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.

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Summary Prepared By:

Erica James

New Lawyers Section Liaison to Bankruptcy Law Section

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

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