Friday, March 25, 2011

Recent Decisions in the First Circuit

Trustee settles claims over debtor's objection, issues of waiver on appellate issues:

Yacovi (In re Yacovi) v. Rubin and Rudman LLP, 2011 U.S. App. Lexis 28718 (1st Cir. March 18, 2011) (Before Justices Lynch, Souter [Retired Supreme Court Justice, sitting by designation] and Stahl, Opinion by Justice Stahl).
District Court affirmed the Bankruptcy Court’s decision to approve the settlement as did the First Circuit.  Chapter 7 trustee settled malpractice claims against former counsel to the debtor, which the debtor objected as “too low”.  Debtor further contended if the Trustee was going to settle so low, the trustee should have abandoned the action to the debtor to pursue, which position was deemed abandoned on appeal.  The First Circuit noted, without deciding, that there is a circuit split as to whether the failure to list an issue in the statement of issues on appeal per Bankruptcy Rule 8006 results in a waiver of that issue.

Debtor incurred $226,000 pre-petition judgment against him for breach of an employment contract later determined to be non-dischargeable, which debtor claimed was done on advice of counsel.  Later, debtor moved to reopen his no-asset chapter 7 case, to assert claims of malpractice against his former counsel, which the trustee settled for $25,000.  Neither the trustee or debtor raised the issue of the debtor having standing to pursue the claims versus the chapter 7 trustee, but the First Circuit was able to dispose of the case on the merits, notwithstanding.  Citing Circuit precedent, the Trustee is to be given deference for its decisions, and the settlement examined whether it falls within the lowest point in the range of reasonableness, which the court concluded it did.  While the appellate court would have preferred more than the four sentence opinion of the bankruptcy court, the record reflected the issues were adequately briefed on both sides and a decision rendered after a hearing which together as factors supported the affirmance by the appellate court.

Towns violated automatic stay in notice and billing practices:

Doolan v. Town of Pembroke, 2011 BNH 2 (March 14, 2011)(J. Michael Deasy, Bankruptcy Judge).
Multiple debtors asserted that creditors, New Hampshire town tax authorities, violated various provisions of the automatic stay by sending various notices of impending tax liens and an arrearage, and execute such lien for delinquent property taxes.  The court considered, as  a matter of first impression , whether certain tax lien procedures under state law followed by the towns were violations of the automatic stay of 11 U.S.C. §362, or were excepted from the stay.  One debtor also claimed the town was in contempt of the order confirming its chapter 13 plan by imposing and collecting interest on the obligations.  One town conceded that it applied payments made to the wrong year, and as a result sent notices for unpaid taxes for years when in fact those taxes were paid. The court scheduled a hearing on actual damages, costs and fees, but noted that punitive damages were not available against a governmental unit per 11 U.S.C. §106(a)(3).

Court held that the Towns at issue violated the automatic stay under §362(a)(4), (a)(5), and (a)(6 ) by sending the various debtors a notice of arrearage and a notice of impending tax lien that included a demand for payment and threatened to execute a tax deed on the property if the arrearage was not redeemed, and that one Town was in contempt of the debtor's Chapter 13 confirmation order because it applied post-petition payments by the debtor to the pre-petition arrearage and accrued interest on the pre-petition arrearage at a rate different than provided in the debtor’s confirmed Chapter 13 plan. 

Court analyzed the steps the NH taxing authorities undergo to achieve a valid lien for unpaid taxes and how the steps impact upon the automatic stay of 11 U.S.C. § 362.  Further, the court determined that the decision was applicable to the towns before it, but as to all other taxing authorities the impact was prospective, not retroactive.

Unliquidated personal injury debt not discharged:

Hermosilla v. Hermosilla, 2011 U.S. Dist. Lexis 28718 (D. Mass. March 11, 2011)(Nancy Gertner, District Judge).
Debtor appealed the Bankruptcy Court’s finding that the unliquidated debt for personal injury owed to his former spouse was not discharged per 11 U.S.C. §Section 523(a)(6).  Non-debtor former spouse moved to dismiss the appeal as untimely and for the costs and fees to defend a frivolous appeal.  The District Court granted the motion to strike the debtor’ brief as untimely, but of necessity had to decide the underlying appeal to determine whether it was frivolous.  Upon consideration, the appeal was determined to be frivolous. The debtor asserted the statute of limitations barred the action, but it could not have run due to the automatic stay being in effect; the debtor asserted triable issues on his intent to harm his former spouse and whether she was actually injured when he in fact stipulated to having done so in his pretrial statement; debtor argued bankruptcy court lacked subject matter jurisdiction to declare the claim nondischargeable when the bankruptcy court certainly had standing to determine if an unliquidated claim was non-dischargeable, and was not barred from doing so, even though the spouse had not yet filed suit because she was precluded from doing so by operation of the automatic stay.  Case remanded to the bankruptcy court to determine the costs and fees incurred by the debtor’s former spouse relevant to the appeal.

Discharge deadline for objections:

Belice v. Belice, 2011 Bankr. Lexis 710 (BAP 1stLamoutte, Haines and Deasy, Opinion by Judge Lamoutte).
Creditor appealed the Bankruptcy Court’s order dismissing its adversary proceeding for failure to state a claim.  Pro se creditor sought to revoke the debtor’s discharge or deny the dishchargeability of its debt for failure to notice the creditor of the bankruptcy case.  Debtor misspelled the creditor’s first and last name and listed the creditors last known address, despite knowing the creditor was incarcerated.  Creditor filed his non-dischargeablity action after he learned of the bankruptcy filing. 

Bankruptcy Court ruled the creditor failed to state a claim under 11 U.S.C. §727(e)(1) as the claim was untimely.  Although the deadline in §727(e)(1)  was jurisdictional, and not subject to equitable tolling, the address the debtor used in its matrix for the creditor was not reasonably calculated to provide the creditor with notice.  As such the complaint presented a plausible case for relief under 11 U.S.C. §523(a)(3), and it was error then for the bankruptcy court to dismiss the complaint.  A debtor is held to a standard of reasonable diligence in ascertaining and listing all creditors.  If a debtor would avoid the effect of the omission of a creditor's name from the schedules the debtor must prove the facts on which he or she relies.  If the creditor is able to show that the address was inadequate for the purposes intended, the burden then shifts to the debtors to show that, notwithstanding the incorrect address, the creditor had timely notice or actual knowledge of the case.

Fees denied where accountant was not disinterested:

In re Liebfried Aviation, 2011 Bankr. Lexis 681 (Bankr. D. Mass. Feb 25, 2011)(Melvin S. Hoffman, Bankruptcy Judge).
Accountant's fee application denied, and all post-petition fees and costs ordered disgorged when it was learned the accountant was not disinterested, and failed to disclose he did work for the debtor’s principal and related companies before the filing.

TILA and notice and rescission:

Sousas v. Wells Fargo Bank, 2011 BNH 3 (Bankr. D.N.H. March 14, 2011)(J. Michael Deasy, Bankruptcy Judge)[unreported opinion].
Court found in favor of the Chapter 13 debtors that the bank violated TILA by failing to make certain disclosures at their loan closing, allowing the debtor to rescind the loan. The Truth in Lending Act requires that the borrower must receive two copies of a notice of right to rescind. 12 C.F.R. § 226.23(b). In the event the copies are never furnished, the right to rescind does not expire until three years after consummation. 12 C.F.R. § 226.23(a). If the borrower chooses to exercise his right of rescission, he is not liable for any finance or other charges, and any security interest given by the borrower becomes void upon such a rescission. 15 U.S.C. § 1635(b)

The evidentiary issue of import was whether the debtor’s testimony alone was sufficient to rebut the presumption of receipt of the required notices, which the Court found it was.  According to the "bursting bubble" theory, a party need only introduce rebutting evidence that is sufficient to support a finding contrary to the presumed fact. Once the presumption is rebutted, the court makes its decision as any ordinary issue of fact. On the other hand, under the Morgan view, a presumption shifts the burden of proving the nonexistence of the presumed fact to the opposing party. The common understanding of Fed. R. Evid. 301 is that it embodies the bursting bubble theory. First Circuit precedent has reasoned that Rule 301 provides only that a presumption shifts the burden of going forward with evidence to rebut or meet the presumption and therefore the presumption has no probative effect once rebutted. Simply stated, once a rebuttable presumption arises, the party with the burden of going forward must bring forth evidence that would support a jury finding the nonexistence of that presumed fact and if done successfully, the presumption vanishes. The First Circuit has adopted this view.

In the case where a borrower rescinds and the creditor does not acknowledge the rescission, the Truth in Lending Act is silent. Some courts have held that a debtor may be relieved of its tender obligations where the creditor does not comply with its statutory duties. Such a remedy is viewed as a harsh one, but a court may impose it using its equitable powers in situations where creditors have not acted in good faith. The right to rescind is an equitable doctrine subject to equitable considerations. Courts are to consider traditional equitable notions in applying the statutory grant of rescission. Even where the statute does not require the debtor to tender first, the court may condition return of property to the debtor upon return of property to the creditor. Therefore, a court may tailor a remedy that is substantiated by the facts of the case.  

A good faith belief that the Debtor did not have a right to rescind justified Wells Fargo's delay here in honoring the debtor's rescission request.  Furthermore, the debtors have not tendered the money they received to Wells Fargo.  At trial, the debtor testified that she was seeking financing to cover the monies lent by Wells Fargo in the Transaction, but so far has been unable to do so. Finally, the debtors have not offered any evidence that Wells Fargo has attempted to either cheat or deceive them. Therefore, the Court will enter a final judgment requiring the Sousas to tender to Wells Fargo the actual money lent minus any finance charges and payments made on the loan after and directing Wells Fargo to cancel its security interest upon satisfaction of the Sousas' obligation.

Excusable neglect in lateness not found (attorney not knowing the rules is not an excuse):

In re Mitchell, 2011 Bankr. Lexis 814 (Bankr. D. Mass. March 2, 2011)(Joan N. Feeney, Bankruptcy Judge).
Debtor’s motion to dismiss appeal was granted, as the creditor’s lateness was not due to excusable neglect, the court reviewing the applicable standards for excusable neglect (which did not include creditor’s counsel not understanding the appellate rules).

Disclosure statement objection  and obj. to confirmation:

In re Walsh, 2011 Bankr. Lexis 780 (Bankr. D. Mass. March 8, 2011)(William C. Hillman, Bankruptcy Judge).
Secured creditor objected to the Chapter 11 debtor's disclosure statement, for the two classes it was a member, which the court preserved as an objection to confirmation. Creditor voted “no” on the plan in its two classes.  Assuming the existence then of a dissenting class, the individual debtor’s plan must comply with 11 U.S.C. §1129(b).  Further, the debts the debtor owed to a bank secured by mortgages on them could not be cross-collateralized because the debtor did not sign the mortgages as the “borrower”.

Equitable subordination:
In re Wolverine, Proctor & Schwartz LLC, Chapter 7 debtor Case 06-10815-JNF, Adv. Pro. 07-1179 (Bankr. D. Mass. 1/21/11)(Joan F. Feeney, Bankruptcy Judge)[unreported].
In an 80-page decision, the Bankruptcy Court denied the Chapter Trustee’s motion to equitably subordinate a claim under 11 U.S.C. §510(c) finding misconduct a pre-requisite, not established by the trustee here.  Secured creditor did not engage in inequitable conduct that injured creditors.  characterize the debt in question as debt or an equity contribution (it was debt), and insider status (not found) in the secured creditor’s limited liability company.

Sale of assets over debtor's objection:
In re Ivy Restaurant Group, Inc., Chapter 7 debtor, 10-18394-JNF (Bankr. D. Mass. 1/24/11)[unreported].
Bankruptcy Court granted the Chapter 7 trustee’s motion to sell the assets of the defunct restaurant, over the objection of its former President who claimed to own five of the items.  However, the debtor’s schedules which he himself completed were contrary to this assertion,

jurisdicition raised sua sponte:
Ostrander v. Surprise (In re Surprise, Chapter 7), (Bankr. D. Mass. 1/14/11)(Henry J. Boroff, Bankruptcy Judge)[unreported].
Court, sua sponte, dismissed third-party complaint for lack of jurisdiction. Pre-petition, in contemplation of divorce, debtor conveyed his interest in the residence to wife and wife disclaimed her interest in his retirement benefits; they subsequently reconciled.  Later, the husband only filed for Chapter 7 and the Chapter 7 Trustee sought to avoid against the wife the transfer of the husband’s interest in the home as a fraudulent conveyance.  Wife brought a third-party complaint action against the bankruptcy attorney for malpractice.  Bankruptcy Court held that the third-party claim did not arise in, arise under nor was it related to the bankruptcy case since any recovery would go to the wife alone on the third-party complaint.

cannot escrow right to rescind:
Botcher v. Emigrant Mortgage Co., (Bankr. D. Mass. 12/22/2010)( Melvin S. Hoffman, Bankruptcy Judge)[unreported].
Notice of right to rescind within three days, with written confirmation that this right was not exercised was signed by borrower at closing, and then held in escrow for three days, rather than executed more than three days later  - doing this violated the Mass. law equivalent of TILA, and thus adequate notice of borrower’s right to cancel loan was not provided. Thus, debtor satisfied 4 prongs of injunctive relief to move against bank.

Exempt severence payments:
In re Gonsalves, Chapter 7, (Bankr. D. Mass. 12/21/10) (Joan N. Feeney, Bankruptcy Judge)[unreported].
Debtor had right to exempt his right to receive severance payments at the commencement of the case under §§522(d)(10)(C) and (E), as it was in the nature of an unemployment benefit and based on length of service. Trustee did not satisfy his burden to prove the exemption was not proper.

frivolous pleading:
In re Baytarian, Chapter 7, Bankr. (D. Mass. 1/11/11)(Joan N. Feeney, Bankruptcy Judge)[unreported].
Court entered OSC per Fed. R. Bankr. P. 9011 (c)(1)(B) against debtor’s counsel for allegedly filing a pleading for an improper purpose and without his client’s consent; Court withdrew its OSC upon the attorney’s affidavit that his fee agreement gave him authority to file procedural motions on his own initiative and the debtors failed to comply with the safe-harbor provisions of Rule 9011.

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