Case Summaries

By Kathleen Rahbany – Craig and Macauley, P.C., Boston

Failure to Timely File a Notice of Appeal May Be a Jurisdictional Bar to Obtaining Direct Review by the First Circuit Court of Appeals

Weaver v. Harmon Law Offices, P.C. (In re Weaver), 319 Fed. Appx. 1 (1st Cir. 2009)

In an unpublished decision, the First Circuit Court of Appeals declined to hear a direct appeal from an order of the Bankruptcy Court, even though the question certified for review may have been “sufficiently important” to justify a direct appeal.

The defendants sought to have the First Circuit determine “[w]hether or not the act of postponing a mortgage foreclosure sale during a pending bankruptcy violates the automatic stay.” The Bankruptcy Court’s determination was adverse to the defendants. The defendants failed to timely file a notice of appeal of the Bankruptcy Court’s order or to timely seek consent of the First Circuit Court of Appeals to directly review the Bankruptcy Court’s order. This procedural defect made it ‘substantially possible’ that the First Circuit Court of Appeals was without jurisdiction to hear the defendants’ direct appeal. Consequently, the court held that it would not hear the direct appeal because even it determined the question at issue, its holding would be unlikely to result in a “definitive resolution” because the court may have been without jurisdiction to hear the matter in the first place.

Means Test Permits a Deduction from Income of Installment Payments Due for Property to Be Surrendered

Morse v. Rudler (In re Rudler), 576 F.3d 37 (1st Cir. 2009)

The First Circuit Court of Appeals upheld the Bankruptcy Court and Bankruptcy Appellate Panel rulings that the means test permits a debtor to deduct from his income installment payments that are scheduled to come due to a secured creditor, even for property that is later to be surrendered during the debtor’s bankruptcy proceeding.

The means test requires a debtor to calculate whether a presumption of abuse arises by subtracting certain statutorily permitted deductions from current monthly income. Under section 707(b)(2)(A)(iii)(I) of the Bankruptcy Code, a debtor is entitled to deduct expenses incurred “on account of secured debts” so long as the payment is “scheduled as contractually due to [the] secured creditor[] in each of the 60 months following the date of the petition.” An issue comes up when a debtor intends to terminate those payments by surrendering the collateral but also deducts those expenses from current monthly income on the means test, where, but for that deduction, a presumption of abuse would arise.

The First Circuit Court of Appeals noted that precedent interpreting section 707(b)(2) is split but that the majority view, based on the plain language of the statute, permits a debtor to deduct secured payments even if the property securing the debt will later be surrendered. Courts following the majority view primarily consider the phrase “scheduled as contractually due” in the forward-looking context suggested by the phrase “following the date of the petition.”

The First Circuit Court of Appeals determined that “scheduled as contractually due” requires a current assessment of obligations, not one that envisions the future termination of payments that are contractually owed at the time that the debtor completes the means test calculation. Likewise, the court found that the phrase “following the date of the petition” requires a current assessment of payments scheduled to come due after the petition date, not a projection of anticipated changes in those payments. The court concluded that such an interpretation does not lead to an “absurd” result because it avoids uncertainties attendant when a debtor intends to surrender property, but such intent is unperformed at the time when the means test is conducted.

First Circuit Resolves Questions of First Impression

Braunstein v. McCabe, 571 F.3d 108 (1st Cir. 2009)

The Chapter 7 trustee brought a turnover action to recover certain insurance proceeds which were paid to the debtor. The debtor made a jury demand in his answer to the turnover complaint. The turnover complaint was subsequently consolidated with litigation pending before the United States District Court for the District of Massachusetts.

The district court denied the debtor’s jury demand and the debtor appealed that decision. The First Circuit held that there is no jury right with respect to a turnover action brought under section 542 of the Bankruptcy Code. The court noted that there is no statutory right to a jury trial in section 542 actions brought by a trustee in district court and that the Bankruptcy Code fails to address the issue. Accordingly, the court looked to the Supreme Court’s decisions determining whether a jury right exists under the Seventh Amendment. Those decisions prescribe a three-part test which requires a court to: (1) determine whether the action involves rights that are legal or equitable in nature because the “Seventh Amendment applies to actions brought to enforce statutory rights [as opposed to equitable rights] that are analogous to common-law causes of action ordinarily decided in English law courts in the late 18th century;” (2) “examine the remedy sought and determine whether it is legal or equitable in nature”; and (3) if the first two prongs indicate the existence of a jury right then “decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as factfinder.” The court observed that the second prong of the test is weighed more heavily than the first. The court then examined American legal history and determined that there was no common law turnover cause of action, that any analogous action was equitable in nature and that the remedy for a turnover action is also equitable. Accordingly, since the first two prongs indicate no jury right, the third prong was inapplicable.

The First Circuit then addressed the meaning of “ordinary course of business” for purposes of using, selling or leasing estate property under section 363 of the Bankruptcy Code. The court established a two-part analysis, the first part being a “horizontal dimension test” and the second being “a vertical dimension, or ‘creditor expectation,’ test.” The “horizontal” test requires a court to determine whether the transaction is common for the industry engaged in by the debtor. The “vertical” test assesses whether the transaction subjects a hypothetical creditor to economic risk that the creditor would find unacceptable when extending credit – in other words, the court must ask whether the transaction is “ordinary” to the creditor-debtor relationship. The purpose of the analysis is to determine whether creditors are entitled to notice and a hearing prior to consummation of the proposed transaction.

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