CLE – Chapter 11 Bankruptcy: Reform is in the Air

In December 2014, after three year of study, the American Bankruptcy Institute’s (ABI) Chapter 11 Bankruptcy Reform Commission released 400 pages of recommendations to reform Chapter 11 bankruptcy. Come to the BBA on February 24 (4:00 – 6:00 p.m.) for an update on the efforts, status and results of the report.

Please click here to register for the program.

First Circuit Issues Opinion on the Discharge of Tax Debt Related to Late-Filed Returns

Fahey v. Mass. Dep’t of Revenue (In re Fahey), No. 14-1328 (1st Cir. Feb. 18, 2015).

Perkins v. Mass. Dep’t of Revenue (In re Perkins), No. 14-1350 (1st Cir. Feb. 18, 2015).

Gonzalez v. Mass. Dep’t of Revenue (In re Gonzalez), No. 14-9002 (1st Cir. Feb. 18, 2015).

Brown v. Mass. Dep’t of Revenue (In re Brown), No. 14-9003 (1st Cir. Feb. 18, 2015).

 

In a 2-1 decision the First Circuit has followed the Fifth and Tenth Circuits in holding that a late-filed state income tax return cannot qualify as a “return” for the purposes of the so-called “hanging paragraph” added to section 523(a) by the BAPCPA amendments, with the result that the tax debt relating to that return can never be discharged, section 523(a)(1)(B)(ii) notwithstanding.  In so holding the First Circuit overturned two BAP decisions (and three bankruptcy court decisions) and upheld two district court decisions (and one bankruptcy court).  The decision construed Massachusetts law (though it would seemingly have reached the same result with respect to all state and federal taxes where a return has a due date) in making a determination that a late-filed state return is not a return for the purposes of the hanging paragraph because the return does not satisfy the paragraph’s definition, i.e., that a return must satisfy “the requirements of applicable nonbankruptcy law (including applicable filing requirements).”  To the extent there’s an “out” to be found in the decision, debtors might try hanging their hat on two footnotes in which the court appears to leave the door open to the argument that a late-filed return, though not a return, could still constitute an “equivalent report or notice” under section 523(a)(1)(B).

Contributed by:

Nathan R. Soucy
Soucy Law Office
755 Dutton Street
Lowell, Massachusetts 01854
Tel: (978) 905-8010
[email protected]
soucylo.com

Judge William Hillman to Retire; Bankruptcy Merit Selection Panel Appointed

On January 30, 2015, the United States Court of Appeals for the First Circuit issued a Press Release:

Judge William Hillman to Retire; Bankruptcy Merit Selection Panel Appointed

Chief Judge Sandra Lynch of the United States Court of Appeals for the First Circuit has announced the formation of a Bankruptcy Merit Selection Panel to screen and review the qualifications of applicants for a forthcoming vacant bankruptcy judgeship in Worcester, Massachusetts. The Honorable William C. Hillman, who has served as a bankruptcy judge in the District of Massachusetts in Boston since 1991, has announced his retirement, effective August 14, 2015. The First Circuit Judicial Council has approved Chief United States Bankruptcy Judge Melvin S. Hoffman’s request to change his duty station from Worcester to Boston, also effective on August 14, 2015. Consequently, the bankruptcy judgeship vacancy to be filled will occur in Worcester.

Click below for the complete Press Release:

First Circuit Press Release (S0503875x7A7A4)

Applications are to be postmarked by Monday, March 16, 2015.  For more information on the application, when visiting the First Circuit’s website, go to the tab “About the Court” and then the “Employment” link.

 

Contributions Sought for Commemorative Book Celebrating the 25th Annual Bench/Bar

In 1991, the BBA Bankruptcy Section held its first Bench Meets Bar program.  The Section will celebrate 25 continuous years of that signature event later this year.  An editorial board is working to prepare a commemorative book for distribution at the 25th annual Bench Meets Bar event on May 15, 2015.  If you have any photographs, interesting, brief reminisces or other material from the practice of bankruptcy law in the district over that period of time, please contact Nina Parker at [email protected] before February 25, 2015.  Thank you!

Lunch Bunch with Judge Hillman – Thursday, February 5th from 11:45AM to 12:45PM

Lunch Bunch with Judge Hillman – Thursday, February 5th from 11:45AM to 12:45PM.

The Consumer Bankruptcy Committee will be hosting Judge Hillman at its February Lunch Bunch session in the library of the Bankruptcy Court (12th Floor of the McCormack Building in Post Office Square).  Come hear Judge Hillman share his insights from the bench and answer our most burning bankruptcy questions, all while networking with your colleagues.  Plus a free lunch?  It’s kinda a no brainer!   Sign up here:  https://www.bostonbar.org/membership/events/event-details?ID=17824

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.

Brown Bag Program on January 13 — Credit Reporting Demystified

Join us as we pry open the black box of credit reporting!

What’s the difference between a short sale and a foreclosure on your client’s credit score?  Is it better to try to settle debts over time or file a bankruptcy?  Does a bankruptcy filing always hurt one’s credit?  How does a bankruptcy filing affect the credit score of a co-signer?  And what’s the correct way for these events to be reported on a credit report, anyway?

Come hear Chi Chi Wu, attorney and consumer credit expert from the National Consumer Law Center, and Ralph Abrams, senior loan officer with NewFed Mortgage Corp., discuss the answers to these questions and more at the Consumer Bankruptcy Committee’s brown bag program at noon on January 13, 2015 at the BBA.

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