Case Summaries– the January 2016 Bankruptcy Court Opinions

The following are summaries of the January 2016 opinions posted on the Massachusetts Bankruptcy Court’s website.

 

In re Humphrey, Case No. 14-15511-JNF (January 6, 2016)

Three judgment creditors had objected to the Chapter 7 debtor’s claimed homestead objection on the basis that the property was not his principal residence.  The property was held as a tenancy by the entirety, though the debtor was separated (but not divorced) from his non-debtor wife and she did not reside in the house as of the petition date.  The debtor died less than a year into his case and the debtor’s personal representative filed a motion to dismiss the contested matter concerning the homestead exemption because the debtor’s interest in the property was terminated by his death.  The court granted the motion to dismiss, holding that the non-debtor surviving spouse held the property by operation of law (outside the debtor’s probate estate) and any rights that the creditors may have had had terminated.

 

In re Diane Moden, Case No. 15-10213-MSH (January 8, 2016)

The Debtor sought to avoid a judicial lien on her residence pursuant to 11 U.S.C. § 522(f) under the theory that the lien impaired her homestead exemption.  In 2009, a judgment creditor obtained a judicial lien against the Debtor’s husband’s interest in the property in question.  When the Debtor and her husband divorced in 2013, the practical effect of the divorce agreement was that the Debtor’s interest in the property became subject to the lien.  Focusing on the language in § 522(f) that a debtor may avoid “the fixing of a lien,” the Bankruptcy Court denied the Debtor’s unopposed motion to avoid the judicial lien on the basis that the lien did not impair the Debtor’s homestead exemption at the time it attached to the property in 2009.

 

In re Weller, Case No. 12-40418-HJB (January 13, 2016)

 Chapter 13 Debtors confirmed a plan in which they surrendered their single family home to Wells Fargo, the secured creditor.  For three years following confirmation, Wells Fargo declined to foreclose its mortgage on the property.  The Debtors, unable to pay for maintenance and insurance on the property, then proposed an amended plan which provided that the property would vest in Wells Fargo and the “confirmation order shall constitute a deed of conveyance” of the property to Wells Fargo.  Wells Fargo objected to the amended plan.  Section 1325(a)(5) requires that a plan either be accepted by the secured creditor, “cram down” the secured creditor, or surrender the property to the secured creditor.  In In re Cormier, 434 B.R. 222 (Bankr. D. Mass. 2010), this same court held that a secured creditor could not be compelled to take title to a property that the debtors proposed to surrender.  The issue here is whether § 1322(b)(9), which provides that a plan may provide for vesting of property of the estate in the debtor or any other entity, trumps the limitations of §1325(a)(5) and Cormier.  The court ruled that it does not.  “A plan which ‘surrenders’ property to a secured creditor fulfills the requirements of § 1325(a)(C) and may be confirmed.  A plan which ‘vests’ property in a secured creditor does not fulfill the requirements of § 1325(a)(C) and may not be confirmed over the secured creditor’s objection.”  The Debtors’ proposed amended plan could not be confirmed.  Notably, in In re Sagendorph, 2015 WL 3867955 (Bankr. D. Mass.), another court in this district, found the opposite; that decision is now on appeal to the district court.

 

Juan Juan Chen, et. al. v. Wen Jing Huang, Adversary Proceeding No. 12-01265-HJB (January 15, 2016)

A group of fifteen Plaintiffs commenced this adversary proceeding seeking a determination that either their claims are excepted from discharge pursuant to § 523(a) or that Debtor is not entitled to a discharge pursuant to § 727(a).  Plaintiffs’ allege that (1) Debtor, the principal officer and sole stockholder of their employer, Millennium Daycare, Inc. (“Daycare”), fraudulently induced them to work without compensation despite having sufficient funds; (2) Debtor made false oaths in connection with both her individual and Daycare’s bankruptcy cases; and (3) Debtor improperly transferred estate assets.  Plaintiffs had little difficulty proving all of the above.  Evidence presented at trial demonstrated that, amongst other things, Debtor failed to disclose tens of thousands of dollars of monthly income deriving from commercial real estate; failed to disclose insurance policies or postpetition proceeds collected on those policies amounting to over $50,000; and failed to disclose substantial transfers in assets to insiders, including her son.  Indeed, Debtor had enough cash flow to pay each and every Plaintiff’s claim.  In responding to Debtor’s defense that she received inadequate counsel and had hampering language barriers, the Court was unimpressed, stating “a debtor cannot, merely by playing ostrich and burying his head deeply enough in the sand, disclaim all responsibility for statements which he has made under oath.”   The Court ruled in favor of the Plaintiffs on the § 727 claim, which rendered the § 523 claim moot.

 

In re New England Compounding Pharmacy, Inc., Case No. 12-19882-HJB (Jan. 15, 2016)

Following a bankruptcy case of “inordinate complexity”, the Chapter 11 trustee sought compensation in the amount of $3.75M, which was less than the maximum trustee commission set by Bankruptcy Code § 326 but more than the “lodestar amount” of the trustee’s hours spent in the case multiplied by his hourly rate.  Objecting parties quarreled with the Trustee’s request solely to the extent that it exceeded the lodestar amount of approximately $1.14M.  In assessing the trustee’s request, the bankruptcy court first discounted arguments that a fee enhancement should not be paid where (i) creditors did not agree to pay the costs of such enhancement, (ii) creditors would not be paid in full, or (iii) the extraordinary outcome of the case was achieved through the cooperation of many professionals rather than the trustee alone.  Then, taking note of the trustee’s “exemplary” work in the case and noting that fee enhancements, when allowed, generally fall in the range of 1.1 to 2 times the lodestar amount, the court found that a reasonable fee for the Chapter 11 trustee was equal to two times the lodestar amount.

 

Lassman v. Short (In re Foley), Ch. 7 Case No. 13-14529, Adv. No. 14-1139, slip op. (Bankr. D. Mass. Jan. 22, 2016)

Judge Feeney recently joined Judge Bailey in ruling that a bankruptcy trustee does not qualify as an “individual” entitled to punitive damages for willful violations of the automatic stay under 11 U.S.C. § 362(k).  See In re Sayeh, 445 B.R. 19, 27 (Bankr. D. Mass. 2011) (finding chapter 11 trustee had no recourse under section 362(k)).

The issue came before the court in an adversary proceeding filed by the chapter 7 trustee (the “Trustee”) against a lender (the “Mortgage Lender”) with a mortgage on certain property of the estate (the “Mortgage”).  The Debtors were obligated under the Mortgage in connection with their purchase of a motel in rural Kentucky from the Mortgage Lender in March 2007 (the “Property”).  The Debtors had subsequently contracted to sell the Property to a purchaser (the “Purchaser”) in exchange for a down payment and equal monthly payments over a ten-year period. The Debtors and the Purchaser agreed that the Debtors would remain liable and continue to make payments to the Mortgage Lender until the Mortgage was paid in full.

When the Debtors filed their chapter 7 bankruptcy petition in July 2013, the Mortgage Lender instructed the Purchaser to make the monthly payments directly to them.  The Purchaser complied, making payments totaling nearly $16,000.  A year later, the Trustee filed the adversary proceeding seeking a determination that the Mortgage was invalid, requesting turnover of the $16,000 in monthly payments received, and seeking damages for willful violation of the automatic stay.  The Trustee and the Mortgage Lender subsequently filed cross-motions for summary judgment.

After determining that Kentucky law applied, the court found that the Mortgage was valid under Kentucky law.  The court then found that the Trustee had no right to the $16,000 in payments received by the Mortgage Lender from the Purchaser, reasoning that the estate had no interest in voluntary payments made between two non-debtor parties.  While the Trustee had a claim against the Purchaser, which he had asserted in a separate adversary proceeding, that claim does not translate to “an ownership in their monies or any authority to dictate how they spend their monies.”  The court further found that the Mortgage Lender was not unjustly enriched by the payments because it would have been entitled to adequate protection or relief from the automatic stay as a secured creditor.

The court then turned to the Trustee’s allegation that the Mortgage Lender owed damages under 11 U.S.C. § 362(k) for “collecting payments belonging to the Estate and threatening to dispose of Estate assets” in willful violation of the automatic stay.  The court adopted the reasoning articulated by Judge Bailey in Sayeh noting that § 362(k) only permits “an individual” injured by a willful violation of the automatic stay to obtain damages.  Although the bankruptcy code does not define “individual,” it is generally understood that “individual” is used to refer to natural persons or human beings, whereas “entity” is used when referring to a broader group.  Thus, had Congress wished to provide the estate or a trustee, as representative of the estate, the right to pursue damages for willful violations of the automatic stay, it would have used the term “entity”.  Accordingly, the Trustee was not entitled to damages under § 362(k) for the Mortgage Lender’s alleged violations of the automatic stay.

Having found against the Trustee on all counts of the adversary proceeding, the court denied the Trustee’s motion for summary judgment and granted summary judgment to the Mortgage Lender, lifting the automatic stay for cause with regard to the Property.

 

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Contributions by:

Benjamin Higgins, Law Clerk to the Hon. Frank J. Bailey (Contributions are on personal behalf and should not be construed as statements by the U.S. Bankruptcy Court)

Gina O’Neil, Mirick, O’Connell, DeMallie & Lougee, LLP

Michael K. O’Neil, Murphy & King

Nathan Soucy, Soucy Law Office

Aaron Todrin, Sassoon & Cymrot, LL