Saturday, July 9, 2011

Recent Bankruptcy Decisions from the First Circuit

Remand moot where mortgagee withdrew stay relief motion:

HARRIS  v. HSBC BANK USA (In re: RONEY HARRIS),2011 Bankr. LEXIS 2333 (Bankr. D. Mass. 6/20/11).
PROCEDURAL POSTURE: On remand from the United States District Court for the District of Massachusetts, the court reconsidered an order granting relief from the automatic stay with respect to a mortgage on certain real property owned by plaintiff Chapter 7 debtor. The debtor filed a motion to vacate the dismissal of one, or both, of two related adversary proceedings based upon the district court's remand.
OVERVIEW: The district court determined that the court erred in not fully considering an argument timely raised by the debtor, to the effect that the purported mortgagee lacked standing to bring the motion for relief from the automatic stay. The court held that the remand order was moot because the purported mortgagee had withdrawn the motion. Nonetheless, the debtor sought a determination that the purported mortgagee was not the holder of the note and mortgage and therefore had no standing to prosecute various rights regarding the property. The court held that it did not have jurisdiction because the determination requested did not "arise under" or "arise in" the Bankruptcy Code, inasmuch as the rights asserted by both parties would exist outside of Title 11. The court emphasized that the trustee had chosen not to pursue the claims asserted by the debtor, and the purported mortgagee had not filed a proof of claim.
OUTCOME: The court characterized the remand order as moot based on changed circumstances and denied the debtor's motion to vacate.

JUDGE:   Henry J. Boroff, Bankruptcy Judge

Stripping off wholly unsecured second mortgage is not “changed circumstance” to re-file within 180 days when prior case was voluntarily dismissed after stay relief motion:

In re: THOMAS L. REDWOOD, Chapter 13 Debtor, 2011 Bankr. LEXIS 2371 (Bankr. D.R.I. 6/16/11).
OUTCOME:  Case dismissed, upon motion of mortgagee bank.
OVERVIEW: There are no disputed issues of fact. Debtor had filed a prior case, BK No. 06-10720, in which the Bank's Motion for Relief from Stay was granted on February 17, 2009. Debtor voluntarily dismissed that case on July 20, 2010, and the current case was filed on October 25, 2010, which is ninety-seven days after the voluntary dismissal of the first petition.  Section 109(g)(2)1 of the Bankruptcy Code imposes a time bar against filing a petition for relief if that person has voluntarily dismissed his case after a motion for relief from stay had been filed. "Generally, based on a dismissal under this section, a debtor is ineligible for relief under the Bankruptcy Code for a period of 180 days." In re Carey, 221 B.R. 571, 572 (BAP 1st  1998).  Debtor argues, imaginatively, but not persuasively that changed circumstances2 now allow him to fund a Chapter 13 plan, which will inure to the benefit of the Bank. The changed circumstances here consist of stripping off a second, wholly unsecured mortgage. The language of the statute is straightforward regarding eligibility and does not, at least on this showing, allow the Court the flexibility to grant the Debtor the relief he seeks.

JUDGE: Arthur N. Votolato, Bankruptcy Judge.

Creditor not allowed to prove challenge to discharge based on debtor’s failure to answer request for admissions:

2011 Bankr. LEXIS 2396 (Bankr. D. Mass 6/22/11).

OUTCOME:  Creditor’s motion for summary judgment denied regarding challenge to the debtor’s discharge.
OVERVIEW: The plaintiff has moved for summary judgment against the pro se defendants, who are the debtors in the main case, and seeks both a judgment in the amount of $55,000 arising from Cheryl A. Skaltsas' alleged embezzlement of funds while she was employed by the plaintiff and an order denying the debtors their discharges under 11 U.S.C. § 727. The sole basis for plaintiffs motion is that because the debtors' failed to answer requests for admissions propounded to them by the plaintiff; the matters set forth in the requests are deemed admitted under Fed. R. Civ. P. 36(a), made applicable to this proceeding by Fed. R. Bankr. P. 7036.  The complaint reflects a profound misunderstanding of the Bankruptcy Code. The complaint incorrectly pleads that the debtors' case is one under Chapter 7 of the Bankruptcy Code. It is not. The debtors filed a joint voluntary petition pursuant to Chapter 13 of the United States Bankruptcy  Code, 11 U.S.C. §§ 101 et seq., and the case has not been converted. Therefore § 1328, not § 727, governs the debtors' right to a discharge. 2 Section 1328(c)(2) prohibits the discharge of a debt that is not dischargeable under § 523(a), which includes a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). Assuming that the plaintiff is able to amend its complaint to properly plead a basis for excluding plaintiff's claim from the debtors' discharge, the plaintiff's motion for summary judgment still should not be granted on the current record.
JUDGE: Melvin S. Hoffman, Bankruptcy Judge.
RATIONALE:  Ordinarily the failure of a party to respond to a request for admissions within thirty days after the request is served results in the deemed admission of the matters in the request. Fed. R. Civ. P. 36(a)(3),   made applicable by Fed. R. Bank. P. 7036. The rule promotes efficiency by avoiding the need to prove facts that are not in dispute. It eliminates the necessity of proving essentially undisputed and peripheral issues of fact. Here, the facts which the defendants were asked to admit are central to the plaintiff's cause of action and, at least with regard to Mr. Skaltsas, but for the deemed admissions, the plaintiff's adversary proceeding against him would be devoid of any merit. Moreover, the requests for admissions do not inform the pro se defendants that their failure to file responses within thirty days would result in the requests being treated as admitted. Depriving the debtors of their right to contest the non-dischargeability of the plaintiff's claim due to a failure to respond to requests for admissions is too harsh a remedy in the circumstances of this case. See In re Milhem, 2007 WL 2815982 at *1 (Bankr. D. Mass. 2007).

Rule 36(a)(3) permits the Court to extend the  
[*5] time for responding to a request for admissions. Had the plaintiff filed a complaint stating a cause of action appropriate in a Chapter 13 case, I would have extended the time for the defendants to respond to the propounded requests. Since at present plaintiff's complaint does not lie in Chapter 13, however, I will dismiss the adversary proceeding unless the plaintiff files a motion to amend the complaint within 30 days of the date of this order. If a motion is filed and allowed, the defendants shall file an answer to the amended complaint within 14 days after it is served on them and file responses to the plaintiff's requests for admissions within 30 days after the amended complaint is served on them.

Debtor’s profit sharing plan, with him as sole participant, did not qualify as an exempt IRA; and even if it did, failure to disclose the alleged IRS’s would deny him the exemption:

(IN RE: DANIELS) AGIN, v. DANIELS, 2011 Bankr. LEXIS 2346 (Bankr. D. Mass.  6/16/11).
JUDGE:  William C. Hillman, Bankruptcy Judge
PROCEDURAL POSTURE: Plaintiff Chapter 7 trustee filed a motion for summary judgment in his action against defendant debtor, which sought a turnover of the debtor's interest in funds in a profit sharing plan and two Individual Retirement Accounts (IRAs), claiming that they could not be exempted from the bankruptcy estate pursuant to 11 U.S.C.S. § 522(b)(4). The debtor filed a cross-motion for summary judgment. The trustee moved to strike the debtor's cross-motion.
OVERVIEW: The debtor, an independent broker of commercial fishing boats with no employees, established a profit sharing plan as its sole participant. He appointed himself Trustee, Administrator, and Employer of the plan. The plan was tailored from a "prototype" plan offered by an insurance company. The court held that, while the prototype plan had received a favorable determination letter from the IRS, the letter explicitly stated that it was applicable only to the form of the plan and was not a ruling or determination as to whether an employer's plan qualified under 26 U.S.C.S. § 401(a). The court also held that, over the life of the plan, the debtor had routinely engaged in "prohibited transactions" under 26 U.S.C.S. § 4975(e). Because the debtor had abused the plan form, the consequence was that the funds held in the plan could not be exempted from the bankruptcy estate. Also, the IRAs were not tax exempt because they were funded by the non-exempt profit sharing plan. Even assuming, arguendo, that the IRAs were otherwise exempt, the debtor would still be barred from claiming the exemption on account of his failure to disclose the existence of the IRAs.
OUTCOME: The court granted the trustee's motion, and denied the debtor's cross-motion and the trustee's motion to strike.

Failure to plead with specificity on discharge issues leads to dismissal:

LAWLESS v. ROMEO (In re: ROMEO), 2011 Bankr. LEXIS 2364 (Bankr. D.R.I. 6/15/11).
PROCEDURAL POSTURE: Plaintiff creditors sought a ruling that the debt owed to them by defendant debtors was non-dischargeable under 11 U.S.C.S. § 523(a)(2), (a)(6), and for an award of attorneys' fees and costs. Debtors moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6).
OVERVIEW: 11 U.S.C.S. § 523(a)(2)(A) allowed a debt to be excepted from discharge if obtained by false pretenses, false representation, or actual fraud. The creditors alleged that debtor and the creditors agreed to enter a Consent Judgment, incidental to confirming the creditors record ownership of a disputed boundary area. Nowhere did the Complaint tell what, if any representations were made by debtors, or what false pretenses were uttered to induce agreement, or what conduct was fraudulent. Because of the glaring absence of any specificity when stripped of the verbiage, the Complaint failed to state a claim that was plausible on its face, which was required under Fed. R. Civ. P. 8, and the allegations fell even farther short of the particularity needed under Fed. R. Civ. P. 9. Next, the creditors' § 523(a)(6) claim rested on a wobbly but, at the pleading stage, not wholly unsupported foundation. The complaint alleged that debtor excavated a significant portion of the creditors' asphalt driveway and destroyed decades old landscaping and other improvements while abusively driving a backhoe and drinking beer. The creditors had just barely alleged sufficient facts to survive the Motion.
OUTCOME: Those portions of the complaint alleging violation of 11 U.S.C.S. § 523(a)(2)(A), based upon breach of the Consent Judgment, were dismissed as to both debtors. Debtors' Motion was denied as to the claims and allegations that the physical injury to the creditors' property regarding the "boundary dispute" was caused by debtors' willful and malicious actions.

JUDGE:  Arthur N. Votolato, Bankruptcy Judge.

Stay relief and costs and fees incurred for the motion awarded to secured creditor on debtor’s auto:

In re: RODRIGO HERNANDEZ, 2011 Bankr. LEXIS 2372 (Bankr. D.R.I. 6/16/11).
JUDGE:  Arthur N. Votolato, Bankruptcy Judge.
OUTCOME:  Stay relief, costs and fees granted to secured creditor on debtor’s vehicle.
Heard on Greenwood Credit Union's Motion for Relief from Stay seeking to exercise its state law rights concerning a vehicle owned by the Debtor in which Greenwood holds a security interest. Greenwood also seeks allowance of attorney's fees and costs.
The Debtor opposes the motion, arguing that by the time Greenwood's motion was filed on January 31, 2011, Debtor was only one month delinquent rather than two months as stated in the Memorandum. Apparently, some confusion arises from the timing of payments made telephonically, probably through an automated clearing house, by the Debtor on January 31, vis-a-vis the computer posting of these payments to Debtor's account. Greenwood acknowledges that the December 2010 payment was posted on February 2, 2011,1 but argues that even after this payment the Debtor is still delinquent under the contract when it (Greenwood) filed this motion. Payments are due on the 24th of each month.  Debtor's response is that under R.I. Gen. L. § 6-51-3, a creditor cannot take any action until the defaulting party under an automobile loan agreement is ten days late in paying. Otherwise, Debtor has offered no evidence or argument refuting Greenwood's showing under § 362(d)(1). Debtor's argument misperceives the relief sought in this Court. Unless and until relief from stay is granted, the creditor may not take any action under applicable state law, and Greenwood acknowledges, as it must, that it is subject to all of the requirements of state law if relief from stay is granted here.

Wells Fargo, as successor-in-interest to debtor’s mortgagee, has standing to seek relief from stay as to debtor’s realty:

In re: FOX, Chapter 7 Debtors, 2011 Bankr. LEXIS 2370 (Bankr. D.R.I. 6/16/11).
JUDGE:  Arthur Votolato, BAnkruptcy Judge.
OUTCOME: Stay relief granted to mortgagee on debtor’s real property.
OVERVIEW: Heard on the Debtors' objections to the Motions for Relief from Stay filed by Wells Fargo Bank, N.A.,   the mortgagee of the Debtors' real property in Charlestown, Rhode Island. Wells Fargo   holds both the first and second mortgages and seeks relief from stay to pursue its state law rights against the property.  Debtors' objection is based on the single argument1 that Wells Fargo   "is not the proper party to seek" this relief as there is no evidence of an assignment of the mortgages from World Savings Bank   to Wells Fargo.  2 In its motions, however, Wells Fargo   has submitted documents from the appropriate federal banking regulators,3 Fed. R. Evid. 902 and 1005, showing through a series of amendments to the bank charter and bylaws, that World Savings Bank   ultimately became Wells Fargo Bank, N.A.   Other than labeling these documents  from the bank regulators "false and statutorily deficient", Debtors have provided no evidence or reasoned argument to support their challenge to the bank's standing. Based the documents before the Court, Wells Fargo   has standing to bring these motions, the Debtors' objections are OVERRULED and the Motions for Relief from Stay are GRANTED. Further, Wells Fargo showed that there is no equity in the property, it is not needed for an effective reorganization and the mortgage has been in arrears since 2008.
Creditor did not have claim against the wife so his successful challenge to the debtor-husband’s discharge cannot be imputed to deny the debtor-wife’s discharge:

WARCHOL  v.  BARRY (IN RE: BARRY),  2011 Bankr. LEXIS 2203 (BAP 1st Cir. 6/9/11).

Appeal from the United States Bankruptcy Court .
PROCEDURAL POSTURE: 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).
OVERVIEW: 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.
OUTCOME: The court reversed the judgment as to the debtor wife and affirmed the judgment as to the debtor husband.

JUDGES: Before Haines  , Votolato  , and Deasy  , United States Bankruptcy Appellate Panel Judges.
OPINION BY: Votolato 

The First Circuit has yet to address the question of whether a chapter 7 discharge may be withheld from a jointly petitioning debtor where, as here, the complaining party holds no claim against such joint debtor. Other courts, however, have addressed the issue. For example, in Pelham Plate Glass, Inc. v. Charette (In re Charette), 148 B.R. 94 (Bankr. D. Mass. 1992), a case which is factually similar to the one at bar and relied upon heavily by Mrs. Barry, the plaintiff unsuccessfully objected to the discharge of the debtor-wife under § 727(a)(2)(A) on the ground that she and her debtor-husband conveyed their residence within one year of bankruptcy and at a time when the husband, alone, owed a judgment debt to the plaintiff. Without regard to questions of the debtor-wife's intent, the court in Charette granted her discharge, notwithstanding her participation in the subject conveyance. Instead, the court  [*15] relied, implicitly, on the plaintiff's lack of standing under § 727(c)(1), and its resulting inability to reach the debtor-wife's assets:  As to Plaintiff [sic] Frances Charette . . . the objection to discharge must be overruled. The Plaintiff was not her creditor but her husband's, and the Plaintiff could not reach her interest in the property to satisfy its judgment against her husband. In short, her conveyance of her interest in the property did not defraud the Plaintiff. Id. at 96. In Rosen's Inc. v. Souers (In re Souers), No. 93-93080, 1996 Bankr. LEXIS 2006, 1996 WL 34486696, *5-6 (Bankr. S.D. Iowa June 24, 1996), the bankruptcy court explicitly relied on § 727(c)(1) in dismissing the plaintiff's complaint objecting to discharge as to the joint debtor-wife for lack of standing, where the plaintiff held a guaranty signed only by the debtor-husband and was therefore not the debtor-wife's creditor. The court held that "a party whose claim has been conclusively disproved does not have standing and cannot object to a debtor's discharge." 1996 Bankr. LEXIS 2006, [WL] at *6.  Based on the foregoing discussion, the Panel concludes that the bankruptcy court may not deny a co-debtor a chapter 7 discharge under § 727(a)(2)(A), regardless of  [*16] the co-debtor's intent, in the absence of consolidation, when the complaining party is not his/her creditor as required by § 727(c)(1). It follows that because Warchol is not Mrs. Barry's creditor, she has no standing under § 727(c)(1) to object to Mrs. Barry's discharge. Accordingly, the bankruptcy court committed an error of law in denying Mrs. Barry a discharge.

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