Recent Bankruptcy Decisions from the Appellate Courts - June/July 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/.

THIRD CIRCUIT

SLW Capital, LLC v. Mansaray-Ruffin (In re Mansaray-Ruffin)
--- F.3d ----, 2008 WL 2498048 (3d Cir. June 24, 2008)
Holding: Debtor did not invalidate lien on her property when she failed to initiate an adversary proceeding against lienholder. Debtor argued she successfully invalidated the lien without filing an adversary proceeding because (1) she filed an unsecured proof of claim on lienholder’s behalf, (2) she treated the claim as unsecured in her plan, (3) lienholder failed to object to treating the claim as unsecured, and (4) the Bankruptcy Code generally makes all confirmed plans final. Rule 7001 requires an adversary proceeding determine the validity of a lien. A confirmed plan has no preclusive effect on issues that must be raised in an adversary proceeding, even if no such proceeding has been brought.

FOURTH CIRCUIT

Tidewater Fin. Co. v. Kenney
--- F.3d ----, 2008 WL 2514194 (4th Cir. June 25, 2008)
Holding: Hanging paragraph at the end of § 1325(a) does not operate to deprive an undersecured “910 creditor” of its deficiency claim. Although the hanging paragraph eliminates a creditor’s access to a federal remedy under § 506(a), the parties remain bound to their contractual rights and obligations under operative state law.

FIFTH CIRCUIT

Hilal v. Williams (In re Hilal)
--- F.3d ----, 2008 WL 2655796 (5th Cir. July 8, 2008)
Holding: (1) Appeal of Chapter 11 confirmation order was not equitably moot even though plan was substantially consummated. Hearing the issues raised on appeal – the plan’s exculpatory clause for the trustee and the trustee’s percentage compensation arrangement – presents no potential for adverse impact on the plan or third parties. (2) Exculpatory clause releasing trustee from liability for all but gross negligence was consistent with the standard of liability for trustees.

Newby v. Arthur Andersen, LLP (In re Enron Corp Sec., Derivative & ERISA Litig.)
--- F.3d ----, 2008 WL 2689248 (5th Cir. July 10, 2008)
Holding: Confirmation of Chapter 11 plan does not divest District Court of jurisdiction over pre-confirmation claims concerning pre-confirmation activities that had properly been removed from state court to bankruptcy court under “related to” jurisdiction, 28 U.S.C. § 1334(b). State law securities actions were commenced in state court pre-petition and removed to federal court when debtor filed Chapter 11 petition. District Court, applying federal securities laws, had jurisdiction to dismiss the adversary proceedings post-confirmation.

Kane v. National Union Fire Insurance Co.
--- F.3d ----, 2008 WL 2721157 (5th Cir. July 14, 2008)
Holding: Judicial estoppel does not bar trustee from pursuing personal injury claim when debtors failed to disclose pending lawsuit in their Chapter 7 bankruptcy schedules. Upon learning of the pre-petition lawsuit, trustee moved to substitute himself for debtors as the real party in interest to pursue the claim for the benefit of the estate’s creditors. District Court ruled debtors were judicially estopped from pursuing their claim as a matter of law and the trustee’s motion was therefore moot. Appellate court reversed, finding that equity required the trustee be able to pursue the claim, distinguishing cases in which judicial estoppel barred debtors from pursuing claims the trustee had abandoned. The nondisclosure of the lawsuit harmed creditors originally, and they would only be hurt a second time if the equitable doctrine of judicial estoppel barred pursuit of the claim.

SIXTH CIRCUIT

Chase Manhattan Mortgage Corp. v. Shapiro (In re Lee)
--- F.3d ----, 2008 WL 2520453 (6th Cir. June 26, 2008)
Holding: Lender that refinanced its mortgage loan with debtor was subject to preference liability when the new mortgage was recorded outside the § 547(e) grace period. Lender asserted the earmarking defense, but it only applies when a third-party transfers property to a designated creditor of the debtor for the agreed-upon purpose of paying that creditor. Since the lender was not a new creditor and since a lien on property, rather than money, was transferred, the earmarking doctrine did not apply. Lender’s argument that the refinancing did not result in a diminution of the estate also failed. From the time the new loan was made and the original mortgage was discharged until the new mortgage was recorded, the lender did not hold a perfected security interest. Diminution occurred when the debtor’s unencumbered, non-exempt equity in the property once again became subject to a perfected lien at the time the new mortgage was recorded.

Phar-Mor, Inc. v. McKesson Corp.
--- F.3d ----, 2008 WL 2756588 (6th Cir. July 17, 2008)
Holding: Reclamation creditor’s administrative expense priority claim was not extinguished when the goods subject to reclamation were sold and proceeds used to satisfy a secured creditor’s superior claim. Under § 546(c)(2), a request for reclamation may be denied only if the claimant is granted an administrative expense claim. Debtor’s argument that the right of reclamation was subject to the secured claim under UCC § 2-207(3) failed because a secured creditor is not the type of good faith purchaser addressed in UCC § 2-207(3).

NINTH CIRCUIT

Central Valley Ag Enters. v. United States
--- F.3d ----, 2008 WL 2513055 (9th Cir. June 25, 2008)
Holding: Section 505(a)(2) does not prohibit a bankruptcy court from determining the amount or legality of a tax where the taxpayer never filed a petition for readjustment in tax court. In order for a tax determination to have preclusive effect in bankruptcy, the debtor must have filed a petition in tax court, the IRS must have filed an answer and the tax court must have entered its judgment.

General Elec. Capital Corp. v. Future Media Prods., Inc.
--- F.3d ----, 2008 WL 2610459 (9th Cir. July 3, 2008)
Holding: Oversecured creditor whose claim was paid in full through a § 363 asset sale is entitled to interest at the contractual default rate under § 506(b) unless the rate is unenforceable under non-bankruptcy law.

TENTH CIRCUIT

Wachovia Dealer Svcs. v. Jones (In re Jones)
--- F.3d ----, 2008 WL 2640116 (10th Cir. July 7, 2008)
Holding: (1) Chapter 13 plan that pays no post-petition interest on claim secured by automobile may not be confirmed over creditor’s objection. A creditor whose claim is secured by a “910 vehicle” is entitled to the present value of the claim under § 1325(a)(5)(B). (2) The provisions of § 1325(a) are mandatory requirements for confirmation of a Chapter 13 plan.

Melquiades v. Hill (In re Hill)
--- F.3d ----, 2008 WL 2673630 (10th Cir. July 9, 2008)
Holding: (1) Judgment for damages relating to workplace injury is dischargeable despite § 523(a)(6) where debtor’s conduct consists of a failure to provide worker’s compensation coverage to an employee rather than cause the physical injury itself. For a debt to be nondischargeable under § 523(a)(6), there must be a showing that debtor willfully and maliciously intended to cause physical injury. (2) Former employee’s nondischargeability claim under § 523(a)(4) also failed. Debtor’s pre-petition sale of assets did not amount to embezzlement, which is the use of proceeds not intended or authorized by the owner. Even though employee may have had an interest in sale proceeds of former employer, the employee was not the owner of those proceeds, and any embezzlement claim from the asset sale belonged solely to the company.

Johnson v. Smith (In re Johnson)
--- F.3d ----, 2008 WL 2690693 (10th Cir. July 10, 2008)
Holding: (1) An action for willful violation of the automatic stay survives dismissal of the main bankruptcy case. Such damages do not evaporate once the stay is no longer in force, nor does the public policy of preventing such stay violations. (2) Objection to attorneys’ fee award was properly overruled where there was no testimony as to the fees being unreasonable or a more specific objection concerning the manner in which fee evidence was submitted.

Anstine v. Carl Zeiss Meditec AG (In re U.S. Medical, Inc.)
--- F.3d ----, 2008 WL 2736658 (10th Cir. July 15, 2008)
Holding: A creditor may only be a non-statutory insider of a debtor for purposes of § 547(b)(4)(B) when the creditor’s transaction of business with the debtor is not at arm’s length at the time of the challenged transaction. Trustee sought to avoid transfers to creditor that had a “strategic alliance” with debtor. CEO of creditor was placed on debtor’s board of directors, and creditor had distribution and stock-purchase agreements with debtor. More than mere closeness is required to hold that a creditor is a non-statutory insider of a debtor.

In re Tri-Valley Distributing Inc.
--- F.3d ----, 2008 WL 2741629 (10th Cir. July 15, 2008)
Holding: Circuit Court does not have jurisdiction to hear appeal of Bankruptcy Court’s order denying in part and granting in part a motion to dismiss because the order is not final and only partially resolves the adversary proceeding. Bankruptcy Appellate Panel order affirming the order only resulted in significant further action in the adversary proceeding and did not cure the non-final character of the Bankruptcy Court’s order.

ELEVENTH CIRCUIT

In re Donovan
--- F.3d ----, 2008 WL 2595876 (11th Cir. July 2, 2008)
Holding: Circuit Court does not have jurisdiction over denial of a motion to dismiss for abuse because it is not a final, appealable order. By denying the motion to dismiss, the Bankruptcy Court permitted the Chapter 7 case to continue and did not conclusively resolve the bankruptcy case or any adversary proceeding or claim.

In re Walker
--- F.3d ----, 2008 WL 2637649 (11th Cir. July 7, 2008)
Holding: (1) Service and filing of a motion for sanctions under Rule 9011 must occur prior to the final judgment or judicial rejection of the offending motion that provides the basis for the sanctions. Bankruptcy Court vacated motion for sanctions after it had already denied the challenged motion. Allowing a motion for sanctions in such circumstances would render the 21-day safe harbor provision a formality. The provision cannot have any effect if the court has already denied the motion at issue because it is too late for the offending party to withdraw the challenged contention. (2) Court also did not err denying fees to attorney for work related to her appeal of a later award of sanctions because her own initially frivolous filing prompted the dispute. (3) Courts also have the power to impose sanctions sua sponte after finding bad faith. This award of sanctions was not abuse of discretion where offending motion required multiple hearings and lacked any evidentiary support or minimal investigation.

Jennings v. Maxfield (In re Jennings)
--- F.3d ----, 2008 WL 2695820 (11th Cir. July 11, 2008)
Holding: Premature payment on contract for improvements to part of Florida homestead was evidence of actual intent to defraud and warranted denial of discharge under § 727(a)(2)(A). Debtor transferred $130,000 to builder in anticipation of construction costs after debtor was found liable in civil lawsuit. Debtor unilaterally determined the amount of the payment, which exceeded the amount due under the contract, almost no work had been done on the project, and debtor could not convincingly explain the rationale behind the payment.