Recent Bankruptcy Decisions from the Appellate Courts - August 2007



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


United States  v. Hyde
--- F.3d ----, 2007 WL 2253522 (1st Cir. Aug. 7, 2007)
Holding: Avoidance of pre-petition lien on debtor’s residence under § 522(f) did not prevent enforcement of post-petition restitution order against proceeds from the debtor’s sale of the residence.  Debtor defrauded his deceased mother’s pension fund so that he received her pension checks for 18 years following her death.  The debt to the pension fund was non-dischargeable, but the pension fund’s pre-petition lien on debtor’s residence was avoided under § 522(f) so as not to impair debtor’s state law homestead exemption.  Post-petition, debtor was convicted of mail fraud and ordered to pay restitution under the Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. § 3613.  When the debtor later sold the residence, the United States sought to garnishment the sale proceeds.  Pursuant to the MVRA, the order of restitution was a lien in favor of the United States on all property of the debtor as if the debt was a tax debt.  Accordingly, the United States in effect possessed a tax lien, which, pursuant to § 522(c)(2)(B), is an exception to the homestead exemption, so that the United States was allowed to execute on the sale proceeds. 

In re Chew
--- F.3d ----, 2007 WL 2165105 (1st Cir. July 30, 2007)
Holding: State court determinations relating to a state law objection to a state law exemption may have preclusive effect in a bankruptcy case.  In Chapter 7 case, debtors claimed state law homestead exemption.  Creditors objected, arguing a portion of the property claimed as exempt was subject to a constructive trust in favor of creditors and, thus, did not belong to the debtors.  Pre-petition, these same creditors had brought state court litigation asserting the same constructive trust theory, but that litigation was dismissed for failure to state a claim.  This determination precluded creditors’ objection in the bankruptcy case.


In re Perlin
--- F.3d ----, 2007 WL 2215602 (3d Cir. Aug. 3, 2007)
Holding:  BAPCPA’s amendment of § 707(b) to create a presumption of abuse against debtors who have primarily consumer debts and have sufficient income to repay their debts did not prohibit a bankruptcy court from considering a debtor’s income and expenses in ruling on a motion to dismiss under § 707(a).  In deciding a motion to dismiss under § 707(a), a bankruptcy court may consider a debtor’s substantial earnings and lavish lifestyle together with any other facts and circumstances surrounding the debtor’s Chapter 7 filing.  Dismissal may not be premised exclusively or primarily on a debtor’s substantial financial means, however.  Otherwise, dismissal would essentially be based upon a debtor’s mere ability to repay, which is prohibited.  In this case, the bankruptcy court did not err in denying creditor’s motion to dismiss.  Although debtors’ annual income was approximately $370,000, debtors spent considerable amounts on luxury items, such as two Lexus automobiles and private school tuition of $5,000 per month, and debtors had saved more than $430,000 for retirement, there was no evidence that debtors schemed to conceal or misrepresent income, inflated expenses to hide income, filed misleading statements or schedules to defraud creditors, unduly interfered with the judicial process or engaged in other misconduct. 

In re Connors
--- F.3d ----, 2007 WL 2215606 (3d Cir. Aug. 3, 2007)
Holding: Section 1322(c)(1) does not give a Chapter 13 debtor the right to cure a default on a mortgage secured by the debtor’s principal residence after the residence is sold at a foreclosure sale.  A foreclosure auction of debtor’s primary residence occurred pre-petition.  Debtor did not exercise any state law right to object to the foreclosure sale and did not redeem within 60 days of the filing, as permitted by § 108(b).  After the 60-day period expired, the foreclosure sale purchaser moved to lift the automatic stay so the purchaser could tender the balance of the purchase price and receive the deed.  Debtor objected, arguing that he could cure the defaults at any time before the deed is delivered to the foreclosure sale purchaser.  The court disagreed, holding that the use of “sold at a foreclosure sale” in § 1322(c)(1) means the foreclosure auction, not subsequent delivery of the deed.

In re Laher
--- F.3d ----, 2007 WL 2199172 (3d Cir. Aug. 2, 2007)
Holding:  Debtor’s interest in an employer-mandated retirement plan, which was used to purchase an annuity, was excluded from the bankruptcy estate under § 541(c)(2).  The annuity was a beneficial interest of the debtor in a trust that contained an enforceable restriction on transfer.  Since “trust” is not defined in the Bankruptcy Code, the court looked to state law and found that the annuity was a trust under New York law.


Tidewater Finance Co. v. Williams (In re Williams)
--- F.3d ----, 2007 WL 2325250 (4th Cir. Aug. 16, 2007)
Holding:  Debtor’s filing of multiple Chapter 13 petitions after receiving a Chapter 7 discharge did not equitably toll the six-year period under § 727(a)(8) for debtor to receive another Chapter 7 discharge.  Section 727(a)(8) does not establish a limitations period for a creditor to assert its claims but, rather, sets forth a condition that a debtor must satisfy in order to qualify for a discharge of debts, and so the theory of equitable tolling was inapplicable.


In re Falcon Products, Inc.
--- F.3d ----, 2007 WL 2317355 (8th Cir. Aug. 15, 2007)
Holding:  As part of a requirement by lender to receive DIP financing, debtor sought to terminate three pension plans as permitted by ERISA guidelines for Chapter 11 debtors, and the bankruptcy court terminated the plans.   Pension Benefit Guaranty Corporation (“PBGC”) appealed, arguing that the plans should be examined for post-bankruptcy viability on a plan-by-plan basis, not in the aggregate, as the bankruptcy court did.  The appellate court disagreed, holding that a plan-by-plan analysis without statutory guidance would be “essentially unworkable.”  Furthermore, such an approach would force the courts to “pick and choose” which plans to terminate, leaving some workers receiving their full pension benefits while leaving others only what is guaranteed under ERISA. 

In re Eagle
--- F.3d ----, 2007 WL 2278902 (8th Cir. Aug. 10, 2007)
Holding:  After fraudulently obtaining cashier's check from bank to purchase real estate and then filing for bankruptcy, pro se debtor appealed orders: (1) sustaining creditor bank's objection to the debtor's claimed homestead exemption in real property and (2) the failure of the bankruptcy court to appoint counsel to represent the debtor.  The appellate court affirmed both orders.  As to the first order, the court held that since the debtor had sold the real property pre-petition, he could not claim a homestead in property he did not own.  As to the second order, the court held that an indigent’s right to counsel exists only in favor of those whose physical liberty is at stake, which was not an issue in the bankruptcy case.

Lange v. Schropp (In re Brook Valley VII, Joint Venture)
--- F.3d ----, 2007 WL 2230065 (8th Cir. Aug. 6, 2007)
Holding: Debtors in possession and those who controlled them violated duty of loyalty to bankruptcy estates when they consented to stay relief and secretly bought estate property at foreclosure sales.  Defendants were partners in 13 commercial real estate partnerships that filed Chapter 11 petitions.  The properties were profitable and had equity, so defendants breached their duty of loyalty when they consented to stay relief, in effect a represention that foreclosure was in the estates’ interests.  Defendants also breached the duty of loyalty when they secretly bid at the foreclosure sales through an entity they controlled.  The purchase price was significantly below the appraised value of the properties.  After the properties were sold, the bankruptcy court converted the case to Chapter 7 and appointed a trustee, who initiated adversary proceedings against the defendants seeking to recover damages for defendants’ breach of their fiduciary obligations.  Defendants argued that the adversary proceedings were impermissible collateral attacks on the foreclosure sales where defendants had taken title that was good against the world.  The court found that Fed. R. Bankr. P. 9024 did not apply because the trustee was not seeking to set aside the orders confirming the sales but was, instead, seeking to recover from defendants for breach of fiduciary duty.  Defendants also argued that they did not owe a duty of loyalty because the properties ceased being property of the estates when stay relief was granted.  The court disagreed, finding that the properties remained property of the estates because lifting the automatic stay merely removes an injunction barring creditors from taking certain actions and does not abandon the interest of the estate in the property.  Since the defendants failed to prove that the transaction was fair and reasonable, the bankruptcy court properly found that defendants breached the duty of loyalty and imposed a constructive trust.  Since the foreclosure sales themselves were breaches of fiduciary duty because the properties were profitable to the estates, the constructive trust included not only the amount by which defendants underpaid at the time of the foreclosure sales but also the profits they received when they sold the properties years later.


In re Mosley
--- F.3d ----, 2007 WL 2263097 (11th Cir. Aug. 9, 2007)
Holding:  In determining the dischargeability of student loans, corroborating medical evidence other than debtor’s own testimony is not required to satisfy the second prong of the Brunner test – that the debtor’s poor state of financial affairs is likely to persist for a significant portion of the repayment period.  Pro se debtor was the sole witness at the discharge hearing and had introduced earnings statements and a letter from his doctor stating debtor’s various medical ailments.  On appeal, the court noted that student loans are generally not dischargeable under § 523(a)(8), and the debtor is not required to introduce expert testimony to satisfy the second Brunner prong.