Recent Decisions in the First Circuit regarding Bankruptcy

Debtor has absolute right to hearing on damages for stay relief violations:


Laboy v. Doral Mortgage Corp. (In re Laboy), 2011 U.S. App. Lexis 10881 (1st Cir. 5/27/11)( Before Circuit Judges Torruella, Lipez and Thompson, Opinion by Thompson).  On appeal from the BAP, debtors claim they were deprived of a hearing on damages due to them as a result of the appellee's willful violation of the automatic stay, with which the First Circuit agreed and remanded the case to do so. Creditor recorded a deed to perfect its interest after the Chapter 13 case was filed, and while the automatic stay was in effect. The bankruptcy court initially held that the attempt to perfect its mortgage fell under an exception to the automatic stay, at 11 U.S.C. §363(b)(3), then later reversed itself finding the creditor was aware of the bankruptcy case and the act to perfect was then a violation of the automatic stay.  The creditor untimely appealed this decision. Next, the debtors asked for damages for this stay violation, for which the bankruptcy court summarily decided that cancellation of the mortgage was remedy enough.  Debtors appealed to the BAP, which affirmed.  After winning summary judgment on the issue of liability, the First Circuit held that the debtors had an absolute right to present evidence on the resultant damages.  Damages fall under §362(k).


Annuity not exempted under Mass. law:

In re LeClair, 2011 Bankr. Lexis 1867 (Bankr. D. Mass. 5/18/11)(Melvin S. Hoffman, Bankruptcy Judge).  Chapter 7 trustee objected to debtor’s exemption (Chapter 7 case) for an annuity, which was sustained. Although it appeared that the annuity qualified as an individual retirement annuity under I.R.C. Section 408(b), it did not follow automatically that it was entitled to the protection of the Mass. State statute, and debtor used the state exemption scheme.


Priority of liens in relation to mechanics lien:

In re McLaughlin, 2011 BNH 5; 2011 Bankr. Lexis 1656 (Bankr. D.N.H. 5/4/11)(unreported)(J. Michael Deasy, Bankruptcy Judge). Bank and mechanic lienor disputed distribution of proceeds of sale of debtor’s real property.  In New Hampshire, any person who performs labor or furnished materials to the amount of $15 or more for erecting a house, by virtue of a contract with the owner, shall have a lien on any material furnished and on said structure, per RSA 447:2.  The mechanic’s lien arises by operation of law.  The contract does not need to be in writing and may be implied from the furnishing of materials which were used in the construction of the building.  Once a lien is created, it will expire unless it is perfected in a timely manner after completion of the contract.  To perfect a mechanic's lien, a party must acquire an attachment after the contract is completed on the specific property to which it supplied materials. Upon completion of the contract from which the mechanic's lien arose, a single indivisible lien for the whole is created. The mechanic's lien continues for 120 days after completion of delivery of goods or performance of services under the contract. The lien must be perfected before it expires. RSA 447:9. The time starts to run not from the date the mechanic's lien accrues but from when the final bill is sent or the last work is completed under the contract.  In order to continue or secure a mechanic's lien, the lien holder must attach the property by writ and return thereon distinctly expressing that purpose, within the 120 day period. RSA 447:10. After the mechanic's lien is validly perfected, it has priority over any interests that were created after.  A builder's need for materials is not satisfied until those materials arrive at the construction site. Therefore, the mechanic lienor first furnished materials when it actually delivered them to the Property, not when the materials were ordered. As a result, it's mechanic's lien arose the day the materials were first furnished. Since its mechanics lien arose seven days after the Bank's attachment, its claim is junior to the Bank.


Cash collateral and IRS interest in it:

In re Reitter Corp., 2011 Bankr. Lexis 1801 (Bankr. D.P.R. 5/12/11)( Enrique S. Lamoutte , Bankruptcy Judge).  IRS objected to Chapter 11 debtor’s use of cash collateral, herein the debtor’ health insurance accounts receivables, claiming a lien senior to the bank’s on the money.  IRS prevailed on the issue of having a superior lien on the money, with an analysis under the FTLA. The Federal Tax Lien Act of 1966, as amended (the "FTLA"), 26 U.S.C. §§6321-6326, provides for a federal tax lien to be created in favor of the United States Federal Government against any taxpayer who fails  to pay which tax lien encumbers, "...all property and rights to property, whether real or personal, belonging to such person." Id. The FTLA also establishes the rights of private creditors with respect to a federal tax lien. 26 U.S.C. §§ 6321-6326.

The federal tax lien is created upon the IRS' assessment and remains until such tax liability is satisfied or the same becomes unenforceable due to lapse of time. 26 U.S.C. §6322 ⁴. However, for federal liens to be valid against holders of a security interest, notice of such liens must be filed in conformity with state recordation law. 26 U.S.C. 6323(a) and (f). Healthcare Services Contracts). See Aquilino; Rodriguez v. Escambron Dev. Corp, 740 F. 2d 92, (1st Cir. 1984)("A federal tax lien is wholly a creature  [*21] of federal law. It is one of the 'formidable arsenal of collection tools' necessary 'to ensure the prompt and certain enforcement of the tax laws in a system relying primarily on self reporting.' United States v. Rodgers, 461 U.S. 677, 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983).

Accordingly, the effects, priority, enforcement, and extinguishment of a tax lien are federal concerns. The Internal Revenue Code 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' United States v. Bess, 357 U.S. 51, 55, 78 S. Ct. 1054, 2 L. Ed. 2d 1135, 1958-2 C.B. 934(1958).").
The FTLA altered to a certain extent the common-law principles that first in time is first in right, and establishes that federal tax liens are superior to inchoate liens by incorporating 26 U.S.C. § 6323(c) and affording certain commercial transactions financing agreements with a 45 day safe harbor period. See Bremen Bank & Trust Co. v. United States, 131 F. 3d 1259, 1263 (8th Cir. 1997); Rodriguez v. Escambron Dev. Corp, 740 F. 2d at 97 fn. 7 ("The Tax Lien Act does not, however, provide for every type of lien, and choateness continues to be a consideration in tax lien cases"); J.D. Court, Inc. v. United States, 712 F. 2d 258, 263 (7th Cir. 1983). "An interest is choate when 'there is nothing more to be done to have a choate lien— when the identity of the lienor, the property subject to the lien, and the amount of the lien are established'" Rodriguez v. Escambron Dev. Corp, 740 F. 2d at 98 citing United States v. Pioneer American Insurance Co., 374 U.S. 84, 89, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963). Notwithstanding, the FTLA did not eliminate the choateness doctrine since the same is incorporated in 26 U.S.C. § 6323(h) which defines the term "security interest" for purposes of 26 U.S.C. §§ 6323 and 6324.