Recent Bankruptcy Decisions from the Appellate Courts - January 2007



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


Collins v. Greater Atlantic Mortgage Corp. (In re Lazarus)
--- F.3d ----, 2007 WL 49640 (1st Cir. Jan. 9, 2007)
Holding:  Refinancing mortgage perfected more than ten days after funding, outside the ten day safe harbor found at § 547(e)(2)(B), may be a preference.  Relying on the earmarking doctrine, mortgagee argued that the property transferred was not an interest of the debtor in property under § 547(b) because the mortgage proceeds were used to pay-off the existing mortgage.  Mortgagee, thus, argued that this was, in effect, a transfer of the mortgage from the first mortgagee to the second mortgagee.  The court rejected this argument, finding that the second mortgage held a new mortgage on different terms from the first mortgage.  Mortgagee also argued that creditors were not made worse off by the refinancing.  The court found that proof of prejudice to other creditors was not required to establish a prejudice.  Finally, mortgagee argued that the exception found in § 547(c)(1) prevented avoidance.  The court disagreed, finding that the perfection of the mortgage was not a substantially contemporaneous exchange for new value because perfection occurred more than ten days after funding.

In re Millivision, Inc.
--- F.3d ----, 2007 WL 93203 (1st Cir. Jan. 16, 2007)
Holding:  Exceptions in § 547(c) and (e) do not limit trustee’s power under § 544(a) to avoid post-petition lien securing pre-petition loan.  Avoidance limitations contained in “generally applicable law,” incorporated through § 546(b), refer to generally applicable nonbankruptcy law, thus excluding § 547(c) and (e) exceptions.  Additionally, for purposes of § 544(a), involuntary case commenced on date of petition, not the date an order for relief was entered, thus lien was deemed post-petition.

In re Wilding
--- F.3d ----, 2007 WL 241297 (1st Cir. Jan. 30, 2007)
Holding: Bankruptcy court has power to avoid a judicial lien that impairs an exemption of the debtor even though the lien has already been satisfied and the bankruptcy case closed.  Approximately two years after debtor’s Chapter 7 discharge and the closure of debtor’s case, debtor sought to refinance his house and discovered a pre-petition judicial lien.  Debtor moved to reopen the case to avoid the lien, but before the motion was heard debtor consummated his refinancing and satisfied the lien.  Although the bankruptcy court and bankruptcy appellate panel held that the matter was moot, the First Circuit held that a lien may be avoided under § 522(f) even though it has already been satisfied.  The Court reached this conclusion based on the reference to “value” in § 522(f)(2)(a).  Section 522(a) defines “value” with relation to the date of the filing of the petition.  Accordingly, if the lien, valued as of the date of the petition, impaired debtor’s exemption, the court may determine that the lien should be avoided, even if the lien was later satisfied. 


In re Enron Corp.
--- F.3d ----, 2007 WL 221242 (2d Cir. Jan. 29, 2007)
Holding:  District court abused its discretion in dismissing appeal for appellant’s failure to timely file brief required by Rule 8009.  District court clerk failed to send appellant a Rule 8007(b) notice of docketing appeal, and the time for filing the brief does not begin to run until notice of docketing is sent.


In re Murphy
--- F.3d ----, 2007 WL 117746 (4th Cir. Jan. 18, 2007)
Holding:  A confirmed Chapter 13 plan may be modified if the debtor experiences a substantial, unanticipated post-confirmation change in his financial condition.  The trustee had moved in both of these consolidated cases to modify the respective plans to increase the amount to be paid to unsecured creditors.  In the first case, debtors experienced a substantial decrease in their income but, through a refinancing, took equity out of their house to make plan payments.  The court held that these combined events resulted in virtually no change to the debtors’ financial condition and affirmed the bankruptcy court order denying the trustee’s motion to modify the plan.  The court noted that the debtors had taken the more noble course of seeking to fulfill their plan obligations even though their decrease in income could have motivated them to file their own motion to modify seeking to pay unsecured creditors less, and, for this, they should not be penalized.  In the second case, debtor sold his condominium for dramatically more than its scheduled value.  This constituted a substantial, unanticipated post-confirmation change in debtor’s financial condition that justified modifying debtor’s plan to provide for a 100% distribution to unsecured creditors.  Additionally, in the second case, the proposed modification met the requirements of § 1329.


In re Williams
--- F.3d ---, 2007 WL 51188 (6th Cir. Jan. 9, 2007)
Holding:  Bankruptcy court erred when it denied fee application of debtor’s counsel without conducting lodestar analysis.  When debtor’s counsel requested fees above presumptive fee for Chapter 7 case, bankruptcy court denied request based on a funding that the services performed were in the range of a routine case.  Lodestar analysis, however, requires analysis of the reasonable rate and the lawyer’s reasonable hours.


Boyer v. Belavilas (In re Belavilas)
--- F.3d ----, 2007 WL 28433 (7th Cir. Jan. 5, 2007)
Holding:  Avoided fraudulent transfer could be recovered from custodian of Uniform Transfers to Minors Act (“UTMA”) account because custodian was initial transferee for whose benefit transfer was made under § 550(a)(1).  Although legal title to UTMA funds was in the children, parent-custodian used the funds for her own benefit by transferring them to a company she formed and controlled rather than for the children’s welfare as required under UTMA. 

In re Doctors Hosp., Inc.
--- F.3d ---, 2007 WL 79701 (7th Cir. Jan. 12, 2007)
Holding:  Bankruptcy court did not abuse its discretion in approving settlement of adversary proceeding against former insider of debtor for multiple fraud-based claims.  The settlement was in the best interests of the estate because the value of the settlement outweighed the probable costs and benefits of litigating.


Peltz v. Vancil (In re Bridge Information Sys., Inc.)
--- F.3d ---, 2007 WL 57597 (8th Cir. Jan. 10, 2007)
Holding:  Payment made less than two months before Chapter 11 petition was filed was not preferential because it was not made on account of an antecedent debt.  Recipient of payment was tenant with renewal options under lease.  The allegedly preferential payment was to purchase those options not to pay a pre-existing debt.


Agarwal v. Pomona Valley Med. Group, Inc. (In re Pomona Valley Med. Group, Inc.)
--- F.3d ----, 2007 WL 102978 (9th Cir. Jan. 17, 2007)
Holding:  Debtor’s § 365(a) rejection of contract with physician did not violate business judgment rule.  Physician claimed rejection was motivated by bad faith because debtor’s motion was filed shortly after physician filed adversary proceeding alleging that debtor had breached contract and violated various state laws, including law prohibiting retaliating against physicians for advocating medically appropriate health care for their patients.  Although this fact made the rejection suspect, the bankruptcy court found the rejection to be in the best interests of the bankruptcy estate and creditors, and the appellate court was not left with the definite and firm conviction that the bankruptcy court made a mistake with respect to this issue.  However, the appellate court reversed the bankruptcy court’s order dismissing the physician’s adversary proceeding.  Since the rejection of an executory contract does not otherwise affect the parties’ substantive rights, debtor’s rejection of the contract did not automatically extinguish the physician’s other causes of action.