Friday, June 24, 2011

Recent Bankruptcy Decisions from the First Circuit

State law claims barred where they were discharged through Chapter 11 confirmed plan;
good legal analysis of what constitutes “Notice” to a large organization for bankruptcy purposes.

Reyes v. Std Parking Corp., 2011 U.S. Dist. LEXIS 63384, (D.R.I. 6/15/11)(William E. Smith District Judge).  SJ granted to third-party defendant.  One of the defendants  in the negligence action filed for Chapter 11 relief.  The plaintiff and Third-party plaintiff did not file a proof of claim by the bar date in the chapter 11 case.  The Chapter 11 case was confirmed and discharged the claims at issue.
The Court turns first to Standard's (third-party plaintiff) contribution and common-law indemnity claims. Standard asserts that its contribution claim did not exist prepetition because, as required under Rhode Island law, it had (and has) not been adjudged a joint tortfeasor with Rouse nor discharged any shared liability to Reyes. Standard also asserts that its Rhode Island common-law indemnification claim did not exist prepetition because "[a]t the time of Rouse's bankruptcy filing, there was no allegation that the prospective indemnitor, Rouse, was liable to the prospective indemnitee, Standard."

However, Standard's arguments seem to conflate having a valid cause of action under Rhode Island law with the existence of a "claim" under federal bankruptcy law. It is well established that "[t]he accrual of a cause of action under state law does not determine when a claim arises under the Bankruptcy Code . . because the Code  defines 'claim' to include contingent and unmatured claims, which may not yet constitute a cause of action under state law."

In finding that Standard's contribution, common-law indemnity and breach of contract claims arose prepetition, the Court concludes that Standard was required to file proof of these claims with the Bankruptcy Court by the bar date. Since it did not, and because its alternative notice argument fails, see infra, Standard is permanently enjoined from pursuing these pursuant to the Bankruptcy Court's Confirmation Order.  A claimant's prepetition claim against a chapter 11 debtor can survive the bankruptcy plan's confirmation if the claimant received constitutionally inadequate notice of the bar date. As such, Standard now argues that even if its claims arose prepetition, they were not discharged by the Confirmation Order because notice of the bar date was inadvertently sent to One Providence Place instead of its correct address at Eleven Providence Place, in Providence, Rhode Island. In response, Rouse highlights the undisputed facts that (1) Standard received notice at eight other offices around the country, including its corporate headquarters, and (2) Standard implicitly acknowledged receipt of notice when it filed a timely proof of claim against GGP for an unrelated matter in the same bankruptcy proceedings.  In the bankruptcy context, notice to a company's branch or division generally satisfies the due process requirements of notice for the entire company. "A creditor who chooses to operate its business by dividing its activities into various departments cannot shield itself against notice properly sent to the creditor in its name and at its place of business." "Once delivered, it is the responsibility of the creditor to distribute the notice to the appropriate party within its organization."

Bankruptcy Court’s reduction in debtor’s counsel fees affirmed: 

Berliner v. Pappalardo (In re Sullivan), 2011 U.S. Dist. Lexis 63484 (D. Mass. 6/15/11)(Michael A. Ponsor, District Judge).  Appellant, debtor’s counsel, has appealed the  bankruptcy court's reduction in his award of attorney's fees. He has moved to stay the underlying bankruptcy proceeding pending his appeal of the fee ruling. At oral argument, Appellant confirmed that his motion seeks a ruling not merely on the stay, but also on the merits of the appeal, and counsel for Appellee agreed.  While Appellant has presented his arguments ably, the deference afforded a bankruptcy judge's fee decision undercuts any valid basis for appeal or remand. As debtor’s counsel’s fees exceeded the “no look” provision (over $4000) under the local rules, he was required to file a fee application.

Appellant filed a fee application on April 16, 2010, and then filed an amended fee application on April 20, 2010. The amended fee application sought $11,857 in fees and expenses, with $8,173 remaining after application of the $3,684 already paid. On May 28, 2010, the Debtors filed the Second Amended Chapter 13 Plan incorporating the amended fee application.

The Standing Chapter 13 Trustee filed an opposition to the amended fee application, specifically contesting two entries, which totaled 1.6 hours at $110 per hour for services rendered by an associate of Appellant.  More generally, the Trustee questioned whether the Debtors were fully informed that the fees would amount to substantially more than the original estimate.

On June 25, 2010, the bankruptcy court resumed the hearing on the amended fee application. At that time, Appellant argued that the higher-than-usual fee ($11,857 in total) was mainly the result of extensive communications he had with the Debtors to answer a myriad of questions they posed to him.  At the conclusion of the hearing, the bankruptcy judge held that Appellant was only entitled to the amount of the original retainer, $3,684, explaining his ruling as follows: I've reviewed the application in some depth, because I, like the Chapter 13 Trustee, was struck by the amount requested in comparison not only to the initial amount that was projected in the retainer agreement, albeit that retainer agreement was left open-ended, but also in comparison to what are typical charges in cases in this District for similar services. This case appears to me, upon review of the docket, to be relatively uncomplicated. The attorney for the debtor goes to great lengths, some would say in the style of puffery, to indicate the extremely fine services that he renders on behalf of debtors, but one is left at the end with the firm conviction that many of those services are duplicative. They are not necessary for what is still appropriate representation for debtors, and in some respects approaches a level of churning. The hourly rate is not troublesome. The number of hours, however, is.  Stating that Appellant failed to provide "a very good reason" for charging an amount "substantially in excess of what is the norm in the District."

On appeal, a district court reviews the bankruptcy court's fee award only for mistake of law or abuse of discretion. See Lopez v. Consejo de Titulares del Condominio Carolina Ct. Apts., 405 B.R. 24, 30 (B.A.P. 1st Cir. 2009). In assessing fee awards, the district court should afford great deference to the conclusions of the bankruptcy judge, "whose intimate knowledge of the nuances of the underlying case uniquely positions him to construct a condign award." Gay Officers Action League v. Puerto Rico, 247 F.3d 288, 292 (1st Cir. 2001). Because the determination of a reasonable fee "necessarily involves a series of judgment calls," the trial court has "extremely broad" discretion in determining an award, and "an appellate court is far more likely to defer to the trial court in reviewing fee computations than in many other situations." Lipsett v. Blanco, 975 F.2d 934, 937 (1st Cir. 1992).

Denial of discharge affirmed as to debtor but not co-debtor: 

Warchol v. Barry (In re Barry), 2011 Bankr. LEXIS 2203 (BAP 1st Cir. 6/9/11)(Before Bankruptcy Judges Haines, Votolato and Deasy, opinion by Votolato). Debtors, husband and wife, appealed a judgment from the United States Bankruptcy Court for the District of Massachusetts denying their Chapter 7 discharges under 11 U.S.C.S. § 727(a)(2)(A); affirmed as to debtor husband, but reversed as to debtor wife.

Prior to the commencement of this bankruptcy case, the debtor husband was a contractor who was hired to remodel a house. The homeowner paid more than twice the original contracted price but the project failed to progress beyond the demolition phase. The homeowner eventually obtained a judgment against the debtor husband and sought to attach certain property. The debtors granted four mortgages on the property and filed for bankruptcy. The bankruptcy court concluded, based upon the totality of the circumstances, that the debtors acted with actual intent to hinder and delay the collection of homeowner's claim in violation of
11 U.S.C.S. § 727(a)(2)(A)
and denied discharges to both the husband and wife. On appeal, the court concluded that the homeowner had no claim against the wife and, because the estates had not been consolidated, the homeowner was not the wife's creditor and had no standing to object to her discharge. Accordingly, the bankruptcy court committed an error of law in denying the wife a discharge. However, there was ample evidence to support the bankruptcy court's finding that the debtor husband intended to hinder or delay the homeowner's collection of her claim.

The court reversed the judgment as to the debtor wife and affirmed the judgment as to the debtor husband.  The United States Court of Appeals for the First Circuit has ruled that four elements are required to deny a discharge under
11 U.S.C.S. § 727(a)(2)(A): (1) transfer or concealment of property, (2) that belonged to the debtor, (3) less than a year before the bankruptcy petition, (4) with actual intent to hinder, delay or defraud a creditor. To prevail on a complaint seeking denial of discharge under § 727(a)(2)(A), the plaintiff must prove each element by a preponderance of the evidence. Given the serious nature of a discharge denial, the reasons for denying a discharge must be real and substantial, not merely technical and conjectural. In light of the effect on the debtor, a denial of discharge is an extreme step that should not be taken lightly, and, therefore, the provisions of § 727 should be construed liberally in favor of debtors. Objections to discharge should be narrowly construed in furtherance of the Bankruptcy Code's fresh start policy and the claimant must show that its claim comes squarely within an objection enumerated in 11 U.S.C.S. § 727(a)(2). The denial of discharge for pre-petition conduct should be limited to those cases where a debtor's actions are truly blameworthy in an equitable sense.  

In determining whether a debtor possessed culpable intent within the meaning of 11 U.S.C.S. § 727(a)(2)(A), courts traditionally consider the totality of circumstances. Inferences regarding the debtor's actual intent are drawn from the totality of circumstances. The United States Court of Appeals for the First Circuit considers the following indicia of fraudulent intent: (1) insider relationship between the parties; (2) the retention of possession, benefit, or use of the property in question; (3) the lack or inadequacy of consideration for the transfer; (4) the financial condition of the debtor both before and after the transaction at issue; (5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of the debt, onset of financial difficulties, or pendency or threat of suits by creditors; (6) the general chronology of the events and transaction under inquiry; and (7) an attempt by the debtor to keep the transfer a secret. Courts agree that the concurrence of several tell-tale badges of fraud will support a finding that the debtor acted with the necessary fraudulent intent. A bankruptcy court may not deny a co-debtor a chapter 7 discharge under 11 U.S.C.S. § 727(a)(2)(A), regardless of the co-debtor's intent, in the absence of consolidation, when the complaining party is not his/her creditor as required by 11 U.S.C.S. § 727(c)(1).  Courts have made clear that withholding funds from one creditor to pay another does not absolve a debtor of the violation of § 727. The mere fact that a debtor's actions were intended to benefit some creditors does not necessarily preclude a finding that the debtor also intended to hinder or delay another creditor, thus warranting denial of a discharge.  When a debtor, with the "wolf at the door," chooses to make sizable transfers of nonexempt property, the debtor had better have a story to tell.   Judgment affirmed as to debtor but reversed as to co-debtor wife.

Debtor's case dismissed and Bankruptcy Court enters two-year bar to any re-filing: 

In re Heredia and Cordero, 2011 Bankr. LEXIS 2254 (Bankr. D.P.R. 6/9/11)(Brian K. Tester, Bankruptcy Judge).   The Debtors made only one of eight payments currently due under the chapter 13 plan. Since 2002, Debtors have filed four bankruptcy cases (including the present case) in the District of Puerto Rico, all of which have been dismissed for failure to make plan payments. The United States Trustee requests that the granting of the Debtors' voluntary dismissal  be conditioned upon a bar to re-file to prevent abuse of the bankruptcy process.  Bankruptcy courts have authority to dismiss bankruptcy cases and bar a debtor from re-filing. 11 U.S.C.A. § 349(a). In an effort to prevent abuse of the bankruptcy system, several bankruptcy courts have barred debtors who have filed multiple cases in bad faith from re-filing. See In re Price, 304 B.R. 769, 774 (Bankr. N.D. Ohio 2004) (imposing a 360-day bar on a debtor who filed six petitions in six years, in conjunction with non-debtor spouse, to prevent mortgage holder from foreclosing on property); In re Craighead, 377 B.R. 648, 657 (Bankr. N.D. Cal. 2007) (imposing a three-year bar on debtor after finding that the six filings by debtor and the sixteen filings by family members of debtor were filed in a bad-faith attempt to avoid foreclosure); In re Gonzalez-Ruiz, 341 B.R. 371, 386 (B.A.P. 1st Cir. 2006) (upholding bankruptcy court's authority both to dismiss debtors' fourth successive Chapter 13 case, and to bar debtor from re-filing for 180 days for lack of good faith).

The majority of bankruptcy courts use a "totality of the circumstances" test to determine whether a Chapter 13 petition has been filed in bad faith, evaluating six factors: (1) the debtor's accuracy in stating his debts and expenses, (2) the debtor's honesty in the bankruptcy process, including whether he or she has made any misrepresentations to the court, (3) whether the Bankruptcy Code is being unfairly manipulated, (4) the type of debt sought to be discharged, (5) whether the debt would be dischargeable in a Chapter 7, and (6) the debtor's motivation and sincerity in seeking Chapter 13 relief. Gonzalez-Ruiz at 383. The final factor is particularly relevant to this case, as the Debtors have a history of failing to make plan payments, raising concern as to their motivation and sincerity in seeking Chapter 13 relief. To prevent further abuse of the bankruptcy process, this Court adopts the United States Trustee's position conditions its dismissal of the Debtors' current case on a bar to re-file a bankruptcy petition in any jurisdiction for two (2) years.In accordance with the abovementioned, this Court GRANTS the Debtors' motion for voluntary dismissal , and adopts the United States Trustee's position and therefore impose a bar to re-file another bankruptcy petition in any jurisdiction for two (2) years.

Section 108 saves secured creditor from application to obsolete mortgage act:

IN RE SHAMUS HOLDINGS, LLC  v. LBM FINANCIAL, 2011 U.S. App. LEXIS 11674 (1st Cir. 6/9/11).  First Circuit affirmed the District Court:  Appellant debtor challenged a decision of the U.S. District Court for the District of Massachusetts, which reversed a bankruptcy court decision that appellee creditor's mortgage was null and void. The debtor filed a voluntary Chapter 11 petition, triggering the automatic stay, 11 U.S.C.S. § 362(a), and halting an anticipated mortgage foreclosure sale by the creditor. The Obsolete Mortgages Statute, Mass. Gen. Laws ch. 260, § 33, required the creditor, on pain of forfeiture, to take action to enforce it within five years after the end of the mortgage's stated term, unless the creditor recorded an extension.

The mortgagee, LBM, was not under any legal compulsion to choose the option of obtaining an extension but, rather, was free to choose the option of judicial foreclosure. See Mass. Gen. Laws ch. 244, § 1; see also In re Morton, 866 F.2d at 567. The exercise of the latter option was temporarily blocked by the operation of the automatic stay. That LBM may have been able to extend the limitations period by the performance of a ministerial act unhindered by the automatic stay is immaterial. See In re Spirtos, 221 F.3d at 1081. Thus, as the district court correctly held, section 108(c) extends the time within which LBM could act to enforce the mortgage.
Shamus contends that the Obsolete Mortgages Statute must control, regardless of the automatic stay, because rights in real property devolve from, and are defined by, state law. This contention misconceives the role of state law in federal bankruptcy proceedings.  We hold that 11 U.S.C. § 108(c) tolls the limitations period set by the Massachusetts Obsolete Mortgages Statute, thereby enlarging the time within which LBM can bring a judicial foreclosure action until after the termination or expiration of the automatic stay. It follows inexorably that the district court did not err in ruling that LBM's mortgage remains in force.  We take no view as to how long LBM will have, after the lifting of the automatic stay, to commence a judicial enforcement action.

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