Friday, July 15, 2011

Recent Decisions from the First Circuit regarding Bankruptcy

Chapter 7 Trustee and his retained professionals may be compensated from the assets of the ERISA plan the Trustee is administering:

In re: FRANCHI EQUIPMENT CO., INC., 2011 Bankr. LEXIS 2489 (Bankr. D. Mass. 6/29/11).
PROCEDURAL POSTURE: Debtor corporation declared Chapter 11 bankruptcy, and after the case was converted to one under Chapter 7 of the Bankruptcy Code and the Chapter 7 trustee obtained approval to administer a retirement plan the debtor established under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.S. § 1001 et seq., the trustee asked the court to authorize payment of compensation from the plan's assets. The Department of Labor objected.
OUTCOME: The court stated that it would authorize the trustee to pay fees his counsel billed for work it performed on the debtor's retirement plan by applying the $10,000 reserved from the plan's assets, with the balance to be paid as a claim against the debtor's bankruptcy estate. However, the court did not approve the trustee's request for compensation because the trustee had not submitted a fee application that complied with the Bankruptcy Code. JUDGE:  Melvin S. Hoffman, Bankruptcy Judge.
DISCUSSION: After the debtor's bankruptcy case was converted to one under Chapter 7 of the Bankruptcy Code, the court approved the trustee's request for authority to terminate a retirement plan the debtor established for its employees and to make distributions to the employees. The court's order authorized the trustee to establish a reserve out of plan assets for paying the costs of administering and terminating the plan, and the trustee established a reserve of $10,000 and asked the court for permission to use that reserve to pay his fees and fees charged by a law firm he hired. The U.S. Department of Labor filed an objections to the trustee's motion, claiming that the court lacked jurisdiction to hear the motion because the request for payment of fees was governed by the ERISA, not the Bankruptcy Code. The court recognized the fact that courts were divided on the issue but found that it had jurisdiction under
28 U.S.C.S. §§ 1334 and 157 to hear the trustee's motion. The trustee administered the debtor's plan pursuant to 11 U.S.C.S. § 704(a)(11), and the court's right to oversee the trustee's actions and approve payment of compensation fell within its core jurisdiction.

Additional Discussion:   "In Massachusetts, the district court has referred to the bankruptcy court the broadest possible universe of cases which a bankruptcy court could hear, namely all cases over which the district court may exercise jurisdiction under either § 1334(a) or (b)." NSCO, 427 B.R. at 176. Chief Justice Roberts, writing for the majority in Stern v. Marshall,     U.S.    , 2011 U.S. LEXIS 4791, 2011 WL 2472792 (June 23, 2011), offered a concise overview of a bankruptcy court's jurisdiction to hear and determine matters before it expressed in terms of core and non-core jurisdiction.  The manner in which a bankruptcy judge may act on a referred matter depends on the type of proceeding involved. Bankruptcy judges may hear and enter final judgments in "all core proceedings arising under title 11, or arising in a case under title 11." § 157(b)(1). "Core proceedings include, but are not limited to" 16 different types of matters, including "counterclaims by [a debtor's] estate against persons filing claims against the estate." § 157(b)(2)(C).  Parties may appeal final judgments of a bankruptcy court in core proceedings to the district court, which reviews them under traditional appellate standards. See § 158(a); Fed. Rule Bkrtcy. Proc. 8013.
§ 704(a)(11), the Chapter 7 trustee in this case was required and has continued to perform the obligations of the administrator of the debtor's 401 (k) plan. Regrettably, "[a]lthough . . . a bankruptcy trustee must continue to perform a debtor plan administrator's obligations, the Bankruptcy Code and Rules provide no further directives as to how to meld the trustee's bankruptcy and ERISA responsibilities." NSCO, 427 B.R. at 174. The Bankruptcy Code is clear, however, that funds withheld by a debtor-employer from employee wages or received from employees as contributions to a retirement plan are not property of the bankruptcy estate. Bankruptcy Code § 541(b)(7).  Neither the Chapter 7 trustee nor the DOL has addressed whether any portion of the funds in the 401(k) plan derived from contributions by the debtor in which case such funds might be estate property. Because  both parties agree that the $10,000 at issue here is not property of the estate, I need not inquire further.

When a bankruptcy judge determines that a referred "proceeding ... is not a core proceeding but . . . is otherwise related to a case under title 11," the judge may only "submit proposed findings of fact and conclusions of law to the district court." § 157(c)(1). It is the district court that enters final judgment in such cases after reviewing de novo any matter to which a party objects. Ibid.
A "case under title 11" is the case instituted by the bankruptcy petition itself. "The 'case' referred to in section 1334(a) is the umbrella under which all of the proceedings that follow the filing of a bankruptcy petition take place."). "[A]rising under" proceedings are (at least) those cases in which the cause of action is created by title 11 . . . . "Arising in" proceedings generally are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence  outside of bankruptcy. [Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.1987)]. "[R]elated to" proceedings [are] proceedings which "potentially have some effect on the bankruptcy estate, such as altering the debtor's rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankruptcy estate."

None of the bankruptcy courts forced to grapple with the intersection of the Bankruptcy Code and ERISA has disagreed with the foregoing summary of bankruptcy court jurisdiction. The disagreement appears to be over which statute governs the bankruptcy trustee's pension-related obligations. Each court recognized that pursuant to § 327 of the Bankruptcy Code, the bankruptcy court has jurisdiction to rule on a trustee's motion to employ professionals to assist him in carrying out his responsibilities under § 704(a)(11); they diverged on the issue of whether the bankruptcy court may rule on fees paid from retirement plan assets pursuant to §§ 330 and 331 of the Bankruptcy Code governing the awarding of fees, including interim fees to, among others, a trustee and professionals employed under § 327.

The court described the responsibilities conferred on a bankruptcy trustee under
§ 704(a)(11) as follows: In the context of the Bankruptcy Code, section 704(a)(11) is simply an additional duty that the trustee must perform. It is, however, quite different from the trustee's other duties because it confers non-estate responsibilities on the trustee. All of the trustee's pre-BAPCPA duties relate to the trustee's role as representative of the bankruptcy estate. See 11 U.S.C. § 704(a). This court undoubtedly has jurisdiction to oversee the trustee's actions when he is acting in that capacity. Section 704(a)(11), however, requires the trustee to disburse assets that do not belong to the bankruptcy estate, for the benefit of persons that are not creditors. In other words, the trustee is required to administer the assets of an entity that is not in bankruptcy.

There can be no doubt that the possibility for a pension plan's insufficiency of assets creates the ever-present potential that a bankruptcy estate will be called upon to compensate a Chapter 7 trustee and his professionals for their plan administration services. Under the standard established by the United States Court of Appeals for the First Circuit in In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir. 1991), this potential confers upon the bankruptcy court at least related-to jurisdiction over the fee requests.

Although AB&C Group is correct in its conclusion that Bankruptcy Code §§ 330 and 331 do not provide "clear support" for requiring bankruptcy court review and approval of fees paid from non-estate assets, neither do they compel the conclusion that the bankruptcy court is prohibited from approving fees in such circumstances.  But I go further and adopt the approach taken in Robert Plan and NSCO and find that the bankruptcy court has core jurisdiction over the award of fees to a Chapter 7 trustee and his professionals for performing, or assisting the trustee in performing, his duties under § 704(a)(11) of the Bankruptcy Code. Congress recognized the critical need to provide retirement plan administration when employers filed bankruptcy. Any number of workable solutions could have been legislated that maintained a wall of separation between the domains of bankruptcy and ERISA. Instead, by enacting § 704(a)(11) Congress chose, quite reasonably, to confer this responsibility on bankruptcy trustees who are, body and soul, creatures of the Bankruptcy Code. Trustees literally "arise under" the Bankruptcy Code. Their oversight and compensation are, without significant exception, within the core federal bankruptcy power delegated to the bankruptcy court.

Fees denied when the purpose of the Chapter 13 case was to pay debtor’s counsel:

BERLINER v. PAPPALARDO (In RE: PUFFER), 2011 U.S. Dist. LEXIS 73602 (D. Mass. 7/8/11).
JUDGE: Michael A. Ponsor, District Judge. OUTCOME: Affirmed Bankruptcy Court’s denial of fees to debtor’s counsel in the filing of a “fee only” Chapter 13 plan.                                                                                                                                                       PROCEDURAL HISTORY:  Appellant Attorney L. Jed Berliner appeals from the bankruptcy court's ruling disallowing his claim for attorney's fees and expenses (other than Debtor's filing fee) in connection with his representation of Wayne Eric Puffer ("Debtor" or "Mr. Puffer"). The appeal raises an issue regarding Chapter 13 that has generated substantial decisional law, mostly adverse to the appellant here. For the reasons stated below, the court will affirm the bankruptcy court's ruling.                                                                                                                                      DISCUSSION:  When Appellant filed his fee application in this matter, the bankruptcy judge ruled as follows: For the reasons set forth in In re Buck, 432 B.R. 13 (Bankr. D. Mass. 2010), the Application is allowed only in the amount of $299.00, and Attorney Berliner is ordered to remit to the Debtor the remainder of any payments received by him within 30 days of the entry of this order.  The issue before this court is whether the bankruptcy court erred when it adopted its previous ruling that "Chapter 13 plans in which all or virtually all of the funds to be distributed are paid only to Debtors' counsel unquestionably fail to meet any fair interpretation of the term 'good faith' in §§ 1325(a)(3) and (7), respectively. See 11 U.S.C. §§ 1325(a)(3), (a)(7) ("[T]he court shall confirm a plan if . . . (a)(3) the plan has been proposed in good faith [and] . . . (a)(7) the action of the debtor in filing the petition was in good faith."). 
Under a Chapter 7 bankruptcy plan, the bankruptcy trustee takes control of all of the debtor's non-exempt property, liquidates it, and distributes the proceeds equitably among the debtor's creditors. 11 U.S.C. § 725. Because Chapter 7 bankruptcy leaves the debtor with no assets, it is a remedy primarily utilized by debtors who have very limited assets, are in the most dire financial straits, and who seek immediate relief from creditors. After surrendering all non-exempt assets to the trustee, the debtor's remaining dischargeable debts are discharged, providing the debtor with a nearly immediate fresh start.

Appellant expects clients who are filing for Chapter 7 bankruptcy to pay their fee prior to the actual filing, because their debt to him would be discharged along with all others once they surrendered their assets to the trustee. There appears to be no contest that this is a standard and accepted, though  perhaps not universal, practice employed by attorneys representing debtors in Chapter 7 proceedings.

Under a Chapter 13 plan, on the other hand, where a debtor retains some of his assets in exchange for repaying his creditors, the attorney becomes one of the creditors and may be paid over the three-to-five year period prescribed by the repayment plan.  Chapter 13 plans that include insignificant repayments to creditors and primarily enable a debtor to pay his debt to his attorney are referred to as "fee-only" Chapter 13 plans.  Considering "fee-only" Chapter 13 plans generally, the majority of courts have held that such plans fail to meet the requirement of good faith imposed by
11 U.S.C. §§ 1325(a)(3) and (7). The court in Buck observed that, although the precise definition of "good faith" in bankruptcy proceedings might be somewhat elusive in borderline cases. The record is clear that Mr. Puffer chose to file under Chapter 13, because he lacked the funds to make the required advance fee payment under Chapter 7, and because he wanted to get bankruptcy protection to stop his creditors' harassment.   
Did the Bankruptcy Court Abuse its Discretion?  Both the Appellant's arguments and the response in opposition by the Appellee Chapter 13 Trustee have some merit. As a result, the standard to be applied by this court in reviewing the bankruptcy judge's decision acquires pivotal importance. A district court reviews the bankruptcy court's fee award only for mistake of law or abuse of discretion. Lopez Conseuo de Titulares del Condominio Carolina Ct. Apts., 405 B.R. 24, 30 (BAP 1st Cir. 2009).  The central question raised in this appeal, therefore, is not whether the judge went through the conventional lodestar arithmetic properly, but whether  his decision to bar fees in this context entirely, based on the misuse of Chapter 13, was an error of law or an abuse of discretion. This is the issue the court will turn to now.

Attorney Fee-Only Chapter 13 Plans:  Appellant contends that the bankruptcy court erred when it followed the majority of courts nationwide in finding that attorney fee-only Chapter 13 plans lack the good faith required by
§ 1325(a)(3). Upon de novo review of the bankruptcy court's rulings of law, this court is unpersuaded by Appellant's arguments both as they pertain to Debtor's case specifically, and to the landscape of bankruptcy law generally. While sympathetic to Appellant's quandary — how to provide necessary representation to clients who are unable to pay for his services — the court can ignore neither the sound rulings from bankruptcy courts nationwide nor the facts of Debtor's case here.

Bankruptcy Court’s reduction in debtor’s counsel’s fees was not an abuse of discretion:
BERLINER (In Re: SULLIVAN)  v. PAPPALARDO, 2011 U.S. Dist. LEXIS 63484 (D. Mass. 6/15/11).
JUDGE:  Michael A. Ponsor, District Court Judge.
PROCEDURAL HISTORY:  Debtor’s counsel appeals the reduction in his fees. 
Appellant, Attorney L. Jed Berliner ("Attorney Berliner" or "Appellant"), has appealed a bankruptcy judge's reduction in his award of attorney's fees arising from his representation of the debtors. He has moved to stay the underlying bankruptcy proceeding pending his appeal of the fee ruling. At oral argument, Appellant confirmed that his motion seeks a ruling not merely on the stay, but also on the merits of the appeal, and counsel for Appellee agreed.  While Appellant has presented his arguments ably, the deference afforded a bankruptcy judge's fee decision undercuts any valid basis for appeal or remand. As a result, for the reasons stated in detail below, the court will affirm the ruling of the bankruptcy court and deny Appellant's motion to stay the proceeding.
OUTCOME:  Affirmed Bankruptcy Court’s fee reduction.
DISCUSSION: This case appeared to be relatively uncomplicated and many of those services duplicative. They are not necessary for what is still appropriate representation for debtors, and in some respects approaches a level of churning. The hourly rate is not troublesome. The number of hours, however, is.
Stating that Appellant failed to provide "a very good reason" for charging an amount "substantially in excess of what is the norm in the District," the bankruptcy court appropriately limited the total award to the amount of the original retainer

Chapter 13 confirmation denied where debtor sought to change the terms of the note and mortgage of a secured creditor whose claim was bifurcated into secured and non-secured portions, but not pay the present value of the secured portion of the claim over the life of the plan:

Bell v Bankowski (In re: Bell), 2011 U.S. Dist. LEXIS 74580 (D. Mass. 7/12/11).
JUDGE:  Denise J. Casper, District Court Judge.
PROCEDURAL HISTORY:  Debtor appeals the order of the United States Bankruptcy Court sustaining the objection of the Chapter 13 Trustee (Bankowski), to Bell's Chapter 13 plan and denying confirmation of the plan on the ground that Bell's proposal to execute a new note and mortgage constituted an impermissible modification  under the Bankruptcy Code. OUTCOME:  Affirmed.
DISCUSSION:  The Plan had a three-year term, providing in part: With respect to the claim of Eastern Bank, which is secured by MORE THAN the debtor's principal residence and thus could be modified, rather than modifying the claim, the debtor will pay the claim by executing a new Note and Mortgage in the standard Fannie Mae/Freddie Mac form, as modified for Massachusetts. Under the new Note and Mortgage, the debtor will pay the present value of the property securing the claim, which is $291,556.20 (after deducting adequate protection payments already made by the trustee) over a thirty-year term commencing the first business day of the month after the plan is confirmed, at a fixed annual rate of 6.75%. All payments shall be made directly to the Bank or its servicer. The payment amount for principal and interest is $2,268.02. An order discharging the debtor shall also discharge the existing Note and Mortgage. The Plan further states that Bell will pay the purported balance of Eastern Bank's claim, or $59,899.97, as an unsecured claim arising after lien avoidance/cramdown.

Eastern Bank and the Trustee again objected to confirmation of the Plan, including, but not limited, to the following: (i) that the Plan attempted to modify the terms of the Note and the Mortgage by revoking the existing Note and Mortgage and issuing a new note and mortgage, the terms of which would extend beyond the life of the Plan; and (ii) that any change in the interest rate, as Bell proposed, does not qualify as maintenance of payments and that therefore the Plan is not a plan of "cure and maintenance" as permitted by 1322(b)(5). The Trustee objected to confirmation of the Plan, noting that the modified secured claim of Eastern Bank must be paid through the Trustee.

Bell makes two arguments on appeal. First, Bell argues that his proposal to execute a new note and mortgage does not amount to a modification triggering
§ 1322, and as a result, the claim need not be paid within the life of the plan to the Trustee. Second, Bell contends that the execution of a new note and mortgage constitutes a "distribution of property" in compliance with § 1325(a)(5)(B) to cure pre-petition defaults within the meaning of § 1322(b)(3) and that because § 1325 is the only governing provision in deciding whether to confirm his plan, the plan term limitation as set forth in § 1322(d) is irrelevant.  Section 1322(a) of the Bankruptcy Code sets forth the mandatory elements for a Chapter 13 bankruptcy repayment plan to obtain court approval. Section 1322(b) provides "plan flexibility for Chapter 13 debtors by listing a number of permissive elements that may be included in any plan." One such permissive element is a "modification," as set forth in section 1322(b)(2) which states that a plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." 11 U.S.C. § 1322(b)(2). Section 1322(b)(2) permits debtors to modify such rights, "including the amount of the payments on the claim, the timing of the payments, and the finance charges."

Where a debtor proposes to bifurcate their mortgage into secured and unsecured claims and the creditor's claim extends beyond a debtor's principal residence, the bifurcation in itself constitutes a modification triggering
§ 1322(b)(2).
However, once a debtor proposes to modify a secured creditor's claim, the Code does not allow a debtor to modify it without limitation. Upon modifying a claim, courts have consistently held that a debtor must choose one of two options: (i) the debtor may modify the terms of the note and mortgage, in which case all payments for the secured portion of the claim must be completed during the term of the Plan and cannot exceed the life of the Plan; or (ii) the debtor may cure the mortgage default and maintain the same payments of principal and interest under the current note during the life of the plan and beyond, as necessary for the total principal payment to equal the amount of the secured claim. That is, "even after claim splitting, the debtor is stuck having either to pay a large real estate secured claim in full during the plan or to maintain payments consistent with the original loan agreement .

Under the first option, modifying the terms of the mortgage note outright triggers the requirements of
§ 1322(d) which dictates the term of the plan and mandates that the full amount of the secured claim be paid over the life of the plan; payments cannot extend beyond the life of the plan.
If a debtor chooses to exercise the second option, the plan must "provide for the curing of any default within a reasonable time and [provide for the] maintenance of payments while the case is pending. . . ." 11 U.S.C. § 1322(b)(5).  Although the Code does not define "maintenance of payments," courts have interpreted such language as constituting "the same principal and interest payments as provided in the note, within the time frame specified in the note." That is, the payments must be made in accordance with the provisions of the mortgage note that existed prior to the bankruptcy proceedings. Plourder, 402 B.R. at 491-492.

Here, Bell's proposed Plan bifurcated Eastern Bank's claim into a secured claim for the value of the property, $291,556.20, and an unsecured claim for the balance. The Code permits Bell to divide Eastern Bank's claim into secured and unsecured portions because Eastern Bank's security for the note extended beyond the real property which is Bell's primary residence. See
11 U.S.C. § 1322(b)(2). Once Bell bifurcated Eastern Bank's claim and proposed to change the terms of his existing mortgage by executing a new note and mortgage with different payment  terms extending throughout a thirty-year period, he triggered § 1322(b)(2)'s modification provision.

However, although Bell's Plan modifies Eastern Bank's claim, his proposal to execute a new note and mortgage does not fall within either one of the two permissible options when modifying a claim. His Plan does not propose to pay the entire secured claim over the term of the plan even though he proposes to change the terms of the mortgage by executing an entirely new note and mortgage (the first option) or cure any defaults and maintain the original note and mortgage, payments which may be made beyond the life of the plan (the second option). Rather, his Plan creates an entirely different option: substituting a new note and mortgage including new payment terms and new interest rate, payments which would extend beyond the life of the plan. Bell cannot create a new option under the Code by combining the options provided under
§ 1322(b)(2) and (b)(5), where none exists.
Bell nonetheless argues that the proposed treatment of Eastern Bank's secured claim is not a modification triggering § 1322, but rather a "distribution of property" - a new note and mortgage -as permitted under § 1325(a)(5)(B). Bell contends that § 1322(b)(2) and § 1322(d)'s requirements are inapplicable here since the Code only requires  that Bell comply with § 1325(a)(5) to obtain confirmation of the Plan.

Bell is correct that to confirm a debtor's Chapter 13 plan, a bankruptcy court must find that the plan satisfies the requirements set forth in
11 U.S.C. § 1325(a). Section 1325(a)(5)(B) provides that a Court must confirm a plan, with respect to each allowed secured claim provided for under the plan,"if one of three conditions is satisfied: [t]he secured creditor accepts the plan, see 11 U.S.C. § 1325(a)(5)(A); the debtor surrenders the property securing the property the claim to the creditor, see § 1325(a)(5)(C); or the debtor invokes the so-called 'cram down' power, see § 1325(a)(5)(B)." Section 1325(a)(5)(B) provides, in relevant part, that "a court shall confirm a plan if. . .with respect to each allowed secured claim provided for by the plan . . . (i) the plan provides that . . . (I) the holder of such claim retain the lien securing such claim . . . (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and (iii) if   — (I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall in be in equal monthly amounts." This "cram down" option allows a debtor to keep his property over a secured creditor's objection if the creditor retains its lien "and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the collateral. . . ."
Here, because Eastern Bank has not accepted the plan, see § 1325(a)(5)(A), and because Bell has not surrendered the property to Eastern Bank, see § 1325(a)(5)(C), Bell seeks to exercise the "cram down" option in § 1325(a)(5)(B).
Bell's proposal of a new note and mortgage, however, still fails to comply with § 1325(a)(5)(B) since the proposal does not provide Eastern Bank with payments, over the life of the plan, that total the present value of Eastern Bank's secured claim.
As Bell acknowledges, (Bell Br. at 12), a number of courts have rejected his proposal, finding that a debtor is not permitted to distribute "property" over a period of time which exceeds the duration of the plan. Such is the case here, where the new note and mortgage proposed by Bell extends the payments to Eastern Bank beyond the term of the Plan.

Further, to rule that substituting one promissory note for another, "as opposed to actually providing the creditor with the value of the collateral," as required under
1325(a)(5)(B)(ii) would render this section of the Bankruptcy Code meaningless. Bell's proposal to execute a new promissory note is not equivalent to a one lump payment to Eastern Bank. It is merely a promise to pay. The Code does not allow Bell to create this option. What is determinative is that the payment obligation is proposed to be modified by the removal of [the creditor's] ability to call the Note and receive payment in full . . . regardless of how that right is denominated. If that right is removed, the obligation is modified and § 1322[d] and § 1325(a)(5) jointly require that payment on the allowed secured claim be made and completed over the life of the plan." Accordingly, because Bell's Plan fails to conform to the requirements of the Bankruptcy Code, the Court finds that the bankruptcy court was correct in sustaining the Trustee's objection and denying confirmation of the Plan.
District Court would not stay the Bankruptcy Court’s Order finding the appellant in contempt and incarcerated for failure to produce the diamonds ordered attached pending conclusion of the related adversary proceeding:
GROSSO v. MILLER, 2011 U.S. Dist. LEXIS 74154 (D. Mass. 7/8/11).                                                                                                                                               JUDGE:  Rya W. Zobel, District Court Judge.
PROCEDURAL HISTORY:  Thomas M. Grosso appeals from a May 25, 2011 order, as amended, of the United States Bankruptcy Court finding him in contempt for failing to turn over certain diamonds to the Middlesex Sheriff. These two orders arise out of an adversary proceeding in the bankruptcy of Ms. Miller, the appellee, in which she seeks to recover assets that she alleges were fraudulently taken from her by Grosso.  the bankruptcy court granted Miller's motion for attachment of Grosso's assets in the amount of $4.7 million. Miller recorded a writ of attachment on real estate held in Grosso's name worth substantially less than $4.7 million but was unable to locate any additional property. The bankruptcy court held a hearing on March 4, 2011, for the purpose of identifying other assets in Grosso's possession. On April 11 the bankruptcy court ordered Grosso to produce by April 19 three cars, "[a]ll diamonds, including the diamonds identified in Exhibit 1 to the March 4, 2011 hearing, the affidavit of [Thomas M. Grosso's uncle] Thomas C. Grosso," and other items for seizure by the Middlesex County Sheriff until the conclusion of the adversary proceeding. The bankruptcy court found him in contempt and ordered him to either produce the diamonds or surrender himself to the U.S. Marshal Service.  Grosso filed a new appeal of the May 25 and related June 1 orders, case No. 11-10997, and again sought an emergency stay. The case was drawn to Judge Woodlock who issued a temporary stay and transferred the case to this court, as related to the prior appeal from the contempt order for failure to produce the cars. I held a hearing on June 29 and continued the stay pending a ruling on the stay motion. By agreement of the parties the two cases were consolidated.
OUTCOME:  Appellant's motion for a stay is DENIED and the temporary stay issued pending this ruling is vacated.
DISCUSSION:  Appealing a contempt order does not open to reconsideration the underlying order alleged to have been disobeyed. Accordingly, Grosso cannot challenge the April 11 order.  Grosso disputes the factual finding in the May 25 and June 1 orders that he has the diamonds and it is not impossible for him to produce them. Those findings cannot be set aside unless "clearly erroneous," Grosso admits that he had "loose diamonds" worth as much as $1.7 million which, he says, he gave to Miller.  She says she was never given the diamonds. Grosso offered two affidavits, from Marty Eli Schwartz and Thomas C. Grosso, which corroborate that there were loose diamonds and place the diamonds in Miller's possession. However, Thomas C. Grosso testified before the bankruptcy court at the March 4 hearing and identified significant portions of his affidavit as "inaccurate," including statements about the diamonds, because "[a]t the time, I was trying to help my nephew." He later disclosed that he told Marty Eli Schwartz to lie and he identified one specific lie in Schwartz's affidavit. A private investigator working for Miller also testified that Thomas C. Grosso told him that "the entire thing was a lie. The only thing that was truthful in that affidavit was line 1. The bankruptcy judge did not commit clear error in concluding from the evidence that Grosso possessed loose diamonds, and rejecting the testimony of Grosso, Schwartz, and Thomas C. Grosso to the extent it placed the diamonds in Miller's possession, given their questionable credibility. Nor, given the lack of any alternative explanation of how Grosso had disposed of the diamonds, was it clear error to find that he continues to possess them.

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