Recent Bankruptcy Decisions from the Appellate Courts - May 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/

SECOND CIRCUIT

In re Methyl Tertiary Butyl Ether Prods. Liab. Litig.
--- F.3d ----, 2007 WL 1500338 (2d Cir. May 24, 2007)
Holding:  State court actions initiated by states alleging that defendants contaminated public drinking water supplies are civil actions to enforce police or regulatory powers under 28 U.S.C. § 1452(a).  The actions, thus, may not be removed to federal district court even though a defendant is a bankruptcy debtor.  Even though the state actions seek monetary damages, the goal of the actions is to remedy and prevent environmental damage with potentially serious consequences for public health, meaning the state actions are efforts by the states to enforce police or regulatory power. 

FOURTH CIRCUIT

Valley Historic Ltd. P’ship v. Bank of New York
--- F.3d ----, 2007 WL 1439734 (4th Cir. May 17, 2007)
Holding:  Bankruptcy court lacked subject-matter jurisdiction over debtor’s post-confirmation adversary proceeding.  In the adversary proceeding, debtor claimed (1) that creditor breached its agreement with debtor by unilaterally increasing lease payments pre-petition and (2) that creditors tortiously interfered with debtor’s contractual relationship post-petition.  The court held that “arising in” jurisdiction did not exist under 28 U.S.C. § 1334(b) for debtor’s first claim because it pre-dated the filing of the bankruptcy petition or for debtor’s second claim because, even though it arose while the bankruptcy case was pending, the claim bore only a coincidental relationship to the bankruptcy case and would have existed whether or not the debtor filed bankruptcy.  The court also held that “related to” jurisdiction did not exist under 28 U.S.C. § 1334(b) because the debtor had paid all its creditors before instituting the adversary proceeding and the plan had been substantially consumed.  Although the plan provided for the bankruptcy court to retain jurisdiction over certain matters, § 1334 jurisdiction cannot be created where it is otherwise lacking.  Finally, although a bankruptcy petition gives the court jurisdiction over property of the estate, that property vests in the reorganized debtor upon confirmation of plan, so it can no longer be considered property of the estate.

FIFTH CIRCUIT

In re Soileau
--- F.3d ----, 2007 WL 1475214 (5^th Cir. May 22, 2007)
Holding:  State may not avoid, on grounds of sovereign immunity alone, discharge of debtor’s forfeiture judgment incurred as surety on bail bonds.  An in rem bankruptcy proceeding brought merely to obtain the discharge of a debt by determining the rights of various creditors in the debtor’s estate in no way infringes the sovereignty of a state as a creditor.  Accordingly, the bankruptcy court correctly denied the state’s motion to dismiss.  Despite criticism of the Court’s earlier opinion in Hickman v. Texas, 260 F.3d 400, that a forfeiture judgment is not nondischargeable under § 523(a)(7), the Court did not re-visit the issue and, instead, focused solely on the sovereign immunity defense to bankruptcy court jurisdiction.

SIXTH CIRCUIT

In re DSC, Ltd.
--- F.3d ----, 2007 WL 1483842 (6^th Cir. May 23, 2007)
Holding:  Section 303(c) does not grant petitioning creditors the absolute right to join an involuntary case.  Bankruptcy court may set deadline for petitioning creditors to join an involuntary case and deny joinder to creditors who do not meet the court’s deadline under Rule 1003(b).  Since an insufficient number of qualified creditors joined in the initial involuntary petition and subsequent petitioning creditors did not meet the bankruptcy court’s deadline for joining, the bankruptcy court did not err in dismissing the involuntary petition.    

SEVENTH CIRCUIT

In re Globe Bldg. Materials, Inc.
484 F.3d 946   (7th Cir. May 4, 2007)
Holding:  An equipment manufacturer sued by the Trustee for recovery of a preferential payment could not claim that its subsequent partial shipment of equipment components to the debtor constituted new value, because at the time of the payment, the manufacturer was obligated to ship the components.  The court gave weight to the connection between the contract law concept of consideration and new value.  It ruled that because the pre-petition contract called for a single price for the assembled equipment, and because the partial payments and partial equipment component shipments were not tied to or conditioned on each other, the shipments to the debtor were part of the original consideration that had been given to the debtor in the underlying contract, and thus nothing "new" had been given when the components were shipped.

EIGHTH CIRCUIT

In re Pyatt
--- F.3d ----, 2007 WL 1486064 (8^th Cir. May 23, 2007)
Holding: An entity lacking present possession of property cannot be subject of a § 542 motion to compel turnover.  When debtor filed Chapter 7 petition, he had several checks outstanding.  Those checks were honored post-petition.  Trustee filed motion to compel debtor to turnover the value of the checks honored post-petition.  Since the checks had been honored, debtor no longer had possession of the funds and could not be compelled to turn them over to the trustee.

NINTH CIRCUIT

Nichols v. Birdsell
--- F.3d ----, 2007 WL 1344219 (9th Cir. May 9, 2007)
Holding:  Debtors' irrevocable pre-petition decision to apply their tax overpayment to their future tax liability did not remove the value of the overpayment from the estate.  The Trustee could require that the Debtors turn over the value of the overpayment to the Trustee pursuant to § 542, regardless of the IRS' refusal to refund the overpayment to the Debtors.

TENTH CIRCUIT

In re Ford
--- F.3d ----, 2007 WL 1445519 (10^th Cir. May 17, 2007)
Holding: Bankruptcy court properly denied debtor’s request to amend schedules to disclose a personal injury settlement and claim the proceeds as exempt.  Since the debtor had acted in bad faith and the amendment would prejudice creditors, the motion was appropriately denied.  The bankruptcy court found that debtor knew of the undisclosed claim and had a motive for concealing it.  Additionally, debtor delayed disclosing the claim even after learning of the duty to disclose.  During that time, she settled the claim in a way that resulted in it being classified entirely as a claim for personal injury, which is exempt, rather than partially a claim for property damage, which is not exempt.  Since the debtor intentionally concealed the claim and the concealment prejudiced creditors and the trustee’s administration of the estate, the bankruptcy court did not err in denying the amendment.

ELEVENTH CIRCUIT

In re Omine
--- F.3d ----, 2007 WL 1373812 (11th Cir. May 11, 2007)
Holding:  State of Hawaii ’s sovereign immunity was both abrogated and waived, and thus the State was subject to sanction for violation of the automatic stay by attempting to collect directly from Chapter 13 debtors outside of their bankruptcy plan.  The automatic stay is fundamental to a bankruptcy court’s exercise of its in rem jurisdiction, and therefore the State has abrogated its sovereign immunity in regard to the automatic stay upon its ratification of the Constitution, in light of the Supreme Court’s decision in Katz.  The State’s proof of claim in the case further waived any sovereign immunity argument, as well.  Punitive damages could not be awarded against the State for its violation of the stay, because § 106(a)(3) prohibits an award of punitive damages against a State, even though the section lays out grounds for statutory abrogation, and the abrogation at issue here was not by statute.  Post-Katz, neither the plain text nor the judicial history of § 106(a)(3) indicates that the damages limitations therein were conditioned on the manner in which a State’s sovereign immunity is ultimately deemed to have been abrogated.

In re Celotex Corp.
--- F.3d ----, 2007 WL 1532345 (11^th Cir. May 29, 2007)
Holding:  Trustees of trust created by Chapter 11 plan did not have authority to deny payment for claims approved by claims administrator pursuant to plan.  Administrator had approved hundreds of claims belonging to one claimant, but, when trustees refused to pay the claims, claimant filed motion with the bankruptcy court to compel payment of the allowed claims.  The plan gave the administrator virtually exclusive authority to implement claims resolution procedures and to allow or disallow claims.  The trustees, on the other hand, had no authority to independently review or overrule the administrator’s determinations.  Instead, the trustees had to either pay the allowed claims or, if the trustees believed claims should not have been allowed, promptly seek instructions from the bankruptcy court.  The bankruptcy court was required to then use an abuse of discretion standard to analyze the administrator’s approval of the claims.