Reynolds v. IRS, Civ. Action No. 13-10788-NMG (D. Mass. Jan. 15, 2014).
A pro se Chapter 13 debtor filed an adversary proceeding seeking discharge of income taxes owed for 2000 through 2003 that she had refused to pay. (The IRS had characterized the debtor as a “tax protester.”) The Bankruptcy Court had denied the IRS’s motion for summary judgment reasoning that a fact finder could plausibly find that the debtor lacked the requisite mental state for a “willful” attempt to evade the tax under section 523(a)(1)(C). As a threshold matter, the District Court granted leave to hear the interlocutory appeal under 28 U.S.C. § 158(a)(3) (though the court mistakenly references 18 U.S.C. § 158(a)(3) throughout). It then went on to reverse the Bankruptcy Court and find that taxes for all of the tax years were nondischargeable pursuant to section 523(a)(1)(C) because the debtor had failed to refute the IRS’s evidence demonstrating that she had willfully attempted to evade the taxes. The District Court reached this conclusion with respect to all three tax years for which the debtor owed taxes, even though the debtor had filed a return for one of the years.
Scotiabank de Puerto Rico v. Burgos, et al. (In re Plaza Resort at Palmas, Inc.), No. 12-9005 (1st Cir. January 16, 2014).
In a Chapter 11 of a timeshare developer, the bank, which was a successor in interest to the original mortgagee for the development, brought an adversary proceeding against timeshare unit owners who had filed a proof of claim as secured creditors. The complaint sought a declaration that the timeshare unit owners did not have a valid lien on the unit. The bank’s mortgage had an express subordination clause, but the bank argued that it was subordinate only to the unit owners’ rights to use and occupy the units during their allotted times, not to the unit owner’s purported security interest in the underlying real estate. On appeal from cross motions for summary judgment, the majority framed the dispositive issue as being whether the transfer from the developer to the timeshare unit owners constituted a transfer of real property, as opposed to a contractual right to use and occupy an accommodation. The First Circuit affirmed the Bankruptcy Court and Bankruptcy Appellate Panel in finding that the purchasers of a timeshare had a real property interest as a matter of Puerto Rican law.
The majority’s analysis and holding is based exclusively on the underlying documents and Puerto Rican law. Of more interest to bankruptcy practitioners will be Judge Selya’s dissent, which (in addition to disagreeing with the majority’s application of Puerto Rican law) states that the majority’s approach fails to address the parties’ rights in bankruptcy–in particular section 365(h), (i) and (j). Judge Selya reproaches the majority for affirming the courts below in the absence of a record sufficient to make any findings or conclusions of law as to whether (i) the timeshare contracts were rejected by virtue of the debtor’s plan, (ii) the unit owners, upon any such rejection, elected to remain in possession or instead treat the timeshare interest as terminated and file a damages claim, (iii) any such damages claim would be secured under 365(j), and (iv) the unit owners were “in possession” of the units for the purposes of section 365.
The majority, for its part simply noted that there was no record below on section 365 issues and that “[c]ourts do not usually make findings on issues not raised before them.
TD Bank, N.A. v. Lapointe, BAP No. NH 13-029 (February 24, 2014).
TD Bank (“Bank”) held a mortgage on the debtor’s residence and the debtor defaulted. On March 20, 2013, the Bank held a foreclosure auction and successfully credit bid the property. The next day the debtor filed a chapter 13 petition. The debtor’s chapter 13 plan proposed to cure the default under the mortgage and reinstate the mortgage. The Bank filed a motion for relief from the automatic stay to permit it to record the deed of sale, complete the sale process and evict the debtor.
Under New Hampshire law, N.H. Rev. Stat. 479:25-26, title of the property does not pass until the buyer at a foreclosure auction records the foreclosure deed, notice of sale, and seller’s affidavit at the registry of deeds. However, N.H. Rev. Stat. 479:18 and Barrows v. Boles, 141 N.H. 382 (1996), provide that the mortgagor’s statutory right to redemption is extinguished at the foreclosure sale with no concern as to whether title has passed to the buyer. Meanwhile, section 1322(c) of the Bankruptcy Code provides that “a default . . . with respect to a lien on the debtor’s principal residence may be cured . . . until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.”
Courts have taken two approaches when faced with this situation. Pursuant to the “Gavel Rule,” courts hold that the right to cure is cut off for good once the gavel falls at the foreclosure auction. Section 1322 does not extend the period beyond the applicable state law right of redemption. A second approach holds that Section 1322(c) creates a federal right of redemption that preempts state law regarding a chapter 13 debtor’s right to reinstate his or her mortgage. For these courts, a residence is not “sold” at a foreclosure sale until the sale process is complete under state law. The cure period is thus extended beyond the period during which a debtor may redeem pursuant to state laws that cut it off prior to completion of the sale process, like New Hampshire’s.
While the Bankruptcy Court (New Hampshire (Harwood, J.)) found that the debtor maintained an interest in his home in the form of an extended redemption right under Section 1322, the Bankruptcy Appellate Panel (“BAP”) reversed and followed the Gavel Rule. “We conclude that the language of § 1322(c)(1) is clear, unambiguous and needs no interpretation. The phrase ‘sold at a foreclosure sale’ refers to a sale that occurs at a foreclosure auction. The additional phrase ‘conducted with applicable nonbankruptcy law’ is a requirement that the foreclosure was noticed, convened, and held in compliance with applicable state laws. . . Thus, we conclude that the Debtor’s residence was ‘sold at a foreclosure sale’ before he filed his bankruptcy petition.” The BAP held that the Bankruptcy Court erred in its interpretation of Section 1322(c)(1), and abused its discretion in denying the Bank’s motion for relief from the automatic stay and reversed and remanded for entry of an order granting the motion.
Eldorado Canyon Properties, LLC v. JPMorgan Chase Bank, N.A., BAP No. MB 13-042 (February 25, 2014).
The debtor, Eldorado Canyon Properties, LLC (“Eldorado”), appealed from a Bankruptcy Court (Massachusetts (Bailey, J.)) order granting relief from the stay and the subsequent order denying reconsideration.
In May 2013, Eldorado filed a petition for chapter 7 relief, without schedules or statements as required by Section 521. After the filing, JPMorgan Chase Bank, N.A. (“Chase”), filed a motion for relief from the automatic stay, seeking authorization to foreclose its first priority mortgage on real property owned by Main/Hitchcock Realty Trust (the “Trust”) of which Eldorado was a 75% beneficiary. Chase argued that the mortgage secured a note from the Trust, which was in default, and because there was no equity in the property, it was entitled to relief under Section 362(d)(2). Eldorado opposed the motion for relief, asserting that the Trust was invalid and that Chase lacked standing to seek relief from the stay. The Bankruptcy Court granted the motion for relief from the stay, and denied Eldorado’s subsequent motion to reconsider on the grounds that it had been rendered moot by the subsequent dismissal of Eldorado’s chapter 7 bankruptcy case for failure to satisfy Section 521.
On appeal, Eldorado reiterated its arguments that the Trust was invalid and that Chase lacked standing to seek relief from the stay. The Bankruptcy Appellate Panel (“BAP”) concluded that Eldorado was without standing to pursue the appeal do to a lack of equity in the property and a lack of any evidence to show that Eldorado was aggrieved in any cognizable way. Therefore, Eldorado’s appeal was dismissed.
Eldorado Canyon Properties, LLC, BAP No. MB 13-045 (February 25, 2014).
The debtor, Eldorado Canyon Properties, LLC (“Eldorado”), appealed from a bankruptcy court order dismissing its chapter 7 case. The Bankruptcy Appellate Panel (“BAP”) found Eldorado’s inability to comply with its Section 521 obligations, despite numerous deadline extensions by the Bankruptcy Court (Massachusetts (Bailey, J.)), sufficient to conclude that the bankruptcy court committed no error in dismissing Eldorado’s case. Therefore, the dismissal was affirmed.
Kramer v. Bankowski, BAP No. MB 13-037 (March 3, 2014).
The issue before the Bankruptcy Appellate Panel (“BAP”) involved the relationship between deductions in income and expenses listed on Schedules I and J, and monthly disposable income for purposes of confirming a chapter 13 plan. Co-debtors (“Debtors”) deducted from their income monthly payments to a second position secured creditor (“Creditor”) on their bankruptcy Schedules I and J. For purposes of conducting the means test, this lowered their monthly disposable income by $813.00. Debtors’ intention, however, was to strip down this second position lien making the Creditor a general unsecured creditor. The problem – and the basis for the Trustee’s objection to the plan – was that despite the Debtors’ not having to make these mortgage payments, they still incorporated the payments in their projected disposable income, thus deflating the amount they could pay to general unsecured creditors.
The Bankruptcy Court (Massachusetts (Bailey, J.)) ruled that while Section 707 allows the monthly payment of a stripped mortgage to be deducted in Form B22C for purposes of the means test, the monthly payment for a stripped mortgage which debtors will not need to pay under the plan may not be included when calculating projected disposable income for purposes of Section 1325. The BAP agreed, ruling there is a stark difference between disposable income when conducting the means test, and projected disposable income when submitting a chapter 13 plan.
Section 1325(b)(1)(B) provides that if a trustee objects to confirmation of a chapter 13 plan that does not provide for full payment to unsecured creditors, as is the case here, the court may not confirm the plan unless it provides for all of the debtor’s projected disposable income to be received during the term of the plan. This is referred to as the “best efforts test.” In relying on Hamilton v. Lanning, a “game chang[ing]” case, the Supreme Court held that projecting disposable income is a forward-looking concept, so a court may take into account changes in a debtor’s income or expenses from those used in the means test. This overruled the previous black-letter practice of using a snapshot of the debtor’s finances six months pre-petition – the statutory look back period under the means test. Because Debtors’ disposable income is higher than the amount they proposed to pay unsecured creditors when incorporating the mortgage payment that they deducted in their means test, they did not meet the best efforts test required under § 1325(b)(1)(B), and the BAP affirmed the Bankruptcy Court’s ruling sustaining the Trustee’s objection to plan confirmation.
In re Gonzalez, BAP No. MW 13-026 (March 6, 2014).
Following entry of an order discharging the Chapter 7 debtor, the debtor initiated an adversary proceeding against the Massachusetts Department of Revenue (MDOR) to determine that his prepetition tax liability was discharged. The MDOR answered on the theory that the debtor filed the tax returns late and, accordingly, they did not qualify as “returns” for purposes of 11 U.S.C. § 523(a) and that 11 U.S.C. § 523(a)(1)(B)(i) renders nondischargeable tax liabilities for which a return was not filed. The Bankruptcy Court (Massachusetts (Hoffman, J.)) ruled in favor of the debtor and determined that the taxes covered by the late returns were dischargeable. The MDOR appealed and, despite the argument by the MDOR that late returns could never qualify as “returns” under the Internal Revenue Code, the Bankruptcy Appellate Panel (“BAP”) focused on the Massachusetts definition of “return” and the definition found in 11 U.S.C. § 523(a)(*) (the “hanging paragraph”). The BAP agreed with the bankruptcy court that the taxes were dischargeable despite being late, because there is no timeliness component found in either the applicable non-bankruptcy law or the hanging paragraph. The BAP refrained from addressing the outcome if the returns were filed post-assessment, as the issue was not before it.
John Joy, Boston College Law School
Michael K. O’Neil, Murphy & King
Aaron S. Todrin, Sassoon & Cymrot
Nathan R. Soucy, Soucy Law Office
Christopher M. Candon, Sheehan Phinney Bass + Green
Kristin M. McDonough, Riemer & Braunstein