Recent Bankruptcy Decisions from the Appellate Courts - January/February 2008

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/.

FIRST CIRCUIT

In re Cunningham
--- F.3d ----, 2008 WL 171084 (1st Cir. Jan. 22, 2008)
Holding: Proceeds from post-petition sale of home subject to homestead exemption do not lose their exempt status. The proceeds, thus, are not subject to a nondischargeable pre-petition debt or a judicial lien against the exempt property based on the nondischargeable debt. Creditor argued state law governs disposition of proceeds from voluntary sale of homestead and proceeds became subject to pre-petition nondischargeable debt secured by judicial lien on the homestead property. Under § 522(c), exempt property is not liable “during or after the case” for pre-petition debt.

In re Larson
--- F.3d ----, 2008 WL 186506 (1st Cir. Jan. 23, 2008)
Holding: The state crime of negligent vehicular homicide qualifies as a “criminal act” that would cap a debtor’s homestead exemption at $125,000 under § 522(q)(1)(B)(iv). Debtor was found criminally liable for negligent vehicular homicide. The Court found that § 522(q)(1)(B)(iv) applied to a criminal act, even if based in negligence rather than intentional, willful or reckless conduct.

SECOND CIRCUIT

In re Johns-Manville Corp.
--- F.3d ----, 2008 WL 399010 (2nd Cir. Feb. 15, 2008)
Holding: A bankruptcy court’s jurisdiction to enter a channeling injunction under § 524(g) is limited to claims that directly affect the res of the bankruptcy estate. Thus, it is inappropriate for a bankruptcy court to enjoin claims brought against a third-party non-debtor solely on the basis of that third-party’s financial contribution to a debtor’s estate. Several lawsuits filed against an insurance carrier alleged independent misconduct by carrier during tenure as debtor’s insurer. Congress did not intend § 524(g)’s supplemental injunctive relief to reach non-derivative claims. Bankruptcy court erred by enjoining suits that, as a matter of state law, were predicated upon an independent duty owed by carrier, did not claim against the res of the bankruptcy estate, and sought damages in excess of and unrelated to debtor’s insurance policy proceeds.

FOURTH CIRCUIT

In re Bateman
--- F.3d ----, 2008 WL 283001 (4th Cir. Feb. 4, 2008)
Holding: (1) Two year prohibition under § 1328(f) on discharge in consecutive Chapter 13 cases runs from filing date of first Chapter 13 petition to filing date of second Chapter 13 petition. (2) Even if a debtor is prohibited from receiving a discharge by § 1328(f), the debtor may still obtain confirmation of a Chapter 13 plan that pays all allowed claims in full. Section 1328(f) is a limitation on discharge, not filing, and Chapter 13 debtors may file a petition for many reasons other than to obtain discharge. The unavailability of discharge to the debtor does not mean the petition was filed in bad faith in violation of § 1325(a)(7). The availability of discharge is only one factor relevant in considering whether a plan was proposed in bad faith, and that factor standing alone is insufficient to support a finding of bad faith.

Educational Credit Mgmt. Corp. v. Mosko (In re Mosko)
--- F.3d ----, 2008 WL 366786 (4th Cir. Feb. 12, 2008)
Holding: Without showing a good-faith effort to repay student loan debt, debtors were not allowed to discharge the debt pursuant to § 523(a)(8). To determine whether student debt repayment would constitute undue hardship, the court applied the Brunner test and found that the debtors failed the third prong – whether they made good faith efforts to repay their student loans. Debtors failed this prong by not demonstrating a good-faith effort to obtain employment and maximize income. The Court noted that one debtor did not work during the summer so she could spend time with her son and care for her mother and that the other debtor was not contributing to the household income despite his ability to do so and offers of employment. Debtors failed the third prong of the Brunner test for the additional reason that they had not minimized expenses. The Court noted expenditures for internet access, cell phones, satellite television, health club membership and cigarettes that were inconsistent with a minimum standard of living. The Court also noted the debtors’ failure to adequately pursue loan consolidation options or to make payments on student loans during a time period when their income substantially exceeded necessary expenses.

FIFTH CIRCUIT

In re McLain
--- F.3d ----, 2008 WL 274403 (5th Cir. Feb. 1, 2008)
Holding: Chapter 7 debtor's use of undisclosed pre-petition funds to pay the initial premium for a term life insurance policy purchased post-petition would make a portion of the policy proceeds property of the estate under § 541(a)(6). Whether the estate’s portion is a pro rata share of the proceeds or simply reimbursement of the funds wrongfully obtained would depend, under state law, on the debtor’s culpability.

Schaffer v. Louisiana State Bd. of Dentistry (In re Schaffer)
--- F.3d ----, 2008 WL 192982 (5th Cir. Jan. 24, 2008)
Holding: Costs of pre-petition state administrative proceeding in which debtor’s dental license was revoked were not non-dischargeable under § 523(a)(7). The state board was empowered to impose the costs of the proceeding and a fine, but chose only to impose costs. The costs were based on the actual expenses of the board, such as the hotel and meal expenses of the committee that heard the debtor’s case. Accordingly, the costs were compensation for actual pecuniary loss, not a fine, penalty or forfeiture.

EIGHTH CIRCUIT

In re Osborn
--- F.3d ----, 2008 WL 304750 (8th Cir. Feb. 5, 2008)
In re Moore
--- F.3d ----, 2008 WL 304743 (8th Cir. Feb. 5, 2008)
Holding: The hanging paragraph in § 1325(a)(9) does not eliminate an under-secured creditor’s deficiency claim when, in a Chapter 13 plan, the debtors propose to surrender a car purchased less than 910 days pre-petition. Although the majority position is to disallow the deficiency claim, the trend is toward allowing the claim. The hanging paragraph prevents application to claims like these of § 506, which bifurcates under-secured claims, but the claim may still be bifurcated under state law and the applicable security agreement, as was the case here. To hold otherwise would essentially turn a recourse loan into a non-recourse loan. Unlike the retention option in § 1325(a)(5)(B), the surrender option in § 1325(a)(5)(C) does not speak to satisfaction of the claim.

ELEVENTH CIRCUIT

In re Walker
--- F.3d ----, 2008 WL 254151 (11th Cir. Jan. 31, 2008)
Holding: (1) A bankruptcy judge may, sua sponte, remove a trustee for lying under oath. Section 324 does not limit the parties that may move for removal, and false testimony constitutes cause for removal. (2) The removal of a bankruptcy trustee is a final, appealable order. (3) When a trial court reduces its oral findings to writing and cites relevant case law, it does not lack jurisdiction to do so because the losing party filed a notice of appeal after the oral hearing but before the entry of the written order.