Posts Categorized: case summaries

Case Law Update: Beware Representing the Company and the Equity in Insider Transactions

Case: Blast Fitness Group, LLC v. Gary W. Cruickshank, Chapter 7 Trustee of The Estate of Blast Fitness Group, LLC (In re Blast Fitness Group, LLC), no. 16-10236-MSH (Bankr. D. Mass.).

Opinion By: Judge Melvin S. Hoffman

January 8, 2019

Facts:

Chapter 7 Trustee brought forth an adversary proceeding seeking damages and injunctive relief against the law firm of Goodwin Proctor, a Goodwin partner, and a former Goodwin attorney (collectively the Goodwin Defendants), along with dozens of other defendants, for allegedly depriving Blast Fitness Group, LLC (BFG) of profit opportunities and diverting valuable assets which lead to BFG’s Chapter 7 filing.

Goodwin, on behalf of BFG and a BFG subsidiary, had drafted an asset purchase agreement to acquire three fitness clubs in 2012 (the Bally Transaction). In order to raise capital for this acquisition, members of BFG agreed to sell a preferred member interest to Dixon Limited Partnership, an affiliate of BFG’s controlling equity holder (Mr. Dixon). The member consent was drafted by the Goodwin Defendants and stated that a direct subsidiary of BFG would be acquiring the three fitness clubs. These member funds were used to subsidize the purchases and upon closing BFG had not received the clubs because they were sold to three LLC’s in which Mr. Dixon managed and effectively owned. Mr. Dixon then directed BFG to make above market rent payments to the LLC’s which managed the three fitness clubs.  In 2012, Mr. Dixon also transferred profitable BFG clubs for less than full consideration to Newfit, LLC, another LLC effectively owned by him.  Goodwin had drafted that asset transfer agreement. Mr. Dixon also transferred BFG received clubs from Lexfit, LLC (also owned by him) to Newfit. Goodwin drafted that agreement as well.

The Trustee’s causes of action against the Goodwin Defendants included legal malpractice, breach of professional fiduciary duty, breach of contract, violation of Mass. Gen. Laws ch. 93A, § § 2 and 11, and unjust enrichment in the form of attorneys’ fees paid to Goodwin. The Trustee also sought to recover attorneys; fees in the Newfit and Lexfit transactions as fraudulent transfers under MFTA § § 5 and 6 and Bankruptcy Code § 550. Goodwin filed motions to dismiss all counts and moved for partial summary judgment on the fraudulent transfer counts and unjust enrichment count with the Goodwin partner joining in on the motion for partial summary judgment. The former Goodwin partner sought dismissal of all counts against him.

Holding:

The Goodwin Defendants’ motions to dismiss relating to the 2012 Bally transaction were denied. The Court found unconvincing the Goodwin Defendants’ arguments that claims relating to this transaction were time-barred by the three year statute of limitations governing malpractice under M.G.L. ch. 260, § 4 because BFG should have realized they did not receive the fitness clubs upon closing, their payment of rent for these properties to Mr. Dixon’s LLC’s, and Mr. Dixon’s knowledge of this should be imputed to the other members. The Court agreed with the Trustee that the statute of limitations was tolled under M.G.L. ch. 260, § 12 which governs tolling when a defendant fraudulently conceals a cause of action from the plaintiff. The Court found that because a fiduciary relationship existed between the Goodwin Defendants and BFG, they had a duty to inform BFG members that they were paying for but not acquiring the fitness clubs. The Court also ruled that rental payments were irrelevant because members were not required to make inquiry into non-BFG entities and Mr. Dixon’s knowledge of the transfer should not be imputed to BGF members because under the adverse domination doctrine his knowledge of the transaction was not enough to prevent tolling.

The Court denied the Goodwin Defendants’ motions to dismiss the Trustee’s claims of malpractice, breach of fiduciary duty, violation of M.G.L. ch. 93A, and breach of contract relating to the Newfit and Lexfit transactions.  The Court found unconvincing Goodwin’s arguments that there was no breach of duty because there was no conflict of interest in simultaneously representing BFG and its controlling equity holder, Mr. Dixon, because it is not unlawful and is common for firms to represent an LLC and its controlling equity holder in transactions designed to favor that main equity holder. The Court ruled that the Trustee’s amended complaint states a claim upon which relief can be granted because a duty of undivided loyalty was owed to BFG and they were harmed through lost revenue and club sales to Newfit and Lexfit for less than market value.

The unjust enrichment claim against the former Goodwin partner was dismissed because the claim did not specify that he had received substantial payments from BFG to which he was entitled. The Court ruled that the motion for partial summary judgment on fraudulent transfers under MFTA §§ 5 and 6 and Bankruptcy Code § 550 in the form of attorneys’ fees paid to Goodwin and the partner was premature and denied without prejudice. Goodwin argued that BFG received sufficient value for the transfers in the form of legal services and that the second fee was not paid by BFG. The Court allowed the Trustee to seek additional discovery to determine whether the second payment was in fact from BFG and if sufficient value was given for the transfers.

Read The Full Case Here

Summary Prepared By:

Erica James

New Lawyers Section Liaison to Bankruptcy Law Section

Recent case development: Termination of the Automatic Stay – Section 362(c)(3)(A)

Case: Leland S. Smith, Jr. v. Maine Bureau of Revenue Services, No. 18-1573 (1st Cir.)
Opinion by: Circuit Judge Sandra Lynch
December 12, 2018

Facts:
The debtor filed three bankruptcy petitions under Chapter 13 of the Bankruptcy Code. In December 2016, he filed his third petition just two months after the dismissal of his second filing. This triggered § 362(c)(3)(A) which provides that when a debtor files a bankruptcy petition within one year after the dismissal of a prior petition, the automatic stay will terminate after 30 days if no extension is granted by the court. 11 U.S.C. § 362(c)(3)(A).


Among his debts, the debtor owed $51,596.53 in state taxes, interest, and penalties to Maine’s Bureau of Revenue Service (“MRS”). There was no request for an extension of the stay, and on January 27, the 30-day period had expired. At a February 2017 bankruptcy court hearing, MRS moved for an order pursuant to § 362(j) to confirm the extent to which the stay had been terminated.

The debtor argued that the phrase “with respect to the debtor” in § 362(c)(3)(A) plainly and unambiguously terminates the stay “only as to actions against the debtor and his property, not as to actions against the property of the bankruptcy estate.” Conversely, MRS argued that the scope of § 362(c)(3)(A) is not limited to just the debtor and his property, but that it terminates the stay for all purposes.

The Bankruptcy Court for the District of Maine ruled that the automatic stay had terminated in full, and the U.S. District Court of Maine affirmed that decision. The U.S. Court of Appeals for the First Circuit then reviewed the bankruptcy court’s decision de novo.

Holding: 
In affirming both lower court rulings, the First Circuit held that “§ 362(c)(3)(A) terminates the entire stay thirty days after the filing of a second petition.”

The Court rejected the debtor’s argument that the language of the statute is plain since “the language at issue could have different meanings.” The Court relied on King v. Burwell, which warns courts against rigorous application of interpretive canons—including the plain meaning rule—where provisions may be “inartfully” drafted. King v. Burwell, 135 S. Ct. 2480, 2492 (2015). The Court applied King because § 362(c)(3)(A) is imprecise in that it is a “collection of ‘with respect to’ phrases, and it is not obvious how the phrases relate to each other, or how the phrases connect to other related provisions.”

Since the text of § 362(c)(3)(A), including the phrase “with respect to the debtor,” did not support or completely dispose of either party’s arguments, the Court looked to the “statutory context, and Congress’s intent in enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and § 362(c)(3)(A).”

The Court opined that in enacting BAPCPA, Congress intended to discourage bankruptcy abuse, in particular bad faith repeat filings for no valid purpose other than to trigger the automatic stay. This outcome, the Court concluded, can best be achieved by reading § 362(c)(3)(A) to terminate the stay in full.

Summary Prepare By:
Carlos Loredo
Candidate for Juris Doctor, May 2019

Read the Full Case Here: http://media.ca1.uscourts.gov/pdf.opinions/18-1573P-01A.pdf

Recent case development: State Court Judgment (re Specific Performance) Excepted From Chapter 7 Discharge

Case: Ginger Sirikanjanachai v. Town of Hingham (In re Ginger Sirikanjanachai), no. 17-12526-FJB (Bankr. D. Mass.) 

Opinion By: Judge Frank J. Bailey
November 7, 2018

Facts:
The town of Hingham (the “Town”) filed an adversary proceeding seeking to except its state court judgement against debtor, Ginger Sirikanjanachai (the “Debtor”) from her chapter 7 discharge. Count I sought a declaration that this judgment for specific performance against Debtor is not a “claim” within the meaning of the Bankruptcy Code. Count II sought a determination that this judgment and recovery of attorney’s fees should be excepted from discharge based on several misrepresentations under 11 U.S.C. § 523(a)(2)(A) or (B) which governs nondischargeability pertaining to false pretenses and fraud.

The Debtor had participated in a lottery to purchase an available unit with the Hingham Housing Authority. It was required for two residents to occupy the unit and in the Debtor’s application she represented that it would be occupied by herself and Laciga Rachaisi, which was a previous name of the Debtor and also the name of the Debtor’s corporation, Laciga Rachaisi Inc. She represented that her landlord was a realty trust but did not disclose her position of Trustee in that realty trust. She also represented that she had not owed a home in the past or present time by leaving the answer blank when in fact she had. Upon purchasing the unit, the Debtor violated Deed Rider provisions by conveying the unit to herself as Trustee of a realty trust and granting two mortgages on the unit to herself; one to herself in her previous name, Laciga Rachaisi, and the second to herself as Trustee of another realty trust. Lastly, she granted a third mortgage to her second husband’s investment trust. All of this was done against Deed Rider provisions and without notice to the Town.

The Town obtained a state court judgment in its favor which declared void the Debtor conveying the unit to herself along with the three mortgages that she had granted on the unit. The Debtor was also ordered to convey fee title to the Town, and the Town was authorized to payoff from the proceeds of mortgage. Lastly, the Town was authorized to recover attorney’s fees and costs from the Debtor.

Holding:
On Count I, the Bankruptcy Court ruled that the Town’s judgment ordering the Debtor to transfer the unit back to the Town is excepted from discharge under 11 U.S.C. § 727(a). Upon reaching this ruling, the Court ruled that this order of specific performance does not require the Debtor to pay the Town, but rather to transfer the unit back. Because of this, the Debtor’s obligation is not a claim giving rise to a right to payment within the meaning of 11 U.S.C. § 101(5)(A) and is in turn not a debt within the meaning of 11 U.S.C. § 727(b).

The Court also ruled that the Debtor’s obligation is not a claim within the meaning of § 101(5)(B) because although the Town has the right to the equitable remedy of having the unit transferred to them, this remedy also does not give right to a rise to payment. The Court ruled that damages would not suffice because there are limited units available in Hingham Housing Authority’s program, the return of Debtor’s unit to the Town is valuable.

On Count II, the Bankruptcy Court ruled that four out of the seven misrepresentations were plead with particularity. The two misrepresentations that were not stated with particularity were regarding the Debtor omitting monthly income and income from the sale of previous real property. The Court ruled that the Town did not specify how and where the Debtor made these misrepresentations and, therefore, did not plead with particularity. The Court deemed these two misrepresentations waived as grounds for nondischargeability under § 523(a)(2).

Regarding the misrepresentation of the Debtor’s lack of answer in her application that she did not have real estate holdings, the Court ruled that the lack of answer was not a basis for discharge under § 523(a)(2)(b) which governs false statements in writing. The Court determined that by leaving this answer blank, it was not a negative answer confirming that she had not owed real estate, but simply a non-answer. The Town had not proved that it relied on this non-answer as a negative and that any reliance it may have placed on it was reasonable which are requirements for nondischargeability under § 523(a)(2)(b).

The Court ruled that the Debtor’s statements regarding the non-existent second resident, not owning a home in the past, that her current landlord was her realty trust, and that she did not presently own a home sounded in fraud under all four requirements of § 523(a)(2)(A). The Debtor had made these representations with the intent to deceive and induce the Town to rely on them in which the Town reasonably did. By relying on these representations, the Town incurred expenses to have the unit transferred back to them which gave rise to a debt for property, including attorney’s fees.

The fourth requirement of § 523(a)(2)(A) requires false representations to not be made in regard to the debtor’s or an insider’s financial condition. In accordance with a previous ruling, the Court applied a narrow interpretation of what constitutes financial condition statements. A narrow interpretation would require income statements, balance sheets, etc. The Court ruled that the Debtor’s statements were not broad enough in scope to constitute a statement respecting her financial condition. Having met all of the requirements of 523(a)(2)(A), the Court excepted the Town’s judgment of specific performance and attorney’s fees from discharge.

Read The Full Case Here: http://www.mab.uscourts.gov/mab/opinions

Summary Prepared By:
Erica James
New Lawyers Section Liaison to Bankruptcy Law Section

Recent case development: Frivolous Rule 60 motion carries sanctions for debtor and debtor’s counsel.

Case: In re Robert J. Spenlinhaur, Debtor no. 13-17191-JNF (Bankr. D. Mass.).

Opinion by: Judge Joan N. Feeney

November 2, 2018

Facts:

At an evidentiary hearing, Debtor Robert Spenlinhaur and Respondents Eric Josephson and Jackson Hole Classic Cars, LLC were found to be in contempt of a previous court order to deliver non-exempt assets of the chapter 7 estate. The assets included vehicles, boats, keys, and registration documents. The Bankruptcy Court found no cause or justification for disobeying the order and ordered the Trustee to immediately collect the non-exempt assets.

Debtor subsequently filed a Motion for Partial Relief from Judgment and Request for Emergency Consideration. He represented that the non-exempt assets, which consisted of a camper and a pickup truck, should be carved out from the Court’s order because without the camper he would be homeless and without the truck he would have no transportation. He also sought relief on behalf of respondent Josephson, representing that another pickup truck and a trailer, both already in possession of the Trustee, should also be carved out from the order for the same reasons.

To support these requests, he argued these needs constituted “any other reason that justifies relief” from a final judgment, order, or proceeding under Fed. R. Civ. P. 60(b)(6). The Court denied the motion stating that if the Trustee were not to collect the non-exempt assets it would be expressly contrary to his duties. The Court found that the debtor did not meet the threshold for Fed. R. Civ. P. 60(b)(6) and was ordered to show cause as to why he should not be sanctioned under Fed. R. Bankr. P. 9011(b) for the filing of the motion. Debtor argued that the motion was filed in the appeals period, was not submitted for improper purpose or unnecessary delay, not intended to needlessly increase litigation costs, and not hinder the Trustee’s duties. Debtor argued the motion was not frivolous because an open tax court case may be resolved in his favor and the zealous advocacy did not cross the line into an area where sanctions could be permitted.

Holding:

After noting that a movant pursuing a Rule 60(b)(6) claim “faces formidable hurdles,” and that “Rule 60(b)(6) motions should be granted only where exceptional circumstances justifying extraordinary relief exist…” Ross v. Garcia (In re Garcia), 532 B.R. 173 (B.A.P. 1st Cir. 2015), citing Simon v. Navon, 116 F.3d 1, 5 (1st Cir. 1997), the Bankruptcy Court observed that the Rule 60(b)(6) request of the Debtor and his counsel was a merely a reiteration of prior arguments made at the evidentiary hearing, was not supported by any legal authority, and therefore did not meet the required threshold for relief. The Court further held that motion was frivolous and therefore violated Fed. R. Bankr. P. 9011(b)(2). In reaching this conclusion, the Court noted that neither the Debtor nor the Respondents made any offer to pay the Trustee for the use of or insurance for the property, nor did they cite any case law or legal authority to support the proposed use.

The Court explained that since the Trustee is a fiduciary to creditors and is required to uphold his duties of collecting and reducing to money property of the estate (citing In re Feinstein Family Partnership, 247 B.R. 502 (Bankr. M.D. Fla. 2000)), granting the requested relief would effectively authorize a breach of the Trustee’s fiduciary duties under 11 U.S.C. § 704(a). Accordingly, the Court issued a monetary sanction against the Debtor and his counsel in the amount of $1,500 for filing a frivolous pleading.

Summary Prepared By:

Erica James

New Lawyers Section Liaison to Bankruptcy Law Section

Read The Full Case Here: http://www.mab.uscourts.gov/mab/opinions

Recent case development: § 363(h) sales of tenancy by the entirety property

Case: John O. Desmond, Chapter 7 Trustee v. Marsha S. Green (In re Warren I. Green), no. 13-10204-MSH (Bankr. D. Mass.).

Opinion By:

Chief Judge Melvin S. Hoffman

October 11, 2018

Facts:

The Chapter 7 Trustee filed an action pursuant to 11 U.S.C. § 363(h) for authority to sell a condominium held by the debtor and his non-debtor spouse as tenants by the entirety. The defendant non-debtor spouse, Ms. Green, moved for summary judgment objecting to the sale on the ground that the Trustee could not meet the balancing test of § 363(h)(3). That section requires the court to determine if the proposed sale will confer upon the estate a benefit that outweighs any detriment to the non-debtor. Relying on Butner v. United States, 440 U.S. 48 (1979), Ms. Green argued that such a determination could not be made because: (i) under Massachusetts tenancy by the entirety law, each owner enjoys equal rights to the entire ownership and proceeds and, as a result any distribution to the estate would result in Ms. Green not receiving her full interest as required by § 363(j); and (ii) Massachusetts law precluded the Trustee from distributing any funds until termination of the tenancy, meaning that neither she nor the bankruptcy estate would receive a benefit from the sale so long as the tenancy remained intact.

Holding:

The Bankruptcy Court held that strict compliance with Massachusetts tenancy by the entirety law would run counter to the policies of the Bankruptcy Code and was therefore preempted to the extent it was inconsistent with Bankruptcy Code § 363(h) and (j). The Court noted that although the Butner decision holds that, “property interests are created and defined by state law,” Ms. Green – like many other litigants – had glossed over the qualifier in the next sentence of that decision, which is that courts must also look to whether “some federal interest requires a different result.”

In Green, the Bankruptcy Court determined that federal bankruptcy law did indeed require a different result, a conclusion reinforced by the Bankruptcy Code’s legislative history, which explicitly states that a trustee should be permitted to sell entireties property.  Further, the Court observed that requiring a trustee to hoard the proceeds of such a sale would be incompatible with the dictates of § 704, which requires the trustee to administer the bankruptcy case expeditiously and consistent with the best interest of the parties. Finally, the Court rejected the notion that § 363(j) should be incorporated into the balancing test of § 363(h). Rather, § 363(j) simply governs what happens after a sale vis-à-vis the non-debtor spouse and does not create a condition precedent to a sale by the Trustee under § 363(h). Interestingly, one question the Court did not decide was the appropriate formula for dividing the sale proceeds, in light of Massachusetts law entitling each party to ownership rights in the entirety of those proceeds. The Court did note, however, that a 50-50 distribution would appear to be a reasonable approach.

Find The Full Case Here:

http://www.mab.uscourts.gov/mab/opinions

Summary Prepared By:

Erica James

New Lawyers Section Liaison to Bankruptcy Law Section

 

Program Materials – Consumer Bankruptcy Case Review

On November 14, 2016, the Consumer Bankruptcy Committee of the Bankruptcy Section held a lunch program that featured a consumer case law update.  Kate Nicholson and Benjamin Higgins gave a wonderful presentation and facilitated a lively discussion. Thank you to Kate and Ben and to everyone who attended!

For those who were unable to attend, the program materials are available here:

consumer-case-review-2016

Case Summaries — the March 2016 Bankruptcy Court Opinions

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

 

In re Willie D. Brown, Ch. 13 Case No. 14-12357-JNF and In re James W. Tosi, Ch. 13 Case No. 13-14017-FJB 

Four bankruptcy judges in the District of Massachusetts have split (2-2) over whether a Chapter 13 plan can vest the Debtor’s real property in a mortgagee over that mortgagee’s objection. At issue is the relationship between § 1322(b)(9), which provides that a plan may vest property of the estate in another entity and § 1325(a)(5), which 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 Brown, Judge Feeney joined Judge Hoffman (In re Sagendorph, 2015 WL 3867955) in finding that a plan vesting property in a mortgagee can be confirmed over that mortgagee’s objection.  In Tosi, Judge Bailey joined Judge Boroff (In re Weller, 2016 WL 164645) in finding that vesting property in the mortgagee does not constitute a surrender of that property under 1325(a)(5) and therefore a vesting plan cannot be confirmed over that secured creditor’s objection.  These issues are currently on appeal, and one argument worth watching may be whether vesting property in a mortgagee under 1322(b)(9) can satisfy the “cram-down” provision of 1325(a)(5).

 

In re Greco, Case No 15-12232-JNF (March 3, 2016)

The court sustained the Chapter 7 trustee’s objection to the debtor’s claimed exemption in a stream of payments stemming from a marital property settlement. The debtor was entitled to $300 per month under a judgment entered by the probate and family court that stated that the amount to be paid was on account of and in lieu of any rights the debtor would have had in the former spouse’s Massachusetts municipal retirement plan.  The debtor attempted to exempt the payments as a “right or interest…in an annuity, pension, profit sharing or other retirement plan” under Mass. Gen. Laws ch. 235, § 34A.  The court held that the payments were not exempt because the family court- ordered note and mortgage given by the former spouse, though payable from a portion of his municipal retirement benefits, “does not fall within the ambit of the plain language of [ch. 235, § 34A].”

 

Hutton v. Vasa (In re Vasa), A.P. No. 14-1173-JNF (March 8, 2016)

The Debtor’s former law partner sought a determination that certain obligations allegedly owed to him by the Debtor were nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). The Bankruptcy Court found a portion of the obligations in question to be non-dischargeable under 11 U.S.C. § 523(a)(4) on the basis that the Debtor’s actions constituted defalcation while acting in a fiduciary capacity.  Specifically, the Bankruptcy Court found that, while acting in a fiduciary capacity, the Debtor had transferred funds from the law firm’s IOLTA account in a grossly reckless fashion and had taken funds from the firm at the expense of the firm’s clients and creditors.  However, the Bankruptcy Court found that the fiduciary relationship between the parties had ended after 2012, and that the plaintiff had failed to establish the elements of § 523(a)(4) with respect to any debt arising after that time.  Additionally, the Bankruptcy Court found that the plaintiff had failed to carry his burden of establishing non-dischargeability under either § 523(a)(2)(A) or (a)(6).

 

Acevedo v. Bayron, AP No. 16-01011-JNF (March 15, 2016)

Approximately six weeks after the confirmation of his Chapter 13 plan, Debtor and two co-plaintiffs filed a verified complaint against thirty three named defendants. Averring that the Bankruptcy Court has jurisdiction pursuant to 28 U.S.C. § 1334 to hear matters related to the interested parties pursuant to Fed.R.Bankr.P. 7019, plaintiffs made allegations stemming from events that occurred in Puerto Rico between August 1946 and Debtor’s Chapter 13 petition date.  The claims include, amongst others, turnover of a gas station located in Puerto Rico, declaration that dividends and profits of said gas station are property of the bankruptcy estate, and several others, all related.  Defendants filed a motion seeking a transfer of venue.  Citing prevalent case law and the language of § 1334(c)(1), the Bankruptcy Court identified three criteria to determine whether sua sponte abstention is appropriate: the interests of justice, comity, and respect for state law.  In a lengthy discussion applying the complicated facts of this case to the relevant criteria, the Bankruptcy Court entered an order abstaining from ruling on this adversary proceeding.

 

Grossman v. Bonefant (In re Bonefant), A.P. No. 14-1143-JNF (March 29, 2016)

The Chapter 7 Trustee for Robert Patrick Bonefant, Jr. (“Debtor”) and Margaret Louise McClory-Bonefant filed an adversary proceeding against the Debtor’s father, Robert Patrick Bonefant, Sr. (“Defendant”) to avoid fraudulent transfers in the form of nearly $775,000 in payments made by the Debtor to his father’s bank accounts in the two years before filing for bankruptcy. At trial, the Trustee did not press his quantum meruit/unjust enrichment or resulting trust claims and the Defendant did not contest liability for fraudulent transfers pursuant to 11 U.S.C. § 548.  The issues analyzed by the Court in this Memorandum were whether the Trustee sustained his burden of proof on his claims pursuant to 11 U.S.C. §§ 548 and 550(a)(1) and calculation of damages.  Although the Trustee asked to recover all amounts voided under 11 U.S.C. § 548 as fraudulently transferred (nearly $775,000), the Court held that recovery pursuant to 11 U.S.C. § 550(a)(1) is limited to the amount that restores the estate to the same position it would have been in notwithstanding the fraudulent transfers.  The Court found that the Debtor withdrew $761,623 from his father’s accounts for his personal use, and so the estate was only entitled to recover the remaining $12,322 plus credit card charged incurred by the Defendant but paid for by the Debtor.

 

DeGiacomo v. First Call Mortg. Co. (In re Reznikov), AP No. 15-1003, 2016 WL 1238916 (Bankr. D. Mass. Mar. 29, 2016)

On cross-motions for summary judgment, the Bankruptcy Court for the District of Massachusetts recently held that there was no genuine dispute as to any material fact in finding that a certificate of acknowledgment that indicated only that the debtor “duly acknowledged” execution of a mortgage was insufficient under Massachusetts law to legally record the mortgage. Such language reflects that the debtor executed the mortgage, but does not indicate, as required under Massachusetts law, that she did so as her free act and deed.  Evidence of the parties’ intent or actual acts would not alter this conclusion, as the court is not interpreting a contract or the validity of the language, but only considering whether the language, on its face, gives notice that the requirements for a legally recorded mortgage have been met.  The phrase “duly acknowledged” does not provide such notice.  Accordingly, the chapter 7 trustee, as a hypothetical bona fide purchaser, is entitled to summary judgment and can avoid the mortgage under § 544(a)(3).  Further, as a matter of law, the mortgage is automatically preserved for the benefit of the estate under § 551, maintaining priority over the debtor’s homestead  exemption.

 

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)

Devon MacWilliam, Partridge Snow & Hahn

Alex McGee, Ropes & Gray

Michael K. O’Neil, Murphy & King

Nathan Soucy, Soucy Law Office

Aaron Todrin, Sassoon & Cymrot, LLP

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.

 

—————————————–

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

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.

—————————–

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, LLP

 

Case Summaries – the September 2015 Bankruptcy Court Opinions

The following are summaries of the September 2015 opinions posted on the Massachusetts Bankruptcy Court’s website.

50 Patton Drive, LLC et al. v. Steven C. Fustolo (In re Fustolo) A.P. No. 14-1193 (September 11, 2015) (Feeney, J.) The Patriot Group, LLC (“Patriot”) filed a motion for partial summary judgment against defendant/debtor (“Debtor”) pursuant to § 727(a)(4)(A) seeking denial of Debtor’s discharge for knowingly and fraudulently making a false oath in his amended Schedule B.  Specifically, Patriot asserted that Debtor improperly listed a “possible whistleblower claim” that did not exist.  Debtor opposed the motion.  Relying on prior claims filed with the IRS and SEC by Debtor, the Bankruptcy Court ruled that the record contained sufficient evidence that Debtor did in fact have a potential whistleblower claim and therefore denied Patriot’s motion.

Follo et al. v. Morency (In re Morency), Case No. 10-13666-JNF, A.P. No. 10-1133 (Sept. 18, 2015) (Feeney, J.) Prior to the debtor’s Chapter 7, the plaintiffs had obtained a $500,000 Vermont state court judgment against the debtor for common law fraud and violations of the Vermont Consumer Fraud Act in connection with the debtor’s sale of an inn to the plaintiffs. The debtor had been found to have provided the plaintiffs with inflated revenue figures when marketing the inn.  In a 2013 decision after a section 523(a)(2) non-dischargeability trial in the Bankruptcy Court in which the plaintiffs relied exclusively on the state court judgment and collateral estoppel/issue preclusion, the Bankruptcy Court found the debt dischargeable.  This time around, on remand from the District Court, the Bankruptcy Court confirmed the dischargeability finding by denying the plaintiff’s’ post-trial motion to amend the complaint to add a more specific reference to section 523(a)(2)(B), and denying the plaintiffs’ motion to take judicial notice of state court jury instructions, which did not make it into the original dischargeability trial record and would have better dovetailed with the requisite elements for a finding under 523(a)(2)(B).

In re Morency, Case No. 10-13666-JNF (Sept. 18, 2015) (Feeney, J.) In the debtor’s Chapter 7 bankruptcy, only three creditors filed claims, all nonpriority and unsecured, two for less than $6,000, and one for over $500,000 (the “Judgment Claim”).  One creditor objected to the Judgment Claim on the grounds that the Vermont state court judgment on which it was based was not final, had no preclusive effect in the bankruptcy, and was obtained with falsified evidence.  The issue for the bankruptcy court was whether the objecting creditor sustained its burden of proof that the Judgment Claim creditor did not have an allowed claim because of the alteration of an exhibit in the state court litigation.  Judge Feeney concluded estoppel was inapplicable because the debtor and objecting creditor were not in privity and there was no shared identity between the issues in the state court action and the objection.  After an evidentiary hearing, the court found that the objecting creditor failed to establish that the Judgment Claim creditor altered the trial exhibit and overruled the objection.

In re Blanchette, Case No. 1540788-MSH (September 22, 2015) (Hoffman, J.) In this case, the Chapter 7 trustee filed an objection to debtor’s homestead exemption claim, asserting that the debtor did not fall under the statutory definition of “owner” under Mass. Gen. Laws. ch 188, § 1. Additionally, the trustee argued that the debtor’s former spouse’s previously recorded declaration of homestead on the shared property was automatically terminated when the debtor recorded a subsequent homestead declaration on the same property, and also because the former spouse’s declaration was terminated when she moved out of the property after the divorce. Despite the bankruptcy court’s finding that the debtor lacked an ownership interest in the property, it overruled the trustee’s objection and held that a homestead declaration when recorded does not automatically terminate a prior recorded declaration. Furthermore, the bankruptcy court held that the former spouse’s departure from the marital property terminated only her homestead rights, and not those of the debtor.

In re Henry A. Sarafin Testamentary Trust, Case No. 12-30221-HJB (September 30, 2015) (Boroff, J.) The Debtor objected to the secured claim filed by an oversecured creditor (the “Bank”) to the extent the amount of the claim exceeded the amount set forth in the Debtor’s confirmed Chapter 12 Plan (the “Plan”).  The Debtor also questioned the reasonableness of attorney’s fees included in the Bank’s claim.  The Bank argued that its claim amount was not limited by the provisions of the Plan and that its attorney’s fees were reasonable.  The Bankruptcy Court stated that while it is well-settled that a confirmed plan has a preclusive effect with regard to the treatment of a claim (i.e., secured vs. unsecured), the same cannot be said with respect to the amount of a claim.  Noting that the total amount of the Bank’s claim in the instant case could not have been determined at the time of confirmation, the Court found that the Plan could not possibly have had a preclusive effect as to the ultimate amount of the Bank’s oversecured claim.  The Court further concluded that the attorney’s fees in question were reasonable in light of the nature of the case and the Debtor’s habitual payment arrearages.

In re GT Advanced Technologies, Inc., Ch. 11 Case No. 14-11916-HJB (Bankr. D. N.H.) (Boroff, J.) The Bankruptcy Court, from the bench, had denied a motion to approve the Debtors’ key employee retention plan (“KERP”) and key employee incentive plan (“KEIP”) and the District Court remanded on appeal requesting that the Bankruptcy Court elucidate additional facts and analysis of the motion to approve with reference to case law.  Section 503(c)(1) of the Bankruptcy Code prohibits bonuses paid to retain insiders unless the plan meets the strict requirements of the section.  If a plan is primarily incentivizing and not retentive in nature (a KEIP instead of a KERP), the more permissive 503(c)(3) applies to the plan.  The KEIP in this case covered 9 insiders and provided bonuses in varying amounts based on performance metrics defined as threshold, target, and stretch.  The Bankruptcy Court found that the KEIP was not primarily incentivizing because the “target” performance metric aligned with estimates and projections contained in the Debtors’ business plan.  Therefore, a threshold level bonus could be achieved by the insiders even if their performance failed to reach the level estimated under the plan.  The Court also found that the repeated statements of counsel and the declarants in support of the KEIP regarding the importance of keeping the insiders on board demonstrated that the KEIP was primarily retentive and not incentivizing in nature.  Since all parties agreed that the KEIP could not meet the requirements of 503(c)(1), the motion to approve with respect to the KEIP was denied.  As to the KERP, the Court applied what have become known as the “Dana factors” and found that it could not approve the KERP. While the Debtors were properly concerned about the retention of their employees and took care to pare down to a group of 26 employees most crucial to their operations, the Court could not conclude that (i) the design of the KERP was reasonably related to the results the Debtor sought to obtain, (ii) the scope of the plan was fair and reasonable and did not discriminate unfairly, or (iii) the plan was consistent with industry standards.  The Court could also not conclude that the cost of the KERP was reasonable given the Debtors’ assets, liabilities, and earning potential.

 

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)

John Joy, Boston College Law School

Devon MacWilliam, Partridge Snow & Hahn

Michael K. O’Neil, Murphy & King

Nathan Soucy, Soucy Law Office

Aaron Todrin, Sassoon & Cymrot, LLP