Recent Bankruptcy Decisions from the Appellate Courts - July/August 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

Arch Wireless, Inc. v. Nationwide Paging, Inc. (In re Arch Wireless, Inc.)
--- F.3d ----, 2008 WL 2814798 (1st Cir. July 23, 2008)
Holding: A known creditor’s general awareness of a pending Chapter 11 reorganization proceeding is insufficient to satisfy the requirements of due process. Creditor was a “known creditor” because its claim was reasonably ascertainable from correspondence with the debtor concerning defective goods and lost business. Such a creditor has a right to assume that proper and adequate notice will be provided before its claims are barred. Because creditor never received proper notice, the discharge injunction does not apply to its pre-confirmation claim.

SECOND CIRCUIT

Chartschlaa v. Nationwide Mut. Ins. Co.
--- F.3d ----, 2008 WL 3480844 (2d Cir. Aug. 14, 2008)
Holding: Assets of corporate entity formed by debtor prior to filing bankruptcy are part of the bankruptcy estate. Debtor formed new corporate entity to change name of preexisting insurance business before filing but did not list the new entity as an asset of the estate. Even though the entity’s formal incorporation came post-petition, debtor should have disclosed the interest to the trustee. Because its existence was not disclosed, the entity’s assets remain part of the estate.

Bondi v. Capital & Finance Asset Mgmt. S.A.
--- F.3d ----, 2008 WL 2812964 (2d Cir. July 22, 2008)
Holding: District court’s denial of foreign debtor’s motion under § 304 to enjoin actions brought against it in the United States did not violate notions of comity. Leaving to foreign courts the question of whether to enforce domestic judgments against the debtor was a sufficient measure of deference and comity.

THIRD CIRCUIT

Mullarkey v. Tamboer (In re Mullarkey)
--- F.3d ----, 2008 WL 2924743 (3d Cir. July 31, 2008)
Holding: A bankruptcy court can still have jurisdiction despite not making a determination under § 157(b)(3) whether the proceeding is core or non-core. Such a determination does not affect the court’s power to hear the case, it only affects whether the court’s disposition is final and appealable to the district court as a core proceeding or is a report and recommendation to the district court when non-core.

In re Reilly
--- F.3d ----, 2008 WL 2789550 (3d Cir. July 21, 2008)
Holding: Debtor entitled to personal property in entirety when trustee did not lodge a timely objection to her exemption, even though trustee later learned property value exceeded the claimed exemption. Debtor exempted the entire value of equipment. A later appraisal valued it at more than the value listed in her Chapter 7 schedules. Trustee contended Rule 4003 and § 522 only place a 30-day limit on the trustee’s ability to object to an improper exemption but that this limitation does not apply to objections based on property valuation. The court found that the trustee was placed on notice that the debtor intended to exempt the property fully because the debtor listed the same value for both the value of the property and value of the exemption. If there were doubts over the proper valuation, the trustee should have taken steps within the 30-day period, but once the deadline passed the property became fully exempt from the estate regardless of its ultimate market value.

FIFTH CIRCUIT

Lowe v. Palmetco, Inc. (In re N.A. Flash Foundation, Inc.)
--- F.3d ----, 2008 WL 3822951 (5th Cir. Aug. 18, 2008)
Holding: Chapter 7 debtor-contractor’s payments to supplier were non-preferential under § 547(b)(5) because supplier did not receive more than it would have received had the transfer not been made and had the supplier been paid under bankruptcy law. Under applicable state law, contractor was required to hold funds in trust for the benefit of supplier or face criminal liability. In a hypothetical case, debtor would have held funds in trust and supplier would have a priority claim to the funds. Supplier would have received 100% of the money owed it in a hypothetical case. Accordingly, pre-petition payments were not preferential.

Young v. Repine (In re Repine)
--- F.3d ----, 2008 WL 2801898 (5th Cir. July 22, 2008)
Holding: (1) Egregious conduct is the appropriate standard to apply when determining whether to award punitive damages under § 362(k) for willful violation of the automatic stay. Attorney seeking payment of pre-petition fees willfully violated the automatic stay by pursuing collection efforts when she knew the debtor was in bankruptcy. Punitive damages were warranted because of attorney’s egregious conduct in ignoring several warnings about the stay, failing to appear in front of the bankruptcy court when ordered to do so, and persisting in collection efforts despite the bankruptcy court’s admonishment to cease. (2) Under § 362(k), emotional injury damages can only be awarded when supported by specific information and the injury must be linked to some other financial injury. (3) Attorneys’ fees incurred in prosecuting a § 362(k) claim may also be awarded.

SIXTH CIRCUIT

Winget v. JP Morgan Chase Bank, NA
--- F.3d ----, 2008 WL 3268201 (6th Cir. Aug. 11, 2008)
Holding: A bankruptcy court’s final sale order is a final order for res judicata purposes. A sale order signals an end to litigation in a bankruptcy proceeding. With the execution of the sale order, the debtor’s assets are judicially sold, and no further litigation can be brought regarding those assets without forcing the court to undo the sale. If sale orders were not final, parties could continue to litigate issues regarding the assets long after their sale.

SEVENTH CIRCUIT

In re Holland
--- F.3d ----, 2008 WL 3844140 (7th Cir. Aug. 19, 2008)
Holding: Circuit court cannot exercise jurisdiction over district court decision remanding the case to the bankruptcy court for further proceedings. Such a decision is not appealable to the circuit court unless the further proceedings are of a purely ministerial character.

EIGHTH CIRCUIT

In re Addison
--- F.3d ----, 2008 WL 3077066 (8th Cir. Aug. 7, 2008)
Holding: Debtor’s day-of-filing mortgage payment was not done with the intent to hinder, delay or defraud a creditor under § 522(o). A debtor’s conversion of non-exempt property to exempt property on the eve of bankruptcy for the express purpose of placing that property beyond the reach of creditors, without more, will not deprive the debtor of the exemption. For fraudulent intent to be found there must be some facts extrinsic to the conversion indicative of fraud. The debtor merely took funds out of an account and paid $11,500 toward his mortgage. Examples of indicia of fraud include borrowing money to place into exempt assets, obtaining goods on credit and selling them to raise money for an exempt account or concealing the transfers in bankruptcy filings. Debtor’s Roth IRA transfer was allowed for the same reasons. However, two Section 529 tuition savings accounts the debtor had opened for the benefit of his children were nonexempt property of the bankruptcy estate under pre- BAPCPA law.

NINTH CIRCUIT

Lockerby v. Sierra
--- F.3d ----, 2008 WL 3091260 (9th Cir. Aug. 7, 2008)
Holding: An intentional breach of contract cannot give rise to non-dischargeability under § 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law. Conduct is not tortious under § 523(a)(6) simply because injury is intended or substantially likely to occur, but only tortious if it constitutes a tort under state law.

Educational Credit Mgmt. Corp. v. Coleman (In re Coleman)
--- F.3d ----, 2008 WL 2940306 (9th Cir. Aug. 1, 2008)
Holding: Question of whether Chapter 13 debtor meets undue hardship requirement to discharge student loan debt may be ripe for determination substantially in advance of plan completion. Under Rule 4007, the complaint for this determination may be filed at any time. A student loan debtor must make good faith efforts to repay the loan in order for the debt to be dischargeable, and, if the debtor is significantly into repayment, the facts may be sufficiently developed for the court to determine undue hardship early in the case. If, on the other hand, the debtor files for bankruptcy immediately upon graduating from college, the court will likely be required to wait the duration of the plan before a good faith determination is possible.

TENTH CIRCUIT

Scrivner v. Mashburn (In re Scrivner)
--- F.3d ----, 2008 WL 3166977 (10th Cir. Aug. 8, 2008)
Holding: Surcharge of exempt property as penalty for debtor’s misconduct is beyond the bankruptcy court’s equitable authority under § 105(a). Bankruptcy court initially required debtors to turn over certain estate property. When they refused, the court required that they turn over certain exempt property. The Code contains specific provisions addressing a debtor’s failure to turn over estate property and does not authorize a surcharge of exempt property.

Paul v. Inglehart (In re Paul)
--- F.3d ----, 2008 WL 2877476 (10th Cir. July 28, 2008)
Holding: The discharge injunction of § 524(a)(2) permits suits that formally name the debtor as a defendant but are brought to collect from a third party and does not bar the debtor from bearing collateral burdens of litigation like responding to discovery. Creditor was not subject to § 524(a)(2) sanction for serving discovery on debtors related to claims that did not concern their pre-petition liabilities. A violation of § 524(a)(2) may be found if the debtor can prove the creditor acted in a way to coerce or harass the debtor to obtain payment on a debt, but the presence of some other procedural impropriety will not give rise to a violation of the discharge injunction if the objective effect is not to coerce payment of a discharged debt.

Pearson v. Stewart (In re Pearson)
--- F.3d ----, 2008 WL 2878619 (10th Cir. July 28, 2008)
Holding: Under the means test, a debtor may take the full vehicle ownership/lease expense deduction even when the debtor’s vehicle is unencumbered by lease or secured payments at the time the case was filed. Debtors proposed to incur debt post-petition to finance a vehicle and wanted this vehicle ownership expense to count in the means test calculation. Under § 707(b)(2)(A)(ii)(I), a debtor may claim “applicable” expenses that could apply regardless of whether they are “actual” expenses. Accordingly, the bankruptcy court erred when it denied confirmation of debtors’ Chapter 13 plan on the grounds that they have wrongfully claimed a vehicle acquisition allowance under the means test.

In re Vincens
--- F.3d ----, 2008 WL 2855630 (10th Cir. July 25, 2008)
Holding: Under § 1112(b)(1), Chapter 11 cases can be dismissed when debtor fails to propose a feasible plan of reorganization. Debtor never submitted a reasonable plan or took steps to revive his business, so case was properly dismissed.

ELEVENTH CIRCUIT

Graupner v. Nuvell Credit Corp. (In re Graupner)
--- F.3d ----, 2008 WL 2993570 (11th Cir. Aug. 6, 2008)
Holding: Purchase money security interest, for purposes of the hanging paragraph at the end of § 1325(a), includes “negative equity” from debtor’s trade-in of previous vehicle. In pre-petition transaction, debtor owed more on his trade-in than the vehicle was worth. Lender financed the purchase price of debtor’s new vehicle and the negative equity from the debtor’s trade in. The negative equity on the trade-in was purchase money security interest because it was debt for the money required to make the purchase of the new vehicle given that the negative equity is inextricably intertwined with the sales transaction and the financing of the purchase. The bankruptcy court, thus, properly sustained lender’s objection to a Chapter 13 plan that proposed to bifurcate and cram down the lender’s claim.

Waldron v. Brown (In re Waldron)
--- F.3d ----, 2008 WL 2953571 (11th Cir. Aug. 4, 2008)
Holding: Debtor’s claim for under-insured motorist benefits arising from post-confirmation auto accident was property of the estate under § 1306(a). Bankruptcy court did not abuse its discretion under Rule 1009 when it required debtor to amend schedules to include the post-confirmation asset.