Saturday, June 11, 2011

Recent Decisions from the First Circuit

Shamus Holdings LLC v. LBM Financial, LLC, (1rst Cir. 6/9/11)(Before Appellate Judges Howard, Selya and Thompson, Opinion by Justice Thompson).
First Circuit affirmed the District Court’s reversal of the Bankruptcy Court:  Foreclosure sale of commercial property that secured a guaranty was stayed by the automatic stay when the debtor filed a Chapter 11 bankruptcy petition.  The Mass. Obsolete Mortgage statute requires that a mortgagee enforce its instrument or extend it by operation of law with a five-year extension recording.  Here, that five-year time period would have expired during the mortgagor’s Chapter 11 case. The mortgagee could avoid this by simply filing an extension. The mortgagee’s position was that it could not, due to the automatic stay, and that such time period of extension was protected by Section 108(c) of the Bankruptcy Code.  The Bankruptcy Court incorrectly held the mortgage was avoided, because the extension was no more than a ministerial act the lender should have take that would not have violated the automatic stay.

Sua sponte Appointment of a Chapter 11 Trustee affirmed on appeal:
KEVEN A. MCKENNA, P.C., Appellant, v. OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellee, 2011 U.S. Dist. Lexis 57985 (D. Mass. May 31, 2011)(Mary M. Lisi, Chief United State District Judge).  The Chapter 11 DIP appealed the Bankruptcy Court’s order which sua sponte appointed a Chapter 11 Trustee.  The appeal was denied and the order affirmed.  The Bankruptcy Court had held a hearing to determine whether to convert from Chapter 11 to 7, based upon the motion of the Committee of Unsecured Creditors, the DIP being a law firm.  Taking the matter under advisement, the Court undertook the conversion and dismissal analysis, concluding that it would be in the best interests of creditors to appoint a Chapter 11 Trustee, based upon the totality of the circumstances, notably the recalcitrance and conduct the equity stakeholder in the firm.  The order appointing a trustee is a final order, appealable to the District Court.  When read together, §§ 1112(b)(1) and 1104(a)(3) require a court to consider three alternatives.  "If cause has been shown by the moving party, the [c]ourt must consider whether to dismiss the case, convert the case to one under Chapter 7, or appoint a Chapter 11 trustee, whichever results in the best interest of creditors." § 1104(a)(3) gives the court discretion to appoint a trustee instead of converting or dismissing the case if the court determines the appointment is in the best interest of the creditors and the estate). Once cause has been shown, instead of either conversion or dismissal, a court may appoint a trustee if such appointment is in the best interest of the creditors and the estate).  The court determines which approach is appropriate based upon the record. The preponderance standard applies to a cause determination pursuant to Section 1112(b). On the other hand, it appears that the clear and convincing standard applies to the appointment of a trustee pursuant to Section 1104.  It appears that the majority applies a clear and convincing standard . . . while the minority uses a preponderance of the evidence standard. Courts in the First Circuit have not directly determined what evidentiary standard to apply when determining the burden under  Section 1104. The Court need not decide which standard applies because, in this case, the facts adduced at the hearing were largely uncontested and they would support a finding under either standard. The Court acknowledges that the appointment of a Chapter 11 Trustee has been described as an extraordinary act.

Dismissal of Involuntary petition improper when summons could be reissued, and thus related motion for reconsideration was improper as well:
EDWARD ST. PETER, Appellant, v. FREDERICK HUTCHINGS, Appellee., 2011 Bankr. Lexis 2039 (BAP 1st Cir. May 25, 2011)(Before Judges Haines, Votolato and Deasy, Opinion by Deasy).  Pro se appellant judgment creditor sought judicial review of a decision by the United States Bankruptcy Court for the District of Massachusetts dismissing the involuntary petition he filed against pro se appellee Chapter 7 debtor and denying his motion for reconsideration. The petition was dismissed for the creditor's failure to timely serve the debtor. The creditor claimed that the bankruptcy court committed several errors related to the service of the summons, including having failed to give him the opportunity to re-serve the summons where the deadline for service had not yet expired under Fed. R. Civ. P. 4(m). The only consequence of the creditor not having served a summons on the debtor 14 days after it was issued was that the summons he held was no longer valid. The deadline for him to serve a summons had not expired; it was six weeks hence. The relief the creditor sought by the extension motion was unnecessary and it could have been denied as moot. Regardless of the reasons for the denial of the extension request, he still had time and opportunity to request and serve a valid summons on the debtor. Based on the slim record and in the absence of any rationale for the bankruptcy court's rulings, it erred in entering the dismissal order and abused its discretion in denying the reconsideration motion.  The decision of the bankruptcy court was reversed, and the case was remanded.  Although Fed. R. Bankr. P. 7004(e) requires delivery of the summons within 14 days after issuance, failure to serve it in that time period only renders the summons invalid and the service ineffective. Typically, the remedy for failing to serve a summons within the 14 days provided in Rule 7004(e), but before the 120 days provided in Fed. R. Civ. P. 4(m), is not dismissal but the issuance of a new summons. The exclusive cure for defective service, when recognized within the 120-day service period, is re-service. Fed. R. Bankr. P. 7004(e) does not limit the number of summonses a plaintiff may receive for the purposes of curing defective service. 
Debtors cannot “pre-pay” Chapter 13 plan and must fully complete the 60-month plan, as confirmed:

IN RE: EVAN S. FILION AND SHELLYE R. BLAKE, 2011 Bankr. LEXIS 1641 (Bankr. D. Mass. May 3, 2011)(William Hillman, Bankruptcy Judge).
Bankruptcy debtors paid the full amount contemplated by their Chapter 13 bankruptcy plan to the trustee two months prior to expiration of the five-year period of their plan. The debtors moved for entry of a bankruptcy discharge. The debtors contended that they paid all amounts due under the plan and thus were entitled to an immediate discharge, even though the plan period had not yet expired. The bankruptcy court held that, while the debtors paid the full amount contemplated by their confirmed plan, they did not do so according to the plan provisions which provide for a term of five years. Five years was the applicable commitment period required for the above-median income debtors' plan under 11 U.S.C.S. § 1325(b)(1), the period was mandatory to obtain confirmation of the debtor's plan, and the debtors were not entitled to a discharge until the expiration of the applicable five-year commitment period.  Under 11 U.S.C.S. § 1329(a), a Chapter 13 bankruptcy plan may be modified on motion of the bankruptcy debtor, trustee, or holder of an allowed unsecured claim at any time after confirmation of the plan but before the completion of payments under such plan, here although 60 months had not expired, all plan payments had been made. If a bankruptcy trustee or the holder of an allowed unsecured claim objects to confirmation of a Chapter 13 plan of a bankruptcy debtor with positive projected disposable income whose plan provides for a less than full recovery for unsecured claimants, the plan cannot be confirmed unless it provides that all of the debtor's projected disposable income to be received in the applicable commitment period will be applied to make payments over a duration equal to the applicable commitment period set forth in 11 U.S.C.S. § 1325(b).  
Creditor’s objection to homestead sustained as debtor did not own the home, their LLC did, at the time the exemption was recorded:

In re JAMES M. KANE and SUSAN A. KANE, 2011 Bankr. LEXIS 2007 (Bankr. D. Mass. 5/23/11)(Joan N. Feeney, Bankruptcy Judge).
A creditor objected to the homestead exemption claimed by debtors, on the ground that title to the property was in the name of a Massachusetts limited liability company (LLC). The creditor maintained that their homestead was invalid because they were not the owners of the property at the time they recorded the homestead. Because debtors claimed the property reverted to them upon dissolution of the LLC, the court had to determine whether they could affirmatively pierce the veil of the LLC to, in effect, regain title to the property which they had conveyed to the LLC in 2004. Even exempt property had to initially be regarded as property of the estate and then claimed and distributed as exempt. The dissolution of the LLC did not terminate the existence of the LLC or effectuate a transfer of the property to the debtors. The LLC continued and, indeed, continued, to exist. The undisputed facts established that the LLC granted a mortgage on the property to a bank, which the debtors did not allege that they guaranteed. The LLC had a business checking account and creditors. Debtors, as members of the LLC, were not entitled to a distribution of the equity until resolution of outstanding claims. The undisputed facts established that the property was not property of the bankruptcy estate. Rather, the debtors' membership interests in the LLC were personal property which was property of their bankruptcy estate. The creditor had met its burden of effectively challenging the claimed exemption. The creditor's objection to the debtors' claimed homestead exemption was sustained. Fed. R. Bankr. P. 4003(c), places the burden of proof on the objecting party to establish that an exemption is not properly claimed. This rule reflects the Bankruptcy Code provision making a debtor's properly listed exemptions presumptively valid. 11 U.S.C.S. § 522(1). If the objector introduces evidence effectively challenging the exemption, the burden shifts to the debtor to produce evidence in support of his claim. If the objecting party can produce evidence to rebut the exemption, the burden of production then shifts to the debtor to come forward with unequivocal evidence to demonstrate that the exemption is proper the burden of persuasion, however, always remains with the objecting party.

Demo costs are an administrative expense:

In re Nichols, Chapter 13 Case # 10-1221 (William C. Hillman, Bankruptcy Judge)(Bankr. D. Mass. June 7, 2011).
Costs and fees incurred in the demolition, post-petition, of barn on debtor’s property due to unsafe conditions, were granted administrative priority.  Fees were limited to reasonable fees, and were thus reduced.

City to pay damages for stay violation:

Bererhout and Fiorita v. City of Malden,(In re Bererhout and Fiorita), Chapter 13 Case # 09-18956, Adv. Pro.09-1314(Joan N. Feeney, Bankruptcy Judge).
Debtors proved that City violated automatic stay by placing an administrative hold on their vehicle registration due to unpaid parking tickets, even though on notice of the petition filing.  Debtors were awarded their attorney costs and fees plus $1000 in emotional distress damages.

Not clear whether lender fit within the confines of a non-dischargeable student loan:

Liberty Bay Credit Union v. Belforte (In re Belforte), Chapter 13 Case #10-22742, Adv. Pro. 11-1008 (Bankr. D. Mass. 5/24/11)(Joan N. Feeney, Bankruptcy Judge).
Creditor sought to determine its loan was non-dischargeable as a student loan, for which summary judgment could not be granted as there were genuine issues of material fact as to whether the lender fit within the discharge exception i.e. (1) educational loan (2) made as part of a program by (3)a non-profit institution.

Costs and fees to debtor:

Eresian v. Scheffer (In re Scheffer)(unpublished), Chapter 7 Case # 06-41218, Adv. Pro. #11-4008 (Melvin Hoffman, Bankruptcy Judge).  Costs and fees awarded to debtors’ defense of vexatious litigation by alleged creditor, baselessly seeking revocation of order of discharge.

Creditor did not have a security interest in debtor’s assets or liquor license:

In re: JOJO'S 10 RESTAURANT, LLC, Debtor. JOJO'S 10 RESTAURANT, LLC, Plaintiff v. DEVIN PROPERTIES, LLC et al, Defendants, 2011 Bankr. LEXIS 2009 (D. Mass. May 20, 2011)(Melvin S. Hoffman, Bankruptcy Judge).
Plaintiff debtor commenced an adversary proceeding against defendant creditor seeking, inter alia, a declaratory judgment avoiding the creditor's security interest in the assets of the debtor for lack of perfection, a judgment avoiding the creditor's security interest pursuant to 11 U.S.C.S. § 544. Before the court were the motions for summary judgment of the creditor, and debtor's successor, the Chapter 7 bankruptcy trustee. None of the transaction documents in the case (except the pledge agreement, which applied only to the liquor license) contained language in which the debtor granted a security interest to the creditor. Without an authenticated security agreement, the secured transaction between the debtor and the creditor failed the test for enforceability. Accordingly the creditor's security interest in the physical assets never attached. With respect to the pledge of the liquor license, although the debtor authenticated the pledge agreement by signing it, the debtor did not have sufficient rights in the liquor license (Mass. Gen. Laws. ch. 138, § 23 required that a debtor must receive approval from both the local licensing authority and the state Massachusetts Alcoholic Beverage Control Commission before a liquor license may be pledged). As debtor failed to secure the necessary governmental approvals to pledge the liquor license to the creditor, it did not acquire "rights in the collateral."  The court denied the creditor's motion for summary judgment and granted in part the trustee's motion for summary judgment determining that the creditor had no security interest in the debtor's assets. The remaining portion of the trustee's motion for summary judgment seeking to avoid the creditor's liens pursuant to 11 U.S.C.S. § 544 was thus moot.

From Rhode Island:
Judge Votolato voluntarily abstained from determining the validity of the creditor’s pre-petition mortgage foreclosure, allowing the stay to be lifted to reduce to judgment these matters in state court. In re Mruk, Chapter 7 Case # 11-11306 (Bankr. D.R.I. 5/27/11).

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