Recent Bankruptcy Decisions from the Appellate Courts - April/May 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 Barroso-Herrans
--- F.3d ----, 2008 WL 1960365 (1st Cir. May 7, 2008)
Holding: Chapter 7 debtor’s claim that the proceeds of two lawsuits were exempt property was limited to the value the debtor placed on the lawsuits in their schedules. Debtor claimed exemptions totaling $4,000 for each of the two lawsuits. However, the debtor was actually seeking more than $4 million in the cases. The Chapter 7 trustee settled the cases for $100,000, and the debtor objected. The court held that the debtor had only exempted a total of $8,000, not the entire lawsuits. If the debtor intended to exempt the entire lawsuits, the debtor could have listed the value of the lawsuits as “unknown” or used a nominal sum like $1 as a placeholder.

SECOND CIRCUIT

COR Route 5 Co., LLC v. Penn Traffic Co. (In re Penn Traffic Co.)
--- F.3d ----, 2008 WL 1885328 (2d Cir. Apr. 29, 2008)
Holding: Court rejected non-debtor party’s post-petition attempt to tender performance owed to debtor so as to render non-executory an otherwise executory contract. Whether a contract is executory is typically determined as of the petition date.

THIRD CIRCUIT

In re Krebs
--- F.3d ----, 2008 WL 2079956 (3d Cir. May 19, 2008)
Holding: Based on the Supreme Court’s decision in Rousey v. Jacoway, 544 U.S. 320 (2005), the Third Circuit overruled prior decision in In re Clark, 711 F.2d 21 (3d Cir. 1983), which had previously held that funds in a Keogh retirement plan were not exempt if the debtor had not reached the required age to receive distributions from the plan. Based on Rousey, the court now held that funds in an IRA meet the first two requirements of § 522(d)(10)(E). The court remanded for a determination of whether the amount exempted was “reasonably necessary for the support fo the debtor and any dependent of the debtor” under § 522(d)(10)(E).

FIFTH CIRCUIT

In re Bayhi
--- F.3d ----, 2007 WL 2068206 (5th Cir. May 16, 2008)
Holding: Chapter 7 Debtor’s student loan obligation was per se non-discchargeable, so debtor still owed the obligation even though lender failed to assert the non-dischargeability of the claim in the bankruptcy case. Co-obligor on the student loan debt did not violate the discharge injunction by obtaining post-petition a state court order that debtor pay the student loan debt.

In re Babcock & Wilcox Co.
--- F.3d ----, 2008 WL 1902216 (5th Cir. May 1, 2008)
Holding: Court may award attorney’s fees at half the regular hourly rate for time spent traveling but not working. Trustee objected to the fee application of the firm representing the claimants’ committee. Law firm argued billing at full rate was its usual custom but failed to produce evidence of the practices of comparable firms. There is not a consensus regarding the billing of travel time under § 330, but courts have broad discretion and may award less compensation than is requested. The law firm did not carry the burden of demonstrating that comparably skilled practitioners charged the full hourly rate for travel time, and the firm did not specify it would bill the full hourly rate for non-productive travel time in its employment agreement with the committee.

SIXTH CIRCUIT

Giant Eagle, Inc. v. Phar-Mor, Inc.
--- F.3d ----, 2008 WL 2078787 (6th Cir. May 19, 2008)
Holding: Non-debtor party to rejected executory equipment lease is entitled to recover rent owed for pre-rejection period plus contractual liquidated damages less payments received based on mitigation efforts. (1) Chapter 11 debtor used equipment post-petition until the lease was rejected. The court rejected debtor’s argument that any rent owed should be reduced to the extent the lessor benefited from the debtor’s use of the equipment. (2) Lessor attempted to mitigate damages by leasing the equipment to a second company, but that company eventually filed a Chapter 11 petition and rejected the lease. After crediting payments received from the second company, the lessor made an administrative expense claim in the case of the original lessee. The court rejected the debtor’s argument that the amount of the claim must be determined at the time of the breach – i.e. before the lessor mitigated its damages. The court found it appropriate to adjust the amount of the claim based on actual events.

SEVENTH CIRCUIT

In re Resource Technology Corporation
--- F.3d ----, 2008 WL 2051908 (7th Cir. May 15, 2008)
Holding: Trustee’s motion to assume agreement that had expired by its terms would be frivolous and subject to sanctions under Rule 9011. The bankruptcy court properly denied third-party’s motion to compel the trustee to seek assumption and assignment.

EIGHTH CIRCUIT

Tri-State Financial, LLC v. Lovald
--- F.3d ----, 2008 WL 2023621 (8th Cir. May 13, 2008)
Holding: (1) A motion seeking recusal of a bankruptcy judge was not timely when filed seven months after the most recent action the motion was based upon. Motions for recusal must be made promptly to avoid any risk that a party hold its application as an option in the event the trial court rules against it. (2) Attorney’s fees for representation of Chapter 7 trustee were allowed where party’s only challenge to the award was based on a conflict of interest disclosed two years prior and not based on the work done or the hourly rate. Attorney represented trustee and an unsecured creditor, but attorney disclosed potential conflict, both the trustee and creditor waived any conflict and the appointment was approved without objection.

NINTH CIRCUIT

In re Slatkin
--- F.3d ----, 2008 WL 1946739 (9th Cir. May 6, 2008)
Holding: (1) A debtor’s admission, through guilty pleas and a plea agreement admissible under the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud his creditors conclusively establishes the debtor’s fraudulent intent under § 548(a)(1)(A). Investors challenged avoidance of some transfers made during operation of a Ponzi scheme. Debtor had admitted to operating a Ponzi scheme in his plea agreement. Once the existence of a Ponzi scheme is established, payments received by investors as purported profits exceeding initial investment are fraudulent transfers as a matter of law. None of the trades made by the debtor were “legitimate” because the money used for the trades came from duped investors depending on fraudulent misrepresentations. (2) Because Debtor did not actually “engage in the business of effecting transactions in securities,” he was not a stockbroker under § 546(e), which prohibits the avoidance of settlement or margin payments made by stockbrokers. The debtor would buy securities with investor funds by contacting a stockbroker, who would then effect the actual trades. (3) The definition of customer under § 741(2)(B) turns on the purpose of the investor and not on the status or intent of the debtor. No “ordinary-course-of-business” requirement should be read into the definition for the other party.

TENTH CIRCUIT

In re Ballard
--- F.3d ----, 2008 WL 2080852 (10th Cir. May 19, 2008)
Holding: The hanging paragraph at the end of § 1325(a) does not prevent a creditor whose claim is secured by an automobile purchased within 910 days pre-petition from pursuing a deficiency claim. By choosing to surrender a vehicle, a debtor satisfies the requirements for plan confirmation under § 1325(a)(5) with respect to the claim secured by the vehicle. However, the creditor may have a state law right to collect any remaining deficiency after the vehicle is liquidated, and this right may exist independently of § 506.

Taumoepeau v. Manufacturers & Traders Trust Co. (In re Taumoepeau)
--- F.3d ----, 2008 WL 1795065 (10th Cir. Apr. 22, 2008)
Holding: Stipulation approved by bankruptcy court and order granting relief from the stay based on debtor’s failure to pay post-petition amounts owed under mortgage survived confirmation of amended Chapter 13 plan that did not address post-petition arrearage.

ELEVENTH CIRCUIT

Trusted Net Media Holdings, LLC v. Morrison Agency, Inc.
--- F.3d ----, 2008 WL 1816396 (11th Cir. Apr. 23, 2008)
Holding: The requirements of § 303(b) must be satisfied in order for the bankruptcy court to have subject matter jurisdiction over an involuntary bankruptcy case.  More than four years after an involuntary bankruptcy petition, Chapter 7 debtor filed a motion to dismiss case for lack of subject matter jurisdiction.  Debtor claimed creditor was not the holder of a non-contingent, undisputed claim nor was the petitioning creditor joined by three holders of non-contingent, undisputed claims.  Circuits are split on whether the requirements of § 303(b) must be met to convey subject matter jurisdiction or if § 303(b) states the elements that must be establish to sustain an involuntary proceeding.  A previous panel decision of the Eleventh Circuit clearly stated that non-compliance with § 303(b) is a non-waivable jurisdictional defect.  Although this panel found the contrary argument more persuasive, the panel was compelled to follow the prior panel precedent.