Recent Bankruptcy Decisions from the Appellate Courts - February/March 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/.

FIFTH CIRCUIT

Drive Financial Services, L.P. v. Jordan
--- F.3d ----, 2008 WL 651547 (5th Cir. Mar. 12, 2008)
Holding: Bankruptcy court may modify the interest rate on debtor's secured claim payments from the contract rate to a lower "prime-plus" rate under § 1325(a)(5) where the creditor objects to the plan and the debtor does not surrender the vehicle securing the claim.  The Supreme Court previously addressed the same issue and rejected the presumptive contract rate approach as too generous to creditors.  Till v. SCS Credit Corp., 541 U.S. 465 (2004).

SIXTH CIRCUIT

In re Long
--- F.3d ----, 2008 WL 564798 (6th Cir. Mar. 4, 2008)
Holding: The hanging paragraph in § 1325(a)(9) does not eliminate an under-secured creditor's deficiency claim when Chapter 13 debtors surrender a car purchased less than 910 days pre-petition.  Although the majority position is to disallow the deficiency claim, completely eliminating a deficiency judgment upon surrender under § 1325(a)(5)(C) would be in conflict with Congressional intent and give debtors the power to wipe out a legitimately incurred debt entirely.  Courts applying state law to preserve deficiency claims are in error, as such dependence undermines the intended uniformity of the Bankruptcy Code.  Until Congress corrects its mistake and fills the gap in the statute, the hanging paragraph should be filled by prior law allowing collection of the deficiency claim.

Heavrin v. Schilling (In re Triple S Restaurants, Inc.)
--- F.3d ----, 2008 WL 697401 (6th Cir. Mar. 17, 2008)
Holding: Bankruptcy court properly exercised jurisdiction over intentional infliction of emotional distress claim against Chapter 7 trustee that was removed from state court.  Leave of bankruptcy court must be obtained by any party wishing to institute an action in a state forum against a trustee for acts done in an official capacity.  During the Chapter 7 case, trustee had threatened criminal prosecution if funds were not turned over to the estate.  Trustee was acting in his scope of authority because the negotiations pertained to recovering assets for the estate.  Bankruptcy court properly dismissed the removed case for failure to state a claim for which relief could be granted.

SEVENTH CIRCUIT

In re Airadigm Communications, Inc.
--- F.3d ----, 2008 WL 649704 (7th Cir. Mar. 12, 2008)
Holding: (1)  Section 1141(c), which eliminates claims and interests against property dealt with in a plan, did not terminate Federal Communications Commission's security interest in spectrum licenses.  The licenses were not dealt with in the plan because all parties erroneously believed the licenses had been terminated.  (2)  Debtor cannot avoid FCC's security interest in spectrum licenses under § 544(a) because other federal law precludes a private party from obtaining a superior interest to the FCC and does not require that the FCC perfect its interest in a spectrum license.  (3)  Court did not err in confirming plan that allowed FCC to retain its lien but eliminated due-on-sale provision found in FCC regulations.  The due-on-sale requirement was not a lien as defined in § 101(37).  (4)  Section 524(e) does not limit bankruptcy court's power to release a non-debtor from a creditor's claim.  A bankruptcy court's equitable powers allow it to release third parties from liability to creditors without the creditors' consent if the release is appropriate and not inconsistent with any Code provision.  The release given in this case to the DIP lender was narrowly tailored and was necessary because the lender required it and a reorganization would not have been possible without the financing.

EIGHTH CIRCUIT

Baldwin v. Credit Based Asset Servicing and Securitization
--- F.3d ----, 2008 WL 482408 (8th Cir. Feb. 25, 2008)
Holding: Insufficient proof of service of motion to dismiss voids dismissal of Chapter 13 case.  The fact that notice was mailed at some point is not sufficient to determine whether notice satisfied due process.  Pro se motion argued notice was defective, which would render the judgment void.  Although the debtor's motion was filed more than ten days after dismissal, the court erred in denying it because the motion should have been characterized as one under Rule 60(b)(4), and such a motion need only be made within a reasonable time.

TENTH CIRCUIT

Morris v. St. John Nat'l Bank (In re Haberman)
--- F.3d ----, 2008 WL 466398 (10th Cir. Feb. 22, 2008)
Holding: Trustee who avoids a lien pursuant to §§ 544 and 551 preserves for the bankruptcy estate the value of the avoided lien, but does not automatically assume other rights the original lienholder may have against the debtor.  Trustee sought to avoid bank's unperfected security interest in a car.  The value of the car had fallen below the total amount owed on the loan.  The lien was preserved for the benefit of the estate but, pursuant to § 506(a)(1) and (d), only to the extent of the value of the collateral.

ELEVENTH CIRCUIT

Kingsley v. Wetzel (In re Kingsley)
--- F.3d ----, 2008 WL 539926 (11th Cir. Feb. 29, 2008)
Holding: Bankruptcy court may grant a credit for any repayments made following an avoidable fraudulent transfer under § 548.  Recipient of fraudulent transfer repaid, pre-petition, a portion of the funds obtained.  Allowing trustee to recover the entire fraudulent transfer without credit for amounts repaid would result in an inequitable windfall to the bankruptcy estate.