Review of 2012 Bankruptcy Decisions, 9th Circuit Court of Appeal, 9th Circuit Bankruptcy Appellate Panel

APPEALS

 Klestadt & Winters, LLP v. Cangelosi, 672 F. 3d 809 (9th Cir. 2012) 672

In federal court, only final orders are automatically appealable.   Ordinarily, interlocutory orders can be appealed, only if: (1)  they conclusively determine the disputed question; (2) they resolve an important issue completely separate from the merits of the action; and (3) they are effectively unreviewable on appeal from a final judgment.  In bankruptcy, a more flexible approach to finality is often taken, in which a Bankruptcy Court order is appealable, if it (1) finally determines the discrete issue to which it is addressed; and (2) resolves and seriously affects substantive rights, such that the losing party would suffer irreparable harm if the appeal could only be brought at the end of the entire bankruptcy case.

In this case, the Ninth Circuit held that the flexible finality rules in bankruptcy do not appeal to appeals from a District Court sitting in bankruptcy.  The Circuit Court further held that a sanctions order was not an appealable order.

 

Motor Vehicle Casualty v. Thorpe Insulation Company (In re Thorpe Insulation Company, 677 F. 3d 869 (9th Cir. 2012)

The Bankruptcy Court confirmed a Chapter 11 plan under 11 U.S.C. Section 524(g), a statute providing special provisions for companies with substantial asbestos-related liability.  Several insurance companies failed to settle with the Debtor and other parties.  These parties objected to confirmation of the plan, and appealed.  The District Court held that the appeal was equitably moot.  The Ninth Circuit reversed.  It held that, even though no stay on appeal had been obtained, the appeal was not equitably moot, because the objecting parties had diligently pursued their claims and because equitable relief was not impossible.  The Court also held that the objecting parties had standing to appeal.

 

ARBITRATION CLAUSES

 

Continental Insurance Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 761 F. 3rd 1011 (9th Cir. 2011)

In a case of first impression in 9th Circuit, the Court of Appeal affirmed a Bankruptcy Court ruling that it had discretion to deny enforcement to a contractual arbitration clause in a breach of contract case.  The Bankruptcy Court found that allowance and disallowance of claims was a core matter.  Although the Federal Arbitration Act, 9 U.S.C. {1, establishes a strong federal policy favoring arbitration, that policy may be overridden by a conflicting federal policy.  Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332 (1987).  Prior Circuit Court opinions in other circuits had held, in non-core matters, the Bankruptcy Court does not have discretion to deny enforcement to an arbitration clause, but in core matters it could do so.   Whiting–Turner Contracting Co. v. Elec. Mach. Enters., Inc. (In re Elec. Mach. Enters., Inc.), 479 F.3d 791, 796 (11th Cir.2007);  Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy Co.),226 F.3d 160, 166 (2d Cir.2000); Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co.), 403 F.3d 164, 169 (4th Cir.2005).   The Ninth Circuit held that, even in core matters, the Bankruptcy Court has discretion to deny enforcement to an arbitration clause only if arbitration would conflict with the underlying purpose of the Bankruptcy Code.

 

Ackerman v. Eber (In re Eber), 687 F. 3d 1123 (9th Cir. 2012)

The Court of Appeal affirmed  Bankruptcy Court ruling denying a motion in a Chapter 7 case to compel arbitration of a breach of contract, fraud and breach of fiduciary duty action.  The Bankruptcy Court held the creditor was in essence seeking to arbitrate a non-dischargeability action, which is a core proceeding.  The Bankruptcy Court held that, if the arbitrator found fraud or breach of fiduciary duty, then the Court would be collaterally estopped on the issue of non-dischargeability.   The Court relied upon  Continental Insurance Co. v. Thorpe Insulation (In re Thorpe Industries), 671 F. 3rd  1011 (9th Cir. 2012).

CHAPTER 7

 

 In re Blixseth, 684 F. 3d 865 (9th Cir. 2012)

Chapter 7 debtor’s failure to timely file a statement of intent with regard to personal property which secured a debt removed from the estate all of her property which secured that debt, not just the property which she listed on her schedules.

Hopkins v. Asset Acceptance, LLC (In re Salgado-Nava), 473 B.R. 911 (Bankr. 9th Cir. 2012)

Statutory fee requested by Chapter 7 trustee based on distribution should not be reduced absent extraordinary circumstances.  Fees are set by 11 U.S.C. Section 326 and 330(a)(7).   In this case, the Bankruptcy Court rejected a statutory fee request, on the basis that it was higher than the trustee and his paralegals would have earned on an hourly fee basis.  The BAP found this to be the wrong legal standard.

 

Ng v. Farmer (In re Ng), 477 B.R. 118 (Bankr. 9th Cir. 2012)

Chapter 7 dismissed for abuse under 11 U.S.C. Section 707(b)(3)(B) under “totality of circumstances.”  Debtor was making many payments to his own retirement.  While the 2005 amendments to the Bankruptcy Code changed the standard from “substantial abuse” to “abuse,” the amendment is best understood as a codification of pre-2005 case law, which is thus still good law.

CHAPTER 9

 

Kirton v. Valley Health System (In re Valley Health System), 471 B.R. 555 (Bankr. 9th Cir. 2012)

Bankruptcy Court lacked jurisdiction over post-plan confirmation  writ of mandate removed from state court brought by former employees who were participants in retirement plan of Chapter 9 debtor.   Employees alleged that debtor had underfunded plan.

CHAPTER 11 PLAN CONFIRMATION

 

Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (Bankr. 9th Cir. 2012)

The absolute priority rule is not applicable in individual Chapter 11 cases.   Under 11 U.S.C. Section 1129(b)(2)(B) (ii), a corporate Chapter 11 plan can not be confirmed, over creditor objections, unless unsecured debt is paid in full,  if the equity interest holders retain any interest in the reorganized debtor.  Prior to 2005, this rule has always been applied to individual Chapter 11 debtors as well.  In 2005, the Bankruptcy Code was amended in a way which suggests that the absolute priority rule no longer applies to individuals.  The majority decision, authored by Judge Clarkson and joined by Judge Kirscher held that the plain language of the 2005 amendment means that the absolute priority rule does not apply to individuals.  Judge Jury dissented.

 

Wells Fargo Bank, N.A. v. Loop 76 (In re Loop 76), 465 B.R. 525 (Bankr. 9th Cir. 2012)

Bankruptcy Court may permit an undersecured creditor holding a third party guarantee to have its unsecured claim classified separately from general unsecured debt for Chapter 11 plan purposes.  Under Bankruptcy Code Section 11122(a), dissimilar claims may not be placed into the same class.  Creditor claims may not be placed into different classes solely to gerrymander a result. The key question is whether claims are “substantially similar.”  The panel held that, a creditor holding a third party guarantee, was a factor which the Bankruptcy Court may consider in holding that claims are not substantially similar.

 In re Windmill Durango Office, LLC, 473 U.S. 762 (Bankr. 9th Cir. 2012)

A secured creditor purchased another claim in order to block the confirmation of a Chapter 11 plan which was otherwise confirmable.  The previous owner of the claim had voted for the plan.  The new owner of the claim moved for an order permitting it to change its vote.  Under Bankruptcy Rule 3018, a creditor may change its vote only for cause.  The Bankruptcy Court found that cause was not shown, because the creditor simply wanted to block the plan.  The BAP held that the Bankruptcy Court  decision was not an abuse of discretion.

In re Caviata Attached Homes, LLC, 2012 WL 3002573 (Bankr. 9th Cir. 2012)

Decline in economy was not an unforeseen and changed circumstance substantially impairing a debtor’s ability to perform under a confirmed Chapter 11 plan that would justify a second Chapter 11 filing.

CHAPTER 13

Danielson v. Flores (In re Flores), 692 F. 3d 1021 (9th Cir. 2012)

Bankruptcy Court is permitted to confirm a three year Chapter 13 plan for a debtor who had above-median income but no projected disposable income.  Under 11 U.S.C. Section 1325(b)(1)(B), a Chapter 13 plan may not be confirmed unless the debtor is to pay any “projected disposable income to be received in the applicable commitment period” to unsecured creditors.  If the debtors are not paying unsecured creditors in full, and if their income is above median, then the “applicable commitment period” is five years.  That was the case here.  However, the debtor had no projected disposable income.  Thus, the plan did not have to last five years.  Rather, it simply had to pay five years worth of projected disposable income, which, in this case, was zero and could thus be done in three years.  The Ninth Circuit ruled that the Supreme Court ruling in Hamilton v. Lanning 130 S. Ct. 2464 (2010) did not overrule Maney v. Kagenveama (In re Kagenveama) 541 F. 3d 868 (9th Cir. 2008).

Drummond v. Welsh (In re Welsh), 465 B.R. 843 (Bankr. 9th Cir. 2012)

In calculating “disposable income, “ above-media-income Chapter 13 debtor could deduct expenses for payments on secured debts whether they needed the collateral securing those debts or not.  The debtor owned several real properties, which could be characterized as luxury properties.  Reading the statutory definition literally, the Court held that payments on these properties were proper deductions from disposable income.

Mattson v. Hoew (In re Mattson), 468 B.R. 361 (Bankr. 9th Cir. 2012)

Chapter 13 debtor with increased income allowed to increase monthly plan payments, but not to decrease term of plan.  The Bankruptcy Court has discretion under 11 U.S.C. Section 1329 to permit modifications of a confirmed Chapter 13 plan.  Proposed modifications of confirmed Chapter 13 plans must be in good faith.  Good faith is measured on a case-by-case basis considering the totality of the circumstances.  In this case, the debtor experienced an unexpected jump in income.  This justified an increase in the monthly plan payments, but not a decrease in the plan period; the debtor was not planning to retire, nor did he had health problems or other issues suggesting an impending end to his career.

Meyer v. Lepe (In re Lepe), 470 B.R. 851 (Bankr. 9th Cir. 2012)

It is not bad faith for a debtor to file a Chapter 13 with the sole purpose of stripping down a junior lien.  Debtor had only $549 in unsecured debt.  He filed a Chapter 13 with the sole purpose of stripping down a junior lien on his family residence, and paying it less than 100%.  “Bad faith” in Chapter 13 cases is measured under a totality of the circumstances test with no one factor being determinative.  Bankruptcy Court found good faith, and BAP affirmed.

Meyer v. Renteria (In re Renteria), 470 B.R. 838 (Bankr. 9th Cir. 2012)

Chapter 13 plan confirmed which paid less to general unsecured debt and more to unsecured debt guaranteed by debtor’s mother.  The BAP held that this was not unfair discrimination under 11 U.S.C. Section 1322(b)(1), because of the “however” clause in the statute which carved out an exception for debts guaranteed by codebtors.  The BAP reviewed at length the conflicting case law on this question, and the ambiguous statutory language.  The BAP ruling was based upon the legislative history, which said that the law was written to reverse the same results of decisions such as In re Utter, 3 B.R. 369 (Bankr. W.D. N.Y. 1980) and In re Montano, 4 B.R. 535 (Bankr. D.D.C. 1980).

Oliver v. United States Trustee (In re Oliver) 2012 WL 5232201 (Bankr. 9th Cr. October 23, 2012)

Bankruptcy Court did not abuse its discretion in dismissing a Chapter 13 for the debtor’s failure to attend a 341a hearing or to make plan payments.

Parks v. Drummond (In re Parks), 475 B.R. 703 (Bankr. 9th Cir. 2012)

In calculating a Chapter 13 debtor’s disposable income, deductions for his or her voluntary post-petition 401)k) contributions are not allowed.  The BAP noted that the courts are split on this issue nationally.  The Court looked carefully at the language of 11 U.S.C. Sections 541 and 1306.

 

Schwartz-Tallard v. America’s Servicing Company (In re Schwartz-Tallard), 473 B.R. 340 (Bankr. 9th Cir. 2012)

Chapter 13 debtor awarded attorney fees against secured  creditor, which foreclosed on home one week after automatic stay reinstated.  Bankruptcy Court did not abuse discretion in not awarding debtor appellate attorney fees.

 

DISCHARGE ISSUES

 

 ATTORNEY FEES FOR FRIVOLOUS LAWSUITS

Searcy v. Ada County Prosecuting Attorney’s Office (In re Searcey) 463 B.R. 888 (Bank. 9th Cir. 2012)

Attorneys’ fees assessed against debtor for pursuing frivolous lawsuit were excepted from discharge as penalty.

 STUDENT LOANS

 Educational Credit Management Corp. v. Joregensen (In re Jorgensen),479 B.R. 79 (Bankr. 9th Cir. 2012)

Chapter 7 debtor with cancer permitted to discharge some of student loan, but not all of it.   Bankruptcy Court correctly required debtor to reduce her spending.   Student loans are presumed non-dischargeable, unless the debtor establishes an undue hardship.  11 U.S.. Section 523(a)(8).   In assessing undue hardship, the Ninth Circuit follows the three part test of In re Bruner, 46 B.R. 752 (Bankr. S.D.N.Y. 1985).  United Student Aid Funds, Inc. v. Pena (In re Pena),155 F.3d 1108, 1112 (9th Cir.1998).   “Under the Brunner test, the debtor must prove that: (1) she cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if required to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans.” 479 B.R. at 86.  Bankruptcy Courts have the equitable power to partially discharge student loans.  The BAP found that the Bankruptcy Court did not abuse its discretion here.

GAMBLING DEBTS

 Nash v. Clark County District Attorney’s Office (In re Nash), 464 B.R. 874 (Bankr. 9th Cir. 2012)

Gambling establishment did not violate discharge by responding to post-bankruptcy inquiry from District Attorney, who had been pursuing debtor criminally for this debt.  Discharge did not alter Nevada criminal law.

 UNEMPLOYMENT INSURANCE TAXES

State of California, Employment Development Department v. Hansen (In re Hansen), 470 B.R. 535 (Bank. 9th Cir. 2012)

Unpaid unemployment insurance taxes were not excepted from discharge.  Applying 11 U.S.C. Section 507(a)(8)(C), the BAP found that unemployment insurance taxes were not withheld from employee income and thus are not withholding taxes.

 

EXEMPTION ISSUES

 Tober v. Lang (In re Tober), 688 F. 3d 1160 (9th Cir. 2012)

Under Arizona law, debtor entitled to claim exemption for cash surrender value of life insurance policies and annuity contract.

 

Wolfe v. Jacobsen (In re Jacobsen), 676 F. 3d 1193 (9th Cir. 2012)

Bankruptcy estate not entitled to debtor’s share of proceeds from judicial sale of homestead property.  Under California state law, proceeds had to be reinvested in new homestead.  Code of Civil Procedure Section 704.710(c).  Debtor did not reinvest proceeds and thus forfeited right to proceeds.  Bankruptcy exemptions are fixed at the time of the bankruptcy filing. 

FRAUD

 

Deitz v. Ford (In re Deitz), 469 B.R. 11 (Bankr. 9th Cir. 2012)

Bankruptcy Court had power to fully adjudicate fraud claim against Chapter 7 debtor-contractor who falsely told homeowner that he was licensed general contractor in good standing, and to hold debt non-dischargeable.

Wilcox v. Parker, (In re Parker) 471 B.R. 570 (Bankr. 9th Cir. 2012)

Debtor broker was not estopped to deny fraud in non-dischargeability action.  He had asserted a conditional claim to equitable indemnity from borrowers, if he was found liable to lender; this was not an admission of joint and several liability with borrowers.

  

SINGLE ASSET REAL ESTATE DEBTORS

Mereulo Maddox Properties-760 S. Hill Street, LLC v. Bank of America, N.T &S.A. (In re Meruelo Maddux Properties, Inc.), 667 F. 3rd 1072 (9th Cir. 2012)

Real estate developer and 53 of its subsidiaries filed Chapter 11 cases, which were jointly administered  but not substantively consolidated.  The subsidiaries each owned a single real estate asset.  The Bankruptcy Court held that none of the subsidiaries were single asset real estate debtor under 11 U.S.C. Section 101(51B).   The District Court reversed this ruling.  The Ninth Circuit affirmed the District Court.  It held that, under plain language of statute, since the subsidiary in question derived substantially all of its income from one real estate complex, it was a single asset debtor.  That debtors had centralized cash management held not relevant, since it provided no income to this subsidiary.

 

STANDING OF TRUSTEES

Hoskins v. Citigroup, Inc. (In re Viola), 469 B.R. 1 (Bankr. 9th Cir. 2012)

Trustee lacked standing to bring a claim for aiding and abetting fraudulent transfers.  Bank could not be sued as “transferees” under fraudulent conveyance law; debtor was running a Ponzi scheme.

 

Levesque v. Shapiro (In re Levesque), 473 B.R. 331 (Bankr. 9th Cir. 2012)

The discharged Chapter 7 trustee had standing to be heard on Chapter 7 debtor’s motion to reopen case and to convert it to a Chapter 11.  Bankruptcy Court did not abuse discretion in permitting case to be reopened but denying request to convert it to a Chapter 11.  Debtor had a substantial pre-petition personal injury claim that had not previously been disclosed.

 

 

 

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