Friday, July 8, 2011

Recent Bankruptcy Decisions from the First Circuit

Credit Counseling Certificate and Judicial Estoppel :

In re NICHOLAS J. FIORILLO, 2011 U.S. Dist. LEXIS 67879 (D. Mass. 6/24/11).
OVERVIEW:  Seeking to use the automatic stay to forestall foreclosure, the debotr filed a Chpater 11 case which was later converted to Chpater 7 at which time the debtor filed a motion to dimiss the case based on the debtor's noncompliance with SECTion 109(h)'s credit-counseling requirement. Because creditors had relied on the debtor's initial representations that he was an eligible debtor and that he had complied with § 109(h), the debtor was judicially estopped from arguing that he had not complied with § 109(h).
OUTCOME: The court affirmed the bankruptcy court's order denying the debtor's motion to dismiss.

JUDGE:  Douglas P. Woodlock, United States District Judge

Sovereign immunity precludes other than actual damages of costs and fees against the government, no emotional distress or punitive damages:

DUBY v. UNITED STATES OF AMERICA, 2011 Bankr. LEXIS 2356 (BAP 1st  Cir. 6/28/11).
Appeal from the Bankruptcy Court (New Hampshire, (Hon. Mark W. Vaughn, U.S. Bankruptcy Judge).Duby v. United States (In re Duby), 2010 Bankr. LEXIS 4870 (Bankr. D.N.H., 2010)
PROCEDURAL POSTURE: Plaintiff debtor and defendant United States of America, Department of Agriculture, appealed from a final judgment of the Bankruptcy Court awarding the debtor $11,848.50 for attorney's fees for a violation of the automatic stay and $3,000 as a sanction for a violation of the discharge injunction.
OVERVIEW: The government violated the automatic stay and the discharge injunction by attempting to collect a debt from the debtor with knowledge of the bankruptcy and the subsequent discharge. The debtor appealed the denial of emotional damages. The court held that the bankruptcy court did not err in declining to award emotional damages to a debtor for the federal government's violation of the discharge injunction because the government has not waived sovereign immunity under 11 U.S.C.S. § 106 for emotional damages. The bankruptcy court did err, however, in awarding $3,000 as a sanction for a violation of the discharge injunction because the government had not waived sovereign immunity under § 106 for punitive sanctions. The bankruptcy court did not err in awarding attorney's fees under 11 U.S.C.S. § 362(k)(1) for the federal government's willful violation of the automatic stay, despite the fact the debtor was not entitled to other compensable damages, because, to the extent that the debtor incurred legal fees to stop the willful violation of the automatic stay, she suffered actual damages and was "injured" within the meaning of § 362(k)(1).
OUTCOME: The court affirmed in part and reversed in part, finding that the bankruptcy court erred as a matter of law by awarding a $3,000 punitive sanction against the federal government.

JUDGES: Before Bankruptcy Judges Hillman, Feeney and Bailey, Opinion by Hillman.

Debtor had no standing to challenge bank’s pooling servicing agreement:

CORREIA v. DEUTSCHE BANK (In re CORREIA), 2011 Bankr. LEXIS 2461 (BAP 1st  Cir. 6/30/11).
Appeal from the Bankruptcy Court (Massachusetts, Hon. William C. Hillman, Bankruptcy Judge).        JUDGES: Before Bankruptcy Judges Haines, Votolato, and Deasy, Per Curiam).

Debtors appeal the bankruptcy court's decision awarding summary judgment to Deutsche Bank. Debtors had initiated an adversary proceeding seeking to set aside Deutsche Bank's post-petition foreclosure of their home. The Bankruptcy Court concluded that the Debtors were without standing to challenge Deutsche Bank's compliance with procedures set forth in the contractual arrangement between and among Deutsche Bank and others, not including the Debtors, governing the transfer of their note and mortgage.
We AFFIRM. Under the Pooling and Servicing Areement, Deutsche Bank was trustee; IndyMac, ABS was defined as the depositor; and IndyMac was the servicing agent for the mortgage.   Thus, IndyMac held the note for the benefit of Deutsche Bank as trustee.  In August 2007, MERS assigned the Debtors' mortgage to Deustche Bank. Thereafter, Deutsche Bank proceeded to foreclose upon (and purchase) the property in accordance with Massachusetts law. The Debtors did not, and do not now, challenge the regularity of that process.  After the auction, the Debtors filed a complaint against Deutsche Bank (and IndyMac) to set aside the foreclosure sale. They alleged that the purported assignments from IndyMac to Deutsche Bank were flawed because they did not comply with the terms of the PSA. According to the Debtors, this rendered them invalid. Deutsche Bank countered that, because the Debtors were not parties to the PSA, they lacked standing to assert any of its terms,   or the breach thereof, in furtherance of their cause.  The Debtors cannot show they were a party to the contract, and, therefore, the record compels the bankruptcy court's conclusion.

Royalties not payable, warranting summary judgment:

VERSUS TECHNOLOGY, INC., v. JALBERT (IN RE: RADIANSE, INC.), 2011 U.S. Dist. LEXIS 71235 (D. Mass. 7/1/11).

JUDGE: Richard G. Stearns, District Judge affirmed the Order of the Bankruptcy Court granting summary judgment to the debtor.
OVERVIEW: In this bankruptcy appeal, appellant unsuccessfully sought to reverse the Bankruptcy Court's determination on summary judgment that the debtor is not obligated to pay the appellant royalties pursuant to a third-party Reseller Agreement.
RULING: In a ruling from the bench, Bankruptcy Judge Melvin S. Hoffman concluded that the transaction did not trigger a royalty obligation because it was not, at the time the money came in, a sale as contemplated by the license agreement.  Appellant argues that the Bankruptcy Court erred in exonerating the debtor from payment of the additional cure cost.

First Circuit  affirms that junior debt holders did not intend to subordinate their pre-petition  debt to senior debt holder’s post-petition interest:

PROCEDURAL POSTURE: Appellant indenture trustee, as representative of the holders of the debtor's senior debt, challenged a decision of the District Court, which affirmed the Bankruptcy Court's authorization of a distribution of assets from the debtor's estate to holders of the debtor's junior debt.
OVERVIEW: The dispute was between holders of the debtor's senior debt and holders of the debtor's junior debt. The parties agree that the holders of the senior debt were entitled to priority payment of their principal along with pre-petition interest, that is, interest that accrued up until the filing of the debtor's bankruptcy petition, before the holders of the junior debt could receive a distribution. At issue was whether the senior priority also included payment of post-petition interest earned on the principal up until the principal was paid in full, as the indenture trustee contended. The bankruptcy court, relying on the testimony of several witnesses, both fact and expert, documentary evidence, and contemporaneous scholarly articles, concluded that the parties to the junior indentures did not intend to permit the holders of senior debt to receive post-petition interest prior to payment on the junior debt. The district court affirmed. On appeal, the court held that the bankruptcy court's factual findings as to the intent of the parties were sufficient in themselves to support the conclusion that the parties did not intend to subordinate the junior note holders to post-petition interest.
OUTCOME: The court affirmed the district court's decision.

JUDGES: Before  Appellate Judges Stahl, Howard and Torruella. OPINION by Stahl.

Attorney Fees reduced, and affirmed:

SULLIVAN v. PAPPALARDO (In Re SULLIVAN), 2011 U.S. Dist. LEXIS 63484 (D. Mass.
OVERVIEW/RULING:  Attorney requested fees from representing debtors, which fees were reduced because case was relatively uncomplicated and many services were duplicative, which ruling was affirmed by the District Court.
JUDGE: Michael A. Ponsor, District Judge.

Rule 2004 Exam by UST of under-secured creditor’s communications with debtor is appropriate:

In re YOUK-SEE, 2011 Bankr. LEXIS 2326 (Bankr. D. Mass. 6/16/11).
PROCEDURAL POSTURE: A creditor of Chapter 13 debtor filed a motion for reconsideration of a court order granting the United States Trustee's (UST) motion for entry of an order authorizing the examination of and requiring the production of documents by the creditor pursuant to Fed. R. Bankr. P. 2004 and also filed a motion to quash subpoena.
OVERVIEW: The creditor held a under-secured first mortgage against the debtor's property. The creditor approved a loan modification, subject to court approval. The court approved the loan modification, but the debtor was unable to obtain an executed loan modification agreement from the creditor for over 100 days. In the meantime, the creditor continued to send account statements to the debtor reflecting the pre-modification monthly mortgage payment amount notwithstanding the approval of the loan modification. The UST sought to ascertain whether the conduct of the creditor in the debtor's case deviated from the standards established by the Bankruptcy Code, and whether its particular actions constituted an abuse of the bankruptcy system or its procedures. The court held that the UST had standing to conduct discovery pursuant to its motion and had established "good cause." The court found that the UST's discovery requests were tailored to the procedures for loan modifications relative to the debtor and the property. Because the requests were focused on the creditor's communications with the debtor or debtor's counsel, the scope of the discovery was neither intrusive or abusive.
OUTCOME: The court denied the motion to reconsider in part and granted the motion in part. The court granted the motion to reconsider and quashed the subpoena to the extent the UST sought to examine any witness in Boston, Massachusetts who lived more than 100 miles of Boston, Massachusetts.

JUDGE: Joan N. Feeney, Bankruptcy Judge.

Tax claim allowed in full against debtor’s chapter 7 estate where tax liability was joint and several as against debtor and non-filing spouse:

In re: BRIAN PROVENCAL, 2011 Bankr. LEXIS 2395 (Bankr. D. Mass. 6/21/11).
OVERVIEW:  Chapter 7 trustee seeks an order reducing by 50% the priority claim for unpaid income taxes filed the Massachusetts Department of Revenue (MDOR). The trustee would force the taxing authority to look to the debtor's spouse, who is not in bankruptcy, for half the claim amount thereby freeing some cash in the bankruptcy estate to create a dividend to the lower priority general unsecured creditors. In opposing the trustee's request the MDOR sites to state law wherein a husband and wife may make a single return jointly of income taxes with such return known as a joint return and shall include the income, exemptions and deductions of both spouses. Each spouse shall be jointly and severally liable for the entire tax.  The debtor has requested a postponement of a ruling on the trustee's objection to the MDOR's claim pending the outcome of his wife's IRS administrative proceeding because the trustee has conceded, should the debtor's wife attain innocent spouse status, that he will abandon his efforts to bifurcate the MDOR's claim. The debtor was keenly interested in making sure that every penny of his bankruptcy estate was devoted to paying the MDOR's claim since what remains unpaid survives his discharge.
RULING: Because Massachusetts law is explicit and unambiguous as to the joint and several liability of spousal taxpayers, the bankruptcy court has no authority to require the MDOR to split its claim between the debtor and his  spouse. The trustee's objection to the claim of the MDOR is overruled and the claim is allowed as filed.
JUDGE:  Melvin S. Hoffman, Bankruptcy Judge.


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