Recent Bankruptcy Decisions from the Appellate Courts - April 2007



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


In re Lafata
--- F.3d ----, 2007 WL 969520 (1st Cir. Apr. 3, 2007)
Holding:  Anti-modification provision of § 1322(b)(2), prohibiting modification of the rights of a holder of “a claim secured only by a security interest in real property that is the debtor’s principal residence,” does not apply if the debtor’s principal residence only encroaches on the mortgaged property.  Debtor mistakenly built a house that straddled the property line between a lot the debtor owned and a lot her did not own.  Debtor mortgaged the property he owned to bank, and the bank’s title work did not disclose that the majority of the house was not on the mortgaged property.  Debtor’s Chapter 13 plan sought to bifurcate bank’s claim into secured and unsecured portions, with the secured portion, based on the appraised value of the lot on which a small portion of the house sat, worth only a fraction of the amount loaned.  Although a portion of debtor’s principal residence encroached on property in which the bank held a security interest, the property was not the debtor’s principal residence.  The policy behind the anti-modification provision of § 1322(b)(2) was to benefit the residential mortgage market, but here the lender had failed to exercise reasonable due diligence before making the loan. 


In re Adelphia Business Solutions, Inc.
--- F.3d ----, 2007 WL 1097078 (2d Cir. Apr. 13, 2007)
Holding:  Bankruptcy court did not abuse its discretion when it gave retroactive effect, 33 months after initially hearing the matter, to its order authorizing rejection of an executory lease.  When the court heard the rejection motion, the bankruptcy judge stated that he would take the motion under advisement and that, if he approved the rejection, it would be retroactive to the date of the hearing so as to limit the estate’s administrative expense liability.  Debtor then abandoned the premises.  Years passed as both the court and the parties allowed the matter to languish.  When the lessor finally brought the matter back to the court’s attention, the court authorized the rejection of the lease and held that the rejection was effective as of the date of the initial hearing.  The lessor waived the argument that the bankruptcy court does not have equitable authority to make its order retroactive, so the appellate court assumed the power existed without deciding that question.  Assuming the power exists, the bankruptcy court did not abuse its discretion because, at the time of the initial hearing, the court had put the lessor on notice that the decision would be retroactive and the lessor then acquiesced in the court’s delay by not raising the issue for years.  Also factoring into the court’s decision were the debtor’s decision to immediately vacate the premises and the lessor’s ability to move for stay relief and lease the premises to another tenant.

In re Weber
--- F.3d ----, 2007 WL 1097077 (2d Cir. Apr. 13, 2007)
Holding:  28 U.S.C. § 158(d), as amended by BAPCPA, authorizes circuit courts, in their discretion, to accept appeals of certain questions certified a bankruptcy court.  The court declined to hear such an appeal in this case, however, because no conflicting decisions existed to create uncertainty in the bankruptcy courts given that all three courts in the circuit that had considered the question had reached the same conclusion. 


Continental Airlines, Inc. v. Eastern Pilots Merger Comm., Inc. (In re Continental Airlines, Inc.)
--- F.3d ----, 2007 WL 1191031 (3d Cir. Apr. 24, 2007)
Holding:  Debtor cannot be required to attend arbitration of claim that had been discharged in bankruptcy.  Eastern pilots asserted that Continental pilots were liable under Eastern collective bargaining agreement, which required arbitration.  Eastern pilots also asserted that even though Continental’s liability under collective bargaining agreement had been discharged, Continental’s duty to arbitrate had not.  The court held that an arbitration that could not result in an enforceable award would be futile, so Continental would not be required to attend arbitration.


Internal Revenue Svc. v. White (In re White)
--- F.3d ----, 2007 WL 1176232 (4th Cir. Apr. 23, 2007)
Holding:  Surrender of collateral under § 1325(a)(5)(C) occurs when the debtor relinquishes all rights in property, including the right to possession.  Internal Revenue Service filed a pre-petition tax lien against Chapter 13 debtor’s assets.  Debtor proposed to partially satisfy lien by surrendering certain apparel and household goods that were exempt from administrative levy under the Internal Revenue Code.  In the absence of actual physical turnover of the property, this did not constitute “surrender” because the IRS would have to engage in additional litigation before it could execute on the property offered by the debtor. 


In re Dollie’s Playhouse, Inc.
--- F.3d ----, 2007 WL 1040318 (7th Cir. Apr. 9, 2007)
Holding:  Debtor’s adversary proceeding against former landlord for breach of fiduciary duty and conversion was barred by res judicata and full faith and credit statute pursuant to 28 U.S.C. § 1738, where Debtor and landlord had already litigated lease-related issues in state court.

In re ABC-Naco, Inc.
--- F.3d ----, 2007 WL 1040242 (7th Cir. Apr. 9, 2007)
Unsecured creditors could avoid as preferential transfers a debtor's payments for Microsoft software during the 90 days prior to its bankruptcy filing.  Debtor's continued use of the software following the payments did not constitute "new value" pursuant to § 547(c)(4), because the software vendor did not have the power to revoke the debtor's software license in the event of default.  Even if, upon nonpayment, the vendor could have caused Microsoft to revoke the debtor's software license, its forbearance from doing so did not constitute new value.

Village  of Rosemont v. Jaffee
--- F.3d ----, 2007 WL 967046 (7th Cir. Apr. 3, 2007)
Holding:   Since sovereign immunity prevented bankruptcy court from granting the relief sought and the confirmed plan in the Chapter 11 case did not require defendants to act in accord with the relief sought, dismissal of adversary proceedings against state gaming board and its members was proper.  A letter from the gaming board was incorporated into debtor’s Chapter 11 plan.  That letter indicated that the board would support transfer of a gaming license from debtor to the high bidder at an auction, but the letter also stated that the board reserved the right to revoke this commitment.  The letter, thus, was not a binding commitment from the board.  Sections 105(a) and 1142(b) do not give the bankruptcy court substantive power to order actions not otherwise provided for by a confirmed plan or the Bankruptcy Code.  Additionally, board has regulatory authority over the license, and the board did not waive sovereign immunity by asserting this authority.   


In re La'Teacha Tigue
--- F.3d ----, 2007 WL 1013352 (8th Cir. Apr. 5, 2007)
Holding:     The Court considered two issues on appeal.  (1) Debtor’s appeal of order granting mortgage lender’s motion for relief from stay to foreclose was moot, where by the time of the order, the real property at issue had been deemed exempt property pursuant to § 522(l).  Because exempt property is not property of the estate, and because the automatic stay as it relates to acts against property of the estate terminates upon the exemption being granted under § 362(c)(1), the order granting relief from stay after that point was superfluous.  (2) Debtor’s appeal of the settlement agreement between the mortgage lender and the trustee was not equitably moot, however, where portions of the settlement agreement involving payment of fees and insurance proceeds could be unwound to return parties to the earlier status quo.

In re Senior Cottages of America , LLC
--- F.3d ----, 2007 WL 958145 (8th Cir. Apr. 2, 2007)
Holding:  While bankruptcy court had discretion to deny the trustee's motion to amend his fraudulent transfer complaint against insiders of the debtor, the district court erroneously upheld the denial on the basis that the trustee did not have standing to assert a claim when the damages would be payable to creditors.  A trustee holds claims belonging to the debtor at the time of filing pursuant to §  704(1), and claims that a debtor was wrongfully deprived of its assets pre-petition is a claim a trustee has standing to assert.  There is no requirement in the avoidance provisions of § 541 that creditors not be the primary beneficiaries of a trustee's avoidance claim, and such a requirement, if imposed, would invalidate avoidance claims in any case in which the estate could not make creditors whole.  The availability to the defendants of the in pari delicto defense would also not affect the trustee's standing, because it is an affirmative defense and not a constitutional bar to the trustee's assertion of the claim.


Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys., Inc.)
--- F.3d ----, 2007 WL 968386 (9th Cir. Apr. 3, 2007)
Holding:  A debt may be incurred within the “ordinary course of business” under § 547(c)(2) even if the debt is the first such agreement between the debtor and creditor and even if the debt was restructured.  Creditor agreed to develop products for debtor, but the relationship soured.  The parties entered into a settlement agreement after creditor threatened to sue debtor.  Debtor made timely payments under the settlement agreement until filing a Chapter 7 petition pre-BAPCPA.  Creditor argued that the payments were subject to the ordinary course of business defense.  A first-time debt between a debtor and creditor may qualify as a “debt incurred in the ordinary course of business” if the debt is ordinary in relation to the specific debtor’s and creditor’s past practices when dealing with other, similarly situated parties.  When the original agreement between the parties has been revised, both the pre-revision and post-revision arrangements are relevant to determining whether the debt was incurred in the ordinary course of business.  Summary judgment was inappropriate, however, because no evidence was submitted as to whether the original agreement was arms-length, routine and ordinary.  Additionally, although creditor submitted a declaration indicating that it frequently uses the threat of litigation as a means of revising payment agreements, no evidence established that the particular revision between creditor and debtor was, in that respect, entered into in the ordinary course of business. 

Wiersma v. Bank of the West (In re Wiersma)
--- F.3d ----, 2007 WL 1029761 (9th Cir. Apr. 6, 2007)
Holding:  Debtors’ appeal to Bankruptcy Appellate Panel was properly dismissed for lack of jurisdiction even though the notice of appeal was timely filed pursuant to Federal Rule of Bankruptcy Procedure 8002(a), on the grounds that Debtors failed to respond to B.A.P.’s request for briefing on whether the order appealed was a final order.  The B.A.P. request for briefing had called into question the finality of the order being appealed and warned that a consequence of failure to respond would be dismissal of the appeal for failure to prosecute.  B.A.P.’s later assertion of jurisdiction, on the basis that it was mistaken in doubting the finality of the order, was invalid (the order that had been appealed was final because it determined the secured status of certain creditors.)  A court can correct its factual mistakes, but the “mistake” at issue was not a factual error.  The “unique circumstances” doctrine did not warrant a different result, because the B.A.P. did not affirmatively mislead the Debtors.  Absent a mistake or unique circumstances, the law of the case doctrine stripped the B.A.P. of jurisdiction pursuant to its own previous orders.

Sherman  v. Harbin (In re Harbin )
--- F.3d ----, 2007 WL 1203545 (9th Cir. Apr. 25, 2007) (amended opinion --- F.3d ----, 2007 WL 1322389 (9th Cir. May 8, 2007))
Holding:  In making the plan feasibility determination required by § 1129(a)(11), a bankruptcy court must evaluate the likely outcome of state court litigation to which the debtor is a party.  Also, a bankruptcy court has discretion to retroactively approve debtor’s post-petition financing  under § 364(c)(2).  (1) At the time of plan confirmation, a state trial court had determined that the debtor had no liability to a certain creditor that had asserted a very large claim, but the state court decision was on appeal.  The bankruptcy court sustained an objection to the creditor’s proof of claim and overruled the creditor’s objection to confirmation.  The bankruptcy court confirmed the debtor’s plan that reserved no allowance for this creditor but paid other creditors in full.  The creditor appealed the confirmation order, and, while the appeal was pending, the state appellate court reversed the state trial court and held that the debtor was liable on the creditor’s claim.  Ninth Circuit held that the bankruptcy court committed clear error by not considering the possibility that a potential future judgment would affect the debtor’s ability to implement its plan.  The bankruptcy court was not required to wait for the resolution of the state court appeal before confirming a plan but had an obligation to consider the likelihood of the creditor’s success in the state court appeal and the impact of such potential success on the feasibility of the plan.  (2) On the issue of post-petition financing, the Ninth Circuit affirmed the bankruptcy court’s order approving, nunc pro tunc, the debtor’s refinancing of his house.  The debtor did not obtain approval from the court prior to this transaction, but § 364(c)(2) does not require the bankruptcy court to authorize a financing transaction before the debt is incurred.  The bankruptcy court should consider four factors in determining whether to exercise its equitable discretion to grant nunc pro tunc approval of post-petition financing under § 364(c)(2): whether the financing transaction benefits the bankruptcy estate, whether the creditor adequately explained its failure to seek prior authorization or otherwise acted in good faith, whether there is full compliance with the requirements of § 364(c)(2) and whether the circumstances of the case present one of those rare situations in which retrospective authorization is appropriate.

Brown v. Wilshire Credit Corp. (In re Brown)
--- F.3d ----, 2007 WL 1217739 (9th Cir. Apr. 26, 2007)
Holding:  Minute entry granting summary judgment was not a final order because it was not a full adjudication of the issues at bar and did not clearly evidence the court’s intention that it be the court’s final act in the matter.  Defendant moved for summary judgment and sanctions in adversary proceeding initiated by debtor.  At oral argument, bankruptcy court indicated it would grant summary judgment motion, entering a minute entry that would be the order, and would take under advisement the request for sanctions.  The minute entry stated that the summary judgment motion was granted and that the court was taking the sanction motion under advisement.  However, the minute entry did not state that judgment would be entered or that the adversary proceeding was dismissed with prejudice.  After the court entered an order granting the sanctions motion, debtor filed a notice of appeal of the summary judgment motion, but the notice was filed more than ten days after the minute entry.  The minute entry was not an order triggering the ten-day window in which to file a notice of appeal because it did not include dispositive language sufficient to put debtor on notice that his entire action was over and the next step was to appeal.


In re Duran
--- F.3d ----, 2007 WL 987421 (10th Cir. Apr. 4, 2007)
Holding:  Tenth Circuit adopted district court opinion that a secured creditor did not the violate automatic stay when it repossessed the Debtor’s vehicle less than ten days after the entry of the bankruptcy court’s order granting relief from the stay.  Even though Federal Rule of Bankruptcy Procedure 4001(a)(1) provides that the effect of an order granting relief from the automatic stay is itself stayed for ten days, the creditor’s original motion of relief was filed more than thirty days prior to the repossession, and the automatic stay terminated after thirty days pursuant to § 362(e).  Because Rule 4001(a)(1) cannot suspend the automatic termination of the stay pursuant to § 362(e), the creditor was not subject to the automatic stay at the time of repossession.


State of Florida  Dept. of Revenue v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.)
--- F.3d ----, 2007 WL 1138867 (11th Cir. Apr. 18, 2007)
Holding:  Tax exemption found in post-BAPCPA § 1146(a) may apply to a § 363 sale that occurs before a plan is confirmed.  Debtor’s § 363 sale of substantially all its assets was necessary to consummate debtor’s plan.  Accordingly, the sale was one “under a plan confirmed under § 1129” even though no plan had been confirmed at the time of the sale.  The “under a plan” language of § 1146(a) is ambiguous because it can be read either as a temporal restriction on when the confirmation of the plan must occur or as describing eligible transfers regardless of when the plan is confirmed.  The court chose the later reading, concluding that the necessity of the transfers to the consummation of a confirmed plan of reorganization, rather than the timing of the transfers, was the touchstone of the analysis.