Upcoming Brown Bag Lunch: Directors and Officers Liability Insurance in the Bankruptcy Context

Please join us on November 11th from noon – 1:00 pm at the BBA for a brown bag discussion about D&O liability insurance with a particular focus on its role in the bankruptcy context.

D&O insurance expert Brian Mukherjee from Goodwin Proctor will be leading the conversation.  After discussing the key components of a D&O insurance policy, Brian will focus on matters especially relevant to bankruptcy practitioners, including side A and DIC coverage, and the insured vs. insured exclusion.  Because this co-sponsored brown bag is sure to attract lawyers from diverse practice areas, the conversation will undoubtedly be both interesting and educational.  Join us!

Co–sponsored by the Insurance & Reinsurance and Professional Liability Committees of the Insurance and Tort Litigation Section

To sign up, please click here.

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

 

Upcoming Lunch Bunch Program with Judge Feeney

The Consumer Bankruptcy Committee’s next Lunch Bunch Program will be held on November 5. The program is an opportunity to sit in an informal setting with Judge Feeney to learn about and discuss her current concerns.

This event will be held from 11:45 a.m. – 12:45 p.m. at the Law Library, 12th Floor, John W. McCormack Post Office and Courthouse, 5 Post Office Square, Boston, MA.

Lunch will be available to those who pre-register. Please RSVP through this link.

Scam Warning

There have been recent warnings of a scam targeting people who have filed bankruptcy: in this scam, fraudsters call debtors and, while pretending to be their lawyer, get the debtors to wire money to satisfy a debt “outside of the bankruptcy.”  An article discussing the scam is linked here.  Although the article is about Vermont debtors, the U.S. Trustee’s office notes that it has received similar reports regarding Massachusetts debtors.

Call for Volunteers

Community Legal Aid (CLA) is seeking volunteer lawyers from eastern Massachusetts who would be able to provide pro bono legal assistance in simple Chapter 7 cases for debtors living in Hampden, Hampshire and Franklin Counties (Springfield Federal Court) or Berkshire County (Pittsfield Federal Court).  CLA has an active Volunteer Lawyers Services program but at this time has more applicants seeking  bankruptcy help than can be placed among local attorneys.  CLA has offices in Worcester, Springfield, Northampton and Pittsfield, and attorneys can arrange to meet with clients in these offices.  If you are able to help, please contact Patricia Walsh-Ollari, [email protected] or Carmen Gonzalez, [email protected].  CLA will also periodically be posting some of its bankruptcy cases on www.massprobono.org.

 

Recent BAP Decision on Preclusion

Recently, the Bankruptcy Appellate Panel for the First Circuit (“BAP”) considered the preclusionary effect of a state court default judgment against a debtor for breach of a settlement agreement. In Gray v. Tacason, No. 15-003 (B.A.P. 1st Cir. Sept. 25, 2015), the BAP held that the state court had made specific findings on all of the elements a creditor must prove under 11 U.S.C. § 523(a)(6) and affirmed the Bankruptcy Court for the District of New Hampshire’s grant of summary judgment in favor of the creditor.

The state court judgment resulted from litigation over a breach of settlement complaint brought by the creditor against the debtor (“2009 Litigation”). The debtor failed to comply with several court orders in the 2009 Litigation, resulting in a finding of contempt and entry of a default judgment against the debtor in the 2009 Litigation as a sanction (“Contempt Judgment”). The state court determined specific damages after a separate evidentiary hearing (“Damages Order”).

Following the debtor’s bankruptcy petition in June 2012, the creditor filed a complaint that included a count to except the debt arising from the Contempt Judgment and Damages Order from discharge pursuant to § 523(a)(6). Thereafter, the creditor filed a motion for summary judgment asserting that the state court’s findings in the Contempt Judgment conclusively established the elements required by § 523(a)(6), thus precluding the debtor from relitigating those issues. The bankruptcy court granted the creditor’s motion for summary judgment, and the debtor appealed.

The BAP addressed and dismissed three issues raised by the debtor on appeal. First, it found that the relevant issues were previously litigated despite the entry of a default judgment. While default judgments do not generally have preclusive effect, a party’s active or substantial participation in the matter creates an exception to that general rule. Additionally, issue preclusion may apply when a default judgment is entered as a contempt sanction. The record reflects that the debtor actively participated in the litigation and the default judgment resulted from her contemptuous conduct in the litigation.

Second, the BAP held that although a contempt sanction is not per se nondischargeable, the state court made sufficient findings of fact to establish the debtor’s willful and malicious conduct as required under § 523(a)(6). The state court’s findings established that injury to the creditor was substantially likely to occur as a result of the debtor’s actions, satisfying the willfulness requirement, and the debtor ignored court orders intentionally, without justification, satisfying the malice requirement.

Third, there was a sufficient causal connection between the debtor’s willful and malicious conduct, as established in the Contempt Judgment, and the amount awarded in the Damages Order. The Damages Order was designed to compensate for injuries resulting from the debtor’s contemptuous conduct. Thus, the debt arose from a monetary sanction for contempt rather than a pre-existing debt owed to the creditor.

The full text of the opinion may be found here.

Contributed by W. Alexander McGee.

Join us at the Franklin Park Clean Up Day

The Bankruptcy Public Service Committee is co-sponsoring a “Clean Up Day” at Franklin Park on Saturday October 17, 2015 from 10:00 AM to 1:00 PM.

In partnership with the Franklin Park Coalition, volunteers will plant native understory plants in Franklin Park and remove invasive species. This is an excellent opportunity to meet fellow lawyers, from many sections, while preserving a jewel in Boston’s Emerald Necklace.

For more information or to register, click here.

Brown Bag Lunch on Tuesday 10/13 re: the New Official Bankruptcy Forms

Next Tuesday, October 13th from 12:00-1:00 p.m., the BBA Bankruptcy Section will be kicking off its Brown Bag Lunch Series with Get Ready: The New Official Bankruptcy Forms are Coming!

On December 1, 2015, the new Official Bankruptcy Forms will go into effect and almost all of the forms have been overhauled. Walter Oney of Oney Law Office will be highlighting the changes to the forms and providing a preview of what to expect on December 1.

This program has something for everyone because the form changes apply to business cases, too!  

Please RSVP through this BBA link.

 

Bankruptcy Internships – Spring and Summer 2016

The following internship positions are available.  Please feel free to forward this information to interested law students!

Bankruptcy Internship Position – Spring 2016

The Civil Division of the U.S. Attorney’s Office, District of Massachusetts, seeks one or two diligent and enthusiastic law students with excellent research and writing skills to serve as a bankruptcy intern for Spring 2016.  The intern will work in Boston.  Prior bankruptcy experience or completion of a bankruptcy course is required.  The intern will be assigned to work with the bankruptcy Assistant United States Attorney within the Civil Division, which represents the United States, its agencies, and its employees in all types of bankruptcy cases filed in Massachusetts.  The internship is an unpaid position.  Prior to beginning an internship, all interns must successfully complete a security process/background investigation.  Applicants must be U.S. citizens.  To apply, please send your resume, writing sample, transcript (unofficial accepted) and a cover letter describing your interest to [email protected].  Applications must be submitted by October 15, 2015.

Bankruptcy Internship Position – Summer 2016

The Civil Division of the U.S. Attorney’s Office, District of Massachusetts, seeks one or two diligent and enthusiastic law students with excellent research and writing skills to serve as a bankruptcy intern for Summer 2016.  The intern will work in Boston.  Prior bankruptcy experience or completion of a bankruptcy course is required.  The intern will be assigned to work with the bankruptcy Assistant United States Attorney within the Civil Division, which represents the United States, its agencies, and its employees in all types of bankruptcy cases filed in Massachusetts.  The internship is an unpaid position.  Prior to beginning an internship, all interns must successfully complete a security process/background investigation.  Applicants must be U.S. citizens.  To apply, please send your resume, writing sample, transcript (unofficial accepted) and a cover letter describing your interest to [email protected].  Applications must be submitted January 15, 2016.