Saturday, July 23, 2011

Recent Bankruptcy Decisions from Courts in the First Circuit

Debtor’s exemption of unknown value of lawsuit under the “wildcard” is limited to the statutory dollar limits of 11.U.S.C.§522(d)(5):

In re: HALL, 2011 Bankr. LEXIS 2623 (Bankr. D. Mass. 7/7/11).
PROCEDURAL POSTURE:  Debtor claimed an exemption in an employment discrimination lawsuit under the general exemption provided 11 U.S.C.S. § 522(d)(5), and the debtor stated that the value of the lawsuit was unknown. The debtor moved for reconsideration of the order granting the bankruptcy trustee's motion to employ special counsel to prosecute the lawsuit.
OVERVIEW: The debtor contended that the lawsuit was claimed as exempt by the debtor without objection and with an unknown value, and thus the lawsuit was not property of the estate subject to prosecution by the trustee. The bankruptcy court held that the debtor claimed the exemption under
§522(d)(5) which provided an express monetary limitation on the amount of the exemption, and thus the portion of any amount recovered in excess of the monetary cap was property of the estate. The fact that the debtor listed the value of the exempt property as unknown did not establish that the debtor claimed the entire recovery from the lawsuit as exempt, and the debtor's express citation of § 522(d)(5) as the statutory basis for the exemption clearly limited the value of the exemption to the statutory cap.  While exemptions are generally construed in the debtor’s favor, ambiguities in the description of the exemption created by the debtor’s words are construed against the debtor.
OUTCOME: The debtor's motion for reconsideration of the employment of special counsel was denied.
JUDGE: Henry J. Boroff, Bankruptcy Judge

Competing plan of reorganization found to be proposed in good faith as creditor’s purchase of an unsecured claim to possess standing to propose the competing plan was legitimate under these facts;
Debtor’s plan denied confirmation because it violated “cramdown” in that equity shareholders retained their interests in contravention of the “absolute priority rule” without giving “new value” to justify retention of their interests and thus the plan was not “fair and equitable”;
Waiver of claims is not “new value” as it was not necessary to an effective reorganization, where the new value was not disclosed in the plan or disclosure statement:

In re: Trikeenan Tileworks, Inc., Trikeenan Holdings, Inc., and Trikeenan Tileworks, Inc. of New York, 2011 BNH 8; 2011 Bankr. LEXIS 2673 (Bankr. D.N.H. 7/14/11)(unpub.).
PROCEDURAL POSTURE: Bankruptcy debtors, a holding company and its operating subsidiaries, sought confirmation a plan of reorganization which provided that junior claim holders receive equity interests before senior claim holders were paid in full. A competitor of the debtors, which purchased a claim, proposed a competing plan that provided for the competitor to become the sole owner of the subsidiaries with new management.
OVERVIEW: The competitor contended that the debtors' plan which provided for equity distribution to junior interests prior to full payment of senior interests was not fair and equitable as required by
11 U.S.C.S. § 1129(b)(2)(B), but the debtors argued that the junior interests provided new value to the debtors. The debtors also asserted that the competitor's plan was essentially a hostile takeover and thus was not proposed in good faith as required by § 1129(a)(3). The bankruptcy court first held that the debtors' plan was not fair and equitable since a loan to the holding company by a debenture holder and waivers of administrative and priority claims by the junior interests did not constitute new value for the equity interests granted to the junior interests. The proposed loan only replaced a prior secured loan as a new liability rather than an infusion of equity, and the waivers of claims were not shown to be necessary to a successful plan of reorganization. Further, the competitor's purchase of a claim solely to provide standing to propose a plan to take over the subsidiaries did not establish bad faith, and continuing the going concern value of the subsidiaries benefited creditors.
OUTCOME: Confirmation of the debtors' plan was denied, and the competitor's plan was found to be proposed in good faith.
JUDGE:  J. Michael Deasy, Bankruptcy Judge.
Additional Discussion:   The Court finds that the waivers of administrative and priority claims in this case are not new value because they are not necessary for a successful reorganization. Prior to filing the Debtors' Memo, there had been no mention on the record of any post-petition fees to managers and directors that would qualify as administrative claims. More importantly, the Debtors did not list waivers of claims in the Debtors' Disclosure Statement or the Debtors' Plan. Put simply, the Debtors  claim that the waivers of administrative and priority claims are vital to the success of the Debtors' Plan but failed to say one word about them in either the Debtors' Plan or the Debtors' Disclosure Statement. The Court cannot conclude that waivers of claims are necessary to successfully complete a plan of reorganization when neither the plan nor the disclosure statement address the issue. Accepting an ad hoc new value argument thrown together on the eve of confirmation would make the absolute priority rule a superfluous, low hurdle to confirmation instead of a safeguard of the Bankruptcy Code's priority scheme. See Case, 308 U.S. at 115-16 (noting creditors should be given precedence over stockholders in reorganization plans); Northern Pac. R. R. Co. v. Boyd, 228 U.S. 482, 33 S. Ct. 554, 57 L. Ed. 931 (1913) (holding the rights and interests of stockholders cannot be preserved at the expense of creditors); Louisville Trust Co. v. Louisville, N.A. & C. Ry. Co., 174 U.S. 674, 683, 19 S. Ct. 827, 43 L. Ed. 1130 (1899) ([W]e observe that no such proceedings can be rightfully carried to consummation which recognize and preserve any interest in the stockholders without also recognizing and preserving the interests of not merely of the mortgagee, but of every creditor of the corporation.").

Accordingly, there has been no new value contribution by class ten or class eleven. 9 Without a new value contribution by classes ten and eleven, the Debtors' Plan does not comply with the fair and equitable requirement of
§1129(b)(2)(B)(ii). Therefore, confirmation of the Debtors' Plan shall be denied and the issue of improper classification is moot.

Creditor's purchase of W.B. Mason's unsecured claim for the purpose of proposing a competing plan does not constitute bad faith as a matter of law. Bankruptcy courts have consistently held that an unrelated party can purchase claims for the sole reason of insuring standing to propose a competing plan of reorganization. However, a claim can be purchased in bad faith if the purchase was made with the intent to "block impede or in any way manipulate confirmation of [a] debtor's plan. Ultimately, the question of good faith is based on whether the claim purchaser's actions were in conformity with the restructuring purposes of chapter 11.  In the present case, creditor's purchase of a claim and proposal of its plan coincides with the goals of chapter 11. Creditor's Plan restructures the Debtors' secured debt, provides a dividend to unsecured creditors, infuses capital into the Debtors, and provides a three step process to restructure the operations of the Debtors. Creditor's Plan has received significant creditor support. From the four corners of creditor's Plan, the Court can only glean that creditor intends to maintain the Debtors as viable entities that will create a going concern value for creditors. In fact, during oral arguments, the Debtors stated that creditor's Plan has many similarities to the Debtors' Plan.

Creditor's status as a competitor is a disputed issue of fact. Even assuming that creditor is a direct competitor, the Debtors have failed to explain how creditor's Plan is in contravention of the policy goals of the Bankruptcy Code. Being a competitor who proposes a competing plan to take over the debtor does not equal bad faith per se. To the contrary, the Supreme Court has noted that lifting exclusivity to propose a competing plan opens the door for other parties to bid for the equity of the company. There is no requirement that a competing plan must be friendly to the existing management or ownership of a debtor. Nor is there any bar in the Bankruptcy Code against a competitor proposing a takeover of the debtor.

No sanctions as automatic stay was not violated by insurance company because they had no affirmative duty to move to reinstate the debtor’s license:

In re: BECKETT, 2011 Bankr. LEXIS 2626 (Bankr. D. Mass. 7/7/11).
PROCEDURAL POSTURE: Debtor filed a motion for sanctions against a creditor insurance company for the company's alleged violation of the automatic stay under 11 U.S.C.S. § 362(a).
OVERVIEW: The insurance company recovered a state court judgment against the debtor for property damage resulting from a motor vehicle accident. As a judgment debtor, the debtor then had his driving privileges suspended in the Commonwealth of Massachusetts. Some five years later the debtor filed for bankruptcy and the insurance company was notified. The debtor sought to have the insurance company affirmatively request that his license be reinstated by the Massachusetts Registry of Motor Vehicles. The insurer initially declined, but then made the request two days later. The issue before the court was whether the insurance company's initial inaction was a violation of
11 U.S.C.S. § 362(a). The court concluded that it was not. Importantly, under Mass. Gen. Laws ch. 90, § 22A (2001), only the Registry had the power to suspend and reinstate the license of a judgment debtor like the debtor here and only such a judgment debtor could initiate the process of seeking reinstatement. Nothing in the Bankruptcy Code placed the affirmative duty of initiating the debtor's license reinstatement proceedings on the insurance company.
OUTCOME: The court denied the debtor's motion.
JUDGE:  Henry J. Boroff, Bankruptcy Judge.

Interlocutory appeal denied; relief denied without prejudice with leave to re-bring once the Bankruptcy Court had rendered a final order on all counts of the adversary proceeding:

MERS v. AGIN (In re: BOWER), 2011 U.S. Dist. LEXIS 78465(D. Mass 7/18/11)
PROCEDURAL HISTORY:  Appeal from the Bankruptcy court to the District Court.
OUTCOME:  Interlocutory appeal from the Bankruptcy Court’s Order was denied i.e. After reviewing the Parties' written submissions and a Hearing held, this court hereby orders that Appellee's Motion to Deny Leave to Appeal for Lack of Jurisdiction is ALLOWED WITHOUT PREJUDICE to raising any of these issues at the conclusion of the Bankruptcy Court's proceeding.                                 
Discussion:  Appellants are not precluded from raising the same issue on appeal after Counts III and IV of the complaint are conclusive resolved.  Orders from a bankruptcy court are not appealable unless they conclusively resolve "'a discrete dispute within the larger case.'" The First Circuit has said that a bankruptcy order does not have to "dispose of all aspects of a case in order to be final." An order is interlocutory, however, if it "'does not finally determine a cause of action but only decides some intervening matter pertaining  to the cause, and . . . requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.'"Orders disposing of fewer than all claims are "generally interlocutory and not appealable as of right upon entry."  The Bankruptcy Court only resolved two of the four counts of the Complaint and dismissed Appellants' counterclaims. Counts III and IV are yet to be adjudicated. Those Counts request relief pursuant to 11 U.S.C. 550(a)(1) and (2).  The Bankruptcy Court thus did not dispose of the whole subject and leave only execution of the judgment to be done. The Bankruptcy Court's decision on those remaining counts may obviate the current appeal if the Trustee is not granted his requested relief. The adversary proceeding has not been fully resolved and the Bankruptcy Court's Order thus is not final.
JUDGE: Joseph L. Tauro, District Judge.
Reconsideration denied:
RODRIGUEZ-BORGES v. MENDER (IN RE: RODRIGUEZ), 2011 Bankr. LEXIS 2543 (Bankr. D.P.R. 6/29/11).
PROCEDURAL HISTORY: This proceeding is before the Court upon the Plaintiff's Motion requesting Reconsideration of the Court's Opinion and Order and the Trustee's Opposition to the Motion for Reconsideration.                                                                                                                                                OUTCOME: Plaintiff's Motion for Reconsideration is hereby DENIED
Discussion:  Reconsideration of a judgment under Rule 59 is an extraordinary remedy that is used sparingly and only when the need for justice outweighs the interests advanced by a final judgment. It is directed at allowing a court to correct it own errors.  The facts in this case have not changed, Plaintiff has failed to meet its burden for reconsideration under Fed. R. Bankr. P. 9023.  Absent a manifest error of law or newly found evidence, the court is not in a position to alter or amend its previous order. Therefore, Plaintiff's motion to alter or amend the order dismissing the captioned adversary proceeding is hereby denied. The case remains dismissed.
JUDGE: Brian K. Tester, Bankruptcy Judge.
Disputed fact issues prevent judgment on the pleadings re TILA claims:
(Bankr. D.R.I. 7/7/11).
OVERVIEW:  The debtor’s one year right under TILA to seek damages had expired.  However, if the debtor prevailed on his rescission claim, then his right to seek attorney’s fees would not be limited to the one year period.  Defendant bank argued that the transaction was exempt from TILA because it was a refinance with no new advances, involving the same lender and secured by an interest in the same property.  However, the court could not presume the lender was the same entity as the original transaction as the documents suggested otherwise created a disputed issue of fact.                                                                                                                                            OUTCOME:  Court granted defendants’ motion as to the debtor’s entitlement to statutory damages.  The motion was denied as to all other matters.
PROCEDURAL HISTORY: Defendant made a Fed. R. Civ. P. 12(c) motion for judgment on the pleadings.  However a 12(c) motion does not allow for any resolution of contested facts; rather, a court may enter judgment on the pleadings only if the uncontested and properly considered facts conclusively establish the movant’s entitlement to a favorable judgment.  Such a motion implicates the pleadings as a whole.                                                                                                                  JUDGE:  Arthur N. Votolato, Bankruptcy Judge.

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