VLP PRO BONO HONOR ROLL

The Volunteer Lawyers Project of the Boston Bar Association (VLP) provides free civil legal assistance to low-income residents of Greater Boston, primarily through the pro bono services of private attorneys.  With your help, VLP makes access to justice possible for people who cannot afford a lawyer.

The following attorneys are commended for accepting a bankruptcy case from VLP during the month of March:

Elaine Benkoski

Angelina Bruce-Flounory

Philip Howe

Nina Parker

Christopher Shannon

Douglas Snook

Neil Warrenbrand

Case Summaries — Recent Appellate Decisions

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.

 

Contributions by:

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

SJC Preserves Tenancy by Entirety Despite Fraudulent Transfer

Bakwin v. Mardirosian, No. SJC-11393 (Mass. Apr. 2, 2014).

The SJC upheld the trial court’s preservation of an “innocent” spouse’s tenancy by the entirety interest in the marital home despite receipt of debtor-husband’s ½ interest through an attempted fraudulent transfer.  The plaintiff had sought a money judgment against the wife for the value of the husband’s ½ interest in the real estate.  Instead the trial judge reversed the fraudulent transfer and gave the plaintiff a lien on the husband’s TBE interest, thus creating the possibility that the lien would be extinguished if the husband predeceased the wife.  Citing the “State’s strong public policy to protect the interest of nondebtor spouses in a tenancy by the entirety,” the SJC upheld the reconveyance of the property to its pre-transfer status.

The SJC also held that the liquidation of a jointly-held (husband and wife) CD and subsequent deposit of the proceeds into a joint savings account (also husband and wife) did not constitute a “transfer” for fraudulent transfer purposes and, consequently, the innocent spouse’s ½ interest in the CD (and savings account) was preserved and protected from the husband’s creditors.

The SJC also affirmed the equitable approach adopted by the trial court with respect to a jointly-held brokerage account that was transferred first to the wife, and then to a family trust.  The trial court had granted judgment against the trustee of the family trust in the amount of the original transfer of the husband’s ½ interest in the account, subject to an adjustment to account for market-related fluctuations in the value of the account from the date of the original transfer.

Finally, the SJC held that the trial court was in error when it ruled that the dissipation of assets fraudulently transferred to the debtor’s son precluded a judgment against the son.  Noting that a reconveyance of the fraudulently transferred property was not the only remedy available, the court directed the trial court to render a money judgment against the son, subject to equitable adjustments.

Contributed by:

Nathan R. Soucy
Soucy Law Office
755 Dutton Street
Lowell, Massachusetts 01854
Tel: (978) 905-8010
nsoucy@soucylo.com
soucylo.com

M. Ellen Carpenter Financial Literacy Program Visits The Bankruptcy Courts

M. Ellen Carpenter Financial Literacy Program Visits The Bankruptcy Courts

On Wednesday, March 26, 2014, more than 120 students attended Consequences sessions in Boston and Worcester as part of the M. Ellen Carpenter Financial Literacy Program.  The Consequences session is the final segment of the program, where students visit the court to observe a mock Section 341 meeting and a relief from stay hearing for repossession of a car, in addition to learning about bankruptcy and the problems that can arise when credit is mismanaged.  Afterwards, students have an opportunity to have an upclose look at the bench, and talk with the Judge and the students.  In Boston, Chief Judge Frank Bailey presided over the session, in which Don Lassman, Leslie Su, Pat Dinardo, Amanda Blaske and Janet Bostwick participated.  The Judge’s courtroom staff, Amber Love, Interim Court Deputy, and Mary Artesani, ECR Operator, helped make the experience authentic for students.  In Worcester, Judge Henry Boroff presided over the session, with Halina Magerowski, Courtroom Deputy, Al Barrows, ECR Operator, Joe Baldiga, Lisa Tingue, Kevin McGee, Barbara Gilmore, and John Luze participating.

IMG_0882 IMG_0879

 

 

Case Summaries — The February Bankruptcy Court Opinions

The following are summaries of the February opinions posted on the Massachusetts Bankruptcy Court’s website.

In re Harborhouse of Gloucester, LLC, Adv. Proc. No. 11-1351-HJB (February 7, 2014).

This adversary proceeding involved cross-motions for summary judgment filed by the plaintiff, Chapter 7 Trustee (the “Trustee”) and the defendant, Raymond C. Green (“Green”). The Trustee asked the court to disallow the secured claim asserted by Green against property of the bankruptcy estate on the grounds that Green was not entitled to enforce the note on which his claim was based or the mortgage which secured payment of the note. The issue before the court was whether, under Massachusetts law, a holder of a lost note affidavit may stand in the shoes of the original holder of the note or, alternatively, assert the rights under the mortgage that secures its payment.

Harborhouse of Gloucester, LLC (“Debtor”) initially acquired title to real property (the “Property”) from Timothy Murphy and assumed the encumbrances of record. At the time of the conveyance, the Property was encumbered by a duly recorded mortgage and security agreement (the “Mortgage”) executed by Murphy in favor of Philip Hansbury. The Mortgage secured Murphy’s obligations under a contemporaneous promissory note (the “Note”) in the original principal amount of $360,000. Hansbury assigned the Note to Connect Plus International Corporation (“CPIC”), however, at some point prior to the assignment, the Note was lost. In connection with the conveyance from Hansbury to CPIC, Hansbury executed an affidavit (the “Lost Note Affidavit”) stating, among other things, that Hansbury was the holder of the Note, the Note had been lost or misplaced, and Hansbury was transferring the Note and all rights thereunder to CPIC for $460,000. CPIC then assigned the Note and Mortgage to Green as security for a loan by Green to CPIC.

On December 1, 2010, Debtor filed for relief under Chapter 11, and the case was converted to one under Chapter 7 on November 30, 2011. Green filed a proof of claim against Debtor for the amount under the Note, secured by the Mortgage on the Property.  The Trustee argued that Green had no enforceable secured claim against the Property because he did not possess the Note at the time of its loss. The Trustee maintained that, under MGL ch. 106, §3-309(a), a claimant relying on a lost note affidavit must have had possession of the note at the time of the loss in order to enforce it. Furthermore, Green’s inability to enforce the Note also precludes his enforcement of the Mortgage, because the Mortgage is not independently enforceable and secured no obligations other than those represented by the unenforceable Note. Green argued that §3-309(a) should not be interpreted in the manner asserted by the Trustee, and that he is entitled to enforce the Note as the holder of the Lost Note Affidavit, stepping into the shoes of the original holder. Moreover, he adds, even if he is unable to enforce the Note or the underlying claim under Massachusetts law, he still has the power to enforce the Mortgage, which mortgage entitles him to the proceeds of the sale of the Property. And finally, in the event the Court grants the Trustee summary judgment, Green requested that he be given leave to join or substitute Hansbury as a party to this action.

The Court began by noting that the amended UCC version of §3-309(a) entitles “a person not in possession of an instrument to enforce the instrument if…(1) the person seeking to enforce the instrument…(B) has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred.” However, Massachusetts has not adopted that amended version of §3-309, and therefore the conditions for enforceability are plainly set forth in MGL ch. 106, §3-309, requiring actual possession at the time of loss as a requirement for enforcement of a negotiable instrument. The court refused to allow Green to enforce the Note because the Note was lost prior to the purported transfer to Green. And because the obligation under the Note was unenforceable, Green had no claim against the estate under §502(b)(1) of the Bankruptcy Code. Furthermore, Green’s inability to enforce the Note also renders him unable to enforce the Mortgage, because the mortgage, no matter who holds it, is always subject to the note. Green did possess a valid legal interest in the Mortgage and, therefore, was entitled to any proceeds from the sale of the Property to which his secured claim attached. Nevertheless, Green must hold any proceeds received from the Trustee on account of the secured claim for the benefit of the true holder of the Note.

 

In re Gagnon, Case No. 11-41251-HJB (February 10, 2014).

The matter before the court in this chapter 13 case was the validity of Debtor’s counsel’s (“Counsel”) second application for allowance of compensation (“Second Fee Application”) pursuant to 11 U.S.C. §§ 330 and 331.

According to Counsel, the Debtor’s situation was dire and constantly in flux, causing several delays in the filing of her chapter 13 case.  Citing these alleged complications, Counsel filed his first fee application where he requested compensation in the amount of $9,762.50, which was $2,659.19 in excess of his retainer.  Although the Court granted this fee application in full, it disagreed that these “dire circumstances” justified a sizable increase of billable hours.  The Court also noted that the requested compensation amount is substantially above the “no-look fee” established by the Local Rules in chapter 13 cases.  The Second Fee Application indicated that the application was “voluntarily reduced” from $4,366.66 to $3,500; this amount being in addition to what was previously allowed in Counsel’s first fee application.  Again, the Court was concerned with Counsel’s billable hours and determined them to be unreasonable under the circumstances.  The allowed compensation was reduced to $750.

 

In re Lindsay Lampasona, LLC, Case No. 11-19747-JNF (February 11, 2014).

The Chapter 7 Trustee (“Trustee”) filed a motion to approve a settlement agreement seeking authority to settle the estate’s claims against a family member (“Payee”) in connection with avoidable and recoverable prepetition payments and a disputed $150,000 loan.

Six self-proclaimed “interested parties” (“Interested Parties”), the defendants in an associated adversary proceeding, objected to the proposed settlement agreement.  Their objection focused on, amongst other things, the merits of the $150,000 claim and the Trustee’s failure to meet her burden for obtaining approval of a settlement agreement.  Trustee replied to their objection claiming that they lacked standing to object, and, in any event, the proposed settlement agreement had no effect on their claims against the Payee.  Trustee contended that if the Interested Parties want to seek recourse for damages in connection to the $150,000 loan, they are free to do so in an adversary proceeding by filing a third-party complaint, or by seeking contribution from the Payee.  The Court agreed.

In ruling for the Trustee, the Court determined that, while one of the Interested Parties might become a creditor in the future, none of them are creditors now, and as such, they do not have standing to object to the settlement agreement.   As for the settlement agreement itself, when considering the obstacles and expense of litigation in view of the amount of money involved, Trustee met her burden in presenting the settlement agreement to the Court.  It was further noted that the Trustee is an experienced and competent fiduciary whose judgment is entitled to deference.  Settlement agreement approved.

 

In re Davenport Beverage Corp., Case No. 12-43583-MSH (February 12, 2014).

The creditor-landlord asserted a claim for administrative expenses for non-rental charges under his lease with the Chapter 11 debtor.  The debtor argued that the charges (late charges, repairs and maintenance costs and attorneys’ fees) did not qualify for administrative expense treatment.  Earlier in the case, the court ruled that the lease had been rejected as a matter of law on February 1, 2013 since the joint motion to extend the time to assume or reject the lease had been filed four days after the expiration of the 120-day period provided under Section 365(d)(4)(a)(i).  Because of the rejection, the court analyzed the claim and distinguished between items that were incurred prior to the rejection and those items incurred after the rejection.  The court ruled that items that were incurred prior to the rejection are governed by Section 365(d)(3) without regard to whether the expenses conferred any benefit on the estate.  Under Section 365(d)(3), a debtor or trustee is required to perform all obligations under a lease until the lease is rejected.  The portion of the claim attributable to the post-rejection period does not enjoy the elevated status conferred by Section 365(d)(3).  Instead, the requirement that an expense be actual and necessary and of benefit to the estate under Section 503(b) applies.  Accordingly, the court (i) found that the portion of the claim attributable to the pre-rejection period to be entitled to administrative expense treatment and (ii) reviewed the post-rejection expenses to determine if they conferred a benefit on the debtor and were both actual and necessary.  Upon completing the analysis and applying certain acknowledged credits (i.e., rent overpayment), the court ruled that the creditor was entitled to an administrative expense but with a significant reduction from the amount requested.

 

Casey v. Schneider (In re Behan), Adv. Proc. No. 13-1376-JNF (February 25, 2014).

The dispositive legal issue in this adversary proceeding within a Chapter 7 bankruptcy case was whether the Debtor’s unexercised general power of appointment as a beneficiary of a Trust invalidated the Trust’s spendthrift clause, rendering the power of appointment property of the estate.  In writing this decision, the court relied on principles detailed in the Restatement (Third) of Trusts and Restatement (Second) of Property, disagreed with the Bankruptcy Court’s 1998 decision in In re CRS Steam, Inc., and distinguished the more recent Massachusetts Supreme Judicial Court’s decision in Bongaards v. Millen, and held that the Debtor’s general power of appointment was a property of the estate and the spendthrift provision was unenforceable.

In 1994, the Debtor’s father set up the trust (the “Trust”) for the benefit of his five children, naming two of his five children trustees.  The settlor conveyed a four-unit residential property to the Trust, and then he died in 1998.  The Trust permitted each beneficiary to demand a distribution of its share of principal and accrued interest in the Trust at any time (the “Power of Appointment”).  At the time the Debtor filed his petition, he lived on the property, paying monthly rent $300 below the market rate.  He had not exercised his right to receive his share of the Trust.

The Debtor in this case filed for bankruptcy on June 6, 2012, disclosing his beneficial interest in the Trust on Schedule B-Personal Property, and claiming the federal exemptions on Schedule C.  After the Court entered an order of discharge, but before the Chapter 7 Trustee filed a Report of No Distribution, the Trustee filed this adversary proceeding naming the then three Trustees of the Trust and the Town of Rockland as Defendants.  The complaint included the following four counts: 1) Turnover of Property of the Estate; 2) Complaint for Declaratory Judgment; 3) To Avoid a Post Petition Transfer Pursuant to 11 U.S.C. §§ 549, 550 and 551, and 4) Violation of the Automatic Stay.  Subsequently, the Debtor amended his schedules, assigning the value of his interest in the Trust at $29,764 and claiming exemptions for the beneficial interest under Massachusetts law.  The Debtor also intervened in the adversary proceeding.

The Court’s decision resolved a motion for judgment on the pleadings filed by the Debtor, a cross motion for summary judgment filed by the Trustee against the Debtor, and a motion for summary judgment on counts 1, 2, and 4 against the Trustees of the Trust.  Despite the complex procedural posture of the case, the Court resolved the questions before it through the single holding of the case: a debtor’s unexercised general power of appointment as a beneficiary of a trust invalidates any spendthrift clause in the trust and renders the power of appointment property of the estate.

The Debtor argued that the Power of Appointment was not property of the estate because 1) the total value of the Debtor’s share of the Trust was permitted under certain Massachusetts exemptions, and 2) the value of the Power of Appointment—although difficult to calculate—must be less than the value of the Trust share.  The Court disagreed, holding that the Trust interest was property of the estate.  The Court began its analysis by acknowledging that in Massachusetts, a valid spendthrift clause will shield the creditors of a trust’s beneficiaries from the trust assets.  Citing Restatement (Third) of Trusts, §§ 56, cmt. b, 58, cmt. b, Restatement (Second) of Property § 13.6(2) and cmt., and Massachusetts case law, the Court continued by identifying repeated declarations that a general power of appointment is equivalent to ownership and cannot be shielded from creditors through a spendthrift clause.  The Court respectfully disagreed with the 1998 In re Steam, Inc. decision, finding that the Court in that case relied on certain restatement provisions in isolation.  The Court also found the facts of the case at hand to be “easily distinguishable” from Bongaards because the defendant in that case had a non-general power of appointment.

Notably, although the Court resolved the issue before it, the Court abstained from addressing a question within the bankruptcy case, namely whether Debtor’s power of appointment could be exempted under Mass. Gen. Laws ch. 235, § 34(17) (interest in personal up to $1000 plus up to $5000 of unused value from other subsections of § 34) and Mass. Gen. Laws ch. 188, § 4 (automatic homestead exemption in absence of a valid recorded declaration of homestead).

 

Contributions by:

Aaron S. Todrin, Sassoon & Cymrot

John Joy, Boston College Law School

Devon MacWilliam, Partridge Snow & Hahn

Christopher M. Candon, Sheehan Phinney Bass + Green

The American College of Bankruptcy First Circuit Fellows Program Event — The Legacy of Mr. Ponzi (March 28)

The American College of Bankruptcy First Circuit Fellows Program Event -- The Legacy of Mr. Ponzi (March 28)

YOU’RE INVITED

The American College of Bankruptcy First Circuit Fellows present:

THE LEGACY OF MR. PONZI
The Madoff and Stanford Cases

A panel discussion featuring the Madoff Trustee, a Co-Liquidator of Stanford International Bank, and reporters from the New York Times and Associated Press who covered the Madoff and Stanford cases

Speakers:

  • Irving Picard: a partner at Baker Hostetler who is the Trustee for the liquidation of Bernard L. Madoff Investment Securities
  • Peter Lattman: currently the media editor of the New York Times, who as a reporter for DealBook covered the Madoff case for the Times
  • Marcus Wide: a Managing Director of Grant Thornton Ltd. who was appointed Co-Liquidator of Stanford International Bank by the High Court of Antigua and Barbuda
  • Juan Lozano: a Houston-based reporter for the Associated Press who covered the Stanford case

What you will hear:

  • First-hand accounts from the reporters who reported on the Madoff and Stanford scandals, and their insights on the nature of the Ponzi schemes, victims and perpetrators
  • Insights from the individuals administering the Madoff and Stanford cases on the legal theories they have employed, how the cases have played out, and prospects for finalizing the cases
  • Reflections on the results obtained in the judicial handling of large-scale Ponzi schemes, and suggestions for change

Moderator: Daniel Glosband, Goodwin Procter LLP

For more information, please contact:

  • Mark Berman, Nixon Peabody LLP, First Circuit Regent
  • Daniel Glosband, Goodwin Procter LLP, Chair of the First Circuit Education Programs Committee

March 28, 2014
1:00 to 4:00 p.m.
Reception to follow

Boston College Law School
Newton, MA

RSVP/Contact

Click here to register or
for more information

Registration is required.
Please respond by March 14, 2014. There is no charge for registration

Sponsored by the First Circuit
Fellows of the American College of Bankruptcy and by Boston College Law School. This program has been made possible by a grant from the American College of Bankruptcy.

Sports and Teamwork at the BBA

Got team spirit?  Do you like competition?  The BBA has a few upcoming programs that may be of interest to sports enthusiasts.  Learn how to optimize team performance, scope out opposing counsel’s strategizing skills at Chess Night or discover how baseball reflects life and law.  In addition to combining your love of sports, law, and the BBA, these programs will provide a great opportunity to meet attorneys from other practice sections and expand your networks.

Follow the link for more details:

http://www.bostonbar.org/sections/diversity-inclusion/upcoming-programs

Contributed by:

Leslie F. Su
Minerva Law, P.C.
300 Brickstone Square, Suite 201
Andover, Massachusetts 01810
Tel: (978) 494-4695
email: leslie.su@minervalawpc.com
website: minervalawpc.com

Client Survey to Assist Consumer Bankruptcy Research

Professor Daniel Austin, Northeastern University School of Law, is conducting research dealing with consumer bankruptcy.  As part of his research, he has created a survey for debtors.  The survey is voluntary, completely anonymous, and takes less than two minutes to complete.  Professor Austin is asking BBA Bankruptcy Section members to print copies and invite clients to fill out the survey.  The completed surveys can be scanned and emailed to Professor Austin, or sent to him by mail.  Professor Austin will share the survey results with the Bankruptcy Section at the conclusion of the research.  For more information or if you have questions, contact Professor Austin at d.austin@neu.edu or 617.373.3668.  His mailing address is shown on the survey.  Professor Austin offers his sincere thanks to section members for their help with the survey.

 https://docs.google.com/forms/d/1KL4nJyo0d9DnQY7os324gepVApr_EgMH_0FOeXhERvQ/edit

Case Summaries — The January Bankruptcy Court Opinions

The following are summaries of the January opinions posted on the Massachusetts Bankruptcy Court’s website.

Damas et al. v. U.S. (In re Damas et al.), Adv. P. No. 12-1331-FJB (January 6, 2014).

Chapter 7 debtors James Damas and Maria Kolettis brought a complaint to recover three setoffs of SSDI benefits owed to Damas by the Social Security Administration under 11 U.S.C. §§ 553(b) and 547(b), a total of $1,790.  The United States, on behalf of the Social Security Administration, opposed the complaint.  The parties submitted cross motions for summary judgment.

In early January of 2011, the SSA determined that Damas had been receiving greater SSDI payments than he was entitled to by a total of $21,748.  As a result, Damas was indebted to the SSA for the repayment of this amount.  In order to recover this total, the SSA withheld $605 from the Damas’s monthly SSDI benefits.  90 days prior to the filing of the bankruptcy petition, Damas still owed $13,278 to the SSA from his overpayment.  Over the next 90 days, the SSA made three payments of $1,185 to Damas, which equals Damas’s regular SSDI payment, minus the $605 being withheld for repayment to the SSA.

At issue was whether there was a decrease in insufficiency as a matter of law, enabling the debtor to recover the insufficiency related to the setoff under §553(b).  In order to calculate the insufficiency, the court first noted the amount by which the claim of the creditor exceeded the debt owed to the debtor on the date of the setoff.  Next, the court calculated the same figure but in relation to the 90th day prior to the bankruptcy filing.  If the former figure is less than the latter, then there is a decrease in insufficiency, and the creditor is obligated to return the difference to the debtor.  If there is not a decrease, then there is no recovery to be had for the debtor.

The opinion provides a chart showing that the insufficiency actually increased by a total of $1,185 per month.  Because of this, there was not a decrease in insufficiency and §553(b) offers no relief to the debtor.

The plaintiffs also argued that the $1,790 may be avoided as a transfer under §547(b).  However, the court rejected this argument by citing to cases that have held that setoffs are specifically excluded from the definition of “transfer,” and therefore are not avoidable under 547(b).

 

Chen et al. v. Huang (In re Huang), Adv. P. No. 12-01265-HJB (January 7, 2014).

The debtor filed a petition under Chapter 13 (Case No. 11-10416).  On the schedules filed with the petition, the debtor disclosed her ownership of “Millennium Day Care Center” (“Millennium”), a debtor in a pending Chapter 11 case.  Both the debtor’s Chapter 13 case and the Millenniun Chapter 11 case have been converted to Chapter 7 cases.  In Millennium’s Chapter 7 case, employees (the “Creditor Employees”) of Millennium brought administrative claims for asserted wage claims accrued during the Chapter 11 case.  The same Creditor Employees, and the plaintiffs in this adversary proceeding, also maintain that the debtor is individually liable for the unpaid wages under the Massachusetts Wage Act.  The Creditor Employees filed a complaint against the debtor, objecting to the dischargeability of their wage claims under Section 523(a) on grounds that the debtor fraudulently induced them to work for Millennium postpetition, and then failed to pay their wages despite having the financial means to do so.  The debtor filed an answer denying personal liability under the Massachusetts Wage Act for any unpaid wages.

Through a summary judgment motion, the Creditor Employees sought a determination that the court has subject matter jurisdiction to determine not only the dischargeability of the Massachusetts Wage Act claims against the debtor, but also to liquidate the amount of those claims and enter judgment accordingly.  Acknowledging the jurisdictional split, the Creditor Employees urged the court to adopt the majority position and hold that it does possess the jurisdiction to liquidate a debt in the context of an adversary proceeding challenging the dischargeability of that debt.  The debtor opposed, arguing that the court does not have subject matter jurisdiction to enter a money judgment in connection with a nondischargeability proceeding.  The debtor asked the court to follow the reasoning in Cambio v. Mattera (In re Cambio), 353 B.R. 30 (B.A.P. 1st Cir. 2004), contending that, in the context of a dischargeability proceeding, the bankruptcy court has jurisdiction only to decide the discrete issue of dischargeability, and not to determine the totality of the claims, counterclaims, and defenses that could be asserted under nonbankruptcy law.

After conducting a thorough analysis of the jurisdictional split and specifying disagreements with the Cambio analysis, the court held “that a determination of the amount of a claim deemed not discharged, … is an essential element of the dischargeability proceeding – a core proceeding pursuant to 28 U.S.C. Section 157(b)(2)(I) and one that fundamentally alters and affects the substantive right to a discharge provided by the Bankruptcy Code.”  Accordingly, among other rulings, the court ruled that the determination of the amount of the debts, as well as the debtor’s liability therefor, which underlie the Creditor Employees’ nondischargeability complaint, constitute core matters over which the court has subject matter jurisdiction.

 

In re Feliberty, Case No. 12-31819-HJB (January 13, 2014).

In this Chapter 7 case, the trustee asked the court to order the debtor, Yarmyn Feliberty, to turn over a portion of the proceeds she received from the prepetition settlement of a personal injury action (the “Settlement,” “Settlement Proceeds”).  Because the trustee’s entitlement to the proceeds in this instance derived from his position as a lienholder pursuant to 11 U.S.C. § 551, the question before the court was whether, and to what extent, the holders of the liens avoided by the trustee had a secured interest in the proceeds.

The debtor filed for Chapter 7 relief on December 13, 2012 and on the schedules indicated that two entities held liens against the proceeds of the Settlement as a result of their provision of medical services in connection with the injury (“Medical Liens,” “Medical Lienholders”).  Debtor indicated on her statement of intention that she wished to avoid the liens by employing 11 U.S.C. §522(f).  On April 11, 2013, the trustee filed an adversary proceeding against both Medical Lienholders and the debtor, alleging the Medical Lienholders attempt to assert liens in the Settlement Proceeds was statutorily deficient, therefore, the trustee sought a judgment avoiding the Medical Liens pursuant to 11 U.S.C. §544, but preserving them for the benefit of the bankruptcy estate pursuant to 11 U.S.C. §551.  As to the debtor, the trustee sought a judgment subordinating her exemptions in the Settlement Proceeds to the avoided liens.  Neither the Medical Lienholders nor the debtor filed an answer in the adversary proceeding and a default judgment was entered as to all defendants.

On July 19, 2013, the trustee filed the Turnover Motion arguing that Settlement Proceeds previously paid to the debtor (largely prepetition) should not have been disbursed to the debtor, as it was subject to priority to the Medical Liens. According to the trustee, since pursuant to the default judgment those liens have been avoided and preserved for the benefit of the bankruptcy estate, the debtor is obliged to disgorge those amounts to the trustee.  Furthermore, if the debtor failed to turn over the prepetition payments, her attorney, should be surcharged for the requested amount, since Massachusetts law imposes such liability on a person with knowledge of a medical lien who nonetheless transfers settlement proceeds to an entity other than a lienholder.  Debtor objected to the motion on the grounds that the Medical Liens were never valid as to the debtor or the Settlement Proceeds, because the Medical Lienholders did not comply with the requisite statutory requirement.  Moreover, neither she nor her attorney is required to disgorge the prepetition payments, because there were never any valid liens that could be preserved.

In denying the trustee’s Turnover Motion, the court concluded that neither Medical Lienholder complied with the statutory requirements for establishing a lien prescribed under §70B of the Massachusetts Medical Lien Statute, therefore, under Massachusetts law, the Medical Liens are invalid.  The court highlighted the fact that the Massachusetts Medical Lien Statute does not contain separate requirements for the creation and perfection of a medical lien.  The act required by the statute to effectively create and perfect a statutory Medical Lien is the sending of a written notice that complies with §70B (providing that a lien for medical services shall take effect if the requisite notice is sent prior to judgment, settlement, or compromise).  Because the notices of the lien sent by the Medical Lienholders did not comply with §70B, no lien under §70A was ever created to attach to the Settlement Proceeds.  Accordingly, the Default Judgment entered in the Adversary proceeding does not entitle the trustee to a turnover of funds received by the debtor prepetition, since the liens preserved for the benefit of the bankruptcy estate never existed.

 

In re Collymore, Case No. 11-15380-FJB (January 15, 2014).

The trustee objected to the debtor’s claim of homestead exemption.  The debtor’s mother (“Mother”), who owned real property in fee simple, conveyed title to the debtor and reserved a life estate, but did not expressly reserve the homestead estate.  The Massachusetts homestead statute protects both the original declarant and the declarant’s family members who have an interest in the property.  Because the Mother transferred the remainder interest in the property to the debtor without reserving the homestead estate, the court ruled that the debtor’s estate of homestead had lapsed.

In reaching this decision, the court looked to M.G.L ch. 188 § 7 and completed a statutory construction analysis on the word ‘may’.  The statute declares that an estate of homestead may be terminated during the lifetime of the owner by one of two methods.  The first method is by conveying a deed which does not specifically reserve the previously recorded estate of homestead, and the second method is through a properly executed release of homestead.  The trustee argued that the estate of homestead was terminated by the first method, and the court agreed.

The court ruled that the statute is plain and unambiguous.  The absence of a specific reservation of homestead in this case is dispositive; a conveyance that does not expressly reserve the estate of homestead terminates it.  The debtor’s argument that the Mother’s intent must be taken into account in deciding whether the homestead was terminated is without basis.  The debtor’s proposed interpretation is inconsistent with both the statute of frauds and the recording system in the Commonwealth.  For these reasons, the court sustained the trustee’s objection.

 

Desmond v. Green (In re Harborhouse of Gloucester, LLC), Adv. P. No. 11-1351- HJB (January 15, 2014).

Harborhouse of Gloucester (the “Debtor”) acquired certain real property in Beverly (the “Property”) in August 2004.  The Property was acquired subject to a mortgage and security agreement (the “Mortgage”) executed by the seller in favor of one Phillip J. Hansbury to secure seller’s obligations under a promissory note (the “Note”) in the amount of $360,000.  Hansbury lost the original Note, but purported to assign it and the Mortgage to Connect Plus International Corporation (“CPIC”) with an affidavit stating, inter alia, that Hansbury was the holder of the Note but it had been lost.  CPIC then purported to assign the Note and Mortgage to Raymond Green (“Green”), the defendant in this case.

In Chapter 7, the trustee sold the Property free and clear and brought this adversary proceeding to object to the validity, extent, and priority of Green’s secured claim.  The Trustee argued that Green has no enforceable secured claim against the Property because he did not possess the Note at the time of its loss.  Since he could not enforce the Note, the trustee concluded, Green could not enforce the Mortgage and had no secured claim.

Mass Gen. Laws ch. 106 § 3-301 provides that a person may enforce an instrument if that person is (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 3-309.  Section 3-309 permits a person to enforce a lost instrument if, inter alia, the person was in possession of the instrument when loss of possession occurred.  The drafters of the Uniform Commercial Code have amended § 3-309 to provide that nonholders may enforce lost notes if they have acquired ownership, directly or indirectly, from a person who was entitled to enforce the note when loss of possession occurred.  Massachusetts, however, has not adopted that amendment. The Court noted that “[a]ctual possession at the time of loss . . . provides an objective method to determine a party’s right to enforce a negotiable instrument and provides a reliable means to determine the parties’ rights.  By setting an actual possession requirement, parties on both sides have a clear and established standard.”  The court held that because the Note was lost prior to the purported transfer to Green, Green could not enforce the Note.

While an inability to enforce the Note did render Green unable to enforce the Mortgage, the Mortgage still exists, and now constitutes a security interest in the proceeds.  Since Green did possess a valid legal interest in the Mortgage, he is entitled to receive some or all of the proceeds to which that secured claim attaches.  “He must hold any such proceeds, however, in trust for the true holder of the Note – who is quite possibly no one other than Hansbury.” The court denied Green’s request, presumably set forth in his summary judgment motion, for leave to substitute or join Hansbury as a proper and indispensible party to the action.  The court noted that this request is more properly made by way of a separate motion, which motion should explain the basis for the court’s subject matter jurisdiction over any dispute between Green and Hansbury.

 

In re McGuire, Case No. 13-14412-WCH (January 15, 2014).

Prepetition, the debtor and his wife acquired real property on Airline Road in Dennis, Massachusetts (the “Airline Road Property”) as joint tenants.  The debtor and his wife subsequently sold the Airline Road Property.  The debtor’s wife then acquired a new property on Main Street in Dennis (the “Main Street Property”), using both her and the debtor’s proceeds from the Airline Road Property sale.  The debtor’s wife recorded a declaration of homestead with respect to the Main Street Property pursuant to Mass. Gen. Laws ch. 188 § 1.

The debtor filed a voluntary Chapter 7 on July 24, 2013 and listed on Schedule A an “equitable homestead as spouse of title holder” in the Main Street Property.  He claimed the “equitable homestead interest” as exempt on Schedule C.  The trustee objected to the claim of exemption, arguing that the homestead right is not property of the estate and therefore may not be claimed as exempt.  The court cited to Mass. Gen. Laws ch. 235 § 34(14) which recognizes a debtor’s right to exempt from seizure “[e]states of homestead as defined in chapter 188.” Chapter 188 § 3 provides that “[a] homestead declaration shall benefit each owner making the declaration and that owner’s family members who occupy . . . the home as their principal residence.”  Based on the statutory scheme, the court held that “it is abundantly clear that the debtor, as the spouse of the declaring owner, has the defined ‘homestead rights’ of a non-titled family member.”  The court further held that, however limited, the homestead rights constitute and equitable interest of the debtor and thus are property of the estate.  The trustee’s objection was therefore overruled.

 

In re Noonan, Case No. 13-15420-WCH (January 15, 2014).

The joint debtors in this case filed a motion to avoid a judicial lien on their principal residence pursuant to 11 U.S.C. 522(f) to the extent it impairs their homestead exemption.  The creditor opposed, claiming that the debtors are not entitled to the exemption because they acquired it by fraud and deceit.  Two years prior to the filing of the debtors’ petition, the creditor sought a real estate attachment in the Orleans District Court on the debtors’ property.  The debtors requested a continuance of the hearing, which was granted and scheduled three weeks later.  Three days later however, the debtors recorded the Declaration of Homestead (“Declaration”).  The creditor argues that but for the continuance, she would have had a preexisting lien which, under Massachusetts law, would not have been affected by the debtors’ homestead.  The court disagreed.

On Schedule A of their bankruptcy petition, debtors listed their property at $225,272.  If the Declaration was filed properly, the debtors are entitled to a $500,000 exemption which would fully cover the property.  If the Declaration was not filed properly, debtors are only entitled to an “automatic homestead exemption” in the amount of $125,000.

The creditor asserts that due to their alleged fraud and deceit, pursuant to 11 U.S.C. § 522(o), the debtors are not entitled to a declared homestead exemption.  This provision was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to limit the value of a debtor’s homestead exemption in circumstances where fraud can be shown.  To apply this provision, the challenging party must establish four elements.  First, the objecting party must show that the debtor disposed of property within 10 years preceding the bankruptcy filing.  The analysis stopped here.  The debtors did not dispose, or transfer in any way, any property within ten years of filing bankruptcy.  The court ruled that a designation of property as one’s homestead is not considered a transfer of property as required by § 522(o).

Once the court determined that the homestead exemption was properly filed, the court ruled that the debtors may avoid the creditor’s lien after following the formula set forth in 11 U.S.C. § 522(f)(2)(A).  The debtors’ motion was granted.

 

Faria v. Silva (In re Silva), Adv. P. No. 12-1274-WCH (January 21, 2014).

Plaintiff, Marta Faria filed a complaint against debtor, Walmar Adriano Silva through which she sought a determination that the debt, which the debtor owed her, was excepted from discharge pursuant to 11 U.S.C. §§523(a)(2)(A), (a)(4), and/or (a)(6).  The Plaintiff argued that during the course of her employment for the debtor he fraudulently induced her to loan him money and intentionally failed to pay her wages.

Count I:

Plaintiff alleged that while she was an employee of debtor’s company, he fraudulently solicited two loans (“May Loan” and “August Loan”) from her by falsely stating that he would pay her back.  The Plaintiff, who is a native of Brazil, asserted that her reliance on the debtor’s promises to repay was justifiable given her lack of education, her gratitude to the debtor for rehiring her after having previously worked for him, and the fact that when the debtor solicited the August Loan she had not yet suffered any damages from the May Loan.

The court concluded the plaintiff successfully established the elements required in order to except debt from discharge pursuant to 11 U.S.C §523(a)(2)(A) with regards to the May Loan, but found the falsity of the debtor’s promise to repay the August Loan should have been evident to the plaintiff and therefore held the resulting August Loan debt should not be excepted from discharge pursuant to §523(a)(2)(A).

Count II:

Plaintiff alleged debtor committed larceny by emotionally coercing her into signing over to him a check properly payable to her.  Plaintiff claims debtor’s dire financial circumstances at the time of the transaction evidence his intent to permanently retain the check rather than pay it back

Despite plaintiff’s argument that her consent in signing over the check to debtor was negated by the debtor’s fraudulent promise of repayment, the court found that the plaintiff voluntarily signed the check and gave it to the debtor, therefore, prohibiting her from using the common law theory of larceny by fraud or trick to prevail under §523(a)(4).

Count III:

Lastly, plaintiff claimed debtor’s failure to pay her wages from April 2007 to August 2007 was a willful and malicious injury pursuant to 11 U.S.C. §523(a)(6).  She argued that the frequency of the missed payments and the debtor’s failure to pay other employees prove his conduct was intentional.

The court found plaintiff’s outstanding wages for April 2007 and May 2007 were rolled into the May Loan, which was already found to be nondischargeable (See Count I).  The court went on to find that the record indicated that debtor’s company, Boston Office Cleaning’s, Capital Cleaning, paid the plaintiff’s wages for July and the beginning of August. As such, the plaintiff did not suffer any injury from the debtor’s failure to pay for those months, and the first element of the §523(a)(6) test was not met.  Thus, the only remaining issue was the debtor’s failure to pay the plaintiff for the month of June 2007.

The court looked to Judge Feeney’s discussion in, In re Ruhland, regarding the applicability of §523(a)(6) in determining whether debtor’s failure to pay plaintiff in June 2007 was willful.  In, Ruhland, the court concluded that the debtor’s failure to pay the plaintiff was willful and took into account the debtor’s history of wage violations, the debtor’s fraudulent promises to the pay the plaintiff the wages he had missed, and the use of business revenue for personal expenses. Similarly, in this case, the number of other employees that brought wage claims against the debtor and debtor’s admission that he paid employees with checks that had insufficient funds indicate that the debtor’s failure to pay his employees extended beyond his missed payments to plaintiff. Furthermore, by June 2007, debtor’s business accounts were rapidly diminishing and debtor had already failed to pay the plaintiff for part of April and all of May. The court also found that debtor’s conduct was without just cause or excuse. The evidence presented to the court indicated that the debtor unjustifiably used company funds for his own expenses rather than paying his employees. Accordingly, the court held that to the extent the plaintiff’s debt arose from the nonpayment of her June 2007 wages, it is excepted from discharge pursuant to §523(a)(6).

 

In re Giannasca, Case No. 11-19499-FJB (January 22, 2014).

The matter before the court was the chapter 7 debtor’s motion to seek a determination that three liens on his real property were unsecured.  The three liens at issue included one junior mortgage by one creditor, and two judgment liens by a different creditor.  The court denied the motion for several reasons.

At the hearing, it became clear that the debtor wasn’t solely seeking a determination of the status of the liens pursuant to 11 U.S.C § 506(a), but was also seeking to avoid these liens pursuant to § 522(f).  Not only did the motion fail to cite the correct statute for avoidance of a lien, but it also failed to articulate any demand for relief.  Regardless of which type of relief was being requested, the court determined that this is a matter to be resolved in an adversary proceeding, which requires a complaint and service thereof with a summons on the holders of the liens.  One creditor did not appear at the hearing, and there was no indication that the creditor was served at all.  For these reasons, the court denied the debtor’s motion.

It should be noted that the Court believes there is an important issue of first impression in this Circuit that needs attention: whether § 506(d) permits a chapter 7 debtor to strip off a lien securing a wholly unsecured claim.

 

Ablavsky v. United States Dept. of Education and Western New England University (In re Ablavsky), Adv. P. No. 12-01267-JNF (January 23, 2014).

The Chapter 7 debtor (Case No. 12-18176) brought a complaint against the United States Department of Education (“US DOE”) and Western New England University (“WNEU”), seeking a discharge of his outstanding student loan obligations to them, totaling $82,893.57, pursuant to “undue hardship” under Section 523(a)(8).  The debtor asserted that the repayment of the student loans would impose an undue hardship on him because he suffers from severe mental illnesses that prevent him from obtaining meaningful employment, now or in the future.  After a review of the stipulated facts and evidence presented, including the expert testimony of a psychiatrist, the court concluded that the debtor is substantially impaired by mental illness and cognitive defects and is and will be incapable of repaying the student loans.  Contrary to the US DOE’s contention that discharge would reward the debtor for bad or criminal behavior, the court was convinced that the debtor’s criminal behavior was caused by his mental illnesses.  Accordingly, under either the Totality of the Circumstances or the Brunner test, the court ruled that the debtor demonstrated by a preponderance of evidence that excepting his student loans to both the US DOE and WNEU would impose on him an undue hardship under Section 523(a)(8).  The court entered judgment in favor of the debtor and against the US DOE and WNEU.

 

In re Garajau, Case No. 10-18478-FJB (January 23, 2014).

In this Chapter 13 case, the chapter 13 trustee sought an order modifying the debtor’s confirmed plan. The trustee alleged that an increase in the value of the debtor’s real property, as a result of the post-confirmation settlement of a state court action involving a right of way that serviced the property, has led to new equity and that the resulting funds that must be distributed to general unsecured creditors.  The debtor opposed the motion.

Nine months after confirmation of the debtor’s 36 month plan, the debtor entered into a settlement regarding a state court action in regards to a right of way on the debtor’s real property. This settlement was approved by the bankruptcy court the following week, resulting in the execution of an appurtenant covenant on the right-of-way in question, running with the land forever, ensuring a passageway to the real property and allowing ingress, egress and the parking of vehicles on the property. After the settlement, the trustee requested a new appraisal for the property. This appraisal showed a value of $359,000, which was significantly higher than the $275,913 value listed on the debtor’s initial filing, and provided significant equity in relation to the $281,362 owed on the property.

After the debtor did not move to modify the plan as a result of the new equity in the property, the trustee sought to have the case dismissed. This motion was denied, with the court holding that the Bankruptcy Code does not require a debtor to modify a confirmed chapter 13 plan for any reason. The court also noted that the chapter 13 trustee may herself move to modify a confirmed plan if she believes it should be modified. Accordingly, the chapter 13 trustee filed a motion to modify the confirmed plan, seeking to increase the amount paid to general unsecured creditors from $946 to $76,600 to account for the new equity.

The court denied the chapter 13 trustee’s motion to modify the plan. Citing to § 1322(a), a requirement and necessary condition of confirmation, the court points out that all funds being paid into a plan must be sufficient to both execute the plan, and fund its distributions.  However, the chapter 13 trustee’s proposed increase in distributions is not matched by an increase in funding, rendering such a modification infeasible. In addition to this flaw, the court noted a procedural defect in the chapter 13 trustee’s motion in that she failed to file a plan that incorporates her proposed modification.

 

Ducharme Estates, Ltd. v. Kappeler (In re Kappeler), Adv. P. No. 13-1166-WCH (January 30, 2014).

In the complaint, the plaintiff asked the court to exempt an alleged debt from discharge pursuant to 11 U.S.C. § 523(a)(2)(A) because the debt was obtained by fraud.  The decision whether to grant the debtor’s motion for judgment on the pleadings turned on whether the plaintiff pled its fraud count with particularity sufficient to satisfy Fed. R. Civ. P. 9(b).  The court determined that the complaint did not meet the Rule 9(b) standard because it failed to state the time and place of the debtor’s alleged misrepresentations.  Because the filing of an amended complaint would not prejudice the debtor and an amendment would not be futile, however, the court permitted the plaintiff to file an amended complaint within twenty-eight (28) days.

According to the complaint, in June 2006, the plaintiff hired the debtor to perform electrical work at an expanding assisted living facility. The debtor represented that he was a properly licensed master electrician, that he was competent to perform the work, that he completed the work to code standards, and that all work passed inspection.  Between September 2010 and February 2012, the plaintiff became aware of certain malfunctions and code violations in the electrical work and hired other electricians to uncover and correct the debtor’s work.  Then, on June 25, 2013, the plaintiff filed the complaint.

To determine whether filing an amendment would be futile, the court applied Rule 12(c) standard of review.  Assuming the truth of all well-pleaded facts, and drawing all reasonable inferences in the plaintiff’s favor, the court evaluated the complaint for whether it contained facts to support the six elements of fraud.  The court determined that the debtor’s representation that he was a master electrician could not support a fraud claim, however the complaint sufficiently alleged the elements of fraud for the remaining three representations.  Additionally, two elements of fraud—causation of damages and justifiable reliance—were inherently factual issues not precluded by the facts alleged in the complaint, and thus were premature to evaluate on a motion for judgment on the pleadings.  Here, the court denied the debtor’s motion even though the plaintiff did not attend the hearing and its written opposition was “only one stream of consciousness paragraph.”

 

Contributions by:

John Joy, Boston College Law School

Devon MacWilliam, Partridge Snow & Hahn

Michael K. O’Neil, Murphy & King

Aaron S. Todrin, Sassoon & Cymrot

Ben Zalman

Christopher M. Candon, Sheehan Phinney Bass + Green

Lawsuit against Lyondell Shareholders for Repayment of LBO Proceeds Survives Motion to Dismiss

The Southern District of New York Bankruptcy Court held in Weisfelner v. Fund 1 (In re Lyondell Chemical Co.) that Section 546(e)’s safe harbor for settlement payments of securities transactions does not apply to or preempt a state law constructive fraudulent transfer claim to recover LBO payments to shareholders.  See Decision and Order on Motion to Dismiss, No. 09-10023, Adv. No. 10-4609 (Bankr. S.D.N.Y. Jan. 14, 2014) (Gerber, B.J.).

On January 14, 2014, the Court ruled that the post-confirmation Creditor Trust’s lawsuit against Lyondell shareholders seeking repayment of LBO proceeds as intentional and constructive fraudulent transfers under state law can continue to go forward.

In 2007, Lyondell was acquired in an LBO led by Leonard Blavatnik for $21 billion of debt secured by the company’s own assets.  Shareholders were paid $12.5 billion of the LBO proceeds.  Less than 13 months later, Lyondell filed for bankruptcy under the weight of the LBO debt.  The Creditor Trust argues that the LBO payments allowed shareholders to leap frog unsecured creditors in violation of the absolute priority rule of bankruptcy law that debt is paid before equity.  The clawback action sought to recover $6.3 billion from shareholders to pay creditors.

Generally, the Creditor Trust must allege and prove that the payments to shareholders were made with actual intent to hinder, delay, or defraud creditors (an intentional fraudulent transfer) or made for less than reasonably equivalent value and caused Lyondell to become insolvent, have unreasonably small capital, or be unable to pay its debts (a constructive fraudulent transfer).  Shareholders filed a motion to dismiss on five grounds, which was granted in part and denied in part by the Court.

First, shareholders sought to rely on Section 546(e) of the Bankruptcy Code that provides a safe harbor prohibiting a bankruptcy trustee from avoiding under Sections 544 and 548 of the Bankruptcy Code (except an intentional fraudulent transfer claim under Section 548(a)(1)(A)) certain settlement payments made in securities transactions.  But the Creditor Trust was intentionally structured to avoid the Section 546(e) proscription and did not assert claims under Section 544 or 548.  Instead, the state law fraudulent transfer actions, which could have been brought by a bankruptcy trustee under Section 544, were abandoned by the Debtors and contributed by the individual creditors to the Creditor Trust to be brought on their behalf. 

Judge Gerber followed the recent decision in In re Tribune Co. Fraudulent Conveyance Litig. and held that Section 546(e) is not applicable to the state law actions and further that the claims are not preempted by federal bankruptcy law.  499 B.R. 310 (S.D.N.Y. 2013) (Sullivan, J.). There was no contention that Congress expressly preempted the state law actions.  The Court also could not find field preemption where federal and state fraudulent transfer statutes have coexisted for centuries and Section 544 expressly incorporates state law avoidance actions.  Finally, the Court rejected shareholders’ conflict preemption argument on both impossibility and obstacle grounds.

With respect to obstacle conflict preemption, the Court followed the well-reasoned Tribune opinion and held that state fraudulent transfer laws do not stand as an obstacle to or actually conflict with the full purposes and objectives of Congress.  Judge Gerber recognized that Section 546(e)’s protection of the financial markets from reversal of settled securities transactions was merely one of many competing concerns in federal bankruptcy policy.  Those concerns include the availability of avoidance actions to recover a debtor’s transfers for the ratable and equitable distribution to similarly situated creditors and the absolute priority rule providing that creditors are paid before shareholders.  Further, Congress was well aware of how to expressly preempt state fraudulent transfer laws and did so with respect to charitable contributions.  Because Congress was fully aware of state fraudulent transfer laws and chose not to expressly preempt them with respect to Section 546(e), Judge Gerber could not find conflict preemption.

Even if the policies underlying Section 546(e) were the only federal policies to be implemented (which is not the case), Judge Gerber explained that he still would not have found conflict preemption.  Section 546(e) is concerned with protecting financial markets from a “ripple effect” caused by the insolvency of one securities firm spreading to other firms like falling dominos and threatening a systematic collapse of the market.  Section 546(e) was not added to the Bankruptcy Code with a concern to protect individual investors.  Drawing a line between the needs of the markets and creditors, the Court held that there is simply no systematic market risk in the reversal of LBO payments to shareholders (including financial institutions) at the end of the asset transfer chain.  Judge Gerber followed Tribune in distinguishing the Whyte v. Barclays Bank PLC case arising out of the SemGroup bankruptcy, which involved a single trust bringing both bankruptcy trustee and individual creditor state law fraudulent transfer claims, and “more fundamentally” disagreed with the analysis in Whyte as flawed.  494 B.R. 196 (S.D.N.Y. 2013) (Rakoff, J.).

Second, Judge Gerber rejected as “puzzling” the shareholders’ argument that the LBO payments were never Lyondell’s property because the payments merely passed through Lyondell from the banks to shareholders.  As routinely done, the Court collapsed the transactions of the LBO—(1) the pledge of a security interest in all of Lyondell’s pre-existing property as collateral, and (2) the payment of loan proceeds secured by such collateral to shareholders—to find that the LBO payments constituted property of Lyondell subject to avoidance.

Third, the Court granted the motion to dismiss as to all Defendants that were mere conduits (including nominees or depositories) of LBO proceeds.  An “initial transferee” from which avoidable transfers may be recovered does not include those who are not beneficial owners of the LBO payments.

Fourth, the Court held that the Creditor Trust could not avoid fraudulent transfers on behalf of and for the benefit of the LBO lenders who were participants and must be deemed to have ratified the transfers as part of the LBO.  This is critically important to shareholders because the Creditor Trust will now only be able to recover up to the amount owed to trade creditors and bondholders harmed by and who did not participate in the LBO.

Fifth, with respect to the intentional fraudulent transfers, the Court found that the Creditor Trust failed to allege that CEO Dan Smith controlled Lyondell with respect to the LBO and shareholder payments, whether by influence on remaining Board members or otherwise, to impute his fraudulent intent to Lyondell.  Further, the Creditor Trust failed to identify the particular Debtors that made the fraudulent transfers (although corporate distinctions ultimately could be disregarded under the collapsing doctrine).  The Court dismissed the intentional fraudulent transfer claims as deficient, but with leave for the Creditor Trust to replead the claims to correct the deficiencies.  The Court found sufficient allegations of fraudulent motive with respect to CEO Smith and other corporate officers and directors seeking to enrich themselves through benefits secured in the LBO, including as shareholders of Lyondell, with reckless disregard of the harmful consequences to creditors.  Similarly, the Court rejected shareholders’ argument that the allegations are not plausible because of participation in the LBO by the sophisticated LBO lenders.  Judge Gerber recognized that the LBO lenders were motivated to participate in the LBO to earn substantial fees and the fact that their secured interest ensured payment ahead of unsecured creditors.

The Lyondell decision is another important step with Tribune of repositioning the rights of creditors in front of shareholders in failed LBOs and recognizing that avoiding LBO payments to shareholders at the end of the transfer chain does not implicate the market protection concerns of Section 546(e).  The Tribune and Whyte decisions have been appealed and are being heard in tandem by the Second Circuit early this year.  Case Nos. 13-2653 (2d. Cir.), ECF Nos. 192-93, 198; 13-3992 (2d Cir.), ECF Nos. 33-34, 37. The Lyondell Creditor Trust has filed an appearance as amicus counsel in that actionand an appeal of the Lyondell decision is expected.  These appeals should be closely watched for their effect on the ability of creditors to recover from shareholders of failed LBOs.

Contributed by:

Timothy J. Durken. Mr. Durken is a bankruptcy & restructuring, finance, litigation and transactions attorney at Jager Smith P.C. and may be reached at tdurken@jagersmith.com.