Recent Bankruptcy Decisions from the Appellate Courts - August/September 2007



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


In re Gencarelli
--- F.3d ----, 2007 WL 2446883 (1st Cir. Aug. 30, 2007)
Holding:  In the case of a solvent debtor, lender is entitled to receive contractual pre-payment penalty to the extent penalty is enforceable under state law.  As part of bankruptcy case, debtor’s assets were sold at auction, the proceeds of which were sufficient to pay all creditors in full with interest.  A multi-million dollar surplus remained.  Lender was repaid following the auction, triggering the pre-payment penalty.  Section 506 provides rules for determining whether and to what extent a claim is secured, but does not answer the question whether the claim itself should be allowed.  The general rules governing allowance of claims are set forth in § 502.  Since unsecured claims are paid-in-full in a solvent debtor case, lender is entitled to collect the pre-payment penalty if it is enforceable under state law.


Estate of Denton  v. Hyman (In re Hyman)
--- F.3d ----, 2007 WL 2492789 (2d Cir. Sept. 6, 2007)
Holding:  In the context of non-dischargeability of a debt under § 523(a)(4), “defalcation” requires a showing of conscious misbehavior or extreme recklessness – a showing akin to the showing required for scienter in the securities context.  Pre-petition state court judgment against debtor did not have preclusive effect on the question of whether debtor engaged in defalcation in a fiduciary capacity because the state court made no express findings with regard to debtor’s state of mind.


In re Shenango Group Inc.
--- F.3d ----, 2007 WL 25055585 (3d Cir. Sept. 6, 2007)
Holding:  (1) After confirmation of a plan, a bankruptcy court has “related to” jurisdiction under 28 U.S.C. § 157(c) if there is a close nexus between the question presented and the bankruptcy plan.  Matters affecting interpretation, implementation, consummation, execution or administration of a confirmed plan typically have the requisite close nexus.  Claim by debtor’s retirees that plan required debtor to immediately fund a pension plan had a close nexus to the bankruptcy case, so “related to” jurisdiction existed.  In reaching this determination, the court noted: the debtor was a party to the dispute, the dispute concerned the plan and interpretation of a plan provision and the debtor’s potential liability if the retirees were successful on their claim would be more than incidental.  (2)  Bankruptcy court’s interpretation of its own plan is subject to abuse of discretion review unless the issue being reviewed presents only a question of law, in which case the standard of review is de novo.

In re Fleming Companies, Inc.
--- F.3d ----, 2007 WL 2390776 (3d Cir. Aug. 22, 2007)
Holding:  Debtor may not assume and assign executory contract when proposed assignee does not intend to comply with a material and economically significant term of contract.  Executory contract required debtor to provide products to grocery retailer from a certain facility.  Debtor sought to assume and assign the contract, but, at the direction of the proposed assignee, debtor rejected the lease of the facility that the contract required the assignee to use.  Non-debtor grocery retailer objected, arguing that the proposed assignment did not provide adequate assurance of future performance as required by § 365(f)(2)(B), and the appellate court agreed. 


Mercantile Peninsula Bank v. French (In re French)
--- F.3d ----, 2007 WL 2410874 (4th Cir. Aug. 27, 2007)
Holding:  Since disputed issues of material fact existed, bankruptcy court erred in granting summary judgment to creditor in adversary proceeding to determine whether debtor should be denied a discharge under § 727(a)(3) and § 727(a)(4)(A).  Debtor’s affidavit that his inaccurate or inconsistent testimony resulted from confusion or impaired mental function and physician’s affidavit that debtor suffered from a disease that made it difficult for debtor to answer questions accurately created factual issues as to whether debtor knowingly and fraudulently made a false oath or account so as to prevent, under § 727(a)(4)(A), discharge.  A factual issue also existed as to whether debtor failed to keep or preserve records of his financial condition so as to prevent, under § 727(a)(3), discharge.  The bankruptcy court’s decision granting summary judgment was based on its finding that debtor was sophisticated, should have maintained better records and should have produced the records in a more timely manner. 


Stanley  v. Trinchard
--- F.3d ----, 2007 WL 2669828 (5th Cir. Sept. 13, 2007)
Holding:  Debtor’s discharge under Chapter 7 did not eliminate compensable damages that may have resulted from debtor’s attorney’s alleged pre-petition legal malpractice.  District court erred in granting summary judgment to defendant in trustee’s malpractice action.  Defendant argued that debtor suffered no damages as a result of defendant’s purportedly negligent actions because all debts were discharged.   The appellate court disagreed, finding that it would be improper to excuse the malpractice liability of a potentially negligent attorney because of the financial misfortunes of his client and that allowing the malpractice action to go forward despite the client’s bankruptcy discharge would not threaten the primary purpose behind the discharge, which is avoiding financial harm to the debtor.


Parker v. Goodman (In re Parker)
--- F.3d ----, 2007 WL 2416173 (6th Cir. Aug. 28, 2007)
Holding:  Bankruptcy court properly enjoined Chapter 7 debtor from pursuing a state court action that was property of the estate and had been sold post-petition to another party.  Debtor’s challenge to the bankruptcy court’s order allowing the sale was moot under § 363(m) because the debtor did not seek a stay of the order and the sale had been effectuated.  Also, the injunction did not violate the Anti-Injunction Act because § 105 is an express authorization by Congress allowing bankruptcy courts to enjoin state court proceedings.


Thacker v. Federal Commc’ns Comm’n (In re Magnacom Wireless, LLC)
--- F.3d ----, 2007 WL 2694717 (9th Cir. Sept. 17, 2007)
Holding:  Proceeds of sale by Federal Communications Commission of spectrum formerly licensed to debtor did not become property of the estate.  The FCC had obtained relief from the stay to terminate debtor’s licenses, and no one took the position that § 525 prevented the termination.  Chapter 7 trustee argued that the proceeds of the new licenses for the same spectrum became property of the estate under § 541.  The court disagreed.  Under applicable non-bankruptcy law, a licensee is allowed to use spectrum but does not own it.  Accordingly, the FCC’s sale of new licenses for the use of spectrum to which debtor no longer had any rights did not generate proceeds traceable to debtor’s licenses under § 541(a)(6).

In re International Fibercom, Inc.
--- F.3d ----, 2007 WL 2610892 (9th Cir. Sept. 12, 2007)
Holding:  Bankruptcy court, acting under Rule 9024(b)(6), properly limited its prior order because the prior order granted relief not permitted by the Code and the motion that prompted the prior order violated notice and conspicuousness requirements.  Debtor and its workers’ compensation insurance provider agreed that debtor would assume pre-petition insurance contract.  As part of this agreement, debtor agreed to pay a fixed amount for an extension of the policy, set aside certain funds to reimburse insurer for deductibles under the policy and grant insurer a first priority security interest in the funds.  Debtor also agreed that insurer would be entitled to an administrative claim if the collateral was insufficient to reimburse insurer for the deductible amounts.  Debtor filed a first day motion to assume the insurance policy under § 365 and effectuate the other terms of the agreement.  The motion did not conspicuously disclose, as required by local rules, that the insurer would be granted a security interest in post-petition assets.  The motion also did not disclose insurer’s significant unpaid pre-petition claims against debtor.  Debtor’s motion to assume was granted without objection.  Debtor did not fulfill its obligations under the assumption order, and insurer sought release of the collateral.  The trustee moved to clarify or vacate the order under Rule 9024.  The bankruptcy court correctly granted that motion. 

Brawders v. County  of Ventura (In re Brawders)
--- F.3d ----, 2007 WL 2596468 (9th Cir. Sept. 11, 2007)
Holding:  Chapter 13 plan discharged county’s unsecured tax claim but did not affect county’s tax lien on debtor’s property.  Section 1328 discharges claims but not interests, which include liens and other interests in property.  Post-confirmation, county violated the automatic stay by sending two notices seeking to collect on the claim that had been discharged.

In re Excel Innovations, Inc.
--- F.3d ----, 2007 WL 2555941 (9th Cir. Sept. 7, 2007)
Holding:  When a debtor applies for a preliminary injunction under § 105(a) to stay a proceeding in which the debtor is not a party, the bankruptcy court must balance the debtor’s likelihood of success in reorganization against the relative hardship to the parties and consider the public interest.  Consideration of whether the debtor has an inadequate remedy at law or would suffer irreparable harm is unnecessary.


In re Johnson
--- F.3d ----, 2007 WL 2421757 (10th Cir. Aug. 28, 2007)
Holding:  (1) Automobile retailer willfully violated automatic stay by repossessing debtor’s vehicle after Chapter 13 petition was filed and refusing to return the vehicle after learning of the filing.  Retailer did not receive official notice of the bankruptcy case because of debtor’s error in listing retailer’s address on the petition, but debtor’s attorney called the retailer, informed retailer of the bankruptcy and requested return of the vehicle.  Retailer believed the call was a scam by debtor to regain possession of the vehicle.  Retailer’s belief was based on the demeanor of debtor’s attorney, which seemed unlike that of other attorneys with whom the retailer had dealt, the attorney’s refusal to provide documentation proving debtor had filed a bankruptcy petition and retailer’s belief that debtor’s previous bankruptcy prevented filing of another petition.  In order to prove a willful violation of the automatic stay under § 362(k)(1), the debtor bears the burden of establishing by a preponderance of the evidence that the creditor knew of the automatic stay and intended the actions that constituted the violation; no specific intent is required.  A creditor’s good faith belief that it had a right to the property is irrelevant.  Retailer’s refusal to return the vehicle was a willful violation of the automatic stay.  Despite the demeanor of debtor’s counsel, retailer had a responsibility to investigate further if it seemed debtor’s counsel was making false representations.  Retailer was a sophisticated party represented by counsel and familiar with repossession and bankruptcy procedure.  Retailer knew debtor’s name and address and could easily have determined whether debtor had filed a bankruptcy petition.  (2)  Automobile retail installment contract was not an executory contract.  Debtor’s sole obligation to tender payments and retailer’s sole obligation to release its lien when handing over vehicle title are insufficient to classify the sales contract as executory.  (3)  Bankruptcy court properly avoided retailer’s lien, which retailer attempted to perfect post-petition without obtaining relief from the stay.