Recent Bankruptcy Decisions from the Appellate Courts - October 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/

SECOND CIRCUIT

In re the Penn Traffic Co.
--- F.3d ----, 2006 WL 2849698 (2d Cir. Oct. 4, 2006)
Holding:  Second Circuit Court had no jurisdiction to hear the issue of whether post-petition performance can alter the executory nature of a contract, because the district court’s order on this issue included a remand to the bankruptcy court for a factual determination, and thus the district court’s order was not “final” and appealable pursuant to 28 U.S.C. 158(d).

Kuhl v. United States
--- F.3d ----, 2006 WL 2972604 (2d Cir. Oct. 18, 2006)
Holding:  Bankruptcy court does not have jurisdiction to hear debtor’s post-discharge claim against the IRS for attorney’s fees resulting from a garnishment to recover a discharged debt.  The waiver of sovereign immunity for the IRS’s willful violation of the § 524(a)(2) discharge injunction is limited – the debtor must first exhaust administrative remedies under 26 U.S.C. § 7430.  Those remedies required this debtor to send a letter to the IRS Insolvency Unit in the Eastern District of New York specifying the claim for attorney’s fees.  Instead, the debtor sent a letter to the IRS office in Fresno , California , and did not refer to attorney’s fees.  Since the administrative remedies had not been exhausted, the bankruptcy court lacked jurisdiction.

FIFTH CIRCUIT

Zaylor v. Department of Agric. (In re Supreme Beef Processors, Inc.)
--- F.3d ----, 2006 WL 2974120 (5^th Cir. Oct. 19, 2006) (en banc)
Holding:  If the debtor could not recover against the United States under the Federal Tort Claims Act (“FTCA”) for the debtor’s pre-petition injury, then the debtor does not hold a claim against a governmental unit that is property of the estate under § 106(c).  Accordingly, the debtor’s claim is subject to sovereign immunity.  When the United States filed a claim in the debtor’s Chapter 11 case, the debtor filed an adversary proceeding seeking tort damages.   Outside of bankruptcy, the debtor’s sole method of recovery for these tort claims would have been under the FTCA, which contains discretionary function and intentional tort exceptions that would have barred recovery by this debtor.  Since the debtor could not have recovered under the FTCA, there was no claim that is property of the estate under § 106(c) and the trial court property dismissed the adversary proceeding.

In re Meza
--- F.3d ----, 2006 WL 2949282 (5^th Cir. Oct. 16, 2006)
Holding:  Chapter 13 debtor may not avoid trustee’s motion to modify plan by paying the outstanding balance of the plan before the court rules on the motion to modify.  Seeking an increase the distribution to unsecured creditors by requiring the debtor to make additional plan payments, the trustee filed a motion to modify based on a tax refund the debtor received.  Debtor paid the outstanding balance after the trustee’s motion but before the court heard the motion.  The bankruptcy court erred in holding that under § 1329 the modification was untimely.

SIXTH CIRCUIT

In re Bli Farms, Partnership
--- F.3d ----, 2006 WL 2918952 (6th Cir. Oct. 13, 2006)
Holding:  Debtor’s Rule 60(b) motion was a nullity when filed against a ruling of the district court sitting as bankruptcy appellate court.  Federal Rule of Civil Procedure 60 ostensibly applies to “cases under the Code” pursuant to Federal Rule of Bankruptcy Procedure 9024, but its application extends only to bankruptcy court orders.

French v. Frey (In re Bergman)
--- F.3d ----, 2006 WL 3040132 (6^th Cir. Oct. 27, 2006)
Holding:  Subrogation clause in insurance contract creates a property right for the insurer, and such property right is not included in the bankruptcy estate.  Pre-petition, debtors were involved in an automobile accident, and insurer expended funds for debtors’ medical care.  Insurer was entitled to recover those funds from first proceeds of trustee’s adversary proceeding against other party to automobile accident. 

SEVENTH CIRCUIT

In re Salem
--- F.3d ----, 2006 WL 2864049 (7th Cir. Oct. 10, 2006)
Holding:  Bankruptcy court in Illinois denied approval of debtor’s Chapter 13 plan and dismissed case.  Before the case was dismissed, debtor had requested the Illinois bankruptcy court to “convert” his closed Chapter 7 case in New York into his pending Chapter 13 case in Illinois , and that motion had been denied but not appealed.  Appellate jurisdiction existed regarding the Illinois bankruptcy court’s denial of the “conversion” motion even though the denial was not appealed at the time pursuant to Federal Rule of Bankruptcy Procedure 8001 et seq. and even though the ruling was not mentioned in the appeal of the order dismissing the Illinois Chapter 13 case.  Denial of the motion was proper, because a case cannot be converted before it is transferred to the jurisdiction where the conversion motion is pending pursuant to 28 U.S.C. 1412 and Federal Rule of Bankruptcy § 1014(b).

In re UAL Corp.
--- F.3d ----, 2006 WL 3019468 (7^th Cir. Oct. 25, 2006)
Holding:  Retired pilots’ assertion that bankruptcy court erred in approving Chapter 11 plan of reorganization that treated their claims differently than the claims of active pilots was made too late because the reorganization had already been carried into effect without the retired pilots seeking a stay.  Moreover, the different treatment of the two groups of pilots was justified by the differences in the claims and circumstances of the two groups.  The district court erred in holding that the retired pilots’ appeal was “unripe.”  There is no doctrine of appellate “ripeness.”

NINTH CIRCUIT

In re American Wagering
--- F.3d ----, 2006 WL 2846373 (9th Cir. Oct. 6, 2006)
Holding:  A claim for nonpayment of services provided to the debtor could not be subordinated as a claim for damages arising from a purchase or sale of security pursuant to § 510(b), even though the compensation for the services was based on the debtor’s stock price.  The claimant had obtained a money judgment for the nonpayment long before the bankruptcy case was filed, and the claim was not based on the issuance or nonissuance of stock, but rather the failure to pay for services provided.

TENTH CIRCUIT

In re Midpoint Dev., LLC
--- F.3d ----, 2006 WL 3072688 (10^th Cir. Oct. 31, 2006)
Holding:  The bankruptcy case of a debtor that no longer exists as a legal entity is subject to dismissal.  An entity’s ability to avail itself of the bankruptcy laws after the entity dissolves depends on state law.  Under Oklahoma law, a limited liability company that has filed with the Secretary of State articles of dissolution ceases to exist as a legal entity, so the district court properly dismissed the case.

ELEVENTH CIRCUIT

U.S.  v. White
--- F.3d ----, 2006 WL 2873264 (11th Cir. Oct. 11, 2006)
Holding:  I.R.S. was not barred by automatic stay from assessing tax liability against Chapter 11 debtor post-confirmation but prior to the plan’s effective date.  The automatic stay did not survive confirmation of the debtor’s plan; confirmation replaces the automatic stay with a permanent injunction pursuant to § 524, which did not apply to debtor’s non-discharged tax debt.  The delayed effective date of the plan did not delay the confirmation-triggered dissolution of the automatic stay, because plan terms govern the claims of holders of dischargeable debts only.  The tax assessment was against the debtor personally, so its validity did not turn on whether the property of the estate had revested in him at the time.