Recent Bankruptcy Decisions from the Appellate Courts - February 2007

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/

SUPREME COURT

In re Marrama
--- F.3d ----, 2007 WL 517340 (U.S. Feb. 21, 2007)
Holding:  Debtor who made false statements and concealed assets and transfers may not convert case from one under Chapter 7 to one under Chapter 13.  Pursuant to § 1307(c), a Chapter 13 case may be converted or dismissed for cause, including the debtor’s bad faith conduct.  A ruling that a Chapter 13 case may be converted or dismissed for bad faith conduct is tantamount to a ruling that the debtor does not qualify under Chapter 13.  Under § 706(d), a case may not be converted unless the debtor may be a debtor under the chapter to which the case is being converted.  Accordingly, a bad faith debtor may not convert his case from Chapter 7 to Chapter 13.  Dissenting, four justices would have allowed conversion because conversion or dismissal under § 1307(c) differs from eligibility to be a debtor under § 109 and does not implicate the § 706(d) limitation on conversion of a case under Chapter 7 to one under Chapter 13.

THIRD CIRCUIT

In re Brannon
--- F.3d ----, 2007 WL 399633 (3rd Cir. Feb. 7, 2007)
Holding:  Where married debtors held exempt property as tenants by the entirety pursuant to Pennsylvania law, wife could claim exemption up to full value not claimed as exempt by husband; she was not limited to claiming only 50% of the value of the property.  A spouse's "aggregate interest" in property pursuant to § 522(d)(5) turns on state law, and under Pennsylvania law "a tenant may act on behalf of both spouses with respect to the whole of the entireties property."

In re O'Lexa
--- F.3d ----, 2007 WL 402689 (3rd Cir. Feb. 7 2007)
Holding:  Pennsylvania "doctrine of necessity" statute did not place home held as tenant by the entirety between debtor wife and non-debtor husband within the reach of wife's creditors.  The statute specifically applies to "separate property" obtained for the necessity of the family, which does not include entirety property, and the statute does not impose joint and several liability on each spouse.

FOURTH CIRCUIT

Grochal v. Ocean Technical Services Corporation (In re Baltimore Marine Industries)
--- F.3d ----, 2007 WL 430767 (4th Cir. Feb. 9, 2007)
Holding:  Subcontractors' interest in interpleaded funds owed to government contractor debtor did not place the funds outside the debtor's estate pursuant to § 541.  The bankruptcy court and district court erroneously compared the subcontractors' interest to that of a surety, whose interest would be excluded from the estate.  Fourth Circuit reversed and remanded for determination of whether subcontractors' claims could nonetheless trump those of other creditors, such as through a theory of equitable trust.

In re Kreisler
--- F.3d ----, 2007 WL 572125 (4th Cir. Feb. 26, 2007)
Holding:  Ejectment action against non-debtor wholly owned subsidiary of Chapter 11 debtor did not violate automatic stay.  Action was not against the debtor under § 362(a)(1) because the tenant had not filed a bankruptcy petition.  Debtor and tenant argued that “unusual circumstances” caused the stay to apply to the non-debtor tenant, but the court disagreed, finding that there was no identity between the debtor and tenant and a judgment against the tenant would not effectively operate as a judgment against the debtor.  Action was not against property of the estate under § 362(a)(3) because the debtor had no interest in the leased premises despite its ownership of the tenant.  Additionally, even though the ejectment action will likely cause the debtor’s interest in the tenant to lose value, the stay nonetheless did not apply.

Nunnery v. Rountree (In re Rountree)
--- F.3d ----, 2007 WL 586568 (4th Cir. Feb. 27, 2007)
Holding:  Debtor’s obligation to creditor did not meet the requirements of § 523(a)(2)(A) and, thus, was dischargeable.  Debtor was a private investigator who befriended creditor and videotaped her water skiing, jet skiing, riding horses and enjoying amusement park rides.  Those videotapes were used against creditor in her personal injury suit.  Creditor then obtained a state court judgment against debtor based on fraud, intentional and negligent infliction of emotional distress and unfair and deceptive trade practices.  The state court judgment was dischargeable, however, despite creditor’s argument that § 523(a)(2)(A) applied.  That section only applies when money, property, services or credit is “obtained by” false pretenses, false representations or fraud.  Debtor never received anything by defrauding creditor.  Accordingly, the debt remained dischargeable.

EIGHTH CIRCUIT

U.S.  v. Mitchell
--- F.3d ----, 2007 WL 328585 (8th Cir. Feb. 6 2007)
Pre-petition income from estate property does not constitute "proceeds ... or profits of or from property of the estate" pursuant to § 541(a)(6).  Eighth Circuit reversed debtor's criminal conviction pursuant to 18 U.S.C. §  152(1) for failing to disclose such income.

NINTH CIRCUIT

U.S.  v Milwitt
475 F.3d 1150 (9th Cir. Feb. 5 2007)
Holding:  Ninth Circuit reversed criminal defendant's conviction for "fraudulently obstruct[ing]" creditor landlords, where U.S. government's case proved only that defendant had engaged in the unauthorized practice of law in advising and filing bankruptcy for the landlords' tenants.  No evidence of specific intent to defraud the landlords was offered at trial.

Frankfort  Digital Svcs., Ltd. v. Kistler (In re Reynoso)
--- F.3d ----, 2007 WL 582719 (9th Cir. Feb. 27, 2007)
Holding:  Company that sold web-based software that prepares bankruptcy petitions was a “bankruptcy petition preparer” subject to penalties for violating § 110.  The software solicited information from customers, translated the information into responses to questions on the bankruptcy forms and prepared completed bankruptcy forms for filing using those responses.  The company charged fees for this service.  Accordingly, the company was a “bankruptcy petition preparer” under § 110(a)(1).  The company violated § 110(b) by not including the company’s name and address on the petition, § 110(c) by not including the social security number of the preparer and § 110(f) by using the words “law” and “legal” in its advertisements.  Bankruptcy court properly acted under the authority granted by § 110(i) and (j) in enjoining the company from acting as a bankruptcy petition preparer and certifying to the district court the question of damages.

TENTH CIRCUIT

Hill v. Akamai Technologies, Inc. (In re MS55, Inc.)
--- F.3d ----, 2007 WL 464781 (10th Cir. Feb. 13 2007)
Holding:  Chapter 7 Trustee was barred from asserting claims against creditor, where pre-conversion Chapter 11 debtor-in-possession waived said claims.  Causes of action retained by the Chapter 11 creditors' committee did not belong to Trustee but dissolved in the conversion.

ELEVENTH CIRCUIT

Thompkins v. Lil' Joe Records, Inc.
--- F.3d ----, 2007 WL 316302 (11th Cir. Feb. 5 2007)
Record label's § 365 rejection of contract with recording artist did not rescind contract and revert intellectual property rights to artist.  Upon rescission, artist's remedy was to file a claim for rejection damages, and his failure to do so precluded his later claims based on contract law, Lanham Act, and other theories.

Dzikowski v. Northern Trust Bank Of Florida , N.A. (In re Prudential of Florida Leasing, Inc.)
--- F.3d ----, 2007 WL 445368 (11th Cir. Feb. 13, 2007)
Holding:  Single satisfaction requirement of § 550(d) looked to federal common law and not to Florida state law to determine whether Trustee's fraudulent transfer claim had been satisfied in previous settlement with other defendants.  State law was inapplicable because the doctrine of single satisfaction governs procedure rather than substantive law, application of Florida law would frustrate the equitable purposes of the Bankruptcy Code, and the doctrine arises only when a bankruptcy court has authorized settlement of a federal cause of action in a core bankruptcy proceeding.  Pursuant to federal common law, the lack of an up-front allocation of damages by settling parties is neither dispositive nor useful in determining whether the settlement has led to a single satisfaction of a trustee's claims against a non-settling obligor.  The bankruptcy court must value the claims at issue, as in the settlement approval process pursuant to Fed. R. Bankr.P. 9019, or the valuation of a claim pursuant to § 502(c).

Whiting-Turner Contracting Co.  v. Electric Mach. Enters., Inc. (In re Electric Mach. Enters., Inc.)
--- F.3d ----, 2007 WL 548781 (11th Cir. Feb. 23, 2007)
Holding: Bankruptcy court erred in denying motion to compel arbitration of dispute concerning how much general contractor owed subcontractor that was Chapter 11 debtor.  General contractor had resolved payment dispute with landowner on behalf of all subcontractors.  While general contractor was negotiating with landowner, general contractor and debtor entered into a tolling agreement that included an arbitration provision.  After the resolution with the landowner, general contractor and debtor disputed the amount of the settlement funds that should be paid to debtor.  Bankruptcy court erroneously concluded that this was a core matter.  The dispute between debtor and the general contractor was not of the type listed in 28 U.S.C. § 157(b)(2), it did not involve a right created by federal law and it was not a proceeding that would arise only in bankruptcy.  Accordingly, this was a non-core matter.  Furthermore, even if this had been a core matter, the bankruptcy court failed to determine whether the arbitration of the dispute would have inherently conflicted with the underlying purposes of the Bankruptcy Code.