Recent Bankruptcy Decisions from the Appellate Courts - November 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

Nisselson v. Lernout
--- F.3d ----, 2006 WL 3216998 (1st Cir. Nov. 8, 2006)
Holding:  Where the merger of two companies was effectuated by the creation of a wholly owned subsidiary of Company A and the subsequent termination of Company B's existence, the bankruptcy trustee of the new subsidiary was barred by the in pari delicto doctrine from asserting any cause of action that Company B had against Company A for fraud in the process of the merger.  Because the facts supported an imputation of the conduct of Company A to its subsidiary, the subsidiary was at least as responsible for the alleged wrong as the defendants.  The innocence of Company B's directors, who became directors of the subsidiary after the merger, was irrelevant, because the in pari delicto doctrine looks to the relative culpability of the parties at the time of the alleged wrongdoing.  No public policy grounds require a different result, because creditors could have factored the in pari delicto risk into their decisions to extend credit.

SECOND CIRCUIT

Evans v. Ottimo
--- F.3d ----, 2006 WL 3354134 (2d Cir. Nov. 20, 2006)
Holding:  Pre-petition state court default judgment that expressly found debtor had engaged in fraud bars relitigation in bankruptcy court of the fraudulent character of the debt.  The default judgment resolved all issues necessary to establish nondischargeability under § 523(a)(2), so collateral estoppel applies based on the issue in the state court being identical to the issue in the bankruptcy court.  The debtor had a full and fair opportunity to litigate the issue in state court even though the debtor did not answer the complaint or actually appear in the state court proceeding.

FIFTH CIRCUIT

In re Darby
--- F.3d ----, 2006 WL 3290286 (5th Cir. Nov. 14, 2006)
Holding:  Chapter 13 debtor could not compel Time Warner to provide cable service, even if he provided adequate assurance of payment and a deposit, because cable is not a “utility” pursuant to § 366.  Although undefined in the statute, the term refers to services necessary to maintain a minimum standard of living, and the debtor admitted that cable would not be such a service.  Furthermore, alternatives were available to the debtor, and the $250 fee for installing and initiating new satellite service was not prohibitively inconvenient.

SIXTH CIRCUIT

Hughes v. Sanders
--- F.3d ----, 2006 WL
Holding:  Court imposed-sanctions in legal malpractice litigation could not constitute nondischargeable debt pursuant to § 523(a)(7), where the money judgment entered against the debtor was derived from plaintiffs' lost claims and expenses caused by the debtor's legal malpractice.  Because the sanctions were payable to the plaintiff and compensated him for his damages, they did not meet the requirement that the debt be "payable to and for the benefit of a government unit," and not be "compensation for actual pecuniary loss."

NINTH CIRCUIT

In re Eliapo
--- F.3d ----, 2006 WL 3262497 (9th Cir. Nov. 13, 2006)
Bankruptcy Court erred in failing to offer Chapter 13 debtor’s attorney an opportunity to object when the Court sua sponte reduced the amount sought in an attorney’s fee application.  Bankruptcy Rule 2017 applies to Chapter 13 fee applications and requires notice and a hearing consistent with § 102(1)(A).   The Court’s local rule that establishes presumptively appropriate debtors attorney fees for routine services in a Chapter 13 case is not inconsistent with § 330 requirements for evaluating reasonable compensation.  The presumptive fee framework under review is optional, and its availability saves attorney and court time preparing and reviewing fee applications, encourages efficient representation, and speeds payments to attorneys.