Recent Bankruptcy Decisions from the Appellate Courts - December 2006



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


Ayes v. United States Dept. of Veterans Affairs
--- F.3d ----, 2006 WL 3788795 (4th Cir. Dec. 27, 2006)
Holding:  Veterans Administration did not violate § 525(a) when it refused to guarantee home loans of veterans who had previously obtained bankruptcy discharges.  The veteran guaranty entitlement is not a license, permit, charter, franchise or other similar grant covered by the non-discrimination provisions of § 525(a).  The governmental authorizations covered by § 525(a) are those that permit an individual to pursue some occupation or economic endeavor, but a home loan guaranty is not similar to those authorizations because loans and guaranties are available in the private sector.


In re Hawkins
469 F.3d 1316 (9th Cir. Dec. 4, 2006)
Holding:  Ninth Circuit upheld and adopted B.A.P. opinion that a medical school tuition subsidy received by the debtor in exchange for her promise to practice in Ohio for five years upon graduation was not an educational loan or educational benefit that would give rise to a non-dischargeable debt pursuant to § 523(a)(8) upon her breach of the five-year practice provision.  The contract upon which the subsidy was based was not an educational loan because it did not quantify the benefit to the debtor or create an obligation to repay the benefit received.  The subsidy did not constitute an educational benefit because such a benefit requires the transfer of funds, and the debtor received no funds as part of the subsidy.

In re First Alliance Mortgage Company
--- F.3d ----, 2006 WL 3525119 (9th Cir. Dec. 8, 2006)
Holding:  District court did not abuse its discretion in denying the Trustee's fraudulent transfer adversary proceeding against, and motion to subordinate the claim of, debtor's lender and underwriter.  The secured lending agreement between the lender and the debtor was not in and of itself fraudulent, and payments of fully secured obligations arising from that agreement did not constitute fraudulent transfers because they did not diminish the assets available to satisfy other claims.  Further, merely aiding and abetting debtor's fraud against its borrowers did not rise to the level of egregious inequitable conduct required to subordinate the claim of a non-insider pursuant to § 510(c).


In re Builders Transport, Inc.
--- F.3d ----, 2006 WL 3490844 (11th Cir. Dec. 5, 2006)
Holding:  The proceeds of a letter of credit created to secure the debtor's pre-petition lease obligations were property of the debtor's bankruptcy estate pursuant to § 542.  The letter of credit doctrine of independence protected the distribution of proceeds to the beneficiary, but the right to retain such proceeds was property of the debtor's estate pursuant to the terms of the lease and South Carolina state law.

In re Celotex Corp.
--- F.3d ----, 2006 WL 3740302 (11th Cir. Dec. 20, 2006)
Holding:  Debtor’s co-defendant who, jointly and severally with the debtor, is primarily liable for a state court judgment is excluded by § 509(b) from seeking subrogation.  By analyzing which party receives consideration for paying a joint debt, § 509(b)(2) embodies the general principle that subrogation is not available to a party who satisfies a debt for which that party was primarily obligated.  Here, the co-defendant who paid the debt received the consideration – release from the debt – for that payment and, accordingly, is prohibited by § 509(b) from subrogation.