It is the pleasure of Receivership News to provide excerpts for our readers from the annual “Recent Developments in Business Bankruptcy.” Part II which follows, discusses consumer bankruptcy matters. The entire 2012 Recent Developments work is a presentation of the California Bankruptcy Forum’s, Bay Area Bankruptcy Forum and the Commercial Law and Business Section of the Bay Area Bar Association. Our thanks to Hon. Dennis Montali, Ron Oliner and Cecily Dumas for allowing us to share their work.

CONSUMER

1. Supreme Court Holds that Capital Gains Incurred in Postpetition Sale of Farm Assets May Not Be Treated as an Unsecured Claim in a Chapter 12 Plan, Notwithstanding § 1222(a)(2)’s Language that Taxes Arising from the “Sale, Transfer, Exchange or Other Disposition of Any Farm Asset” Shall Be Treated as an Unsecured Claim
   
   Section 1222(a)(2) of the Bankruptcy Code requires that chapter 12 plans of family farmers provide for the full payment of all priority claims under § 507. As part of BAPCPA, Congress added § 1222(a)(2)(A) excepting from this requirement debts “owed to a governmental unit that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under section 507, but the debt shall be treated in such a manner only if the debtor receives a discharge.” Priority taxes generally fall within § 507(a)(2) (granting priority to adminis¬trative expenses under § 503(b) or § 507(a)(8) (governing taxes based on prepetition income and taxes)). Section 503(b)(1)(B)(i), in turn, grants administrative priority to taxes “incurred by the estate.”
   
   In this case, the chapter 12 debtors proposed a plan of reorganization under which they sought to pay off their outstanding liabilities using proceeds from the postpetition sale of their farm and to treat the capital gains tax obligation arising from that sale as a general unsecured debt. Relying on § 1222(a)(2)(A), the debtors contended that their plan did not have to provide full payment of the these taxes as they “arose as a result of the sale, trans¬fer, exchange, or other disposition of any farm asset.” The IRS, however, contended that the exception of § 1222(a)(2)(A) was inapplicable, and that debtors could not discharge the capital gains tax.
   
   The bankruptcy court (376 B.R. 741) sustained the IRS’s objection to the plan, and the debtors appealed. The district court reversed (393 B.R. 857) and the government appealed. In a decision discussed on page 39 of the 2010 materials, the Ninth Circuit reversed (617 F.3d 1161). In a 5–4 decision resolving a split among the circuits, the Supreme Court affirmed the Ninth Circuit, holding that capital gains tax liability arising from postpetition sale of debtors’ farmland was not a tax liability “incurred by the estate” within the meaning of §§ 507(a)(2) and 503(b)(2). In so holding, the Supreme Court expressly abrogated Knudsen v. IRS, 581 F.3d 696 (8th Cir. 2009).
   
   Writing on behalf of the majority, Justice Sotomayer indicated that the parties agreed that § 1222(a)(2)(A) “applies only to priority claims collectible in the bankruptcy plan and that postpetition federal income taxes so qualify only if they constitute a ‘tax . . . incurred by the estate.’ ” Referring to the Internal Revenue Code, Justice Sotomayer compared the tax liability of chapter 12 estates to that of chapter 7 and 11 estates:
    

   Title 26 U.S.C. §§ 1398 and 1399 address taxation in bankruptcy and define the division of responsibilities for the payment of taxes between the estate and the debtor on a chapter-by-chapter basis. Section 1398 provides that when an individual debtor files for Chapter 7 or 11 bankruptcy, the estate shall be liable for taxes. In such cases, the trustee files a separate return on the estate’s behalf and “[t]he tax” on “the taxable income of the estate . . . shall be paid by the trustee.” . . . Section 1399 provides that “[e]xcept in any case to which section 1398 applies, no separate taxable entity shall result from the commencement of a [bankruptcy] case.” In Chapter 12 and 13 cases, then, there is no separately taxable estate. The debtor—not the trustee—is generally liable for taxes and files the only tax return. . . . These provisions suffice to resolve this case: Chapter 12 estates are not taxable entities. Petitioners, not the estate itself, are required to file the tax return and are liable for the taxes resulting from their postpetition farm sale. The postpetition federal income tax liability is not “incurred by the estate” and thus is neither collectible nor dischargeable in the Chapter 12 plan.

   As the debt was not “dischargeable,” § 1222(a)(2)(A) did not apply.
   
   Justice Breyer, authoring a dissent joined by Justices Kennedy, Ginsburg, and Kagan, observed that chapter 12 “helps family farmers in economic difficulty reorganize their debts without losing their farms. Consistent with the chapter’s purposes, Congress amended § 1222(a) of the 
 Code to enable the debtor to treat certain capital gains tax claims as ordinary unsecured claims.” He opined that the majority’s holding “prevents the Amendment from carrying out this basic objective” and the statute should be inter¬preted in a manner that is consistent with its language and that allows the amendment “better to achieve its purposes.”
   Hall v. United States, 132 S. Ct. 1882 (2012)
    

2. Split Ninth Circuit Holds that Kagenveama Is Still Good Law, Notwithstanding Lanning
   
   Chapter 13 debtors with above-median income (but negative monthly disposable income) proposed a three-year plan. The chapter 13 trustee objected to confirmation, arguing that the Supreme Court’s holding in Hamilton v. Lanning, 130 S. Ct. 2464 (2010) (discussed in last year’s materials) implicitly overruled the holding of the Ninth Circuit in Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. 2008), that the five-year minimum for chapter 13 plans in § 1325(b)(4) is inapplicable where above-average-income debtors have no projected disposable income. The bankruptcy court sustained the trustee’s objection, and the Ninth Circuit accepted a direct appeal from the bankruptcy court’s order. In a 2–1 decision, the Ninth Circuit reversed, holding that the portion of Kagenveama analyzing the “applicable commitment period” of § 1325 remained intact; Lanning only overruled the portion of Kagenveama holding that “projected disposable income” could not be measured on a forward-looking basis. As stated by the majority: “Indeed, the fact that ‘projected disposable income’ is to be determined under the more flexible forward-looking approach under Lanning adds assurance that able debtors will not escape their obligations even under Kagenveama’s definition of ‘applicable commitment period.’ ”
   
   In dicta, the Ninth Circuit indicated a willingness to allow creditors to object to a plan on bad faith grounds even where the plan technically complies with the other requirements of confirmation, thus bringing the BAP’s holding in Meyer v. Lepe (In re Lepe), 470 B.R. 851 (9th Cir. BAP 2012) (discussed below) into question. “[T]he applicable commitment period is not the only weapon in creditors’ arsenal to ensure that Chapter 13 plans pro¬vide for the maximum payments debtors can afford. For example, debtors are required to propose plans in good faith according to § 1325(a)(3), which, although subject to some dispute post-BAPCPA, has generally been applied using a totality of the circumstances test to determine if debtors have ‘unfairly manipulated the Bankruptcy Code, or otherwise proposed their chapter 13 plan in an inequitable manner.’ ”
   Danielson v. Flores (In re Flores), F.3d 2012 WL 3803936 (9th Cir. Aug. 31, 2012).

MISCELLANEOUS

1. Bankruptcy Court Appropriately Declined to Compel Arbitration When Claims to be Arbitrated Implicated Nondischargeability Issues
   
   Plaintiffs commenced an arbitration proceeding against Jose Eber for breach of contract, fraud, and breach of fiduciary duty. Eber thereafter filed his chapter 7 case, and plaintiffs filed a nondischargeability proceeding, a motion for relief from stay, and a motion to compel arbitration. The bankruptcy court denied those motions, and while an appeal was pending, the bankruptcy court conducted a trial and granted a judgment in favor of Eber on the § 523(a)(2) and (4) claims. The district court and the Ninth Circuit affirmed, holding that the bankruptcy court did not abuse its discretion in refusing to compel arbitration. Arbitration of creditors’ underlying state law breach of contract, fraud, and breach of fiduciary duty claims could implicate nondischargeability issues, and the bankruptcy court was appropriately concerned about being collaterally estopped by arbitrator’s decision.
   Ackerman v. Eber (In re Eber), 687 F.3d 1123 (9th Cir. 2012).
    

2. 524(g) Plan Process Trumps Arbitration Provision
   
   Debtor filed for chapter 11 seeking to confirm a plan under § 524(g), which authorizes a bankruptcy court to enter a “channeling injunction” channeling asbestos-related claims to a single trust for the benefit of present and future asbestos claimants. An insurer filed a proof of claim based upon alleged violations of a prepetition settlement agreement with the debtor, and moved to compel arbitration thereunder. Among other things, the insurer’s claim contested the debtor’s ability to assign certain contribution, indemnity, and subrogation rights against the insurer to the 524(g) trust. The debtor objected to the insurer’s claim and opposed arbitration.
   
   The Ninth Circuit, affirming the district and bankruptcy courts, held that in a core proceeding a bankruptcy court has discretion to decline to enforce an otherwise applicable arbitration provision only if arbitration would conflict with the underlying purposes of the Bankruptcy Code. Here, the Court found that the claim objection was a core proceeding, and arbitration would conflict with the purposes and policies of § 524(g), since Congress had intended that bankruptcy courts oversee all aspects of a § 524(g) reorganization. Accordingly, the bankruptcy court did not abuse its discretion in denying the insurer’s motion to compel arbitration. In addition, the Court affirmed the disallowance of the insurer’s claim on the basis that a debtor cannot waive prepetition a protection granted by the Bankruptcy Code, including the right to avail itself of the protections of § 524(g).
   Continental Insurance Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir. 2012).
    

3. Shout It Out! Failure to Announce Postponement of Foreclosure Sale Violated Nonjudicial Foreclosure Statute and Was a Deceptive Practice
   Like California’s (see Cal. Civ. Code § 2924g(d)), Hawaii’s nonjudicial foreclosure statute requires a “public announcement” of a foreclosure sale. In this Hawaii case, the debtor filed her chapter 13 petition three days before the scheduled foreclosure date. A representative of the foreclosing lender appeared at the sale, but did not shout out the postponement of the sale. Rather, she simply attempted to determine whether interested buyers existed and, upon finding none, left without announcing a postponement. Thereafter, the lender obtained relief from the automatic stay and conducted a foreclosure sale. After the lender initiated eviction proceedings, the debtor filed an action in bankruptcy court alleging that the sale violated the automatic stay and various state laws. The bankruptcy court voided the foreclosure sale as violating Hawaii’s nonjudicial foreclosure law. The BAP reversed, holding that the mortgagee’s failure to publicly announce the sale did not violate Hawaii law. The Ninth Circuit reversed the BAP, stating: “We hold that (1) the lack of public announcement did violate Hawaii's nonjudicial foreclosure statute, and (2) this defect was a deceptive practice under state law. Accordingly, we affirm the bankruptcy court’s avoidance of the foreclosure sale. However, we remand to the bankruptcy court for a proper calculation of attorneys’ fees and damages under [the Hawaii statute].”
   Kekauoha Alisa v. Ameriquest Mortgage Co. (In re Kekauoha Alisa), 674 F.3d 1083 (9th Cir. 2012).

*Hon. Dennis Montali is a United States Bankruptcy Judge sitting in the San Francisco Division of the Northern District of California.

*Cecily Dumas is a partner in the San Francisco firm of Dumas & Clark LLP.

*Ron Mark Oliner is a partner at the San Francisco office of Duane Morris LLP.