Recent Bankruptcy Decisions from the Appellate Courts - October/November 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 Smith
--- F.3d ----, 2007 WL 3243846 (2d Cir. Nov. 5, 2007)
Holding:  (1) Chapter 7 debtor's objection to replacement of special counsel to prosecute personal injury action was not a sufficient basis to deny trustee's motion under § 327(a).  The best interests of the estate would be served by replacement because the existing attorney had filed a state court action in the debtor's name despite an order from the bankruptcy court that the action be filed in the trustee's name.  The existing attorney had then delayed nine months changing the caption of the state court action and transferred the case to another attorney without approval from the court or trustee.  (2) When a debtor moves to dismiss her case under § 707(a), the debtor's ability to repay her debts may constitute cause for dismissal.  Debtor had obtained financing that would repay all creditors in full with interest, whereas, without dismissal, the creditors would not be paid until the debtor's personal injury suit - the sole asset of the estate - was completed, and if that action proved unsuccessful the creditors would receive nothing.  Accordingly, dismissal would be in the interest of creditors.  The bankruptcy court's concern that the debtor had been improperly influenced by the injury attorney the trustee sought to replace was not supported by the record.

THIRD CIRCUIT

Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.)
--- F.3d ----, 2007 WL 3085905 (3d Cir. Oct. 24, 2007)
Holding:  (1) Adversary proceeding alleging accountant misconduct during a case in which the bankruptcy court relied on the accountant's work constitutes a core proceeding.  Matters concerning administration of the estate and proceedings affecting liquidation of estate assets are core under 28 U.S.C. § 157(b)(2).  The bankruptcy court also had "arising in" jurisdiction under 28 U.S.C. § 157(b)(1) because the accountant malpractice could only arise in the context of a bankruptcy case, implicated the integrity of and was inseparable from the bankruptcy process.  (2) Circuit Court had jurisdiction to determine whether bankruptcy court had subject matter jurisdiction and the authority to issue final orders in adversary proceeding.  (3) Since adversary proceeding was a core proceeding, the "close nexus" test was not applicable.  The "close nexus" test only applies when a federal court has jurisdiction over a non-core "related to" proceeding in the post-confirmation context. (4) Bankruptcy court's decision not to remand adversary proceeding to state court in light of arguments that notice of removal was procedurally deficient could not be reviewed by Circuit Court because, under 28 U.S.C. § 1452(b), the decision was based on an equitable ground.  (5) Circuit Court also did not have jurisdiction to decide appeal from bankruptcy court's decision not to abstain from hearing adversary proceeding.  Appeals of decisions involving permissive abstention, whether or not the court abstains, are barred by 28 U.S.C. § 1334(d).

FIFTH CIRCUIT

In re Scotia Pacific Co., LLC
--- F.3d ----, 2007 WL 3349093 (5th Cir. Nov. 13, 2007)
Holding:  (1) Even though case was still pending in the bankruptcy court when the district court certified the appeal to the Circuit Court pursuant to 28 U.S.C. § 158(d)(2), the Circuit Court still had jurisdiction over the appeal.  Interim Rule 8001(f) requires that the bankruptcy court make the certification while the matter is pending in the bankruptcy court.  The bankruptcy court apparently believed it no longer had jurisdiction because an appeal had been taken.  However, the appeal had not been docketed, so the case was still pending in the bankruptcy court, which recommended that the district court certify the appeal.  Where both courts wish to certify the case for appeal, the error is technical in nature and the error does not affect substantial rights, the court may exercise its discretion to decide the appeal on the merits.  (2) Debtor was not a single asset real estate under § 101(51B) because substantial business other than the operation of the real estate occurred on the property.  The debtor had more than 60 employees in its timber operation.  Sophisticated operations took place, such as planning, growing and maintaining the timber as well as building and maintenance of roads on the property.

Elixir Indus. Inc. v. City Bank & Trust Co. (In re Ahern Enters. Inc.)
--- F.3d ----, 2007 WL 3261504 (5th Cir. Nov. 6, 2007)
Holding: Lien on property dealt with in plan was voided under § 1141(c) because lien was not addressed in plan and lienholder participated in the case.  Judgment creditor filed and recorded, pre-petition, a judgment lien on debtor's property that was subject to a prior recorded mortgage that exceeded the value of the property.  Lienholder filed a proof of claim in the case and received notice of the plan but filed no objection.  The plan referred to the property and provided that the mortgage lien would remain in place until paid in full.  Since the plan did not expressly preserve the judgment lien, it was voided.

Friendly Fin. Serv.-Eastgate Inc. v. Dorsey (In re Dorsey)
--- F.3d ----, 2007 WL 3076944 (5th Cir. Oct. 23, 2007)
Holding:  (1) Bankruptcy court erred when it held that creditor did not have standing to challenge dischargeability under § 523 or whether the debtor should be denied a discharge under § 727.  Debtor had obtained confirmation of a Chapter 13 plan, but debtor failed to fulfill his obligation under the plan to surrender collateral to the creditor, and debtor had abandoned the plan by converting the case to one under Chapter 7.  Additionally, debtor acknowledged the debt to the creditor in his Chapter 7 schedules.  Accordingly, the creditor was not bound by the terms of the plan and had standing to file an adversary complaint objecting to discharge and dischargeability.  (2) Even though debtor gave inconsistent testimony about who owned property that constituted a portion of the creditor's purported collateral, the bankruptcy court did not clearly err in holding that the debtor did not intend to deceive the creditor.  Accordingly, the bankruptcy court did not err in denying the objection to discharge of the debt to the creditor under § 523(a)(2).  (3) Creditor's objection to discharge under § 727 was based on debtor's failure to turn over a tax refund pursuant to the terms of the Chapter 13 plan.  The debtor's failure to turn over this refund did not support a denial of discharge under § 727, however, because the debtor received the tax refund after the case was converted to one under Chapter 7.  (4) Bankruptcy court erred in enjoining creditor, based on alleged abusive practices, from filing a complaint under § 523 or § 727 in any Chapter 7 case without prior leave of court.  The only alleged abuse reflected in the record was that the creditor did not have standing to file the complaint in this case, but the appellate court found that the bankruptcy court reaching this conclusion in error.  As a result, there was no basis to enjoin the creditor from filing adversary complaints.

SIXTH CIRCUIT

In re Thompson
--- F.3d ----, 2007 WL 3286743 (6th Cir. Nov. 8, 2007)
Holding:  Improperly venued cases are governed by 28 U.S.C. § 1406.  If a case is brought in an improper venue and an interested party objects, under § 1406 a court has only two options: dismiss the case or transfer the case to a jurisdiction of proper venue.

SEVENTH CIRCUIT

Fischer Inv. Capital, Inc. v. Cohen (In re Cohen)
--- F.3d ----, 2007 WL 3307081 (7th Cir. Nov. 9, 2007)
Holding:  Bankruptcy court correctly granted summary judgment to debtor in adversary proceeding to determine dischargeability under § 523(a)(2)(B).  Although the debt was obtained through a list of accounts receivable, and there was testimony that some of the accounts were "hopeful," the record did not reflect that the hopeful items were not real receivables or were never collected.  Additionally, although it was suggested that the debtor had the intent to deceive, the list of accounts receivable was actually prepared and submitted by debtor's business partner, so there was no basis for attributing any inaccuracies to the debtor.

In re Boone County Utilities, LLC
--- F.3d ----, 2007 WL 3054255 (7th Cir. Oct. 22, 2007)
Holding:  Bankruptcy court did not abuse its discretion in disallowing claims based on a contract to which the debtor was not a party and another claim as untimely.  The untimely claim was filed after the proof of claim bar date and did not relate back to the earlier proofs of claim, all of which mentioned as their basis a contract to which the debtor was not a party.  The untimely claim did not mention a contract, changed the date on which the debt was incurred and increased the claim tenfold.

EIGHTH CIRCUIT

Suggs v. Regency Financial Corp. (In re Suggs)
--- F.3d ----, 2007 WL 3242721 (8th Cir. Nov. 5, 2007)
Holding:  Local rule permitting secured creditor to repossess vehicle if debtor fails to provide proof of insurance enlarges creditors' rights beyond the scope permitted by § 362 and Rule 4001(a).  Obtaining property of the estate or of the debtor without permission from the court or even filing a motion, as allowed by the local rule, is in derogation of the limited ex parte relief allowed under Rule 4001(a).

NINTH CIRCUIT

Lewis v. United States Dept. of Agric. (In re Lewis)
--- F.3d ----, 2007 WL 3243949 (9th Cir. Nov. 5, 2007)
Holding:  1998 amendment to § 523(a)(8)(A) retroactively eliminated the dischargeability of student loans except in cases of undue hardship.  Prior to the 1998 amendment, student loans that had been in repayment for at least seven years could be discharged.  The court rejected debtor's argument that since the earlier version of § 523(a)(8)(A) was in effect when debtor signed his promissory note, he had a contractual or constitutional right to discharge after seven years of repayment.  Bankruptcy is a legislatively created benefit, not a right, and the bankruptcy clause empowers Congress to retroactively impair contracts.

In re Wind N' Wave
--- F.3d ----, 2007 WL 3197102 (9th Cir. Nov. 1, 2007)
Holding:  Petitioning creditors were entitled to recover attorney's fees under § 503(b)(4) for filing of involuntary petition as well as expense of appealing the denial of those fees by the bankruptcy court.  Time and expenses devoted to securing an attorney's fee award are compensable if the services for which compensation is sought satisfy the requirements of § 330(a) and the case exemplifies a set of circumstances where the time and expense incurred in the litigation is necessary.  If attorneys are not compensated for time spent obtaining fee awards, a risk arises that the effectively hourly rate will be decreased.  The appeal of the bankruptcy court's denial of fees was necessary because this was the only method through which the creditors could receive their due compensation.

Ellett v. Stanislaus
--- F.3d ----, 2007 WL 3132404 (9th Cir. Oct. 29, 2007)
Holding:  Debtor's pre-petition taxes were not discharged because the bankruptcy notice sent to the taxing authority incorrectly listed the debtor's Social Security Number.  The Social Security Number listed on the notice belonged to another individual who, according to the records of the taxing authority, owed no taxes.  Accordingly, the taxing authority did not file a proof of claim or otherwise participate in the case.  The misstated Social Security Number violated Rule 1005, and the taxing authority received inadequate notice of the case.