Recent Bankruptcy Decisions from the Appellate Courts - March 2007



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


Travelers Cas. & Sur. Co. v. Pacific Gas & Elec. Co.
127 S.Ct. 1199, 2007 WL 816795 (Mar. 20, 2007)
Holding:  Attorney’s fees incurred by creditor in bankruptcy case may be recovered as unsecured claim when pre-petition contract allows them.  Pre-petition indemnity contract required debtor to repay creditor any loss creditor incurred in connection with pre-petition surety bonds, including attorney’s fees incurred pursing, protecting or litigating creditor’s rights in connection with the bonds.  Although no default occurred, creditor asserted a claim in the bankruptcy case to protect itself in case debtor defaulted on the obligations secured by the bonds, and creditor incurred attorney’s fees negotiating plan language and a stipulation.  When creditor amended proof of claim to include a claim for post-petition attorney’s fees, debtor objected.  Creditor is allowed to recover its attorney’s fees, however, because no provision of § 502(b) prohibits recovery of the attorney’s fees. 


In re Ontos Inc.
--- F.3d ----, 2007 WL 613742 (1st Cir. Mar. 1, 2007)
Holding:  Creditors’ alleged fraudulent transfer, breach of fiduciary duty, successor liability, and alter ego claims against the debtor’s directors and the purchaser of its assets were estate property pursuant to § 541(a)(1).  The claims alleged harm to the debtor and were thus derivative claims belonging to the trustee.

Abboud v. Ground Round, Inc. (In re The Ground Round, Inc.)
--- F.3d ----, 2007 WL 949595 (1st Cir. Mar. 30, 2007)
Holding:  Debtor, which was a lessee of real property used for a restaurant, was required to return liquor license to lessor when debtor rejected the unexpired lease in Chapter 11 case.  Lessor transferred license to debtor at the beginning of the lease term, but the license provided that debtor must transfer the license back to lessor at the termination of the lease.  State law permitted liquor licenses to be transferred but not leased.  Under state law, specific performance would be available to the lessor to retrieve the license.  Additionally, if state law had allowed a lease of the license, then debtor would have lost its right to continue using the license when it rejected the lease.

Ford v. Skorich (In re Skorich)
--- F.3d ----, 2007 WL 949593 (1st Cir. Mar. 30, 2007)
Holding:  Prepetition escrowing of proceeds from sale of property jointly owned by debtor and spouse, pursuant to order of state court in divorce case, was not a preference under § 547.  Bankruptcy court had given spouse relief from stay to obtain a final divorce decree in state court, and that decree awarded spouse the entire amount of the proceeds held in the escrow account.  Bankruptcy trustee argued that the transfer of the debtor’s legal title in the property to the escrow agents was a preference.  The court disagreed, finding that spouse was not a creditor under § 101(10) because she did not hold a claim under § 101(5) and that the transfer was not made on account of an antecedent debt.  Spouse did not hold a claim because her interest in the property was not a right to payment. 


Supplee v. Bethlehem Steel Corporation
--- F.3d ----, 2007 WL 625202 (2nd Cir. Mar. 2, 2007)
Holding:  An early retirement benefit owed to one of debtor’s employees, as a result of his post-petition termination without cause, was not an administrative expense pursuant to § 507(a)(1).  A termination-related debt arising post-petition qualifies as an administrative expense if it is a new benefit earned at termination, but in this case the retirement benefit was owed to the employee regardless of the termination which merely accelerated the timing of payment.

In re Iridium Operating LLC
--- F.3d ----, 2007 WL 642590 (2nd Cir. Mar. 5, 2007)
Holding:  Where a secured lender’s lien was in dispute and the lender’s settlement of the litigation challenging the lien provided for a distribution to unsecured creditors before administrative claimants, the Second Circuit vacated the settlement approval order and remanded to the bankruptcy court for a clarification of the reason for the parties’ deviation from the absolute priority rule.  The priority scheme of the Bankruptcy Code should be the most important factor in determining whether a proposed settlement is fair and equitable under Federal Rule of Bankruptcy Procedure 9019, and approval of the settlement without a review of the priority issue was insufficient.

EDP Medical Computer Systems, Inc. v. U.S.
--- F.3d ----, 2007 WL 706925 (2nd Cir. Mar. 9, 2007)
Holding:  Second Circuit joins Fifth and Ninth Circuits in holding that the uncontested allowance of a proof of claim pursuant to §  502(a) is a final judgment with res judicata effect, even without the entry of a separate order.  The ability to pursue reconsideration of the allowance pursuant to  § 502(j) does not defeat finality, for the same reasons that the relief available under Federal Rule of Civil Procedure 60(b) does not defeat finality.  Furthermore, where the debtor has received a discharge and the bankruptcy case has been closed, there can be no question of finality.

Northwest Airlines Corp. v. Association of Flight Attendants (In re Northwest Airlines Corp.)
--- F.3d ----, 2007 WL 926488 (2d Cir. Mar. 29, 2007)
Holding:  Debtor’s rejection of collective bargaining agreement under § 1113 abrogated the agreement.  In contrast to § 365, where rejection is treated as a breach, not termination, of a contract, under § 1113 rejection is the termination of a collective bargaining agreement, thus, allowing the debtor to impose new terms of employment.  Although the rejection terminated the status quo under the Railway Labor Act, union continued to have the obligation to make an agreement with debtor, and that obligation justified district court injunction against a strike.

Banka A.D., Beograd v. Superintendent of Banks (In re Deposit Ins. Agency)
--- F.3d ----, 2007 WL 927138 (2d Cir. Mar. 29, 2007)
Holding:  New York Superintendent of Banks was not immune under the Eleventh Amendment from § 304 petition of foreign banks to recover assets held by the Superintendent.  Assuming, without deciding, that the Eleventh Amendment would bar the petitions, relief is available under the doctrine of Ex parte Young, which provides that immunity does not apply if a complaint against a state officer alleges an ongoing violation of federal law and seeks prospective relief.  The federal law allegedly violated is § 304, in that the Superintendent has refused to turnover property allegedly belonging to the banks, and the relief sought, turnover of the property and an injunction against state insolvency proceedings, is prospective.


American Pad and Paper Co.
--- F.3d ----, 2007 WL 624346 (3rd Cir. Mar. 2, 2007)
Holding:  Chapter 7 Trustee was time-barred from initiating avoidance actions more than two years after the petition date pursuant to § 546(a).  The Trustee was not elected within the two years limitations period following the petition date, and the appointment of an interim trustee pursuant to § 701 within the two-year period is not one of the triggers for a one-year extension of the limitations period pursuant to § 546(a)(1)(B).

VFB, LLC v. Campbell Soup Co.
--- F.3d ----, 2007 WL 942360 (3d Cir. Mar. 30, 2007)
Holding:  When a creditor alleges facts sufficient to support a claim, the claim is prima facie valid, and an unverified complaint or unintroduced answers to interrogatories are insufficient to overcome the prima facie validity of the claim.   Here, the assignee of debtor’s claims brought an action to set aside a leveraged spin transaction between the debtor and the defendant, and the defendant brought its bankruptcy claims against the plaintiff as successor in interest to the debtor.  The plaintiff’s defense of the claims included only its unverified complaint and its sworn answers to interrogatories that were never introduced into evidence.  The court allowed the defendant’s claim and denied all relief requested by the plaintiff.

In re Insilco Tech., Inc.
--- F.3d ----, 2007 WL 823849 (3d Cir. Mar. 20, 2007)
Holding:  Trustee’s recharacterization and equitable subordination actions were barred by a settlement agreement entered into early in the case.  The settlement agreement established that certain debts were allowable claims.  Since a claim is, by definition, not equity, the settlement agreement barred the trustee’s recharacterization action against the holders of the debts that were established as allowable claims.  The settlement agreement, which released actions in respect of this debt, also barred the trustee’s equitable subordination action because an equitable subordination action relates to the debt.   


Edge Petroleum Operating Co. v. GPC Holdings, LLC (In re TXNB Internal Case)
--- F.3d ----, 2007 WL 914983 (5th Cir. Mar. 28, 2007)
Holding:  Federal subject matter jurisdiction extended to removed conversion action between non-debtor natural gas suppliers.  Plaintiff sold gas to debtors, who then sold it to defendant.  Defendant removed plaintiff’s state court conversion action, and “related to” jurisdiction existed under 28 U.S.C. § 1334(b) because the outcome of the action could conceivably affect the bankruptcy estate.  Plaintiff was clearly entitled to payment from someone for the gas it sold, and if it was not defendant, then it was the debtors.  If it was the defendant, then the defendant will have discharged a liability of the debtors and will probably file a claim against the debtors’ estate for reimbursement.  Although defendant’s removal was timely only as to one debtor, “related to” jurisdiction existed as to that debtor and, accordingly, gave the court power to determine plaintiff’s claims concerning gas sold to all debtors.  The mandatory abstention provisions of 28 U.S.C. § 1334(c)(2) did not apply because plaintiff stated both a core claim for recovery of the proceeds of the sale from the debtors to defendant and a supplemental claim for recovery of the proceeds of the sale from defendant to third-parties.  The bankruptcy court erred, however, in holding that the conversion action was automatically stayed under § 362(a).  Plaintiff’s claim for conversion against defendant was against a non-debtor and did not implicate the property of the debtors, so the automatic stay did not apply to it.


Fifth Third Bank, Indiana, v. Edgar County Bank & Trust
--- F.3d ----, 2007 WL 765894 (7th Cir. Mar. 15, 2007)
Holding:  Appeals of parties’ various claims in an adversary proceeding were ripe because the adversary proceeding had been fully resolved and because a plan had been confirmed in the underlying bankruptcy – both final judgments.  A final judgment is the prerequisite for appeal pursuant to Fed.R.Civ.P. 54(b), made applicable in bankruptcy proceedings pursuant to Fed. R. Bankr.P. 7054(a).


In re Zahn
--- F.3d ----, 2007 WL 817510 (8th Cir. Mar. 20, 2007)
Holding:  Order denying confirmation of a Chapter 13 plan is not a final order, and debtor does not have standing to appeal an order confirming a Chapter 13 plan even though the debtor objected to her own plan.  Debtor filed a statement of current monthly income that did not include the distribution that her non-filing spouse had taken from his IRA account.  The bankruptcy court denied confirmation of the plan because inclusion of this income would have required a commitment period of five years rather than three.  The debtor filed an appeal, but it was dismissed as interlocutory.  The debtor filed an amended statement that included the IRA distribution and an amended plan with a commitment period of five years.  The debtor then objected to her own plan.  The bankruptcy court confirmed the plan.  Since the debtor was not an aggrieved party from the confirmation order, the appeal was dismissed for lack of standing.


In re Troff
--- F.3d ----, 2007 WL 766277 (10th Cir. Mar. 15, 2007)
Holding:  Debtor’s criminal restitution obligation pursuant to Utah state law was non-dischargeable pursuant to § 523(a)(7), even in the absence of two of the three factors required by the statute – namely, that the payments be made to a governmental unit and they not compensate the victim’s pecuniary loss.  The plain language of § 523(a)(7) is not dispositive in light of Congress’ long-established reliance on or acquiescence to the U.S. Supreme Court’s decision in Kelly, which held that federalism prohibits bankruptcy law from interfering with state criminal sentences.