Posts Categorized: case summaries

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.

 

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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

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, 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

 

Case Summaries — The July/August MA Bankruptcy Court Opinions

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

 

Riley v. InstaMortgage.com, et al. (In re Smith), Case No. 07‐14013-FJB, Adv. P. No. 13‐1357 (July 15, 2015)

The court held that there was no valid mortgage on the debtor’s half interest in property because the mortgage’s granting clause referenced a “Borrower,” which was a defined term in the mortgage that included the non-debtor tenant in common, but not the debtor.  Notably, all parties in the adversary proceeding agreed that the debtor had signed the mortgage on a line above the word “Borrower” on the last page of the mortgage and on a mortgage rider.  However, the court held that this fact was insufficient to read the debtor into the term “Borrower” for purposes of the mortgage’s granting clause.  In construing this state law issue the court acknowledged there is no S.J.C. authority directly on point but noted that its holding was consistent with Judge Feeney’s decision in Agin v. South Point, Inc. (In re Kurak), 409 B.R. 259 (Bankr. D. Mass. 2009), aff’d 433 B.R. 52 (D. Mass. 2010) and with other jurisdictions.

Theresa Matthews v. Christian Nealon (In re Nealon), Adv. P. Case No. 14-4069 (July 15, 2015)

In this adversary proceeding, Plaintiff brought a motion for summary judgment asking the Bankruptcy Court to give preclusive effect to a prepetition arbitrator’s finding that the parties intended an initial deposit given to the Debtor by the Plaintiff for construction work was to be placed in an escrow account. Debtor, in turn, filed a motion for judgment on the pleadings alleging Plaintiff lacked a factual basis for her claims under §§523(a)(2)(A) and (a)(4). According to the Court, because the arbitrator’s conclusion regarding the existence of an escrow account was not essential to the award, the issue could not be given preclusive effect in the present proceeding. Absent a preclusive finding that an escrow account was created and misused by the Debtor, the Court denied Plaintiff’s motion because an undisputed issue of fact existed regarding the parties’ intentions with respect to the initial deposit. However, the Court found that Plaintiff had pled facts sufficient to support her claims under §§523(a)(2)(A) and (a)(4), and therefore, Debtor’s motion was denied.

Butler v. Wojtukun et. al. (In re Wojtkun), Case No. 13-12719-WCH, Adv. P. Case No. 15-1016 (July 20, 2015)    Chapter 7 Trustee brought claims against the Debtor, his wife, and various trusts and corporate entities associated with one or both of them, seeking, among other things, (i) declarations that resulting trusts and constructive trusts exist for the Debtor’s interest in a condominium held by an affiliate corporation and proceeds of real estate (the Debtor’s home) owned by an affiliated trust, (ii) avoidance of transfers of income from the Debtor, a dentist and owner of a dental corporation, to his wife, an office manager for the dental corporation, and (iii) a shareholder derivative action on behalf of the dental corporation.  The Defendants moved to dismiss all counts.  The court denied the Defendants’ motion to dismiss the resulting trust claim regarding the proceeds of real estate because the Debtor had claimed to own 50% of that property in various financial documents, but the court dismissed the resulting trust claim regarding the Debtor’s interest in the condominium because “merely residing in a home does not rise to the level of exercise of the indicia of ownership” (citations omitted).  The court denied the motion to dismiss all counts related to transfers of income between the Debtor and his wife because, among other things, the Trustee had alleged that the Debtor’s and his wife’s salaries from the dental corporation had increased at the same time as the Debtor’s financial liabilities increased and while litigation was imminent.  Finally, the court denied the motion to dismiss the shareholder derivative action after determining that the in pari delicto defense was not available to the wife as an insider of the owner of the dental corporation (i.e. the Debtor).

Taatjes v. Maggio (In re Maggio), Case No. 13-16257-JNF, Adv. P. No. 14-1025  (July 27, 2015)

The Debtor was a joint holder of savings bonds with a deceased relative (“Decedent”). The Debtor had assisted Decedent with the management of her affairs through a power of attorney during Decedent’s lifetime. Plaintiffs, who were relatives of Debtor and Decedent and also joint holders of savings bonds with Decedent, filed a motion for summary judgment seeking a declaration that a state court judgment of breach of fiduciary duty in favor of Plaintiffs constituted a non-dischargeable debt pursuant to 11 U.S.C. § 523(a)(4). The Bankruptcy Court held that § 523(a)(4), which excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity . . .,” requires: 1) a debt resulting from a fiduciary’s fraud or defalcation under an express or technical trust; 2) a debtor acting in fiduciary capacity for that trust; 3) a debt caused by fraud or defalcation within the meaning of bankruptcy law. The state court judgment included no determination that Debtor owed Plaintiffs any fiduciary duty, nor did it find that an express or technical trust existed between Debtor and Plaintiffs. The power of attorney established a fiduciary duty from Debtor to Decedent, not from Debtor to Plaintiffs. Plaintiffs failed to submit copies of the bonds or any other evidence that could establish a fiduciary duty or the existence of an express or technical trust. Accordingly, summary judgment was granted in favor of Debtor.

In re Lewis D. Siegal and Joanna Siegal, Case No. 14-13678-JNF (July 29, 2015)

The Debtor’s father, as a creditor in his individual capacity and as the trustee of a creditor trust, filed a motion to reopen the Debtor’s chapter 7 case and to vacate a discharge order.  The Debtor’s father alleged that prior to the entry of the Debtor’s discharge, the parties had entered into a settlement agreement by which the Debtor agreed that the debt he owed to his father and to the trust was non-dischargeable.  The Debtor objected to the motion arguing that the settlement agreement was not signed until after the expiration of the deadline to object to the entry of his discharge and that no motion to approve the settlement agreement had been filed with the Bankruptcy Court prior to entry of his discharge.  Although the Bankruptcy Court concluded that the Debtor’s father could not establish the elements required to vacate the Debtor’s discharge under 11 U.S.C.  § 727(d), it allowed the motion to reopen on the basis that the Debtor’s father may be able to establish that the settlement agreement constitutes an enforceable reaffirmation agreement.

Sega Auto Sales v. Flores (In re Flores), Case No. 13-16079-WCH, Adv. P. No. 13-01441 (August 13, 2015)

[Case summary to follow in later post]

Lassman v. Robinson (In re Toli), Case No. 12-19194-WCH, Adv. P. No. 12-1373 (August 14, 2015)

Prior to the Debtors’ bankruptcy filing, the Debtors purchased a commercial property from the Defendants.  The purchase and sale agreement reflected a $400,000 sale price, but the Debtors also signed a $100,000 promissory note “outside of the closing” in favor of the Defendants, which none of the parties disclosed to the institutional lenders.  The Trustee sought recovery of payments made to the Defendants as fraudulent transfers, as well as damages for fraud, misrepresentation, and Chapter 93(A) violations.  Following a two day trial, the court: (i) entered judgment in favor of the Defendants regarding the fraudulent transfer count because the parties had stipulated that the total purchase price for the property was $500,000 and therefore the Trustee did not meet his burden of showing that the Debtors did not receive “reasonably equivalent value”; (ii) entered judgment in favor of the Trustee with respect to various fraud and misrepresentation counts due to one of the Defendants’ false representations to the institutional lenders and the other Defendant’s failure to read the sale documents that she signed; and (iii) entered judgment in favor of the Defendants with respect to the Chapter 93(A) count because the Trustee had not sent the requisite demand letter.

Agin v. Green Tree Servicing, LLC et al., Case No. 14-14739-JNF, Adv. P. No. 14-1220 (August 19, 2015)

The Chapter 7 trustee sought to avoid a mortgage pursuant to 11 U.S.C. § 544 based on the absence of a proper certificate of acknowledgment in accordance with the requirements of Massachusetts law (Mass. Gen. Laws. Ch. 183, § 29).  Specifically, the trustee alleged that the form of certificate was materially defective because it failed to include language indicating that the execution of the mortgage was the voluntary act of the mortgagor.  The lender defendants asserted that the mortgage contains “proof of its due execution” in compliance Mass. Gen. Laws. Ch. 183, § 29, which permitted the mortgage’s recordation notwithstanding the absence of a certificate of acknowledgment.  On Cross-Motions for Summary Judgment filed by the trustee and the lender defendants, the Bankruptcy Court authorized the trustee’s avoidance of the mortgage based on the absence of a valid certificate of acknowledgment.  The Court noted that while Mass. Gen. Laws. Ch. 183, § 29 permits two alternatives for the recordation of a deed, the second alternative (a certificate of proof of due execution) requires evidence, the involvement of a court of record, and subscribing witnesses as set forth in Mass. Gen. Laws Ch. 183, §§  34-41.

Estate of Philip L. Lavallee by Christine Makara, Personal Representative v. Lavallee (In re Lavallee), Case No. 14-41386-MSH, Adv. P. No. 14-04088 (Aug. 20, 2015)

The defendant moved to dismiss the adversary proceeding (the “A.P.”) for lack of subject matter jurisdiction on the ground that his sister—who had filed the A.P. when she was the personal representative of their father’s estate—had been replaced.  The new estate representative declined to substitute himself for the sister in the A.P., and the defendant alleged the sister no longer had standing to sue.  In opposition, the sister moved to substitute herself in her personal capacity as a beneficiary of the estate.  The Court applied the facts in evidence to the rules for intervention set out in Fed. R. Civ. P. 24(a)(2), made applicable by Fed. R. Bankr. P. 7024, and allowed the motion to intervene.  The Court also found that Mass. Gen. Laws ch. 230, § 5 provided additional support for the conclusion that the sister had standing to sue to enforce the claims for the estate’s benefit because the new representative refused to pursue the action.

Greater Love Tabernacle Church of Boston, Massachusetts v. VFC Partners 18 LLC, Case No. 13-17099, Adv. P. No. 15-1031 (August 21, 2015)

A Chapter 11 debtor-in-possession sought to avoid a mortgage pursuant to 11 U.S.C. § 544 based on an alleged defective certificate of acknowledgment annexed to the mortgage.  Specifically, the debtor alleged that the certificate of acknowledgment failed to specify the representative capacity of the corporate officer who executed the mortgage on behalf of the corporation or that the officer’s execution of the mortgage was the voluntary act of the corporation.  The issue presented was whether the certificate of acknowledgment attached to the mortgage complies with the requirements of Massachusetts law (Mass. Gen. Laws ch. 183, § 29) and, thus, provides constructive notice of the mortgage.  On Cross-Motions for Summary Judgment filed by the parties, the Bankruptcy Court determined that the certificate of acknowledgment, read together with the signature block of the mortgage, is unambiguous and satisfies the requirements of Massachusetts law.

In re Carlo J. Genatossio, Jr., Case No. 14-40502-MSH (Aug. 31, 2015)

Debtor’s counsel filed an application seeking the allowance of fees and expenses for representing the Debtor in the chapter 13 case and in the chapter 7 case before it was converted to chapter 13.  Since debtor’s counsel was not employed under Section 327, compensation could not be awarded under Section 330(a)(1).  See Lamie v. United States Trustee, 540 U.S. 526 (2004). Counsel could therefore only be awarded compensation under Section 330(a)(4)(B), which provides that in a Chapter 13 case the court may allow reasonable compensation to a debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of the services provided.  Some courts, however, have held that, under Lamie, compensation for services performed before a chapter 7 case is converted to chapter 13 cannot be compensated in a chapter 13 case under either section.  Judge Hoffman disagreed with these courts, holding that Section 330(a)(4)(B) “permits counsel for a chapter 13 debtor to seek an award of fees and expenses ‘for representing the interests of the debtor in connection with the bankruptcy case’ even when a portion of the fees and expenses were incurred when the case was previously pending in chapter 7.”

 

Contributions by:

Kate Foley, Mirick, O’Connell, DeMallie & Lougee

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

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

Michael K. O’Neil, Murphy & King

Kathleen M. Ryan, Morgan, Lewis & Bockius

Nathan Soucy, Soucy Law Office

 

 

Case Summaries — The December Bankruptcy Court Opinions

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

In re Angela Michaud, Case No. 14-41538-HJB (December 1, 2014).

The court struck attorney’s appearance on behalf of the Debtor, and disallowed all compensation otherwise due for failing to file an appropriate Attorney Disclosure under Section 329 and Rule 2016(b). In his three separate disclosures, the attorney failed to disclose the contingency fee agreement, the hourly rate in the event that an hourly rate would substitute for the contingent fee agreement, and the manner of payment. Upon finding the disclosures insufficient, the court stated the importance of the disclosure duties under Section 329 and Rule 2016(b) as allowing the Bankruptcy Court the opportunity to “supervise the terms of the financial agreement between debtor and counsel.”

 

Associated Receivables Funding, Inc. v. Julian O’Donnell (In re O’Donnell), Case No. 12-10038-FJB, Adv. P. No. 12-1146 (December 17, 2014).

Associated Receivables Funding, Inc. (“ARF”), the plaintiff in this adversary proceeding, filed a complaint seeking determination that debts owed to it by the Debtor are excepted from discharge pursuant to Section 523 and objects to an entry of discharge pursuant to Section 727. Debtor was a part owner of a limited liability company, Grove Electronics, LLC (“Grove”), that purchased and resold computer parts on a wholesale basis. When the business was steadily declining, Grove entered into a factoring agreement with ARF, whereby Grove would assign rights to collection of accounts receivable in exchange for an immediate payment. This allowed Debtor and Grove to continue operation and pay creditors by getting immediate payment from ARF, and not having to wait for their accounts to pay on their invoices. While this arrangement initially worked for both ARF and Grove, Debtor started to engage in suspicious activity with several accounts. For example, Debtor sent an invoice to ARF, ARF paid Grove on the invoice, but Grove never actually shipped the products. Therefore when ARF went to collect on that invoice, the account refused to pay because it never received the product. The facts are lengthy, the examples of deceit are plentiful, and the analysis is thorough. Ultimately, the Court ruled that Debtor made false representations to obtain factoring payments from ARF, the Debtor was aware of these falsities, and the Debtor made them with intent to deceive. Further, ARF relied on these false representations, this reliance was justifiable, and financial damage was a result. All of these things weigh into the Courts decision to except these debts from discharge, and to deny Debtor’s discharge in the first instance.

 

Santos et al. v. Souza (In re Souza), Case No. 14-10251-WCH, Adv. P. No. 14-01059 (December 22, 2014).

The Plaintiffs filed an action against the Debtor in superior court. The jury found the Debtor liable for misrepresentation and breach of contract and awarded a judgment to the Plaintiffs in the amount of approximately $200,000. The Court found that the Debtor had not breached Chapter 93A willfully or knowingly. The Debtor filed Chapter 7 and the Plaintiffs filed an adversary to seek a declaration that their judgments were excepted from discharge under Sections 523(a)(2), (4), and (6). Both parties moved for summary judgment on each count, each party arguing that issue preclusion from the jury verdict and Court’s finding worked in their favor. As to 523(a)(2)(A), the Court found that the jury verdict precluded him from finding in the Defendant’s favor on all but two factors: (i) the amount of damages that were potentially nondischargable under (a)(2), since the jury did not apportion its damages between the breach of contract and fraud findings; and (ii) the scienter requirement of (a)(2) since no scienter was required for the jury to find the Debtor guilty. As to those two factors, material issues of fact remained and both summary judgment motions were denied. As to (a)(2)(B), summary judgment was denied for both parties since genuine issues of fact remained as to whether the Debtor furnished the plaintiffs with a financial document. As to (a)(4), since neither the verdict found, nor did the Plaintiffs’ complaint allege, that the Debtor acted in a fiduciary capacity, embezzled, or committed larceny, summary judgment was granted to the Debtor on this count. Finally, as to (a)(6), the jury verdict made no mention of whether the Debtor caused willful and malicious injury to the Plaintiffs, so summary judgment to both parties was denied on this count.

 

Murphy v. Perry, Johnson, Anderson, Miller & Moskowitz LLP (In re Colman), Case No. 12-15855-WCH, Adv. P. No. 14-1054 (December 24, 2014).

Prior to the Petition Date, Perry, Johnson, Anderson, Miller & Moskowitz LLP (“PJAMM”) represented the Debtor in a state court action (the “Enforcement Action”) filed by his ex-wife to enforce their divorce settlement agreement (the “Settlement Agreement”). The Settlement Agreement required the Debtor to make spousal support payments and the ex-wife to convey her interest in certain New York City real estate (the “Cooperative Interests”) to the Debtor. Neither of those events occurred, and the state court ruled that the ex-wife would be required to convey her Cooperative Interests only after the Debtor paid a monetary judgment. The Debtor failed to pay his legal bills from the Enforcement Action and PJAMM filed a UCC-1 Financing Statement listing the New York City real estate as security for the debt.

PJAMM argued the Debtor agreed the New York City real estate could be subject to an attorney’s lien. Applying California law, Judge Hillman disagreed. The form engagement letter PJAMM used limited liens to those funds that were “recovered, awarded, or otherwise the proceeds of the Enforcement Action.” Here, the Debtor already had a right to the Cooperative Interests through the Settlement Agreement, and the Enforcement Action judgment did not provide “an affirmative or tangible benefit flowing to the Debtor.” Therefore, PJAMM’s lien was unenforceable.

 

In re Quincy Medical Center, Inc., Case No. 11-16394-MSH (December 29, 2014).

Two former senior executives of the Debtor had previously obtained a bankruptcy court order directing the purchaser of substantially all of the Debtor’s assets to pay their employment severance claims.  While the purchaser appealed the decision (and avoided payment pending appeal), the purchaser’s financial condition deteriorated and the former executives moved in the bankruptcy court under F.R.C.P. 64 for writs of attachment and injunctions prohibiting the purchaser from diminishing its cash accounts pending final disposition of the appeal.  The purchaser’s first argument in opposition to the motion was that the employees had no right to security because the court’s order was not a “money judgment” rendered after an adversary proceeding, but instead issued as part of a contested matter arising out of a sale order dispute.  In rejecting this argument the court noted that F.R.B.P. 9001(7) defines a judgment as “any appealable order.”  The court also rejected the purchaser’s argument that the pendency of the appeal deprived the bankruptcy court of jurisdiction to grant security for the judgment.  Finally, the court ordered as security the posting of a bond pending appeal.  In so holding the court denied the relief sought under F.R.C.P. 64, but instead invoked F.R.C.P. 62(d).  Even though F.R.B.P. 7062 (and thus F.R.C.P. 62) is not among the rules specifically incorporated into contested matters pursuant to F.R.B.P. 9014(c) (and in fact had been removed as part of the 1999 rule amendments), the court noted that it retained the power and discretion under Rule 9014(c) to invoke the non-enumerated “Part VII” bankruptcy rules.

Contributions by:

John Joy, Boston College Law School
Devon MacWilliam, Partridge Snow & Hahn
Michael K. O’Neil, Murphy & King
Nathan Soucy, Soucy Law Office
Aaron S. Todrin, Sassoon & Cymrot
Christopher M. Candon, Sheehan Phinney Bass + Green

Wellness International Network, Limited. v. Sharif: Argument Highlights from the Briefs

The question of the power of bankruptcy judges to enter final judgment pursuant to 28 U.S.C. § 157 will soon return to the Supreme Court.  On January 14, 2015, the Justices will hear oral arguments in Wellness International Network, Limited v. Sharif.  Observers hope the court will address two questions previously unanswered in Stern v. Marshall (134 S. Ct. 2165 (2011)) and Executive Benefits Insurance Agency v. Arkison (134 S. Ct. 2165 (2014)):

  1. Does a bankruptcy judge have constitutional authority to finally determine if property in a debtor’s possession is property of the estate pursuant to 11 U.S.C. § 541 when that determination involves an issue of state property law?
  2.  May a bankruptcy judge enter final judgment with the consent of the parties on a matter that is not a core proceeding? If so, is consent implied by conduct sufficient?

To read more about Wellness, including the parties’ arguments and the amicus briefs filed in the case, please click this link:  Wellness International Network, Limited. v. Sharif. Argument Highlights from the Briefs (A2810573x7A575)

This blog post was prepared and contributed by Kathleen Bardsley.  The author is a 2014 graduate of Boston College Law School and a term law clerk to Judge William C. Hillman.  To the extent this post contains any opinions, they belong to the author alone.

Case Summaries — The November Bankruptcy Court Opinions

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

Prime Rate Premium Fin. Corp., Inc. v. Shannon (In re Shannon), Case No. 11‐18113-FJB, Adv. P. No. 11-1337-FJB (November 4, 2014).

After a trial and submission of post-trial briefs, the court ruled that $59,771.00 in insurance premium financing advances received by the Chapter 7 Debtor were non-dischargeable under Section 523(a)(4).  The Debtor, through two insurance agencies he had controlled, obtained premium financing on behalf of his customers from the plaintiff.  The Debtor had signed premium financing agreements under which the Plaintiff advanced funds to the Debtor’s agency escrow accounts so that the Debtor could use the funds to buy specifically identified insurance policies for his customers who were financing their premiums (and who were also individually identified in each of the financing agreements).  Instead, the court found that the Debtor used the money advanced by the Plaintiff for his own personal use and never bought the policies.  The court held that, under the terms of the premium financing agreements, the money in the agency escrow accounts was held in trust for the benefit of the Plaintiff, and thus the Debtor’s unauthorized use of such funds constituted an embezzlement rendering the Debtor’s obligation to the Plaintiff for the premium advances non-dischargeable.

Brooke-Petit v. Spagnuolo (In re Spagnuolo), Case No. 11-10844-JNF, Adv. P. No. 11-1290-JNF (November 17, 2014).

This case explores the complications of discharging a state court damage award in bankruptcy. A jury verdict was entered against the Debtor in a state court action in the amount of $250,000 resulting from a home-improvement construction contract gone wrong. The jury instructions included claims for breach of contract, damages for breach of contract, fraud, damages for fraud, and violations of 93A and 142A. Despite the overwhelming evidence of fraudulent inducement and misrepresentations made by Debtor in the context of this construction contract, the Debtor claimed that the jury did not intend to attribute the verdict to the fraud claim, but instead to the breach of contract claim. Indeed, this was not specified in the state court action. If the Bankruptcy Court agreed with Debtor’s contention, the verdict would be dischargeable. However, after a lengthy case law analysis of contract breaches and fraudulent conduct, coupled with Debtor’s myriad improprieties shown in the state court transcript, the Bankruptcy Court did not agree. Conceding that the jury instructions could have been clearer, the Court concluded that there is no inconsistency in the jury’s measure of damages for breach of contract and fraud, and inferred that the jury’s award was intended to compensate the Plaintiff, Brooke-Petit, for Debtor’s fraudulent conduct in inducing her to enter into an unwritten contract that Debtor did not intend to perform, and subsequently breached. The Court therefore attributed the full $250,000 damage award to fraud and found it to be non-dischargeable.

Lemieux v. Am. Servicing Co, et al. (In re Lemieux), Case No. 12-40104-MSH, Adv. P. No. 14-04042 (November 18, 2014).

Chapter 7 Debtors surrendered and abandoned their principal residence and received a discharge of their debts.  Subsequently, Lenders holding a security interest in the Debtors’ former residence sent the Debtors various mailings concerning the loan.  The Debtors filed an adversary proceeding against the Lenders alleging that the Lenders’ communications violated the Section 542(a)(2) discharge injunction.  The Court ruled that mailings consisting of monthly statements and rate-change information that provided numerous clear disclaimers as to the Debtors’ bankruptcy and the fact that the Lenders were not attempting to collect a debt did not violate the discharge injunction.  However, the Court ruled that the Debtor had stated a claim upon which relief may be granted and denied the Lenders’ motion to dismiss with respect to the third mailing – a twelve-page document related to hazard insurance on the property, which contained only one short disclaimer in small type and was otherwise “strongly” worded and made numerous requests for payment and other action on the part of the Debtors.

 

Contributions by:

Michael K. O’Neil, Murphy & King

Nathan Soucy, Soucy Law Office

Aaron S. Todrin, Sassoon & Cymrot

 

Case Summaries — Recent Appellate Decisions

Below are summaries of two recent appellate decisions.  In both cases, and with differing outcomes, the courts considered the scope of a notice of appeal and the requirements of Fed. R. App. P. 3.

Biltcliffe v. CitiMortgage, Inc., C.A. No. 14-1043 (1st Cir. November 25, 2014) (Stahl, J.).

After Defendant-Appellee initiated foreclosure proceedings on Plaintiff-Appellant’s house, Plaintiff filed suit, alleging breach of contract, unjust enrichment, and breach of the covenant of good faith and fair dealing. The district court granted summary judgment to Defendant on all counts, and denied Plaintiff’s motion for reconsideration. The threshold jurisdiction question for the First Circuit Court of Appeals was whether Plaintiff appealed the District Court’s order entering summary judgment for Defendant or its order denying the Plaintiff’s motion for reconsideration. Fed. R. App. P. 3(c)(1)(B) requires a party to “designate the judgment, order, or party thereof being appealed” in the notice of appeal, and appellate jurisdiction is limited to the events designated in the notice of appeal. Here, Plaintiff’s notice of appeal stated he appealed from “Final Order Denying Reconsideration of Entry of Judgment.” The Court held that Plaintiff’s notice of appeal was not sufficient to fairly put Defendant on notice of an appeal of the underlying judgment. The consequence of Plaintiff’s notice of appeal was that the First Circuit reviewed the District Court’s reconsideration decision only and under the deferential abuse of discretion standard. The Court found the District Court did not abuse its discretion in denying reconsideration, adding in a footnote that it also would have affirmed the District Court’s underlying summary judgment decision using the de novo standard of review.

 

Witkowski v. Boyajian et al. (In re Witkowski), B.A.P. No. 14-040 (November 13, 2014).

The Debtor appealed the Bankruptcy Court’s orders dismissing her chapter 13 case and denying her motion for reconsideration. Citing First Circuit precedent for liberally construing Fed. R. App. P. 3 (c)(1)(B), the BAP ruled that both the dismissal order and the reconsideration order were properly before the panel even though the Debtor only identified the reconsideration order in her notice of appeal. This part of the decision may have turned out differently had the matter been decided two weeks later (see Biltcliffe case summary above). The BAP affirmed the dismissal order, ruling that the Debtor’s “failure to make plan payments – viewed independently or in combination with her failure to attend the Section 341 meeting of creditors – easily justifies the dismissal of her chapter 13 case.” The reconsideration order was also affirmed as the Debtor failed to identify any new evidence or establish any manifest error of law or fact.

Contributed by:

Devon MacWilliam, Partridge Snow & Hahn

Christopher M. Candon, Sheehan Phinney Bass + Green