The 20th Annual Bench Meets Bar Conference is just around the corner. Mark your calender today.
Where: The Colonnade Hotel, 120 Huntington Ave., Boston
When: May 12, 2010, 2:00 – 8:00 p.m.
The 20th Annual Bench Meets Bar Conference is just around the corner. Mark your calender today.
Where: The Colonnade Hotel, 120 Huntington Ave., Boston
When: May 12, 2010, 2:00 – 8:00 p.m.
Dear Friends and Colleagues:
As 2009 draws to a close, I want to take this time to thank all of our members for supporting the terrific work of our Section. Indeed, our Section has been extremely active this fall. In September we had the privilege of kicking off our 2009-2010 term with a fabulous welcoming reception for our newest addition to the Massachusetts Bankruptcy Bench, Judge Frank J. Bailey. Judge Bailey’s remarks were an inspiration to the practitioners and numerous court personnel that were able to attend the festivities. We are privileged to have him on the Bench. In addition to welcoming Judge Bailey, members were invited to tour the remodeled second floor of the BBA. For those of you who were not able to attend or take a tour, I encourage you to stop by 16 Beacon and tour the new second floor; the new space will make you seek out CLE and meeting opportunities in these rooms.
On October 1, 2009, the Section hosted its first CLE of the year. Many thanks to Jeffrey D. Sternklar and Russell J. Barron for serving as program chairs for The Intersection of Bankruptcy & Intellectual Property – it was a terrific presentation. Also, thanks to the hard work of our CLE Committee Co-Chairs, Jeanne Darcey and Bill McLeod, we have a terrific selection of upcoming CLE’s planned for this winter and spring, including a nuts and bolts program for representing a pro bono debtor, the annual consumer law update, and avoidance actions in leverage buyout bankruptcies. The Section is also delighted to continue with its newest tradition – the Young Bar Meets Bench program will be held on February 4, 2010. This program is especially suited for our law students, clerks and more junior practitioners. The highlight of the Section’s CLE programs will take place on May 12, 2010 – our annual Bench Meets Bar program.
The Section is also deeply involved in promoting legislation to amend the law on homestead and personal exemptions. This fall, our Law and Public Policy Committee Co-Chairs, Diane Rallis and Susan Grossberg attended public hearings and Susan gave testimony concerning this important legislation. I encourage all of you to visit the blog post from Diane and Susan on this issue. If you are so inclined, I encourage you to reach out to your state representative and senator on this matter and voice your personal opinions.
One important function of our Section is to keep our members apprised of changes in bankruptcy practice. On December 1, 2009, amendments to the Federal Rules of Bankruptcy Procedure, as well as to the Massachusetts Local Bankruptcy Rules went into effect. For a summary of the significant changes to the MLBR, please see the impressive summary prepared by our Practice and Procedures Committee Co-Chairs, Ethan Jeffery and Ken Leonetti.
A fun and relaxed way to connect with your colleagues and stay up to date in your practice has become our popular Consumer Rap sessions. Our Consumer Section Co-Chairs, Sanjit Korde and John Sommerstein organized two successful events this fall. I encourage you to reach out to Sanjit or John or to check our calendar page regularly for details on upcoming rap sessions, which are generally held in the evenings at the BBA or in one of our members’ conference rooms.
We encourage all of our members to become involved in the many activities of the Section, including participation in pro bono efforts such as the Reaffirmation Clinic, representing pro bono clients, or mentoring a lawyer that agrees to take on a consumer case. Especially in these significant financial times we’re living through, we are privileged to have the skills to provide access to justice for those that can not afford counsel. If you are able to volunteer, please do so. The Section is in the process of scheduling a training session and developing additional ways in which more of our members can volunteer. We look forward to announcing these projects in early 2010. For more information on our pro bono activities, please reach out to Doug Gooding and Elaine Benkoski, our Pro Bono Committee Co-Chairs.
And in this season of giving, I would like to encourage each of you to consider making year-end gifts to the Normandin Fund and the Carpenter Fund. These Funds were established to honor the memory of two of our beloved colleagues and the proceeds are used to support wonderful pro bono and community outreach programs, including the M. Ellen Carpenter Financial Literacy Program. Please consider making a donation today.
Finally, please remember to join us at our monthly brown-bag lunches, typically held on the Second Tuesday of every month at 12:00 pm at BBA headquarters.
– Adrienne K. Walker
By Taruna Garg – Murtha Cullina LLP, Boston
Cross-Default Provision Inapplicable to Monetary Defaults Arising from Separate Executory Contract or Lease For Purposes of Assumption Under 365(a)
In re Szenda, 406 B.R. 574 (Bankr. D. Mass. 2009)
This case concerned an objection filed by a sublessor and franchisor to a chapter 13 debtor’s motion to assume a non-residential sublease pursuant to 11 U.S.C. § 365(a). The debtor was a franchisee of two Subway restaurants located in Millbury and Worcester for which he executed separate franchise agreements and subleases for each location. Due to the lack of profitability at the Worcester location, the debtor defaulted on his obligations under the sublease which led to the termination of the franchise agreement and sublease.
After filing his bankruptcy petition, the debtor sought to assume the sublease for the Millbury location pursuant to 11 U.S.C. § 365(a). The sublessor objected, arguing that under various cross-default provisions of the debtor’s franchise agreement, the debtor should be prohibited from assuming the Millbury sublease unless he cured monetary defaults arising from the franchise agreement and sublease that governed the operation of the Worcester restaurant.
The court noted the well-established rule that “[c]ross default provisions do not integrate executory contracts or unexpired leases that are otherwise separable or severable.” 406 B.R. at 580. Accordingly, in order to enforce cross-default provisions to apply to the debtor’s defaults under the Worcester agreements, the sublessor was required to demonstrate that the Worcester and Millbury agreements were “economically interdependent.” The court determined that the Millbury and Worcester Agreements were not interrelated, in that Subway did not show that it would not have entered into the Worcester agreement without the Millbury agreement and the consideration for one agreement did not support the other. As a result, the court held that the debtor was not required to cure monetary defaults arising from the Worcester agreements prior to assuming the sublease for the Millbury location.
Debtor’s Rescission of Loan Transaction For Lender’s Failure to Provide Required Notice May Require Tender of Amounts Due
Wells Fargo Bank, N.A. v Jasskelainen, 407 B.R. 449 (D. Mass. 2009)
This case involved an appeal of a final order by the bankruptcy court allowing chapter 13 debtors to rescind a loan transaction due to the mortgagee’s failure to provide each debtor with two copies of a Notice of Right to Cancel (“NOR”), a notice which discloses a borrower’s limited right to rescind a transaction required by the federal Truth-in-Lending Act (“TILA”) and the Massachusetts Consumer Credit Cost Disclosure Act (the “MCCCDA”). After an evidentiary hearing, the bankruptcy court concluded that a) the lender failed to sustain its burden of proof that each debtor received two copies of the NOR, and therefore violated the MCCCDA, b) that the lender’s failure to provide the NOR was not a ‘bona fide error’ entitling it to receive safe harbor protection under MCCCDA, c) the debtors’ rescission became effective immediately upon providing notice of rescission to the lender and d) the debtors’ notice of rescission terminated the lender’s security interest without any requirement for the debtors to return the loan proceeds.
On appeal, the district court determined that the evidence submitted to the bankruptcy court was sufficient to show that the debtors did not receive required copies of the NOR and that the lender’s failure, although likely inadvertent, was not the type of “clerical” error to qualify as a bona fide error pursuant to the MCCDA.
With respect to the bankruptcy court’s findings concerning the debtors’ rescission of the loan, the district court adopted a different view. First, the district court held that rescission did not become automatically effective upon the debtors’ mailing of a notice of rescission. Instead, if a lender disputes a borrower’s right to rescind, then a court must first decide whether the conditions for rescission have been fulfilled. Until such a determination is made, the borrower had only a claim of rescission.
Second, the district court adopted the majority position that courts have the equitable power to condition rescission upon tender by the borrower of the amounts owed on a loan. To hold otherwise, according to the court, would have the “net effect…[of allowing] a debtor [to] receive substantial sums of money or what amounts to a free house, while the creditor receives nothing, which would be contrary to the purposes of rescission.” Id., 407 B.R. at 461. Accordingly, the court remanded the case to the bankruptcy court to determine the appropriate conditions to impose upon the debtors’ exercise of rescission and recommended the bankruptcy court to consider traditional notions of equity, including factors such as the severity of the lender’s violation and the debtors’ ability to pay the outstanding balance.
Chapter 13 Plan May Include Payments Contractually Due to Undersecured Junior Mortgagee for Purposes of Calculated Projected Monthly Disposable Income Pursuant to § 1325(a)
In re Marshall, 407 B.R. 1 (Bankr. D. Mass. 2009)
The central issue in this case concerned whether above-median income chapter 13 debtors should be permitted to deduct payments “contractually due” to a junior mortgagee for purposes of determining their monthly disposable income pursuant to 11 U.S.C. §§ 1325(b) in instances where the debtors intend to seek a determination that the mortgagee’s lien is void and its claim unsecured based on the lack of equity in the property.
The debtors filed an amended chapter 13 plan which reflected a deduction for monthly amounts due for a second mortgage. In their plan, the debtors characterized the second mortgage as an unsecured claim due to the lack of equity in the property. On the same day, the debtors filed an objection to the secured status of the junior mortgage, which was subsequently sustained by the court. The chapter 13 trustee filed an objection to the debtors’ plan contending that the debtors should not be entitled to claim an expense deduction for the second mortgage, an unsecured claim, for purposes of determining their plan payment.
In analyzing two recent circuit decisions that considered this issue, United States Trustee v. Rudler (In re Rudler), 388 B.R. 433 (B.A.P. 1st Cir. 2008) and In re Burbank, 401 B.R. 67 (Bankr. D.R.I. 2009), the court considered the interplay between §§ 707(b)(2)(A)(iii) and § 1325(b)(3) of the Bankruptcy Code. For purposes of calculating disposable income under the means test pursuant § 707(b)(2)(iii), the court agreed that the express language of the statute permitted debtors to deduct payments to secured creditors that were “contractually due.” The more challenging issue concerned how the means test calculation of § 707(b)(2)(A)(iii) applied for purposes of calculating a chapter 13 debtor’s projected disposable income under § 1325(b)(3), which incorporated the means test calculation of § 707(b)(2).
The court adopted the approach set forth in Burbank, where the court reasoned that “…the term ‘projected’ modifies ‘disposable income’ and is not synonymous with the word ‘anticipated’ in this context. ‘Projected disposable income’ means ‘disposable income’ as defined by Section 1325(b)(2), projected over the ‘applicable commitment period.’ In turn, for debtors with above median income the ‘amounts reasonable necessary to be expended’ are determined in accordance with Section 707(b)(2). Burbank, 401 B.R. at 73-74 (internal citations omitted). Accordingly, the court held that the debtors were allowed to claim a deduction for ‘contractually due payments’ to a second mortgagee, although a motion for plan modification may later be filed to reflect the debtors’ actual financial situation.
Commercial Loan Workouts: Part 1
Wednesday, December 9, 2009 — 12:30 p.m.
Nixon Peabody LLP — 100 Summer Street, Boston
We look forward to seeing you.
By Kathleen Rahbany – Craig and Macauley, P.C., Boston
Failure to Timely File a Notice of Appeal May Be a Jurisdictional Bar to Obtaining Direct Review by the First Circuit Court of Appeals
Weaver v. Harmon Law Offices, P.C. (In re Weaver), 319 Fed. Appx. 1 (1st Cir. 2009)
In an unpublished decision, the First Circuit Court of Appeals declined to hear a direct appeal from an order of the Bankruptcy Court, even though the question certified for review may have been “sufficiently important” to justify a direct appeal.
The defendants sought to have the First Circuit determine “[w]hether or not the act of postponing a mortgage foreclosure sale during a pending bankruptcy violates the automatic stay.” The Bankruptcy Court’s determination was adverse to the defendants. The defendants failed to timely file a notice of appeal of the Bankruptcy Court’s order or to timely seek consent of the First Circuit Court of Appeals to directly review the Bankruptcy Court’s order. This procedural defect made it ‘substantially possible’ that the First Circuit Court of Appeals was without jurisdiction to hear the defendants’ direct appeal. Consequently, the court held that it would not hear the direct appeal because even it determined the question at issue, its holding would be unlikely to result in a “definitive resolution” because the court may have been without jurisdiction to hear the matter in the first place.
Means Test Permits a Deduction from Income of Installment Payments Due for Property to Be Surrendered
Morse v. Rudler (In re Rudler), 576 F.3d 37 (1st Cir. 2009)
The First Circuit Court of Appeals upheld the Bankruptcy Court and Bankruptcy Appellate Panel rulings that the means test permits a debtor to deduct from his income installment payments that are scheduled to come due to a secured creditor, even for property that is later to be surrendered during the debtor’s bankruptcy proceeding.
The means test requires a debtor to calculate whether a presumption of abuse arises by subtracting certain statutorily permitted deductions from current monthly income. Under section 707(b)(2)(A)(iii)(I) of the Bankruptcy Code, a debtor is entitled to deduct expenses incurred “on account of secured debts” so long as the payment is “scheduled as contractually due to [the] secured creditor in each of the 60 months following the date of the petition.” An issue comes up when a debtor intends to terminate those payments by surrendering the collateral but also deducts those expenses from current monthly income on the means test, where, but for that deduction, a presumption of abuse would arise.
The First Circuit Court of Appeals noted that precedent interpreting section 707(b)(2) is split but that the majority view, based on the plain language of the statute, permits a debtor to deduct secured payments even if the property securing the debt will later be surrendered. Courts following the majority view primarily consider the phrase “scheduled as contractually due” in the forward-looking context suggested by the phrase “following the date of the petition.”
The First Circuit Court of Appeals determined that “scheduled as contractually due” requires a current assessment of obligations, not one that envisions the future termination of payments that are contractually owed at the time that the debtor completes the means test calculation. Likewise, the court found that the phrase “following the date of the petition” requires a current assessment of payments scheduled to come due after the petition date, not a projection of anticipated changes in those payments. The court concluded that such an interpretation does not lead to an “absurd” result because it avoids uncertainties attendant when a debtor intends to surrender property, but such intent is unperformed at the time when the means test is conducted.
First Circuit Resolves Questions of First Impression
Braunstein v. McCabe, 571 F.3d 108 (1st Cir. 2009)
The Chapter 7 trustee brought a turnover action to recover certain insurance proceeds which were paid to the debtor. The debtor made a jury demand in his answer to the turnover complaint. The turnover complaint was subsequently consolidated with litigation pending before the United States District Court for the District of Massachusetts.
The district court denied the debtor’s jury demand and the debtor appealed that decision. The First Circuit held that there is no jury right with respect to a turnover action brought under section 542 of the Bankruptcy Code. The court noted that there is no statutory right to a jury trial in section 542 actions brought by a trustee in district court and that the Bankruptcy Code fails to address the issue. Accordingly, the court looked to the Supreme Court’s decisions determining whether a jury right exists under the Seventh Amendment. Those decisions prescribe a three-part test which requires a court to: (1) determine whether the action involves rights that are legal or equitable in nature because the “Seventh Amendment applies to actions brought to enforce statutory rights [as opposed to equitable rights] that are analogous to common-law causes of action ordinarily decided in English law courts in the late 18th century;” (2) “examine the remedy sought and determine whether it is legal or equitable in nature”; and (3) if the first two prongs indicate the existence of a jury right then “decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as factfinder.” The court observed that the second prong of the test is weighed more heavily than the first. The court then examined American legal history and determined that there was no common law turnover cause of action, that any analogous action was equitable in nature and that the remedy for a turnover action is also equitable. Accordingly, since the first two prongs indicate no jury right, the third prong was inapplicable.
The First Circuit then addressed the meaning of “ordinary course of business” for purposes of using, selling or leasing estate property under section 363 of the Bankruptcy Code. The court established a two-part analysis, the first part being a “horizontal dimension test” and the second being “a vertical dimension, or ‘creditor expectation,’ test.” The “horizontal” test requires a court to determine whether the transaction is common for the industry engaged in by the debtor. The “vertical” test assesses whether the transaction subjects a hypothetical creditor to economic risk that the creditor would find unacceptable when extending credit – in other words, the court must ask whether the transaction is “ordinary” to the creditor-debtor relationship. The purpose of the analysis is to determine whether creditors are entitled to notice and a hearing prior to consummation of the proposed transaction.
Bills filed in both the Massachusetts House of Representative and the Senate to amend and update the Homestead exemption and the exemptions for personal property have been scheduled for hearing before Joint Committee on the Judiciary on Thursday, October 15th at 1:00 p.m. in Room A1.
A brief description of the bills, House Bills 1584 and 1585 and Senate Bill 1619 and links to the text of the bills are provided in a separate blog submission on this page. Members of the Bankruptcy Section are urged to express their opinion of the legislation and its effect upon consumers to the members of the Joint Committee on the Judiciary listed below, on or before October 15th :
Cynthia Stone Creem of First Middlesex and Norfolk- Chair
Steven A. Baddour of First Essex – Vice-Chair
Gale D. Candaras of First Hampden and Hampshire
Jack Hart of First Suffolk
Thomas M. McGee of Third Essex and Middlesex
Bruce E. Tarr of Essex and Middlesex
Eugene L. O’Flaherty of Chelsea – Chair
Christopher N. Speranzo of Pittsfield- Vice-Chair
James H. Fagan of Taunton
Colleen M. Garry of Dracut
Marie P. St. Fleur of Boston
John V. Fernandes of Milford
Katherine Clark of Melrose
James J. Dwyer of Woburn
Danielle W. Gregoire of Marlborough
Lewis G. Evangelidis of Holden
Daniel K. Webster of Pembroke
In submitting your comments to the members of the Joint Committee on the Judiciary, please make it clear that your comments reflect your own professional views, and should not be construed to reflect the position of the Boston Bar Association or the Boston Bar Association Bankruptcy Law Section.
The following summary was prepared by Diane N. Rallis of Holland & Knight LLP and Susan Grossberg of the Law Offices of Susan Grossberg, co-chairs of the Law and Public Policy Committee. The summary reflects the professional views of the authors and does not reflect the position of the Boston Bar Association or the Boston Bar Association Bankruptcy Law Section. The summary is provided for informational purposes only and should not be construed as legal advice on any subject matter.
— The Editors
There are two bills currently pending this legislative session that update both the Massachusetts Homestead and Personal Property Exemption Statutes. The current versions of the Homestead (M.G.L. c. 188 §1, et seq.) and Personal Property Exemption (M.G.L. c. 235 §34) Statutes are greatly in need of modernization and the proposed updates would provide additional financial protections to individuals in Massachusetts. If ultimately passed, these bills will have a significant impact on the consumer side of bankruptcy practice in Massachusetts. Below are links to the text of the pending bills, as well as a summary of the proposed changes to the current statutes.
Significant Proposed Changes to Homestead Statute
Automatic homestead protection, without the need for recording a declaration, in an amount not to exceed $125,000, which amount corresponds to some of the limitations on homestead exemptions enacted in 2005 in the Federal Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Individuals and families with more equity in their homes will still have a significant incentive to record a declaration to protect up to $500,000 of their equity (the amount of the declared exemption under current law).
Beneficiaries of trusts are entitled to homestead protection
Mortgages cannot terminate previously filed homesteads – instead, any provision in a mortgage that purports to terminate a homestead is deemed merely to subordinate the homestead to such mortgage
Proceeds from the sale of a home, or insurance proceeds, are entitled to homestead protection (for up to a year for sale proceeds, and two years for insurance proceeds)
Transfers among family members will not terminate a previously declared homestead – even if the homestead isn’t reserved in the deed
Manufactured homes are eligible for protection under all provisions of the statute
Massachusetts Personal Exemption Legislation (House Bill No. 1585: An Act Increasing the Value and Kind of Personal Property Exemption From Execution)
Significant Proposed Changes to Personal Exemptions Statute
Increases most of the personal property exemptions in order to partially adjust for the cost of living since the exemptions were last revised in the 1970’s. For example, the exemption amount in an automobile increases from $700 to $7,500.
Recommends new exemptions to account for items necessary to a modern household
Creates two new sections that provide for a “wildcard” exemption to cover personal property not covered by a more specific exemption and a limited exemption for jewelry
Includes an automatic triennial cost of living adjustment, which is crucial to keep the Massachusetts exemption scheme current
Brings the Massachusetts personal exemption statute more in line with other states
Thursday, October 22, 2009 – 6:00 pm
Boston Bar Association – 16 Beacon Street
Follow this link to sign up for this program.
The Consumer Subcommittee of the Boston Bar Association’s Bankruptcy Section will be hosting a consumer rap session. Please join us for an informal discussion of the consumer practice from both creditor’s and debtor’s perspective. Refreshments will be provided
We look forward to seeing you at this event.
Rule 1007-1: Failure to file an original matrix of creditors within 3 court days of the order for relief shall be cause for dismissal under 11 U.S.C § 109(g).
Rule 1017-1(h): Time periods that had been set forth under previous rule for scheduling hearings on motions to dismiss/convert Chapter 11 cases are eliminated.
Rule 3007-1(b): The rule governing objections to claims is modified slightly to require the objecting party to file a proposed form of notice with blank spaces to set the deadline for filing responses.
Rule 3017-2: The rule governing the filing of a plan and disclosure statement in small business cases now references a new Local Form 15, which is a sample Combined Small Business Plan of Reorganization and Disclosure Statement for Small Business Debtor.
Rule 4001-1: The time limits for setting a hearing date on a motion to continue the automatic stay or to impose the automatic stay are eliminated. Similarly, service time limits for the motion and for the opposition to any such motion are eliminated.
Rule 4001-2: Cash Collateral and DIP Motions no longer need to be accompanied by the loan agreement governing the credit to be extended or a summary of the same. The Motion itself must set forth certain required information in Rule 4001-2.
Rule 4001-3: There is a new rule governing permitted billing and settlement communications. When the automatic stay applies, it shall be deemed lifted in order to enable a secured creditor or its agent, representative or nominee (excluding its attorney) to:
Rule 4002-1: Requires the Debtor to bring the personal identification and financial information required by FED. R. BANKR P. 4002(b) to the §341 meeting of creditors.
Rule 4008-1: Requires a reaffirmation agreement to be accompanied by the cover sheet prescribed by Official Form 27 to be enforceable.
Rule 6004-1: Sets forth new procedures by which a request for authorization to sell estate property must be made including the requirement that a motion be filed; a defined list of persons upon whom the motion must be served; different procedures for private sales, public auctions and internet auctions.
Rule 9010-1: Allows an attorney representing, without compensation, an otherwise pro se debtor to file a limited notice of appearance and to decline representation in other matters. However, the attorney may not withdraw without leave of court.
Rule 9013-1(g): Emergency and expedited motions are treated similarly as opposed to distinct forms of relief. Several changes are made to the procedure for seeking determination on an emergency or expedited basis:
Appendix 1 – Chapter 13 Cases: Several major changes are made to the Local Rules governing Chapter 13 cases, including objections to claims, filing proofs of claims, and seeking relief from the stay in such cases.
Appendix 8 – Electronic Filing Rules: These are mostly technical changes. The one substantive amendment is that attorneys who appear in no more than three cases per year need not file electronically and may file documents in paper form at the Clerk’s Office.
Official Local Forms: There are changes to most of the Official Local Forms.
Comments are invited, and should be submitted to Chief Judge Henry J. Boroff, United States Bankruptcy Court, 300 State Street, Springfield, MA 01105 and to the Hon. Joan N. Feeney, 1101 Thomas P. O’Neill, Jr. Federal Building, 10 Causeway Street, Boston, MA 02222, no later than October 2, 2009. Those who wish to email comments should do so at [email protected] and [email protected].
In submitting your comments to the court, please make it clear that your comments reflect your own professional views, and should not be construed to reflect the position of the Boston Bar Association or the Boston Bar Association Bankruptcy Law Section.