Current Month (September 2025)
Recent Developments in Bankruptcy Law in the Fourth and Ninth Circuits
By Samuel (Yinan) Han, Duke University School of Law
This piece is part of a series of summaries of the leading cases decided in the last year on bankruptcy.
In a trio of notable recent decisions, courts across the Fourth and Ninth Circuits addressed important procedural and substantive issues in bankruptcy law. The Fourth Circuit emphasized the enforceability of local bankruptcy rules and the significance of the debtor’s reliance on legal counsel when imposing sanctions. In another case, the Fourth Circuit clarified the continued applicability of the Fair Debt Collection Practices Act post-discharge, where a mortgage lien survived. Meanwhile, the Ninth Circuit Bankruptcy Appellate Panel tackled a question of first impression, holding that corporate debtors in Subchapter V bankruptcies are not subject to the nondischargeability exceptions of § 523(a). Together, these cases reflect ongoing tensions between statutory interpretation, debtor protections, and creditor rights in both personal and corporate bankruptcy contexts.
Sugar v. Burnett, 130 F.4th 358 (4th Cir. 2025)
Issues/Statutes: Dismissal for Cause; Sanctions; Local Bankruptcy Rule—E.D.N.C. LBR 4002-1(g)(4)
The North Carolina Local Bankruptcy Rule E.D.N.C. LBR 4002-1(g)(4) requires court approval to sell nonexempt property over $10,000. The Debtor filed for Chapter 13 bankruptcy and claimed a $32,348.81 homestead exemption on her residence valued at $150,000. She then sold her property without obtaining a court order, based on advice from her attorney that the property was fully exempt.
The Bankruptcy Court found that she violated her confirmed Chapter 13 bankruptcy plan (“Confirmed Plan”) and the Local Rule, dismissed her case, and prohibited her from refiling for five years. The court also imposed monetary sanctions against her attorney. The Debtor and her attorney, separately, appealed the district court’s affirmance of the Bankruptcy Court’s findings and decisions.
On appeal, the Fourth Circuit upheld the Local Rule as valid and enforceable, explaining that the Debtor had agreed to be bound by it through the terms of her Confirmed Plan. The court also rejected the Debtor’s argument that, because she used the sale proceeds to pay off the balance due under the Plan, the Bankruptcy Court no longer had the authority to rule on this matter. The Fourth Circuit further affirmed that, because the Debtor claimed only a limited homestead exemption, a portion of the residence remained nonexempt and therefore required court approval for sale under the Local Rule.
However, regarding the dismissal of the bankruptcy case and the five-year bar on refiling, the Fourth Circuit found that the Bankruptcy Court failed to fully consider evidence that the Debtor had relied on her attorney’s advice that court approval was unnecessary. Advice of counsel is relevant to assessing bad faith and sanction severity. Accordingly, the court vacated the dismissal and the five-year bar on refiling, remanding for the Bankruptcy Court to evaluate the Debtor’s reliance on counsel in assessing bad faith and the appropriate remedy.
In contrast, the court affirmed the sanctions against the Debtor’s attorney, noting his willful and reckless disregard of binding legal authority and repeated incorrect advice to his client. The court emphasized that he has practiced consumer bankruptcy law in North Carolina for around two decades and had previously represented a debtor in a similar case before the same bankruptcy judge, in which the scope of the Local Rule had already been interpreted.
Koontz v. SN Servicing Corp., 133 F.4th 320 (4th Cir. 2025)
Issues/Statutes: Fair Debt Collection Practices Act; 15 U.S.C. §§ 1692(e), 1692(f)
The plaintiff obtained a mortgage secured by real property in 2008. He later filed a Chapter 7 bankruptcy petition and received a discharge order. More than five years after the discharge, SN Servicing Corporation (“SNSC”) sent Koontz two letters. While the letters disclaimed any attempt to collect personal liability, they demanded payment of late fees and referenced enforcement of the mortgage lien. Koontz filed suit against SNSC, alleging violations of the Fair Debt Collection Practices Act (“FDCPA”) and a similar West Virginia statute.
The district court granted SNSC’s motion to dismiss both Koontz’s federal and state law claims after concluding that he was no longer a “consumer” with a “debt” as defined in the FDCPA and that the letters from SNSC did not constitute attempts to collect a consumer debt. The court also held that Koontz failed to adequately plead a “false, deceptive, or misleading representation” under 15 U.S.C. § 1692(e), though it found he had adequately pled use of “unfair or unconscionable means” under 15 U.S.C. § 1692(f).
On appeal, the Fourth Circuit relied on the Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S. 78 (1991), finding that even after the debtor’s personal obligations on the underlying loan have been extinguished via a Chapter 7 discharge, the surviving mortgage interest still corresponds to an enforceable obligation of the debtor. As such, the district court erred in finding that Koontz was not a “consumer” with a “debt” under the FDCPA, since an in rem obligation via the mortgage lien survives the discharge.
The Fourth Circuit also concluded that the letters plausibly constituted collection efforts. Although those letters included bankruptcy disclaimers, they explicitly demanded payment and described themselves as collection communications. The Court affirmed dismissal of the § 1692(e) claim for lack of specificity, as Koontz failed to identify any false or misleading statements. However, it held that the § 1692(f) claim was properly pled, particularly the allegations that SNSC charged late fees exceeding the contractual cap and refused to credit lawful payments.
Lafferty v. Off-Spec Sols., LLC (In re Off-Spec Sols., LLC), 651 B.R. 862 (B.A.P. 9th Cir. 2023)
Issues/Statutes: Nondischargeability; 11 U.S.C. §§ 1192, 523(a)
This appeal was a matter of first impression for the Ninth Circuit Bankruptcy Appellate Panel (“BAP”), requiring it to decide whether the nondischargeability provisions of § 523(a) apply to corporate debtors.
After the Debtor filed its Chapter 11 Subchapter V petition as a corporate debtor, the Appellant filed a proof of claim and an adversary complaint against the Debtor, asserting a nondischargeable claim under § 523(a)(6) based on alleged harassment and discrimination during her employment. The Appellant argued that § 1192 applies to both corporate and individual debtors and excepts the types of debts specified in § 523(a), regardless of the type of debtor. The bankruptcy court was unconvinced and entered an order dismissing the complaint.
On appeal, the Appellant maintained that the reference in § 1192(2) to debts “of the kind specified in section 523(a)” rendered those debts nondischargeable regardless of the debtor’s entity type, citing a Fourth Circuit decision. The BAP disagreed, finding that the plain language of § 523(a) expressly limits its application to “an individual debtor,” and § 1192 contains no language expanding that scope. The BAP also emphasized that Congressional intent and statutory amendments indicate a broad corporate discharge in Chapter 11. The BAP concluded that the Fourth Circuit’s approach would override the express language of § 523(a) and conflict with the broader statutory scheme.
However, the BAP acknowledged the oddity that certain debts are nondischargeable for corporate debtors in consensual Subchapter V plans under § 1141(d)(6), but potentially dischargeable under nonconsensual plans governed by § 1192. Still, the court found this disparity insufficient to overcome the plain language and longstanding policy of corporate discharge. The court further cautioned that applying § 523(a) to corporate debtors might encourage opportunistic behavior by debtors. A small business debtor with potentially nondischargeable debts could be incentivized to elect subchapter V and force creditors to spend resources proving their claims, only to then amend its election and proceed under Chapter 11, where those claims will be discharged upon confirmation. Therefore, the BAP affirmed the bankruptcy court’s dismissal of the Appellant’s complaint.
Supreme Court Clarifies § 106(a) Sovereign Immunity Waiver, Limiting Trustee’s Avoidance of Tax Transfers
By Yuanhao Zhang, Northwestern Pritzker School of Law
This piece is part of a series of summaries of the leading cases decided in the last year on bankruptcy.
In United States v. Miller, 604 U.S. 518 (2025), the Supreme Court recently reversed the Tenth Circuit’s decision affirming a bankruptcy trustee’s avoidance action to recover tax payments made by insolvent All Resort Group, holding that 11 U.S.C. § 106(a) waives sovereign immunity only for the federal cause of action under § 544(b) and not for the underlying state‑law fraudulent‑transfer claims. The trustee, David L. Miller, had relied on Utah’s fraudulent‑transfer statute (Utah Code Ann. § 25‑6‑6 et seq.) as the “applicable law” to void two shareholders’ misappropriation of $145,000 in corporate funds paid to the Internal Revenue Service. Although the Bankruptcy Court, District Court, and Tenth Circuit all concluded that § 106(a) abrogated immunity for both the federal avoidance claim and the nested state‑law right, the Supreme Court held that Congress intended the waiver to extend only to the federal action itself, leaving sovereign immunity intact for state‑law causes of action outside of bankruptcy.
Here, the Supreme Court began by parsing the text and structure of § 106(a). Section 106(a)(1) provides that “[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated” with respect to specific provisions under the Code, including § 544(b). In contrast, § 106(a)(5) specifies that “nothing in this section shall create any substantive claim for relief of cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.” The Court held that § 106(a) does not extend to the underlying state-law claim itself—even though that claim furnishes the “applicable law” for § 544(b) avoidance—because that would create a substantive claim for relief that does not otherwise exist. The Court warned that reading § 106(a) to waive immunity for every state-law statute invoked in a § 544(b) action would far exceed the limited waiver Congress enacted and upset the sovereign-immunity regime.
Accordingly, because no creditor could invoke Utah’s fraudulent‑transfer statute against the United States outside of bankruptcy, the trustee could not satisfy § 544(b)’s requirement to identify an “actual creditor” capable of voiding the payments. The Supreme Court therefore reversed the judgment below and dismissed the trustee’s avoidance proceeding.
