information, even though the Commission's prepetition claim had been disallowed and the debtor's Chapter 11 plan purported to limit jurisdiction of future litigation against the debtor to the Bankruptcy Court for the Southern District of New York. Neither bankruptcy order applied to an action to enjoin prospective acts of the debtor.