Recent Bankruptcy Decisions from the Appellate Courts - September 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

In re Pratt
--- F.3d ----, 2006 WL 2522139 (1st Cir. Sept. 1, 2006)
Holding: Secured creditor violated debtor’s discharge injunction pursuant to §524(a) by exercising its state law right to refuse to release lien on motor vehicle which had been surrendered by the debtor pursuant to § 521(a)(2)(A) but not retrieved by the creditor. The reason for the lien no longer existed because the vehicle had no value, and the creditor’s refusal to either retrieve the vehicle or release the lien so that it could be junked by the debtor, amounted to coercion in violation of § 524(c).

SECOND CIRCUIT

In re Cacioli
--- F.3d ----, 2006 WL 2588038 (2d Cir. Sept. 6, 2006)
Holding: Debtor’s failure to maintain business records was justified due to his limited education and reasonable reliance on his business partner for record-keeping and was thus not grounds for denial of discharge pursuant to § 727(a)(3). Debtor’s explanation of his loss of assets as a decline in the value of his partnership interest was satisfactory and credible and was thus not grounds for denial of discharge for failure to explain satisfactorily all relevant losses or deficiencies pursuant to §727(a)(5).

In re Harris
--- F.3d ----, 2006 WL 2669328 (2d Cir. Sept. 18, 2006)
Holding: District Court abused its discretion when it dismissed debtor’s appeal for failure to file a transcript required by Rule 8006. The Court should have first given the debtor notice and an opportunity to respond and should have considered lesser sanctions.

SEVENTH CIRCUIT

In re Globe Building Materials, Inc.
--- F.3d ----, 2006 WL 2574041 (7th Cir. Sept. 8, 2006)
Holding: Trustee could avoid State of Wisconsin’s employee wages lien, because applicable Wisconsin lien statute did not specifically give the lien priority status over a bona fide purchaser. The Trustee could thus avoid the lien pursuant to § 545.

Stinnett v. Laplante (In re Stinnett)
--- F.3d ----, 2006 WL 2739361 (7th Cir. Sept. 27, 2006)
Holding: Disability insurance payments received post-petition by debtor are property of the bankruptcy estate, where at the time the petition was filed debtor’s interest in the insurance contracts was property of the estate pursuant to § 541(a). The fact that the payments are a substitute for earnings from services performed does not bring the payments within the scope of the exception found at § 541(a)(6). That exception only covers earnings from services actually performed by an individual debtor.

NINTH CIRCUIT

Hebbring v. U.S. Trustee
--- F.3d ----, 2006 WL 2589429 (9th Cir. Sept. 11, 2006)
Holding: Bankruptcy Court did not abuse discretion in dismissing a Chapter 7 petition for substantial abuse pursuant to pre-BAPCPA § 707(b), where debtor’s disposable income was sufficient to pay creditors if she included her voluntary monthly retirement contributions. The Ninth Circuit rejected any bright-line, universal rule as to whether such contributions constitute a reasonably necessary expense.

Universal Serv. Admin. Co. v. Post-Confirmation Comm. of Unsecured Creditors of Incomnet Commc’ns Corp. (In re Incomnet, Inc.)
--- F.3d ----, 2006 WL 2684814 (9th Cir. Sept. 20, 2006)
Holding: The Universal Service Administrative Company is a transferee under §§ 547 and 550. The Company is a non-profit corporation that collects, pools and disburses universal service support funds contributed by telecommunications carriers pursuant to the Telecommunications Act of 1996. During the preference period, debtor paid such funds to the Company as required by law. The Company argued it was not a transferee and, thus, not liable for preferences because it is regulated by the Federal Communications Commission (“FCC”) and was legally obligated to hold and distribute the funds so that telecommunications services will be universally available. Although the law limits the ways in which the Company may use the funds, the Company nonetheless had legal title to the funds and some discretion as to their use. The Company was not the agent of the FCC, nor the agent of the telecommunications carriers who provide services to the beneficiaries of the Telecommunications Act of 1996. Accordingly, the Company is a transferee.

Educational Credit Mgmt. Corp. v. Mason (In re Mason)
--- F.3d ----, 2006 WL 2773843 (9th Cir. Sept. 28, 2006)
Holding: Bankruptcy court erred in finding that full repayment of student loans would cause debtor undue hardship under § 523(a)(8). Despite a learning disability, debtor had obtained a law degree, though he was unable to pass the state bar exam on his first try. He worked part-time as a home siding installer and claimed to be using his free time to search for a job. The record showed the debtor’s efforts to find additional employment inadequate in light of the significant free time his schedule provided him. The debtor also had not sought to take the bar exam for a second time nor had he requested any special testing accommodations consistent with his learning disability. Finally, the debtor had not sought an income contingent repayment plan. Debtor, thus, failed to show that he had exhibited good faith in his efforts to repay the student loans.

TENTH CIRCUIT

Peters v. Pikes Peak Musicians Association
--- F.3d ----, 2006 WL 2522471 (10th Cir. Sept. 1, 2006)
Tenth Circuit joins majority view that claims arising from collective bargaining agreements (CBAs) are not automatically entitled administrative priority status under §507 under a theory that the CBA restrictions of § 1113 trump the literal language of § 503. Instead, the Tenth Circuit revised the administrative expense priority test in § 503 to require, instead of post-petition action by the debtor, a post-petition service rendered by the claimant that is necessary to preserve the bankruptcy estate. The Tenth Circuit affirmed the Bankruptcy Court grant of administrative priority status to wages to musicians for their mere availability, because the viability of the orchestra depended on the availability of musicians, regardless of various cancellations of rehearsals or performances. The end date for the claim period would be the date of the order terminating the CBA and not the date of the trustee’s motion to reject the CBA, because unilateral termination of a CBA is prohibited pursuant to § 1113(f), and despite a delay in the issuance of the order that was caused by the musicians, any delay could have been but was not addressed by the Trustee pursuant to the interim relief provision of § 1113(e).